1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23378
THERMADYNE HOLDINGS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2482571
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
COMMISSION FILE NUMBER 333-57457
THERMADYNE MFG. LLC
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2878452
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
COMMISSION FILE NUMBER 333-57457
THERMADYNE CAPITAL CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2878453
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
101 S. HANLEY, SUITE 300 63105
ST. LOUIS, MISSOURI (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (314) 721-5573
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrants: (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: approximately $4.3 million based on the closing sales price
of the Common Stock, on March 12, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 3,590,326 shares of
Common Stock, outstanding at March 22, 1999.
Thermadyne Mfg. LLC and Thermadyne Capital Corp. meet the conditions set
forth in General Instruction I of Form 10-K and are therefore filing this form
with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors and the other risks
described in this Annual Report and the other documents the Company files from
time to time with the Securities and Exchange Commission. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or that reflect
the occurrence of unanticipated events.
PART I
ITEM 1. BUSINESS.
GENERAL
Thermadyne Holdings Corporation, a Delaware corporation ("Thermadyne" or
the "Company"), is a leading global manufacturer of cutting and welding products
and accessories. The Company manufactures a broad range of gas (oxy-fuel) and
electric arc cutting and welding products that are ultimately sold to end-user
customers principally engaged in the aerospace, automotive, construction, metal
fabrication, mining, mill and foundry, petroleum and shipbuilding industries.
Thermadyne Mfg. LLC ("Thermadyne LLC") is a wholly owned and the principal
operating subsidiary of the Company and Thermadyne Capital Corp. ("Thermadyne
Capital") is a wholly owned subsidiary of Thermadyne LLC.
BACKGROUND
On May 22, 1998, the Company consummated (i) the merger (the "Merger") of
Mercury Acquisition Corporation ("Mercury"), a corporation organized by DLJ
Merchant Banking Partners II, L.P. ("DLJMB") and affiliated funds and entities
(the "DLJMB Funds"), with and into the Company and (ii) the associated
recapitalization of the Company (collectively, the "Recapitalization"). The
DLJMB Funds acquired approximately 80.6% of the outstanding common stock, par
value $0.01 per share ("Common Stock") of the Company pursuant to such
transactions.
In 1998 the Company made the following four acquisitions. On September 1,
the Company acquired all the issued and outstanding capital stock of Thermadyne
Victor Ltda. (formerly known as Equi Solda SA) ("Victor Brazil"), a leading
manufacturer of gas cutting apparatus in Brazil. On July 24, the Company
acquired substantially all the assets of Mid-America Cryogenics Company
("Mid-America"), which specializes in the design, installation and service of
cryogenic equipment and is located in Indianapolis, Indiana. On May 21, the
Company acquired substantially all the assets of OCIM Srl ("OCIM"), a
manufacturer of a variety of arc welding accessories including metal inert gas
("MIG") and tungsten inert gas ("TIG") torches and consumables, located in
Milan, Italy. On February 1, the Company acquired substantially all the assets
of Pro-tip, a division of Settles Ground Support, Inc., a producer of low-cost
oxygen fuel cutting tips in Cuthbert, Georgia. The aggregate consideration paid
for these four acquisitions was approximately $19 million.
PRINCIPAL PRODUCTS
The Company manufactures a broad range of both gas (oxy-fuel) and arc
cutting and welding equipment (including a line of advanced plasma arc cutting
systems and oxy-fuel apparatus), accessories and consumables, including repair
parts used in the cutting and welding industry. Gas cutting and welding torches
burn a mixture of oxygen and fuel gas, typically acetylene. Arc cutting and
welding systems are powered by electricity. The major arc cutting and welding
systems are plasma, stick, MIG and TIG. Arc technology is more sophisticated
than gas technology and can be used on more types of metals. In addition, arc
equipment produces less distortion in the surrounding metal and it cuts and
welds faster, reducing labor costs. However, gas technology is more portable and
generally less expensive than arc technology and therefore remains important in
many industries.
1
3
The Company conducts its operations through the following subsidiaries:
THERMAL DYNAMICS -- PLASMA ARC CUTTING PRODUCTS. Thermal Dynamics
Corporation ("Thermal Dynamics"), located in West Lebanon, New Hampshire and
founded in 1957, developed many of the early plasma cutting systems and
maintains its position as a leading manufacturer of plasma cutting systems and
replacement parts. Thermal Dynamics' product line ranges from a portable 12 amp
unit to large 1000 amp units. Thermal Dynamics' end-users are engaged primarily
in fabrication and repair of sheet metal and plate products found in fabricated
structural steel and non-ferrous metals, automotive products, appliances, sheet
metal, HVAC, general fabrication, shipbuilding and general maintenance.
Advantages of the plasma cutting process over other methods include faster
cutting speeds, the ability to cut ferrous and non-ferrous alloys and minimum
heat distortion on the material being cut. Plasma cutting also permits metal
cutting using only compressed air and electricity.
TWECO -- ELECTRIC ARC PRODUCTS AND ARC GOUGING SYSTEMS. Tweco Products,
Inc. ("Tweco"), located in Wichita, Kansas and founded in 1936, manufactures a
line of arc welding replacement parts and accessories, including electrode
holders, ground clamps, cable connectors, terminal connectors and lugs and cable
splicers, and a variety of automatic and semi-automatic welding guns and cable
assemblies utilized in the arc welding process. Tweco also manufactures manual
stick electrode holders, ground clamps and accessories. Manual stick welding is
one of the oldest forms of welding and is used primarily by smaller welding
shops which perform general repair, maintenance and fabrication work. Tweco's
end-users are primarily engaged in the manufacture or repair and maintenance of
transportation equipment, including automobiles, trucks, aircraft, trains and
ships; the manufacture of a broad range of machinery; and the production of
fabricated metal products, including structural metal, hand tools and general
hardware.
Tweco is a leading domestic manufacturer of MIG welding guns. The MIG
process is an arc welding process utilized in the fabrication of steel,
aluminum, stainless steel and other metal products and structures. In the MIG
process, a small diameter consumable electrode wire is continuously fed into the
arc. The welding arc area is protected from the atmosphere by a "shielding" gas.
The welding guns and cable assemblies manufactured by Tweco carry the continuous
wire electrode, welding current and shielding gas to the welding arc. Tweco
manufactures a related line of robotic welding accessory products. This new
accessory line includes, but is not limited to, a robotic torch with patented
consumables, a robotic deflection mount, a robotic cleaning station, robotic
arms and an anti-splatter misting system.
Through its Arcair product line, Tweco manufactures equipment and related
consumable materials for "gouging," a technique that liquefies metal in a narrow
groove and then removes it using compressed air. Gouging products are often used
in joint preparation prior to a welding process. Numerous other applications
exist for these gouging systems, such as removal of defective welds, removal of
trim in foundries and repair of track, switches and freight cars in the railroad
industry. Arcair also manufactures a line of underwater welding and gouging
equipment.
In addition to gouging products, Arcair produces a patented exothermic
cutting system, SLICE(R). This system generates temperatures in excess of 70007
F and can quickly cut through steel, concrete and other materials. SLICE(R) has
many applications, including opening clogged steel furnaces and providing rapid
entry in fire and rescue operations. Arcair has developed an underwater version
of the SLICE(R) cutting system for use in the marine repair and salvage
industry.
Arcair also manufactures TIG torches and accessories. The TIG process can
be used to fuse metals of almost all alloys and in thicknesses down to foil
size. TIG welding is used for pressure vessels, such as tanks, valves and pipes
and is relied on heavily in welding nuclear components. Fabrications involving
aluminum, magnesium and other specialty metals for use in aircraft, ships and
weapon systems also utilize the TIG process.
Arcair provides a complete line of chemicals used in the welding industry.
Chemicals are used for weld cleaning and as agents to reduce splatter adherence
on the metal being welded. Chemicals are also used to reduce splatter adherence
in welding nozzles in MIG applications.
2
4
VICTOR -- OXY-FUEL GAS PRODUCTS. Victor Equipment Company ("Victor") has
plants in Abilene and Denton, Texas and Gallman, Mississippi and was founded in
1913. Victor is a leading domestic manufacturer of gas operated cutting and
welding torches and gas and flow pressure regulation equipment. Victor's torches
are used to cut ferrous metals and to weld, heat, solder and braze a variety of
metals, and its regulation equipment is used to control pressure and flow of
most industrial and specialty gases. In addition, Victor manufactures a variety
of replacement parts, including welding nozzles and cutting tips of various
types and sizes and a line of specialty gas regulators purchased by end-users in
the process control, electronics and other industries. Victor also manufactures
a wide range of medical regulation equipment serving the oxygen therapy market,
including home health care and hospitals.
The torches produced by Victor are commonly referred to as oxy-fuel
torches. These torches combine a mixture of oxygen and a fuel gas, typically
acetylene, to produce a high temperature flame. These torches are designed for
maximum durability, repair ability and performance utilizing patented built-in
reverse flow check valves and flash arresters in several models. Victor also
manufactures lighter-duty hand-held heating, soldering and brazing torches.
Pressure regulators, which are basically diaphragm valves, serve a broad range
of industrial and specialty gas process control operations.
The principal uses of the Victor torch are cutting steel in metal
fabricating applications such as shipbuilding, construction of oil refineries,
power plants and manufacturing facilities, and welding, heating, brazing and
cutting in connection with maintenance of machinery, equipment and facilities.
Victor sells its lighter-duty products to end-user customers principally
engaged in the plumbing, refrigeration and heating, ventilation and air
conditioning industries. The relative low cost, mobility and ease of use of
Victor torches makes them suitable for a wide variety of uses.
CIGWELD -- ELECTRIC ARC PRODUCTS, OXY-FUEL PRODUCTS, FILLER METALS, GAS
CONTROL PRODUCTS AND SAFETY PRODUCTS. The business now known as Cigweld, located
in Melbourne, Australia and founded in 1922, is the leading Australian
manufacturer of gas equipment and welding products.
Cigweld manufactures arc welding equipment products for both the automatic
arc and manual arc welding markets. The Cigweld range of automatic welding
equipment includes packages specifically designed for particular market
segments. End users of this product range include the rural market and the
vehicle repair, metal fabrication, ship building, general maintenance and heavy
industries. Manual arc equipment products range from small welders designed for
the home handyman to units designed for heavy industry.
Cigweld manufactures a range of consumable products (filler metals) for
manual and automatic arc and gas welding. The range of manual arc electrodes
includes over 50 individual electrodes for different applications. Cigweld
markets its manual arc electrodes under such brand names as Satincraft,
Weldcraft, Ferrocraft(R), Alloycraft(R), Satincrome, Cobalarc(R), Castcraft and
Weldall(R).
For automatic and semi-automatic welding applications, Cigweld manufactures
a significant range of solid and flux-cored wires, principally under the
Autocraft(R), Verti-Cor, Satin-Cor, Metal-Cor and Cobalarc(R) brand names. For
gas and TIG welding, Cigweld manufactures and supplies approximately 40
individual types of wires and solders for use in different applications.
Cigweld's filler metals are manufactured to standards appropriate for their
intended use, with the majority of products approved by agencies, such as
Lloyd's Register of Shipping, American Bureau of Shipping, De Norske Veritas and
U.S. Naval Ships.
Cigweld manufactures a comprehensive range of equipment for gas welding and
cutting and ancillary products such as gas manifolds, gas regulators and
flowmeters. Gas welding and cutting equipment is sold in kit form or as
individual products. Kits are manufactured for various customer groups and their
components include combinations of oxygen and acetylene regulators, blowpipes,
cutting attachments, mixers, welding and heating tips, cutting nozzles, roller
guides, twin welding hoses, goggles, flint lighters and tip cleaners,
combination spanners and cylinder keys. In addition to its kits, Cigweld
manufactures and/or distributes a complete range of gas equipment, including a
range of blowpipes and attachments, regulators (for oxygen, acetylene, argon and
carbon dioxide), flashback arrestors, cutting nozzles, welding and heating tips,
hoses and fittings, gas manifolds and accessories.
3
5
Cigweld also manufactures a range of gas control equipment including
specialty regulators (for use with different gases, including oxygen, acetylene,
liquified petroleum gas, argon, carbon dioxide, nitrogen, air, helium, hydrogen,
carbon monoxide, ethylene, ethane and nitrous oxide), manifold systems, cylinder
valves and spares and natural gas regulators. Cigweld's gas control items are
primarily sold to gas companies.
Cigweld manufactures and/or distributes a range of safety products for use
in welding and complementary industries. The product range includes welding
helmets and accessories, respirators and masks, breathing apparatus, earmuffs
and earplugs, safety spectacles, safety goggles and gas welding goggles, safety
helmets, faceshields, flashields (see-through welding curtains and screens) and
welding apparel.
Medical products are also manufactured by Cigweld in its manufacturing
plant in Melbourne, Australia. These products are sold through distributors in
the Australian market and exported through third party distributors and related
entities. The product range includes regulators, flowmeters, suction units,
oxygen therapy, resuscitation and outlet valves for medical gas systems.
C&G SYSTEMS -- CUTTING TABLES. C&G Systems Inc. ("C&G"), located in Itasca,
Illinois and founded in 1968, manufactures a line of mechanized cutting tables
for fabricating sheet metal and metal plate. The machines utilize either
oxy-fuel or plasma cutting torches produced by other divisions of the Company.
C&G has a wide range of cutting tables from the relatively inexpensive
cantilever type used in general fabrication and job shops to the large precision
gantry type found in steel service centers and specialty cutting applications.
These metal cutting tables can be used in virtually any metal fabrication plant.
STOODY -- HARDFACING PRODUCTS. Stoody Company ("Stoody"), located in
Bowling Green, Kentucky and with operations founded in 1921, is a recognized
world leader in the development and manufacture of hardfacing welding wires,
electrodes and rods. While Stoody's primary product line is iron-based welding
wires, Stoody also participates in the markets for cobalt-based and nickel-based
electrodes, rods and wires, which are essentially protective overlays, deposited
on softer base materials by various welding processes. This procedure, referred
to as "hardfacing" or "surface treatment," adds a more resistant surface,
thereby increasing the component's useful life. Lower initial costs, the ability
to treat large parts, and ease and speed of repairs in the field are some of the
advantages of hardfacing over solid wear resistant components. A variety of
products have been developed for hardfacing applications in industries utilizing
earth moving equipment, agricultural tools, crushing components, and steel mill
rolls, and in virtually all applications where metal is exposed to external wear
factors.
THERMAL ARC -- ARC WELDERS, PLASMA WELDERS AND WIRE FEEDERS. In 1997, the
inverter and plasma arc welder business of Thermal Dynamics and the welding
division of Prestolite Power Corporation ("Arcsys"), were combined to form
Thermal Arc, Inc. ("Thermal Arc"). The combined operation is located in Troy,
Ohio and produces a full line of inverter and transformer-based electric arc
welders, plasma welders, engine driven welders and wire feeders. Thermal Arc
products compete in the marketplace for construction, industrial and automated
applications, and serve a large and diverse user base.
The inverter arc welding power machines use high frequency power
transistors to provide welding machines that are extremely portable and power
efficient when compared to conventional welding power sources. Plasma welding
dramatically improves productivity for the end-user. Additionally, conventional
transformer-based machines provide a cost-effective alternative for markets
where low cost and simplicity of maintenance are a high priority.
GENSET -- ENGINE-DRIVEN WELDERS AND GENERATORS. GenSet S.p.A. ("GenSet"),
which was acquired by the Company in January 1997 and is located in Pavia,
Italy, commenced operations in 1976 with the production of small generating
sets. In 1976, it developed its first engine-driven welder and, in 1977,
obtained its first patent for the synchronous alternator designed for welding
purposes. It now offers a full range of technologically advanced generators and
engine-driven welders that are sold throughout the world. These products are
used both where main power is not available and for stand-by power where
continuous power supply is a key requirement.
VICTOR GAS SYSTEMS -- CRYOGENIC PUMPS, AMBIENT AND ELECTRIC VAPORIZERS AND
AUTOMATIC CYLINDER FILLING SYSTEMS. The operations of Victor Gas Systems, Inc.
("Victor Gas"), formerly known as Woodland
4
6
Cryogenics Company, commenced in 1986, and were acquired by the Company in
November 1997. Victor Gas is a leading manufacturer, distributor and installer
of cryogenic and high pressure gas fill plants, vaporizers and pumps, and its
products are used to control, mix and package both cryogenic and high pressure
gases into containment vessels such as gas cylinders.
The principal uses of Victor Gas products are for the filling of cryogenic
and high pressure gases for applications in industrial, medical and specialty
gas markets served by gas distributors and producers. Victor Gas has developed
computerized filling equipment to maximize productivity while also offering
conventional or manual filling equipment.
VICTOR BRAZIL -- OXY-FUEL PRODUCTS AND CUTTING TABLES. Victor Brazil, with
offices and manufacturing facilities located in Rio de Janeiro, Brazil, was
acquired by the Company in 1998. Victor Brazil is the leading manufacturer of
oxy-fuel products for industrial and medical use and of mechanized cutting
tables for shaping and fabricating sheet metal and metal plate in South America.
Victor Brazil primarily serves the Latin America market. The oxy-fuel
product line is very competitive in the region and offers the customer a broad
range of gas cutting and welding equipment. Metal fabricators of all sizes,
including applications such as shipbuilding, steel construction, machinery
manufacturing, pressure vessel producers, and steel mills use the industrial
oxy-fuel products. Hospitals, home care and doctor's offices use the medical
oxy-fuel products.
The cutting table line of products use either oxy-fuel or plasma cutting
systems produced by Victor Brazil or other divisions of the Company. The line of
products is oriented to the needs of the Latin America market. Inexpensive
cantilever tables and higher precision, computer numeric controlled tables are
produced by Victor Brazil. These products are used in all types of metal
fabricating plants.
INTERNATIONAL BUSINESS
The Company had aggregate international sales from continuing operations of
approximately $199.4 million, $220.2 million and $171.6 million for the fiscal
years ended December 31, 1998, 1997 and 1996, respectively, or approximately
37%, 42% and 39%, respectively, of net sales in each such period. The Company's
international sales are influenced by fluctuations in exchange rates of foreign
currencies, foreign economic conditions and other risks associated with foreign
trade. Additionally, as a result of the current downturn in the Asian and
certain South American economies, there may be a decrease in infrastructure
development in these regions or an overall worldwide contraction of industrial
development. The impact of decreased development could have a material adverse
effect on the Company's business, financial condition or results of operations.
The Company's international sales consist of (a) export sales of Thermadyne
products manufactured at domestic manufacturing facilities and, to a limited
extent, products manufactured by third parties, sold through overseas field
representatives of Thermadyne International Corporation ("Thermadyne
International"), a subsidiary of Thermadyne, and (b) sales of Thermadyne
products manufactured at international manufacturing facilities, sold by
Thermadyne's foreign subsidiaries. For further information concerning the
international operations of the Company, see the notes to the Consolidated
Financial Statements of the Company included elsewhere herein.
Thermadyne International was formed in 1980 to coordinate Thermadyne's
efforts to increase international sales and sells cutting and welding products
through independent distributors in more than 80 countries. In support of this
effort, the Company operates distribution centers in Canada, Australia, Italy,
Mexico, Japan, Singapore, Brazil, the Philippines, Malaysia, Indonesia and the
United Kingdom and employs sales people located in 23 additional countries.
COMPETITION
The Company competes principally with a number of domestic manufacturers of
cutting and welding products, the majority of which compete only in limited
segments of the overall market. Management believes that competition is based
primarily on product quality and brand name, breadth and depth of product lines,
effectiveness of distribution channels, a knowledgeable sales force capable of
solving customer application problems, price and quality of customer service. To
date, the Company has experienced little direct foreign
5
7
competition in its U.S. markets due to the relatively limited size of such
markets, the inability of foreign manufacturers to establish effective
distribution channels and the relatively non-labor intensive nature of the
cutting and welding product manufacturing process. The Company also competes in
certain international markets in which it faces substantial competition from
foreign manufacturers of cutting and welding products.
DISTRIBUTION
The Company's cutting and welding products are distributed through a
domestic network of approximately 1,100 independent welding products
distributors with over 2,800 locations who carry one or more of its product
lines. Relationships with the distributors are maintained by a separate sales
force for each of the Company's principal product lines. In addition, a national
accounts group exists to support the sale of all of the Company's product lines
to its major distributors. The Company's products are distributed
internationally through a direct sales force and independent distributors.
RAW MATERIALS
The Company has not experienced any difficulties in obtaining raw materials
for its operations because its principal raw materials, copper, brass, steel and
plastic, are widely available and need not be specially manufactured for use by
the Company. Certain of the raw materials used in hardfacing products, such as
cobalt and chromium, are available primarily from sources outside the United
States, some of which are located in countries that may be subject to economic
and political conditions which could affect pricing and disrupt supply. Although
the Company has historically been able to obtain adequate supplies of these
materials at acceptable prices and has been able to recover the costs of any
increases in the price of raw materials in the form of higher unit sales prices,
restrictions in supply or significant fluctuations in the prices of cobalt,
chromium and other raw materials could adversely affect the Company's business.
The Company also purchases certain products which it either uses in its
manufacturing processes or resells. These products include, but are not limited
to, electronic components, circuit boards, semi-conductors, motors, engines,
pressure gauges, springs, switches, lenses and chemicals. The Company believes
its sources of such products are adequate to meet foreseeable demand.
RESEARCH AND DEVELOPMENT
The Company has research and development groups for each of its product
lines that primarily conduct process and product development to meet market
needs. As of December 31, 1998, the Company employed approximately 125 persons
in its research and development groups, most of which are engineers.
EMPLOYEES
As of December 31, 1998, the Company employed 3,506 people, of which
approximately 618 were engaged in sales and marketing activities, 205 were
engaged in administrative activities, 2,572 were engaged in manufacturing
activities and 111 were engaged in engineering activities. Labor unions
represent none of the Company's work force in the United States and virtually
all of the manufacturing employees in its foreign operations. The Company
believes that its employee relations are good. The Company has not experienced
any significant work stoppages.
PATENTS, LICENSES AND TRADEMARKS
The Company's products are sold under a variety of trademarks and trade
names. The Company owns trademark registrations or has filed trademark
applications for all trademarks and has registered all trade names that the
Company believes are material to the operation of its businesses. The Company
also owns various patents and from time to time acquires licenses from owners of
patents to apply such patents to its operations. The Company does not believe
any single patent or license is material to the operation of its businesses
taken as a whole.
ITEM 2. PROPERTIES.
The Company operates 17 manufacturing facilities in the United States,
Italy, the Philippines, Brazil, Indonesia, Malaysia and Australia. All domestic
manufacturing facilities, leases and leasehold interests are
6
8
encumbered by liens securing the Company's obligations under its senior credit
facility. The Company considers its plants and equipment to be modern and
well-maintained and believes its plants have sufficient capacity to meet future
anticipated expansion needs.
The Company leases and maintains a 43,600 square foot facility located in
St. Louis, Missouri, which houses the executive offices of the Company and its
operating subsidiaries, as well as all centralized services.
The following table describes the location and general character of the
Company's principal properties:
SUBSIDIARY/ BUILDING SPACE/ PROPERTY
LOCATION OF FACILITY NUMBER OF BUILDINGS SIZE
-------------------- ------------------- --------
Thermal Dynamics/West Lebanon, New
Hampshire........................ 187,000 sq. ft. 8.0 acres
5 buildings (office, manufacturing, sales
training, future expansion)
Tweco/Wichita, Kansas.............. 220,816 sq. ft. 21.7 acres
3 buildings (office, manufacturing, storage
space)
Victor/Denton, Texas............... 222,403 sq. ft. 30.0 acres
4 buildings (office, manufacturing,
storage, sales training center)
Victor/Abilene, Texas.............. 123,740 sq. ft. 32.0 acres
1 building (office, manufacturing)
Victor Brazil/Rio de Janeiro,
Brazil........................... 200,000 sq. ft. 6.0 acres
6 buildings (office, manufacturing,
warehouse)
Thermadyne Canada/Oakville,
Ontario, Canada.................. 57,000 sq. ft. 8.3 acres
1 building (office, warehouse)
Modern Engineering Company/Gallman,
Mississippi...................... 60,000 sq. ft. 60.0 acres
1 building (office, manufacturing)
Thermadyne Australia/Melbourne,
Australia........................ 588,000 sq. ft. 32.4 acres
8 buildings (office, manufacturing,
storage, research)
Comweld Philippines/Cebu,
Philippines...................... 41,380 sq. ft. 1.2 acres
1 building (office, manufacturing)
Comweld Indonesia/Jakarta,
Indonesia........................ 52,500 sq. ft. 2.1 acres
1 building (office, manufacturing)
Comweld Malaysia/Kuala Lumpur,
Malaysia......................... 56,000 sq. ft, 2.2 acres
1 building (office, manufacturing,
warehouse)
C&G/Itasca, Illinois............... 38,000 sq. ft. 2.0 acres
1 building (office, manufacturing, future
expansion)
Stoody/Bowling Green, Kentucky..... 185,000 sq. ft. 37.0 acres
1 building (office, manufacturing)
GenSet/Pavia, Italy................ 193,000 sq. ft. 7.9 acres
2 buildings (office, manufacturing,
warehouse)
OCIM/Milan, Italy.................. 10,000 sq. ft. 0.5 acres
1 building (office, manufacturing)
Thermal Arc/Troy, Ohio............. 120,000 sq. ft. 6.5 acres
1 building (office, manufacturing,
warehouse, sales training)
Victor Gas/Philadelphia,
Pennsylvania..................... 25,537 sq. ft. 3.4 acres
1 building (office, manufacturing)
Victor Gas/Indianapolis, Indiana... 5,000 sq. ft. 1.0 acres
1 building (office, manufacturing,
warehouse)
7
9
All of the above facilities are leased, except for the facilities located
in Melbourne, Cebu, Pavia, Rio de Janeiro and Gallman, which are owned. The
Company also has additional assembly and warehouse facilities in Canada, the
United Kingdom, Italy, Japan, Singapore, Mexico, the Philippines, Indonesia,
Brazil and Australia.
