<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------------
Commission file number 0-23378
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Thermadyne Holdings Corporation
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2482571
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Commission file number 333-57457
------------
Thermadyne Mfg. LLC
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2878452
- ------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Commission file number 333-57457
-------------
Thermadyne Capital Corp.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2878453
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 S. Hanley, St. Louis, MO 63105
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code 314/721-5573
----------------------------
Indicate by [X] whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No ______
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No ______
The number of shares outstanding of the issuer's common stock, par
value $0.01 per share, as of November 11, 1998 was 3,236,898.
Thermadyne Mfg. LLC and Thermadyne Capital Corp. meet the conditions
set forth in General Instruction H(1) of Form 10-Q and are therefore filing
this form with the reduced disclosure format.
<PAGE> 2
THERMADYNE HOLDINGS CORPORATION
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of
Thermadyne Holdings Corporation
Condensed Consolidated Balance Sheets....................................................3
Condensed Consolidated Statements of Operations..........................................4
Condensed Consolidated Statements of Cash Flows..........................................5
Notes to Condensed Consolidated Financial Statements..................................6-13
Condensed Consolidated Financial Statements of Thermadyne Mfg. LLC
Condensed Consolidated Balance Sheets...................................................14
Condensed Consolidated Statements of Operations.........................................15
Condensed Consolidated Statements of Cash Flows.........................................16
Notes to Condensed Consolidated Financial Statements.................................17-28
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................................... 29-35
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .......................................................36
SIGNATURES 37-39
</TABLE>
<PAGE> 3
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,928 $ 1,481
Accounts receivable, less allowance for
doubtful accounts of $2,353 and
$2,217, respectively 88,277 76,847
Inventories 136,408 105,135
Prepaid expenses and other 11,373 8,534
------------ ------------
Total current assets 238,986 191,997
Property, plant and equipment, at cost, net 99,374 85,257
Deferred financing costs, net 23,872 5,754
Intangibles, at cost, net 35,152 33,970
Deferred income taxes 34,174 35,552
Other assets 1,286 1,997
------------ ------------
Total assets $ 432,844 $ 354,527
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 44,375 $ 55,390
Accrued and other liabilities 37,376 32,697
Accrued interest 15,011 5,680
Income taxes payable 7,144 4,769
Current maturities of long-term obligations 7,362 4,912
------------ ------------
Total current liabilities 111,268 103,448
Long-term obligations, less current maturities 702,373 353,175
Other long-term liabilities 63,118 60,751
Redeemable preferred stock (paid in kind), $0.01 par value, 15,000,000
shares authorized and 2,000,000 shares
outstanding at September 30, 1998 52,352 --
Shareholders' deficit:
Common stock, $0.01 par value, 30,000,000 and 25,000,000 shares
authorized, and 3,236,898 and 11,189,675 shares issued and
outstanding at September 30, 1998 and
December 31, 1997, respectively 32 112
Additional paid-in capital (115,143) 149,023
Accumulated deficit (356,200) (299,208)
Management loans (3,701) --
Accumulated other comprehensive income (21,255) (12,774)
------------ ------------
Total shareholders' deficit (496,267) (162,847)
------------ ------------
Total liabilities and shareholders' deficit $ 432,844 $ 354,527
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 129,662 $ 131,902 $ 397,200 $ 384,828
Operating expenses:
Cost of goods sold 82,708 80,895 248,829 233,782
Selling, general and administrative expenses 25,371 28,469 77,745 82,047
Amortization of intangibles 912 2,271 2,769 6,350
Net periodic postretirement benefits 650 585 1,750 1,755
Special charges 4,567 -- 48,784 --
------------ ------------ ------------ ------------
Operating income (loss) 15,454 19,682 17,323 60,894
Other expense:
Interest expense 18,507 11,025 43,238 34,532
Amortization of deferred financing costs 890 376 1,800 1,214
Other, net 1,061 1,044 2,035 896
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income
tax provision and extraordinary item (5,004) 7,237 (29,750) 24,252
Income tax provision 10,570 3,192 12,105 10,694
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
extraordinary item (15,574) 4,045 (41,855) 13,558
Discontinued operations:
Gain on disposal of discontinued operations,
net of applicable taxes $12,623 -- 18,015 -- 18,015
Gain from discontinued operations, net of
income taxes -- 935 -- 3,173
------------ ------------ ------------ ------------
Income (loss) before extraordinary item (15,574) 22,995 (41,855) 34,746
Extraordinary item - loss on early extinguishment of
debt, net of tax benefit of $8,151 -- -- (15,137) --
------------ ------------ ------------ ------------
Net income (loss) (15,574) 22,995 (56,992) 34,746
Preferred stock dividends (paid in kind) 1,648 -- 2,352 --
------------ ------------- ------------ ------------
Net income (loss) applicable to common shares $ (17,222) $ 22,995 $ (59,344) $ 34,746
============ ============ ============ ============
Basic earnings per share amounts applicable
to common shares:
Income (loss) from continuing operations $ (5.32) $ 0.36 $ (6.01) $ 1.23
Net income (loss) $ (5.32) $ 2.07 $ (8.07) $ 3.14
Diluted earnings per share amounts applicable to
common shares:
Income (loss) from continuing operations $ (5.32) $ 0.35 $ (6.01) $ 1.19
Net income (loss) $ (5.32) $ 2.02 $ (8.07) $ 3.06
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ (56,992) $ 34,746
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Net periodic postretirement benefits 1,750 1,755
Depreciation 10,865 9,172
Amortization of intangibles 2,769 6,350
Non-cash interest expense 4,246 --
Amortization of deferred financing costs 1,800 1,214
Recognition of net operating loss carryforwards -- 1,757
Deferred income taxes 1,413 (1,757)
Net gain on sale of discontinued operations -- (18,015)
Issuance of common stock warrants 12,190 --
Extraordinary item (2,272) --
Noncash charges for discontinued operations -- 1,621
Changes in operating assets and liabilities:
Accounts receivable (8,817) (15,910)
Inventories (30,663) (15,252)
Prepaid expenses and other (3,268) (2,757)
Accounts payable (11,084) 9,679
Accrued and other liabilities 2,397 (4,449)
Accrued interest 9,441 6,872
Income taxes payable 9,834 (1,427)
Other long-term liabilities (2,180) (1,829)
Discontinued operations -- 285
------------- -------------
Total adjustments (1,579) (22,691)
------------- -------------
Net cash provided by (used in) operating activities (58,571) 12,055
------------- -------------
Cash flows provided by (used in) investing activities:
Capital expenditures, net (11,831) (11,912)
Change in other assets (1,488) 5,512
Acquisitions, net of cash (18,953) (35,255)
Proceeds from sale of discontinued operations -- 88,543
Investing activities of discontinued operations -- (1,680)
------------- -------------
Net cash provided (used in) by investing activities (32,272) 45,208
------------- -------------
Cash flows provided by (used in) financing activities:
Change in long-term receivables 471 150
Repayment of long-term obligations (402,145) (108,571)
Borrowing of long-term obligations 750,587 49,464
Issuance of common stock 90,335 1,157
Issuance of preferred stock 50,000 --
Repurchase of common stock (368,815) --
Change in accounts receivable securitization (3,422) 5,473
Financing activities of discontinued operations -- (2,808)
Financing fees (23,824) --
Other (897) (1,187)
------------- -------------
Net cash provided by (used in) financing activities 92,290 (56,322)
------------- -------------
Net increase in cash and cash equivalents 1,447 941
Cash and cash equivalents at beginning of period 1,481 1,420
------------- -------------
Cash and cash equivalents at end of period $ 2,928 $ 2,361
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
As used in this report, the term "Mercury" means Mercury
Acquisition Corporation, the term "Issuer" means Mercury before the
Merger and Thermadyne Holdings Corporation after the Merger (as defined
in Note 3), the term "Holdings" means Thermadyne Holdings Corporation,
the terms "Thermadyne" and the "Company" mean Thermadyne Holdings
Corporation, its predecessors and subsidiaries, the term "Thermadyne
LLC" means Thermadyne Mfg. LLC, a wholly owned and the principal
operating subsidiary of Thermadyne Holdings Corporation, and the term
"Thermadyne Capital" means Thermadyne Capital Corp., a wholly owned
subsidiary of Thermadyne LLC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial
statements of Holdings have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-
and nine-month periods ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 1997.
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, the Company
considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Interest and taxes paid
were as follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Interest $ 29,662 $ 30,612
Taxes 652 11,682
</TABLE>
6
<PAGE> 7
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share ("FASB 128"). FASB 128 replaced
the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings
per share. All earnings per share amounts for all periods have been
presented to conform to FASB 128 requirements.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Basic earnings per share amounts applicable
to common shares:
Income (loss) from continuing
operations before extraordinary item $(5.32) $0.36 $(6.01) $1.23
Discontinued operations -- 1.71 -- 1.91
Extraordinary item -- -- (2.06) --
--------- ---------- --------- ----------
Net income (loss) $(5.32) $2.07 $(8.07) $3.14
========= ========== ========= ==========
Diluted earnings per share amounts
applicable to common shares:
Income (loss) from continuing
operations before extraordinary item $(5.32) $0.35 $(6.01) $1.19
Discontinued operations -- 1.67 -- 1.87
Extraordinary item -- -- (2.06) --
--------- ---------- --------- ----------
Net income (loss) $(5.32) $2.02 $(8.07) $3.06
========= ========== ========= ==========
Weighted average shares - basic earnings
per share 3,236,898 11,093,615 7,355,742 11,060,411
Effect of dilutive securities:
Employee stock options -- 315,302 -- 296,780
--------- ---------- --------- ----------
Weighted average shares - diluted earnings
per share 3,236,898 11,408,917 7,355,742 11,357,191
========= ========== ========= ==========
</TABLE>
7
<PAGE> 8
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
2. INVENTORIES
The composition of inventories at September 30, 1998 was as
follows:
<TABLE>
<S> <C>
Raw materials $ 25,426
Work-in-process 28,336
Finished goods 83,669
LIFO Reserve (1,023)
----------
Total $ 136,408
==========
</TABLE>
3. MERGER WITH MERCURY ACQUISITION CORPORATION
On May 22, 1998, Holdings consummated the merger of Mercury, a
corporation organized by DLJ Merchant Banking Partners II, L.P.
