<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 June 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
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 Identification No.)
Incorporation or Organization)
Commission file number 333-57457
--------------
Thermadyne Capital Corp.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 74-2878453
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 August 12, 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............................. 29-33
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .............................34
Item 6. Exhibits and Reports on Form 8-K ................................................34
SIGNATURES...................................................................................35-37
</TABLE>
2
<PAGE> 3
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,838 $ 1,481
Accounts receivable, less allowance for
doubtful accounts of $2,263 and
$2,217, respectively 86,615 76,847
Inventories 122,756 105,135
Prepaid expenses and other 7,985 8,534
--------- ---------
Total current assets 228,194 191,997
Property, plant and equipment, at cost, net 84,106 85,257
Deferred financing costs, net 24,768 5,754
Intangibles, at cost, net 31,235 33,970
Deferred income taxes 40,827 35,552
Other assets 4,090 1,997
--------- ---------
Total assets $ 413,220 $ 354,527
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $ 47,289 $ 55,390
Accrued and other liabilities 28,754 32,697
Accrued interest 3,347 5,680
Income taxes payable 3,019 4,769
Current maturities of long-term obligations 7,205 4,912
--------- ---------
Total current liabilities 89,614 103,448
Long-term obligations, less current maturities 686,706 353,175
Other long-term liabilities 59,232 60,751
Redeemable preferred stock (paid in kind), $0.01 par value, 15,000,000
shares authorized and 2,000,000 shares
outstanding at June 30, 1998 50,704 --
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 June 30, 1998 and
December 31, 1997, respectively 32 112
Additional paid-in capital (113,495) 149,023
Accumulated deficit (340,626) (299,208)
Management loans (3,632) --
Accumulated other comprehensive income (15,315) (12,774)
--------- ---------
Total shareholders' deficit (473,036) (162,847)
--------- ---------
Total liabilities and shareholders' deficit $ 413,220 $ 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 Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 135,709 $ 135,175 $ 267,538 $ 252,926
Operating expenses:
Cost of goods sold 84,337 82,545 166,121 152,887
Selling, general and administrative expenses 69,527 27,308 96,591 53,578
Amortization of intangibles 957 2,030 1,857 4,079
Net periodic postretirement benefits 450 585 1,100 1,170
--------- --------- --------- ---------
Operating income (loss) (19,562) 22,707 1,869 41,212
Other income (expense):
Interest expense (13,897) (11,969) (24,731) (23,507)
Amortization of deferred financing costs (540) (378) (910) (838)
Other, net (1,140) (258) (974) 148
--------- --------- --------- ---------
Income (loss) from continuing operations before income
tax provision and extraordinary item (35,139) 10,102 (24,746) 17,015
Income tax provision (benefit) (3,049) 4,521 1,535 7,502
--------- --------- --------- ---------
Income (loss) from continuing operations before
extraordinary item (32,090) 5,581 (26,281) 9,513
Discontinued operations:
Gain from discontinued operations, net of income taxes -- 1,202 -- 2,238
--------- --------- --------- ---------
Income (loss) before extraordinary item (32,090) 6,783 (26,281) 11,751
Extraordinary item - loss on early extinguishment of debt,
net of tax benefit of $8,151 (15,137) -- (15,137) --
--------- --------- --------- ---------
Net income (loss) (47,227) 6,783 (41,418) 11,751
Preferred stock dividends (paid in kind) 704 -- 704 --
--------- --------- --------- ---------
Net income (loss) applicable to common shares $ (47,931) $ 6,783 $ (42,122) $ 11,751
========= ========= ========= =========
Basic earnings per share amounts applicable to common shares:
Income (loss) from continuing operations ($4.25) $ 0.50 ($2.86) $ 0.86
Net income (loss) ($6.22) $ 0.61 ($4.46) $ 1.06
Diluted earnings per share amounts applicable to common shares:
Income (loss) from continuing operations ($4.25) $ 0.49 ($2.86) $ 0.84
Net income (loss) ($6.22) $ 0.60 ($4.46) $ 1.04
</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>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ (41,418) $ 11,751
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Net periodic postretirement benefits 1,100 1,170
Depreciation 7,112 5,960
Amortization of intangibles 1,857 4,079
Non-cash interest expense 1,286 --
Amortization of deferred financing costs 910 838
