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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________________________ to _____________________
Commission file number 0-23378
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.)
16052 Swingley Ridge Road, Suite 300, Chesterfield, MO 63017
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (636) 728-3000
Indicate by [X] whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Indicate by [X] whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate by [X] whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15 (f) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $0.01
per share, as of July 31, 2003 was 13,300,000.
THERMADYNE HOLDINGS CORPORATION
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of
Thermadyne Holdings Corporation (Unaudited)
Condensed Consolidated Balance Sheets................... 3
Condensed Consolidated Statements of Operations......... 4-5
Condensed Consolidated Statements of Cash Flows......... 6
Notes to Condensed Consolidated Financial Statements.... 7-18
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations........ 19-25
Item 4. Controls and Procedures................................. 25
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............... 25-26
Item 6. Exhibits and Reports on Form 8-K........................ 26-27
SIGNATURES........................................................... 28
ITEM 1
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
Reorganized Predecessor
Company Company
----------- ------------
June 30, December 31,
2003 2002
----------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 13,311 $ 17,413
Accounts receivable, less allowance for doubtful
accounts of $4,684 and $4,275, respectively 84,741 80,423
Inventories 106,967 95,702
Prepaid expenses and other 12,250 12,057
---------- ----------
Total current assets 217,269 205,595
Property, plant and equipment, at cost, net 86,753 72,291
Goodwill 137,876 10,625
Intangibles, at cost, net 80,323 3,696
Other assets 1,094 5,354
---------- ----------
Total assets $ 523,315 $ 297,561
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 29,697 $ 23,855
Accrued and other liabilities 36,849 27,458
Accrued interest 105 -
Income taxes payable 4,458 1,658
Current maturities of long-term obligations 6,699 13,328
---------- ----------
Total current liabilities 77,808 66,299
Liabilities subject to compromise - 832,919
Long-term obligations, less current maturities 219,505 17,285
Other long-term liabilities 41,639 46,201
Redeemable preferred stock - 78,509
Shareholders' equity (deficit):
Common stock, $0.01 par value, 25,000,000 shares authorized,
and 13,300,000 shares issued and outstanding 133 36
Additional paid-in capital 183,267 (128,523)
Retained earnings (deficit) 806 (568,963)
Management loans - (1,596)
Accumulated other comprehensive income (loss) 157 (44,606)
---------- ----------
Total shareholders' equity (deficit) 184,363 (743,652)
---------- ----------
Total liabilities and shareholders' equity (deficit) $ 523,315 $ 297,561
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
Reorganized
Company Predecessor Company
------------ ----------------------------
One Month Two Months Three Months
Ended Ended Ended
June 30, May 31, June 30,
2003 2003 2002
------------ ------------ ------------
Net sales $ 36,299 $ 71,917 $ 108,076
Operating expenses:
Cost of goods sold 24,419 47,144 67,844
Selling, general and administrative expenses 8,800 18,419 28,426
Amortization of intangibles 342 158 226
Net periodic postretirement benefits 114 228 288
------------ ------------ ------------
Operating income 2,624 5,968 11,292
Other income (expense):
Interest expense (contractual interest of $12,045 and $17,693 for the (1,455) (3,556) (5,656)
two months ended May 31, 2003 and the three months
ended June 30, 2002, respectively)
Amortization of deferred financing costs (38) - (829)
Other, net (7) (1,264) (1,642)
------------ ------------ ------------
Income before reorganization items and
income tax provision 1,124 1,148 3,165
Reorganization items - (12,466) (2,897)
Gain on reorganization and adoption of fresh-start accounting - 581,089 -
------------ ------------ ------------
Income before income tax provision 1,124 569,771 268
Income tax provision 318 2,001 774
------------ ------------ ------------
Net income (loss) $ 806 $ 567,770 $ (506)
============ ============ ============
Basic and diluted income (loss) per share amounts:
Net income (loss) $ 0.06 $ 158.14 $ (0.14)
============ ============ ============
See accompanying notes to condensed consolidated financial statements
4
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
Reorganized
Company Predecessor Company
------------ ----------------------------
One Month Five Months Six Months
Ended Ended Ended
June 30, May 31, June 30,
2003 2003 2002
------------ ------------ ------------
Net sales $ 36,299 $ 172,909 $ 210,763
Operating expenses:
Cost of goods sold 24,419 112,232 135,393
Selling, general and administrative expenses 8,800 44,341 55,135
Amortization of intangibles 342 363 574
Net periodic postretirement benefits 114 516 576
------------ ------------ ------------
Operating income 2,624 15,457 19,085
Other income (expense):
Interest expense (contractual interest of $29,962 and $35,562 for the
five months ended May 31, 2003 and the six months ended
June 30, 2002, respectively) (1,455) (8,798) (11,636)
Amortization of deferred financing costs (38) - (1,658)
Other, net (7) (1,174) (1,511)
------------ ------------ ------------
Income before reorganization items and
income tax provision 1,124 5,485 4,280
Reorganization items - (14,672) (6,047)
Gain from reorganization and adoption of fresh-start accounting - 581,089 -
------------ ------------ ------------
Income (loss) before income tax provision 1,124 571,902 (1,767)
Income tax provision 318 2,939 1,490
------------ ------------ ------------
Net income (loss) $ 806 $ 568,963 $ (3,257)
============ ============ ============
Basic and diluted income (loss) per share amounts:
Net income (loss) $ 0.06 $ 158.47 $ (0.91)
============ ============ ============
See accompanying notes to condensed consolidated financial statements
5
THERMADYNE HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Reorganized
Company Predecessor Company
------------ ----------------------------
One Month Five Months Six Months
Ended Ended Ended
June 30, May 31, June 30,
2003 2003 2002
------------ ------------ ------------
Cash flows provided by (used in) operating activities:
Net income (loss) $ 806 $ 568,963 $ (3,257)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Net periodic postretirement benefits 114 516 576
Depreciation 1,801 6,071 7,434
Amortization of intangibles 342 363 574
Amortization of deferred financing costs 38 - 1,658
Gain on reorganization and adoption of fresh-start accounting - (581,089) 0
Deferred income taxes 164 (33) 255
Changes in operating assets and liabilities:
Accounts receivable 1,375 (1,521) (6,489)
Inventories (628) (5,703) (4,156)
Prepaid expenses and other (1,020) 347 1,528
Accounts payable 161 3,326 2,451
Accrued and other liabilities (3,788) 5,059 2,714
Accrued interest 105 11 (372)
Income taxes payable 116 2,028 730
Other long-term liabilities (85) (1,035) (2,124)
------------ ------------ ------------
Total adjustments (1,305) (571,660) 4,779
------------ ------------ ------------
Net cash provided by (used in) operating activities (499) (2,697) 1,522
------------ ------------ ------------
Cash flows used in investing activities:
Capital expenditures, net (683) (4,114) (3,950)
Change in other assets (27) (768) (665)
------------ ------------ ------------
Net cash used in investing activities (710) (4,882) (4,615)
------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Change in long-term receivables 10 74 297
Borrowing under debtor-in-possession credit facility - - 1,500
Repayment of long-term obligations - (12,780) (1,748)
Borrowing of long-term obligations 2,495 16,038 1,246
Financing fees - (1,352) -
Other (778) 979 1,110
------------ ------------ ------------
Net cash provided by financing activities 1,727 2,959 2,405
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents 518 (4,620) (688)
Cash and cash equivalents at beginning of period 12,793 17,413 14,800
------------ ------------ ------------
Cash and cash equivalents at end of period $ 13,311 $ 12,793 $ 14,112
============ ============ ============
See accompanying notes to condensed consolidated financial statements
6
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1. REORGANIZATION AND BASIS OF PRESENTATION
Thermadyne Holdings Corporation ("Thermadyne" or the "Company"), a
Delaware corporation, is a global manufacturer of cutting and welding
products and accessories. On May 23, 2003 (the "Effective Date"),
Thermadyne consummated its plan of reorganization under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") and completed
a comprehensive financial restructuring (the "Restructuring").
