Securities and Exchange Commission

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

ý           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended March 31, 2005

 

OR

 

o           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 Incorporation or Organization)		(I.R.S. Employer 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 ý 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   ý          No   o

 

Indicate by ý whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   ý          No   o

 

Indicate by ý whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes   ý          No   o

 

The number of shares outstanding of the issuer’s common stock, par value $0.01 per share, as of April 30, 2005 was 13,313,973.

 

 

THERMADYNE HOLDINGS CORPORATION

 

INDEX

 

PART I – FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements of Thermadyne Holdings Corporation (Unaudited)
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Operations
	Condensed Consolidated Statements of Cash Flows
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II – OTHER INFORMATION
Item 6.	Exhibits
SIGNATURES

 

2

 

PART I.  FINANCIAL INFORMATION

Item 1.

 

THERMADYNE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

		March 31, 2005			December 31, 2004
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	9,349		$	6,650
Accounts receivable, less allowance for doubtful accounts of $5,568 and $6,109, respectively		98,611			93,555
Inventories		119,524			118,707
Prepaid expenses and other		8,455			8,299
Current deferred tax assets		2,690			3,129
Total current assets		238,629			230,340
Property, plant and equipment, net		75,536			79,014
Goodwill		208,403			208,403
Intangibles, net		75,005			76,614
Other assets		7,566			7,533
Total assets		$	605,139		$	601,904
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	44,047		$	39,458
Accrued and other liabilities		33,176			35,715
Accrued interest		2,809			7,129
Income taxes payable		1,525			2,664
Working capital and second-lien facilities		44,926			30,824
Current maturities of long-term obligations		10,224			11,255
Total current liabilities		136,707			127,045
Long-term obligations, less current maturities		200,946			203,668
Deferred tax liabilities		69,909			71,445
Other long-term liabilities		45,428			44,110
Shareholders’ equity:
Common stock, $0.01 par value, 25,000,000 shares authorized, and 13,313,973 shares issued and outstanding		133			133
Additional paid-in capital		183,460			183,460
Accumulated deficit		(40,538		)	(41,528		)
Accumulated other comprehensive income		9,094			13,571
Total shareholders’ equity		152,149			155,636
Total liabilities and shareholders’ equity		$	605,139		$	601,904

 

See accompanying notes to condensed consolidated financial statements.

 

3

 

THERMADYNE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31, 2005			Three Months Ended March 31, 2004
Net sales		$	126,041		$	116,688
Cost of goods sold		88,023			81,991
Gross Margin		38,018			34,697
Selling, general and administrative expenses		28,032			26,313
Amortization of intangibles		902			1,035
Net periodic postretirement benefits		615			687
Restructuring costs		136			2,141
Operating income		8,333			4,521
Other income (expense):
Interest, net		(5,564		)	(4,771		)
Amortization of deferred financing costs		(430		)	(220		)
Other, net		(398		)	368
Income (loss) before income tax provision		1,941			(102		)
Income tax provision		951			927
Net income (loss)		$	990		$	(1,029	)
Basic and diluted net income (loss) per share		$	0.07		$	(0.08	)