("DLJMB") and affiliated funds and entities (the "DLJMB Funds"), with
and into Holdings, with Holdings continuing as the surviving
corporation (the "Merger").
The funding required to pay cash for common stock not receiving
the right to retain Holdings common stock; to pay cash in lieu of each
previously outstanding employee stock option; to pay cash in lieu of
the right to purchase common stock under the Company's employee stock
purchase plan; to refinance and/or retire outstanding indebtedness of
the Company; and to pay expenses incurred in connection with the Merger
was approximately $808 million. These cash requirements were funded
with the proceeds obtained from concurrent equity and debt financings.
Thermadyne LLC and Thermadyne Capital issued $207 million principal
amount of 9-7/8% Senior Subordinated Notes due 2008 (the "Senior
Subordinated Notes") and Thermadyne LLC entered into a syndicated
senior secured loan facility providing for term loan borrowings in the
aggregate principal amount of $330 million and revolving loan
borrowings of $100 million (the "New Credit Facility"). In connection
with the Merger, Thermadyne LLC borrowed all term loans available under
the New Credit Facility plus $25 million of revolving loans, which were
subsequently repaid. The revolving loans are available to fund the
working capital requirements of Thermadyne LLC. The proceeds of such
financings were distributed to Holdings in the form of a dividend.
Mercury issued approximately $94.6 million aggregate proceeds of
12-1/2% Senior Discount Debentures due 2008 (the "Debentures"). In
connection with the Merger, Holdings succeeded to the obligations of
Mercury with respect to the Debentures. The DLJMB Funds also purchased
2,608,696 shares of common stock of Mercury ("Mercury Common Stock"),
2,000,000 shares of preferred stock of Mercury ("Mercury Preferred
Stock") and warrants to purchase 353,428 shares of Mercury Common Stock
at an exercise price of $0.01 per share (the
8
<PAGE> 9
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
"DLJMB Warrants") for approximately $140 million. As a result of the
Merger, the proceeds of such purchases became an asset of Holdings,
each share of Mercury Common Stock became a share of Holdings Common
Stock, each share of Mercury Preferred Stock became a share of
exchangeable preferred stock of Holdings ("Holdings Preferred Stock")
and each DLJMB Warrant to acquire Mercury Common Stock became
exercisable for an equal number of shares of Holdings Common Stock. In
addition, in connection with the Merger, certain members of senior
management purchased 143,192 shares of Holdings Common Stock for
approximately $4.9 million (the "Management Share Purchase"), of which
approximately $3.6 million was provided through non-recourse loans from
Holdings (the "Management Loans").
As a result of these transactions, the Company experienced an
approximate 85% ownership change, the DLJMB Funds obtained ownership of
approximately 80.6% of the Company's outstanding common stock, and the
Company became highly leveraged. The Merger and related transactions
have been treated as a leveraged recapitalization in which the issuance
and retirement of debt have been accounted for as financing
transactions, the sales and purchases of the Company's common stock
have been accounted for as capital transactions at amounts paid to or
received from stockholders, and no changes were made to the carrying
values of the Company's assets and liabilities that were not directly
effected by the transaction.
In connection with the Merger, the Company incurred special
charges of approximately $44.2 million, consisting of expenses of
approximately $18.5 million related to employee stock options and
related plans and $25.7 million of non-capitalizable transaction fees.
In addition, the Company recorded an extraordinary loss in the amount
of $23.3 million due to the early extinguishment of long-term debt. The
Company paid DLJMB approximately $20 million for professional services
in connection with the merger transaction.
4. LONG-TERM OBLIGATIONS
New Credit Facility
The New Credit Facility includes a $330 million term loan facility
(the "Term Loan Facility") and a $100 million revolving credit facility
(subject to adjustment as provided below), which provides for revolving
loans and up to $50 million of letters of credit (the "Revolving Credit
Facility"). The Term Loan Facility is comprised of a term A facility of
$100 million (the "Term A Facility"), which has a maturity of six
years, a term B facility of $115 million (the "Term B Facility"), which
has a maturity of seven years, and a term C facility of $115 million
(the "Term C Facility"), which has a maturity of eight years. The
Revolving Credit Facility terminates six years after the date of
initial funding of the New
9
<PAGE> 10
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
Credit Facility and is subject to a potential, but uncommitted,
increase of up to $25 million at Thermadyne LLC's request at any time
prior to such sixth anniversary. Such increase is available only if one
or more financial institutions agrees, at the time of Thermadyne LLC's
request, to provide it.
The New Credit Facility bears interest, at Thermadyne LLC's
option, at the administrative agent's alternate base rate or at the
reserve-adjusted London Interbank Offered Rate ("LIBOR") plus, in each
case, applicable margins of (i) in the case of alternative base rate
loans, (x) 1.00% for revolving and Term A loans, (y) 1.25% for Term B
loans and (z) 1.50% for Term C loans and (ii) in the case of LIBOR
loans, (x) 2.25% for revolving and Term A loans, (y) 2.50% for Term B
loans and (z) 2.75% for Term C loans.
Thermadyne LLC pays a commitment fee calculated at a rate of 0.50%
per annum on the daily average unused commitment under the Revolving
Credit Facility (whether or not then available). Such fee is payable
quarterly in arrears and upon termination of the Revolving Credit
Facility (whether at stated maturity or otherwise).
Beginning six months after the consummation of the Merger, the
applicable margin for the Term A Facility and the Revolving Credit
Facility, as well as the commitment fee and letter of credit fee, is
subject to possible reductions based on the ratio of consolidated Debt
to EBITDA (each as defined in the New Credit Facility).
Thermadyne LLC pays a letter of credit fee calculated (i) in the
case of standby letters of credit, at a rate per annum equal to the
then applicable margin for LIBOR loans under the Revolving Credit
Facility minus 0.125% and (ii) in the case of documentary letters of
credit, at a rate per annum equal to 1.25% plus, in each case, a
fronting fee on the stated amount of each letter of credit. Such fees
are payable quarterly in arrears. In addition, Thermadyne LLC pays
customary transaction charges in connection with any letters of credit.
The Term Loan Facility is subject to the following amortization
schedule:
<TABLE>
<CAPTION>
Year Term Loan A Term Loan B Term Loan C
---- ----------- ----------- -----------
<S> <C> <C> <C>
1............................ 0.0% 1.0% 1.0%
2............................ 5.0% 1.0% 1.0%
3............................ 10.0% 1.0% 1.0%
4............................ 20.0% 1.0% 1.0%
5............................ 25.0% 1.0% 1.0%
6............................ 40.0% 1.0% 1.0%
7............................ -- 94.0% 1.0%
8............................ -- -- 93.0%
------ ------- -------
100.0% 100.0% 100.0%
</TABLE>
10
<PAGE> 11
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
The Term Loan Facility is subject to mandatory prepayment: (i)
with 100% of the net cash proceeds from the issuance of debt, subject
to certain exceptions, (ii) with 100% of the net cash proceeds of asset
sales and casualty events, subject to certain exceptions, (iii) with
50% of Thermadyne LLC's excess cash flow (as defined in the New Credit
Facility) to the extent that the Leverage Ratio (as defined in the New
Credit Facility) exceeds 3.5 to 1.0, and (iv) with 50% of the net cash
proceeds from the issuance of equity to the extent that the Leverage
Ratio exceeds 4.0 to 1.0. Thermadyne LLC's obligations under the New
Credit Facility are secured by a first-priority perfected lien on: (i)
substantially all domestic property and assets, tangible and intangible
(other than accounts receivable sold or to be sold into the accounts
receivable program and short term real estate leases), of Thermadyne
LLC and its domestic subsidiaries (other than the special purpose
subsidiaries involved in the accounts receivable program); (ii) the
capital stock of (a) Thermadyne LLC held by Holdings and (b) all
subsidiaries of Thermadyne LLC (provided that no more than 65% of the
equity interest in non-U.S. subsidiaries held by Thermadyne LLC and its
domestic subsidiaries and no equity interests in subsidiaries held by
foreign subsidiaries are required to be pledged); and (iii) all
intercompany indebtedness. Holdings has guaranteed the obligations of
Thermadyne LLC under the New Credit Facility. In addition, obligations
under the New Credit Facility are guaranteed by all domestic
subsidiaries.
