**Securities and ExchangeCommission**

**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, 2004** |
| **OR**                                                              |
|                                                                |
| **o**                                                               |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom                                                  to                                                  **

 

**Commission filenumber       0-23378**

 

**Thermadyne Holdings Corporation**

(Exact Name of Registrant as Specified in ItsCharter)

 

|                                                        | **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 AreaCode            **(636) 728-3000**

 

Indicate by ýwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes     ý     No     o

 

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

Yes     ý     No     o

 

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

Yes     ý     No     o

 

The number ofshares outstanding of the issuer’s common stock, par value $0.01 per share, asof April 30, 2004 was 13,300,000.

 

 

----

 

## **THERMADYNEHOLDINGS 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.                                |   | Market Risk |   |
|                                    |   |   |   |
| Item 4.                                 |   | Controls and Procedures |   |
|                                    |   |   |   |
| **PART  II – OTHER INFORMATION**   |   |
|                                    |   |   |   |
| Item 6.                                 |   | Exhibits and Reports on Form 8-K |   |
|                                    |   |   |   |
| **SIGNATURES**                          |   |

 

----

 

**PARTI.  FINANCIAL INFORMATION**

**Item 1**

**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(In thousands, except share data)**

 
|                                                                                                       |   | **Reorganized  Company** |    | **Reorganized  Company** |   |
|------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|--------------------------|--------|
|                                                                                                       |   | **March 31,  2004**      |    | **December  31,  2003**  |   |
|                                                                                                       |   | **(Unaudited)**          |    |                     |   |
| **ASSETS**                                                                                                 |   |                     |    |                     |   |
|                                                                                                       |   |                     |    |                     |   |
| Current Assets:                                                                                            |   |                     |    |                     |   |
| Cash and cash equivalents                                                                                  |   | $                        | 11,580  |                     | $      | 16,784 |   |
| Accounts receivable, less allowance for  doubtful accounts of $6,739 and $6,443, respectively              |   | 91,737                   |    | 84,079                   |   |
| Inventories                                                                                                |   | 108,103                  |    | 100,070                  |   |
| Prepaid expenses and other                                                                                 |   | 11,840                   |    | 10,846                   |   |
| Total current assets                                                                                       |   | 223,260                  |    | 211,779                  |   |
| Property, plant and equipment, net                                                                         |   | 81,023                   |    | 82,520                   |   |
| Goodwill                                                                                                   |   | 135,868                  |    | 135,868                  |   |
| Intangibles, net                                                                                           |   | 77,177                   |    | 77,904                   |   |
| Other assets                                                                                               |   | 6,772                    |    | 1,406                    |   |
| Total assets                                                                                               |   | $                        | 524,100 |                     | $      | 509,477 |   |
|                                                                                                       |   |                     |    |                     |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                              |   |                     |    |                     |   |
|                                                                                                       |   |                     |    |                     |   |
| Current Liabilities:                                                                                       |   |                     |    |                     |   |
| Accounts payable                                                                                           |   | $                        | 37,217  |                     | $      | 36,182 |   |
| Accrued and other liabilities                                                                              |   | 33,578                   |    | 36,465                   |   |
| Accrued interest                                                                                           |   | 2,519                    |    | 307                      |   |
| Income taxes payable                                                                                       |   | 4,178                    |    | 3,623                    |   |
| Working capital facility                                                                                   |   | 13,284                   |    | 12,860                   |   |
| Current maturities of long-term obligations                                                                |   | 7,088                    |    | 15,114                   |   |
| Total current liabilities                                                                                  |   | 97,864                   |    | 104,551                  |   |
| Long-term obligations, less current  maturities                                                            |   | 214,778                  |    | 190,404                  |   |
| Other long-term liabilities                                                                                |   | 41,840                   |    | 42,287                   |   |
| Shareholders’ equity:                                                                                 |   |                     |    |                     |   |
| Common stock, $0.01 par value, 25,000,000  shares authorized, and 13,300,000 shares issued and outstanding |   | 133                      |    | 133                      |   |
| Additional paid-in capital                                                                                 |   | 183,267                  |    | 183,267                  |   |
| Accumulated deficit                                                                                        |   | (18,580                  | )       | (17,551                  | )      |
| Accumulated other comprehensive income                                                                     |   | 4,798                    |    | 6,386                    |   |
| Total shareholders’ equity                                                                            |   | 169,618                  |    | 172,235                  |   |
| Total liabilities and shareholders’ equity                                                            |   | $                        | 524,100 |                     | $      | 509,477 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(In thousands, except share data)**