The principal elements of the Restructuring and the principal effects
of its consummation pursuant to the plan of reorganization are
summarized below. The Company has accounted for the Restructuring using
the principles of "fresh-start" accounting as required by the American
Institute of Certified Public Accountants Statement of Position No.
90-7, entitled "Financial Reporting by Entities in Reorganization under
the Bankruptcy Code" ("SOP 90-7"). As a result of the application of
SOP 90-7, as of June 1, 2003, the Company's financial results for the
quarter ended June 30, 2003 and for the quarter ended June 30, 2002
include two different bases of accounting and, accordingly the
operating results and cash flows of the Reorganized Company (as defined
below) and the Predecessor Company (as defined below) have been
separately disclosed. For the purposes of these financial statements,
references to the "Predecessor Company" are references to the Company
for periods prior to June 1, 2003 (the first day of the calendar month
following the month in which the Company emerged from bankruptcy) and
references to the "Reorganized Company" are references to the Company
for the periods subsequent to May 31, 2003. The Reorganized Company's
financial statements are not comparable to the Predecessor Company's
financial statements. The combined results of operations of the Company
for the three-month and six-month periods ended June 30, 2003 are not
necessarily indicative of the operating results that may be expected
for future periods.
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
of Thermadyne have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the five months
ended May 31, 2003 and the one month ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31,
2002.
PLAN OF REORGANIZATION
On November 19, 2001, the Company and substantially all of its domestic
subsidiaries (collectively, the "Debtors"), filed voluntary petitions
for relief under Chapter 11 of the
7
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Bankruptcy Code in the United States Bankruptcy Court for the Eastern
District of Missouri (the "Court".)
On January 17, 2003, the Debtors filed with the Court the First Amended
and Restated Joint Plan of Reorganization (the "Plan") and the First
Amended and Restated Disclosure Statement describing the Plan (the
"Disclosure Statement"). The Plan and the Disclosure Statement were
filed with the SEC on Form 8-K on February 6, 2003. On April 3, 2003,
the Court confirmed the Plan. The Plan was consummated on the Effective
Date, and the Company emerged from Chapter 11 bankruptcy protection.
The Plan provided for a substantial reduction of the Company's
long-term debt. Under the Plan, the Company's total debt was reduced to
approximately $225 million, as compared to the nearly $800 million in
debt and $79 million in preferred stock outstanding at the time the
Company filed for Chapter 11 protection in November 2001. The Plan
provided for treatment to the various classes of claims and equity
interest as follows (as is more fully described in the Plan):
Administrative Expense Claims, Priority Tax Claims and the Class 1
Other Priority Claims (as each such class, and all classes described
herein, are more fully described in the Plan) remain unaffected by the
Chapter 11 cases and are to be paid in full. The Class 3 Other Secured
Claims are also unimpaired by the Chapter 11 cases and the holders of
such claims continue to retain their liens.
The pre-petition senior secured lenders (Class 2) exchanged their
approximately $365 million in debt and outstanding letters of credit
for approximately 94.5% of the new common stock of the Company, $180
million in new senior debt notes and Series C Warrants exercisable for
additional shares of new common stock of the Company. The pre-petition
senior lenders transferred the Series C Warrants to certain
pre-petition Company equity holders.
General Unsecured Creditors (Class 4) will receive distributions of
cash equal to the lesser of (1) a holder's pro rata share of $7,500,000
and (2) fifty percent (50%) of such holder's claim (estimated by the
Company to provide a recovery on such claims of 30% to 37% of the
amount of such claims). The Company has made initial distributions of
such amounts.
The 9 7/8% Senior Subordinated Note Holders (Class 5) exchanged their
approximately $230 million in debt and accrued interest for
approximately 5.5% of the new common stock of the Company, and Series A
Warrants and Series B Warrants exercisable for additional shares of new
common stock of the Company. The 9 7/8% Senior Subordinated Note
Holders had the opportunity to subscribe for more shares through a
subscription offering held pursuant to the Plan, but no holders
subscribed to the offering of the new common stock of the Company.
The Junior Subordinated Note Claims, the 10.75% Senior Subordinated
Note Claims and the 12 1/2% Senior Discount Debenture Claims (Class 6,
Class 7 and Class 8, respectively) did not receive any distribution
under the Plan, but had the opportunity to participate in the
subscription offering for shares of new common stock of the reorganized
Company. None of the holders elected to subscribe to the offering.
8
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
The Thermadyne Holdings Equity Interests (Class 9), which includes the
existing common and preferred stock of the Company, were cancelled upon
the Effective Date of the Plan and the holders of such interests did
not receive any distributions pursuant to the Plan.
On the Effective Date of the Plan, the Company issued 13.3 million
shares of new common stock, $180 million in new senior debt notes,
1,157,000 Series A Warrants, 700,000 Series B Warrants and 271,429
Series C Warrants. The Company concurrently entered into a new senior
secured credit facility providing for revolving loans of up to $50
million. The Company borrowed $15.3 million under the facility on the
Effective Date to repay in full amounts outstanding under the $60
million debtor-in-possession credit facility among Thermadyne Mfg. LLC,
as borrower, the Company and certain U.S. subsidiaries as guarantors,
and a syndicate of lenders with ABN AMRO Bank N.V. as agent (the "DIP
Facility"), for the payment of various pre-petition obligations and for
general working capital purposes. The Company may make additional draws
under the facility.