The New Credit Facility contains customary covenants and
restrictions on Thermadyne LLC's ability to engage in certain
activities, including, but not limited to: (i) limitations on the
incurrence of liens and indebtedness, (ii) restrictions on sale
lease-back transactions, consolidations, mergers, sale of assets,
capital expenditures, transactions with affiliates and investments, and
(iii) severe restrictions on dividends, and other similar
distributions.
The New Credit Facility contains financial covenants requiring
Thermadyne LLC to maintain a minimum level of Adjusted EBITDA (as
defined in the New Credit Facility); a minimum Interest Coverage Ratio
(as defined in the New Credit Facility); a minimum Fixed Charge
Coverage Ratio (as defined in the New Credit Facility); and a maximum
Leverage Ratio (as defined in the New Credit Facility).
Senior Subordinated Notes
Thermadyne LLC and Thermadyne Capital have outstanding $207
million aggregate principal amount of the Senior Subordinated Notes.
The Senior Subordinated Notes are general unsecured obligations of
Thermadyne LLC and Thermadyne Capital and will be subordinated in right
of payment to all existing and future senior indebtedness of Thermadyne
LLC and Thermadyne Capital (including borrowings under the New Credit
Facility). The Senior Subordinated Notes are unconditionally guaranteed
on a senior subordinated basis by
11
<PAGE> 12
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
certain of Thermadyne LLC's existing domestic subsidiaries (the
"Guarantor Subsidiaries"). The note guarantees will be general
unsecured obligations of the Guarantor Subsidiaries, are subordinated
in right of payment to all existing and future senior indebtedness of
the Guarantor Subsidiaries, including indebtedness under the New Credit
Facility, and will rank senior in right of payment to any future
subordinated indebtedness of the Guarantor Subsidiaries.
The Senior Subordinated Notes mature on June 1, 2008. Interest on
the Senior Subordinated Notes accrues at the rate of 9-7/8% per annum
and is payable semi-annually in arrears on June 1 and December 1,
commencing on December 1, 1998, to holders of record on the immediately
preceding May 15 and November 15.
Debentures
Holdings has outstanding $95.9 million of Debentures. The
Debentures initially are limited in aggregate principal amount at
maturity to $174 million and will mature on June 1, 2008. The
Debentures were issued at $94.6 million, a substantial discount from
their principal amount at maturity. Until June 1, 2003, no interest
will accrue on the Debentures, but the accreted value will increase
(representing amortization of original issue discount) between the date
of original issuance and June 1, 2003, on a semi-annual bond equivalent
basis using a 360-day year comprised of twelve 30-day months, such that
the accreted value shall be equal to the full principal amount at
maturity of the Debentures on June 1, 2003. Beginning on June 1, 2003,
interest on the Debentures will accrue at the rate of 12-1/2% per annum
and will be payable in cash semi-annually in arrears on June 1 and
December 1, commencing on December 1, 2003, to holders of record on the
immediately preceding May 15 and November 15. Interest on the
Debentures will accrue from the most recent date to which interest has
been paid or, if no interest has been paid, from June 1, 2003. Interest
will be computed on the basis of a 360-day year comprised of twelve
30-day months. Subject to certain covenants, additional notes may be
issued under the Indenture having the same terms in all respects as the
Debentures.
5. HOLDINGS PREFERRED STOCK
Holdings has outstanding 2,000,000 shares of Holdings Preferred
Stock, par value $0.01 per share, with an initial liquidation
preference of $25.00 per share. Holdings Preferred Stock accrues
dividends at a rate equal to 13% per annum, computed on the basis of a
360-day year. Such dividends are payable quarterly on March 31, June
30, September 30, and December 31 of each year. Prior to the fifth
anniversary of the issuance of the Holdings Preferred Stock,
12
<PAGE> 13
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
dividends are payable through increases in the liquidation preference
of the Holdings Preferred Stock or, at the election of the holders,
dividends may be payable by the issuance of additional shares.
Following the fifth anniversary of the issuance, dividends shall be
payable in cash. The Holdings Preferred Stock is mandatorily redeemable
on May 15, 2010 at a redemption price of 100% of the liquidation
preference plus accrued and unpaid dividends. In the event of a change
in control, the Holdings Preferred Stock is mandatorily redeemable at a
redemption price of 101% of the liquidation preference plus accrued and
unpaid dividends. The Holdings Preferred Stock may be redeemed by
Holdings prior to May 15, 2001, in whole, at a redemption price per
share equal to 113% of the liquidation preference per share plus
accrued and unpaid dividends with the proceeds of a public equity
offering. In addition, the Holdings Preferred Stock may be redeemed at
any time on or after May 15, 2003, in whole, at certain established
redemption prices.
6. RECENT ACCOUNTING PRONOUNCEMENT
As of January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, Reporting Comprehensive Income
("FASB 130"). FASB 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the
adoption of this statement had no impact on the Company's net income or
shareholders' equity. FASB 130 requires foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to
the requirements of FASB 130.
During the first nine months of 1998 and 1997, total comprehensive
income (loss) amounted to $(65,473) and $25,156, respectively.
13
<PAGE> 14
THERMADYNE MFG. LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,928 $ 1,481
Accounts receivable, less allowance for
doubtful accounts of $2,353 and
$2,217, respectively 88,277 76,847
Inventories 136,408 105,135
Prepaid expenses and other 11,373 8,534
------------ ------------
Total current assets 238,986 191,997
Property, plant and equipment, at cost, net 99,374 85,257
Deferred financing costs, net 20,232 5,754
Intangibles, at cost, net 35,152 33,970
Deferred income taxes 34,174 35,552
Other assets 1,286 1,997
------------ ------------
Total assets $ 429,204 $ 354,527
============ ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Accounts payable $ 44,375 $ 55,390
Accrued and other liabilities 37,376 32,697
Accrued interest 13,351 5,680
Income taxes payable 7,144 4,769
Current maturities of long-term obligations 7,362 4,912
------------ ------------
Total current liabilities 109,608 103,448
Long-term obligations, less current maturities 566,452 353,175
Other long-term liabilities 63,118 60,751
Shareholder's deficit:
Accumulated deficit (364,880) (299,208)
Accumulated other comprehensive income (21,255) (12,774)
------------ ------------
Total shareholder's deficit (386,135) (311,982)
Net equity and advances to / from parent 76,161 149,135
------------ ------------
Total liabilities and shareholder's deficit $ 429,204 $ 354,527
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
14
<PAGE> 15
THERMADYNE MFG. LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, 1998 September 30, 1997 September 30, 1998 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales $ 129,662 $ 131,902 $ 397,200 $ 384,828
Operating expenses:
Cost of goods sold 82,708 80,895 248,829 233,782
Selling, general and administrative expenses 25,371 28,469 77,745 82,047
Amortization of intangibles 912 2,271 2,769 6,350
Net periodic postretirement benefits 650 585 1,750 1,755
Special changes 4,567 -- 48,784 --
------------ ------------ ------------- -----------
Operating income 15,454 19,682 17,323 60,894
Other expense:
Interest expense 14,520 11,025 37,648 34,532
Amortization of deferred financing costs 795 376 1,674 1,214
Other, net 1,130 1,044 2,104 896
------------ ------------ ------------- -----------
Income (loss) from continuing operations before
income tax provision and extraordinary item (991) 7,237 (24,103) 24,252
Income tax provision 10,570 3,192 12,105 10,694
------------ ------------ ------------- -----------
Income (loss) from continuing operations before
extraordinary item (11,561) 4,045 (36,208) 13,558
Discontinued operations:
Gain on disposal of discontinued
operations, net of applicable taxes of $12,623 -- 18,015 -- 18,015
Gain from discontinued operations, net of
income taxes -- 935 -- 3,173
------------ ------------ ------------- -----------
Income (loss) before extraordinary item (11,561) 22,995 (36,208) 34,746
Extraordinary item - loss on early extinguishment
of debt, net of tax benefit of $8,151 -- -- (15,137) --
------------ ------------ ------------- -----------
Net income (loss) $ (11,561) $ 22,995 $ (51,345) $ 34,746
============ ============ ============= ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
15
<PAGE> 16
THERMADYNE MFG. LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ (51,345) $ 34,746
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Net periodic postretirement benefits 1,750 1,755
Depreciation 10,865 9,172
Amortization of intangibles 2,769 6,350
Amortization of deferred financing costs 1,674 1,214
Recognition of net operating loss carryforwards -- 1,757
Deferred income taxes 1,413 (1,757)
Extraordinary item (2,272) --
Net gain on sale of discontinued operations -- (18,015)
Noncash charges for discontinued operations -- 1,621
Changes in operating assets and liabilities:
Accounts receivable (8,817) (15,910)
Inventories (30,663) (15,252)
Prepaid expenses and other (3,268) (2,757)
Accounts payable (11,084) 9,679
Accrued and other liabilities 2,397 (4,449)
Accrued interest 7,781 6,872
Income taxes payable 9,834 (1,427)
Other long-term liabilities (2,180) (1,829)
Discontinued operations -- 285
------------- ------------
Total adjustments (19,801) (22,691)
------------- ------------
Net cash provided by (used in) operating activities (71,146) 12,055
------------- ------------
Cash flows provided by (used in) investing activities:
Capital expenditures, net (11,831) (11,912)
Change in other assets (1,488) 5,512
Acquisitions, net of cash (18,953) (35,255)
Proceeds from sale of discontinued operations -- 88,543
Investing activities of discontinued operations -- (1,680)
------------- ------------
Net cash provided by (used in) investing activities (32,272) 45,208
------------- ------------
Cash flows provided by (used in) financing activities:
Change in long-term receivables 471 150
Repayment of long-term obligations (402,145) (108,571)
Borrowing of long-term obligations 618,912 49,464
Issuance of common stock -- 1,157
Change in accounts receivable securitization (3,422) 5,473
Financing fees (20,058) --
Financing activities of discontinued operations -- (2,808)
Change in net equity of parent (87,303) --
Other (1,590) (1,187)
------------- ------------
Net cash provided by (used in) financing activities 104,865 (56,322)
------------- ------------
Net increase in cash and cash equivalents 1,447 941
Cash and cash equivalents at beginning of period 1,481 1,420
------------- ------------
Cash and cash equivalents at end of period $ 2,928 $ 2,361
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
16
<PAGE> 17
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
As used in this report, the term "Mercury" means Mercury Acquisition
Corporation, the term "Issuer" means Mercury before the Merger and Thermadyne
Holdings Corporation after the Merger (as defined in Note 3), the term
"Holdings" means Thermadyne Holdings Corporation, the terms "Thermadyne" and the
"Company" mean Thermadyne Holdings Corporation, its predecessors and
subsidiaries, the term "Thermadyne LLC" means Thermadyne Mfg. LLC, a wholly
owned and the principal operating subsidiary of Thermadyne Holdings Corporation,
and the term "Thermadyne Capital" means Thermadyne Capital Corp., a wholly owned
subsidiary of Thermadyne LLC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of
Thermadyne LLC and Thermadyne Capital have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three- and nine-month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
CO-ISSUER
Thermadyne Capital, a wholly-owned subsidiary of Thermadyne LLC, was formed
solely for the purpose of serving as co-issuer of the 9-7/8% Senior Subordinated
Notes due 2008 (the "Senior Subordinated Notes"). Thermadyne Capital has no
substantial assets or liabilities and no operations of any kind and the
Indenture pursuant to which the Senior Subordinated Notes were issued limits
Thermadyne Capital's ability to acquire or hold any significant assets, incur
any liabilities or engage in any business activities, other than in connection
with the issuance of the Senior Subordinated Notes.