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

THERMADYNE HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31, 2005			Three Months Ended March 31, 2004
Cash flows from operating activities:
Net income (loss)		$	990		$	(1,029	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Net periodic postretirement benefits		615			687
Depreciation		4,663			5,214
Amortization of intangibles		902			1,035
Amortization of deferred financing costs		430			220
Changes in operating assets and liabilities:
Accounts receivable		(7,537		)	(7,830		)
Inventories		(3,050		)	(7,782		)
Prepaid expenses and other		127			(1,401		)
Accounts payable		5,611			1,325
Accrued and other liabilities		(2,770		)	(2,854		)
Accrued interest		(4,320		)	2,212
Income taxes payable		(856		)	514
Other long-term liabilities		(1,711		)	(1,021		)
Total adjustments		(7,896		)	(9,681		)
Net cash used in operating activities		(6,906		)	(10,710		)
Cash flows from investing activities:
Capital expenditures		(1,856		)	(4,038		)
Net cash used in investing activities		(1,856		)	(4,038		)
Cash flows from financing activities:
Net borrowings under revolving credit facility		14,102			424
Repayment of long-term obligations		(1,906		)	(180,000		)
Borrowing of long-term obligations		—			195,989
Financing fees		(460		)	(5,175		)
Other		(292		)	(1,898		)
Net cash provided by financing activities		11,444			9,340
Effect of exchange rate changes on cash and cash equivalents		17			204
Net increase (decrease) in cash and cash equivalents		2,699			(5,204		)
Cash and cash equivalents at beginning of period		6,650			16,784
Cash and cash equivalents at end of period		$	9,349		$	11,580
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest		$	9,884		$	2,559
Income taxes		3,162			416

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

 

1.             Basis of Presentation

 

Thermadyne Holdings Corporation (“Thermadyne” or the “Company”), a Delaware corporation, is a leading global designer and manufacturer of cutting and welding products, including equipment, accessories and consumables.

 

The accompanying unaudited condensed consolidated financial statements of Thermadyne have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.  The combined results of operations of the Company for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.  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, 2004.

 

2.             Significant Accounting Policies

 

Intangibles.  Goodwill and trademarks have an indefinite life.  Patents and customer relationships are amortized on a straight-line basis over their estimated useful lives, which generally range from 10 to 15 years.

 

Goodwill and trademarks are tested for impairment annually and whenever events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.

 

Product Warranty Programs. Various products are sold with product warranty programs. Provisions for warranty programs are made as the products are sold and adjusted periodically based on current estimates of anticipated warranty costs.

 

The following table provides the activity in the warranty accrual for the three months ended March 31, 2005 and 2004:

 

Product warranty accrual:		Balance at Beginning of Period			Provision			Payments			Balance at End of Period
Three months ended March 31, 2005		$	3,048		$	816		$	(846	)	$	3,018
Three months ended March 31, 2004		4,005			594			(778		)	3,821

 

Derivative Instruments. The Company accounts for derivatives and hedging activities in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Certain Hedging Activities, as amended, (“SFAS No. 133”) which requires that all derivative instruments be recorded on the balance sheet at their respective fair values. The Company does not use derivative instruments for trading or speculative purposes.

 

The Company designates and documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. The Company also assesses, both at the inception of the hedge and on an on-going basis, whether the hedge is effective.

 

6

 

Net Income (Loss) Per Share.  The calculation of net income (loss) per share follows:

 

		Three Months Ended March 31,
		2005			2004
Numerator:
Net income (loss) applicable to common shares		$	990		$	(1,029	)
Denominator:
Weighted average shares-basic		13,314			13,300
Weighted average shares-diluted		13,353			13,300
Basic and diluted net income (loss) per share:
Net income (loss) applicable to common shares		$	0.07		$	(0.08	)

 

The effects of certain options and warrants have not been considered in the determination of net income (loss) per share for the three months ended March 31, 2005 and 2004, because the result would be antidilutive.  Options and warrants not included in the calculation for the three months ended March 31, 2005 and 2004 were as follows:

 

		Three Months Ended March 31,
		2005		2004
Stock Options		150,000		300,000
Class A Warrants		—		1,157,000
Class B Warrants		700,000		700,000
Class C Warrants		271,429		271,429

 

Stock-Based Compensation.  Stock options are granted for a fixed number of shares to employees and directors with an exercise price equal to or greater than the fair value of the shares at the date of grant. Stock option grants are recorded under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Accordingly, no stock-based employee compensation cost is reflected in operating results. Pro forma information regarding net operating results and per share results is required by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), which also requires that the information be determined as if employee stock options were granted under the fair value method of that statement.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. In April 2005, the Securities and Exchange Commission delayed the effective date of SFAS No. 123(R) to January 1, 2006.