In addition, the Company has subleased 295,000 square feet of its 325,000
square foot facility in City of Industry, California, which formerly was the
manufacturing facility for certain products now manufactured at the Company's
Bowling Green, Kentucky facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to ordinary litigation incidental to its businesses,
including a number of product liability cases seeking substantial damages. The
Company maintains insurance against any product liability claims. Coverage for
most years has a $500,000 self insured retention with $500,000 of primary
insurance per claim. In addition, the Company maintains umbrella policies
providing an aggregate of $50,000,000 in coverage for product liability claims.
Although it is difficult to predict the outcome of litigation with any
certainty, the Company believes that the liabilities which might reasonably
result from such lawsuits, to the extent not covered by insurance, will not have
a material adverse effect on the Company's financial condition or results of
operations.
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the storage, handling, generation, treatment,
emission, release, discharge and disposal of certain substances and wastes. The
Company is currently not aware of any citations or claims filed against it by
any local, state, federal and foreign governmental agencies which, if
successful, would have a material adverse effect on the Company's financial
condition or results of operations.
The Company may be required to incur costs relating to remediation of
properties, including properties at which the Company disposes waste, and
environmental conditions could lead to claims for personal injury, property
damage or damages to natural resources. The Company is aware of environmental
conditions at certain properties which it now or previously owned or leased
which are undergoing remediation. The Company does not believe that the cost of
such remediation will have a material adverse effect on the Company's business,
financial condition or results of operations.
Certain environmental laws, including but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act and the equivalent state
laws, provide for strict, joint and several liability for investigation and
remediation of spills or other releases of hazardous substances. Such laws may
apply to conditions at properties presently or formerly owned or operated by the
Company or by its predecessors or previously owned business entities, as well as
to conditions at properties at which wastes or other contamination attributable
to the Company or its predecessors or previously owned business entities come to
be located. The Company has in the past and may in the future be named a
potentially responsible party at off-site disposal sites to which it has sent
waste. The Company does not believe that the ultimate cost relating to such
sites will have a material adverse effect on the Company's financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of shareholders of the registrant held on November 4,
1998, there were 3,236,834 shares of Common Stock of the Company issued and
outstanding and entitled to be voted, if represented. The following matters were
presented to the meeting for a vote and the results of such voting are as
follows:
(1) Election of Directors
FOR ALL NOMINEES WITHHELD
- ---------------- --------
3,113,366 42
8
10
(2) To ratify the adoption of the Thermadyne Holdings Corporation Bonus
Plan
FOR AGAINST ABSTAIN BROKER NON-VOTE
- --------- ------- ------- ---------------
2,991,475 39,686 30 82,217
(3) To ratify the adoption of the Thermadyne Holdings Corporation
Management Incentive Plan
FOR AGAINST ABSTAIN BROKER NON-VOTE
- --------- ------- ------- ---------------
2,976,684 54,405 102 82,217
(4) To ratify the adoption of the Thermadyne Holdings Corporation 1998
Non-Employee Directors Stock Option Plan
FOR AGAINST ABSTAIN BROKER NON-VOTE
- --------- ------- ------- ---------------
3,029,767 1,337 102 82,217
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock began trading on The Nasdaq Stock Market
("NASDAQ") on May 17, 1994. On October 15, 1998 the NASDAQ delisted the Common
Stock. Following its delisting from NASDAQ, the Common Stock traded in the over
the counter market. The following table shows, for the periods indicated, the
high and low sale prices of a share of the Common Stock for the fiscal years
1997 and 1998 as reported by published financial sources.
CLOSING SALE
PRICE
-------------
HIGH LOW
---- ---
1997
First Quarter............................................. $28 1/4 $24 3/8
Second Quarter............................................ 31 7/8 25 1/2
Third Quarter............................................. 31 1/2 27 5/8
Fourth Quarter............................................ 30 1/2 27 3/4
1998
First Quarter............................................. 34 1/4 28
Second Quarter............................................ 47 37 3/8
Third Quarter............................................. 40 5/8 24
Fourth Quarter............................................ 29 1/16 15
On March 12, 1999 the last reported bid price for the Common Stock as
reported by published financial sources was $16.00 per share. As of March 23,
1999, there were approximately 84 holders of record of Common Stock.
The Company has historically not paid any cash dividends on Common Stock
and it does not have any present intention to commence payment of any cash
dividends. The Company intends to retain earnings to provide funds for the
operation and expansion of the Company's business and to repay outstanding
indebtedness. The Company's debt agreements contain certain covenants
restricting the payment of dividends on, or repurchases of, Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
9
11
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data for and as of each of the years in the
five-year period ended December 31, 1998 set forth below have been derived from
the audited Consolidated Financial Statements of the Company. The Selected
Financial Data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements including the Notes thereto in each case
included elsewhere herein.
FISCAL YEARS ENDED DECEMBER 31,
-----------------------------------------------
1994(1) 1995(2) 1996(2) 1997 1998
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AND RATIO DATA)
Operating Results Data:
Net sales........................................ $258.1 $ 316.8 $ 439.7 $ 520.4 $ 532.8
Cost of goods sold............................... 141.1 176.0 259.8 320.0 340.2
Selling, general and administrative expenses..... 60.0 72.4 95.9 110.7 102.6
Amortization of goodwill(3)...................... 83.9 92.9 83.0 1.6 1.5
Amortization of intangibles(4)................... 10.7 48.4 12.4 6.8 2.4
Net periodic postretirement benefits............. 2.1 2.1 2.7 2.8 2.6
Special charges.................................. -- 2.3 -- -- 50.5
------ ------- ------- ------- -------
Operating income (loss).......................... (39.7) (77.3) (14.1) 78.5 33.0
Interest expense................................. 39.1 41.3 45.7 45.3 62.2
Other expense, net............................... 2.0 4.8 3.7 4.7 5.6
Income (loss) from continuing operations
available to common........................... (85.1) (131.8) (62.9) 15.1 (46.2)
Income (loss) per share from continuing
operations:
Basic......................................... (8.51) (12.97) (5.83) 1.36 (7.95)
Diluted....................................... (8.51) (12.97) (5.83) 1.33 (7.95)
Consolidated Balance Sheet Data:
Working capital(5)............................... $ 81.5 $ 52.3 $ 67.6 $ 88.5 $ 121.2
Total assets..................................... 627.8 416.4 353.4 354.5 420.2
Total debt....................................... 497.7 456.5 421.3 358.1 710.7
Total stockholders' equity (deficit)............. 20.6 (132.2) (185.3) (162.8) (496.3)
Consolidated Cash Flow Data:
Net cash provided by (used in) operating
activities.................................... $ 5.4 $ 31.2 $ 21.5 $ 15.0 $ (50.3)
Net cash provided by (used in) investing
activities.................................... (1.0) (15.7) 18.7 36.8 (39.5)
Net cash provided by (used in) financing
activities.................................... (5.8) (20.9) (40.6) (51.7) 89.7
Other Data:
Adjusted EBITDA(6)............................... $ 62.7 $ 74.6 $ 95.7 $ 102.1 $ 105.1
Depreciation..................................... 5.7 8.5 11.7 12.5 15.1
Capital expenditures............................. 8.0 7.2 11.4 16.3 17.5
- ---------------
(1) Represents the eleven-month period from February 1, 1994, the effective date
of the Company's comprehensive financial restructuring under chapter 11 of
the United States Bankruptcy Code (the "Restructuring"), through December
31, 1994.
(2) In 1996 the Company announced plans to sell, and in 1997 consummated the
sale of, its wear resistance business and in late 1995 announced its plans
to sell, and in 1996 consummated the sale of, its gas containment and floor
maintenance businesses. These businesses are accounted for as discontinued
operations in the Company's Consolidated Financial Statements.
(3) In conjunction with the Restructuring, the Company's assets and liabilities
were revalued at the effective date thereof. The assets and liabilities were
stated at their reorganization value. The portion of the reorganization
value not attributable to specific assets was amortized over a three year
period.
(4) Includes $33.0 million in 1995 related to the writedown of intangible assets
in accordance with Financial Accounting Standards Board Statement No. 121.
10
12
(5) Excludes net assets of discontinued operations.
(6) "Adjusted EBITDA" is defined as operating income plus depreciation,
amortization of goodwill, amortization of intangibles, net periodic
postretirement benefits expense and special charges 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.
11
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
OVERVIEW
Thermadyne, through its subsidiaries, is engaged in the design, manufacture
and distribution of cutting and welding products and accessories. Since 1994,
the Company has embarked on a strategy designed to focus its business
exclusively on the cutting and welding industry and enhance the Company's market
position within that industry.
The following is a discussion and analysis of the consolidated financial
statements of the Company. The Company conducts its operations through its
wholly-owned subsidiary Thermadyne LLC. The accompanying consolidated financial
statements for the Company and Thermadyne LLC are substantially the same except
for certain debt and equity securities issued by the Company, 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, net periodic postretirement benefits
expense and special charges 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
The following discussion of results of operations is presented for the
fiscal years ended December 31, 1996, 1997 and 1998. The results of operations
of the Company include the operations of C&G, Cigweld, GenSet, Arcsys, Victor
Gas, Pro-tip, Mid-America, OCIM and Victor Brazil from their respective dates of
acquisition.
1998 Compared to 1997
Net Sales
Net sales from continuing operations for the year ended December 31, 1998
were $532.8 million, an increase of $12.3 million, or 2.4%, over net sales from
continuing operations of $520.4 million for the year ended December 31, 1997.
Domestic sales increased 10.6% in 1998, including $13.9 million related to
acquisitions. Excluding acquisitions domestic sales increased 6.0% in 1998,
which is largely the result of successful new product introductions and
marketing programs. International sales decreased 9.0% in a comparison of 1998
and 1997. Results in Asia and Australia continue to significantly impact
consolidated results. Combined sales in those regions are down 27.4% in 1998 of
which approximately 70% related to changes in currency exchange rates. Also
included in the overall 9.0% international sales decrease is $4.5 million in
sales attributable to a recently acquired company in Brazil. Excluding the
effects of the decreases in Asia and Australia, and the acquisition in Brazil,
international sales increased 7.7% in 1998 compared to 1997.
Costs and Expenses
Cost of goods sold from continuing operations as a percentage of sales for
the year ended December 31, 1998 was 63.9% compared to 61.5% for the year ended
December 31, 1997. Acquisitions continue to put downward pressure on gross
margins as the Company expands its product line in the cutting and welding
industry which often includes adding lower gross margin businesses. Current
sales mix is also influencing the
12
14
gross margin percentage as the Company is experiencing growth in some of its
lower margin product lines, which results in a lower overall gross margin
percentage. Cost of goods sold as a percentage of sales would have been 63.3%,
excluding the effect of acquisitions.
Selling, general and administrative expenses from continuing operations
decreased $8.1 million, or 7.4%, from $110.7 million for the year ended December
31, 1997 to $102.6 million for the year ended December 31, 1998. As a percentage
of sales, selling, general and administrative expenses were 19.2% for the year
ended December 31, 1998 compared to 21.3% for the year ended December 31, 1997.
This decrease in costs is primarily the result of a broad cost reduction program
implemented by the Company in 1998.
Amortization of other intangibles decreased 65.2%, or $4.4 million, to $2.4
million for the year ended December 31, 1998 compared to the year ended December
31, 1997. This decrease results from events that occurred during 1997, including
the recognition of net operating loss carryforward benefits and the sale of the
wear resistance business.
Special charges of $50.5 million in 1998 are the result of the Merger and
headcount reductions in the third and fourth quarters. The amounts applicable to
these two events were $44.2 million, and $6.3 million, respectively.
Interest expense increased $16.8 million in 1998 to $62.2 million, from
$45.3 million in 1997. Increased debt levels as a result of the Merger is the
reason for this 37.1% increase.
Amortization of deferred financing costs was $2.7 million for the year
ended December 31, 1998 compared to $1.6 million for the year ended December 31,
1997. This $1.1 million, or 70.1%, increase is a result of Merger-related debt
placement costs.
An income tax provision of $11.4 million was reported for the year ended
December 31, 1998 on a pre-tax loss of $34.8 million. An income tax provision of
$13.5 million was reported for the year ended December 31, 1997 on pre-tax
income of $28.5 million. The 1998 income tax provision differs from the amount
determined by applying the US federal statutory rate to pre-tax loss primarily
as a result of certain non-deductible expenses recorded in connection with the
Merger as well as an increase in the valuation allowance for deferred tax
assets. The 1997 income tax provision differs from the amount determined by
applying the US federal statutory rate to pre-tax income primarily as a result
of non-deductible goodwill amortization and other non-deductible expenses.
Adjusted EBITDA
Adjusted EBITDA was $105.1 million, or 19.7% of net sales, for the year
ended December 31, 1998. This compares to Adjusted EBITDA from continuing
operations of $102.1 million for the year ended December 31, 1997, which is
19.6% of net sales.
1997 Compared to 1996
Net Sales
Net sales from continuing operations for the year ended December 31, 1997
were $520.4 million, compared to net sales of $439.7 million for the year ended
December 31, 1996, an increase of $80.7 million, or 18.4%. Domestic and
international sales increased 12.0% and 28.3%, respectively in 1997. Included in
net sales for the year ended December 31, 1997 are sales of $32.9 million
related to GenSet, which was acquired effective February 1, 1997, $5.6 million
related to Arcsys, which was acquired on September 26, 1997 and $0.2 million
related to Woodland, which was acquired on November 25, 1997. Excluding sales
from these acquired companies, net sales from continuing operations increased
$42.0 million, or 9.6%. New product introductions and the addition of products
through acquisition have been the most significant growth factors in domestic
sales. Success with new marketing programs and with sales through alternate
channels have also contributed to this increase. Sales in international markets
have increased as a result of strategic initiatives in Asia and Latin America,
and the addition of sales personnel.
13
15
Costs and Expenses
Cost of goods sold from continuing operations as a percentage of sales for
the year ended December 31, 1997 was 61.5% compared to 59.1% for the year ended
December 31, 1996. This change is largely due to the 1997 acquisitions as these
new product lines have lower average gross margins than the blended margin in
the Company's existing businesses. Excluding the effect of the 1997
acquisitions, cost of goods sold as a percentage of sales would have been 59.9%.
Selling, general and administrative expenses from continuing operations
increased 15.4% to $110.7 million for the year ended December 31, 1997 from
$95.9 million for the year ended December 31, 1996. The 1997 acquisitions added
$4.6 million of this $14.8 million increase. The remainder of this increase is
mostly the result of spending in Asia and Latin America related to internal
infrastructure and business development as the Company pursues increased market
share in these regions. As a percentage of sales, selling, general and
administrative expenses from continuing operations decreased to 21.3% for the
year ended December 31, 1997 from 21.8% for the year ended December 31, 1996.
Amortization of goodwill decreased $81.4 million to $1.6 million for the
year ended December 31, 1997 from $83.0 million for the year ended December 31,
1996. Goodwill amortization in 1997 relates to acquisitions since the Company's
1994 financial reorganization. In 1996, goodwill recorded in connection with the
reorganization was reduced, in part, by the initial recognition of certain
deferred tax assets existing on the effective date of the Company's
comprehensive financial restructuring and the remaining amount associated with
the reorganization became fully amortized. Amortization of other intangibles
decreased from $12.4 million to $6.8 million for the years ended December 31,
1996 and 1997, respectively. This $5.6 million, or 45.3%, decrease results from
the initial recognition of the net deferred tax asset as well as adjustments
during 1997 resulting from the recognition of net operating loss carryforward
benefits and the sale of the wear resistance business.
Interest expense was essentially the same for 1997 as in 1996, even though
the Company's overall debt level decreased $63.3 million over the course of the
year. This is due to the acquisition of GenSet in February 1997 which resulted
in a higher overall debt balance the first nine months of the year. Cash
proceeds from the sale of discontinued operations were used to reduce debt at
the end of the third quarter 1997.
Income tax expense was $13.5 million for the year ended December 31, 1997
compared to an income tax benefit of $0.5 million for the year ended December
31, 1996. The income tax benefit recorded in the fourth quarter of 1996 includes
a $13.8 million income tax benefit resulting from the initial recognition of the
Company's net deferred tax asset.
Adjusted EBITDA
Adjusted EBITDA from continuing operations was $102.1 million and $95.7
million for the years ended December 31, 1997 and 1996, respectively. As a
percentage of net sales, Adjusted EBITDA was 19.6% for the year ended December
31, 1997 compared to 21.8% for the year ended December 31, 1996.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 1999. The Statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to adopt
the new Statement effective January 1, 2000. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the change in fair
value of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not anticipate that the
adoption of this Statement will have a significant effect on its results of
operations or financial position.
14
16
LIQUIDITY AND CAPITAL RESOURCES
Working Capital and Cash Flows. Cash used in operating activities was $50.3
million for the year ended December 31, 1998 compared to cash provided by
operations of $15.0 million for the year ended December 31, 1997. This decrease
in cash provided by operating activities is the result of a decrease in earnings
(adjusted for noncash expenses) of $62.2 million plus a net increase in
operating assets and liabilities of $3.1 million in a comparison of the years
ended December 31, 1998 and 1997. Special charges of $50.5 million and an
extraordinary loss of $15.1 million on the early extinguishment of debt resulted
in a loss of $61.3 million for the year ended December 31, 1998. This compares
to net income of $34.3 million for the year ended December 31, 1997, which
included $19.2 million in gains from discontinued operations. Inventories,
accounts payable and accrued interest all used more cash in 1998 than in 1997.
This use of cash was partially offset by a decrease in cash used by accounts
receivable, prepaid expenses, accrued liabilities and income taxes payable. Net
cash used in investing activities was $39.5 million in 1998 compared to net cash
provided by investing activities of $36.8 million in 1997. The year 1997
includes $86.9 million of cash provided by discontinued operations, which was
partially offset by $18.9 million more in cash used for acquisitions in 1997.
The Company used $1.2 million more in cash for capital expenditures and $7.2
million more in cash for other assets in 1998 compared to 1997. Financing
activities provided cash of $89.7 million in 1998 due to the issuance of debt
and equity securities in connection with the Merger in May. These proceeds were
partially offset by cash used for related financing fees and the repurchase of
common stock. Financing activities used cash of $51.7 million in 1997 largely as
the result of cash proceeds from the sale of discontinued operations which were
used to repay long-term obligations.
Capital Expenditures. The Company had $17.5 million of capital expenditures
related to continuing operations in 1998. The Company's new senior secured loan
facility (the "New Credit Facility") contains restrictions on the Company's
ability to make capital expenditures. Based on present estimates, management
believes that the amount of capital expenditures permitted to be made under the
New Credit Facility will be adequate to maintain the properties and businesses
of the Company's continuing operations.
Liquidity. The Company's principal sources of liquidity are cash flow from
operations and borrowings under the New Credit Facility. The Company's principal
uses of cash will be debt service requirements, capital expenditures,
acquisitions and working capital. The Company expects that ongoing requirements
for debt service, capital expenditures and working capital will be funded from
operating cash flow and borrowings under the New Credit Facility. In connection
with future acquisitions, the Company may require additional funding which may
be provided in the form of additional debt, equity financing or a combination
thereof. There can be no assurance that any such additional financing will be
available to the Company on acceptable terms, if at all.
In connection with the Merger, Mercury raised approximately $140 million
through the issuance of 2,608,696 shares of common stock ("Mercury Common
Stock"), 2,000,000 shares of senior exchangeable preferred stock ("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"), and
approximately $94.6 million aggregate gross proceeds through the issuance of
12 1/2% Senior Discount Debentures due 2008 (the "Debentures"). As a result of
the Merger, the proceeds from the sale of such securities became an asset of the
Company, each share of Mercury Common Stock became a share of Common Stock, each
share of Mercury Preferred Stock became a share of exchangeable preferred stock
of the Company ("Holdings Preferred Stock"), each DLJMB Warrant by its terms
became exercisable for an equal number of shares of Common Stock, and the
Company 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. These proceeds were used to finance the
conversion of shares of Common Stock into cash, to refinance outstanding
indebtedness, to fund cash payments to holders of stock options and to holders
of rights to purchase Common Stock under the Company's Employee Stock Purchase
Plan upon cancellation of those options and rights, and to pay expenses incurred
in connection with the Merger. Also, in connection with the Merger, certain
members of senior management purchased 143,192 shares of Common Stock for
approximately $4.9 million (the "Management Share Purchase"), of
15
17
which approximately $3.6 million was provided through non-recourse loans from
the Company (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 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, the
Company has guaranteed the obligations of Thermadyne LLC under the New Credit
Facility. Such guarantee is only recourse to the Company's 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 the
Company.
The Debentures were issued by Mercury, became obligations of the Company
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 the Company's 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.
MARKET RISK AND RISK MANAGEMENT POLICIES
The Company's earnings and cash flow are subject to fluctuations due to
changes in foreign currency exchange rates. The Company is also exposed to
changes in interest rates from its long-term debt arrangements. See Item
7A -- "Quantitative and Qualitative Disclosures About Market Risk" for further
discussion.
16
18
EFFECT OF INFLATION; SEASONALITY
Inflation has not been a material factor affecting the Company's business.
In recent years, the cost of electronic components has remained relatively
stable due to competitive pressures within the industry, which has enabled the
Company to contain its service costs. The Company's general operating expenses,
such as salaries, employee benefits, and facilities costs, are subject to normal
inflationary pressures.
The operations of the Company are generally not subject to seasonal
fluctuations.
YEAR 2000 COMPLIANCE
Year 2000 Issue
The "Year 2000 Issue" is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The operating subsidiaries of the Company have been assembled through a
series of acquisitions beginning in 1987. As such, the Company consists of over
twenty locations operating on a variety of business computer systems. In late
1997 the Company decided to standardize and upgrade all business computer
systems at all but three locations, and as part of this standardization, address
the Year 2000 Issue. The excluded locations are "Year 2000 Ready" and will
convert to the standardized system in early 2000.
In addressing the Year 2000 Issue, the Company is currently evaluating its
computer-based systems, facilities and products and identifying all steps
necessary to determine they are all Year 2000 Ready. The Company is employing a
combination of internal resources and outside consultants to address this issue.
The Company's information technology department is responsible for its business
computers, PC's and related software. General managers of the Company's
manufacturing facilities oversee the Year 2000 Issue at their respective plants
including all engineering computer systems, PC's and related software,
manufacturing equipment and facilities' systems, such as security, climate
control and telecommunication systems. Detailed checklists have been developed
for all of the aforementioned areas which note the review date, actions required
and completion date. The Company has identified systems which are not Year 2000
Ready, and is in the process of upgrading or replacing those systems. The
Company is currently on schedule to complete these upgrades and replacements by
the year 2000. The Company has completed its assessment of its products and has
identified no Year 2000 Issues. In addition, the Company has contacted its
vendors to determine whether they are Year 2000 Ready, and is in the process of
accumulating those responses. Initial responses indicate most of the Company's
vendors are addressing their Year 2000 Issues and that all critical vendors are
either Year 2000 Ready or will be in the near future. As a precaution,
alternative vendors have been identified.
While the Year 2000 Issue is a top priority of the Company and a
significant amount of resources have been allocated to this issue, there can be
no assurance that all of its systems and equipment or its vendors will be Year
2000 Ready. However, at this time, the Company does not believe that its or its
vendors Year 2000 related issues will have a material adverse effect on the
Company's business. In the unlikely event of a systems failure at one of the
Company's facilities, any one of a number of other facilities' systems could be
utilized as a backup system.
The total cost to standardize and upgrade all business computer systems is
currently estimated to be $6.5 million. Through December 31, 1998, the Company
has spent approximately $5.0 million of this total. Given the nature of this
project and the fact that it addresses many issues in addition to preparing the
Company for the Year 2000, it is impractical to attempt to estimate the total
costs specifically related to the Year 2000 Issue. In compliance with generally
accepted accounting principles, costs incurred by the Company for hardware,
software and consultants are capitalized, while costs incurred in training
employees are expensed as incurred. As the process to become Year 2000 Ready
continues, additional costs may be identified that have
17
19
not yet been considered. Consequently, the full cost of all upgrades,
replacements and modifications that may be required to become Year 2000 Ready
has not yet been determined.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
A substantial portion of the Company's operations consists of manufacturing
and sales activities in foreign regions, particularly Europe, Australia/Asia and
Canada. As a result, the Company's financial results could be significantly
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company distributes its
products. The Company's exposure to foreign currency transactions is partially
mitigated by having manufacturing locations in Australia, Italy, Indonesia,
Malaysia, the Philippines and Brazil as well as in the United States. A
substantial portion of the product manufactured in these regions is sold locally
and denominated in the local currency. A significant amount of the export sales
from the U.S. are denominated in U.S. dollars which further limits the Company's
exposure to changes in the exchange rates. The Company is most susceptible to a
strengthening U.S. dollar and the negative affect when local currency financial
statements are translated into U.S. dollars, the Company's reporting currency.