17
<PAGE> 18
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents. Interest and taxes paid were as follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Interest $29,977 $30,612
Taxes 652 11,682
</TABLE>
2. INVENTORIES
The composition of inventories at September 30, 1998 was as follows:
<TABLE>
<S> <C>
Raw materials $ 25,426
Work-in-process 28,336
Finished goods 83,669
LIFO Reserve (1,023)
-----------
Total $ 136,408
===========
</TABLE>
3. MERGER WITH MERCURY ACQUISITION CORPORATION
On May 22, 1998, Holdings consummated the merger of Mercury, a corporation
organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated
funds and entities (the "DLJMB Funds"), with and into Holdings, with Holdings
continuing as the surviving corporation (the "Merger").
The funding required to pay cash for common stock not receiving the right
to retain Holdings common stock; to pay cash in lieu of each previously
outstanding employee stock option; to pay cash in lieu of the right to purchase
common stock under the Company's employee stock purchase plan; to refinance
and/or retire outstanding indebtedness of the Company; and to pay expenses
incurred in connection with the Merger was approximately $808 million. These
cash requirements were funded with the proceeds obtained from concurrent equity
and debt financings. Thermadyne LLC and Thermadyne Capital issued the Senior
Subordinated Notes and Thermadyne LLC entered into a syndicated senior secured
loan facility providing for term loan borrowings in the aggregate principal
amount of $330 million and revolving loan borrowings of $100 million (the "New
Credit Facility"). In
18
<PAGE> 19
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
connection with the Merger, Thermadyne LLC borrowed all term loans available
under the New Credit Facility plus $25 million of revolving loans, which were
subsequently repaid. The revolving loans are available to fund the working
capital requirements of Thermadyne LLC. The proceeds of such financings were
distributed to Holdings in the form of a dividend.
Mercury issued approximately $94.6 million aggregate proceeds of 12 1/2%
Senior Discount Debentures due 2008 (the "Debentures"). In connection with the
Merger, Holdings succeeded to the obligations of Mercury with respect to the
Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of
Mercury ("Mercury Common Stock"), 2,000,000 shares of preferred stock of Mercury
("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury
Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for
approximately $140 million. As a result of the Merger, the proceeds of such
purchases became an asset of Holdings, each share of Mercury Common Stock became
a share of Holdings Common Stock, each share of Mercury Preferred Stock became a
share of exchangeable preferred stock of Holdings ("Holdings Preferred Stock")
and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an
equal number of shares of Holdings Common Stock. In addition, in connection with
the Merger, certain members of senior management purchased 143,192 shares of
Holdings Common Stock for approximately $4.9 million (the "Management Share
Purchase"), of which approximately $3.6 million was provided through
non-recourse loans from Holdings (the "Management Loans").
As a result of these transactions, the Company experienced an approximate
85% ownership change, the DLJMB Funds obtained ownership of approximately 80.6%
of the Company's outstanding common stock, and the Company became highly
leveraged. The Merger and related transactions have been treated as a leveraged
recapitalization in which the issuance and retirement of debt have been
accounted for as financing transactions, the sales and purchases of the
Company's common stock have been accounted for as capital transactions at
amounts paid to or received from stockholders, and no changes were made to the
carrying values of the Company's assets and liabilities that were not directly
effected by the transaction.
In connection with the Merger, the Company incurred special charges of
approximately $44.2 million, consisting of expenses of approximately $18.5
million related to employee stock options and related plans and $25.7 million of
non-capitalizable transaction fees. In addition, the Company recorded an
extraordinary loss in the amount of $23.3 million due to the early
extinguishment of long-term debt. The Company paid DLJMB approximately $20
million for professional services in connection with the merger transaction.
19
<PAGE> 20
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
4. LONG-TERM OBLIGATIONS
New Credit Facility
The New Credit Facility includes a $330 million term loan facility (the
"Term Loan Facility") and a $100 million revolving credit facility (subject to
adjustment as provided below), which provides for revolving loans and up to $50
million of letters of credit (the "Revolving Credit Facility"). The Term Loan
Facility is comprised of a term A facility of $100 million (the "Term A
Facility"), which has a maturity of six years, a term B facility of $115 million
(the "Term B Facility"), which has a maturity of seven years, and a term C
facility of $115 million (the "Term C Facility"), which has a maturity of eight
years. The Revolving Credit Facility terminates six years after the date of
initial funding of the New Credit Facility and is subject to a potential, but
uncommitted, increase of up to $25 million at Thermadyne LLC's request at any
time prior to such sixth anniversary. Such increase is available only if one or
more financial institutions agrees, at the time of Thermadyne LLC's request, to
provide it.
The New Credit Facility bears interest, at Thermadyne LLC's option, at the
administrative agent's alternate base rate or at the reserve-adjusted London
Interbank Offered Rate ("LIBOR") plus, in each case, applicable margins of (i)
in the case of alternative base rate loans, (x) 1.00% for revolving and Term A
loans, (y) 1.25% for Term B loans and (z) 1.50% for Term C loans and (ii) in the
case of LIBOR loans, (x) 2.25% for revolving and Term A loans, (y) 2.50% for
Term B loans and (z) 2.75% for Term C loans.
Thermadyne LLC pays a commitment fee calculated at a rate of 0.50% per
annum on the daily average unused commitment under the Revolving Credit Facility
(whether or not then available). Such fee is payable quarterly in arrears and
upon termination of the Revolving Credit Facility (whether at stated maturity or
otherwise).
Beginning six months after the consummation of the Merger, the applicable
margin for the Term A Facility and the Revolving Credit Facility, as well as the
commitment fee and letter of credit fee, is subject to possible reductions based
on the ratio of consolidated Debt to EBITDA (each as defined in the New Credit
Facility).
Thermadyne LLC pays a letter of credit fee calculated (i) in the case of
standby letters of credit, at a rate per annum equal to the then applicable
margin for LIBOR loans under the Revolving Credit Facility minus 0.125% and (ii)
in the case of documentary letters of credit, at a rate per annum equal to 1.25%
plus, in each case, a fronting fee on the stated amount of each letter of
credit. Such fees are payable quarterly in arrears. In addition, Thermadyne LLC
pays customary transaction charges in connection with any letters of credit.
20
<PAGE> 21
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
The Term Loan Facility is subject to the following amortization schedule:
<TABLE>
<CAPTION>
Year Term Loan A Term Loan B Term Loan C
---- ----------- ----------- -----------
<S> <C> <C> <C>
1............................ 0.0% 1.0% 1.0%
2............................ 5.0% 1.0% 1.0%
3............................ 10.0% 1.0% 1.0%
4............................ 20.0% 1.0% 1.0%
5............................ 25.0% 1.0% 1.0%
6............................ 40.0% 1.0% 1.0%
7............................ -- 94.0% 1.0%
8............................ -- -- 93.0%
----------- ----------- -------
100.0% 100.0% 100.0%
</TABLE>
The Term Loan Facility is subject to mandatory prepayment: (i) with 100% of
the net cash proceeds from the issuance of debt, subject to certain exceptions,
(ii) with 100% of the net cash proceeds of asset sales and casualty events,
subject to certain exceptions, (iii) with 50% of Thermadyne LLC's excess cash
flow (as defined in the New Credit Facility to the extent that the Leverage
Ratio (as defined in the New Credit Facility) exceeds 3.5 to 1.0, and (iv) with
50% of the net cash proceeds from the issuance of equity to the extent that the
Leverage Ratio exceeds 4.0 to 1.0. Thermadyne LLC's obligations under the New
Credit Facility are secured by a first-priority perfected lien on: (i)
substantially all domestic property and assets, tangible and intangible (other
than accounts receivable sold or to be sold into the accounts receivable program
and short term real estate leases), of Thermadyne LLC and its domestic
subsidiaries (other than the special purpose subsidiaries involved in the
accounts receivable program); (ii) the capital stock of (a) Thermadyne LLC held
by Holdings and (b) all subsidiaries of Thermadyne LLC (provided that no more
than 65% of the equity interest in non-U.S. subsidiaries held by Thermadyne LLC
and its domestic subsidiaries and no equity interests in subsidiaries held by
foreign subsidiaries are required to be pledged); and (iii) all intercompany
indebtedness. Holdings has guaranteed the obligations of Thermadyne LLC under
the New Credit Facility. In addition, obligations under the New Credit Facility
are guaranteed by all domestic subsidiaries.