 

Accordingly, the Company plans to adopt SFAS No. 123(R) on January 1, 2006 using the “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date.

 

7

 

The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) per share in Note 3 included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

 

3.             Reclassifications

 

Certain prior period amounts have been reclassified to conform to current period presentation.  The more significant categories of reclassifications are outlined below.

 

Rebates.  Rebate costs, which the Company had included in cost of goods sold prior to the fourth quarter of 2004, have been reclassified as a reduction in sales.  These reclassifications decreased both net sales and cost of goods sold approximately $2,043 for the three months ended March 31, 2004.

 

Brazilian Period Costs.  Certain period costs previously classified as amortization of intangibles by the Company’s Brazilian operations were reclassified as cost of goods sold.  These reclassifications increased cost of goods sold and decreased amortization of intangibles approximately $77 for the three months ended March 31, 2004.

 

Restructuring Costs.  Certain period costs previously classified as restructuring costs were reclassified to cost of goods sold. These reclassifications increased cost of goods sold and decreased restructuring costs approximately $416 for the three months ended March 31, 2004.

 

Warranty Costs.  Warranty costs incurred at one of the Company’s distribution operations were previously classified as other expenses. To conform to current presentation of other similar costs, these warranty costs were reclassified as cost of goods sold.  These reclassifications increased cost of goods sold and decreased other expenses approximately $104 for the three months ended March 31, 2004.

 

Shipping and Other Administrative Costs.  Certain shipping and other administrative costs incurred to manufacture the Company’s products previously classified as selling, general and administrative have been reclassified to cost of goods sold during the first quarter of 2005.  These reclassifications increased cost of goods sold and decreased selling, general and administrative expenses approximately $3,312 for the three months ended March 31, 2004.

 

These reclassifications had no effect on the Company’s financial position, cash flows or net income (loss). The following table sets forth a summary of these reclassifications showing previously reported and adjusted amounts for the three months ended March 31, 2004:

 

		Three Months Ended March 31, 2004
		previously reported			as adjusted
Net sales		$	118,731		$	116,688
Cost of goods sold		80,125			81,991
Selling, general and administrative expenses		29,625			26,313
Amortization of intangibles		1,112			1,035
Restructuring costs		2,557			2,141
Other expense		264			368

 

4.             Comprehensive Income (Loss)

 

Comprehensive income (loss) totaled ($3,487) and ($2,617) for the three months ended March 31, 2005 and 2004, respectively.

 

8

 

5.             Inventories

 

The composition of inventories was as follows:

 

		March 31, 2005			December 31, 2004
Raw materials		$	29,349		$	25,311
Work-in-process		33,480			33,095
Finished goods		60,684			64,370
		123,513			122,776
LIFO reserve		(3,989		)	(4,069		)
		$	119,524		$	118,707

 

6.             Intangible Assets

 

The composition of intangibles was as follows:

 

		March 31, 2005			December 31, 2004
Goodwill		$	208,403		$	208,403
Patents and customer relationships		48,810			49,517
Trademarks		33,403			33,403
		290,616			291,323
Accumulated amortization		(7,208		)	(6,306		)
		$	283,408		$	285,017

 

Amortization expense amounted to $902 and $1,035 for the three months ended March 31, 2005 and 2004, respectively.  Estimated amortization expense for each of the next five fiscal years has not changed significantly from the amounts disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

 

7.             Debt and Capital Lease Obligations

 

The composition of long-term obligations was as follows:

 

9

 

		March 31, 2005			December 31, 2004
Working Capital Facility		$	24,926		$	10,824
Second-Lien Facility		20,000			20,000
Term A Loan		8,589			9,250
Senior Subordinated Notes		175,000			175,000
Capital Leases		18,762			19,160
Other		8,819			11,513
		256,096			245,747
Current maturities, working capital facility and second-lien facility		(55,150		)	(42,079		)
		$	200,946		$	203,668