The Company does not believe its exposure to transaction gains or losses
resulting from changes in foreign currency exchange rates is material to its
financial results. As a result, the Company does not actively try to manage its
exposure through foreign currency forward or option contracts.
The Company is also exposed to changes in interest rates primarily from its
long-term financial arrangements which are predominantly denominated in U.S.
dollars. At December 31, 1998, the Company had approximately $308.1 million of
variable rate U.S. debt. The Company limited its exposure to variations in the
interest rate by entering into an interest rate swap arrangement effective
January 1, 1999, with respect to approximately $61.5 million of this debt. The
Company also has approximately $20.4 million and $13.7 million of variable rate
debt denominated in Australian dollars and Italian lira, respectively. A
hypothetical 100 basis point increase in the Company's variable borrowing rates
would result in an increase in interest expense of approximately $2.8 million
for the year ended December 31, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements that are filed as part of this Annual Report on
Form 10-K are set forth in the Index to Consolidated Financial Statements at
page F-1 hereof and are included at pages F-2 to F-53 hereof.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
18
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the current
directors and executive officers of the Company. Each officer of the Company
serves in the same capacity for Thermadyne LLC and Thermadyne Capital.
NAME AGE POSITION(S)
---- --- -----------
Randall E. Curran..................... 44 Director of the Company, Thermadyne
LLC and Thermadyne Capital, Chairman
of the Board, President and Chief
Executive Officer
James H. Tate......................... 51 Director of the Company, Thermadyne
LLC and Thermadyne Capital, Senior
Vice President and Chief Financial
Officer
Peter T. Grauer....................... 53 Director of the Company, Thermadyne
LLC and Thermadyne Capital
William F. Dawson, Jr................. 34 Director of the Company, Thermadyne
LLC and Thermadyne Capital
John F. Fort III...................... 57 Director of the Company
Harold A. Poling...................... 73 Director of the Company
Lawrence M.v.D. Schloss............... 44 Director of the Company
Stephanie N. Josephson................ 45 Vice President, General Counsel and
Corporate Secretary
Thomas C. Drury....................... 42 Vice President, Human Resources
Robert D. Maddox...................... 39 Vice President and Corporate
Controller
Mr. Curran has been a Director of the Company since February 1994 and was
elected Chairman of the Board and Chief Executive Officer in February 1995,
having previously served as President of the Company from August 1994 and as
Executive Vice President and Chief Operating Officer of the Company from
February 1994. From 1992 to 1994 Mr. Curran was President of the Cutting and
Welding division of the Company. From 1986 to 1992, Mr. Curran was Chief
Financial Officer of the Company and/or its predecessors. Prior to 1986, Mr.
Curran held various executive positions with Cooper Industries, Inc. Mr. Curran
presently serves on the board of directors of Insilco Holding Co. and the
Whitfield School.
Mr. Tate has been a Director of the Company since October 1995. He was
elected Senior Vice President and Chief Financial Officer in February 1995,
having previously served as Vice President of the Company and Vice President and
Chief Financial Officer of the Company's subsidiaries since April 1993. Prior to
joining the Company, Mr. Tate was employed by the accounting firm of Ernst &
Young LLP for eighteen years, the last six of which he was a partner. Mr. Tate
currently serves on the board of directors of Rowe International, Inc.
Mr. Grauer has been a Director of the Company since May 1998. Mr. Grauer
has been a Managing Director of DLJ Merchant Banking II, Inc. ("DLJMB II Inc.")
(and its predecessor) since September 1992. Mr. Grauer is a director of Doane
Pet Care Products, Inc., Total Renal Care Holdings, Inc., DecisionOne Holdings
Corp., Nebco Evans Holding Company, Ameriserve Food Distribution, Inc. and
Bloomberg, Inc.
Mr. Dawson has been a Director of the Company since May 1998. Mr. Dawson
has been a Principal of DLJMB II Inc. since August 1997. From December 1995 to
August 1997, he was a Senior Vice President in Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC") High Yield Capital Markets Group. Prior thereto
Mr. Dawson was a Vice President in the Leveraged Finance Group within DLJSC's
Investment Banking Group. Mr. Dawson serves as a director of Von Hoffmann
Corporation and Insilco Holding Co.
19
21
Mr. Fort has been a Director of the Company since May 1998. Mr. Fort
retired as Chairman of the Board of Tyco International Ltd. in January of 1993.
In 1964, after receiving degrees in Aeronautical Engineering and Industrial
Management from Princeton and the MIT Sloan School, respectively, he joined the
Simplex Wire & Cable Company (now a subsidiary of Tyco). Mr. Fort held a broad
range of positions throughout his thirty years at Tyco. He currently holds
directorships at Tyco International Ltd. and Roper Industries. He is an active
participant on advisory boards at MIT, Princeton University, Full Circle
Investments and the Appalachian Mountain Club.
Mr. Poling has been a Director of the Company since May 1998. Mr. Poling
retired as Chairman of the Board and Chief Executive Officer of Ford Motor
Company on January 1, 1994, a position he held since 1990. Mr. Poling is a
director of Shell Oil Company, Flint Ink Corporation, the Kellogg Company,
Karrington Health, Inc. and Meritor Automotive, Inc. He is a member of the DLJ
Executive Advisory Board and a member of the VIAG International Board. Mr.
Poling is a director of the Monmouth (Ill.) College Senate and a member of the
Dean's Advisory Council for the Indiana University School of Business. He was
national chairman of Indiana University's Annual Fund campaigns from 1986-88.
Mr. Schloss has been a Director of the Company since May 1998. Mr. Schloss
has been the Managing Partner of DLJMB II Inc. since November 1995. Prior to
November 1995, he was the Chief Operating Officer and a Managing Director of DLJ
Merchant Banking, Inc. Mr. Schloss currently serves as Chairman of the Board of
McCulloch Corporation and as a director of Wilson Greatbatch, Inc. and
DecisionOne Holdings Corp. Mr. Schloss has previously served as a director of
GTECH Corporation, Krueger International, Inc., OSi Specialties, Inc. and MPB
Corporation.
Ms. Josephson, having previously been elected Corporate Counsel and
Corporate Secretary of the Company in March 1995, was elected Vice President and
General Counsel in April 1995. Prior to joining the Company, Ms. Josephson was
Corporate Counsel for Mills & Partners, Inc. from 1993 to 1995 and an Adjunct
Professor at St. Louis University School of Business in the MBA program from
1991 to 1993. Prior thereto, Ms. Josephson was employed in Houston, Texas as
Counsel for Cooper Industries, Inc. and in private practice with the law firms
Andrews & Kurth and Weycer and Kaplan from 1979 to 1991.
Mr. Drury was elected Vice President -- Human Resources of the Company in
March 1995. Prior to that time, Mr. Drury served as Director of Human Resources
for the Company since November 1991. Prior to joining the Company, Mr. Drury was
Manager -- Human Resources at McDonnell Douglas Systems Integration Company from
1988 through 1991.
Mr. Maddox was elected Vice President and Corporate Controller of the
Company in April 1996. Prior to that time, Mr. Maddox served as Vice President
and Controller of the Company's operating subsidiaries from April 1995 to April
1996 and Controller from May 1992 to April 1995. Prior to joining the Company,
Mr. Maddox was a senior audit manager with the accounting firm of Ernst & Young
LLP.
20
22
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information in respect of the compensation
of the Chief Executive Officer and each of the other four most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers") for services in all capacities to the Company and its
subsidiaries for the fiscal years ended December 31, 1998, 1997 and 1996. Each
of the Named Executive Officers entered into a new employment agreement with the
Company in connection with the Recapitalization. See "Employment
Arrangements -- Employment Contracts."
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
-------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION(S) YEAR SALARY($) BONUS($) OPTIONS(#) ($)(1)
- ------------------------------ ---- --------- -------- ------------ ------------
Randall E. Curran........................... 1998 538,400 506,634 99,397 36,282
Chairman of the Board, President and 1997 517,847 538,400 30,600 33,807
Chief Executive Officer 1996 498,921 385,050 91,000 8,008
James H. Tate............................... 1998 294,741 219,488 51,686 19,230
Director, Senior Vice President and Chief 1997 275,093 188,614 27,000 18,039
Financial Officer 1996 241,012 169,114 36,000 7,403
Stephanie N. Josephson...................... 1998 181,577 94,935 10,603 10,248
Vice President, General Counsel and 1997 168,719 84,625 10,000 10,210
Corporate Secretary 1996 129,573 70,208 6,000 6,489
Thomas C. Drury............................. 1998 150,481 78,279 10,603 7,292
Vice President -- Human Resources 1997 132,206 66,479 10,000 7,444
1996 107,115 53,708 6,000 5,982
Robert D. Maddox............................ 1998 150,481 78,279 10,603 6,854
Vice President and Controller 1997 134,254 67,417 5,000 7,749
1996 113,658 60,055 6,000 6,272
- ---------------
(1) All other compensation includes group life insurance premiums paid by the
Company and contributions made on behalf of the Named Executive Officers to
the Company's 401(k) retirement and profit sharing plan. The amount of
insurance premiums paid and 401(k) contributions made on behalf of the Named
Executive Officers for 1998 are as follows: Mr. Curran, $3,978 and $32,304,
respectively; Mr. Tate, $4,729 and $14,501, respectively; Ms. Josephson,
$2,262, and $7,986, respectively; Mr. Drury, $785 and $6,507, respectively;
and Mr. Maddox, $317 and $6,537, respectively.
21
23
The following table sets forth certain information related to stock options
granted to the Named Executive Officers in 1998.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR GRANT DATE
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
GRANTED(#)(1) FISCAL YEAR(%) ($/SH) DATE ($)(2)
------------- -------------- ----------- ---------- -------------
Randall E. Curran.............. 99,397 30.8 34.50 05/22/08 1,813,995
James H. Tate.................. 51,686 16.0 34.50 05/22/08 943,270
Stephanie N. Josephson......... 10,603 3.3 34.50 05/22/08 193,505
Thomas C. Drury................ 10,603 3.3 34.50 05/22/08 193,505
Robert D. Maddox............... 10,603 3.3 34.50 05/22/08 193,505
- ---------------
(1) The options to purchase Common Stock were granted under the Company's 1998
Management Incentive Plan and become exercisable as follows; (a) 10%
immediately on the date of grant, (b) 40% ratably over five years, and (c)
50% at the end of eight years. For a more complete description of the 1998
Management Incentive Plan, see "Employment Arrangements -- Management
Incentive Plan."
(2) The grant date present value of each option grant was determined using a
variation of the Black-Scholes option pricing model. The estimated values
presented are based on the following assumptions made as of the time of
grant: an expected dividend yield of 0%; an expected option term of 10
years; volatility of .278 (based on historical stock price observations just
prior to each grant); and a risk-free rate of 5.76%. The actual value, if
any, that the Named Executive Officers may realize from the exercise of the
options will be the excess of the fair market value of the Common Stock on
the date of exercise over the exercise price. See "Fiscal Year-End Option
Values."
The following table provides information related to the number and value of
options held by the Named Executive Officers at the end of 1998. On December 31,
1998, the last reported close price for the Common Stock was $20.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS AT
FISCAL YEAR-END
---------------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#)(1) REALIZED($)(1) EXERCISABLE(#)(2) UNEXERCISABLE(#)(2)
---- -------------- -------------- ----------------- -------------------
Randall E. Curran....... -- 7,647,575 9,939 89,458
James H. Tate........... -- 2,125,750 5,168 46,518
Stephanie N.
Josephson............. -- 711,750 1,060 9,543
Thomas C. Drury......... -- 711,750 1,060 9,543
Robert D. Maddox........ -- 356,750 1,060 9,543
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END
---------------------------------
NAME EXERCISABLE($) UNEXERCISABLE($)
---- -------------- ----------------
Randall E. Curran....... -- --
James H. Tate........... -- --
Stephanie N.
Josephson............. -- --
Thomas C. Drury......... -- --
Robert D. Maddox........ -- --
- ---------------
(1) As of May 22, 1998, the effective time of the Merger, all outstanding
options to acquire shares of Common Stock granted to employees and directors
under the Management Option Plan and the Employee Stock Option Plan, whether
vested or not (the "Options"), were cancelled, and the holders of such
Options received a cash payment in an amount equal to the product of (x) the
excess, if any, of $34.50 over the exercise price of such Option multiplied
by (y) the number of shares of Common Stock subject to such Option.
(2) Consists of options granted following consummation of the Merger. See
"Employment Arrangements -- Management Incentive Plan" for a more complete
discussion of the 1998 Management Incentive Plan.
22
24
EMPLOYMENT ARRANGEMENTS
Employment Contracts. On May 22, 1998, in connection with the Merger,
Messrs. Curran, Tate, Drury and Maddox and Ms. Josephson entered into employment
agreements with the Company and its subsidiaries. All five employment agreements
terminate on May 22, 2001; however, such agreements automatically renew for an
additional year on each May 22 beginning in 1999 so that a new three-year term
begins upon each extension (unless the agreements are earlier terminated as
provided therein). Messrs. Curran, Tate, Drury and Maddox and Ms. Josephson
serve in their current executive capacities with the Company as a requirement of
their respective employment agreements.
Messrs. Curran, Tate, Drury and Maddox and Ms. Josephson are entitled to
annual base salaries (subject to increase at the Board of Directors' discretion)
of $538,400, $311,000, $170,000, $170,000 and $205,000, respectively. In
addition, Messrs. Curran, Tate, Drury and Maddox and Ms. Josephson are eligible
to participate in an annual bonus plan providing for an annual bonus opportunity
of not less than 100%, 75%, 55%, 55% and 55%, respectively, of such executive's
base salary. Each executive is also entitled to such benefits as are customarily
provided to the executives of the Company and its subsidiaries. All five
executives are required to devote all their business time and attention to the
business of the Company and its subsidiaries.
Each employment agreement provides that if the executive's employment
ceases as a result of disability or death, the executive or the executive's
estate, heirs or beneficiaries, as the case may be, will continue to receive the
executive's then current salary for a period of 24 months from the date of his
or her disability or death. If the executive's employment is terminated by the
Company for Cause (as defined in the employment agreement) or voluntarily by the
executive for any reason other than death, disability or upon a constructive
termination (which includes, among other things, reduction of compensation,
title, position or duties) the executive will not be entitled to receive
compensation or unaccrued benefits after the date of termination. If the
executive's employment is terminated by the Company without Cause or is
terminated by the executive upon a constructive termination, the executive will
continue to receive his or her then current salary and other benefits provided
by the agreement during the unexpired term of the agreement.
Direct Investment Program. In May 1998, in connection with the Merger,
certain members of senior management were offered the opportunity to purchase
shares of Common Stock through the Thermadyne Holdings Corporation Direct
Investment Program (the "Investment Program"). The following table sets forth
the number of shares of Common Stock purchased by each Named Executive Officer
participating in the Investment Program.
DIRECT INVESTMENT PROGRAM PURCHASES
NUMBER OF
NAME SHARES(1)
---- ---------
Randall E. Curran........................................... 49,274
James H. Tate............................................... 14,492
Stephanie N. Josephson...................................... 11,370
Thomas C. Drury............................................. 8,800
Robert D. Maddox............................................ 9,368
- ---------------
(1) All such shares were purchased at $34.50 per share.
In connection with the Merger, a portion of the funds required to purchase
the shares under the Investment Program were provided through loans made by the
Company. Messrs. Curran, Tate, Maddox and Drury and Ms. Josephson received
secured, non-recourse loans from the Company in the amount of $1,249,890,
$367,606, $237,630, $223,222 and $288,413, respectively. The loans bear interest
at the rate of 5.69% per annum and are due in full on May 22, 2006. Upon the
termination of the participant's employment with the Company, other than as a
result of the participant's death, any outstanding loan will become due and
payable.
23
25
Management Incentive Plan. In May 1998, in connection with the Merger, the
Board of Directors adopted the Management Incentive Plan, which provides for the
granting of options to acquire up to 500,000 shares of Common Stock to certain
officers and employees of the Company. In connection with the Merger, options to
purchase approximately 322,966 shares of Common Stock were granted under the
Management Incentive Plan to certain officers and employees of the Company at an
exercise price of $34.50 per option share. Pursuant to the terms of the
Management Incentive Plan, options granted to certain members of senior
management provide for both a "Time Vesting Option" and a "Cliff Vesting
Option." Under the Time Vesting Option, the option vests and is exercisable with
respect to twenty percent of the shares subject to the option on the day it was
granted. Then, on each of the first five anniversaries from that date the Time
Vesting Option was granted, an additional sixteen percent of the shares subject
to the option vests and becomes exercisable as long as the option recipient is
still employed by the Company or its subsidiaries. The Cliff Vesting Option
becomes vested and exercisable with respect to twenty percent of the shares on
the thirtieth day after the availability of the audited financial statements for
each of the fiscal years ended December 31, 1998 through December 31, 2002,
provided that the option recipient is still employed by the Company or its
subsidiaries on such date of determination, and further provided, that the
targeted implied common equity value of the Company was met for such fiscal
year. If the targeted implied common equity value of the Company is not attained
for any of the fiscal years ending on or before December 31, 2002, the Cliff
Vesting Option will be treated as vested and exercisable if the target is
attained for the subsequent year as long as the option recipient is still
employed by the Company or its subsidiaries on such date of determination. If,
after eight years from receipt of the Cliff Vesting Option, all shares subject
to such option have not vested, such shares shall become fully vested and
exercisable as long as the option recipient is still employed by the Company or
its subsidiaries on such date.
The following table sets forth the number of shares of Common Stock
issuable upon the exercise of options granted to each Named Executive Officer
under the Management Incentive Plan.
MANAGEMENT INCENTIVE PLAN OPTION GRANTS
NAME TIME VESTING SHARES CLIFF VESTING SHARES
- ---- ------------------- --------------------
Randall E. Curran................................. 49,699 49,698
James H. Tate..................................... 25,843 25,843
Stephanie N. Josephson............................ 5,302 5,301
Thomas C. Drury................................... 5,302 5,301
Robert D. Maddox.................................. 5,302 5,301
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Board of Directors served as
an officer or employee of the Company or any of its subsidiaries during 1998.
COMPENSATION OF DIRECTORS
Other than Messrs. Curran, Tate, Dawson, Schloss and Grauer, each director
of the Company is entitled to receive a $12,000 annual retainer plus a $1,000
fee for each regular meeting of the Board of Directors attended and a $500 fee
for each meeting of a board committee attended. Additionally, certain
non-employee directors (as described in the Thermadyne Holdings Corporation 1998
Non-Employee Directors Stock Option Plan (the "Directors Plan")) are eligible to
receive options under the Directors Plan. The Directors Plan, adopted by the
Board of Directors following the consummation of the Merger, provides that
certain non-employee directors shall receive options to purchase 3,000 shares of
Common Stock upon becoming a director and options to purchase 500 shares of
Common Stock each year thereafter. During 1998, the Board of Directors awarded
each of Messrs. Fort and Poling options to purchase 3,000 shares of Common Stock
pursuant to the Directors Plan. Directors also are reimbursed for all reasonable
travel and other expenses of attending meetings of the Board of Directors or
committees of the Board of Directors.
24
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 1, 1999, certain information
regarding the ownership of Common Stock (i) by each person known by the Company
to be the beneficial owner of more than five percent of the outstanding Common
Stock, (ii) by each director of the Company, (iii) by each executive officer
named in the Summary Compensation Table included elsewhere in this Annual Report
on Form 10-K and (iv) by all current directors and executive officers of the
Company as a group.
BENEFICIAL OWNERSHIP OF
COMMON STOCK
------------------------
NAME OF NUMBER PERCENT OF
BENEFICIAL OWNER OF SHARES CLASS(1)
- ---------------- ---------- -----------
DLJ Merchant Banking Partners II, L.P. and related
investors(2).............................................. 2,962,124 82.5%
Magten Asset Management Corp................................ 267,339 7.4%
35 East 21st Street
New York, NY 10010(3)
Randall E. Curran(4)........................................ 67,165 1.9%
James H. Tate(5)............................................ 23,795 *
Peter T. Grauer(6).......................................... -- *
William F. Dawson(6)........................................ -- *
John F. Fort III(7)......................................... 3,000 *
Harold A. Poling(8)......................................... 3,000 *
Lawrence M.v.D. Schloss(6).................................. -- *
Stephanie N. Josephson(9)................................... 13,278 *
Thomas C. Drury(10)......................................... 10,708 *
Robert D. Maddox(11)........................................ 11,276 *
All directors and executive officers as a group (10
persons)(6)(12)........................................... 132,222 3.7%
- ---------------
* Represents less than 1 percent.
(1) Based on 3,590,326 shares of Common Stock outstanding and calculated in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(2) Consists of shares held directly by the following investors related to
DLJMB: DLJ Offshore Partners II, C.V. ("Offshore"), a Netherlands Antilles
limited partnership, DLJ Diversified Partners, L.P. ("Diversified"), a
Delaware limited partnership, DLJMB Funding II, Inc. ("Funding"), a
Delaware corporation, DLJ Merchant Banking Partners II-A, L.P.
("DLJMBPIIA"), a Delaware limited partnership, DLJ Diversified Partners-A,
L.P. ("Diversified A"), a Delaware limited partnership, DLJ Millennium
Partners, L.P. ("Millennium"), a Delaware limited partnership, DLJ
Millennium Partners-A, L.P. ("Millennium A"), a Delaware limited
partnership, DLJ EAB Partners, L.P. ("EAB"), a Delaware limited
partnership, UK Investment Plan 1997 Partners ("UK Partners"), a Delaware
partnership, DLJ First ESC L.P. ("DLJ First ESC"), a Delaware limited
partnership, and DLJ ESC II, L.P. ("DLJ ESC II"), a Delaware limited
partnership. The address of each of DLJMB, Diversified, Funding, DLJMBPIIA,
Diversified A, Millennium, Millennium A, EAB, DLJ First ESC and DLJ ESC II
is 277 Park Avenue, New York, New York 10172. Includes 353,428 shares of
Common Stock acquired by the DLJMB Funds in January 1999 on exercise of
warrants purchased in connection with the Recapitalization. The address of
Offshore is John B. Gorsiraweg, 14 Willemstad, Curacao, Netherlands
Antilles. The address of UK Partners is 2121 Avenue of the Stars, Fox
Plaza, Suite 3000, Los Angeles, California 90067.
(3) The following information is based on a Schedule 13D, dated July 25, 1996,
as amended on September 25, 1996, on February 12, 1998, on March 9, 1998,
and on June 10, 1998, filed with the Securities and Exchange Commission
(the "Commission") by Magten Asset Management Corp. ("Magten"), an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"). Magten has (i) shared voting power
over 227,897 of the shares and no voting power over 39,442 of the shares
and (ii) shared investment power over all 267,339 shares.
25
27
(4) Includes 17,891 shares of Common Stock issuable to Mr. Curran upon the
exercise of vested stock options or stock options that will vest within 60
days.
(5) Includes 9,303 shares of Common Stock issuable to Mr. Tate upon the
exercise of vested stock options or stock options that will vest within 60
days.
(6) Messrs. Grauer, Dawson and Schloss are officers of DLJMB II Inc., the
general partner of DLJMB. Share data shown for such individuals excludes
shares shown as held by the DLJMB Funds, as to which such individuals
disclaim beneficial ownership.
(7) Includes 3,000 shares of Common Stock issuable to Mr. Fort upon the
exercise of vested stock options or stock options that will vest within 60
days.
(8) Includes 3,000 shares of Common Stock issued to Mr. Poling upon the
exercise of vested stock options or stock options that will vest within 60
days.
(9) Includes 1,908 shares of Common Stock issuable to Ms. Josephson upon the
exercise of vested stock options or stock options that will vest within 60
days.
(10) Includes 1,908 shares of Common Stock issuable to Mr. Drury upon the
exercise of vested stock options or stock options that will vest within 60
days.
(11) Includes 1,908 shares of Common Stock issuable to Mr. Maddox upon the
exercise of vested stock options or stock options that will vest within 60
days.
(12) Includes 38,918 shares of Common Stock issuable upon the exercise of vested
stock options or stock options that will vest within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
DLJ Capital Funding received customary fees and reimbursement of expenses
in connection with the arrangement and syndication of the New Credit Facility
and as a lender thereunder. DLJSC also received customary fees in connection
with the distribution of the Old Senior Subordinated Notes and the Debentures,
and the offer to purchase and consent solicitation for the Company's outstanding
Senior Notes and Subordinated Notes. Additionally, DLJ Bridge Finance, Inc.
received customary fees in connection with its commitment to provide bridge
financing in the event that the issuance of the Senior Subordinated Notes and
the Debentures did not occur. The aggregate fees received by these DLJ entities
for these services were approximately $20 million.
Pursuant to a letter agreement dated January 16, 1998 (the "Engagement
Letter"), DLJMB engaged DLJSC to act as DLJMB's exclusive financial advisor with
respect to the Merger and, following the Merger, to act as the Company's
exclusive financial advisor for a period of five years (the "Engagement Period")
with respect to the review and analysis of financial and structural alternatives
available to the Company. Upon the consummation of the Merger, DLJMB's
obligations under the Engagement Letter were assumed by the Company.