The New Credit Facility contains customary covenants and restrictions on
Thermadyne LLC's ability to engage in certain activities, including, but not
limited to: (i) limitations on the incurrence of liens and indebtedness, (ii)
restrictions on sale lease-back transactions, consolidations, mergers, sale of
assets, capital expenditures, transactions with affiliates and investments, and
(iii) severe restrictions on dividends, and other similar distributions.
The New Credit Facility contains financial covenants requiring Thermadyne
LLC to maintain a minimum level of Adjusted EBITDA (as defined in the New Credit
Facility); a minimum Interest Coverage Ratio (as defined in the New Credit
Facility); a minimum Fixed Charge Coverage Ratio (as defined in the New Credit
Facility); and a maximum Leverage Ratio (as defined in the New Credit Facility).
21
<PAGE> 22
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
Senior Subordinated Notes
Thermadyne LLC and Thermadyne Capital have outstanding $207 million
aggregate principal amount of the Senior Subordinated Notes. The Senior
Subordinated Notes are general unsecured obligations of Thermadyne LLC and
Thermadyne Capital and will be subordinated in right of payment to all existing
and future senior indebtedness of Thermadyne LLC and Thermadyne Capital
(including borrowings under the New Credit Facility). The Senior Subordinated
Notes are unconditionally guaranteed on a senior subordinated basis by certain
of Thermadyne LLC's existing domestic subsidiaries (the "Guarantor
Subsidiaries"). The note guarantees will be general unsecured obligations of the
Guarantor Subsidiaries, are subordinated in right of payment to all existing and
future senior indebtedness of the Guarantor Subsidiaries, including indebtedness
under the New Credit Facility, and will rank senior in right of payment to any
future subordinated indebtedness of the Guarantor Subsidiaries.
The Senior Subordinated Notes mature on June 1, 2008. Interest on the
Senior Subordinated Notes accrues at the rate of 9-7/8% per annum and is payable
semi-annually in arrears on June 1 and December 1, commencing on December 1,
1998, to holders of record on the immediately preceding May 15 and November 15.
5. RECENT ACCOUNTING PRONOUNCEMENT
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, Reporting Comprehensive Income ("FASB 130"). FASB 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on the
Company's net income or shareholders' equity. FASB 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
FASB 130.
During the first nine months of 1998 and 1997, total comprehensive income
(loss) amounted to $(59,826) and $25,156, respectively.
22
<PAGE> 23
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
6. GUARANTOR SUBSIDIARIES
In connection with the merger of Holdings and Mercury, Thermadyne LLC and
Thermadyne Capital, both wholly-owned subsidiaries of Holdings, issued $207
million of Senior Subordinated Notes. Holdings received all of the net proceeds
from the issuance of the Senior Subordinated Notes and Thermadyne LLC and
Thermadyne Capital are jointly and severally liable for all payments under the
Senior Subordinated Notes. Additionally, the Senior Subordinated Notes are fully
and unconditionally (as well as jointly and severally) guaranteed on an
unsecured senior subordinated basis by the Guarantor Subsidiaries. Each of the
Guarantor Subsidiaries is wholly-owned by Thermadyne LLC.
The following condensed consolidating financial information of Thermadyne
LLC includes the accounts of Thermadyne LLC, the combined accounts of the
Guarantor Subsidiaries and the combined accounts of the non-guarantor
subsidiaries for the periods indicated. Separate financial statements of each of
the Guarantor Subsidiaries are not presented because management has determined
that such information is not material in assessing the Guarantor Subsidiaries.
23
<PAGE> 24
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ----------- -------------- ------------- --------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.............................. $ -- $ (85) $ 3,013 $ -- $ 2,928
Restricted cash........................................ -- -- 25,604 (25,604) --
Accounts receivable.................................... -- 13,390 98,643 (23,756) 88,277
Inventories............................................ -- 84,037 52,371 -- 136,408
Prepaid expenses and other............................. -- 2,867 8,739 (233) 11,373
---------- ---------- ---------- ----------- -----------
Total current assets................................... -- 100,209 188,370 (49,593) 238,986
Property, plant and equipment, at cost, net............ -- 46,997 52,377 -- 99,374
Deferred financing costs, net.......................... 19,744 -- 488 -- 20,232
Intangibles, at cost, net.............................. -- 7,411 27,741 -- 35,152
Deferred income taxes.................................. -- 31,406 2,768 -- 34,174
Investment in and advances to/from subsidiaries........ 226,297 10,472 -- (236,769) --
Other assets........................................... -- (142) 1,428 -- 1,286
---------- ---------- ---------- ----------- -----------
Total assets....................................... $ 246,041 $ 196,353 $ 273,172 $ (286,362) $ 429,204
========== ========== ========== =========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Accounts payable....................................... $ -- $ 18,828 $ 25,547 $ -- $ 44,375
Accrued and other liabilities.......................... -- 27,848 9,528 -- 37,376
Accrued interest....................................... 12,761 4 586 -- 13,351
Income taxes payable................................... -- 7,774 (630) -- 7,144
Current maturities of long-term obligations............ 3,550 -- 3,812 -- 7,362
---------- ---------- ---------- ----------- -----------
Total current liabilities.......................... 16,311 54,454 38,843 -- 109,608
Long-term obligations, less current maturities............ 518,449 16,640 81,363 (50,000) 566,452
Other long-term liabilities............................... -- 53,018 10,100 -- 63,118
Shareholder's equity (deficit):
Retained earnings (accumulated deficit)................ (364,880) (297,472) (10,553) 308,025 (364,880)
Accumulated other comprehensive income................. -- 309 (21,564) -- (21,255)
---------- ---------- ---------- ----------- -----------
Total shareholder's equity (deficit)............... (364,880) (297,163) (32,117) 308,025 (386,135)
Net equity and advances to/from subsidiaries.............. 76,161 369,404 174,983 (544,387) 76,161
---------- ---------- ---------- ----------- -----------
Total liabilities and shareholder's equity (deficit)... $ 246,041 $ 196,353 $ 273,172 $ (286,362) $ 429,204
========== ========== ========== =========== ===========
</TABLE>
24
<PAGE> 25
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ----------- -------------- ------------- --------------
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents...................... $ -- $ 308 $ 1,173 $ -- $ 1,481
Restricted cash................................ -- -- 21,634 (21,634) --
Accounts receivable............................ -- 6,595 99,281 (29,029) 76,847
Inventories.................................... -- 62,329 42,806 -- 105,135
Prepaid expenses and other..................... -- 4,601 4,152 (219) 8,534
---------- ---------- ---------- ----------- -----------
Total current assets........................... -- 73,833 169,046 (50,882) 191,997
Property, plant and equipment, at cost, net.... -- 48,367 36,890 -- 85,257
Deferred financing costs, net.................. 5,052 1 701 -- 5,754
Intangibles, at cost, net...................... -- 5,376 28,594 -- 33,970
Deferred income taxes.......................... -- 35,552 -- -- 35,552
Investment in and advances to/from subsidiaries 170,414 10,783 -- (181,197) --
Other assets................................... -- 130 1,867 -- 1,997
---------- ---------- ---------- ----------- -----------
Total assets............................... $ 175,466 $ 174,042 $ 237,098 $ (232,079) $ 354,527
========== ========== ========== =========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Accounts payable.............................. $ -- $ 30,697 $ 24,693 $ -- $ 55,390
Accrued and other liabilities................. -- 25,079 7,618 -- 32,697
Accrued interest.............................. 5,430 10 240 -- 5,680
Income taxes payable.......................... -- 8,106 (3,337) -- 4,769
Current maturities of long-term obligations... -- 1 4,911 -- 4,912
---------- ---------- ---------- ----------- -----------
Total current liabilities.................. 5,430 63,893 34,125 -- 103,448
Long-term obligations, less current maturities.... 320,109 16,320 66,746 (50,000) 353,175
Other long-term liabilities....................... -- 53,421 7,330 -- 60,751
Shareholder's equity (deficit):
Retained earnings (accumulated deficit)........ (299,208) (254,562) (3,668) 258,230 (299,208)
Accumulated other comprehensive
income..................................... -- 2,406 (15,180) -- (12,774)
---------- ---------- ---------- ----------- -----------
Total shareholder's equity (deficit)....... (299,208) (252,156) (18,848) 258,230 (311,982)
Net equity and advances to/from subsidiaries...... 149,135 292,564 147,745 (440,309) 149,135
---------- ---------- ---------- ----------- -----------
Total liabilities and shareholder's ...........