LIABILITIES SUBJECT TO COMPROMISE
Under Chapter 11, certain claims against the debtor in existence prior
to the filing of the petition for relief under federal bankruptcy laws
are stayed while the debtor continues business operations as
debtor-in-possession. These claims are shown in the accompanying
December 31, 2002, balance sheet as "liabilities subject to
compromise." The principal categories of liabilities subject to
compromise at December 31, 2002, consisted of the following:
December 31,
2002
------------
Trade accounts payable $ 15,949
Accrued and other liabilities 3,023
Accrued interest 24,809
Accrued income taxes 9,086
Old Credit Facility 356,172
Senior Subordinated Notes 207,000
Debentures 145,066
Subordinated Notes 37,060
Junior Notes 33,427
Other long-term obligations 1,327
-----------
Total $ 832,919
===========
9
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
REORGANIZATION ITEMS
Reorganization items for the two-month period ended May 31, 2003, which
totaled $12.5 million, consisted of $12.0 million of professional fees
and expenses, $0.2 million paid under the key employee retention
program, and $0.3 million of other reorganization costs. For the five
months ended May 31, 2003, reorganization items totaled $14.7 million
and included $13.9 million of professional fees and expenses, $0.2
million paid under the key employee retention program, and $0.6 million
of other reorganization costs. Reorganization items for the three-month
period ended June 30, 2002, include $1.7 million of professional fees
and expenses, $0.4 million of expenses related to financing fees
associated with the DIP Facility, $0.4 million associated with a lease
obligation that was rejected, $0.3 million related to payments under
the key employee retention plan approved by the Court, and $0.1 million
of other reorganization costs. For the six months ended June 30, 2002,
reorganization items include $4.0 million of professional fees and
expenses, $1.0 million of expenses related to financing fees associated
with the DIP Facility, $0.4 million associated with a lease obligation
that was rejected, $0.3 million related to payments under the key
employee retention plan approved by the Court, and $0.3 million of
other reorganization costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the one-month period
ended June 30, 2003 and the two-month period ended May 31, 2003,
included $0.1 million and $1.0 million, respectively, of charges
related to certain logistic and technology initiatives, and costs
incurred related to the reorganization of domestic manufacturing
facilities. For the five months ended May 31, 2003, selling, general
and administrative expenses included $0.8 million related to the
logistics and technology projects and $0.5 million related to plant
reorganizations. Included in selling, general and administrative
expenses for the three months ended June 30, 2002, are costs of
approximately $0.8 million related to an information technology
transformation project and $0.3 million related to logistics
initiatives. For the six months ended June 30, 2002, selling, general
and administrative expenses include $1.3 million related to the
information technology transformation initiative and $0.5 million
related to the logistics projects.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
current period presentation. These reclassifications did not affect net
income (loss).
STATEMENTS OF CASH FLOWS
For purposes of the Statements of Cash Flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Operating cash disbursements for the one month ended June 30, 2003, and
the five months ended May 31, 2003, related to the reorganization
totaled $5.6 million and consisted of approximately $4.7 million of
professional fees and expenses, $0.3 million paid under the key
employee retention
10
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
program, $0.2 million of U.S. Trustee fees and $0.4 million of other
reorganization related payments. For the six months ended June 30,
2002, operating cash disbursements related to the reorganization were
$5.5 million and included $4.0 million of professional fees and
expenses, $0.4 million of fees related to the DIP Facility, $0.3
million of payments under the key employee retention plan approved by
the Court, $0.4 million related to a rejected lease obligation, and
$0.4 million of other reorganization related disbursements.
INCOME (LOSS) PER SHARE
The following table sets forth the information used in the computation
of basic and diluted loss per share for the periods indicated.
Reorganized
Company Predecessor Company
------------- ---------------------------
One Month Two Months Three Months
Ended Ended Ended
June 30, 2003 May 31, 2003 June 30, 2002
------------- ------------ -------------
Numerator:
Net income (loss) applicable to common shares $ 806 $ 567,770 $ (506)
============ ============ ============
Denominator:
Weighted average shares-basic and diluted 13,300,000 3,590,326 3,590,326
============ ============ ============
Basic and diluted loss per share amounts:
------------ ------------ ------------
Net income (loss) applicable to common shares $ 0.06 $ 158.14 $ (0.14)
============ ============ ============
Reorganized
Company Predecessor Company
------------- ---------------------------
One Month Five Months Six Months
Ended Ended Ended
June 30, 2003 May 31, 2003 June 30, 2002
------------- ------------ -------------
Numerator:
Net income (loss) applicable to common shares $ 806 $ 568,963 $ (3,257)
============ ============ ============
Denominator:
Weighted average shares-basic and diluted 13,300,000 3,590,326 3,590,326
============ ============ ============
Basic and diluted loss per share amounts:
------------ ------------ ------------
Net income (loss) applicable to common shares $ 0.06 $ 158.47 $ (0.91)
============ ============ ============
11
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2. FRESH-START ACCOUNTING
The company has accounted for the Restructuring using the principles of
"fresh-start" accounting as required by SOP 90-7. Pursuant to such
principles, the Company's assets and liabilities were revalued as of
the month-end closest to the Effective Date. The assets were stated at
their reorganization value (the "Reorganization Value"), which is
defined as the fair value of the Company's assets before considering
liabilities.
The Reorganization Value was determined by the Company through
consultation with its financial advisors, by developing a range of
values using both comparable companies and net present value
approaches. The Reorganization Value was based in part on financial
projections prepared by the Company for the period 2002 through 2006.
These projections assume a compound annual growth rate for sales of
approximately 3.3% with domestic sales growing at a slightly faster
pace than international. This growth rate compares to a negative
compounded rate of 4.5% the Company experienced for the years 1997 to
2002. The projections also assume improved profitability from continued
efforts to reduce cost. The determination of the Reorganization Value
is more fully described in the Plan. Based on the analyses prepared by
the Company and its financial advisor, the Company estimated the
Reorganization Value at approximately $523 million. The Company has
made a preliminary allocation of the Reorganization Value, which
includes certain estimates and judgements. The final allocation of the
Reorganization Value may change once the Company has completed the
valuation of its assets and liabilities.
The following unaudited consolidated balance sheet as of June 1, 2003,
illustrates the effect of the Company's Restructuring and the effect of
fresh-start accounting adjustments to record the Company's preliminary
allocation of the Reorganization Value to its assets. The total amount
of debt forgiveness was $782.1 million and was included as a
reorganization item gain in the accompanying statements for the two and
five month periods ended May 31, 2003. The consolidated balance sheet
at June 1, 2003, has been prepared on a different basis of accounting
and is not comparable in material respects to any such balance sheet as
of any prior date or for any prior period.