 

Senior Subordinated Notes

 

On February 5, 2004, the Company completed a private placement of $175,000 in aggregate principal of 9¹/₄% Senior Subordinated Notes due 2014 (the “Senior Subordinated Notes”). The net proceeds from the offering, together with approximately $20,000 of borrowings under a new term loan (the “Term Loan”) added through an amendment and restatement to the General Electric Capital Corporation (“GECC”) credit agreement (the “Credit Agreement”), were used to repay all outstanding borrowings under the $180,000 senior term note facility and to reduce amounts outstanding under the Company’s revolving credit facility. In May 2004, for the purpose of an exchange offer, the Company registered notes with terms identical to the Senior Subordinated Notes under the Securities Act of 1933.  The Company completed the exchange offer in the second quarter and more than 99% of the original notes were exchanged for the registered notes.

 

The Senior Subordinated Notes are unsecured senior subordinated obligations and are subordinated in right of payment to all existing and future Senior Indebtedness (as defined in the indenture). Interest will accrue at the rate of 9¹/₄% per annum and is payable semiannually in arrears on February 1 and August 1.

 

Credit Agreement

 

On November 22, 2004, the Company entered into the Amended Credit Agreement. The Amended Credit Agreement that matures on November 22, 2009 added the Company’s foreign subsidiaries in Australia, the United Kingdom and Canada as credit collateral parties, and changed the determination of the borrowing base from a cash flow-based formula to an asset-based formula.  Under the Amended Credit Agreement, the total loan commitment was increased from $70,000 to $91,300 (subject to the limitation described below), with a revolving loan commitment of $80,000 (the “Working Capital Facility”) and term loan commitments of $11,300 (subject to the limitation described below). The term loan commitments consist of a $9,250 Term A Loan and a maximum $2,050 Delayed Draw Term Loan dependent upon the final evaluation of certain real property located in Australia. Up to $25,000 of the Working Capital Facility is available for letters of credit. The Amended Credit Agreement is secured by substantially all of the assets of the Company’s domestic subsidiaries and the Company’s foreign subsidiaries in Australia, the United Kingdom and Canada, including a pledge of the capital stock of substantially all of the Company’s subsidiaries, subject to certain limitations with respect to foreign subsidiaries. Borrowings under the revolving loan commitment may not exceed 85% of eligible receivables plus the lesser of (i) 85% of the net orderly liquidation value of eligible inventories or (ii) 65% of the book value of inventories less customary reserves. The Amended Credit Agreement contains financial covenants, including minimum levels of EBITDA (as defined in the Credit Agreement and determined on a consolidated basis) and other customary provisions and requires the Second-Lien Facility to be paid or refinanced 60 days prior to its maturity.  In connection with the Amended Credit Agreement, the Company’s foreign subsidiaries in Australia, the United Kingdom and Canada granted second security interests in their assets to the lenders under the

 

10

 

Company’s $20,000 Second-Lien Facility and guaranteed the Company’s $175,000 9¹/₄% Senior Subordinated Notes.  Interest rates on the Amended Credit Agreement are, at the Company’s option, LIBOR plus 2.25% or the prime rate plus 0.5% on the revolving facility, and LIBOR plus 2.50% or the prime rate plus 0.75% on the term loan facilities. All of these percentages are subject to an interest rate grid and will decline if certain conditions are met. Principal payments on the term loan facilities are equal quarterly payments based on a seven-year amortization schedule, with the remaining amount paid at maturity. Unused portions of the revolving credit facility bear interest at the rate of 0.5% per annum.  The Amended Credit Agreement limits total borrowings under the facility to $75,000 until the Second-Lien Facility is paid or refinanced with long-term debt. The Amended Credit Agreement does under certain conditions allow for the use of the revolving facility to repay the Second-Lien Facility.  As of March 31, 2005, the Company had outstanding borrowings of $24,926 and issued letters of credit totaling $12,095 under the revolving facility.  The Company had availability of $20,158 under the revolving facility at March 31, 2005. The revolving facility terminates on November 22, 2009.  The Term A Loan requires equal quarterly principal payments of $330 per quarter, which began December 31, 2004 and continues through October 31, 2009, with the balance of the outstanding principal being payable on November 22, 2009.  As of March 31, 2005 the Company did not have access to the Delayed Draw Term Loan.