equity (deficit)............................... $ 175,466 $ 174,042 $ 237,098 $ (232,079) $ 354,527
========== ========== ========== =========== ===========
</TABLE>
25
<PAGE> 26
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $ -- $ 107,037 $ 48,025 $ (25,400) $ 129,662
Operating expenses:
Cost of goods sold................................ -- 68,376 39,654 (25,322) 82,708
Selling, general and administrative expenses...... -- 17,992 7,379 -- 25,371
Amortization of other intangibles................. -- 405 507 -- 912
Net periodic postretirement benefits.............. -- 650 -- -- 650
Special charges................................... -- 2,231 2,336 -- 4,567
---------- ----------- ----------- ----------- -----------
Operating income (loss)................................ -- 17,383 (1,851) (78) 15,454
Other income (expense):
Interest expense.................................. -- (12,796) (2,560) 836 (14,520)
Amortization of deferred financing costs.......... -- (746) (49) -- (795)
Equity in net loss of subsidiaries................ (11,561) -- -- 11,561 --
Other............................................. -- (621) 630 (1,139) (1,130)
---------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income tax provision....................... (11,561) 3,220 (3,830) 11,180 (991)
Income tax provision (benefit)......................... -- 11,036 (466) -- 10,570
---------- ----------- ----------- ----------- -----------
Net income (loss)..................................... $ (11,561) $ (7,816) $ (3,364) $ 11,180 $ (11,561)
========== =========== =========== =========== ===========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ----------- -------------- ------------ -----------
Net sales.............................................. $ -- $ 95,413 $ 61,403 $ (24,914) $ 131,902
Operating expenses:
Cost of goods sold.................................. -- 55,239 49,617 (23,961) 80,895
Selling, general and administrative expenses........ -- 19,464 9,005 -- 28,469
Amortization of other intangibles................... -- 1,679 592 -- 2,271
Net periodic postretirement benefits................ -- 585 -- -- 585
---------- ----------- ----------- ----------- -----------
Operating income (loss)................................ 18,446 2,189 (953) 19,682
Other income (expense):
Interest expense.................................... -- (9,641) (2,038) 654 (11,025)
Amortization of deferred financing costs............ -- (316) (60) -- (376)
Equity in net loss of subsidiaries.................. 4,045 -- -- (4,045) --
Other .............................................. -- 159 (150) (1,053) (1,044)
---------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income tax provision......................... 4,045 8,648 (59) (5,397) 7,237
Income tax provision................................... -- 2,466 726 ---- 3,192
---------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations............... 4,045 6,182 (785) (5,397) 4,045
Discontinued operations:
Gain on disposal of discontinued operations,
net of applicable taxes......................... 18,015 -- -- -- 18,015
Gain from discontinued operations, net of
income taxes.................................... 935 -- -- -- 935
---------- ----------- ----------- ----------- -----------
Net income (loss)...................................... $ 22,995 $ 6,182 $ (785) $ (5,397) $ 22,995
========== =========== =========== ============ ===========
</TABLE>
26
<PAGE> 27
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Net sales .................................... $ -- $ 332,023 $ 332,023 $ (79,037) $ 397,200
Operating expenses:
Cost of goods sold.......................... -- 209,290 118,139 (78,600) 248,829
Selling, general and administrative expenses -- 55,484 22,261 -- 77,745
Amortization of other intangibles........... -- 1,188 1,581 -- 2,769
Net periodic postretirement benefits........ -- 1,750 -- -- 1,750
Special charges............................. -- 46,448 2,336 -- 48,784
---------- ----------- ----------- ----------- --------------
Operating income (loss)........................ -- 17,863 (103) (437) 17,323
Other income (expense):
Interest expense............................ -- (33,239) (7,227) 2,818 (37,648)
Amortization of deferred financing costs.... -- (1,520) (154) -- (1,674)
Equity in net loss of subsidiaries.......... (51,345) -- -- 51,345 --
Other .................................... -- 1,428 399 (3,931) (2,104)
---------- ----------- ----------- ----------- --------------
Income (loss) from continuing operations before
income tax provision and extraordinary item. (51,345) (15,468) (7,085) 49,795 (24,103)
Income tax provision (benefit)................. -- 12,305 (200) -- 12,105
---------- ----------- ----------- ----------- --------------
Income (loss) from continuing operations before
extraordinary item.......................... (51,345) (27,773) (6,885) 49,795 (36,208)
Extraordinary item, net of tax................. -- (15,137) -- -- (15,137)
---------- ----------- ----------- ----------- --------------
Net income (loss).............................. $ (51,345) $ (42,910) $ (6,885) $ 49,795 $ (51,345)
========== =========== =========== =========== ==============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ----------- -------------- ------------ --------------
Net sales .................................... $ -- $ 295,912 $ 160,980 $ (72,064) $ 384,828
Operating expenses
Cost of goods sold.......................... -- 178,914 125,975 (71,107) 233,782
Selling, general and administrative expenses -- 56,060 25,987 -- 82,047
Amortization of other intangibles........... -- 4,851 1,499 -- 6,350
Net periodic postretirement benefits........ -- 1,755 -- -- 1,755
---------- ----------- ----------- ----------- --------------
Operating income (loss)........................ -- 54,332 7,519 (957) 60,894
Other income (expense)
Interest expense............................ -- (29,956) (7,792) 3,216 (34,532)
Amortization of deferred financing costs.... -- (1,029) (185) -- (1,214)
Equity in net loss of subsidiaries.......... 13,558 -- -- (13,558) --
Other ...................................... -- 2,220 1,324 (4,440) (896)
---------- ----------- ----------- ----------- --------------
Income (loss) from continuing operations
before income tax provision................. 13,558 25,567 866 (15,739) 24,252
Income tax provision........................... -- 8,412 2,282 -- 10,694
---------- ----------- ----------- ----------- --------------
Income (loss) from continuing operations....... 13,558 17,155 (1,416) (15,739) 13,558
Discontinued operations:
Gain on disposal of discontinued operations,
net of applicable taxes................. 18,015 -- -- -- 18,015
Gain from discontinued operations, net of
income taxes............................ 3,173 -- -- -- 3,173
---------- ----------- ----------- ----------- --------------
Net income (loss).............................. $ 34,746 $ 17,155 $ (1,416) $ (15,739) $ 34,746
========== =========== =========== =========== ==============
</TABLE>
27
<PAGE> 28
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
------------ ----------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating activities.. $ (44,014) $ (58,396) $ (18,531) $ 49,795 $ (71,146)
Cash flows provided by (used in) investing activities
Capital expenditures, net........................ -- (5,742) (6,089) -- (11,831)
Change in other assets........................... -- (2,361) 873 -- (1,488)
Acquisitions, net of cash........................ -- (1,125) (17,828) -- (18,953)
------------ ----------- ---------- ------------ ---------
Net cash used in investing activities................ -- (9,228) (23,044) -- (32,272)
Cash flows provided by (used in) financing activities
Change in long-term receivables.................. -- -- 471 -- 471
Repayment of long-term obligations............... (402,145) -- -- -- (402,145)
Borrowing of long-term obligations............... 604,035 319 14,558 -- 618,912
Change in accounts receivable securitization..... -- (3,422) -- -- (3,422)
Financing fees................................... (20,058) -- -- -- (20,058)
Change in net equity and advances to / from
subsidiaries................................... (137,818) 70,334 29,976 (49,795) (87,303)
Other .......................................... -- -- (1,590) -- (1,590)
------------ ----------- ---------- ------------ ---------
Net cash provided by (used in) financing activities.. 44,014 67,231 43,415 (49,795) 104,865
------------ ------ ---------- ------------ ---------
Net increase (decrease) in cash and cash equivalents. -- (393) 1,840 -- 1,447
Cash and cash equivalents at beginning of period .... -- 308 1,173 -- 1,481
------------ ---------- ---------- ------------ ---------
Cash and cash equivalents at end of period .......... $ -- $ (85) $ 3,013 $ -- $ 2,928
============ =========== ========== ============ =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
------------ ----------- -------------- ------------ ---------
Net cash provided by (used in) operating activities.. $ 22,866 $ 5,008 $ (80) $ (15,739) $ 12,055
Cash flows provided by (used in) investing activities
Capital expenditures, net........................ -- (6,963) (4,949) -- (11,912)
Change in other assets........................... -- 6,282 (770) -- 5,512
Investing activities of discontinued operations.. -- -- (1,680) -- (1,680)
Acquisitions, net of cash........................ -- (7,500) (27,755) -- (35,255)
Proceeds from sale of discontinued operations.... 88,543 -- -- -- 88,543
------ ----------- ---------- ------------ ---------
Net cash provided by (used in) investing activities.. 88,543 (8,181) (35,154) -- 45,208
Cash flows provided by (used in) financing activities
Change in long-term receivables.................. -- 150 -- -- 150
Repayment of long-term obligations............... (108,489) -- (82) -- (108,571)
Borrowing of long-term obligations............... 49,251 213 -- -- 49,464
Change in accounts receivable securitization..... -- 5,473 -- -- 5,473
Financing activities of discontinued operations.. -- -- (2,808) -- (2,808)
Change in net equity and advances to / from......
subsidiaries................................... (50,266) (4,419) 40,103 15,739 1,157
Other .......................................... (1,905) 997 (279) -- (1,187)
------------ ----------- ---------- ------------ ---------
Net cash provided by (used in) financing activities.. (111,409) 2,414 36,934 15,739 (56,322)
------------ ----------- ---------- ------------ ---------
Net increase (decrease) in cash and cash equivalents. -- (759) 1,700 -- 941
Cash and cash equivalents at beginning of period..... -- 690 730 -- 1,420
------------ ---------- ---------- ------------ ---------
Cash and cash equivalents at end of period .......... $ -- $ (69) $ 2,430 $ -- $ 2,361
============ =========== ========== ============ =========
</TABLE>
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the condensed
consolidated financial statements of Holdings. Holdings conducts its operations
through its wholly-owned subsidiary Thermadyne LLC. The accompanying condensed
consolidated financial statements for Holdings and Thermadyne LLC are
substantially the same except for certain debt and equity securities issued by
Holdings, and therefore, a separate discussion of Thermadyne LLC is not
presented.