**(Unaudited)**

 
|                                                                                  |   | **Reorganized  Company**                  |    | **Predecessor  Company**                  |   |
|---------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|-------------------------------------------|--------|
|                                                                                  |   | **Three  Months  Ended  March 31,  2004** |    | **Three  Months  Ended  March 31,  2003** |   |
|                                                                                  |   |                                      |    |                                      |   |
| Net sales                                                                             |   | $                                         | 118,731 |                                      | $      | 100,454 |   |
| Operating expenses:                                                                   |   |                                      |    |                                      |   |
| Cost of goods sold                                                                    |   | 80,125                                    |    | 64,553                                    |   |
| Selling, general and administrative  expenses                                         |   | 32,182                                    |    | 25,922                                    |   |
| Amortization of intangibles                                                           |   | 1,112                                     |    | 205                                       |   |
| Net periodic postretirement benefits                                                  |   | 687                                       |    | 288                                       |   |
| Operating income                                                                      |   | 4,625                                     |    | 9,486                                     |   |
| Other income (expense):                                                               |   |                                      |    |                                      |   |
| Interest (contractual interest of $17,917  for the three months ended March 31, 2003) |   | (4,771                                    | )       | (5,242                                    | )      |
| Amortization of deferred financing costs                                              |   | (220                                      | )       | —                                    |   |
| Other, net                                                                            |   | 264                                       |    | 90                                        |   |
| Income (loss) before reorganization items  and income tax provision                   |   | (102                                      | )       | 4,334                                     |   |
| Reorganization items                                                                  |   | —                                    |    | 2,206                                     |   |
| Income (loss) before income tax provision                                             |   | (102                                      | )       | 2,128                                     |   |
| Income tax provision                                                                  |   | 927                                       |    | 938                                       |   |
| Net income (loss)                                                                     |   | $                                         | (1,029  | )                                         | $      | 1,190 |   |
|                                                                                  |   |                                      |    |                                      |   |
| Basic and diluted income (loss) per share  applicable to common shares:               |   | $                                         | (0.08   | )                                         | $      | 0.33 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

4

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**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(In thousands, except share data)**

**(Unaudited)**

 
|                                                                                  |   | **Reorganized  Company**                 |   | **Predecessor  Company**                 |   |
|---------------------------------------------------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|                                                                                  |   | **Three  Months  Ended  March 31, 2004** |   | **Three  Months  Ended  March 31, 2003** |   |
|                                                                                  |   |                                     |   |                                     |   |
| Cash flows from operating activities:                                                 |   |                                     |   |                                     |   |
| Net income (loss)                                                                     |   | $                                        | (1,029 | )                                        | $      | 1,190 |   |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |   |                                     |   |                                     |   |
| Net periodic postretirement benefits                                                  |   | 687                                      |   | 288                                      |   |
| Depreciation                                                                          |   | 5,214                                    |   | 3,557                                    |   |
| Amortization of intangibles                                                           |   | 1,112                                    |   | 205                                      |   |
| Amortization of deferred financing costs                                              |   | 220                                      |   | —                                   |   |
| Changes in operating assets and  liabilities:                                         |   |                                     |   |                                     |   |
| Accounts receivable                                                                   |   | (7,830                                   | )      | (3,047                                   | )      |
| Inventories                                                                           |   | (7,782                                   | )      | (4,367                                   | )      |
| Prepaid expenses and other                                                            |   | (1,478                                   | )      | (1,868                                   | )      |
| Accounts payable                                                                      |   | 1,325                                    |   | 3,845                                    |   |
| Accrued and other liabilities                                                         |   | (2,854                                   | )      | (2,895                                   | )      |
| Accrued interest                                                                      |   | 2,212                                    |   | —                                   |   |
| Income taxes payable                                                                  |   | 514                                      |   | 757                                      |   |
| Other long-term liabilities                                                           |   | (1,021                                   | )      | (438                                     | )      |
| Total adjustments                                                                     |   | (9,681                                   | )      | (3,963                                   | )      |
| Net cash used in operating activities                                                 |   | (10,710                                  | )      | (2,773                                   | )      |
| Cash flows from investing activities:                                                 |   |                                     |   |                                     |   |
| Capital expenditures                                                                  |   | (4,038                                   | )      | (2,263                                   | )      |
| Net cash used in investing activities                                                 |   | (4,038                                   | )      | (2,263                                   | )      |
| Cash flows from financing activities:                                                 |   |                                     |   |                                     |   |
| Net borrowings under revolving credit  facility                                       |   | 424                                      |   | —                                   |   |
| Repayment of long-term obligations                                                    |   | (180,000                                 | )      | (1,130                                   | )      |
| Borrowing of long-term obligations                                                    |   | 195,989                                  |   | 1,352                                    |   |
| Financing fees                                                                        |   | (5,175                                   | )      | —                                   |   |
| Other                                                                                 |   | (1,694                                   | )      | 625                                      |   |
| Net cash provided by financing activities                                             |   | 9,544                                    |   | 847                                      |   |
| Net decrease in cash and cash equivalents                                             |   | (5,204                                   | )      | (4,189                                   | )      |
| Cash and cash equivalents at beginning of  period                                     |   | 16,784                                   |   | 17,413                                   |   |
| Cash and cash equivalents at end of period                                            |   | $                                        | 11,580 |                                     | $      | 13,224 |   |
|                                                                                  |   |                                     |   |                                     |   |
| Supplemental disclosure of cash flow  information Cash paid during the period for:    |   |                                     |   |                                     |   |
| Interest                                                                              |   | $                                        | 2,559  |                                     | $      | 5,242 |   |
| Income taxes                                                                          |   | 416                                      |   | 98                                       |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