12
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
June 1, 2003
Historical Debt Discharge June 1, 2003
Basis of and Fresh-Start New Basis of
Accounting Restructuring Adjustments Accounting
------------ ------------- ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 12,793 $ - $ - $ 12,793
Accounts receivable, net 86,089 - - 86,089
Inventories 105,804 - - (j) 105,804
Prepaid expenses and other 12,123 - (933) (k) 11,190
------------ ---------- ------------ ----------
Total current assets 216,809 - (933) 215,876
Property, plant and equipment 73,934 - 13,793 (l) 87,727
Deferred financing costs 675 677 (a) - 1,352
Goodwill 13,089 - 124,787 (m) 137,876
Intangibles 4,046 - 75,382 (n) 79,428
Other assets 1,113 - - 1,113
------------ ---------- ------------ ----------
Total assets $ 309,666 $ 677 $ 213,029 $ 523,372
============ ========== ============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 29,649 $ - $ - $ 29,649
Accrued and other liabilities 31,963 8,639 (b) - 40,602
Accrued interest 1,348 (1,348) (c) - -
Income taxes payable 3,841 488 (d) - 4,329
Current maturities of long-term obligations 15,511 (11,650) (e) - 3,861
------------ ---------- ------------- ----------
Total current liabilities 82,312 (3,871) - 78,441
Liabilities subject to compromise 835,969 (835,969) (f) - -
Long-term obligations, less current maturities 15,742 195,349 (g) 8,744 (o) 219,835
Other long-term liabilities 47,203 9,648 (d) (15,155) (o) 41,696
------------ ---------- ------------ ----------
Total liabilities 981,226 (634,843) (6,411) 339,972
------------- ---------- ------------ ----------
Redeemable preferred stock 78,509 (78,509) (h) - -
Stockholders' equity (deficit):
Common stock 36 97 (i) - 133
Additional paid-in capital (130,204) 313,471 (i) - 183,267
Accumulated other comprehensive loss (38,812) (2,488) (i) 41,300 (p) -
Accumulated deficit (581,089) 402,949 (i) 178,140 (p) -
------------ ---------- ------------ ----------
Total stockholders' equity (deficit) (750,069) 714,029 219,440 183,400
------------ ---------- ------------ ----------
Total liabilities and shareholders'
equity (deficit) $ 309,666 $ 677 $ 213,029 $ 523,372
============ ========== ============ ==========
13
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
DEBT DISCHARGE AND RESTRUCTURING ADJUSTMENTS:
(a) To record financing costs related to the Company's new credit agreement
and the new term notes issued as part of the Plan.
(b) To record amounts expected to be paid in accordance with the Plan.
Amount includes $7,500 to be paid to unsecured creditors with the
remainder related to other secured and priority claims.
(c) To record payment of accrued interest on the DIP Facility and the
pre-petition credit agreement.
(d) To reestablish obligations expected to be paid in the normal course of
business. Amounts were previously included in liabilities subject to
compromise.
(e) To record repayment principal outstanding under the DIP Facility.
(f) To eliminate liabilities subject to compromise.
(g) To record initial borrowings of $15,349 under the Company's new credit
agreement and to record $180,000 of new term notes in accordance with
the Plan. Initial borrowings under the new credit agreement were used
to repay the DIP Facility and to pay certain amounts due at closing
including interest on the DIP Facility and the Company's pre-petition
credit facility.
(h) To eliminate preferred stock in accordance with the Plan.
(i) To adjust equity for adjustments contemplated in the Plan and to record
new common stock.
FRESH-START ADJUSTMENTS:
(j) The company revalued its inventory to record work-in-process and
finished goods at their respective selling prices less (i) costs to
complete, (ii) costs of disposal, and (iii) a reasonable profit on the
selling effort, as applicable. The write-up in inventory resulting
from this revaluation was essentially offset by an adjustment to
eliminate the existing LIFO reserve and previousling capitalized
inventory costs.
(k) To eliminate prepaid pension asset. In accordance with SOP 90-7, the
Company recorded the liability related to its defined benefit pension
plans at the projected benefit obligation in excess of plan assets and
eliminated other amounts recorded on the balance sheet. In addition to
the prepaid pension asset, the Company eliminated $4,459 recorded in
accumulated other comprehensive loss.
(l) Preliminary adjustment to write-up fixed assets to their estimated fair
value. The write-up was based on management estimates and an appraisal
prepared for the Company by an outside third party. The outside
appraisal firm is in the process of finalizing its report, therefore
this adjustment is subject to change.
(m) Represents the excess of Reorganization Value over identifiable assets
("goodwill".)
14
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
(n) Represents the incremental allocation of the Reorganization Value to
identifiable intangible assets. Intangibles consist of the following as
of June 1, 2003:
Patents $ 33,600
Trademarks 7,436
Customer relationships 38,392
----------
$ 79,428
==========
The value assigned to patents, trademarks and customer relationships
was based on management's estimates and an appraisal prepared for the
Company by an outside third party. The outside appraisal firm is in the
process of finalizing its report, therefore the values assigned to
these assets may change.
(o) Adjustments consist of the following:
Other
Long-term Long-term
Obligations Liabilities
-------------------------
Properly classify capital lease obligations $ 8,744 $ (8,769)
Adjust pension obligation in accordance with SOP 90-7 - 1,787
Adjust post-retirement benefit obligation in accordance
with SOP 90-7 - (8,173)
----------------------
$ 8,744 $ (15,155)
======================
Similar to the adjustment made related to the defined benefit pension
plans, in accordance with SOP 90-7, the Company adjusted the liability
related to its post-retirement benefit plan to the accumulated
post-retirement benefit obligation.
(p) To eliminate remaining balances of accumulated other comprehensive loss
and retained deficit.
3. INVENTORIES
The composition of inventories was as follows:
June 30, December 31,
2003 2002
--------- ------------
Raw materials $ 20,586 $ 15,881
Work-in-process 31,280 26,413
Finished Goods 55,101 52,488
LIFO reserve - 920
--------- --------
Total $ 106,967 $ 95,702
========= ========
15
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
4. SEGMENT INFORMATION
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. Export sales from the United
States are included in the United States segment. The "Other" column
includes the elimination of intersegment sales and profits, corporate
related items and other costs not allocated to the reportable segments.
Other
United Australia/ Geographic
States Europe Asia Regions Other Consolidated
---------- ---------- ---------- ---------- ---------- ------------
One Month Ended June 30, 2003
Revenue from external customers $ 20,896 $ 5,194 $ 5,080 $ 5,129 $ - $ 36,299
Intersegment revenues 1,814 1,055 117 230 (3,216) -
Operating income (loss) 5,620 381 392 422 (4,191) 2,624
Five Months Ended May 31, 2003
Revenue from external customers $ 101,924 $ 26,235 $ 21,243 $ 23,507 $ - $ 172,909
Intersegment revenues 9,579 2,562 257 1,109 (13,507) -
Operating income (loss) 27,990 2,508 205 1,261 (16,507) 15,457
Six Months Ended June 30, 2002
Revenue from external customers $ 138,874 $ 24,751 $ 21,414 $ 25,724 $ - $ 210,763
Intersegment revenues 12,268 2,452 289 1,500 (16,509) -
Operating income (loss) 28,395 1,426 (1,170) 2,074 (11,640) 19,085
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income totaled $963, $610,505 and $1,941 for the one
month ended June 30, 2003, the two months ended May 31, 2003, and the
three months ended June 30, 2002, respectively. For the five-month
period ended May 31, 2003, and the six-month period ended June 30,
2002, comprehensive income (loss) was $613,566 and $(1,137),
respectively.
16
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
6. INTANGIBLE ASSETS
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", the Company ceased amortization
of its goodwill on January 1, 2002. Effective June 1, 2003, the Company
made an adjustment of $124,787 to write-up goodwill pursuant to the
principles of "fresh-start" accounting as required by SOP 90-7.
Goodwill had a net balance of approximately $137,876 and $10,625 at
June 30, 2003 and December 31, 2002, respectively.