 

The Working Capital Facility requires lockbox agreements which provide for all receipts to be swept daily to reduce borrowings outstanding under the revolving line of credit. These agreements, combined with the existence of a subjective Material Adverse Effect (“MAE”) clause, cause the Working Capital Facility to be classified as a current liability. However, the Company does not expect to repay, or be required to repay, within one year, the balance of the Working Capital Facility classified as a current liability. The Company’s intent is to continually use the Working Capital Facility throughout the life of the agreement to fund working capital needs. The MAE clause, which is a typical requirement in commercial credit agreements, allows the lender to require the loan to become due if it determines there has been a material adverse effect on the Company’s operations, business, assets or prospects.

 

On March 16, 2005 and March 30, 2005, the Company amended the Amended Credit Agreement to modify certain financial covenants and enable the Company to extend its Second-Lien Facility.

 

Second-Lien Facility

 

On July 29, 2004 the Company entered into a new $20,000 second-lien term loan facility (the “Second-Lien Facility”). Borrowings under the facility were used to repay a portion of the amount outstanding under the Working Capital Facility. On November 5, 2004 the Company entered into an amendment to the Second-Lien Facility to extend its maturity to July 22, 2005 and modified a financial covenant.  The Second-Lien Facility is secured by a second lien on substantially all of the assets of the Company. The Second-Lien Facility accrues interest at the Company’s option, at LIBOR plus 6.00%, or an alternative base rate of the greater of a) the Prime Rate or b) the federal funds rate plus one half of 1.00% plus 5.00%. The Second-Lien Facility restricts how much long-term debt the Company may have and has other customary provisions including financial and non-financial covenants. On March 16, 2005 and March 30, 2005, the Second-Lien Facility was amended to modify a financial covenant and extend its maturity until April 30, 2006.

 

8.             Derivative Instrument

 

In February 2004, the Company entered into an interest rate swap arrangement to convert a portion of the fixed rate exposure on its Senior Subordinated Notes to variable rates. Under the terms of the interest rate swap contract, which has a notional amount of $50,000, the Company receives interest at a fixed rate of 9¹/₄% and pays interest at a variable rate equal to LIBOR plus a spread of 442 basis points. The six-month LIBOR rate on each semi-annual reset date determines the variable portion of the interest rate swap.  The six-month LIBOR rate for each semi-annual reset date is determined in arrears.

 

11

 

The Company has designated the interest rate swap as a fair value hedge of its fixed rate debt. The terms of the interest rate swap contract and hedged item meet the criteria to be measured using the short-cut method defined in SFAS No. 133 and therefore perfect effectiveness is assumed over the term of the swap.

 

In accordance with SFAS No. 133, as of March 31, 2005, the Company recorded a fair value adjustment to the portion of its fixed rate long-term debt that is hedged. This fair value adjustment of $1,430 was recorded as a decrease to long-term obligations, with the related value for the interest rate swap’s non-current portion recorded in other long-term liabilities. Interest rate differentials associated with the interest rate swap are recorded as an adjustment to a current asset or liability, with the offset to interest expense over the life of the interest rate swap.  For the three months ended March 31, 2005, the Company realized a reduction in its expense as a result of the interest rate swap of $141.