5

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**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.****                                      Basisof Presentation**

 

Thermadyne Holdings Corporation (“Thermadyne” or the“Company”), a Delaware corporation, is a leading global designer andmanufacturer of cutting and welding products, including equipment, accessoriesand consumables. On May 23, 2003 (the “Effective Date”), Thermadyne consummatedits plan of reorganization under Chapter 11 of the United States BankruptcyCode (the “Bankruptcy Code”) and completed a comprehensive financialrestructuring (the “Restructuring”). For the purposes of these condensedconsolidated financial statements, references to the “Predecessor Company” arereferences to the Company for periods prior to June 1, 2003 (the first day ofthe calendar month following the month in which the Company emerged frombankruptcy) and references to the “Reorganized Company” are references to theCompany for the periods subsequent to May 31, 2003. The principal elements ofthe Restructuring and the principal effects of its consummation pursuant to theplan of reorganization are described in “Plan of Reorganization” and in theCompany’s annual report on Form 10-K for the year ended December 31, 2003.

 

The accompanying unaudited condensed consolidated financial statementsof Thermadyne have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the three months ended March 31, 2004 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2004.  For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Company’s annual report on Form 10-K for the year endedDecember 31, 2003.

 

**2.****                                      RecentEvents**

#  

# ***Plan of Reorganization***

 

The Company’s emergence from Chapter 11 bankruptcy proceedings on May23, 2003 resulted in a new reporting entity and adoption of “fresh-start”accounting as required by the American Institute of Certified PublicAccountants Statement of Position No. 90-7, entitled “Financial Reporting byEntities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). Pursuant tosuch principles, the Company’s assets and liabilities were revalued as of June1, 2003.  The assets were stated attheir reorganization value (the “Reorganization Value”), which is defined asthe fair value of the Company’s assets before considering liabilities.

 

As a result ofthe application of SOP 90-7, the Company’s financial results for the quarterended March 31, 2004 and for the quarter ended March 31, 2003 include twodifferent bases of accounting and accordingly, the Reorganized Company’sfinancial statements are not comparable to the Predecessor Company’s financialstatements.

 

For the three-month period ended March 31, 2003, reorganization itemstotaled approximately $2,206 and included $2,000 of professional fees andexpenses and $206 of other reorganization costs.