The Company has other identifiable intangible assets such as patents,
trademarks and customer relationships. In accordance with SOP 90-7, the
Company revalued its identifiable intangible assets and recorded a
fresh-start adjustment of $75,382 to write-up these assets. Patents and
customer relationships are amortized on a straight-line basis over
their estimated useful lives, which generally range from 10 to 20
years. Trademarks are not amortized, but are periodically evaluated for
impairment. The total cost of these intangible assets was $79,351 and
$13,511 at June 30, 2003 and December 31, 2002, respectively.
Accumulated amortization totaled $342 and $9,815 at June 30, 2003 and
December 31, 2002, respectively. Amortization expense amounted to $342,
$158 and $226 for the one month period ended June 30, 2003, the two
month period ended May 31, 2003 and the three month period ended June
30, 2002, respectively. Amortization expense was $363 and $574 for the
five months ended May 31, 2003 and the six months ended June 30, 2002,
respectively. Amortization expense is expected to be approximately
$3,100 for each of the next five fiscal years.
7. LONG-TERM OBLIGATIONS
On the Effective Date, the Company entered into a credit agreement
dated as of May 23, 2003 (the "Working Capital Facility") among the
Company, as a guarantor thereunder, Thermadyne Industries, Inc. and
certain other domestic subsidiaries of the Company, as borrowers, the
other credit parties signatory thereto, the lenders signatory thereto
from time to time, General Electric Capital Corporation, as Agent and
Lender, and GECC Capital Markets Group, Inc., as Lead Arranger,
providing for up to $50,000 in a revolving loan for working capital
purposes. A copy of the Working Capital Facility was filed with the SEC
on Form 8-K on June 3, 2003.
Additionally, in connection with the Plan and as a distribution to the
Company's pre-petition senior secured lenders for their claims in the
bankruptcy, the Company entered into the Credit and Guaranty Agreement
dated as of May 23, 2003 (the "Senior Notes Facility") among the
Company, as Borrower, the guarantors referred to therein, the New Term
Lenders referred to therein and Deutsche Bank Trust Company Americas,
as Administrative Agent and Collateral Agent, providing a total of
$180,000 in term loans (the "Senior Term Notes.") A copy of the Senior
Notes Facility was filed with the SEC on Form 8-K on June 3, 2003.
The Working Capital Facility provides for total borrowings of $50
million, of which up to $20 million may be used for letters of credit.
Actual borrowing availability is subject to a borrowing base
calculation, which is equal to 1.5 times Adjusted EBITDA. The Working
Capital Facility defines Adjusted EBITDA as 100% of the EBITDA for the
Company and its domestic subsidiaries
17
THERMADYNE HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
plus 65% of the EBITDA of the Company's Canadian subsidiaries. EBITDA
is defined in the Working Capital Facility as net income less interest
income, gains from extraordinary items, any aggregate net gain on the
sale of tangible assets, and any other non-cash gains added in
determining net income; plus, provision for income taxes, interest
expense, depreciation, amortization of intangibles, amortization of
deferred financing costs, any amount deducted from net income as a
result of stock or stock option grants, net periodic post-retirement
benefit costs, losses from extraordinary items, reorganization costs
related to the Chapter 11 cases, and any non-recurring employee
severance expenses and non-recurring cash expenses related plant
reorganizations, not to exceed $5,000 in the aggregate. Availability
under the Working Capital Facility may also be limited if the Company
fails to meet certain levels of Adjusted EBITDA. Borrowings under the
Working Capital Facility accrue interest, at the Company's option, at
the prime lending rate plus 2.25% in the case of index rate loans, or
at the London Interbank Offered Rate ("LIBOR") plus 3.25% in the case
of LIBOR loans. The Working Capital Facility is secured by
substantially all the assets of the Company, including a pledge of the
capital stock of substantially all its subsidiaries, subject to certain
limitations with respect to foreign subsidiaries. The Working Capital
Facility contains financial covenants, including minimum levels of
EBITDA (determined on a consolidated basis for the Company) and other
customary provisions. As of June 30, 2003, the Company had borrowed
$15,453 and issued letters of credit totaling $9,356 under the Working
Capital Facility. The Working Capital Facility terminates on May 16,
2006.
The Senior Term Notes accrue interest, in the case of eurodollar loans
at LIBOR plus a margin ranging from 3.0% to 7.5%, and in the case of
base rate loans at the prime rate plus a margin ranging from 2.0% to
6.5%. The interest margin applicable to the Eurodollar and base rate
loans varies depending on the level of indebtedness and the time
elapsed from the Effective Date. The Senior Notes Facility contains
financial covenants and other provisions similar to those in the
Working Capital Facility. No payments of principal are due under the
Senior Note Facility until June 2004.
18
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
On January 17, 2003, the Debtors filed with the Court the First Amended and
Restated Joint Plan of Reorganization (the "Plan") and the First Amended and
Restated Disclosure Statement describing the Plan (the "Disclosure Statement").
The Plan and the Disclosure Statement were filed with the SEC on Form 8-K on
February 6, 2003. On April 3, 2003, the Court confirmed the Plan. The Plan was
consummated on May 23, 2003 (the "Effective Date") as all conditions necessary
for the Plan to become effective were satisfied or waived, and the Company
emerged from Chapter 11 bankruptcy protection.
Effective June 1, 2003, the Company adopted "fresh-start" financial reporting
pursuant to which the assets of the Company were recorded at their
reorganization value, which is defined as the fair value of the reorganized
company. As part of its fresh-start revaluation, the Company also recorded
significant goodwill (reorganization value in excess of identifiable assets). In
addition, as part of the Restructuring, the Company significantly reduced its
long-term debt and eliminated its preferred stock. As a result of the foregoing,
the Company's financial data from June 1, 2003, as presented in the consolidated
financial statements is not comparable to prior periods.
To facilitate meaningful comparisons of the Company's second quarter 2003 and
2002 operating results, and the year to date operating results for the six
months ended June 30, 2003 and 2002, the following discussions of results of
operations on a consolidated basis are presented on a traditional three and six
month basis for both years. Consequently, the information presented below does
not reflect the periods in the three months and six months ended June 30, 2003,
as they were presented in the Consolidated Statements of Operations. A summary
of financial data which combines the one-month period ended June 30, 2003 and
the two-month period ended May 31, 2003 is presented to provide a basis for
discussions and is referred to as "Combined Three Months Ended June 30, 2003." A
summary of financial data which combines the one-month period ended June 30,
2003 and the five month period ended May 31, 2003 is presented to provide a
basis for discussions and is referred to as "Combined Six Months Ended June 30,
2003." The results of operations for the three and six month periods ended June
30, 2003, are not necessarily indicative of the operating results that might be
achieved for the full fiscal year.