Recognition of net operating loss carryforwards -- 1,171
Deferred income taxes (5,240) (1,171)
Issuance of common stock warrants 12,190 --
Extraordinary item (2,272) --
Noncash charges for discontinued operations -- 1,121
Changes in operating assets and liabilities:
Accounts receivable (9,989) (11,674)
Inventories (20,780) (11,255)
Prepaid expenses and other (916) (252)
Accounts payable (6,892) 8,634
Accrued and other liabilities (4,124) (6,572)
Accrued interest (2,198) (276)
Income taxes payable 6,265 (1,521)
Other long-term liabilities (2,046) (809)
Discontinued operations -- 159
--------- --------
Total adjustments (23,737) (10,398)
--------- --------
Net cash provided by used in operating activities (65,155) 1,353
--------- --------
Cash flows provided by (used in) investing activities:
Capital expenditures, net (8,466) (6,794)
Change in other assets (465) 6,348
Acquisitions, net of cash (3,654) (27,755)
Investing activities of discontinued operations -- (1,401)
--------- --------
Net cash used in investing activities (12,585) (29,602)
--------- --------
Cash flows provided by (used in) financing activities:
Change in long-term receivables 449 6
Repayment of long-term obligations (390,002) (18,953)
Borrowing of long-term obligations 727,106 47,284
Issuance of common stock 90,335 1,006
Issuance of preferred stock 50,000 --
Repurchase of common stock (368,815) --
Change in accounts receivable securitization (2,642) 7,243
Financing activities of discontinued operations -- (1,629)
Financing fees (23,820) --
Other 4,486 (1,817)
--------- --------
Net cash provided by financing activities 87,097 33,140
--------- --------
Net increase in cash and cash equivalents 9,357 4,891
Cash and cash equivalents at beginning of period 1,481 1,420
--------- --------
Cash and cash equivalents at end of period $ 10,838 $ 6,311
========= ========
</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
six-month periods ended June 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>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Interest $25,778 $25,791
Taxes 703 8,264
</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 Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Basic earnings per share amounts applicable
to common shares:
Income (loss) from continuing
operations before extraordinary item $ (4.25) $ 0.50 $ (2.86) $ 0.86
Discontinued operations -- 0.11 -- 0.20
Extraordinary item (1.97) -- (1.60) --
-------------- -------------- -------------- --------------
Net income (loss) $ (6.22) $ 0.61 $ (4.46) $ 1.06
============== ============== ============== ==============
Diluted earnings per share amounts
applicable to common shares:
Income (loss) from continuing
operations before extraordinary item $ (4.25) $ 0.49 $ (2.86) $ 0.84
Discontinued operations -- 0.11 -- 0.20
Extraordinary item (1.97) -- (1.60) --
-------------- -------------- -------------- --------------
Net income (loss) $ (6.22) $ 0.60 $ (4.46) $ 1.04
============== ============== ============== ==============
Weighted average shares - basic earnings
per share 7,709,393 11,058,772 9,449,299 11,043,533
Effect of dilutive securities:
Employee stock options -- 287,466 -- 287,519
-------------- -------------- -------------- --------------
Weighted average shares - diluted earnings
per share 7,709,393 11,346,238 9,449,299 11,331,052
============== ============== ============== ==============
</TABLE>
2. INVENTORIES
The composition of inventories at June 30, 1998 was as follows:
<TABLE>
<S> <C>
Raw materials $ 23,883
Work-in-process 26,483
Finished goods 73,212
LIFO Reserve (822)
---------
Total $ 122,756
=========
</TABLE>
7
<PAGE> 8
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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 have subsequently been 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").
8
<PAGE> 9
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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 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.
9
<PAGE> 10
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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>
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
10
<PAGE> 11
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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 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,
11
<PAGE> 12
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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,
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'
12
<PAGE> 13
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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 six months of 1998 and 1997, total comprehensive income
(loss) amounted to $(43,959) and $5,572.