 

9.             Warrants

 

In connection with the Company’s emergence from Chapter 11 bankruptcy protection on May 23, 2003, three classes of warrants were issued that allow the holders to purchase the Company’s common stock in the future at stated exercise prices. The key financial elements of the warrants are as follows:

 

		Warrants Issued to Purchase Common Stock		Exercise Price Per Share			Expiration Date		Warrants Issued and Outstanding as of March 31, 2005
Class A Warrants		1,157,000		$	13.85		May 23, 2004		—
Class B Warrants		700,000		$	20.78		May 23, 2006		700,000
Class C Warrants		271,429		$	27.70		May 23, 2006		271,429

 

The Class A and B Warrants were issued, pro rata, to participants in the former 9 7/8% senior subordinated notes. These former bondholders received approximately 5% of the Company’s common stock upon emergence from Chapter 11, plus the Class A and B warrants. These warrants have been effectively valued and recorded within shareholders’ equity (additional paid-in capital) in connection with establishing the opening fresh-start balance sheet.

 

The Class C Warrants were issued to the former majority equity holders of the Company. The former equity holders received no other significant disbursements or consideration upon emergence from Chapter 11. These warrants have been treated as an exchange of old equity securities for new equity securities in connection with recording the reorganization entries and establishing the opening fresh-start balance sheet.

 

There were no warrants exercised during the three-month periods ended March 31, 2005 and March 31, 2004.

 

10.          Stock Options

 

The 2004 Non-Employee Directors Stock Option Plan (the “Directors Plan”) was adopted in May 2004 for the Company’s board of directors. Up to 200,000 shares of the Company’s common stock may be issued pursuant to awards granted by the Compensation Committee under the Directors Plan.

 

The 2004 Stock Incentive Plan (the “Stock Incentive Plan”) was adopted in May 2004 for the Company’s employees. Up to 1,477,778 shares of the Company’s common stock may be issued pursuant to awards granted by the Compensation Committee under the Stock Incentive Plan. The Stock Incentive Plan provides for the grant of (a) incentive stock options intended to qualify under Section 422 of the Internal

 

12

 

Revenue Code of 1986, (b) non-statutory stock options, (c) stock appreciation rights (“SARs”), (d) restricted stock, (e) stock units and (f) performance awards.

 

As of March 31, 2005, 725,000 shares were issued and outstanding under the Directors Plan, the Stock Incentive Plan and other specific agreements.

 

The following table illustrates the effect on net income (loss) per share if the fair value expense recognition requirements of SFAS No. 123 had been applied to all stock options granted under the plans:

 

		Three Months Ended March 31,
		2005			2004
Net income (loss), as reported		$	990		$	(1,029	)
Deduct: Total stock-based compensation expense determined under fair value based method for all awards		(256		)	(155		)
Pro forma net income (loss)		$	734		$	(1,184	)
Basic and diluted net income (loss) per share:
As reported		$	0.07		$	(0.08	)
Pro forma		$	0.06		$	(0.09	)

 

11.          Income Taxes

 

The Company’s tax provision relates primarily to its foreign subsidiaries.  The tax benefits of losses incurred in the U.S. are fully reserved with a valuation allowance based on the Company’s current tax position and estimates of taxable income for the foreseeable future.

 

12.          Employee Benefit Plans

 

401(k) Retirement Plan. The 401(k) Retirement Plan covers the majority of the Company’s domestic employees. At its discretion the Company 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 matching contributions of 50% for the first 6% of the voluntary employee contribution.

 

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 three noncontributory defined benefit pension plans through amendments to such plans effective December 31, 1989 into one plan (the “Retirement Plan”). All former participants of these plans became eligible to participate in the 401(k) Retirement Plan effective January 1, 1990.

 

The Company’s Australian subsidiary has a Superannuation Fund (the “Fund”) established by a Trust Deed. Pension benefits are actuarially determined and are funded through mandatory participant contributions and the Company’s actuarially determined contributions.  The prepaid benefit cost is not included in the table below or in the balance sheet, as the Company has no legal right to amounts included in this fund. In addition, upon dissolution of the Fund, any excess funds are required to be allocated to the participants as determined by the actuary. Accordingly, the Company accounts for this fund as a defined contribution plan. The actuarial assumptions used to determine the Company’s contribution, the funded status, and the retirement benefits are consistent with previous years.