 

6

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***Reclassifications***

 

Certain prior period amounts have been reclassified to conform tocurrent period presentation.  Thesereclassifications did not affect net income (loss).  Additionally, certain intercompany sales transactions, which wereinadvertently misclassified as trade sales, have been reclassified.  This reclassification of sales was offset bya corresponding change in the cost of goods sold and had no effect on theCompany’s financial condition, changes in financial condition and results ofoperations including no effect on reported operating income, net income or netincome per common share.  A summary ofthese reclassifications for the quarter ended March 31, 2003 is as follows:

 
|                           |   | **Predecessor  Company**                  |    |
|--------------------------------|--------|-------------------------------------------|---------|
|                           |   | **Three  Months  Ended  March 31,  2003** |    |
| Net sales as reported          |   | $                                         | 100,991 |   |
| Reclassification               |   | (537                                      | )       |
| Net sales as adjusted          |   | $                                         | 100,454 |   |
|                           |   |                                      |    |
| Cost of goods sold as reported |   | $                                         | 65,090  |   |
| Reclassification               |   | (537                                      | )       |
| Cost of goods sold as adjusted |   | $                                         | 64,553  |   |
|                           |   |                                      |    |
| Operating income as reported   |   | $                                         | 9,486   |   |

 

**3.****                                      SignificantAccounting Policies**

 

***ProductWarranty Programs****.* Various products are soldwith product warranty programs. Provisions for warranty programs are made asthe products are sold and adjusted periodically based on current estimates ofanticipated warranty costs. During the three months ended March 31, 2004 and2003, the Company recorded $602 and $775 of warranty expense, respectively,through cost of goods sold and made payments related to warranty of $786 and$782, respectively. As of March 31, 2004, the warranty accrual totaled $3,821.

 

***Earnings Per Share****.*The following table sets forth the information used in the computation of basicand diluted income (loss) per share for the periods indicated.

 

7

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|                                                |   | **Reorganized  Company**                  |   | **Predecessor  Company**                  |   |
|-----------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                                |   | **Three  Months  Ended  March 31,  2004** |   | **Three  Months  Ended  March 31,  2003** |   |
| Numerator:                                          |   |                                      |   |                                      |   |
| Net income (loss) applicable to common  shares      |   | $                                         | (1,029 | )                                         | $      | 1,190 |   |
|                                                |   |                                      |   |                                      |   |
| Denominator:                                        |   |                                      |   |                                      |   |
| Weighted average shares-basic and diluted           |   | 13,300,000                                |   | 3,590,286                                 |   |
|                                                |   |                                      |   |                                      |   |
| Basic and diluted income (loss) per share  amounts: |   |                                      |   |                                      |   |
| Net income (loss) applicable to common  shares      |   | $                                         | (0.08  | )                                         | $      | 0.33 |   |

 

***DerivativeInstruments****.* The Company accounts for derivatives andhedging activities in accordance with Statement of Financial AccountingStandards No. 133, “Accounting for Derivative Instruments and Certain HedgingActivities,” as amended, (“SFAS No. 133”) which requires that all derivativeinstruments be recorded on the balance sheet at their respective fair values.The Company does not use derivative instruments for trading or speculativepurposes.

The Company formally documents all relationships between hedginginstruments and hedged items, as well as its risk management objectives andstrategies for undertaking hedge transactions. The Company also assesses, bothat the inception of the hedge and on an on-going basis, whether the hedge iseffective. Should it be determined that the hedge is not effective as a hedge,the Company would discontinue the hedge accounting prospectively.

 

**4.****                                      ComprehensiveIncome (Loss)**

 

Comprehensive income (loss) totaled ($2,617) and $3,061 for the threemonths ended March 31, 2004 and 2003, respectively.

 

**5.****                                      Inventories**

 

The composition of inventories was as follows:

 
|            |   | **March 31,  2004** |    | **December  31,  2003** |   |
|-----------------|--------|---------------------|---------|-------------------------|--------|
|            |   |                |    |                    |   |
| Raw materials   |   | $                   | 18,918  |                    | $      | 21,218 |   |
| Work-in-process |   | 33,882              |    | 28,906                  |   |
| Finished Goods  |   | 55,585              |    | 50,228                  |   |
| 108,385         |   | 108,385             |    | 100,352                 |   |
| LIFO reserve    |   | (282                | )       | (282                    | )      |
|            |   | $                   | 108,103 |                    | $      | 100,070 |   |

 

8

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**6.****                                      IntangibleAssets**

 

Thecomposition of intangibles was as follows:

 
|                               |   | **March 31,  2004** |    | **December  31,  2003** |   |
|------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                               |   |                |    |                    |   |
| Goodwill                           |   | $                   | 135,868 |                    | $      | 135,868 |   |
| Patents and Customer Relationships |   | 47,789              |    | 47,404                  |   |
| Trademarks                         |   | 33,353              |    | 33,353                  |   |
|                               |   | 217,010             |    | 216,625                 |   |
| Accumulated amortization           |   | (3,965              | )       | (2,853                  | )      |
|                               |   | $                   | 213,045 |                    | $      | 213,772 |   |

 

Patents and customer relationships are amortized on a straight-linebasis over their estimated useful lives, which generally range from 10 to 15years.  Goodwill and trademarks are notamortized, but are periodically evaluated for impairment.  Amortization expense amounted to $1,112 and$205 for the three months ended March 31, 2004 and 2003, respectively.  Amortization expense is expected to beapproximately $4,000 for each of the next five fiscal years.