As compensation for the services to be provided by DLJSC under the
Engagement Letter, DLJSC received a fee of $4,000,000 upon the consummation of
the Merger and will be entitled to receive an annual advisory fee of $300,000,
payable quarterly in equal installments of $75,000. DLJSC will also be entitled
to reimbursement for all of its out-of-pocket expenses incurred in connection
with its engagement.
During the Engagement Period, DLJSC is also entitled to act as the
Company's exclusive financial advisor, sole placement agent, sole initial
purchaser, sole managing underwriter or sole dealer-manager, as the case may be,
with respect to any Transaction (as hereinafter defined) the Company determines
to pursue. The term "Transaction" includes the following: (i) the sale, merger,
consolidation or any other business combination, in one or a series of
transactions, involving any portion of the business, securities or assets of the
Company; (ii) the acquisition (and any related matters such as financings,
divestitures, etc.) in one or a series of transactions, of all or a portion of
the business, securities or assets of another entity or person; (iii) any
recapitalization, refinancing, repurchase or restructuring of the Company's
equity or debt securities or indebtedness or any amendments or modifications to
the Company's debt securities or indentures whether or not in connection
therewith, involving, by or on behalf of the Company, an offer to purchase or
exchange for
26
28
cash, property, securities, indebtedness or other consideration, or a
solicitation of consents, waivers of authorizations with respect thereto; (iv)
any spin-off, split-off or other extraordinary dividend of cash, securities or
other assets to stockholders of the Company; or (v) any sale of securities of
the Company effected pursuant to a private sale or an underwritten public
offering.
The Company has agreed to indemnify and hold harmless DLJSC and its
affiliates, and the respective directors, officers, agents and employees of
DLJSC and its affiliates (each, an "Indemnified Person") from and against any
losses, claims, damages, judgments, assessments, costs and other liabilities and
will reimburse such Indemnified Persons for all fees and expenses (including the
reasonable fees and expenses of counsel) as they are incurred in investigating,
repairing, pursuing or defending any claim, action, proceeding or investigation
arising out of or in connection with advice or services rendered or to be
rendered by any Indemnified Person pursuant to the Engagement Letter, the
transactions contemplated by the Engagement Letter or any Indemnified Person's
action or inactions in connection with any such advice, services or
transactions, other than liabilities or expenses that are determined by a
judgment of a court of competent jurisdiction to have resulted solely from such
Indemnified Person's gross negligence or willful misconduct.
The Engagement Letter makes available the resources of DLJSC concerning a
variety of financial and operational matters. The services that have been and
will continue to be provided by DLJSC could not otherwise be obtained by the
Company without the addition of personnel or the engagement of outside
professional advisors. In the opinion of management, the fees provided for under
the Engagement Letter reasonably reflect the benefits received and to be
received by the Company.
The Company has entered into an Investors' Agreement with the DLJMB Funds
and the senior executive officers of the Company (the "Investors' Agreement").
The Investors' Agreement, among other things, contains provisions regarding the
composition of the Board of Directors of the Company, grants the parties thereto
certain registration rights and contains provisions requiring the senior
executive officers parties thereto to sell their shares of Holdings Common Stock
in connection with certain sales of the Holdings Common Stock by the DLJMB Funds
("drag-along rights") and granting the senior executive officers parties thereto
the right to include a portion of their shares of Holdings Common Stock in
certain sales of the Holdings Common Stock by the DLJMB Funds ("tag-along
rights").
In connection with the Merger, a portion of the funds required to purchase
the shares under the Investment Program were provided through the Management
Loans. Messrs. Curran, Tate, Maddox and Drury and Ms. Josephson received
secured, non-recourse loans from the Company in the amount of $1,249,890,
$367,606, $237,630, $223,222 and $288,413, respectively. The loans bear interest
at the rate of 5.69% per annum and are due in full on May 22, 2006. Upon the
termination of a participant's employment with the Company, other than as a
result of the participant's death, any outstanding loan will become due and
payable.
27
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS
The financial statements that are filed as part of this Annual Report on
Form 10-K are set forth in the Index to Consolidated Financial Statements at
page F-1 hereof and are included at pages F-2 to F-53 hereof.
FINANCIAL STATEMENT SCHEDULES
Report of Ernst & Young LLP, Independent Auditors is included at page S-1
hereof.
Schedule II -- Valuation and Qualifying Accounts is included at page S-2
hereof.
All other schedules for which provision is made in the applicable accounting
regulation of the Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
REPORTS ON FORM 8-K
On October 29, 1998, the Company filed a Current Report on Form 8-K
reporting that the Company no longer met the requirements for continued listing
on the Nasdaq National Market.
EXHIBITS
EXHIBIT
NO. EXHIBIT
------- -------
2.1 -- First Amended and Restated Plan of Reorganization of TDII
Company under Chapter 11 of the Bankruptcy Code,
confirmed by the United States Bankruptcy Court, District
of Delaware, on January 18, 1994.(1)
2.2 -- Agreement and Plan of Merger, dated as of January 20,
1998, between Thermadyne Holdings Corporation and Mercury
Acquisition Corporation.(2)
2.3 -- Amendment No. 1 to Agreement and Plan of Merger between
Thermadyne Holdings Corporation and Mercury Acquisition
Corporation.(3)
2.4 -- Certificate of Merger of Mercury Acquisition Corporation
with and into Thermadyne Holdings Corporation.(3)
3.1 -- Certificate of Incorporation of Thermadyne Holdings
Corporation.(included in Exhibit 2.4)
3.2 -- Bylaws of Thermadyne Holdings Corporation.(3)
3.3 -- Certificate of Incorporation of Thermadyne Capital
Corp.(4)
3.4 -- Bylaws of Thermadyne Capital Corp.(4)
3.5 -- Limited Liability Company Agreement of Thermadyne Mfg.
LLC.(4)
4.1 -- Indenture, dated as of May 22 1998, between Mercury
Acquisition Corporation and IBJ Schroder Bank & Trust
Company, as Trustee.(3)
4.2 -- First Supplemental Indenture, dated as of May 22, 1998,
between Thermadyne Holdings Corporation and IBJ Schroder
Bank & Trust Company, as Trustee.(3)
4.3 -- Form of 12 1/2% Senior Discount Debenture.(3)
4.4 -- A/B Exchange Registration Rights Agreement dated as of
May 22, 1998, among Mercury Acquisition Corporation and
Donaldson, Lufkin & Jenrette Securities Corporation.(3)
28
30
EXHIBIT
NO. EXHIBIT
------- -------
4.5 -- Amendment to Registration Rights Agreement dated May 22,
1998, among Thermadyne Holdings Corporation and
Donaldson, Lufkin & Jenrette Securities Corporation.(3)
4.6 -- Indenture, dated as of February 1, 1994, between
Thermadyne Holdings Corporation and Chemical Bank, as
Trustee, with respect to $179,321,000 principal amount of
the Senior Subordinated Notes Due November 1, 2003.(1)
4.7 -- Form of Senior Subordinated Note (included in Exhibit
4.3).(1)
4.8 -- Indenture, dated May 22, 1998, among Thermadyne Mfg. LLC,
Thermadyne Capital Corp., the guarantors named therein
and State Street Bank and Trust Company, as Trustee.(3)
4.9 -- Form of 9 7/8% Senior Subordinated Notes.(3)
4.10 -- A/B Exchange Registration Rights Agreement dated as of
May 22, 1998, among Thermadyne Mfg. LLC, Thermadyne
Capital Corp., the guarantors named therein and
Donaldson, Lufkin & Jenrette Securities Corporation.(3)
10.1 -- Omnibus Agreement, dated as of June 3, 1988, among Palco
Acquisition Company (now Thermadyne Holdings Corporation)
and its subsidiaries and National Warehouse Investment
Company.(5)
10.2 -- Escrow Agreement, dated as of August 11, 1988, among
National Warehouse Investment Company, Palco Acquisition
Company (now Thermadyne Holdings Corporation) and Title
Guaranty Escrow Services, Inc.(5)
10.3 -- Amended and Restated Industrial Real Property Lease dated
as of August 11, 1988, between National Warehouse
Investment Company and Tweco Products, Inc., as amended
by First Amendment to Amended and Restated Industrial
Real Property Lease dated as of January 20, 1989.(5)
10.4 -- Schedule of substantially identical lease agreements.(5)
10.5 -- Amended and Restated Continuing Lease Guaranty, made as
of August 11, 1988, by Palco Acquisition Company (now
Thermadyne Holdings Corporation) for the benefit of
National Warehouse Investment Company.(5)
10.6 -- Schedule of substantially identical lease guaranties.(5)
10.7 -- Lease Agreement, dated as of October 10, 1990, between
Stoody Deloro Stellite and Bowling Green-Warren County
Industrial Park Authority, Inc.(5)
10.8 -- Lease Agreement, dated as of February 15, 1985, as
amended, between Stoody Deloro Stellite, Inc. and
Corporate Property Associates 6.(5)
10.9 -- Receivables Purchase Agreement, dated as of December 28,
1994, among Thermadyne Receivables, Inc., as Transferor,
and NationsBank of Virginia, N.A., as Trustee.(6)
10.10 -- Purchase Agreement, dated as of August 2, 1994, between
Coyne Cylinder Company and BA Credit Corporation.(6)
10.11 -- Sublease Agreement, dated as of April 7, 1994, between
Stoody Deloro Stellite, Inc., and Swat, Inc.(6)
10.12 -- Share Sale Agreement dated as of November 18, 1995, among
certain scheduled persons and companies, Rosny Pty
Limited, Byron Holdings Limited, Thermadyne Holdings
Corporation, and Thermadyne Australia Pty Limited
relating to the sale of the Cigweld Business.(7)
10.13 -- Rights Agreement dated as of May 1, 1997, between
Thermadyne Holdings Corporation and BankBoston, N.A., as
Rights Agent.(8)
29
31
EXHIBIT
NO. EXHIBIT
------- -------
10.14 -- First Amendment to Rights Agreement, dated January 20,
1998, between Thermadyne Holdings Corporation and
BankBoston, N.A.(2)
10.15+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and Randall E.
Curran.(3)
10.16+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and James H.
Tate.(3)
10.17+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and Stephanie N.
Josephson.(3)
10.18+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and Thomas C.
Drury.(3)
10.19+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and Robert D.
Maddox.(3)
10.20+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and Randall E. Curran.(3)
10.21+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and James H. Tate.(3)
10.22+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and Stephanie N. Josephson.(3)
10.23+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and Thomas C. Drury.(3)
10.24+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and Robert D. Maddox.(3)
10.25+ -- Thermadyne Holdings Corporation Management Incentive
Plan.(3)
10.26+ -- Thermadyne Holdings Corporation Direct Investment
Plan.(3)
10.27 -- Investors' Agreement dated as of May 22, 1998, between
Thermadyne Holdings Corporation, the DLJ Entities (as
defined therein) and the Management Stockholders (as
defined therein).(3)
10.28 -- Credit Agreement dated as of May 22, 1998, between
Thermadyne Mfg. LLC, Comweld Group Pty. Ltd., GenSet
S.P.A. and Thermadyne Welding Products Canada Limited, as
Borrowers, Various Financial Institutions, as Lenders,
DLJ Capital Funding, Inc., as Syndication Agent, Societe
Generale, as Documentation Agent, and ABN Amro Bank N.V.,
as Administrative Agent.(3)
10.29 -- Letter Agreement dated as of January 16, 1998, between
Donaldson, Lufkin & Jenrette Securities Corporation and
DLJ Merchant Banking II, Inc.(3)
10.30 -- Assignment and Assumption Agreement dated as of May 22,
1998, between DLJ Merchant Banking II, Inc. and
Thermadyne Holdings Corporation.(3)
21.1 -- Subsidiaries of Thermadyne Holdings Corporation.*
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.*
27.1 -- Financial Data Schedule.*
- ---------------
+ Indicates a management contract or compensatory plan or arrangement.
* Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement on Form
10 (File No. 0-23378) filed under Section 12(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), on February 7, 1994.
30
32
(2) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-23378) filed under Section 12(g) of the Exchange Act on January 21,
1998.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1, (File No. 333-57455) filed on June 23, 1998.
(4) Incorporated by reference to Thermadyne LLC and Thermadyne Capital's
Registration Statement on Form S-1 (File No. 333-57457) filed on June 23,
1998.
(5) Incorporated by reference to the Company's Registration Statement on Form
10/A, Amendment No. 2 (File No. 0-23378) filed under Section 12(g) of the
Exchange Act, on April 28, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(7) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-23378) filed under Section 12(g) of the Exchange Act on January 18,
1996.
(8) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-23378) filed under Section 12(g) of the Exchange Act on May 12, 1997.
31
33
THERMADYNE HOLDINGS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Thermadyne Holdings Corporation
Report of Ernst & Young LLP, Independent Auditors......... F-2
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997, and 1996...................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1998, 1997, and
1996................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996...................... F-6
Notes to Consolidated Financial Statements................ F-7
Thermadyne Mfg. LLC
Report of Ernst & Young LLP, Independent Auditors......... F-26
Consolidated Balance Sheets at December 31, 1998 and
1997................................................... F-27
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997, and 1996...................... F-28
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1998, 1997, and
1996................................................... F-29
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996...................... F-30
Notes to Consolidated Financial Statements................ F-31
F-1
34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Thermadyne Holdings Corporation
We have audited the accompanying consolidated balance sheets of Thermadyne
Holdings Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Thermadyne Holdings Corporation and subsidiaries at December 31, 1998 and 1997,
and the consolidated results of its operations and cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
------------------------------------
Orange County, California
February 22, 1999
F-2
35
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 1,319 $ 1,481
Accounts receivable, less allowance for doubtful accounts
of $2,852 and $2,217 respectively...................... 87,905 76,847
Inventories............................................... 122,733 105,135
Prepaid expenses and other................................ 7,365 8,534
-------- ---------
Total current assets.............................. 219,322 191,997
Property, plant and equipment, at cost, net................. 104,997 85,257
Deferred financing costs, net............................... 23,118 5,754
Intangibles, at cost, net................................... 39,159 33,970
Deferred income taxes....................................... 32,402 35,552
Other assets................................................ 1,251 1,997
-------- ---------
Total assets...................................... $420,249 $ 354,527
======== =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 44,170 $ 55,390
Accrued and other liabilities............................. 36,444 32,697
Accrued interest.......................................... 3,154 5,680
Income taxes payable...................................... 5,211 4,769
Current maturities of long-term obligations............... 9,180 4,912
-------- ---------
Total current liabilities......................... 98,159 103,448
Long-term obligations, less current maturities.............. 701,529 353,175
Other long-term liabilities................................. 62,834 60,751
Redeemable preferred stock (paid in kind), $0.01 par value,
15,000,000 shares authorized and 2,000,000 shares
outstanding at December 31, 1998.......................... 54,053 --
Shareholders' equity (deficit):
Common stock, $.01 par value, 30,000,000 and 25,000,000
shares authorized, 3,236,898 and 11,189,675 shares
issued and outstanding, at December 31, 1998 and 1997,
respectively........................................... 32 112
Additional paid-in capital................................ (116,551) 149,023
Accumulated deficit....................................... (360,520) (299,208)
Management loans.......................................... (3,753) --
Accumulated other comprehensive loss...................... (15,534) (12,774)
-------- ---------
Total shareholders' deficit....................... (496,326) (162,847)
-------- ---------
Total liabilities and shareholders' deficit....... $420,249 $ 354,527
======== =========
See accompanying notes to consolidated financial statements.
F-3
36
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
Net sales............................................... $532,777 $520,440 $439,744
Operating expenses:
Cost of goods sold.................................... 340,236 320,120 259,835
Selling, general and administrative expenses.......... 102,554 110,696 95,907
Amortization of goodwill.............................. 1,524 1,591 83,033
Amortization of other intangibles..................... 2,360 6,776 12,377
Net periodic postretirement benefits.................. 2,550 2,750 2,731
Special charges....................................... 50,523 -- --
-------- -------- --------
Operating income (loss)................................. 33,030 78,507 (14,139)
Other income (expense):
Interest expense...................................... (62,151) (45,325) (45,655)
Amortization of deferred financing costs.............. (2,700) (1,587) (2,711)
Other................................................. (2,939) (3,051) (968)
-------- -------- --------
Income (loss) from continuing operations before income
taxes and extraordinary item.......................... (34,760) 28,544 (63,473)
Income tax provision (benefit).......................... 11,415 13,475 (534)
-------- -------- --------
Income (loss) from continuing operations before
extraordinary item.................................... (46,175) 15,069 (62,939)
Discontinued operations:
Gain on sale of discontinued operations, net of income
taxes of $12,623 and $14,732, respectively......... -- 16,015 8,480
Income (loss) from discontinued operations, net of
income taxes....................................... -- 3,173 (5,463)
-------- -------- --------
Income (loss) before extraordinary item................. (46,175) 34,257 (59,922)
Extraordinary item-loss on early extinguishment of
long-term debt, net of income tax benefit of $8,151
and $2,001, respectively.............................. (15,137) -- (3,715)
-------- -------- --------
Net income (loss)....................................... (61,312) 34,257 (63,637)
Preferred stock dividends (paid in kind)................ 4,053 -- --
-------- -------- --------
Net income (loss) applicable to common shares........... $(65,365) $ 34,257 $(63,637)
======== ======== ========
Basic earnings (loss) per share amounts applicable to
common shares:
Income (loss) from continuing operations.............. $ (7.95) $ 1.36 $ (5.83)
Net income (loss)..................................... $ (10.35) $ 3.09 $ (5.89)
Diluted earnings (loss) per share amounts applicable to
common shares:
Income (loss) from continuing operations.............. $ (7.95) $ 1.33 $ (5.83)
Net income (loss)..................................... $ (10.35) $ 3.01 $ (5.89)
See accompanying notes to consolidated financial statements.
F-4
37
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON PAID-IN ACCUMULATED MANAGEMENT INCOME
STOCK CAPITAL DEFICIT LOANS (LOSS) TOTAL
------ ---------- ----------- ---------- ------------- ---------
January 1, 1996....................... $107 $ 138,583 $(269,828) $ -- $ (1,108) $(132,246)
Comprehensive income:
Net loss............................ -- -- (63,637) -- -- (63,637)
Other comprehensive income --
Foreign currency translation........ -- -- -- -- 5,957 5,957
---------
Comprehensive income.................. (57,680)
---------
Exercise of stock options............. 2 2,424 -- -- -- 2,426
Stock issued under employee stock
purchase plan....................... 1 2,230 -- -- -- 2,231
---- --------- --------- ------- -------- ---------
December 31, 1996..................... 110 143,237 (333,465) -- 4,849 (185,269)
Comprehensive income:
Net income.......................... -- -- 34,257 -- -- 34,257
Other comprehensive income --
Foreign currency translation........ -- -- -- -- (17,623) (17,623)
---------
Comprehensive income 16,634
---------
Exercise of stock options............. 1 1,498 -- -- -- 1,499
Stock issued under employee stock
purchase plan....................... 1 1,993 -- -- -- 1,994
Recognition of net operating loss
carryforwards....................... -- 2,295 -- -- -- 2,295
---- --------- --------- ------- -------- ---------
December 31, 1997..................... 112 149,023 (299,208) -- (12,774) (162,847)
Comprehensive income:
Net loss............................ -- -- (61,312) -- -- (61,312)
Other comprehensive income --
Foreign currency translation........ -- -- -- -- (4,150) (4,150)
---------
Comprehensive income (65,462)
---------
Exercise of stock options............. -- 624 -- -- -- 624
Merger................................ (80) (262,145) -- (3,632) 1,390 (264,467)
Interest on management loans.......... -- -- -- (121) -- (121)
Accretion of preferred stock.......... -- (4,053) -- -- -- (4,053)
---- --------- --------- ------- -------- ---------
December 31, 1998..................... $ 32 $(116,551) $(360,520) $(3,753) $(15,534) $(496,326)
==== ========= ========= ======= ======== =========
See accompanying notes to consolidated financial statements.
F-5
38
THERMADYNE HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Cash flows provided by (used in) operating activities:
Net income (loss)..................................... $ (61,312) $ 34,257 $ (63,637)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Net periodic postretirement benefits............. 2,550 2,750 2,731
Depreciation..................................... 15,089 12,448 11,651
Amortization of goodwill......................... 1,524 1,591 83,033
Amortization of other intangibles................ 2,360 6,776 12,377
Non-cash interest expense........................ 7,270 -- --
Amortization of deferred financing costs......... 2,700 1,587 2,711
Recognition of net operating loss
carryforwards.................................. -- 2,343 8,534
Deferred income taxes............................ 3,185 (1,836) (21,882)
Non-cash charges for discontinued operations..... -- 1,621 13,949
Gain on sale of discontinued operations.......... -- (16,015) (8,480)
Issuance of stock warrants....................... 12,190 -- --
Non-cash portion of extraordinary item........... (2,272) -- 3,715
Changes in operating assets and liabilities:
Accounts receivable.............................. (8,251) (19,905) (10,166)
Inventories...................................... (19,487) (17,228) (10,107)
Prepaid expenses and other....................... 728 (1,628) (1,957)
Accounts payable................................. (11,610) 20,605 3,498
Accrued and other liabilities.................... 2,809 (5,757) (4,510)
Accrued interest................................. (2,429) (258) 643
Income taxes payable............................. 7,920 (3,498) 1,379
Other long-term liabilities...................... (3,272) (3,152) (2,124)
Discontinued operations.......................... -- 285 97
--------- --------- ---------
Total adjustments........................... 11,004 (19,271) 85,092
--------- --------- ---------
Net cash provided by (used in) operating
activities................................ (50,308) 14,986 21,455
--------- --------- ---------
Cash flows provided by (used in) investing activities:
Capital expenditures, net........................... (17,506) (16,339) (11,447)
Change in other assets.............................. (3,046) 4,162 (4,399)
Acquisitions, net of cash........................... (18,953) (37,895) (74,011)
Investing activities of discontinued operations..... -- (1,680) (3,766)
Proceeds from sale of discontinued operations....... -- 88,543 112,359
--------- --------- ---------
Net cash provided by (used in) investing
activities................................ (39,505) 36,791 18,736
--------- --------- ---------
Cash flows provided by (used in) financing activities:
Change in long-term receivables..................... 638 170 (283)
Repayment of long-term obligations.................. (408,970) (131,486) (150,384)
Borrowing of long-term obligations.................. 753,865 72,855 119,854
Issuance of common stock............................ 90,624 3,069 4,146
Issuance of preferred stock......................... 50,000 -- --
Repurchase of common stock.......................... (368,815) -- --
Change in accounts receivable securitization........ (4,462) 5,676 (9,994)
Financing fees...................................... (23,824) -- (3,855)
Financing activities of discontinued operations..... -- (2,808) (1,732)
Other............................................... 595 808 1,639
--------- --------- ---------
Net cash provided by (used in) financing
activities................................ 89,651 (51,716) (40,609)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... (162) 61 (418)
Cash and cash equivalents at beginning of year........ 1,481 1,420 1,838
--------- --------- ---------
Cash and cash equivalents at end of year.............. $ 1,319 $ 1,481 $ 1,420
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
39
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY
Thermadyne Holdings Corporation ("Thermadyne" or the "Company"), a Delaware
corporation, is a global manufacturer of cutting and welding products and
accessories.
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 2), 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.
2. RECENT EVENTS
Merger with Mercury Acquisition Corporation
On May 22, 1998, Holdings consummated the merger of Mercury, a corporation
organized by DLJ Merchant Banking Partners II, L.P. ("DLJMB") and affiliated
funds and entities (the "DLJMB Funds"), with and into Holdings, with Holdings
continuing as the surviving corporation (the "Merger").
The funding required to pay cash for common stock not receiving the right
to retain Holdings common stock; to pay cash in lieu of each previously
outstanding employee stock option; to pay cash in lieu of the right to purchase
common stock under the Company's employee stock purchase plan; to refinance
and/or retire outstanding indebtedness of the Company; and to pay expenses
incurred in connection with the Merger was approximately $808 million. These
cash requirements were funded with the proceeds obtained from concurrent equity
and debt financings. Thermadyne LLC and Thermadyne Capital issued $207 million
principal amount of 9 7/8% Senior Subordinated Notes due 2008 (the "Senior
Subordinated Notes") and Thermadyne LLC entered into a syndicated senior secured
loan facility providing for term loan borrowings in the aggregate principal
amount of $330 million and revolving loan borrowings of $100 million (the "New
Credit Facility"). In connection with the Merger, Thermadyne LLC borrowed all
term loans available under the New Credit Facility plus $25 million of revolving
loans, which were subsequently repaid. The revolving loans are available to fund
the working capital requirements of Thermadyne LLC. The proceeds of such
financings were distributed to Holdings in the form of a dividend.
Mercury issued approximately $94.6 million aggregate proceeds of 12 1/2%
Senior Discount Debentures due 2008 (the "Debentures"). In connection with the
Merger, Holdings succeeded to the obligations of Mercury with respect to the
Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of
Mercury ("Mercury Common Stock"), 2,000,000 shares of preferred stock of Mercury
("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury
Common Stock at an exercise price of $0.01 per share (the "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"). The Management Loans
have a term of eight years and bear interest at the rate of 5.69% compounded
annually.