19
Combined Three
One Month Two Months Months Three Months
Ended Ended Ended Ended
June 30, May 31, June 30, June 30,
2003 2003 2003 2002
------------ ------------ -------------- ------------
Net sales $ 36,299 $ 71,917 $ 108,216 $ 108,076
Operating expenses:
Cost of goods sold 24,419 47,144 71,563 67,844
Selling, general and administrative expenses 8,800 18,419 27,219 28,426
Amortization of intangibles 342 158 500 226
Net periodic postretirement benefits 114 228 342 288
------------ ------------ ------------ ------------
Operating income 2,624 5,968 8,592 11,292
Other income (expense):
Interest expense (1,455) (3,556) (5,011) (5,656)
Amortization of deferred financing costs (38) - (38) (829)
Other, net (7) (1,264) (1,271) (1,642)
------------ ------------ ------------ ------------
Income (loss) before reorganization items and
income tax provision 1,124 1,148 2,272 3,165
Reorganization items - (12,466) (12,466) (2,897)
Gain on reorganization and fresh-start accounting - 581,089 581,089 -
------------ ------------ ------------ ------------
Income (loss) before income tax provision 1,124 569,771 570,895 268
Income tax provision 318 2,001 2,319 774
------------ ------------ ------------ ------------
Net income (loss) $ 806 $ 567,770 $ 568,576 $ (506)
============ ============ ============ ============
Combined Six
One Month Five Months Months Six Months
Ended Ended Ended Ended
June 30, May 31, June 30, June 30,
2003 2003 2003 2002
------------ ------------ ------------ ------------
Net sales $ 36,299 $ 172,909 $ 209,208 $ 210,763
Operating expenses:
Cost of goods sold 24,419 112,232 136,651 135,393
Selling, general and administrative expenses 8,800 44,341 53,141 55,135
Amortization of intangibles 342 363 705 574
Net periodic postretirement benefits 114 516 630 576
------------ ------------ ------------ ------------
Operating income 2,624 15,457 18,081 19,085
Other income (expense):
Interest expense (1,455) (8,798) (10,253) (11,636)
Amortization of deferred financing costs (38) - (38) (1,658)
Other, net (7) (1,174) (1,181) (1,511)
------------ ------------ ------------ ------------
Income (loss) before reorganization items and
income tax provision 1,124 5,485 6,609 4,280
Reorganization items - (14,672) (14,672) (6,047)
Gain on reorganization and fresh-start accounting - 581,089 581,089 -
------------ ------------ ------------ ------------
Income (loss) before income tax provision 1,124 571,902 573,026 (1,767)
Income tax provision 318 2,939 3,257 1,490
------------ ------------ ------------ ------------
Net income (loss) $ 806 $ 568,963 $ 569,769 $ (3,257)
============ ============ ============ ============
20
OVERVIEW
The statements in this Quarterly Report on Form 10-Q 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 Quarterly 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net sales of the three-month period ended June 30, 2003, were $108.2 million,
which was comparable to net sales of $108.1 million for the same three-month
period in 2002. Domestic sales were $57.1 million for the second quarter of 2003
compared to $64.8 million for the same period last year, which is a decrease of
11.9%. A struggling industrial economy in the U.S. and highly competitive market
conditions have dampened the demand for the Company's products and are the
primary reasons for the decline in domestic sales. International sales were
$51.1 million for the three months ended June 30, 2003 compared to $43.3 million
for the second quarter of 2002, or an increase of 18.1%. South Africa, Australia
and Europe had the strongest sales growth in the second quarter, and were all up
over 15% compared to the second quarter in 2002. Although international volumes
were up over the second quarter in 2002, a weaker U.S. dollar also contributed
to the sales increase for the quarter. Approximately 16.5% of the sales increase
in the second quarter compared to the same quarter in 2002 was attributable the
effects of currency.
Cost of goods sold was 66.1% of sales for the three-month period ended June 30,
2003, which compares to 62.8% for the same quarterly period in 2002. This
unfavorable change relates primarily to a less favorable mix between domestic
and international sales, and a decline in volume through the domestic
manufacturing facilities which has lowered the absorption of fixed factory
costs.
Selling, general and administrative expenses were $27.2 million for the
three-month period ended June 30, 2003, or 4.2% less than the same three-month
period in 2002. As a percentage of sales, selling, general and administrative
expenses were 25.2% for the quarter ended June 30, 2003, versus 26.3% for the
three months ended June 30, 2002. Increasing selling, general and administrative
expenses in the three-month period ended June 30, 2002, was approximately $2.0
million accrued related to the Company's management incentive plan. Through the
first six months of 2003 the Company has not incurred any expense related to the
2003 management incentive program. Excluding the effect of the $2.0 million on
the second quarter 2002, selling, general and administrative expenses for the
three months ended June 30, 2003, would be 3.0% higher than the same period last
year. This increase results from expenditures related to new products and
certain sales and marketing programs. Selling, general and administrative
expenses in the second quarter 2003 include $0.6 million related to logistics
and technology initiatives, and $0.5 million related to the reorganization of
certain domestic manufacturing facilities. Selling, general and administrative
expenses incurred during the quarter ended June 30, 2002, included
21
approximately $0.8 million related to an information technology transformation
project and $0.3 million related to logistics initiatives.
Reorganization items for the three-month period ended June 30, 2003 were $12.5
million, consisting of $12.0 million of professional fees and expenses, $0.2
million paid under the key employee retention program, and $0.3 million of other
reorganization costs. Reorganization costs in 2002 consisted of $1.7 million of
professional fees and expenses, $0.4 million of expenses related to financing
fees associated with the DIP Facility, $0.4 million associated with a lease
obligation that was rejected, $0.3 million related to payments under the key
employee retention plan approved by the Court, and $0.1 million of other
reorganization costs.
Interest expense for the second quarter of 2003 was $5.0 million, which compares
to $5.7 million for the second quarter of 2002. The difference results primarily
from a reduction in variable interest rates, however, the reduction in long-term
debt resulting from the consummation of the plan of reorganization also had a
favorable effect on interest expense for the quarter.
An income tax provision of $2.3 million was recorded on pretax income of $570.1
million for the three months ended June 30, 2003. The income tax provision
primarily relates to income generated in certain foreign jurisdictions, and
differs from that determined by applying the U.S. federal statutory rate
primarily due to the gain recognized on the reorganization and adoption of
fresh-start accounting, nondeductible expenses and the disallowance of losses.
An income tax provision of $0.8 million was recorded on a pretax income of $0.3
million for the quarter ended June 30, 2002. The income tax provision differs
from that determined by applying the U.S. federal statutory rate primarily due
to nondeductible expenses and the disallowance of losses.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net sales for the first half of 2003 were $209.2 million compared to $210.8
million for the same six-month period in 2002, or a decrease of 0.7 %. Domestic
sales for the six months ended June 30, 2003, were $113.2 million, which is a
decline of 12.9% compared to net sales of $129.9 million for the six months
ended June 30, 2002. Generally weak economic conditions in the U.S. together
with a highly competitive market are the main reasons for the decrease in
domestic sales. International sales were $96.0 million for the six months ended
June 30, 2003, or 18.7% higher than sales of $80.8 million for the same period
in 2002. Sales growth was in excess of 18% in all key geographic regions except
Latin America, which was down compared to last year. A weaker U.S. dollar
contributed to the increase in international sales with approximately 14.7% of
the growth over 2002 attributable to the effects of currency.
Cost of goods sold was 65.3% of sales for the six months ended June 30, 2003,
which compares to 64.2% for the same six-month period in 2002. This increase
results partly to the mix between domestic and international sales, and also to
a decline in production volume in the domestic manufacturing facilities which
has resulted in less absorption of fixed factory costs.