13
<PAGE> 14
THERMADYNE MFG. LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,838 $ 1,481
Accounts receivable, less allowance for
doubtful accounts of $2,263 and
$2,217, respectively 86,615 76,847
Inventories 122,756 105,135
Prepaid expenses and other 7,985 8,534
--------- ---------
Total current assets 228,194 191,997
Property, plant and equipment, at cost, net 84,106 85,257
Deferred financing costs, net 21,033 5,754
Intangibles, at cost, net 31,235 33,970
Deferred income taxes 40,827 35,552
Other assets 4,090 1,997
--------- ---------
Total assets $ 409,485 $ 354,527
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Accounts payable $ 47,289 $ 55,390
Accrued and other liabilities 28,754 32,697
Accrued interest 2,713 5,680
Income taxes payable 3,019 4,769
Current maturities of long-term obligations 7,205 4,912
--------- ---------
Total current liabilities 88,980 103,448
Long-term obligations, less current maturities 553,746 353,175
Other long-term liabilities 59,232 60,751
Shareholder's deficit:
Accumulated deficit (353,319) (299,208)
Accumulated other comprehensive income (15,315) (12,774)
--------- ---------
Total shareholder's deficit (368,634) (311,982)
Net equity and advances to / from parent 76,161 149,135
--------- ---------
Total liabilities and shareholder's deficit $ 409,485 $ 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 Six Months Six Months
Ended Ended Ended Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 135,709 $ 135,175 $ 267,538 $ 252,926
Operating expenses:
Cost of goods sold 84,337 82,545 166,121 152,887
Selling, general and administrative expenses 69,527 27,308 96,591 53,578
Amortization of intangibles 957 3,030 1,857 4,079
Net periodic postretirement benefits 450 585 1,100 1,170
--------- --------- --------- ---------
Operating income (loss) (19,562) 22,707 1,869 41,212
Other income (expense):
Interest expense (12,294) (11,969) (23,128) (23,507)
Amortization of deferred financing costs (509) (378) (879) (838)
Other, net (1,140) (258) (974) 148
--------- --------- --------- ---------
Income (loss) from continuing operations before income
tax provision and extraordinary item (33,505) 10,102 (23,112) 17,015
Income tax provision (benefit) (3,049) 4,521 1,535 7,502
--------- --------- --------- ---------
Income (loss) from continuing operations before extraordinary item (30,456) 5,581 (24,647) 9,513
Discontinued operations:
Gain from discontinued operations, net of income taxes -- 1,202 -- 2,238
--------- --------- --------- ---------
Income (loss) before extraordinary item (30,456) 6,783 (24,647) 11,751
Extraordinary item - loss on early extinguishment of debt,
net of tax benefit of $8,151 (15,137) -- (15,137) --
--------- --------- --------- ---------
Net income (loss) $ (45,593) $ 6,783 $ (39,784) $ 11,751
========= ========= ========= =========
</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>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ (39,784) $ 11,751
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Net periodic postretirement benefits 1,100 1,170
Depreciation 7,112 5,960
Amortization of intangibles 1,857 4,079
Amortization of deferred financing costs 879 838
Recognition of net operating loss carryforwards -- 1,171
Deferred income taxes (5,240) (1,171)
Extraordinary item (2,272) --
Noncash charges for discontinued operations -- 1,121
Changes in operating assets and liabilities:
Accounts receivable (9,989) (11,674)
Inventories (20,780) (11,255)
Prepaid expenses and other (916) (252)
Accounts payable (6,892) 8,634
Accrued and other liabilities (4,124) (6,572)
Accrued interest (2,832) (276)
Income taxes payable 6,265 (1,521)
Other long-term liabilities (2,046) (809)
Discontinued operations -- 159
--------- --------
Total adjustments (37,878) (10,398)
--------- --------
Net cash provided by (used in) operating activities (77,662) 1,353
--------- --------
Cash flows provided by (used in) investing activities:
Capital expenditures, net (8,466) (6,794)
Change in other assets (465) 6,348
Acquisitions, net of cash (3,654) (27,755)
Investing activities of discontinued operations -- (1,401)
--------- --------
Net cash used in investing activities (12,585) (29,602)
--------- --------
Cash flows provided by (used in) financing activities:
Change in long-term receivables 449 6
Repayment of long-term obligations (390,002) (18,953)
Borrowing of long-term obligations 595,432 47,284
Change in accounts receivable securitization (2,642) 7,243
Financing activities of discontinued operations -- (1,629)
Financing fees (20,054) --
Change in net equity of parent (87,303) 1,006
Other 3,724 (1,817)
--------- --------
Net cash provided by financing activities 99,604 33,140
--------- --------
Net increase in cash and cash equivalents 9,357 4,891
Cash and cash equivalents at beginning of period 1,481 1,420
--------- --------
Cash and cash equivalents at end of period $ 10,838 $ 6,311
========= ========
</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 six-month periods ended June 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>
Six Months Six Months
Ended Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Interest $26,095 $25,791
Taxes 703 8,264
</TABLE>
2. INVENTORIES
The composition of inventories at June 30, 1998 was as follows:
<TABLE>
<S> <C>
Raw materials $ 23,883
Work-in-process 26,483
Finished goods 73,212
LIFO Reserve (822)
---------
Total $ 122,756
=========
</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 have
subsequently been 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
20
<PAGE> 21
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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>
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
21
<PAGE> 22
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
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 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 six months of 1998 and 1997, total comprehensive income
(loss) amounted to $(42,325) and $5,572.