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
F-7
40
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Acquisitions
In 1998 the Company made the following four acquisitions. On September 1,
the Company acquired all the issued and outstanding capital stock of Thermadyne
Victor Ltda. (formerly known as Equi Solda SA), a leading manufacturer of gas
cutting apparatus in Brazil. On July 24, the Company acquired substantially all
the assets of Mid-America Cryogenics Company, which specializes in the design,
installation and service of cryogenic equipment and is located in Indianapolis,
Indiana. On May 21, the Company acquired substantially all the assets of OCIM
Srl, a manufacturer of a variety of arc welding accessories including Mig and
Tig torches and consumables, located in Milan, Italy. On February 1, the Company
acquired substantially all the assets of Pro-tip, a division of Settles Ground
Support, Inc., a producer of low-cost oxygen fuel cutting tips in Cuthbert,
Georgia. The aggregate consideration paid for these four acquisitions was
approximately $19 million and was financed through existing bank facilities.
These transactions were all accounted for as purchases.
In 1997 the Company completed three acquisitions. On November 25, the
Company acquired substantially all of the assets of Woodland Cryogenics,
Incorporated, a manufacturer of cryogenic pumps, ambient and electric vaporizers
and automatic cylinder filling systems located in Philadelphia, Pennsylvania. On
September 26, the Company acquired substantially all of the assets of the
welding division of Prestolite Power Corporation, a manufacturer of arc welders,
plasma welders and wire feeders, located in Troy, Ohio. On January 31, the
Company acquired all of the issued and outstanding capital stock of GenSet
S.p.A., a leading manufacturer of engine-driven welders and generators in Italy.
The aggregate consideration paid for these three acquisitions was approximately
$38 million and was financed through existing bank facilities. These
transactions were all accounted for as purchases.
On January 18, 1996, the Company acquired all of the issued and outstanding
capital stock of Duxtech Pty. Ltd., an Australian holding company that operates
Cigweld, the leading manufacturer of welding products in Australia and New
Zealand. The aggregate consideration paid was approximately $74,000 of which
approximately $21,500 was the assumption of existing debt. The remaining balance
was paid in cash which was financed through cash on hand and borrowing under the
Company's existing credit agreement. This transaction was accounted for as a
purchase.
Net working capital......................................... $21,220
Excess of cost over fair value of net assets acquired....... 31,002
Property, plant and equipment, at cost, net................. 29,083
Other long-term liabilities, net............................ (7,294)
-------
$74,011
=======
The operating results of the acquired companies have been included in the
Consolidated Statements of Operations from their respective dates of
acquisition. Pro forma unaudited results of operations for the twelve
F-8
41
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended December 31, 1998 and 1997 have not been presented, since they
would not have differed materially from actual results.
Sale of Discontinued Operations
On September 30, 1997, the Company completed the sale of its Wear
Resistance business for $96,000 which consisted of $88,500 in cash and $7,500 in
the assumption of long-term liabilities. The Company realized a net gain of
$16,015 on this transaction, net of income taxes of $12,623. The net proceeds
were used to reduce debt. The financial results of the Wear Resistance
operations were reported separately as discontinued operations in the
Consolidated Statements of Operations.
On April 26, 1996, the Company completed the sale of substantially all of
the assets of Coyne Cylinder Company ("Coyne"), and on June 27, 1996, the
Company completed the sale of its Floor Maintenance business. Consideration
received from these two transactions totaled $137,000 and consisted of $112,359
in cash and $24,641 in the assumption or elimination of certain liabilities. The
Company realized a net gain of $8,480 on these two transactions, net of income
taxes of $14,732. The net proceeds were used to reduce debt. The financial
results of the Coyne and Floor Maintenance operations were reported separately
as discontinued operations in the Consolidated Statements of Operations.
Sales from the discontinued businesses totaled $76,163 and $183,440 for the
years ended December 31, 1997 and 1996, respectively. Certain expenses were
allocated to discontinued operations including interest expense, which was
allocated on a ratio of earnings before interest, taxes, depreciation and
amortization for the years presented. Interest expense allocated to discontinued
operations was $2,048 and $7,630 for the years ended December 31, 1997 and 1996,
respectively. Income (loss) from discontinued operations included in the
accompanying Consolidated Statements of Operations include immaterial amounts of
income taxes (see Note 11).
3. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Thermadyne
and its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified to conform to current year presentation.
Preparation of financial statements in conformity with generally accepted
accounting principles requires certain estimates and assumptions be made that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Inventories. Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method for domestic
subsidiaries and the first-in, first-out ("FIFO") method for foreign
subsidiaries. Inventories at foreign subsidiaries amounted to approximately
$56,183 and $46,798 at December 31, 1998 and 1997, respectively.
Property, Plant and Equipment. Property, plant and equipment is carried at
cost and is depreciated using the straight-line method. The average estimated
lives utilized in calculating depreciation are as follows: buildings -- 25
years; and machinery and equipment -- two to ten years.
Deferred Financing Costs. The Company capitalizes loan origination fees and
other costs incurred arranging long-term financing. These costs are amortized
over the respective lives of the obligations using the effective interest
method.
Intangibles. The excess of costs over the net tangible assets of businesses
acquired consists of assembled work forces, customer and distributor
relationships, patented and unpatented technology, and goodwill. In conjunction
with the 1993 financial reorganization of the Company, assets and liabilities
were revalued as of
F-9
42
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
February 1, 1994. The assets were stated at their reorganization value which is
defined as the fair value of the reorganized company (see Note 7). The portion
of the reorganization value not attributable to specific assets was amortized
over a three-year period. Identified intangible assets are amortized on a
straight-line basis over the various estimated useful lives of such assets,
which generally range from three to 25 years. Goodwill related to acquisitions
subsequent to the financial reorganization is amortized over 40 years.
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to temporary differences between
the carrying value of assets and liabilities for financial reporting purposes
and their tax bases and carryforward items. The measurement of current and
deferred tax assets and liabilities is based on provisions of the enacted tax
law; the effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
Revenue Recognition. Revenue from the sale of cutting and welding products
is recognized upon shipment to the customer. Costs and related expenses to
manufacture cutting and welding products are recorded as cost of sales when the
related revenue is recognized.
Comprehensive Income. 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 1998 and 1997, total comprehensive income (loss) amounted to
$(65,462) and $16,634, respectively.
Earnings Per Share. In 1997, the Financial Account 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 the Statement 128 requirements.
The effects of options,
F-10
43
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
warrants and convertible securities have not been considered for the years ended
December 31, 1998 and 1996 because the result would be antidilutive.
1998 1997 1996
---------- ----------- -----------
Basic earnings (loss) per share amounts applicable to
common shares:
Income (loss) from continuing operations before
extraordinary item................................ $ (7.95) $ 1.36 $ (5.83)
Discontinued operations.............................. -- 1.73 0.28
---------- ----------- -----------
Income (loss) before extraordinary item.............. (7.95) 3.09 (5.55)
Extraordinary item -- loss on early extinguishment of
long-term debt.................................... (2.40) -- (0.34)
---------- ----------- -----------
Net income (loss)............................ $ (10.35) $ 3.09 $ (5.89)
========== =========== ===========
Diluted earnings (loss) per share amounts applicable to
common shares:
Income (loss) from continuing operations before
extraordinary item................................ $ (7.95) $ 1.33 $ (5.83)
Discontinued operations.............................. -- 1.68 0.28
---------- ----------- -----------
Income (loss) before extraordinary item.............. (7.95) 3.01 (5.55)
Extraordinary item -- loss on early extinguishment of
long-term debt.................................... (2.40) -- (0.34)
---------- ----------- -----------
Net income (loss)............................ $ (10.35) $ 3.01 $ (5.89)
========== =========== ===========
Weighted average shares -- basic earnings per share.... 6,317,568 11,072,088 10,797,261
Effect of dilutive securities:
Employee stock options............................... -- 296,109 --
---------- ----------- -----------
Weighted average shares -- diluted earnings per
share................................................ 6,317,568 11,368,197 10,797,261
========== =========== ===========
Stock Based Compensation. The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. The Company accounts for these stock option
grants in accordance with Accounting Principles Board Opinion No. 25 --
"Accounting for Stock Issued to Employees" ("APB 25"), and, accordingly,
recognizes no compensation expense for the stock option grants.
Statement of Cash Flows. For purposes of the statement of cash flows,
Thermadyne considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The carrying value of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
The following table shows the interest and taxes paid (refunded) during the
periods presented in the accompanying Consolidated Statements of Cash Flows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Interest............................ $57,407 $48,683 $48,581
Taxes............................... (989) 12,276 11,409
Foreign Currency Translation. Local currencies have been designated as the
functional currencies for all subsidiaries. Accordingly, assets and liabilities
of foreign subsidiaries are translated at the rates of exchange at the balance
sheet date. Income and expense items of these subsidiaries are translated at
average monthly rates
F-11
44
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of exchange. The resultant translation gains or losses are included in the
component of shareholders' equity designated "Foreign currency translation." The
Company's foreign operations are discussed in Note 13.
Recent Accounting Pronouncements. In June 1998, the FASB issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement effective January 1,
2000. The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged asset, liability, or firm
commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
4. ACCOUNTS RECEIVABLE
The Company has entered into a trade accounts receivable securitization
agreement whereby it will sell on an ongoing basis, through December 28, 1999,
participation interests in up to $50,000 of designated accounts receivable. The
amount of participation interests sold under this financing arrangement is
subject to change based on the level of eligible receivables and restrictions on
concentrations of receivables, and was approximately $23,843 and $28,305 at
December 31, 1998 and 1997, respectively. The sold accounts receivable are
reflected as a reduction of accounts receivable on the Consolidated Balance
Sheets. Interest expense is incurred on participation interests at the rate of
one-month LIBOR plus 50 basis points, per annum (approximately 6.04% at December
31, 1998). The fair value of accounts receivable approximates the carrying
value.
5. INVENTORIES
The composition of inventories at December 31, is as follows:
1998 1997
-------- --------
Raw materials............................................... $ 31,189 $ 25,044
Work-in-process............................................. 27,414 25,602
Finished goods.............................................. 65,623 56,087
-------- --------
124,226 106,773
LIFO reserve................................................ (1,493) (1,598)
-------- --------
$122,733 $105,135
======== ========
6. PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment at December 31, is as
follows:
1998 1997
-------- --------
Land........................................................ $ 15,478 $ 14,071
Building.................................................... 41,555 33,748
Machinery and equipment..................................... 91,372 68,008
-------- --------
148,405 115,827
Accumulated depreciation.................................... (43,408) (30,570)
-------- --------
$104,997 $ 85,257
======== ========
F-12
45
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assets recorded under capitalized leases were $17,556 ($13,619 net of
accumulated depreciation) and $17,663 ($14,432 net of accumulated depreciation)
at December 31, 1998 and 1997, respectively.
7. INTANGIBLES
The composition of intangibles at December 31, is as follows:
1998 1997
-------- -------
Goodwill.................................................... $ 44,497 $39,532
Other....................................................... 5,090 3,038
-------- -------
49,587 42,570
Accumulated amortization.................................... (10,428) (8,600)
-------- -------
$ 39,159 $33,970
======== =======
In the fourth quarter of 1996, the carrying value of intangible assets
recorded in connection with the Company's financial reorganization was reduced
by approximately $2,400 resulting from the initial recognition of the Company's
net deferred tax asset. The carrying value of these intangibles was further
reduced during 1997 by approximately $26,000 upon the recognition of net
operating loss carryforward benefits and the sale of the Wear Resistance
business.
8. LONG-TERM OBLIGATIONS
The composition of long-term obligations at December 31, is as follows:
1998 1997
-------- --------
Revolving Credit Facility................................... $ 14,000 $ --
Term A Facility -- United States............................ 70,000
Term A Facility -- Australia................................ 19,480 --
Term A Facility -- Italy.................................... 10,410 --
Term B Facility............................................. 114,425 --
Term C Facility............................................. 114,425 --
Domestic credit agreement................................... -- 41,500
Australian credit agreement................................. -- 18,057
Senior subordinated notes, due June 1, 2008, 9 7/8% interest
payable semiannually on June 1 and December 1............. 207,000 --
Debentures, due June 1, 2008, 12 1/2% interest payable
semiannually on June 1 and December 1..................... 101,881 --
Senior notes, due May 1, 2002, 10.25% interest payable
semiannually on May 1 and November 1...................... -- 99,288
Subordinated notes, due November 1, 2003, 10.75% interest
payable semiannually on May 1 and November 1.............. 37,060 179,321
Capital leases.............................................. 17,804 17,630
Other....................................................... 4,224 2,291
-------- --------
710,709 358,087
Current maturities.......................................... (9,180) (4,912)
-------- --------
$701,529 $353,175
======== ========
F-13
46
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, the schedule of principal payments on long-term debt,
excluding capital lease obligations, is as follows:
1999........................................................ $ 8,337
2000........................................................ 10,518
2001........................................................ 17,348
2002........................................................ 24,812
2003........................................................ 71,861
Thereafter.................................................. 560,029
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. At December 31, 1998, the Company had $8,598 of standby letters of
credit outstanding under the Revolving Credit Facility. Unused borrowing
capacity under the Revolving Credit Facility was $77,402.
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. At December 31, 1998 the prime rate
was 7.75%
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).
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.
F-14
47
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Term Loan Facility is subject to the following amortization schedule:
YEAR TERM LOAN A TERM LOAN B TERM LOAN 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%
The Term Loan Facility is subject to mandatory prepayment: (i) with 100% of
the net cash proceeds from the issuance of debt, subject to certain exceptions,
(ii) with 100% of the net cash proceeds of asset sales and casualty events,
subject to certain exceptions, (iii) with 50% of Thermadyne LLC's excess cash
flow (as defined in the New Credit Facility) to the extent that the Leverage
Ratio (as defined in the New Credit Facility) exceeds 3.5 to 1.0, and (iv) with
50% of the net cash proceeds from the issuance of equity to the extent that the
Leverage Ratio exceeds 4.0 to 1.0. Thermadyne LLC's obligations under the New
Credit Facility are secured by a first-priority perfected lien on: (i)
substantially all domestic property and assets, tangible and intangible (other
than accounts receivable sold or to be sold into the accounts receivable program
and short term real estate leases), of Thermadyne LLC and its domestic
subsidiaries (other than the special purpose subsidiaries involved in the
accounts receivable program); (ii) the capital stock of (a) Thermadyne LLC held
by Holdings and (b) all subsidiaries of Thermadyne LLC (provided that no more
than 65% of the equity interest in non-U.S. subsidiaries held by Thermadyne LLC
and its domestic subsidiaries and no equity interests in subsidiaries held by
foreign subsidiaries are required to be pledged); and (iii) all intercompany
indebtedness. Holdings has guaranteed the obligations of Thermadyne LLC under
the New Credit Facility. In addition, obligations under the New Credit Facility
are guaranteed by all domestic subsidiaries.
The New Credit Facility contains customary covenants and restrictions on
Thermadyne LLC's ability to engage in certain activities, including, but not
limited to: (i) limitations on the incurrence of liens and indebtedness, (ii)
restrictions on sale lease-back transactions, consolidations, mergers, sale of
assets, capital expenditures, transactions with affiliates and investments, and
(iii) severe restrictions on dividends, and other similar distributions.
The New Credit Facility contains financial covenants requiring Thermadyne
LLC to maintain a minimum level of Adjusted EBITDA (as defined in the New Credit
Facility); a minimum Interest Coverage Ratio (as defined in the New Credit
Facility); a minimum Fixed Charge Coverage Ratio (as defined in the New Credit
Facility); and a maximum Leverage Ratio (as defined in the New Credit Facility).
Senior Subordinated Notes
Thermadyne LLC and Thermadyne Capital have outstanding $207 million
aggregate principal amount of the Senior Subordinated Notes. The Senior
Subordinated Notes are general unsecured obligations of Thermadyne LLC and
Thermadyne Capital and will be subordinated in right of payment to all existing
and future senior indebtedness of Thermadyne LLC and Thermadyne Capital
(including borrowings under the New Credit Facility). The Senior Subordinated
Notes are unconditionally guaranteed on a senior subordinated basis by 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
F-15
48
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indebtedness under the New Credit Facility, and will rank senior in right of
payment to any future subordinated indebtedness of the Guarantor Subsidiaries.
Debentures
Holdings has outstanding $101.9 million of Debentures. The Debentures
initially are limited in aggregate principal amount at maturity to $174 million.
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.
Prior to the Merger, the Company was party to a $250,000 revolving credit
and letters of credit facility with a consortium of 22 banks (the "Domestic
Facility"). At the Company's option, interest accrued at (i) the prime rate plus
an applicable margin in the range of 0.5%-1.25% or, (ii) LIBOR plus an
applicable margin in the range of 1.5%-2.25%. The applicable margin percentage
was dependent upon the Company meeting certain financial conditions. The
facility contained financial covenants which, among other things, required the
Company to maintain certain financial ratios and restricted the Company's
ability to incur indebtedness, make capital expenditures, and pay dividends. The
facility was secured by the capital stock, personal and real property of the
Company and a significant portion of its subsidiaries' capital stock and
personal and real property.
In addition, prior to the Merger, the Company was party to an Australian
credit agreement (the "Australian Facility") denominated in Australian dollars
("A$"). The Australian Facility consisted of an A$15,000 term commitment and an
A$22,000 revolving credit commitment. The Australian Facility bore interest at
the Bank Bill Rate (as defined) plus a margin of 1.5% for the term commitment
and 0.75% for the revolving credit commitment. Interest payment dates varied
depending on the funding period selected by the Company. The facility required
the Company's Australian subsidiary to comply with various financial covenants.
The facility was secured by personal and real property of the Company's
Australian subsidiary.
The indentures governing the Senior Subordinated Notes, the Debentures and
the subordinated notes restrict, subject to certain exceptions, the Company and
its subsidiaries from incurring additional debt, paying dividends or making
other distributions on or redeeming or repurchasing capital stock, making
investments, loans or advances, disposing of assets, creating liens on assets
and engaging in transactions with affiliates.
The estimated fair value amounts of the Company's long-term obligations
have been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is required to
develop the estimates of fair value; thus, the estimates provided herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts. The fair values of
the Senior Subordinated Notes, the Debentures and the subordinated notes were
based on the most recent market information available, and is estimated to be
94.5%, 82.8% and 107.0% of their current carrying values at December 31, 1998,
or $195,615, $84,390 and $39,654, respectively. The fair values of the credit
agreement and the Company's other long-term obligations are estimated at their
current carrying values since these obligations are fully secured and have
varying interest charges based on current market rates.
F-16
49
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. REDEEMABLE 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. Holders of a majority of the outstanding shares
of Holdings Preferred Stock will have the right to elect two members to the
board of directors of Holdings upon the failure of Holdings to pay cash
dividends for more than four consecutive quarters or six quarters, satisfy
mandatory redemption obligations, provide required notices or comply with
certain other specified provisions relating to the Holdings Preferred Stock.
This right terminates and the term of the additional directors ceases upon cure.
In addition, Holdings cannot amend, alter or repeal any provision that would
adversely affect the preferences, rights or powers of the Holdings Preferred
Stock or create, authorize or issue any class of stock ranking prior to or on a
parity with the Holdings Preferred Stock without the written consent of a
majority of the holders.
10. STOCK OPTIONS
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation"
("FASB 123"), requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998,
1997 and 1996, respectively: risk-free interest rates of 5.6%, 6.1% and 5.5%; a
dividend yield of 0.0% for each year presented; volatility factors of the
expected market price of the Company's common stock of 0.35, 0.38 and 0.39; and
a weighted-average expected life of the options of six years for each year
presented.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-17
50
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
Pro forma net income (loss) applicable to common
shares........................................ $(66,166) $32,239 $(64,574)
Pro forma net income (loss) per share:
Basic......................................... (10.47) 2.91 (5.98)
Diluted....................................... (10.47) 2.84 (5.98)
Because FASB 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until future
periods.
The Company has two option plans for the grant of options to its employees
and directors. The 1998 Management Incentive Plan (the "1998 Management Plan")
provides for the grant of options to acquire up to 500,000 shares of common
stock to key officers and employees of the Company or its affiliates. Grants
under the 1998 Management Plan vest either a) immediately on the date of grant,
b) ratably over five years from the date of grant, c) upon the attainment of
yearly targeted implied common equity values of the Company or, d) if yearly
targeted implied common equity values are not attained, after an eight-year
period. The Non-Employee Directors Stock Option Plan (the "1998 Directors Plan")
provides for the grant of options to acquire up to 20,000 shares of common stock
to non-employee directors of the Company. Grants under the 1998 Directors Plan
vest immediately on the date of grant. All options granted under the two plans
described above are non-qualified stock options granted at 100% of the fair
market value on the grant dates. In connection with the Merger, the 1993
Management Option Plan (the "1993 Management Plan"), the Non-Employee Directors
Plan (the "1995 Directors Plan") and the 1996 Employee Stock Option Plan (the
"1996 Employee Plan") were terminated. At that time, the option holders received
a cash payment with respect to each option and the underlying options were
canceled.
F-18
51
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding stock options is summarized as follows:
1998 1997 1996
------------------------------ ----------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
----------- ---------------- ---------- ---------------- --------- ----------------
Outstanding -- beginning
of year............... 1,061,217 $16.91 963,055 $14.27 913,000 $12.30
Granted................. 328,866 34.50 217,200 27.00 340,000 17.85
Exercised............... (27,549) 12.17 (87,255) 12.38 (169,054) 12.01
Canceled or forfeited... (1,035,968) 17.08 (31,783) 18.32 (120,891) 12.62
----------- ---------- ---------
Outstanding-end of
year.................. 326,566 34.50 1,061,217 16.91 963,055 14.27
=========== ========== =========
Exercisable at end of
year:
1993 Management Plan.. -- 430,399 359,329
1995 Directors Plan... -- 23,000 24,000
1996 Employee Plan.... -- 39,355 --
1998 Management Plan.. 30,213 -- --
1998 Directors Plan... 6,000 -- --
Reserved for future
grants:
1993 Management Plan.. -- 15,704 70,621
1995 Directors Plan... -- 22,000 26,000
1996 Employee Plan.... -- 470,500 97,000
1998 Management Plan.. 179,434 -- --
1998 Directors Plan... 14,000 -- --
Weighted-average fair
value of options
granted during the
year.................. $ 15.16 $ 13.14 $ 8.49
Weighted-average
remaining contractual
life of options
(years)............... 9.4 7.2 8.0
10. LEASES
Future minimum lease payments related to continuing operations under leases
with initial or remaining noncancelable lease terms in excess of one year at
December 31, 1998 are as follows:
CAPITAL OPERATING
LEASE LEASE
-------- ---------
1999........................................................ $ 3,721 $ 8,504
2000........................................................ 3,655 7,752
2001........................................................ 3,640 5,940
2002........................................................ 3,706 4,720
2003........................................................ 3,909 4,110
Thereafter.................................................. 45,823 27,261
--------
Total minimum lease payments...................... 64,454
Amount representing interest................................ (46,650)
--------
Present value of net minimum lease payments, including
current obligations of $843............................... $ 17,804
========
Rent expense under operating leases from continuing operations amounted to
$9,528, $9,358 and $7,562 for the years ended December 31, 1998, 1997 and 1996,
respectively.
F-19
52
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
Pre-tax income (losses) from continuing operations were taxed under the
following jurisdictions:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Domestic............................ $(27,450) $31,104 $(69,694)
Foreign............................. (7,310) (2,560) 6,221
-------- ------- --------
Income (loss) before income
taxes........................ $(34,760) $28,544 $(63,473)
======== ======= ========
The provision (benefit) for income taxes charged to continuing operations
is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Current:
Federal........................ $ (768) $11,014 $ 8,091
Foreign........................ 1,458 1,064 1,785
State and local................ 350 927 1,050
------- ------- --------
Total current............. 1,040 13,005 10,926
------- ------- --------
Deferred.......................... 10,375 470 (11,460)
------- ------- --------
$11,415 $13,475 $ (534)
======= ======= ========
The composition of deferred tax assets and liabilities attributable to
continuing operations at December 31 is as follows:
1998 1997
-------- --------
Deferred tax assets:
Post-employment benefits.................................. $ 8,862 $ 9,214
Accrued liabilities....................................... 7,482 3,316
Intangibles............................................... 8,781 14,408
Deferred interest......................................... 2,412 --
Other..................................................... 1,489 --
Fixed assets.............................................. 6,769 6,992
Net operating loss carryforwards.......................... 35,654 29,523
-------- --------
Total deferred tax assets......................... 71,449 63,453
Valuation allowance for deferred tax assets............... (35,519) (22,493)
-------- --------
Net deferred tax assets........................... 35,930 $ 40,960
-------- --------
Deferred tax liabilities:
Inventories............................................... 3,528 4,562
Other..................................................... -- 846
-------- --------
Total deferred tax liabilities.................... 3,528 5,408
-------- --------
Net deferred tax asset............................ $ 32,402 $ 35,552
======== ========
F-20
53
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to pretax income from continuing operations as a result of the following
differences:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
Tax at U.S. statutory rates..................... $(12,166) $ 9,991 $(22,216)
Nondeductible goodwill amortization and other
nondeductible expenses........................ 2,660 2,048 28,877
Change in valuation allowance, recognition of
net operating loss carryforward benefits and
other......................................... 12,000 -- 6,318
Foreign tax rate differences and recognition of
foreign tax loss benefits..................... 1,032 833 (393)
Nondeductible merger costs...................... 7,662 -- --
State income taxes, net of federal tax
benefit....................................... 227 603 683
Initial recognition of net deferred tax asset... -- -- (13,803)
-------- ------- --------
$ 11,415 $13,475 $ (534)
======== ======= ========
In the fourth quarter of 1996, the Company re-evaluated the realizability
of the net deferred tax asset. As a result, a net deferred tax asset of
approximately $22,000 was recorded on December 31, 1996. Of the total amount
recorded, approximately $8,000 was reported as an adjustment to the carrying
value of goodwill and other intangible assets. The balance was reported as a
reduction to income tax expense. A portion of the net adjustment for deferred
taxes was allocated to discontinued operations. During 1998, the valuation
allowance for deferred tax assets increased by $13,026. Approximately $1,026 of
the increase was recorded as an adjustment to goodwill recorded in recent
acquisitions. Accordingly, the initial recognition of these tax benefits will be
recorded as an adjustment to the related goodwill. The remaining $12,000 was
recorded as an increase to income tax expense.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $98,000 available for US federal income tax purposes which expire
beginning 2001. Utilization of the majority of these net operating loss
carryforwards is subject to various limitations because of previous changes in
control of ownership (as defined in the Internal Revenue Code) of the Company.