Selling, general and administrative expenses were $53.1 million for the six
months ended June 30, 2003, which is 3.6% lower than the comparable period in
2002. As a percentage of sales, selling, general and administrative expenses
were 25.4% for the first half of 2003 versus 26.2% for the six months ended June
30, 2002. Increasing selling, general and administrative expenses in the
six-month period ended June 30, 2002, was approximately $2.0 million accrued
related to the Company's management incentive plan. Through the first six months
of 2003, the Company has not incurred any expense related to the 2003 management
incentive program. Excluding the effects of this $2.0 million on 2002, selling,
general
22
and administrative expenses were essentially flat when comparing the first half
of 2003 to the same period in 2002. Selling, general and administrative expenses
for the six months ended June 30, 2003, include $0.9 million related to
logistics and technology initiatives, and $0.6 million related to the
reorganization of certain domestic manufacturing facilities. Selling, general
and administrative expenses for the six months ended June 30, 2002, include
$1.3 million related to the information technology transformation initiative and
$0.5 related to the logistics projects.
Reorganization costs for the six months ended June 30, 2003 were $14.7 million
and included $13.9 million of professional fees, $0.2 million paid under the key
employee retention program, and expenses and $0.6 million of other
reorganization costs. Reorganization costs for the six months ended June 30,
2002, include $4.0 million of professional fees and expenses, $1.0 million of
expenses related to financing fees associated with the DIP Facility, $0.4
million associated with a lease obligation that was rejected, $0.3 million
related to payments under the key employee retention plan approved by the Court,
and $0.3 million of other reorganization costs.
Interest expense for the first six months of 2003 was $10.3 million, which
compares to $11.6 million for the first half of 2002. The difference results
primarily from a reduction in variable interest rates, and to a lesser degree
the benefit realized from the overall reduction in long-term debt that resulted
from the consummation of the plan of reorganization.
An income tax provision of $3.3 million was recorded on a pretax income of
$573.0 million for the six months ended June 30, 2003. The income tax provision
primarily relates to income generated in certain foreign jurisdictions, and
differs from that determined by applying the U.S. federal statutory rate
primarily due to the gain recognized on the reorganization and adoption of
fresh-start accounting, nondeductible expenses and the disallowance of losses.
An income tax provision of $1.5 million was recorded on a pretax loss of $1.8
million for the six months ended June 30, 2002. The income tax provision differs
from that determined by applying the U.S. federal statutory rate primarily due
to nondeductible expenses and the disallowance of losses.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOWS
Operating activities used $3.2 million of cash during the first six months of
2003, which compares to $1.5 million of cash provided during the same time
period in 2002. After adjusting for non-cash expenses, the Company had a loss of
$1.9 million for the six months ended June 30, 2003, compared to earnings of
$7.2 million for the comparable time frame in 2002. This difference results
primarily from higher reorganization costs and an increase in tax expense.
Operating assets and liabilities used $1.2 million of cash in the six-month
period ended June 30, 2003, or $4.5 million less than during the same period
last year. Inventory has used $6.3 million of cash through the first six months
of 2003, as compared to a $4.2 million use of cash in the same six-month period
last year. This increase in inventory results mainly from the Company's efforts
to ensure timely deliveries. Accounts payable provided $3.5 million of cash in
the first two quarters of 2003, or approximately $1.0 million more than the same
period in 2002. The increase in payables results partly from the increase in
inventory, but also to the Company's efforts to negotiate normal payment terms
with some of its suppliers. Accrued and other liabilities provided $1.3 million
of cash in the six-month period ended June 30, 2003, which compares to cash
provided of $2.7 million during the same period last
23
year. The majority of this difference results from a $2.0 million accrual made
in the second quarter of 2002 related to the 2002 management incentive program.
Through the first six months of 2003, the Company has not incurred any expense
related to the 2003 management incentive plan.
Investing activities used $5.6 million during the six months ended June 30,
2003, which compares to $4.6 million for the same period in 2002. Capital
expenditures were $4.8 million during the six months ended June 30, 2003, which
is $0.8 million more than was spent during the same period last year.
Financing activities provided $4.7 million during the first half of 2003
compared to cash provided of $2.4 million during the same period last year. This
difference results primarily from additional net borrowings.
Operating cash disbursements during the first half of 2003 related to the
reorganization totaled $5.6 million and consisted of approximately $4.7 million
of professional fees and expenses, $0.3 million paid under the key employee
retention program, $0.2 million of U.S. Trustee fees and $0.4 million of other
reorganization related payments.
LIQUIDITY
The Company's principal uses of cash will be capital expenditures, working
capital and debt service requirements under the Working Capital Facility and the
Senior Term Notes. 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 Working Capital Facility.
The Working Capital Facility provides for total borrowings of $50 million under
a revolver, of which up to $20 million may be used for letters of credit. Actual
borrowing availability is subject to a borrowing base calculation, which is
equal to 1.5 times Adjusted EBITDA. The Working Capital Facility defines
Adjusted EBITDA as 100% of the EBITDA for the Company and its domestic
subsidiaries plus 65% of the EBITDA of the Company's Canadian subsidiaries.
EBITDA is defined in the Working Capital Facility as net income less interest
income, gains from extraordinary items, any aggregate net gain on the sale of
tangible assets, and any other non-cash gains added in determining net income;
plus, provision for income taxes, interest expense, depreciation, amortization
of intangibles, amortization of deferred financing costs, any amount deducted
from net income as a result of stock or stock option grants, net periodic
post-retirement benefit costs, losses from extraordinary items, reorganization
costs related to the Chapter 11 cases, and any non-recurring employee severance
expenses and non-recurring cash expenses related to plant reorganizations, not
to exceed $5 million in the aggregate. Availability under the Working Capital
Facility may also be limited if the Company fails to meet certain levels of
Adjusted EBITDA. Borrowings under the Working Capital Facility accrue interest,
at the Company's option, at the prime lending rate plus 2.25% in the case of
index rate loans, or at the London Interbank Offered Rate ("LIBOR") plus 3.25%
in the case of LIBOR loans. The Working Capital Facility is secured by
substantially all the assets of the Company, including a pledge of the capital
stock of substantially all its subsidiaries, subject to certain limitations with
respect to foreign subsidiaries. The Working Capital Facility contains financial
covenants, including minimum levels of EBITDA (determined on a consolidated
basis for the Company) and other customary provisions. As of June 30, 2003, the
Company had borrowed $15.5 million and issued letters of credit totaling $9.4
million under the Working Capital Facility, resulting in availability of
approximately $25 million. The Working Capital Facility terminates on May 16,
2006.