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
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................ $ -- $ 9,714 $ 1,124 $ -- $ 10,838
Restricted cash .................................. -- -- 24,821 (24,821) --
Accounts receivable .............................. -- 11,480 100,312 (25,177) 86,615
Inventories ...................................... -- 76,425 46,331 -- 122,756
Prepaid expenses and other ....................... -- 1,185 7,042 (242) 7,985
Net assets of discontinued operations ............ -- -- -- -- --
--------- --------- --------- --------- ---------
Total current assets ......................... -- 98,804 179,630 (50,240) 228,194
Property, plant and equipment, at cost, net ...... -- 47,877 36,229 -- 84,106
Deferred financing costs, net .................... 20,486 2 545 -- 21,033
Intangibles, at cost, net ........................ -- 5,387 25,848 -- 31,235
Deferred income taxes ............................ -- 40,827 -- -- 40,827
Investment in and advances to/from subsidiaries .. 211,871 10,623 -- (222,494) --
Other assets ..................................... -- (130) 4,220 -- 4,090
--------- --------- --------- --------- ---------
Total assets ................................. $ 232,357 $ 203,390 $ 246,472 $(272,734) $ 409,485
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current Liabilities:
Accounts payable ................................. $ -- $ 22,618 $ 24,671 $ -- $ 47,289
Accrued and other liabilities .................... -- 21,481 7,273 -- 28,754
Accrued interest ................................. 2,515 3 195 -- 2,713
Income taxes payable ............................. -- 1,271 1,748 -- 3,019
Deferred income taxes ............................ -- -- -- -- --
Current maturities of long-term obligations ...... -- -- 7,205 -- 7,205
--------- --------- --------- --------- ---------
Total current liabilities .................... 2,515 45,373 41,092 -- 88,980
Long-term obligations, less current maturities ...... 507,000 16,451 80,295 (50,000) 553,746
Other long-term liabilities ......................... -- 53,055 6,177 -- 59,232
Shareholder's equity (deficit):
Retained earnings (accumulated deficit) .......... (353,319) (289,656) (7,189) 296,845 (353,319)
Accumulated other comprehensive
income ....................................... -- 907 (16,222) -- (15,315)
--------- --------- --------- --------- ---------
Total shareholder's equity (deficit) ......... (353,319) (288,749) (23,411) 296,845 (368,634)
Net equity and advances to/from subsidiaries ........ 76,161 377,260 142,319 (519,579) 76,161
--------- --------- --------- --------- ---------
Total liabilities and shareholder's
equity (deficit) ............................. $ 232,357 $ 203,390 $ 246,472 $(272,734) $ 409,485
========= ========= ========= ========= =========
</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
---------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
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
Net assets of discontinued operations .................. -- -- -- -- --
--------- --------- --------- --------- ---------
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
Deferred income taxes .................................. -- -- -- -- --
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 shareholders' 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 JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales ................................................. $ -- $ 113,475 $ 48,364 $(26,130) $ 135,709
Operating expenses:
Cost of goods sold ................................... -- 71,204 39,315 (26,182) 84,337
Selling, general and administrative expenses ......... -- 61,989 7,538 -- 69,527
Amortization of other intangibles .................... -- 423 534 -- 957
Net periodic postretirement benefits ................. -- 450 -- -- 450
-------- --------- -------- -------- ---------
Operating income (loss) ................................... -- (20,591) 977 52 (19,562)
Other income (expense):
Interest expense ..................................... -- (10,909) (2,291) 906 (12,294)
Amortization of deferred financing costs ............. -- (458) (51) -- (509)
Equity in net loss of subsidiaries ................... (45,593) -- -- 45,593 --
Other ................................................ -- 1,700 (1,537) (1,303) (1,140)
-------- --------- -------- -------- ---------
Income (loss) from continuing operations
before income tax provision and extraordinary item ... (45,593) (30,258) (2,902) 45,248 (33,505)
Income tax provision (benefit) ............................ -- (2,700) (349) -- (3,049)
-------- --------- -------- -------- ---------
Income (loss) from continuing operations before
extraordinary item ................................... (45,593) (27,558) (2,553) 45,248 (30,456)