Included in the following discussions are comparisons of Adjusted EBITDA
which is defined as operating income plus depreciation, amortization of
goodwill, amortization of intangibles and net periodic postretirement benefits
expense and is a key financial measure but should not be construed as an
alternative to operating income or cash flows from operating activities (as
determined in accordance with generally accepted accounting principles).
Adjusted EBITDA is also one of the financial measures by which the Company's
compliance with its covenants is calculated under its debt agreements. The
Company believes that Adjusted EBITDA is a useful supplement to net income
(loss) and other consolidated income statement data in understanding cash flows
generated from operations that are available for taxes, debt service and capital
expenditures. However, the Company's method of computation may or may not be
comparable to other similarly titled measures of other companies. In addition,
Adjusted EBITDA is not necessarily indicative of amounts that may be available
for discretionary uses and does not reflect any legal or contractual
restrictions on the Company's use of funds.
RESULTS OF OPERATIONS
Three Months ended September 30, 1998 compared to Three Months ended September
30, 1997
Net sales were $129.7 million and $131.9 million for the three months ended
September 30, 1998 and 1997, respectively. Domestic sales growth continues to be
strong, up 10.8% (4.9% excluding acquisitions) for the quarter compared to last
year. International sales are down 17.6% for the three months ended September
30, 1998 compared to the same period of the prior year. Lingering economic
problems in Asia and Australia have resulted in combined drop of 35.2% for these
two regions in a comparison of the 1998 and 1997 third quarters which is largely
the result of devaluations in the regions' currencies. Positive results in
Europe, South America and the Middle East offset some of the decline in Asia and
Australia, posting a combined 5.3% increase for the quarter.
Cost of goods sold as a percentage of sales for the three months ended
September 30, 1998 was 63.8% compared to 61.3% for the three months ended
September 30, 1997. Recent acquisitions have had a somewhat detrimental effect
on gross margins as they tend to offer products that carry a slightly lower
gross margin, on average, than the blended gross margin of products sold by the
Company's existing businesses. In addition, current sales mix resulting from
growth in some of the Company's lower margin product lines is driving average
gross
29
<PAGE> 30
margins lower. Lastly, the $2.2 million sales decline in the third quarter of
1998 has a negative effect on gross margins as certain costs do not vary with
sales.
Selling, general and administrative expenses were $25.4 million in the
third quarter of 1998 compared to $28.5 million in the third quarter of 1997. As
a percentage of sales, selling, general and administrative expenses were 19.6%
for the three months ended September 30, 1998 and 21.6% for the three months
ended September 30, 1997. A primary focus throughout 1998 has been to reduce the
cost structure of the Company. The decrease in selling, general and
administrative expense dollars and as a percentage of sales is the result of
these cost reduction efforts.
Special charges of $4.6 million were recorded in September in conjunction
with a headcount reduction.
Interest expense was $18.5 million for the three months ended September 30,
1998, an increase of $7.5 million, or 67.9% over $11.0 million for the three
months ended September 30, 1997. The Company incurred additional debt in its
merger in May, which consequently results in higher interest expense.
An income tax provision of $10.6 million was reported for the third quarter
of 1998 on a pre-tax loss of $5.0 million. This includes a charge of $6.7
million due to the net reduction of the Company's deferred tax asset as a result
of recording a valuation allowance for this asset in the third quarter of 1998.
This compares to an income tax provision of $3.2 million on pre-tax income of
$7.2 million for the third quarter of 1997.
Adjusted EBITDA was $20.8 million for the three months ended September 30,
1998, and includes $4.6 million in charges associated with a headcount reduction
in September. Absent these special charges Adjusted EBITDA was $25.4 million.
This compares to $25.8 million for the three months ended September 30, 1997.
Nine Months ended September 30, 1998 compared to Nine Months ended September 30,
1997
Net sales were $397.2 million for the nine months ended September 30, 1998,
an increase of $12.4 million, or 3.2% over sales of $384.8 million for the nine
months ended September 30, 1997. Domestic sales are solid with an increase of
14.7% ( 8.5% excluding acquisitions) in the first nine months of 1998 compared
to the same period of the prior year. International sales have decreased 11.5%
year-to-date as economic problems in Asia and Australia persist. Absent these
two regions, which are down a combined 29.9% year-to-date, sales in the
remaining international markets combined are up a respectable 10.7% in the first
three quarters of 1998 compared to 1997.
Cost of goods sold as a percentage of sales was 62.6% and 60.7% for the
nine months ended September 30, 1998 and 1997, respectively. Newly acquired
companies have increased this percentage as the average gross margins earned by
these businesses are typically somewhat lower than the Company's historical
gross margin percentages. Recent sales mix is also putting pressure
30
<PAGE> 31
on gross margins. The Company is currently experiencing higher growth in some
of its lower margin product lines which results in a higher cost of goods sold
percentage.
Selling, general and administrative expenses were $77.7 million and $82.0
million for the nine months ended September 30, 1998 and 1997, respectively. As
a percentage of sales, selling, general and administrative expenses were 19.6%
and 21.3%, respectively, for the 1998 and 1997 periods. A cost reduction
program outlined by the Company in late 1997 and initiated in 1998 is the
primary reason behind a decrease in selling, general and administrative
expenses through the first nine months of 1998 of $4.3 million, or 5.2%.
Special charges of $48.8 million in the first nine months of 1998 are the
result of the merger in May and headcount reductions in September, which
accounted for $44.2 million and $4.6 million of total special charges,
respectively.
Interest expense was $43.2 million and $34.5 million for the three quarters
ended September 30, 1998 and 1997, respectively. This $8.7 million, or 25.2%
increase is the result of increased debt levels resulting from the merger in
May.
An income tax provision of $12.1 million for the first nine months of 1998
compares to a provision of $10.7 million for the first nine months of 1997.
Included in the 1998 provision is a net charge of $1.4 million as a result of
recording a valuation allowance for the Company's deferred tax asset. A pre-tax
loss of $29.8 million was reported through September 30, 1998 compared to
pre-tax income of $24.3 million for the same period of the prior year. The
Company's tax profile has changed as a result of expenses incurred in
conjunction with the merger in May.
Adjusted EBITDA was $32.7 million for the nine months ended September 30,
1998 and includes $48.8 million in special charges. Adjusted EBITDA was $81.5
million for the period excluding these special charges. Adjusted EBITDA was
$78.2 million for the nine months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flows. Cash used in operating activities was $58.6
million in the nine months ended September 30, 1998 compared to cash provided by
operations of $12.1 million in the nine months ended September 30, 1997. This
decrease in cash provided by operating activities is the result of a decrease in
earnings (adjusted for noncash expenses) of $61.1 million plus a net increase in
operating assets and liabilities of $9.6 million in the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997. Special
charges of $48.8 million and an extraordinary loss of $15.1 million on the early
extinguishment of debt resulted in a net loss of $57.0 million in the first nine
months of 1998 compared to net income of $34.7 million in the first nine months
of 1997 which included $21.2 million in gains from discontinued operations. In
addition, inventories used $15.4 million more cash and accounts payable used
$20.8 million more cash in a comparison of the first nine months of 1998 and
1997. These uses of cash were partly offset by a decrease in cash used of $7.1
million by accounts receivable, $6.8 million by accrued and other liabilities
and $11.3 million by income taxes payable. Net cash used in investing activities
was $32.3 million dollars in the first nine months of 1998. This compares to
31
<PAGE> 32
net cash provided by investing activities of $45.2 million in the first nine
months of 1997 which includes $86.9 million of net cash provided by discontinued
operations. This amount was increased by other assets using $7.0 million more in
cash and partly offset by acquisitions using $16.3 million less in cash in a
comparison of the 1998 and 1997 periods. Financing activities provided cash of
$92.3 million in the first nine months of 1998 largely as a result of issuing
debt and equity securities in connection with the Merger in May. These proceeds
were partially offset by cash used for related financing fees and the repurchase
of common stock. Financing activities used cash of $56.3 million in the first
nine months of 1997 primarily as a result of the repayment of long-term
obligations with the cash proceeds from the sale of discontinued operations.
Liquidity. The Company's principal sources of liquidity are cash flow from
operations and borrowings under the New Credit Facility. The Company's principal
uses of cash will be debt service requirements, capital expenditures,
acquisitions and working capital. The Company expects that ongoing requirements
for debt service, capital expenditures and working capital will be funded from
operating cash flow and borrowings under the New Credit Facility. In connection
with future acquisitions, the Company may require additional funding which may
be provided in the form of additional debt, equity financing or a combination
thereof. There can be no assurance that any such additional financing will be
available to the Company on acceptable terms.