Pursuant to the requirements of the American Institute of Certified Public
Accountants Statement of Position No. 90-7, entitled "Financial Entities in
Reorganization Under the Bankruptcy Code," the tax benefit resulting from the
utilization of net operating loss carryforwards that existed on the effective
date of the Company's financial reorganization will be reported as a direct
addition to paid-in capital.
The Company's foreign subsidiaries have undistributed earnings at December
31, 1998. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable because of the complexities
associated with its hypothetical calculation.
12. EMPLOYEE BENEFIT PLANS
401(k) Retirement Plan. The 401(k) Retirement Plan covers the majority of
the Company's domestic employees. The Company, at its discretion, can make a
base contribution of 1% of each employee's compensation and an additional
contribution equal to as much as 4% of the employee's compensation. At the
F-21
54
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee's discretion, an additional 1% to 15% voluntary employee contribution
can be made. The plan requires the Company to make a matching contribution of
50% of the first 6% of the voluntary employee contribution. Total expense for
this plan related to continuing operations was approximately $2,115, $2,628, and
$2,585 for the years ended December 31, 1998, 1997 and 1996, respectively.
Employee Stock Purchase Plan. The Employee Stock Purchase Plan was canceled
in connection with the Merger. It enabled substantially all employees of the
Company to purchase shares of common stock at a purchase price of 85% of the
fair market value at specified dates. For plan year 1997 the plan was amended to
change the plan year to a calendar year basis. For the plan year ended December
31, 1997, 1,098 employee participants purchased 82,085 shares at an aggregate
purchase price of $1,989. For the plan year ended October 31, 1996, 1,090
employee participants purchased 145,584 shares at an aggregate purchase price of
$2,119.
Pension Plans The Company's subsidiaries have had various noncontributory
defined benefit pension plans which covered substantially all U.S. employees.
The Company froze and combined its three noncontributory defined benefit pension
plans through amendments to such plans effective December 31, 1989. All former
participants of these plans became eligible to participate in the 401(k)
Retirement Plan effective January 1, 1990. In addition, the Company's Australian
subsidiary has a Superannuation Fund established by a Trust Deed which operates
on a lump sum scheme to provide benefits for its employees.
Other Postretirement Benefits. The Company has a retirement plan covering
both salaried and nonsalaried retired employees, which provides postretirement
health care benefits (medical and dental) and life insurance benefits. The
postretirement health care portion is contributory, with retiree contributions
adjusted annually as determined by the Company based on claim costs. The
postretirement life insurance portion is noncontributory. The Company recognizes
the cost of postretirement benefits on the accrual basis as employees render
service to earn the benefit. The Company continues to fund the cost of health
care and life insurance benefits in the year incurred.
The following table provides a reconciliation of benefit obligations, plan
assets and status of the Pension and Other Postretirement Benefit Plans as
recognized in the Company's Consolidated Balance Sheet for the years ended
December 31, 1998 and 1997:
Other
Postretirement
Pension Benefits Benefits
----------------- -------------------
1998 1997 1998 1997
------- ------- -------- --------
Change in Benefit Obligation:
Benefit obligation at beginning of year.... $44,439 $47,279 $ 12,010 $ 16,395
Service cost............................... 1,057 1,259 1,218 1,255
Participant contributions.................. 795 937 -- --
Interest cost.............................. 2,424 3,045 1,330 496
Actuarial (gains)/losses................... (266) 5,442 (870) (4,533)
Foreign currency exchange rate changes..... (1,507) (6,196) -- --
Plan amendments............................ -- -- -- (1,079)
Benefits paid.............................. (5,240) (7,327) (914) (524)
------- ------- -------- --------
Benefit obligation at end of year.......... $41,702 $44,439 $ 12,774 $ 12,010
======= ======= ======== ========
F-22
55
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other
Postretirement
Pension Benefits Benefits
----------------- -------------------
1998 1997 1998 1997
------- ------- -------- --------
Change in plan assets:
Fair value of plan assets at beginning of
year.................................... $44,399 $50,137
Actual return on plan assets............... 3,968 5,644
Sponsor contributions...................... 3,086 1,952
Participant contributions.................. 795 937
Benefits paid.............................. (5,240) (7,327)
Foreign currency exchange rate changes..... (1,632) (6,813)
Administrative expenses.................... (110) (131)
------- -------
Fair value of plan assets at end of year... $45,266 $44,399
======= =======
Funded status of the plan (underfunded)...... $ 3,564 $ (40) $(12,774) $(12,010)
Unrecognized net actuarial loss (gain)..... 989 1,848 (9,426) (9,428)
Unrecognized prior service cost............ 99 122 (1,927) (1,927)
------- ------- -------- --------
Prepaid (accrued) benefit cost............. $ 4,652 $ 1,930 $(24,127) $(23,365)
======= ======= ======== ========
Weighted-average assumptions as of December
31:
Discount rate.............................. 7% 7% 7% 7%
Expected rate on plan assets............... 8% 8% -- --
Rate of compensation increase.............. 3% 3% N/A N/A
Net periodic pension and other postretirement benefit costs include the
following components:
Pension Benefits Other Benefits
--------------------------- ------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------
Components of the net periodic benefit cost:
Service cost...................... $ 1,057 $ 1,259 $ 1,283 $1,218 $1,255 $1,365
Interest cost..................... 2,424 3,045 3,194 1,330 1,496 1,564
Actual return on plan assets...... (3,366) (3,644) (3,509) -- -- --
Recognized gain/loss.............. -- -- 2 (1) (198)
Amortization of prior service
costs.......................... 2 3 3 -- -- --
Prior service cost recognized..... 23 23 23 -- -- --
------- ------- ------- ------ ------ ------
Benefit cost (credit)............... $ 140 $ 686 $ 994 $2,550 $2,750 $2,731
======= ======= ======= ====== ====== ======
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.5% in 1998, declining gradually to 6.0%
in 2012. The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 10.5% in 1997 and 10.5% in
1996. A one percentage point change in the assumed health care cost trend rate
would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components in
1998...................................................... $ 306 $ (256)
Effect on postretirement benefit obligation as of December
31, 1998.................................................. 1,948 (1,546)
13. SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FASB 131") which changes the way the Company reports information about its
operating segments. The information for 1997 and 1996 has been restated from the
prior year's presentation in order to conform to the current year presentation.
F-23
56
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company reports its segment information by geographic region. Although
the Company's domestic operation is comprised of several individual business
units, similarity of products, paths to market, end users, and production
processes results in performance evaluation and decisions regarding allocation
of resources being made on a combined basis. The Company's reportable geographic
regions are the United States, Europe and Australia/Asia.
The Company evaluates performance and allocates resources based principally
on operating income net of any special charges or significant one-time charges.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intersegment sales
are based on market prices.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes the
elimination of intersegment sales and profits, corporate related items and other
costs not allocated to the reportable segments.
ALL OTHER
UNITED GEOGRAPHIC
STATES EUROPE AUSTRALIA/ASIA REGIONS OTHER CONSOLIDATED
-------- ------- -------------- ---------- --------- ------------
1998
Revenue from external
customers..................... $363,371 $54,657 $ 82,238 $32,511 $ -- $532,777
Intersegment revenues........... 39,715 14,355 4,447 -- (58,517) --
Depreciation and amortization of
intangibles................... 9,562 2,682 3,979 646 2,104 18,973
Operating income (loss)......... 90,691 3,953 (1,549) (48) (60,017) 33,030
Identifiable assets............. 174,272 57,539 107,991 31,686 48,761 420,249
Capital expenditures............ 7,965 1,114 7,091 420 916 17,506
1997
Revenue from external
customers..................... 333,871 51,900 109,984 24,685 -- 520,440
Intersegment revenues........... 35,503 4,699 2,700 -- (42,902) --
Depreciation and amortization of
intangibles................... 12,190 2,333 4,677 57 1,558 20,815
Operating income (loss)......... 85,279 3,416 2,304 1,148 (13,640) 78,507
Identifiable assets............. 158,038 48,684 102,342 9,285 36,178 354,527
Capital expenditures............ 7,843 2,464 4,828 78 1,126 16,339
1996
Revenue from external
customers..................... 292,549 17,879 105,337 23,979 -- 439,744
Intersegment revenues........... 30,770 21 2,362 -- (33,153) --
Depreciation and amortization of
intangibles................... 14,399 83 6,594 150 85,835 107,061
Operating income (loss)......... 74,166 888 5,688 2,183 (97,064) (14,139)
Identifiable assets............. 152,987 11,453 113,590 9,754 65,621 353,405
Capital expenditures............ 6,991 149 3,246 135 926 11,447
Product Line Information
The Company manufactures a variety of products, substantially all of which
are used in the cutting, welding or fabrication of metal. End-users of the
Company's products are engaged in various applications
F-24
57
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
including construction, automobile manufacturing, repair and maintenance and
ship building. The following table shows sales for each of the Company's key
product lines:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Gas apparatus.......................... $183,688 $183,253 $167,169
Arc welding equipment.................. 103,803 90,440 42,054
Arc welding consumables................ 162,696 171,922 161,783
Plasma and automated cutting
equipment............................ 71,742 61,685 56,111
All other.............................. 10,848 13,140 12,627
-------- -------- --------
$532,777 $520,440 $439,744
======== ======== ========
14. CONTINGENCIES
Thermadyne and certain of its wholly owned subsidiaries are defendants in
various legal actions, primarily in the products liability area. While there is
uncertainty relating to any litigation, management is of the opinion that the
outcome of such litigation will not have a material adverse effect on the
Company's financial condition or results of operations.
The Company is party to an agreement with a financial institution to sell
at face value up to a total of $25,000 of its long-term receivables. The product
line that generated these long-term receivables has been divested, and
consequently, no further sales will occur. Under the terms of this agreement,
the Company is liable for a total of 20% of the aggregate receivables sold and
this liability approximates $4,000. The Company has further retained collection
and administrative responsibilities on behalf of the financial institution. The
Company has a secured interest in the inventory sold under these long-term
receivables which has been assigned to the financial institution. At December
31, 1998, approximately $1,871 in contracts subject to this agreement are
outstanding. Management believes the allowance for doubtful accounts at December
31, 1998 will be adequate for all uncollectible receivables.
F-25
58
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Thermadyne Mfg. LLC
We have audited the accompanying consolidated balance sheets of Thermadyne
Mfg. LLC and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholder's equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Thermadyne Mfg. LLC and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
------------------------------------
Orange County, California
February 22, 1999
F-26
59
THERMADYNE MFG. LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Current assets:
Cash and cash equivalents................................. $ 1,319 $ 1,481
Accounts receivable, less allowance for doubtful accounts
of $2,852 and $2,217 respectively...................... 87,905 76,847
Inventories............................................... 122,733 105,135
Prepaid expenses and other................................ 7,365 8,534
--------- ---------
Total current assets.............................. 219,322 191,997
Property, plant and equipment, at cost, net................. 104,997 85,257
Deferred financing costs, net............................... 19,572 5,754
Intangibles, at cost, net................................... 39,159 33,970
Deferred income taxes....................................... 29,135 35,552
Other assets................................................ 1,251 1,997
--------- ---------
Total assets...................................... $ 413,436 $ 354,527
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 44,170 $ 55,390
Accrued and other liabilities............................. 36,444 32,697
Accrued interest.......................................... 498 5,680
Income taxes payable...................................... 5,211 4,769
Current maturities of long-term obligations............... 9,180 4,912
--------- ---------
Total current liabilities......................... 95,503 103,448
Long-term obligations, less current maturities.............. 562,588 353,175
Other long-term liabilities................................. 62,834 60,751
Shareholder's deficit:
Accumulated deficit....................................... (368,408) (299,208)
Accumulated other comprehensive loss...................... (15,534) (12,774)
--------- ---------
Total shareholder's deficit....................... (383,942) (311,982)
Net equity and advances to/from parent.................... 76,453 149,135
--------- ---------
Total liabilities and shareholder's deficit....... $ 413,436 $ 354,527
========= =========
See accompanying notes to consolidated financial statements.
F-27
60
THERMADYNE MFG. LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
Net sales............................................... $532,777 $520,440 $439,744
Operating expenses:
Cost of goods sold.................................... 340,236 320,120 259,835
Selling, general and administrative expenses.......... 102,554 110,696 95,907
Amortization of goodwill.............................. 1,524 1,591 83,033
Amortization of other intangibles..................... 2,360 6,776 12,377
Net periodic postretirement benefits.................. 2,550 2,750 2,731
Special charges....................................... 50,523 -- --
-------- -------- --------
Operating income (loss)................................. 33,030 78,507 (14,139)
Other income (expense):
Interest expense...................................... (52,545) (45,325) (45,655)
Amortization of deferred financing costs.............. (2,480) (1,587) (2,711)
Other................................................. (3,059) (3,051) (968)
-------- -------- --------
Income (loss) from continuing operations before income
taxes and extraordinary item.......................... (25,054) 28,544 (63,473)
Income tax provision (benefit).......................... 14,682 13,475 (534)
-------- -------- --------
Income (loss) from continuing operations before
extraordinary item.................................... (39,736) 15,069 (62,939)
Discontinued operations:
Gain on sale of discontinued operations, net of income
taxes of $12,623 and $14,732, respectively......... -- 16,015 8,480
Income (loss) from discontinued operations, net of
income taxes....................................... -- 3,173 (5,463)
-------- -------- --------
Income (loss) before extraordinary item................. (39,736) 34,257 (59,922)
Extraordinary item-loss on early extinguishment of
long-term debt, net of income tax benefit of $8,151
and $2,001, respectively.............................. (15,137) -- (3,715)
-------- -------- --------
Net income (loss)....................................... $(54,873) $ 34,257 $(63,637)
======== ======== ========
See accompanying notes to consolidated financial statements.
F-28
61
THERMADYNE MFG. LLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME (LOSS) TOTAL
----------- ------------- ---------
January 1, 1996................................... $(269,828) $ (1,108) $(270,936)
Comprehensive income:
Net loss........................................ (63,637) -- (63,637)
Other comprehensive income --
Foreign currency translation.................... -- 5,957 5,957
---------
Comprehensive income.............................. (57,680)
--------- -------- ---------
December 31, 1996................................. (333,465) 4,849 (328,616)
Comprehensive income:
Net income...................................... 34,257 -- 34,257
Other comprehensive income --
Foreign currency translation.................... -- (17,623) (17,623)
---------
Comprehensive income.............................. 16,634
--------- -------- ---------
December 31, 1997................................. (299,208) (12,774) (311,982)
Comprehensive income:
Net income...................................... (54,873) -- (54,873)
Other comprehensive income --
Foreign currency translation.................... -- (4,150) (4,150)
---------
Comprehensive income.............................. (59,023)
Merger............................................ (14,327) 1,390 (12,937)
--------- -------- ---------
December 31, 1998................................. $(368,408) $(15,534) $(383,942)
========= ======== =========
See accompanying notes to consolidated financial statements.
F-29
62
THERMADYNE MFG. LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Cash flows provided by (used in) operating activities:
Net income (loss)..................................... $ (54,873) $ 34,257 $ (63,637)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Net periodic postretirement benefits............. 2,550 2,750 2,731
Depreciation..................................... 15,089 12,448 11,651
Amortization of goodwill......................... 1,524 1,591 83,033
Amortization of other intangibles................ 2,360 6,776 12,377
Amortization of deferred financing costs......... 2,480 1,587 2,711
Recognition of net operating loss
carryforwards.................................. -- 2,343 8,534
Deferred income taxes............................ 6,452 (1,836) (21,882)
Non-cash charges for discontinued operations..... -- 1,621 13,949
Gain on sale of discontinued operations.......... -- (16,015) (8,480)
Non-cash portion of extraordinary item........... (2,272) -- 3,715
Changes in operating assets and liabilities:
Accounts receivable.............................. (8,251) (19,905) (10,166)
Inventories...................................... (19,487) (17,228) (10,107)
Prepaid expenses and other....................... 728 (1,628) (1,957)
Accounts payable................................. (11,610) 20,605 3,498
Accrued and other liabilities.................... 2,809 (5,757) (4,510)
Accrued interest................................. (5,085) (258) 643
Income taxes payable............................. 7,920 (3,498) 1,379
Other long-term liabilities...................... (3,272) (3,152) (2,124)
Discontinued operations.......................... -- 285 97
--------- --------- ---------
Total adjustments........................... (8,065) (19,271) 85,092
--------- --------- ---------
Net cash provided by (used in) operating
activities................................ (62,938) 14,986 21,455
--------- --------- ---------
Cash flows provided by (used in) investing activities:
Capital expenditures, net........................... (17,506) (16,339) (11,447)
Change in other assets.............................. (3,046) 4,162 (4,399)
Acquisitions, net of cash........................... (18,953) (37,895) (74,011)
Investing activities of discontinued operations..... -- (1,680) (3,766)
Proceeds from sale of discontinued operations....... -- 88,543 112,359
--------- --------- ---------
Net cash provided by (used in) investing
activities................................ (39,505) 36,791 18,736
--------- --------- ---------
Cash flows provided by (used in) financing activities:
Change in long-term receivables..................... 638 170 (283)
Repayment of long-term obligations.................. (408,970) (131,486) (150,384)
Borrowing of long-term obligations.................. 622,194 72,855 119,854
Issuance of common stock............................ -- 3,069 4,146
Change in accounts receivable securitization........ (4,462) 5,676 (9,994)
Financing fees...................................... (20,058) -- (3,855)
Financing activities of discontinued operations..... -- (2,808) (1,732)
Change in net equity of parent...................... (87,010) -- --
Other............................................... (51) 808 1,639
--------- --------- ---------
Net cash provided by (used in) financing
activities................................ 102,281 (51,716) (40,609)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... (162) 61 (418)
Cash and cash equivalents at beginning of year........ 1,481 1,420 1,838
--------- --------- ---------
Cash and cash equivalents at end of year.............. $ 1,319 $ 1,481 $ 1,420
========= ========= =========
See accompanying notes to consolidated financial statements.
F-30
63
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. THE COMPANY
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 2), 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. The Company is a global manufacturer of cutting
and welding products and accessories.
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.
2. RECENT EVENTS
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 connection with the Merger, Thermadyne LLC borrowed all
term loans available under the New Credit Facility plus $25 million of revolving
loans, which were subsequently repaid. The revolving loans are available to fund
the working capital requirements of Thermadyne LLC. The proceeds of such
financings were distributed to Holdings in the form of a dividend.
Mercury issued approximately $94.6 million aggregate proceeds of 12 1/2%
Senior Discount Debentures due 2008 (the "Debentures"). In connection with the
Merger, Holdings succeeded to the obligations of Mercury with respect to the
Debentures. The DLJMB Funds also purchased 2,608,696 shares of common stock of
Mercury ("Mercury Common Stock"), 2,000,000 shares of preferred stock of Mercury
("Mercury Preferred Stock") and warrants to purchase 353,428 shares of Mercury
Common Stock at an exercise price of $0.01 per share (the "DLJMB Warrants") for
approximately $140 million. As a result of the Merger, the proceeds of such
purchases became an asset of Holdings, each share of Mercury Common Stock became
a share of Holdings Common Stock, each share of Mercury Preferred Stock became a
share of exchangeable preferred stock of Holdings ("Holdings Preferred Stock")
and each DLJMB Warrant to acquire Mercury Common Stock became exercisable for an
equal number of shares of Holdings Common Stock. In addition, in connection with
the Merger, certain members of senior management purchased 143,192 shares of
Holdings Common Stock for approximately $4.9 million (the "Management Share
Purchase"), of which approximately
F-31
64
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$3.6 million was provided through non-recourse loans from Holdings (the
"Management Loans"). The Management Loans have a term of eight years and bear
interest at the rate of 5.69% compounded annually.
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.
Acquisitions
In 1998 the Company made the following four acquisitions. On September 1,
the Company acquired all the issued and outstanding capital stock of Thermadyne
Victor Ltda. (formerly known as Equi Solda SA), a leading manufacturer of gas
cutting apparatus in Brazil. On July 24, the Company acquired substantially all
the assets of Mid-America Cryogenics Company, which specializes in the design,
installation and service of cryogenic equipment and is located in Indianapolis,
Indiana. On May 21, the Company acquired substantially all the assets of OCIM
Srl, a manufacturer of a variety of arc welding accessories including Mig and
Tig torches and consumables, located in Milan, Italy. On February 1, the Company
acquired substantially all the assets of Pro-tip, a division of Settler Ground
Support, Inc., a producer of low-cost oxygen fuel cutting ips in Cuthbert,
Georgia. The aggregate consideration paid for these four acquisitions was
approximately $19 million and was financed through existing bank facilities.
These transactions were all accounted for as purchases.
In 1997 the Company completed three acquisitions. On November 25, the
Company acquired substantially all of the assets of Woodland Cryogenics,
Incorporated, a manufacturer of cryogenic pumps, ambient and electric vaporizers
and automatic cylinder filling systems located in Philadelphia, Pennsylvania. On
September 26, the Company acquired substantially all of the assets of the
welding division of Prestolite Power Corporation, a manufacturer of arc welders,
plasma welders and wire feeders, located in Troy, Ohio. On January 31, the
Company acquired all of the issued and outstanding capital stock of GenSet
S.p.A., a leading manufacturer of engine-driven welders and generators in Italy.
The aggregate consideration paid for these three acquisitions was approximately
$38 million and was financed through existing bank facilities. These
transactions were all accounted for as purchases.
F-32
65
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 18, 1996, the Company acquired all of the issued and outstanding
capital stock of Duxtech Pty. Ltd., an Australian holding company that operates
Cigweld, the leading manufacturer of welding products in Australia and New
Zealand. The aggregate consideration paid was approximately $74,000 of which
approximately $21,500 was the assumption of existing debt. The remaining balance
was paid in cash which was financed through cash on hand and borrowing under the
Company's existing credit agreement. This transaction was accounted for as a
purchase.
Net working capital......................................... $21,220
Excess of cost over fair value of net assets acquired....... 31,002
Property, plant and equipment, at cost, net................. 29,083
Other long-term liabilities, net............................ (7,294)
-------
$74,011
=======
The operating results of the acquired companies have been included in the
Consolidated Statements of Operations from their respective dates of
acquisition. Pro forma unaudited results of operations for the twelve months
ended December 31, 1998 and 1997 have not been presented since they would not
have differed materially from actual results.
Sale of Discontinued Operations
On September 30, 1997, the Company completed the sale of its Wear
Resistance business for $96,000 which consisted of $88,500 in cash and $7,500 in
the assumption of long-term liabilities. The Company realized a net gain of
$16,015 on this transaction, net of income taxes of $12,623. The net proceeds
were used to reduce debt. The financial results of the Wear Resistance
operations were reported separately as discontinued operations in the
Consolidated Statements of Operations.
On April 26, 1996, the Company completed the sale of substantially all of
the assets of Coyne Cylinder Company ("Coyne"), and on June 27, 1996, the
Company completed the sale of its Floor Maintenance business. Consideration
received from these two transactions totaled $137,000 and consisted of $112,359
in cash and $24,641 in the assumption or elimination of certain liabilities. The
Company realized a net gain of $8,480 on these two transactions, net of income
taxes of $14,732. The net proceeds were used to reduce debt. The financial
results of the Coyne and Floor Maintenance operations were reported separately
as discontinued operations in the Consolidated Statements of Operations.
Sales from the discontinued businesses totaled $76,163 and $183,440 for the
years ended December 31, 1997 and 1996, respectively. Certain expenses were
allocated to discontinued operations including interest expense, which was
allocated on a ratio of earnings before interest, taxes, depreciation and
amortization for the years presented. Interest expense allocated to discontinued
operations was $2,048 and $7,630 for the years ended December 31, 1997 and 1996,
respectively. Income (loss) from discontinued operations included in the
accompanying Consolidated Statements of Operations include immaterial amounts of
income taxes (see Note 11).
3. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Thermadyne
and its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation. Certain amounts from prior
years have been reclassified to conform to current year presentation.
Preparation of financial statements in conformity with generally accepted
accounting principles requires certain estimates and assumptions be made that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-33
66
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories. Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method for domestic
subsidiaries and the first-in, first-out ("FIFO") method for foreign
subsidiaries. Inventories at foreign subsidiaries amounted to approximately
$56,183 and $46,798 at December 31, 1998 and 1997, respectively.