Extraordinary item, net of tax ............................ -- (15,137) -- -- (15,137)
-------- --------- -------- -------- ---------
Net income (loss) ......................................... $(45,593) $ (42,695) $ (2,553) $ 45,248 $ (45,593)
======== ========= ======== ======== =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ----------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales ......................................... $ -- $ 107,167 $ 55,182 $(27,174) $ 135,175
Operating expenses:
Cost of goods sold ............................. -- 66,977 42,681 (27,113) 82,545
Selling, general and administrative expenses ... -- 18,598 8,710 -- 27,308
Amortization of other intangibles .............. -- 1,473 557 -- 2,030
Net periodic postretirement benefits ........... -- 585 -- -- 585
------ --------- -------- -------- ---------
Operating income (loss) ........................... -- 19,534 3,234 (61) 22,707
Other income (expense):
Interest expense ............................... -- (10,231) (3,048) 1,310 (11,969)
Amortization of deferred financing costs ....... -- (316) (62) -- (378)
Equity in net loss of subsidiaries ............. 5,581 -- -- (5,581) --
Other .......................................... -- 845 652 (1,755) (258)
------ --------- -------- -------- ---------
Income (loss) from continuing operations
before income tax provision .................... 5,581 9,832 776 (6,087) 10,102
Income tax provision .............................. -- 3,522 999 -- 4,521
------ --------- -------- -------- ---------
Income (loss) from continuing operations .......... 5,581 6,310 (223) (6,087) 5,581
Discontinued operations:
Income from discontinued operations, net of
income taxes ............................... 1,202 -- -- -- 1,202
------ --------- -------- -------- ---------
Net income (loss) ................................. $6,783 $ 6,310 $ (223) $ (6,087) $ 6,783
====== ========= ======== ======== =========
</TABLE>
26
<PAGE> 27
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales ......................................... $ -- $ 224,986 $ 96,189 $(53,637) $ 267,538
Operating expenses:
Cost of goods sold ............................. -- 140,914 78,485 (53,278) 166,121
Selling, general and administrative expenses ... -- 81,709 14,882 -- 96,591
Amortization of other intangibles .............. -- 783 1,074 -- 1,857
Net periodic postretirement benefits ........... -- 1,100 -- -- 1,100
-------- --------- -------- -------- ---------
Operating income (loss) ........................... -- 480 1,748 (359) 1,869
Other income (expense):
Interest expense ............................... -- (20,443) (4,667) 1,982 (23,128)
Amortization of deferred financing costs ....... -- (774) (105) -- (879)
Equity in net loss of subsidiaries ............. (39,784) -- -- 39,784 --
Other .......................................... -- 2,049 (231) (2,792) (974)
-------- --------- -------- -------- ---------
Income (loss) from continuing operations before
income tax provision and extraordinary item .... (39,784) (18,688) (3,255) 38,615 (23,112)
Income tax provision (benefit) .................... -- 1,269 266 -- 1,535
-------- --------- -------- -------- ---------
Income (loss) from continuing operations before
extraordinary item ............................. (39,784) (19,957) (3,521) 38,615 (24,647)
Extraordinary item, net of tax .................... -- (15,137) -- -- (15,137)
-------- --------- -------- -------- ---------
Net income (loss) ................................. $(39,784) $ (35,094) $ (3,521) $ 38,615 $ (39,784)
======== ========= ======== ======== =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Net sales ......................................... $ -- $ 200,499 $ 99,577 $(47,150) $ 252,926
Operating expenses:
Cost of goods sold ............................. -- 123,675 76,358 (47,146) 152,887
Selling, general and administrative expenses ... -- 36,596 16,982 -- 53,578
Amortization of other intangibles .............. -- 3,172 907 -- 4,079
Net periodic postretirement benefits ........... -- 1,170 -- -- 1,170
------- --------- -------- -------- ---------
Operating income (loss) ........................... -- 35,886 5,330 (4) 41,212
Other income (expense):
Interest expense ............................... -- (20,315) (5,754) 2,562 (23,507)
Amortization of deferred financing costs ....... -- (713) (125) -- (838)
Equity in net loss of subsidiaries ............. 9,513 -- -- (9,513) --
Other .......................................... -- 2,061 1,474 (3,387) 148
------- --------- -------- -------- ---------
Income (loss) from continuing operations
before income tax provision .................... 9,513 16,919 925 (10,342) 17,015