 

13

 

Other Postretirement Benefits. The Company has a retirement plan covering both salaried and non-salaried 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 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.

 

Net periodic pension and other postretirement benefit costs include the following components:

 

		Pension Benefits						Other Postretirement Benefits
		Three Months Ended March 31,						Three Months Ended March 31,
		2005			2004			2005			2004
Components of the net periodic benefit cost:
Service Cost		$	—		$	—		$	308		$	297
Interest Cost		285			299			296			374
Expected return on plan assets		(285		)	(274		)	—			—
Recognized (gain) loss		—			—			11			16
Net periodic benefit cost		$	—		$	25		$	615		$	687

 

The Company previously disclosed in its financial statements for the year ended December 31, 2004 that it expected to contribute $1,172 to its Retirement Plan in 2005. As of March 31, 2005, $221 has been contributed.  The Company presently anticipates contributing an additional $951 to fund its pension plan in 2005.

 

13.          Segment Information

 

Although the Company’s operations are comprised of several product lines and operating locations, 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, and accordingly, management has concluded the Company operates in one segment. Reportable geographic regions are the United States, Europe and Australia/Asia.

 

Summarized financial information concerning the Company’s geographic regions is shown in the following table:

 

		Three Months Ended March 31,
		2005			2004
Net Sales
United States		$	71,772		$	69,501
Europe		18,240			16,730
Australia / Asia		16,787			15,739
All other international		19,242			14,718
		$	126,041		$	116,688

 

14

 

		March 31, 2005			December 31, 2004
Indentifiable assets
United States		$	33,396		$	35,915
Europe		13,947			14,472
Australia / Asia		10,325			10,769
All other international		12,824			13,025
Corporate		296,018			297,383
		$	366,510		$	371,564

 

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 shipbuilding. The following table shows sales for each of the Company’s key product lines:

 

		Three Months Ended March 31,
		2005			2004
Gas apparatus		$	42,829		$	42,928
Arc welding equipment		22,040			19,589
Arc welding consumables		39,236			35,168
Plasma and automated cutting equipment		18,510			18,127
All other		3,426			876
		$	126,041		$	116,688

 

14.          Condensed Consolidating Financial Statements

 

On February 5, 2004, the Company completed a private placement of $175,000 in aggregate principal of 9¹/₄% Senior Subordinated Notes due 2014. The Company’s domestic, wholly-owned subsidiaries and the Company’s foreign subsidiaries in Australia, the United Kingdom and Canada (“Guarantor Subsidiaries”) fully and unconditionally guarantee the Senior Subordinated Notes and are jointly and severally liable for all payments under the Senior Subordinated Notes. Each of the Guarantor Subsidiaries is wholly owned by the Company.

 

The following condensed consolidating financial information includes the accounts of the Company, which has no independent assets or operations, 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 such information is not material in assessing the financial condition, cash flows or results of operations of the Company and its subsidiaries.  This information was prepared on the same basis as the consolidated financial statements:

 

15

 

THERMADYNE HOLDINGS CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

MARCH 31, 2005

 