Property, Plant and Equipment. Property, plant and equipment is carried at
cost and is depreciated using the straight-line method. The average estimated
lives utilized in calculating depreciation are as follows: buildings -- 25
years; and machinery and equipment -- two to ten years.
Deferred Financing Costs. The Company capitalizes loan origination fees and
other costs incurred arranging long-term financing. These costs are amortized
over the respective lives of the obligations using the effective interest
method.
Intangibles. The excess of costs over the net tangible assets of businesses
acquired consists of assembled work forces, customer and distributor
relationships, patented and unpatented technology, and goodwill. In conjunction
with the 1993 financial reorganization of the Company, assets and liabilities
were revalued as of February 1, 1994. The assets were stated at their
reorganization value which is defined as the fair value of the reorganized
company (see Note 7). The portion of the reorganization value not attributable
to specific assets was amortized over a three-year period. Identified intangible
assets are amortized on a straight-line basis over the various estimated useful
lives of such assets, which generally range from three to 25 years. Goodwill
related to acquisitions subsequent to the financial reorganization is amortized
over 40 years.
Income Taxes. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to temporary differences between
the carrying value of assets and liabilities for financial reporting purposes
and their tax bases and carryforward items. The measurement of current and
deferred tax assets and liabilities is based on provisions of the enacted tax
law; the effects of future changes in tax laws or rates are not anticipated. The
measurement of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not expected to be
realized.
Revenue Recognition. Revenue from the sale of cutting and welding products
is recognized upon shipment to the customer. Costs and related expenses to
manufacture cutting and welding products are recorded as cost of sales when the
related revenue is recognized.
Comprehensive Income. 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 1998 and 1997, total comprehensive income (loss) amounted to
$(59,023) and $16,634, respectively.
Statement of Cash Flows. For purposes of the statement of cash flows,
Thermadyne considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The carrying value of cash and cash
equivalents approximates fair value because of the short maturity of these
investments.
F-34
67
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the interest and taxes paid (refunded) during the
periods presented in the accompanying Consolidated Statements of Cash Flows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Interest............................ $57,722 $48,683 $48,581
Taxes............................... (989) 12,276 11,409
Foreign Currency Translation. Local currencies have been designated as the
functional currencies for all subsidiaries. Accordingly, assets and liabilities
of foreign subsidiaries are translated at the rates of exchange at the balance
sheet date. Income and expense items of these subsidiaries are translated at
average monthly rates of exchange. The resultant translation gains or losses are
included in the component of shareholders' equity designated "Foreign currency
translation." The Company's foreign operations are discussed in Note 13.
Recent Accounting Pronouncements. In June 1998, the FASB issued Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement effective January 1,
2000. The Statement will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged asset, liability or firm
commitment through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company does not anticipate that the adoption of this Statement will have a
significant effect on its results of operations or financial position.
4. ACCOUNTS RECEIVABLE
The Company has entered into a trade accounts receivable securitization
agreement whereby it will sell on an ongoing basis, through December 28, 1999,
participation interests in up to $50,000 of designated accounts receivable. The
amount of participation interests sold under this financing arrangement is
subject to change based on the level of eligible receivables and restrictions on
concentrations of receivables, and was approximately $23,843 and $28,305 at
December 31, 1998 and 1997, respectively. The sold accounts receivable are
reflected as a reduction of accounts receivable on the Consolidated Balance
Sheets. Interest expense is incurred on participation interests at the rate of
one-month LIBOR plus 50 basis points, per annum (approximately 6.04% at December
31, 1998). The fair value of accounts receivable approximates the carrying
value.
5. INVENTORIES
The composition of inventories at December 31, is as follows:
1998 1997
-------- --------
Raw materials............................................... $ 31,189 $ 25,044
Work-in-process............................................. 27,414 25,602
Finished goods.............................................. 65,623 56,087
-------- --------
124,226 106,733
LIFO reserve................................................ (1,493) (1,598)
-------- --------
$122,733 $105,135
======== ========
F-35
68
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment at December 31, is as
follows:
1998 1997
-------- --------
Land........................................................ $ 15,478 $ 14,071
Building.................................................... 41,555 33,748
Machinery and equipment..................................... 91,372 68,008
-------- --------
148,405 115,827
Accumulated depreciation.................................... (43,408) (30,570)
-------- --------
$104,997 $ 85,257
======== ========
Assets recorded under capitalized leases were $17,556 ($13,619 net of
accumulated depreciation) and $17,663 ($14,432 net of accumulated depreciation)
at December 31, 1998 and 1997, respectively.
7. INTANGIBLES
The composition of intangibles at December 31, is as follows:
1998 1997
-------- -------
Goodwill.................................................... $ 44,497 $39,532
Other....................................................... 5,090 3,038
-------- -------
49,587 42,570
Accumulated amortization.................................... (10,428) (8,600)
-------- -------
$ 39,159 $33,970
======== =======
In the fourth quarter of 1996, the carrying value of intangible assets
recorded in connection with the Company's financial reorganization was reduced
by approximately $2,400 resulting from the initial recognition of the Company's
net deferred tax asset. The carrying value of these intangibles was further
reduced during 1997 by approximately $26,000 upon the recognition of net
operating loss carryforward benefits and the sale of the Wear Resistance
business.
F-36
69
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM OBLIGATIONS
The composition of long-term obligations at December 31, is as follows:
1998 1997
-------- --------
Revolving Credit Facility................................... $ 14,000 $ --
Term A Facility -- United States............................ 70,000 --
Term A Facility -- Australia................................ 19,480 --
Term A Facility -- Italy.................................... 10,410 --
Term B Facility............................................. 114,425 --
Term C Facility............................................. 114,425 --
Domestic credit agreement................................... -- 41,500
Australian credit agreement................................. -- 18,057
Senior subordinated notes, due June 1, 2008, 9 7/8% interest
payable semiannually on June 1 and December 1............. 207,000 --
Senior notes, due May 1, 2002, 10.25% interest payable
semiannually on May 1 and November 1...................... -- 99,288
Subordinated notes, due November 1, 2003, 10.75% interest
payable semiannually on May 1 and November 1.............. -- 179,321
Capital leases.............................................. 17,804 17,630
Other....................................................... 4,224 2,291
-------- --------
571,768 358,087
Current maturities.......................................... (9,180) (4,912)
-------- --------
$562,588 $353,175
======== ========
At December 31, 1998, the schedule of principal payments on long-term debt,
excluding capital lease obligations, is as follows:
1999........................................................ $ 8,337
2000........................................................ 10,518
2001........................................................ 17,348
2002........................................................ 24,812
2003........................................................ 34,801
Thereafter.................................................. 458,148
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. At December 31, 1998, the Company had $8,598 of standby letters of
credit outstanding under the Revolving Credit Facility. Unused borrowing
capacity under the Revolving Credit Facility was $77,402.
F-37
70
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. At December 31, 1998, the prime
rate was 7.75%.
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).
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:
YEAR TERM LOAN A TERM LOAN B TERM LOAN 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%
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.
F-38
71
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Prior to the Merger, the Company was party to a $250,000 revolving credit
and letters of credit facility with a consortium of 22 banks (the "Domestic
Facility"). At the Company's option, interest accrued at (i) the prime rate plus
an applicable margin in the range of 0.5%-1.25% or, (ii) LIBOR plus an
applicable margin in the range of 1.5%-2.25%. The applicable margin percentage
was dependent upon the Company meeting certain financial conditions. The
facility contained financial covenants which, among other things, required the
Company to maintain certain financial ratios and restricted the Company's
ability to incur indebtedness, make capital expenditures, and pay dividends. The
facility was secured by the capital stock, personal and real property of the
Company and a significant portion of its subsidiaries' capital stock and
personal and real property.
In addition, prior to the Merger, the Company was party to an Australian
credit agreement (the "Australian Facility") denominated in Australian dollars
("A$"). The Australian Facility consisted of an A$15,000 term commitment and an
A$22,000 revolving credit commitment. The Australian Facility bore interest at
the Bank Bill Rate (as defined) plus a margin of 1.5% for the term commitment
and 0.75% for the revolving credit commitment. Interest payment dates varied
depending on the funding period selected by the Company. The facility required
the Company's Australian subsidiary to comply with various financial covenants.
The facility was secured by personal and real property of the Company's
Australian subsidiary.
The indentures governing the Senior Subordinated Notes restrict, subject to
certain exceptions, the Company and its subsidiaries from incurring additional
debt, paying dividends or making other distributions on or redeeming or
repurchasing capital stock, making investments, loans or advances, disposing of
assets, creating liens on assets and engaging in transactions with affiliates.
The estimated fair value amounts of the Company's long-term obligations
have been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is required to
develop the estimates of fair value; thus, the estimates provided herein are not
necessarily indicative of the amounts that could be realized in a current market
exchange. The use of different market assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts. The
F-39
72
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of the Senior Subordinated Notes was based on the most recent market
information available, and is estimated to be 94.5% of their current carrying
value at December 31, 1998, or $195,615. The fair values of the credit agreement
and the Company's other long-term obligations are estimated at their current
carrying values since these obligations are fully secured and have varying
interest charges based on current market rates.
9. LEASES
Future minimum lease payments related to continuing operations under leases
with initial or remaining noncancelable lease terms in excess of one year at
December 31, 1998 are as follows:
CAPITAL OPERATING
LEASE LEASE
-------- ---------
1999........................................................ $ 3,721 $ 8,504
2000........................................................ 3,655 7,752
2001........................................................ 3,640 5,940
2002........................................................ 3,706 4,720
2003........................................................ 3,909 4,110
Thereafter.................................................. 45,823 27,261
--------
Total minimum lease payments...................... 64,454
Amount representing interest................................ (46,650)
--------
Present value of net minimum lease payments, including
current obligations of $843............................... $ 17,804
========
Rent expense under operating leases from continuing operations amounted to
$9,528, $9,358 and $7,562 for the years ended December 31, 1998, 1997 and 1996,
respectively.
10. INCOME TAXES
Pre-tax income (losses) from continuing operations were taxed under the
following jurisdictions:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Domestic............................ $(17,744) $31,104 $(69,694)
Foreign............................. (7,310) (2,560) 6,221
-------- ------- --------
Income (loss) before income
taxes........................ $(25,054) $28,544 $(63,473)
======== ======= ========
The provision (benefit) for income taxes charged to continuing operations
is as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Current:
Federal........................ $ (768) $11,014 $ 8,091
Foreign........................ 1,458 1,064 1,785
State and local................ 350 927 1,050
------- ------- --------
Total current............. 1,040 13,005 10,926
------- ------- --------
Deferred.......................... 13,642 470 (11,460)
------- ------- --------
$14,682 $13,475 $ (534)
======= ======= ========
F-40
73
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The composition of deferred tax assets and liabilities attributable to
continuing operations at December 31 is as follows:
1998 1997
-------- --------
Deferred tax assets:
Post-employment benefits.................................. $ 8,862 $ 9,214
Accrued liabilities....................................... 7,482 3,316
Intangibles............................................... 8,781 14,408
Other..................................................... 1,488 --
Fixed assets.............................................. 6,769 6,992
Net operating loss carryforwards and AMT credits.......... 27,658 22,381
-------- --------
Total deferred tax assets......................... 61,040 56,311
Valuation allowance for deferred tax assets............... (28,377) (15,351)
-------- --------
Net deferred tax assets........................... $ 32,663 $ 40,960
-------- --------
Deferred tax liabilities:
Inventories............................................... 3,528 4,562
Other..................................................... -- 846
-------- --------
Total deferred tax liabilities.................... 3,528 5,408
-------- --------
Net deferred tax asset............................ $ 29,135 $ 35,552
======== ========
The provision (benefit) for income taxes differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income tax rate
to pretax income from continuing operations as a result of the following
differences:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
Tax at U.S. statutory rates..................... $(8,767) $ 9,991 $(22,216)
Nondeductible goodwill amortization and other
nondeductible expenses........................ 2,528 2,048 28,877
Change in valuation allowance, recognition of
net operating loss carryforward benefits and
other......................................... 12,000 -- 6,318
Foreign tax rate differences and recognition of
foreign tax loss benefits..................... 1,032 833 (393)
Non-deductible merger costs..................... 7,662 -- --
State income taxes, net of federal tax
benefit....................................... 227 603 683
Initial recognition of net deferred tax asset... -- -- (13,803)
------- ------- --------
$14,682 $13,475 $ (534)
======= ======= ========
In the fourth quarter of 1996, the Company re-evaluated the realizability
of the net deferred tax asset. As a result, a net deferred tax asset of
approximately $22,000 was recorded on December 31, 1996. Of the total amount
recorded, approximately $8,000 was reported as an adjustment to the carrying
value of goodwill and other intangible assets. The balance was reported as a
reduction to income tax expense. A portion of the net adjustment for deferred
taxes was allocated to discontinued operations. During 1998, the valuation
allowance for deferred tax assets increased by $13,026. Approximately $1,026 of
the increase was recorded as an adjustment to goodwill recorded in recent
acquisitions. According, the initial recognition of these tax benefits will be
recorded as an adjustment to the related goodwill. The remaining $12,000 was
recorded as an increase to income tax expense.
F-41
74
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $82,000 available for US federal income tax purposes which expire
beginning 2001. Utilization of the majority of these net operating loss
carryforwards is subject to various limitations because of previous changes in
control of ownership (as defined in the Internal Revenue Code) of the Company.
Pursuant to the requirements of the American Institute of Certified Public
Accountants Statement of Position No. 90-7, entitled "Financial Entities in
Reorganization Under the Bankruptcy Code," the tax benefit resulting from the
utilization of net operating loss carryforwards that existed on the effective
date of the Company's financial reorganization will be reported as a direct
addition to paid-in capital.
The Company's foreign subsidiaries have undistributed earnings at December
31, 1998. Those earnings are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the form of dividends
or otherwise, the Company would be subject to both U.S. income taxes (subject to
an adjustment for foreign tax credits) and withholding taxes payable to the
various foreign countries. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable because of the complexities
associated with its hypothetical calculation.
11. EMPLOYEE BENEFIT PLANS
401(k) Retirement Plan. The 401(k) Retirement Plan covers the majority of
the Company's domestic employees. The Company, at its discretion, can make a
base contribution of 1% of each employee's compensation and an additional
contribution equal to as much as 4% of the employee's compensation. At the
employee's discretion, an additional 1% to 15% voluntary employee contribution
can be made. The plan requires the Company to make a matching contribution of
50% of the first 6% of the voluntary employee contribution. Total expense for
this plan related to continuing operations was approximately $2,115, $2,628, and
$2,585 for the years ended December 31, 1998, 1997 and 1996, respectively.
Employee Stock Purchase Plan. The Employee Stock Purchase Plan was canceled
in connection with the Merger. It enabled substantially all employees of the
Company to purchase shares of common stock at a purchase price of 85% of the
fair market value at specified dates. For plan year 1997 the plan was amended to
change the plan year to a calendar year basis. For the plan year ended December
31, 1997, 1,098 employee participants purchased 82,085 shares at an aggregate
purchase price of $1,989. For the plan year ended October 31, 1996, 1,090
employee participants purchased 145,584 shares at an aggregate purchase price of
$2,119.
Pension Plans. The Company's subsidiaries have had various noncontributory
defined benefit pension plans which covered substantially all U.S. employees.
The Company froze and combined its three noncontributory defined benefit pension
plans through amendments to such plans effective December 31, 1989. All former
participants of these plans became eligible to participate in the 401(k)
Retirement Plan effective January 1, 1990. In addition, the Company's Australian
subsidiary has a Superannuation Fund established by a Trust Deed which operates
on a lump sum scheme to provide benefits for its employees.
Other Postretirement Benefits. The Company has a retirement plan covering
both salaried and nonsalaried retired employees, which provides postretirement
health care benefits (medical and dental) and life insurance benefits. The
postretirement health care portion is contributory, with retiree contributions
adjusted annually as determined by the Company based on claim costs. The
postretirement life insurance portion is noncontributory. The Company recognizes
the cost of postretirement benefits on the accrual basis as employees render
service to earn the benefit. The Company continues to fund the cost of health
care and life insurance benefits in the year incurred.
F-42
75
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables provide a reconciliation of benefit obligations, plan
assets and status of the Pension and Other Postretirement Benefit Plans as
recognized in the Company's Consolidated Balance Sheet for the years ended
December 31, 1998 and 1997:
Other
Postretirement
Pension Benefits Benefits
----------------- -------------------
1998 1997 1998 1997
------- ------- -------- --------
Change in Benefit Obligation:
Benefit obligation at beginning of year............ $44,439 $47,279 $ 12,010 $ 16,395
Service cost....................................... 1,057 1,259 1,218 1,255
Participant contributions.......................... 795 937 -- --
Interest cost...................................... 2,424 3,045 1,330 496
Actuarial (gains)/losses........................... (266) 5,442 (870) (4,533)
Foreign currency exchange rate changes............. (1,507) (6,196) -- --
Plan amendments.................................... -- -- -- (1,079)
Benefits paid...................................... (5,240) (7,327) (914) (524)
------- ------- -------- --------
Benefit obligation at end of year.................. $41,702 $44,439 $ 12,774 $ 12,010
======= ======= ======== ========
Change in plan assets:
Fair value of plan assets at beginning of year..... $44,399 $50,137
Actual return on plan assets....................... 3,968 5,644
Sponsor contributions.............................. 3,086 1,952
Participant contributions.......................... 795 937
Benefits paid...................................... (5,240) (7,327)
Foreign currency exchange rate changes............. (1,632) (6,813)
Administrative expenses............................ (110) (131)
------- -------
Fair value of plan assets at end of year........... $45,266 $44,399
======= =======
Funded status of the plan (underfunded).............. $ 3,564 $ (40) $(12,774) $(12,010)
Unrecognized net actuarial loss (gain)............. 989 1,848 (9,426) (9,428)
Unrecognized prior service cost.................... 99 122 (1,927) (1,927)
------- ------- -------- --------
Prepaid (accrued) benefit cost..................... $ 4,652 $ 1,930 $(24,127) $(23,365)
======= ======= ======== ========
Weighted-average assumptions as of December 31:
Discount rate...................................... 7% 7% 7% 7%
Expected return on plan assets..................... 8% 8% -- --
Rate of compensation increase...................... 3% 3% N/A N/A
Net periodic pension and other postretirement benefit costs include the
following components:
Pension Benefits Other Benefits
--------------------------- ------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------ ------ ------
Components of the net periodic benefit
cost:
Service cost......................... $ 1,057 $ 1,259 $ 1,283 $1,218 $1,255 $1,365
Interest cost........................ 2,424 3,045 3,194 1,330 1,496 1,564
Actual return on plan assets......... (3,366) (3,644) (3,509) -- -- --
Recognized gain/loss................. -- -- -- 2 (1) (198)
Amortization of prior service
costs............................. 2 3 3 -- -- --
Prior service cost recognized........ 23 23 23 -- -- --
------- ------- ------- ------ ------ ------
Benefit cost (credit).................. $ 140 $ 686 $ 994 $2,550 $2,750 $2,731
======= ======= ======= ====== ====== ======
F-43
76
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.5% in 1998, declining gradually to 6.0%
in 2012. The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 10.5% in 1997 and 10.5% in
1996. A one percentage point change in the assumed health care cost trend rate
would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service and interest cost components in
1998...................................................... $ 306 $ (256)
Effect on postretirement benefit obligation as of December
31, 1998.................................................. 1,948 (1,546)
12. SEGMENT INFORMATION
The Company has adopted the Financial Accounting Standards Board Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FASB 131") which changes the way the Company reports information about its
operating segments. The information for 1997 and 1996 has been restated from the
prior year's presentation in order to conform to the current year presentation.
The Company reports its segment information by geographic region. Although
the Company's domestic operation is comprised of several individual business
units, similarity of products, paths to market, end users, and production
processes results in performance evaluation and decisions regarding allocation
of resources being made on a combined basis. The Company's reportable geographic
regions are the United States, Europe and Australia/Asia.
The Company evaluates performance and allocates resources based principally
on operating income net of any special charges or significant one-time charges.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intersegment sales
are based on market prices.
F-44
77
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column includes the
elimination of intersegment sales and profits, corporate related items and other
costs not allocated to the reportable segments.
All Other
United Geographic
States Europe Australia/Asia Regions Other Consolidated
-------- -------- --------------- ---------- -------- ------------
1998
Revenue from external
customers..................... $363,371 $ 54,657 $ 82,238 $32,511 $ -- $532,777
Intersegment revenues........... 39,715 14,355 4,447 -- (58,517) --
Depreciation and amortization of
intangibles................... 9,562 2,682 3,979 646 2,104 18,973
Operating income (loss)......... 90,691 3,953 (1,549) (48) (60,017) 33,030
Identifiable assets............. 174,272 57,539 107,991 31,686 41,948 413,436
Capital expenditures............ 7,965 1,114 7,091 420 916 17,506
1997
Revenue from external
customers..................... 333,871 51,900 109,984 24,685 -- 520,440
Intersegment revenues........... 35,503 4,699 2,700 -- (42,902) --
Depreciation and amortization of
intangibles................... 12,190 2,333 4,677 57 1,558 20,815
Operating income (loss)......... 85,279 3,416 2,304 1,148 (13,640) 78,507
Identifiable assets............. 158,038 48,684 102,342 9,285 36,178 354,527
Capital expenditures............ 7,843 2,464 4,828 78 1,126 16,339
1996
Revenue from external
customers..................... 292,549 17,879 105,337 23,979 -- 439,744
Intersegment revenues........... 30,770 21 2,362 -- (33,153) --
Depreciation and amortization of
intangibles................... 14,399 83 6,594 150 85,835 107,061
Operating income (loss)......... 74,166 888 5,688 2,183 (97,064) (14,139)
Identifiable assets............. 152,987 11,453 113,590 9,754 65,621 353,405
Capital expenditures............ 6,991 149 3,246 135 926 11,447
Product Line Information
The Company manufactures a variety of products, substantially all of which
are used in the cutting, welding or fabrication of metal. End-users of the
Company's products are engaged in various applications including construction,
automobile manufacturing, repair and maintenance and ship building. The
following table shows sales for each of the Company's key product lines:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1998 1997 1996
----------------- ----------------- -----------------
Gas apparatus....................... $183,688 $183,253 $167,169
Arc welding equipment............... 103,803 90,440 42,054
Arc welding consumables............. 162,696 171,922 161,783
Plasma and automated cutting
equipment......................... 71,742 61,685 56,111
All other........................... 10,848 13,140 12,627
-------- -------- --------
$532,777 $520,440 $439,744
======== ======== ========
F-45
78
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. CONTINGENCIES
Thermadyne and certain of its wholly owned subsidiaries are defendants in
various legal actions, primarily in the products liability area. While there is
uncertainty relating to any litigation, management is of the opinion that the
outcome of such litigation will not have a material adverse effect on the
Company's financial condition or results of operations.
The Company is party to an agreement with a financial institution to sell
at face value up to a total of $25,000 of its long-term receivables. The product
line that generated these long-term receivables has been divested, and
consequently, no further sales will occur. Under the terms of this agreement,
the Company is liable for a total of 20% of the aggregate receivables sold and
this liability approximates $4,000. The Company has further retained collection
and administrative responsibilities on behalf of the financial institution. The
Company has a secured interest in the inventory sold under these long-term
receivables which has been assigned to the financial institution. At December
31, 1998, approximately $1,871 in contracts subject to this agreement are
outstanding. Management believes the allowance for doubtful accounts at December
31, 1998 will be adequate for all uncollectible receivables.
14. 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 certain subsidiaries of the Company (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.