Income tax provision .............................. -- 5,946 1,556 -- 7,502
------- --------- -------- -------- ---------
Income (loss) from continuing operations .......... 9,513 10,973 (631) (10,342) 9,513
Discontinued operations:
Income from discontinued operations, net of
income taxes ............................... 2,238 -- -- -- 2,238
------- --------- -------- -------- ---------
Net income (loss) ................................. $11,751 $ 10,973 $ (631) $(10,342) $ 11,751
======= ========= ======== ======== =========
</TABLE>
27
<PAGE> 28
THERMADYNE MFG. LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 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 .... $ (42,699) $(62,735) $(10,843) $ 38,615 $ (77,662)
Cash flows provided by (used in) investing activities
Capital expenditures, net .......................... -- (4,127) (4,339) -- (8,466)
Change in other assets ............................. -- (369) (96) -- (465)
Acquisitions, net of cash .......................... -- (640) (3,014) -- (3,654)
--------- -------- -------- -------- ---------
Net cash provided by (used in) investing activities .... -- (5,136) (7,449) -- (12,585)
Cash flows provided by (used in) financing activities
Change in long-term receivables .................... -- -- 449 -- 449
Repayment of long-term obligations ................. (390,002) -- -- -- (390,002)
Borrowing of long-term obligations ................. 576,893 130 18,409 -- 595,432
Change in accounts receivable securitization ....... -- (2,642) -- -- (2,642)
Financing fees ..................................... (20,054) -- -- -- (20,054)
Change in net equity and advances to / from
subsidiaries ..................................... (124,138) 79,789 (4,339) (38,615) (87,303)
Other .............................................. -- -- 3,724 -- 3,724
--------- -------- -------- -------- ---------
Net cash provided by (used in) financing activities .... 42,699 77,277 18,243 (38,615) 99,604
--------- -------- -------- -------- ---------
Net increase (decrease) in cash and cash equivalents ... -- 9,406 (49) -- 9,357
Cash and cash equivalents at beginning of period ....... -- 308 1,173 -- 1,481
--------- -------- -------- -------- ---------
Cash and cash equivalents at end of period ............. $ -- $ 9,714 $ 1,124 $ -- $ 10,838
========= ======== ======== ======== =========
</TABLE>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(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 .... $ 10,809 $ (584) $ 1,470 $(10,342) $ 1,353
Cash flows provided by (used in) investing activities
Capital expenditures, net .......................... -- (3,730) (3,064) -- (6,794)
Change in other assets ............................. -- 4,835 1,513 -- 6,348
Investing activities of discontinued operations .... -- -- (1,401) -- (1,401)
Acquisitions, net of cash .......................... -- -- (27,755) -- (27,755)
-------- ------- -------- -------- --------
Net cash provided by (used in) investing activities .... -- 1,105 (30,707) -- (29,602)
Cash flows provided by (used in) financing activities
Change in long-term receivables .................... -- 6 -- -- 6
Repayment of long-term obligations ................. (18,709) -- (244) -- (18,953)
Borrowing of long-term obligations ................. 47,145 139 -- -- 47,284
Change in accounts receivable securitization ....... -- 7,243 -- -- 7,243
Financing fees ..................................... -- -- -- -- --
Financing activities of discontinued operations .... -- -- (1,629) -- (1,629)
Change in net equity and advances to / from
subsidiaries ..................................... (37,446) (4,860) 32,970 10,342 1,006
Other .............................................. (1,799) 198 (216) -- (1,817)
-------- ------- -------- -------- --------
Net cash provided by (used in) financing activities .... (10,809) 2,726 30,881 10,342 33,140
-------- ------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ... -- 3,247 1,644 -- 4,891
Cash and cash equivalents at beginning of period ....... -- 690 730 -- 1,420
-------- ------- -------- -------- --------
Cash and cash equivalents at end of period ............. $ -- $ 3,937 $ 2,374 $ -- $ 6,311
======== ======= ======== ======== ========
</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 June 30, 1998 compared to Three Months ended June 30, 1997
Net sales were $135.7 million for the three months ended June 30, 1998
compared to $135.2 million for the three months ended June 30, 1997. Domestic
sales increased a solid 13.5% (7.5% excluding acquisitions) in the second
quarter of 1998 compared to the second quarter of 1997. However, international
sales decreased 15.6% as problems in Asia worsened. Exchange rate declines in
Asia and Australia have significantly impacted results.