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The Senior Term Notes accrue interest, in the case of eurodollar loans at LIBOR
plus a margin ranging from 3.0% to 7.5%, and in the case of base rate loans at
the administrative agent's alternative base rate plus a margin ranging from 2.0%
to 6.5%. The interest margin applicable to the Eurodollar and base rate loans
varies depending on the level of indebtedness and the time elapsed from the
Effective Date. At June 30, 2003, the Company had $180 million outstanding under
the Senior Term Notes. No payments of principal are due under the Senior Notes
Facility until June 2004. Thereafter, the Senior Notes Facility requires
quarterly amortization payments totaling $10 million in the second year of the
loan, $20 million in the third year of the loan, $30 million in the fourth year
of the loan and the remainder in the fifth year of the loan. Payments under the
Senior Notes Facility are subject to limitation by the Working Capital Facility
under certain circumstances. The Senior Notes Facility contains financial
covenants and other provisions similar to those in the Working Capital Facility.
The Senior Notes Facility is secured by substantially all the assets of
Thermadyne and its domestic subsidiaries, including a pledge of the capital
stock of substantially all subsidiaries, subject to certain limitations with
respect to foreign subsidiaries, subordinated to the liens under the Working
Capital Facility. The respective rights of the lenders under each of the Working
Capital Facility and the Senior Notes Facility are governed by an intercreditor
agreement.
The Company expects its operating cash flow, together with borrowings under the
Working Capital Facility, will be sufficient to meet its anticipated future
operating expenses, capital expenditures and the debt service requirements of
the Working Capital Facility and the Senior Term Notes. However, the Company's
ability to generate sufficient cash flow to meet its operating needs will be
affected by general economic, financial, competitive, legislative, regulatory,
business and other factors beyond its control.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO") have
reviewed and evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 240.13a-14(c)
and 15d-14(c)) as of the end of the current reporting period. Based on
that evaluation, the CEO and CFO have concluded that the Company's
current disclosure controls and procedures are effective in timely
providing them with material information relating to the Company
required to be disclosed in the reports the Company files or submits
under the Exchange Act.
(b) Changes in internal controls. There have not been any significant
changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of
their evaluation. There were no significant deficiencies or material
weaknesses, and therefore no corrective actions were taken.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Amended and Restated Certificate of Incorporation
Pursuant to the Plan, on the Effective Date, the Company filed with the Delaware
Secretary of State an Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), under which its authorized capital stock as of
the Effective Date consists of (i) 25,000,000 shares of common stock, with a
25
par value of $0.01 per share (the "New Common Stock") and (ii) 5,000,000 shares
of preferred stock with a par value of $0.01 per share (the "Preferred Stock").
No Preferred Stock has been issued. Pursuant to the Certificate of
Incorporation, Preferred Stock may be issued in one or more series as determined
from time to time by the board of directors of the Company, without further
approval by the stockholders. Upon issuance of Preferred Stock, the board of
directors will determine the voting powers, preferences, rights, qualifications,
limitations and restrictions as the board may set forth in the certificate of
designation for such Preferred Stock. The Plan provides that the Company shall
not issue nonvoting equity securities for so long as Section 1123 of the
Bankruptcy Code is applicable to the Company. Pursuant to the Plan, on the
Effective Date, all then-outstanding pre-Effective Date debt and equity
securities were cancelled as well as all options and agreements to issue or
purchase any equity interests.
Warrant Agreements
Pursuant to the Plan, on the Effective Date, the Company issued three series of
warrants exercisable for shares of the New Common Stock. The Company issued: (i)
1,157,000 Series A Warrants exercisable before the first anniversary of the
Effective Date with an exercise price of $13.85 in cash per share of New Common
Stock, payable to the Company; (ii) 700,000 Series B Warrants exercisable before
the third anniversary of the Effective Date with an exercise price of $20.78 in
cash per share of New Common Stock, payable to the Company; and (iii) 271,429
Series C Warrants exercisable before the third anniversary of the Effective Date
with an exercise price of $27.70 in cash per share of New Common Stock, payable
to the Company. Each of the series of warrants is exercisable in accordance with
the respective warrant agreements, each as attached as an exhibit to this
filing.
Registration Rights Agreement
The issuance of shares by the Company pursuant to the Plan on the Effective Date
are exempt from the registration requirements of the Securities Act of 1933, as
amended, to the extent provided by section 1145 of the Bankruptcy Code. Certain
holders of the New Common Stock that are deemed "underwriters" under section
1145 of the Bankruptcy Code received securities with legends restricting the
transfer of such shares. On the Effective Date, the Company entered into a
registration rights agreement with certain holders of restricted shares of New
Common Stock (the "Registration Rights Agreement"). The Registration Rights
Agreement is attached as an exhibit to this filing.
Subscription Offering
Pursuant to the Plan, the Company offered certain holders of pre-petition claims
the opportunity to subscribe for shares of New Common Stock for a specified time
period. No holders subscribed to the offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
2.1 First Amended and Restated Plan of Reorganization dated
January 17, 2003 (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated April 11,
2003).
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2.2 Confirmation Order dated April 3, 2003 and signed by the
Bankruptcy Court (incorporated by reference to Exhibit 2.2 to
the Company's Current Report on Form 8-K dated April 11,
2003).
3.1 Amended and Restated Certificate of Incorporation of the
Company dated as of May 23, 2003.*
3.2 Amended and Restated Bylaws of the Company dated as of May 23,
2003.*
4.1 Credit Agreement dated as of May 23, 2003 among the Company,
as a guarantor thereunder, Thermadyne Industries, Inc.,
Thermal Dynamics Corporation, Tweco Products, Inc., Victor
Equipment Company, C & G Systems, Inc., Stoody Company,
Thermal Arc, Inc., ProTip Corporation and Thermadyne
International Corp., as borrowers, the credit parties
signatory thereto, the lenders signatory thereto from time to
time, General Electric Capital Corporation, as Agent and
Lender, and GECC Capital Markets Group, Inc., as Lead Arranger
(incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K dated June 3, 2003).
4.2 Credit and Guaranty Agreement dated as of May 23, 2003 among
the Company, as Borrower, the guarantors referred to therein,
the New Term Lenders referred to therein and Deutsche Bank
Trust Company Americas, as Administrative Agent and Collateral
Agent (incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K dated June 3, 2003).
4.3 Registration Rights Agreement dated as of May 23, 2003 by and
between the Company and Angelo Gordon & Co., L.P., on behalf
of certain managed funds and accounts.* 4.4 Class A Warrant
Agreement dated as of May 23, 2003 by and between the Company
and Equiserve Trust Company, N.A.*
4.4 Class A Warrant Agreement dated as of May 23, 2003 by and
between the Company and Equiserve Trust Company, N.A.*
4.5 Class B Warrant Agreement dated as of May 23, 2003 by and
between the Company and Equiserve Trust Company, N.A.*
4.6 Class C Warrant Agreement dated as of May 23, 2003 by and
between the Company and Equiserve Trust Company, N.A.*
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002*
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
*Filed herewith.
b) Reports on Form 8-K
April 11, 2003 Reporting the confirmation of the Plan.
June 3, 2003 Reporting the Effective Date of the Plan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THERMADYNE HOLDINGS CORPORATION
By: /s/ Karl R. Wyss
--------------------------------------
Karl R. Wyss
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ James H. Tate
--------------------------------------
James H. Tate
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: August 14, 2003
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