F-46
79
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1998
ASSETS
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
Current Assets:
Cash and cash equivalents.................... $ -- $ (1,051) $ 2,370 $ -- $ 1,319
Restricted cash.............................. -- -- 26,646 (26,646) --
Accounts receivable.......................... -- 13,682 96,606 (22,383) 87,905
Inventories.................................. -- 68,742 53,991 -- 122,733
Prepaid expenses and other................... -- 1,259 6,325 (219) 7,365
--------- --------- -------- --------- ---------
Total current assets................... -- 82,632 185,938 (49,248) 219,322
Property, plant and equipment, at cost,
net........................................ -- 48,023 56,974 -- 104,977
Deferred financing costs, net................ 19,001 -- 571 -- 19,572
Intangibles, at cost, net.................... -- 10,561 28,598 -- 39,159
Deferred income taxes........................ -- 26,470 2,665 -- 29,135
Investment in and advances to/from
subsidiaries............................... 209,369 9,969 -- (219,338) --
Other assets................................. -- (55) 1,306 -- 1,251
--------- --------- -------- --------- ---------
Total assets........................... $ 228,370 $ 177,600 $276,052 $(268,586) $ 413,436
========= ========= ======== ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable............................. $ -- $ 21,003 $ 23,167 $ -- $ 44,170
Accrued and other liabilities................ -- 26,060 10,384 -- 36,444
Accrued interest............................. 275 6 217 -- 498
Income taxes payable......................... -- 7,927 (2,716) -- 5,211
Current maturities of long-term
obligations................................ 5,000 60 4,120 -- 9,180
--------- --------- -------- --------- ---------
Total current liabilities.............. 5,275 55,056 35,172 -- 95,503
Long-term obligations, less current
maturities................................... 515,050 16,101 81,437 (50,000) 562,588
Other long-term liabilities.................... -- 52,116 10,718 -- 62,834
Shareholders' equity (deficit):
Retained earnings (accumulated deficit)...... (368,408) (295,702) (16,201) 311,903 (368,408)
Accumulated other comprehensive income....... -- 224 (15,758) -- (15,534)
--------- --------- -------- --------- ---------
Total shareholders' equity (deficit)... (368,408) (295,478) (31,959) 311,903 (383,942)
Net equity and advances to/from subsidiaries... 76,453 349,805 180,684 (530,489) 76,453
--------- --------- -------- --------- ---------
Total liabilities and shareholders'
equity (deficit)..................... $ 228,370 $ 177,600 $276,052 $(268,586) $ 413,436
========= ========= ======== ========= =========
F-47
80
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1997
ASSETS
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
Current Assets:
Cash and cash equivalents.................... $ -- $ 308 $ 1,173 $ -- $ 1,481
Restricted cash.............................. -- -- 21,634 (21,634) --
Accounts receivable.......................... -- 6,595 99,281 (29,029) 76,847
Inventories.................................. -- 62,329 42,806 -- 105,135
Prepaid expenses and other................... -- 4,601 4,152 (219) 8,534
--------- --------- -------- --------- ---------
Total current assets................... -- 73,833 169,046 (50,882) 191,997
Property, plant and equipment, at cost,
net........................................ -- 48,367 36,890 -- 85,257
Deferred financing costs, net................ 5,052 1 701 -- 5,754
Intangibles, at cost, net.................... -- 5,376 28,594 -- 33,970
Deferred income taxes........................ -- 35,552 -- -- 35,552
Investment in and advances to/from
subsidiaries............................... 170,414 10,783 -- (181,197) --
Other assets................................. -- 130 1,867 -- 1,997
--------- --------- -------- --------- ---------
Total assets........................... $ 175,466 $ 174,042 $237,098 $(232,079) $ 354,527
========= ========= ======== ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Accounts payable............................. $ -- $ 30,697 $ 24,693 $ -- $ 55,390
Accrued and other liabilities................ -- 25,079 7,618 -- 32,697
Accrued interest............................. 5,430 10 240 -- 5,680
Income taxes payable......................... -- 8,106 (3,337) -- 4,769
Current maturities of long-term
obligations................................ -- 1 4,911 -- 4,912
--------- --------- -------- --------- ---------
Total current liabilities.............. 5,430 63,893 34,125 -- 103,448
Long-term obligations, less current
maturities................................... 320,109 16,320 66,746 (50,000) 353,175
Other long-term liabilities.................... -- 53,421 7,330 -- 60,751
Shareholders' 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 shareholders' 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
========= ========= ======== ========= =========
F-48
81
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ --------
Net Sales.......................... $ -- $438,013 $195,940 $(101,176)(a) $532,777
Operating Expenses:
Cost of goods sold............... -- 279,470 161,817 (101,051)(a) 340,236
Selling, general and
administrative expenses....... -- 73,081 29,473 -- 102,554
Amortization of goodwill......... -- 72 1,452 -- 1,524
Amortization of other
intangibles................... -- 1,520 840 -- 2,360
Net periodic postretirement
benefits...................... -- 2,550 -- -- 2,550
Special charges.................. -- 46,448 4,075 -- 50,523
-------- -------- -------- --------- --------
Operating income (loss)............ -- 34,872 (1,717) (125) 33,030
Other income (expense):
Interest expense................. -- (46,447) (9,583) 3,485 (52,545)
Amortization of deferred
financing costs............... -- (2,276) (204) -- (2,480)
Equity in net loss of
subsidiaries.................. (54,873) -- -- 54,873 --
Other............................ -- 2,276 (775) (4,560) (3,059)
-------- -------- -------- --------- --------
Income (loss) before income tax
provision and extraordinary
item............................. (54,873) (11,575) (12,279) 53,673 (25,054)
Income tax provision............... -- 14,428 254 -- 14,682
-------- -------- -------- --------- --------
Income (loss) before extraordinary
item............................. (54,873) (26,003) (12,533) 53,673 (39,736)
Extraordinary item, net of tax..... -- (15,137) -- -- (15,137)
-------- -------- -------- --------- --------
Net income (loss).................. $(54,873) $(41,140) $(12,533) $ 53,673 $(54,873)
======== ======== ======== ========= ========
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-49
82
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ --------
Net Sales......................... $ -- $405,039 $210,462 $(95,061)(a) $520,440
Operating Expenses:
Cost of goods sold.............. -- 246,794 167,430 (94,104)(a) 320,120
Selling, general and
administrative expenses...... -- 76,676 34,020 -- 110,696
Amortization of goodwill........ -- 86 1,505 -- 1,591
Amortization of other
intangibles.................. -- 6,137 639 -- 6,776
Net periodic postretirement
benefits..................... -- 2,750 -- -- 2,750
------- -------- -------- -------- --------
Operating income (loss)........... -- 72,596 6,868 (957) 78,507
Other income (expense):
Interest expense................ -- (39,641) (10,823) 5,139 (45,325)
Amortization of deferred
financing costs.............. -- (1,346) (241) -- (1,587)
Equity in net loss of
subsidiaries................. 15,069 -- -- (15,069) --
Other........................... -- 1,889 1,882 (6,822) (3,051)
------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
provision....................... 15,069 33,498 (2,314) (17,709) 28,544
Income tax provision.............. -- 13,012 463 -- 13,475
------- -------- -------- -------- --------
Income (loss) from continuing
operations...................... 15,069 20,486 (2,777) (17,709) 15,069
Discontinued operations:
Gain on sale of discontinued
operations, net of income
taxes of $12,623............. 16,015 -- -- -- 16,015
Income from discontinued
operations, net of income
taxes........................ 3,173 -- -- -- 3,173
------- -------- -------- -------- --------
Net income (loss)................. $34,257 $ 20,486 $ (2,777) $(17,709) $ 34,257
======= ======== ======== ======== ========
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-50
83
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ --------
Net Sales.......................... $ -- $352,244 $152,322 $(64,822)(a) $439,744
Operating Expenses:
Cost of goods sold............... -- 210,585 114,066 (64,816)(a) 259,835
Selling, general and
administrative expenses....... -- 69,989 25,918 -- 95,907
Amortization of goodwill......... -- 82,276 757 -- 83,033
Amortization of other
intangibles................... -- 9,562 2,815 -- 12,377
Net periodic postretirement
benefits...................... -- 2,731 -- -- 2,731
-------- -------- -------- -------- --------
Operating income (loss)............ -- (22,899) 8,766 (6) (14,139)
Other income (expense):
Interest expense................. -- (40,215) (9,579) 4,139 (45,655)
Amortization of deferred
financing costs............... -- (2,540) (171) -- (2,711)
Equity in net loss of
subsidiaries.................. (62,939) -- -- 62,939 --
Other............................ -- (1,872) 7,267 (6,363) (968)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax
provision and extraordinary
item............................. (62,939) (67,526) 6,283 60,709 (63,473)
Income tax provision (benefit)..... -- (1,751) 1,217 -- (534)
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
item............................. (62,939) (65,775) 5,066 60,709 (62,939)
Discontinued operations:
Gain on sale of discontinued
operations, net of income
taxes of $14,732.............. 8,480 -- -- -- 8,480
Loss from discontinued
operations, net of income
taxes......................... (5,463) -- -- -- (5,463)
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item............................. (59,922) (65,775) 5,066 60,709 (59,922)
Extraordinary item -- loss on early
extinguishment of long-term debt,
net of tax benefit of $2,001..... (3,715) -- -- -- (3,715)
-------- -------- -------- -------- --------
Net income (loss).................. $(63,637) $(65,775) $ 5,066 $ 60,709 $(63,637)
======== ======== ======== ======== ========
- ---------------
(a) Reflects the elimination of intercompany sales among all of the Company's
subsidiaries.
F-51
84
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
Net cash provided by (used in) operating
activities................................... $ (60,028) $(36,628) $(19,955) $53,673 $ (62,938)
Cash flows provided by (used in) investing
activities:
Capital expenditures, net.................... -- (8,227) (9,279) -- (17,506)
Change in other assets....................... -- (2,592) (454) -- (3,046)
Acquisitions, net of cash.................... -- (1,125) (17,828) -- (18,953)
--------- -------- -------- ------- ---------
Net cash provided by (used in) investing
activities................................... -- (11,944) (27,561) -- (39,505)
Cash flows provided by (used in) financing
activities:
Change in long-term receivables.............. -- -- 638 -- 638
Repayment of long-term obligations........... (408,810) (160) -- -- (408,970)
Borrowing of long-term obligations........... 608,751 -- 13,443 -- 622,194
Change in accounts receivable
securitization............................. -- (4,462) -- -- (4,462)
Financing fees............................... (20,058) -- -- -- (20,058)
Changes in net equity and advances to/from
subsidiaries............................... (119,855) 51,835 34,683 (53,673) (87,010)
Other........................................ -- -- (51) -- (51)
--------- -------- -------- ------- ---------
Net cash provided by (used in) financing
activities................................... 60,028 47,213 48,713 (53,673) 102,281
Net increase (decrease) in cash and cash
equivalents.................................. -- (1,359) 1,197 -- (162)
Cash and cash equivalents at beginning of
period....................................... -- 308 1,173 -- 1,481
--------- -------- -------- ------- ---------
Cash and cash equivalents at end of period..... $ -- $ (1,051) $ 2,370 $ -- $ 1,319
========= ======== ======== ======= =========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
Net cash provided by (used in) operating
activities................................... $ 17,369 $ 15,561 $ (235) $(17,709) $ 14,986
Cash flows provided by (used in) investing
activities:
Capital expenditures, net.................... -- (9,084) (7,255) -- (16,339)
Change in other assets....................... -- 2,722 1,440 -- 4,162
Investing activities of discontinued
operations................................. -- -- (1,680) -- (1,680)
Acquisitions, net of cash.................... -- (10,140) (27,755) -- (37,895)
Proceeds from sale of discontinued
operations................................. 88,543 -- -- -- 88,543
--------- -------- -------- -------- ---------
Net cash provided by (used in) investing
activities................................... 88,543 (16,502) (35,250) -- 36,791
Cash flows provided by (used in) financing
activities:
Change in long-term receivables.............. -- 170 -- -- 170
Repayment of long-term obligations........... (123,450) -- (8,036) -- (131,486)
Borrowing of long-term obligations........... 63,950 301 8,604 -- 72,855
Change in accounts receivable
securitization............................. -- 5,676 -- -- 5,676
Issuance of common stock..................... 3,069 -- -- -- 3,069
Changes in net equity and advances to/from
subsidiaries............................... (49,821) (7,346) 39,458 17,709 --
Financing activities of discontinued
operations................................. -- -- (2,808) -- (2,808)
Other........................................ 340 1,758 (1,290) -- 808
--------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities................................... (105,912) 559 35,928 17,709 (51,716)
Net increase (decrease) in cash and cash
equivalents.................................. -- (382) 443 -- 61
Cash and cash equivalents at beginning of
period....................................... -- 690 730 -- 1,420
--------- -------- -------- -------- ---------
Cash and cash equivalents at end of period..... $ -- $ 308 $ 1,173 $ -- $ 1,481
========= ======== ======== ======== =========
F-52
85
THERMADYNE MFG. LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
THERMADYNE TOTAL TOTAL
LLC GUARANTORS NON-GUARANTORS ELIMINATIONS TOTAL
---------- ---------- -------------- ------------ ---------
Net cash provided by (used in) operating
activities................................... $ (65,804) $ 16,238 $ 10,312 $60,709 $ 21,455
Cash flows provided by (used in) investing
activities:
Capital expenditures, net.................... -- (6,554) (4,893) -- (11,447)
Change in other assets....................... -- (2,581) (1,818) -- (4,399)
Investing activities of discontinued
operations................................. -- -- (3,766) -- (3,766)
Acquisitions, net of cash.................... -- -- (74,011) -- (74,011)
Proceeds from sale of discontinued
operations................................. 112,359 -- -- -- 112,359
--------- -------- -------- ------- ---------
Net cash provided by (used in) investing
activities................................... 112,359 (9,135) (84,488) -- 18,736
Cash flows provided by (used in) financing
activities:
Change in long-term receivables.............. -- (283) -- -- (283)
Repayment of long-term obligations........... (150,384) -- -- -- (150,384)
Borrowing of long-term obligations........... 100,000 (188) 20,042 -- 119,854
Change in accounts receivable
securitization............................. -- (9,994) -- -- (9,994)
Issuance of common stock..................... 4,146 -- -- -- 4,146
Financing fees............................... -- (3,855) -- -- (3,855)
Changes in net equity and advances to/from
subsidiaries............................... (828) 8,331 53,206 (60,709) --
Financing activities of discontinued
operations................................. -- -- (1,732) -- (1,732)
Other........................................ 511 (1,291) 2,419 -- 1,639
--------- -------- -------- ------- ---------
Net cash provided by (used in) financing
activities................................... (46,555) (7,280) 73,935 (60,709) (40,609)
Net increase (decrease) in cash and cash
equivalents.................................. -- (177) (241) -- (418)
Cash and cash equivalents at beginning of
period....................................... -- 867 971 -- 1,838
--------- -------- -------- ------- ---------
Cash and cash equivalents at end of period..... $ -- $ 690 $ 730 $ -- $ 1,420
========= ======== ======== ======= =========
F-53
86
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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.
Date: March 30, 1999
THERMADYNE HOLDINGS CORPORATION
By: /s/ JAMES H. TATE
------------------------------------
James H. Tate
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ RANDALL E. CURRAN Chairman of the Board, March 30, 1999
- ----------------------------------------------------- President, and Chief
Randall E. Curran Executive Officer (principal
executive officer)
/s/ JAMES H. TATE Director, Senior Vice March 30, 1999
- ----------------------------------------------------- President and Chief
James H. Tate Financial Officer (principal
financial and accounting
officer)
/s/ PETER T. GRAUER Director March 30, 1999
- -----------------------------------------------------
Peter T. Grauer
/s/ WILLIAM F. DAWSON Director March 30, 1999
- -----------------------------------------------------
William F. Dawson
/s/ JOHN F. FORT III Director March 30, 1999
- -----------------------------------------------------
John F. Fort III
/s/ HAROLD A. POLING Director March 30, 1999
- -----------------------------------------------------
Harold A. Poling
/s/ LAWRENCE M.V.D. SCHLOSS Director March 30, 1999
- -----------------------------------------------------
Lawrence M.V.D. Schloss
87
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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.
Date: March 30, 1999
THERMADYNE MFG. LLC
By: /s/ JAMES H. TATE
------------------------------------
James H. Tate
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ RANDALL E. CURRAN Chairman of the Board, March 30, 1999
- ----------------------------------------------------- President, and Chief
Randall E. Curran Executive Officer (principal
executive officer)
/s/ JAMES H. TATE Director, Senior Vice March 30, 1999
- ----------------------------------------------------- President and Chief
James H. Tate Financial Officer (principal
financial and accounting
officer)
/s/ PETER T. GRAUER Director March 30, 1999
- -----------------------------------------------------
Peter T. Grauer
/s/ WILLIAM F. DAWSON Director March 30, 1999
- -----------------------------------------------------
William F. Dawson
88
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) 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.
Date: March 30, 1999
THERMADYNE CAPITAL CORP.
By: /s/ JAMES H. TATE
------------------------------------
James H. Tate
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ RANDALL E. CURRAN Chairman of the Board, March 30, 1999
- ----------------------------------------------------- President, and Chief
Randall E. Curran Executive Officer (principal
executive officer)
/s/ JAMES H. TATE Director, Senior Vice March 30, 1999
- ----------------------------------------------------- President and Chief
James H. Tate Financial Officer (principal
financial and accounting
officer)
/s/ PETER T. GRAUER Director March 30, 1999
- -----------------------------------------------------
Peter T. Grauer
/s/ WILLIAM F. DAWSON Director March 30, 1999
- -----------------------------------------------------
William F. Dawson
89
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Thermadyne Holdings Corporation
We have audited the consolidated financial statements of Thermadyne
Holdings Corporation and Thermadyne Mfg. LLC as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998 and have
issued our report thereon dated February 22, 1999. Our audits also included the
accompanying financial statement schedule. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
February 22, 1999
S-1
90
SCHEDULE II
THERMADYNE HOLDINGS CORPORATION
THERMADYNE MFG. LLC
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLLECTION
BALANCE AT OF PREVIOUSLY EFFECT OF BALANCE AT
BEGINNING OF WRITTEN OFF DISCONTINUED END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD PROVISION WRITEOFFS ACCOUNTS OPERATIONS PERIOD
- ------------------------------- ------------ --------- --------- ------------- ------------ ----------
Year ended December 31, 1998.......... $2,217 $1,267 $632 $ 0 $ 0 $2,852
Year ended December 31, 1997.......... 1,649 875 315 8 0 2,217
Year ended December 31, 1996.......... 1,888 975 785 57 486 1,649
S-2
91
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT
------- -------
2.1 -- First Amended and Restated Plan of Reorganization of TDII
Company under Chapter 11 of the Bankruptcy Code,
confirmed by the United States Bankruptcy Court, District
of Delaware, on January 18, 1994.(1)
2.2 -- Agreement and Plan of Merger, dated as of January 20,
1998, between Thermadyne Holdings Corporation and Mercury
Acquisition Corporation.(2)
2.3 -- Amendment No. 1 to Agreement and Plan of Merger between
Thermadyne Holdings Corporation and Mercury Acquisition
Corporation.(3)
2.4 -- Certificate of Merger of Mercury Acquisition Corporation
with and into Thermadyne Holdings Corporation.(3)
3.1 -- Certificate of Incorporation of Thermadyne Holdings
Corporation.(included in Exhibit 2.4)
3.2 -- Bylaws of Thermadyne Holdings Corporation.(3)
3.3 -- Certificate of Incorporation of Thermadyne Capital
Corp.(4)
3.4 -- Bylaws of Thermadyne Capital Corp.(4)
3.5 -- Limited Liability Company Agreement of Thermadyne Mfg.
LLC.(4)
4.1 -- Indenture, dated as of May 22 1998, between Mercury
Acquisition Corporation and IBJ Schroder Bank & Trust
Company, as Trustee.(3)
4.2 -- First Supplemental Indenture, dated as of May 22, 1998,
between Thermadyne Holdings Corporation and IBJ Schroder
Bank & Trust Company, as Trustee.(3)
4.3 -- Form of 12 1/2% Senior Discount Debenture.(3)
4.4 -- A/B Exchange Registration Rights Agreement dated as of
May 22, 1998, among Mercury Acquisition Corporation and
Donaldson, Lufkin & Jenrette Securities Corporation.(3)
4.5 -- Amendment to Registration Rights Agreement dated May 22,
1998, among Thermadyne Holdings Corporation and
Donaldson, Lufkin & Jenrette Securities Corporation.(3)
4.6 -- Indenture, dated as of February 1, 1994, between
Thermadyne Holdings Corporation and Chemical Bank, as
Trustee, with respect to $179,321,000 principal amount of
the Senior Subordinated Notes Due November 1, 2003.(1)
4.7 -- Form of Senior Subordinated Note (included in Exhibit
4.3).(1)
4.8 -- Indenture, dated May 22, 1998, among Thermadyne Mfg. LLC,
Thermadyne Capital Corp., the guarantors named therein
and State Street Bank and Trust Company, as Trustee.(3)
4.9 -- Form of 9 7/8% Senior Subordinated Notes.(3)
4.10 -- A/B Exchange Registration Rights Agreement dated as of
May 22, 1998, among Thermadyne Mfg. LLC, Thermadyne
Capital Corp., the guarantors named therein and
Donaldson, Lufkin & Jenrette Securities Corporation.(3)
10.1 -- Omnibus Agreement, dated as of June 3, 1988, among Palco
Acquisition Company (now Thermadyne Holdings Corporation)
and its subsidiaries and National Warehouse Investment
Company.(5)
10.2 -- Escrow Agreement, dated as of August 11, 1988, among
National Warehouse Investment Company, Palco Acquisition
Company (now Thermadyne Holdings Corporation) and Title
Guaranty Escrow Services, Inc.(5)
92
EXHIBIT
NO. EXHIBIT
------- -------
10.3 -- Amended and Restated Industrial Real Property Lease dated
as of August 11, 1988, between National Warehouse
Investment Company and Tweco Products, Inc., as amended
by First Amendment to Amended and Restated Industrial
Real Property Lease dated as of January 20, 1989.(5)
10.4 -- Schedule of substantially identical lease agreements.(5)
10.5 -- Amended and Restated Continuing Lease Guaranty, made as
of August 11, 1988, by Palco Acquisition Company (now
Thermadyne Holdings Corporation) for the benefit of
National Warehouse Investment Company.(5)
10.6 -- Schedule of substantially identical lease guaranties.(5)
10.7 -- Lease Agreement, dated as of October 10, 1990, between
Stoody Deloro Stellite and Bowling Green-Warren County
Industrial Park Authority, Inc.(5)
10.8 -- Lease Agreement, dated as of February 15, 1985, as
amended, between Stoody Deloro Stellite, Inc. and
Corporate Property Associates 6.(5)
10.9 -- Receivables Purchase Agreement, dated as of December 28,
1994, among Thermadyne Receivables, Inc., as Transferor,
and NationsBank of Virginia, N.A., as Trustee.(6)
10.10 -- Purchase Agreement, dated as of August 2, 1994, between
Coyne Cylinder Company and BA Credit Corporation.(6)
10.11 -- Sublease Agreement, dated as of April 7, 1994, between
Stoody Deloro Stellite, Inc., and Swat, Inc.(6)
10.12 -- Share Sale Agreement dated as of November 18, 1995, among
certain scheduled persons and companies, Rosny Pty
Limited, Byron Holdings Limited, Thermadyne Holdings
Corporation, and Thermadyne Australia Pty Limited
relating to the sale of the Cigweld Business.(7)
10.13 -- Rights Agreement dated as of May 1, 1997, between
Thermadyne Holdings Corporation and BankBoston, N.A., as
Rights Agent.(8)
10.14 -- First Amendment to Rights Agreement, dated January 20,
1998, between Thermadyne Holdings Corporation and
BankBoston, N.A.(2)
10.15+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and Randall E.
Curran.(3)
10.16+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and James H.
Tate.(3)
10.17+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and Stephanie N.
Josephson.(3)
10.18+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and Thomas C.
Drury.(3)
10.19+ -- Executive Employment Agreement dated May 22, 1998,
between Thermadyne Holdings Corporation and Robert D.
Maddox.(3)
10.20+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and Randall E. Curran.(3)
10.21+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and James H. Tate.(3)
10.22+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and Stephanie N. Josephson.(3)
93
EXHIBIT
NO. EXHIBIT
------- -------
10.23+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and Thomas C. Drury.(3)
10.24+ -- Award Agreement dated May 22, 1998, between Thermadyne
Holdings Corporation and Robert D. Maddox.(3)
10.25+ -- Thermadyne Holdings Corporation Management Incentive
Plan.(3)
10.26+ -- Thermadyne Holdings Corporation Direct Investment
Plan.(3)
10.27 -- Investors' Agreement dated as of May 22, 1998, between
Thermadyne Holdings Corporation, the DLJ Entities (as
defined therein) and the Management Stockholders (as
defined therein).(3)
10.28 -- Credit Agreement dated as of May 22, 1998, between
Thermadyne Mfg. LLC, Comweld Group Pty. Ltd., GenSet
S.P.A. and Thermadyne Welding Products Canada Limited, as
Borrowers, Various Financial Institutions, as Lenders,
DLJ Capital Funding, Inc., as Syndication Agent, Societe
Generale, as Documentation Agent, and ABN Amro Bank N.V.,
as Administrative Agent.(3)
10.29 -- Letter Agreement dated as of January 16, 1998, between
Donaldson, Lufkin & Jenrette Securities Corporation and
DLJ Merchant Banking II, Inc.(3)
10.30 -- Assignment and Assumption Agreement dated as of May 22,
1998, between DLJ Merchant Banking II, Inc. and
Thermadyne Holdings Corporation.(3)
21.1 -- Subsidiaries of Thermadyne Holdings Corporation.*
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.*
27.1 -- Financial Data Schedule.*
- ---------------
+ Indicates a management contract or compensatory plan or arrangement.
* Filed herewith.
(1) Incorporated by reference to the Company's Registration Statement on Form
10 (File No. 0-23378) filed under Section 12(g) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), on February 7, 1994.
(2) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-23378) filed under Section 12(g) of the Exchange Act on January 21,
1998.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-1, (File No. 333-57455) filed on June 23, 1998.
(4) Incorporated by reference to Thermadyne LLC and Thermadyne Capital's
Registration Statement on Form S-1 (File No. 333-57457) filed on June 23,
1998.
(5) Incorporated by reference to the Company's Registration Statement on Form
10/A, Amendment No. 2 (File No. 0-23378) filed under Section 12(g) of the
Exchange Act, on April 28, 1994.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(7) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-23378) filed under Section 12(g) of the Exchange Act on January 18,
1996.
(8) Incorporated by reference to the Company's Current Report on Form 8-K (File
No. 0-23378) filed under Section 12(g) of the Exchange Act on May 12, 1997.