Cost of goods sold as a percentage of sales in the second quarter of 1998
was 62.1% compared to 61.1% in the second quarter of 1997. Recent acquisitions
and current sales mix are the primary reasons for this decline in gross margin.
Recently acquired companies have a somewhat lower average gross margin than that
which previously existed at the Company on a blended basis. In addition, the
Company is experiencing an increase in unit sales of machines and now offers a
full complement of cutting and welding products with the addition of items in
more competitive segments of the market. This change in sales mix also puts
pressure on margins.
29
<PAGE> 30
Selling, general and administrative expenses were $69.5 million in the
three months ended June 30, 1998 and included $44.2 million in special charges
related to the merger. Excluding the special charges, selling, general and
administrative expenses would have been $25.3 million for the three months ended
June 30, 1998 which compares to $27.3 million for the three months ended June
30, 1997. As a percentage of sales, selling, general and administrative
expenses, excluding special charges related to the merger in 1998, would have
been 18.7% for the second quarter of 1998 and were 20.2% for the second quarter
of 1997. The major factor in this reduction of selling, general and
administrative expense is the cost reduction program implemented by the Company
at the end of 1997.
Interest expense increased $1.9 million to $13.9 million for the three
months ended June 30, 1998 compared to $12.0 million for the three months ended
June 30, 1997, an increase of 16.1%. Incremental debt incurred in connection
with the merger accounts for the majority of this increase.
There was an income tax benefit in the amount of $3.0 million on a pre-tax
loss of $35.1 million for the second quarter of 1998. The second quarter of 1997
resulted in an income tax provision of $4.5 million on pre-tax income of $10.1
million. Expenses incurred in connection with the merger changed the Company's
tax profile.
Adjusted EBITDA was a negative $14.6 million for the three months ended
June 30, 1998 which includes $44.2 million in special charges related to the
merger. Excluding these special charges, Adjusted EBITDA was $29.6 million for
the three months ended June 30, 1998 which compares to $28.4 million for the
three months ended June 30, 1997, an increase of $1.2 million, or 4.3%.
Six Months ended June 30, 1998 compared to Six Months ended June 30, 1997
Net sales for the six months ended June 30, 1998 were $267.5 million, an
increase of $14.6 million, or 5.8%, over net sales of $252.9 million for the six
months ended June 30, 1997. Sales have increased 16.7% (10.4% excluding
acquisitions) domestically thus far in 1998 compared to 1997. Internationally
sales have decreased 8.3% in the first half of 1998 compared to the first half
of 1997. International sales have been negatively impacted by steep declines in
Asia and Australia, a region which accounted for approximately 21.1% of 1997
sales. Exchange rates have played a major role in these declines as Asian
currencies have devalued as much as 75% while the Australian dollar has declined
over 16% compared to the first half of 1997.
Cost of goods sold as a percentage of sales was 62.1% in the first six
months of 1998 and 60.4% in the first six months of 1997. Gross margins have
decreased from the levels of 1997 principally as a result of sales mix. The
Company is experiencing growth in some of its relatively lower margin product
lines, such as equipment, with consumables making up a
30
<PAGE> 31
smaller percentage of the Company's overall sales. Recent acquisitions have also
impacted gross margins, as they typically carry lower gross margins on average.
Selling, general and administrative expenses for the six months ended June
30, 1998 were $96.6 million and included $44.2 million in special charges
related to the merger. Selling, general and administrative expenses for this
period would have been $52.4 million excluding the merger's special charges.
This compares favorably with selling, general and administrative expenses of
$53.6 million for the first six months of 1997. As a percentage of sales,
excluding special charges, selling, general and administrative expenses would
have been 19.6% for the six months ended June 30, 1998, compared to 21.2% for
the six months ended June 30, 1997. Cost reduction initiatives identified by the
Company in December of 1997 and implemented in the first half of 1998 are
primarily responsible for this decrease in the Company's cost structure.
Interest expense increased from $23.5 million in the first half of 1997 to
$24.7 million in the first half of 1998, a total increase of $1.2 million.