		Parent Thermadyne Holdings Corporation			Guarantors			Non- Guarantors			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	—		$	6,382		$	2,967		$	—		$	9,349
Accounts receivable, net		—			62,508			36,103			—			98,611
Inventories		—			81,645			37,879			—			119,524
Prepaid expenses and other		—			5,291			3,164			—			8,455
Current deferred tax assets		—			2,690			—			—			2,690
Total current assets		—			158,516			80,113			—			238,629
Property, plant and equipment, net		—			46,698			28,838			—			75,536
Goodwill		—			208,403			—			—			208,403
Intangibles, net		—			62,931			12,074			—			75,005
Other assets		4,426			2,760			380			—			7,566
Investment in and advances to subsidiaries		178,039			—			—			(178,039		)	—
Total assets		$	182,465		$	479,308		$	121,405		$	(178,039	)	$	605,139
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	—		$	26,889		$	17,158		$	—		$	44,047
Accrued and other liabilities		—			28,838			4,338			—			33,176
Accrued interest		2,602			207			—			—			2,809
Income taxes payable		—			(1,952		)	3,477			—			1,525
Working capital and second-lien facilities		—			44,926			—			—			44,926
Current maturities of long-term obligations		—			2,175			8,049			—			10,224
Total current liabilities		2,602			101,083			33,022			—			136,707
Long-term obligations, less current maturities		173,570			22,498			4,878			—			200,946
Deferred tax liabilities		—			69,909			—			—			69,909
Other long-term liabilities		1,430			37,605			6,393			—			45,428
Shareholders’ equity (deficit):
Common stock		133			—			—			—			133
Additional paid-in-capital		183,460			—			—			—			183,460
Retained earnings (accumulated deficit)		(40,538		)	(4,624		)	(9,511		)	14,135			(40,538		)
Accumulated other comprehensive income (loss)		9,094			13,255			10,405			(23,660		)	9,094
Total shareholders’ equity (deficit)		152,149			8,631			894			(9,525		)	152,149
Net equity and advances to / from subsidiaries		(147,286		)	239,582			76,218			(168,514		)	—
Total liabilities and shareholders’ equity (deficit)		$	182,465		$	479,308		$	121,405		$	(178,039	)	$	605,139

 

16

 

THERMADYNE HOLDINGS CORPORATION

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2004

 

		Parent Thermadyne Holdings Corporation			Guarantors			Non- Guarantors			Eliminations			Consolidated
ASSETS
Current Assets:
Cash and cash equivalents		$	—		$	5,558		$	1,092		$	—		$	6,650
Accounts receivable, net		—			54,544			39,011			—			93,555
Inventories		—			78,914			39,793			—			118,707
Prepaid expenses and other		—			5,302			2,997			—			8,299
Current deferred tax assets		—			3,129			—			—			3,129
Total current assets		—			147,447			82,893			—			230,340
Property, plant and equipment, net		—			48,791			30,223			—			79,014
Goodwill		—			208,403			—			—			208,403
Intangibles, net		—			63,714			12,900			—			76,614
Other assets		4,551			2,594			388			—			7,533
Investment in and advances to subsidiaries		177,630			—			—			(177,630		)	—
Total assets		$	182,181		$	470,949		$	126,404		$	(177,630	)	$	601,904
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable		$	—		$	19,386		$	20,072		$	—		$	39,458
Accrued and other liabilities		—			31,288			4,427			—			35,715
Accrued interest		6,487			642			—			—			7,129
Income taxes payable		—			(676		)	3,340			—			2,664
Working capital and second-lien facilities		—			30,824			—			—			30,824
Current maturities of long-term obligations		—			4,631			6,624			—			11,255
Total current liabilities		6,487			86,095			34,463			—			127,045
Long-term obligations, less current maturities		174,787			20,978			7,903			—			203,668
Deferred tax liabilities		—			71,445			—			—			71,445
Other long-term liabilities		213			37,278			6,619			—			44,110
Shareholders’ equity (deficit):
Common stock		133			—			—			—			133
Additional paid-in-capital		183,460			—			—			—			183,460
Retained earnings (accumulated deficit)		(41,528		)	(11,055		)	(8,221		)	19,276			(41,528		)
Accumulated other comprehensive income (loss)		13,571			5,758			7,707			(13,465		)	13,571
Total shareholders’ equity (deficit)		155,636			(5,297		)	(514		)	5,811			155,636
Net equity and advances to / from subsidiaries		(154,942		)	260,450			77,933			(183,441		)	—
Total liabilities and shareholders’ equity (deficit)		$	182,181		$	470,949		$	126,404		$	(177,630	)	$	601,904

 

17