In connection with the Merger, Mercury raised approximately $140 million
through the issuance of the Mercury Common Stock, the Mercury Preferred Stock,
and the DLJMB Warrants, and approximately $94.6 million aggregate gross proceeds
of the Debentures. As a result of the Merger, the proceeds from the sale of such
securities became an asset of Holdings, each share of Mercury Common Stock
became a share of Holdings Common Stock, each share of Mercury Preferred Stock
became a share of Holdings Preferred Stock, each DLJMB Warrant by its terms
became exercisable for an equal number of shares of Holdings Common Stock, and
Holdings succeeded to the obligations of Mercury with respect to the Debentures.
In addition, Thermadyne LLC and Thermadyne Capital issued approximately $207
million of Senior Subordinated Notes and entered into the New Credit Facility
which raised $330 million through term loans and provides a $100 million
revolver and letters of credit facility. Also, in connection with the Merger,
certain members of senior management purchased 143,192 shares of Holdings Common
Stock for approximately $4.9 million through the Management Share Purchase, of
which approximately $3.6 million was provided through the Management Loans.
The term loan facility under the New Credit Facility consists of: (i) a
$100 million Term A loan, (ii) a $115 million Term B loan, and (iii) a $115
million Term C loan. The Term A loan will mature six years after the closing
date, the Term B loan will mature seven years after the closing date and the
Term C loan will mature eight years after the closing date. The New Credit
Facility also includes a $100 million revolving credit facility, which is
subject to increase by up to $25 million upon request by Thermadyne LLC and that
will terminate six years after the closing date.
32
<PAGE> 33
Borrowings under the New Credit Facility generally will bear interest based
on a margin over, at the Company's option, the base rate or LIBOR. The
applicable margin will vary based on Thermadyne LLC's ratio of consolidated
indebtedness to Adjusted EBITDA. Thermadyne LLC's obligations under the New
Credit Facility will be secured by substantially all of the assets of Thermadyne
LLC, including a pledge of the capital stock of all of its subsidiaries, subject
to certain limitations with respect to foreign subsidiaries. In addition,
Holdings has guaranteed the obligations of Thermadyne LLC under the New Credit
Facility. Such guarantee is only recourse to Holdings' pledge of all of the
outstanding capital stock of Thermadyne LLC to secure Thermadyne LLC's
obligations under the New Credit Facility. The New Credit Facility contains
customary covenants and events of default including substantial restrictions on
Thermadyne LLC's ability to make dividends or other distributions to Holdings.
The Debentures were issued by Mercury, became obligations of Holdings
following the Merger and are not guaranteed by Thermadyne LLC or any of its
consolidated subsidiaries. The Debentures will mature in 2008 and will not
require cash interest payments until 2003. The Debentures contain customary
covenants and events of default, including covenants that limit the ability of
the Company and its subsidiaries to incur debt, pay dividends and make certain
investments.
The Senior Subordinated Notes were issued by Thermadyne LLC and Thermadyne
Capital and, were guaranteed by certain of Holdings' domestic subsidiaries. The
Senior Subordinated Notes will mature in 2008. Interest on the Senior
Subordinated Notes will be payable semiannually in cash. The Senior Subordinated
Notes contain customary covenants and events of default, including covenants
that limit the ability of Thermadyne LLC and its subsidiaries to incur debt, pay
dividends and make certain investments.
The Holdings Preferred Stock issued in connection with the Merger has an
initial liquidation preference of $50 million and will accrue dividends at an
annual rate of 13%. Prior to the fifth anniversary of the original date of
issuance, such dividends will be paid through increases in the liquidation
preference thereof or through the issuance of additional shares of Holdings
Preferred Stock. The Company is required to redeem the Holdings Preferred Stock
on May 15, 2010 at a redemption price equal to the liquidation preference per
share, plus accrued and unpaid dividends, if any, to the date of redemption. In
addition, in the event of a "change of control," as defined in the certificate
of designation related thereto, holders of Holdings Preferred Stock will have
the right to require the Company to repurchase its shares at a purchase price
equal to 101% of the liquidation preference thereof plus accrued and unpaid
dividends, if any.
The Company anticipates that its operating cash flow, together with
borrowings under the New Credit Facility, will be sufficient to meet its
anticipated future operating expenses, capital expenditures and to service its
debt requirements as they become due. However, the Company's ability to make
scheduled payments of principal of, to pay interest on or to refinance its
indebtedness and to satisfy its other debt obligations will depend upon its
future operating performance, which will be affected by general economic,
financial, competitive, legislative, regulatory, business and other factors
beyond its control.
33
<PAGE> 34
Year 2000 Issue
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The operating subsidiaries of the Company have been assembled through a
series of acquisitions beginning in 1987. As such, the Company consists of over
twenty locations operating on a variety of business computer systems. In late
1997 the Company decided to standardize and upgrade all business computer
systems at all but three locations, and as part of this standardization, address
the Year 2000 Issue. The excluded locations are "Year 2000 Ready" and will
convert to the standardized system in early 2000.
In addressing the Year 2000 Issue, the Company is currently evaluating its
computer-based systems, facilities and products and identifying all steps
necessary to determine they are all Year 2000 Ready. The Company is employing a
combination of internal resources and outside consultants to address this issue.
The Company's information technology department is responsible for its business
computers, PC's and related software. General managers of the Company's
manufacturing facilities oversee the Year 2000 Issue at their respective plants
including all engineering computer systems, PC's and related software,
manufacturing equipment and facilities' systems, such as security, climate
control and telecommunication systems. Detailed checklists have been developed
for all of the aforementioned areas which note the review date, actions required
and completion date. The Company has identified systems which are not Year 2000
Ready, and is in the process of upgrading or replacing those systems. The
Company is currently on schedule to complete these upgrades and replacements by
the year 2000. The Company has completed its assessment of its products and has
identified no Year 2000 Issues. In addition, the Company has contacted its
vendors to determine whether they are Year 2000 Ready, and is in the process of
accumulating those responses. Initial responses indicate most of the Company's
vendors are addressing their Year 2000 Issues. As a precaution, alternative
vendors have been identified.
While the Year 2000 Issue is a top priority of the Company and a
significant amount of resources have been allocated to this issue, there can be
no assurance that all of its systems and equipment or its vendors will be Year
2000 Ready. However, at this time, the Company does not believe that its or its
vendors Year 2000 related issues will have a material adverse effect on the
Company's business. In the unlikely event of a systems failure at one of the
Company's facilities, any one of a number of other facilities' systems could be
utilized as a backup system.
34
<PAGE> 35
The total cost to standardize and upgrade all business computer systems is
currently estimated to be $6.5 million. Through September 30, 1998, the Company
has spent approximately $3.0 million of this total. Given the nature of this
project and the fact that it addresses many issues in addition to preparing the
Company for the Year 2000, it is impractical to attempt to estimate the total
costs specifically related to the Year 2000 Issue. In compliance with generally
accepted accounting principles, costs incurred by the Company for hardware,
software and consultants are capitalized, while costs incurred in training
employees are expensed as incurred. As the process to become Year 2000 Ready
continues, additional costs may be identified that have not yet been considered.
Consequently, the full cost of all upgrades, replacements and modifications that
may be required to become Year 2000 Ready has not yet been determined.
35
<PAGE> 36
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 - Financial Data Schedule
b) Reports on Form 8-K
None
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMADYNE HOLDINGS CORPORATION
By: /s/ Randall E. Curran
-------------------------------------
Randall E. Curran
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ James H. Tate
-------------------------------------
James H. Tate
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 12, 1998
37
<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMADYNE MFG. LLC
By: /s/ Randall E. Curran
-------------------------------------
Randall E. Curran
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ James H. Tate
-------------------------------------
James H. Tate
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 12, 1998
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMADYNE CAPITAL CORP.
By: /s/ Randall E. Curran
-------------------------------------
Randall E. Curran
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ James H. Tate
-------------------------------------
James H. Tate
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 12, 1998
39
<PAGE> 40
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT
</LEGEND>
<CIK> 0000850660
<NAME> THERMADYNE HOLDINGS CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,928
<SECURITIES> 0
<RECEIVABLES> 88,277
<ALLOWANCES> 2,353
<INVENTORY> 136,408
<CURRENT-ASSETS> 238,986
<PP&E> 99,374
<DEPRECIATION> 0
<TOTAL-ASSETS> 432,844
<CURRENT-LIABILITIES> 111,268
<BONDS> 709,735
53,352
0
<COMMON> 32
<OTHER-SE> (484,299)
<TOTAL-LIABILITY-AND-EQUITY> 432,844
<SALES> 397,200
<TOTAL-REVENUES> 397,200
<CGS> 248,829
<TOTAL-COSTS> 248,829
<OTHER-EXPENSES> 131,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,238
<INCOME-PRETAX> (29,750)
<INCOME-TAX> 12,105
<INCOME-CONTINUING> (41,855)
<DISCONTINUED> 0
<EXTRAORDINARY> (15,137)
<CHANGES> 0
<NET-INCOME> (56,992)
<EPS-PRIMARY> (8.07)
<EPS-DILUTED> (8.07)
</TABLE>