Higher debt levels resulting from the merger in the second quarter of 1998 more
than offset the lower debt levels of the Company in the first quarter of 1998
when compared to the first quarter of 1997.
The income tax provision for the first six months of 1998 was $1.5 million
on a pre-tax loss of $24.7 million compared to an income tax provision of $7.5
million on a pre-tax income of $17.0 million for the first six months of 1997.
Expenses incurred in connection with the merger changed the Company's tax
profile.
Adjusted EBITDA was $11.9 million including $44.2 million in special
charges related to the merger for the six months ended June 30, 1998. Excluding
special charges Adjusted EBITDA increased $3.7 million, or 7.1%, in the first
half of 1998 to $56.2 million from $52.4 million in the first half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flows. Cash used in operating activities was $65.2
million in the first six months of 1998 compared to cash provided by operating
activities of $1.4 million in the first six months of 1997. This decrease in
cash provided by operating activities is the result of a decrease in earnings
(adjusted for noncash expenses) of $49.4 million in the first half of 1998
compared to the first half of 1997, plus a net increase in operating assets and
liabilities of $17.1 million in the six months ended June 30, 1998 compared to
the six months ended June 30, 1997. Expenses incurred in connection with the
Merger contributed to a net loss of $41.4 million through the second quarter of
1998, compared to net income of $11.8 million through the second quarter of
1997. In addition, inventories used $9.5 million more cash and accounts payable
used $15.5 million more cash in a comparison of the 1998 period to the 1997
period. Net cash used in investing activities was $12.6 million in the first two
quarters of 1998 compared to $29.6 million in the first two quarters of 1997.
Acquisitions used $24.1 million less and
31
<PAGE> 32
discontinued operations used $1.4 million less thus far in 1998 compared to
1997. These amounts were partially offset by an increase in capital expenditures
of $1.7 million and an increase in cash used by other assets of $6.8 million.
Net cash provided by financing activities was $87.1 million and $33.1 million in
the first six months of 1998 and 1997, respectively. This increase is the result
of a net increase in cash provided by the issuance of debt and equity securities
in connection with the Merger, partially offset by an increase in cash used for
related financing fees and the repurchase of common stock.
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, and 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.
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
32
<PAGE> 33
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
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On May 21, 1998, the Company's stockholders, represented by 9,775,300
shares of the 11,175,293 shares of common stock outstanding, at a special
meeting of the stockholders, approved the Agreement and Plan of Merger (the
"Merger Agreement"), dated as of January 20, 1998, between Mercury Acquisition
Corporation and the Company, as amended, and the transactions contemplated
thereby, with 9,771,079 votes cast in favor of the Merger Agreement, 2,351
votes cast against the Merger Agreement and 1,870 abstentions.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 - Financial Data Schedule
b) Reports on Form 8-K
A Current Report on Form 8-K dated June 4, 1998 was filed by the
Company regarding its merger with an affiliate of DLJ Merchant Banking
Partners II.
34
<PAGE> 35
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: August 14, 1998
-----------------------
35
<PAGE> 36
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: August 14, 1998
--------------------
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 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: August 14, 1998
-------------------
37
<PAGE> 38
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT.
</LEGEND>
<CIK> 0000850660
<NAME> THERMADYNE HOLDINGS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,838
<SECURITIES> 0
<RECEIVABLES> 86,615
<ALLOWANCES> 2,263
<INVENTORY> 122,756
<CURRENT-ASSETS> 228,194
<PP&E> 84,106
<DEPRECIATION> 0
<TOTAL-ASSETS> 413,220
<CURRENT-LIABILITIES> 89,614
<BONDS> 693,911
50,704
0
<COMMON> 32
<OTHER-SE> (473,068)
<TOTAL-LIABILITY-AND-EQUITY> 413,220
<SALES> 267,538
<TOTAL-REVENUES> 267,538
<CGS> 166,121
<TOTAL-COSTS> 166,121
<OTHER-EXPENSES> 99,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,731
<INCOME-PRETAX> (24,746)
<INCOME-TAX> 1,535
<INCOME-CONTINUING> (26,281)
<DISCONTINUED> 0
<EXTRAORDINARY> (15,137)
<CHANGES> 0
<NET-INCOME> (41,418)
<EPS-PRIMARY> (4.46)
<EPS-DILUTED> (4.46)
</TABLE>