 

**7.****                                     ****Long-Term Obligations**

 

***Senior SubordinatedNotes***

 

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 withapproximately $20,000 of borrowings under a new term loan (the “New Term Loan”)added through an amendment and restatement to the Company’s GECC credit agreement(the “New Credit Agreement”), were used to repay all outstanding borrowingsunder the existing $180,000 senior term note facility and to reduce amountsoutstanding under the Company’s revolving credit facility. The notes wereoffered in reliance upon an exemption from registration under the SecuritiesAct of 1933 for an offer and sale of securities that does not involve a publicoffering. In May the Company registered, under the Securities Act of 1933,notes with terms identical to the Senior Subordinated Notes in regards to anexchange offer.  The Company expects tocomplete the exchange offer by the end of the second quarter.

 

The SeniorSubordinated Notes are unsecured senior subordinated obligations and aresubordinated in right of payment to all existing and future Senior Indebtedness(as defined in the indenture). Interest will accrue at the rate of 9.25% perannum and will be payable semiannually in arrears on February 1 andAugust 1, commencing on August 1, 2004.

 

***New Credit Agreement***

 

The New Credit Agreement consists of the NewTerm Loan and a $50,000 revolving credit facility (the “Working CapitalFacility”).  Up to $20,000 of theWorking Capital Facility may be used for letters of credit.  Actual borrowing availability is subject toa borrowing base calculation, which is

 

9

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equal to 1.5 times Adjusted EBITDA.  The New Credit Agreement defines AdjustedEBITDA as 100% of the EBITDA for the Company and its domestic subsidiaries plus65% of the EBITDA of the Company’s Canadian subsidiaries.  EBITDA is defined in the New CreditAgreement as net income less income tax credits, interest income, gains fromextraordinary items, any aggregate net gain on the sale of tangible assets, andany other non-cash gains added in determining net income; plus, provision forincome taxes, interest expense, depreciation, amortization of intangibles,amortization of deferred financing costs, any amount deducted from net incomeas a result of stock or stock option grants, the accrual net of any payments incash related to net periodic post-retirement benefit costs, losses fromextraordinary items, reorganization costs related to the Chapter 11 cases, andany non-recurring employee severance expenses and non-recurring cash expensesrelated to plant reorganizations, not to exceed $5,000 in the aggregate, thenon-cash portion of any expense or loss attributable to anyinterest rate agreement or arrangement permitted under the New Credit Agreement prior to thetermination or expiration of such agreement or arrangement, and $8,900 ofnon-cash reserves recorded at December 31, 2003 related to theimplementation of a revised reserve methodology for inventory and accountsreceivable and recognition of an additional accrual for warranty obligations.Availability under the Working Capital Facility may also be limited if theCompany fails to meet certain levels of Adjusted EBITDA. Borrowings under theNew Term Loan and the Working Capital Facility accrue interest, at theCompany’s option, at the prime lending rate plus 2.25%, in the case of indexrate loans, or at the London InterbankOffered Rate (“LIBOR”) plus 3.25%, in the case of LIBOR loans. Unused portions of the Working Capital Facilityare charged 75 basis points as of March 31, 2004. The New Credit Agreement issecured by substantially all of the assets of the Company’s domesticsubsidiaries, including a pledge of the capital stock of substantially all ofthe Company’s subsidiaries, subject to certain limitations with respect toforeign subsidiaries.  The New CreditAgreement contains financial covenants, including minimum levels of EBITDA(determined on a consolidated basis) and other customary provisions.  As of March 31, 2004, the Company hadoutstanding borrowings of $13,284 and issued letters of credit totaling $11,007under the Working Capital Facility.  TheCompany had availability of $25,709 under the Working Capital Facility at March31, 2004. The Working Capital Facility terminates on May 23, 2006.  The New Term Loan matures onDecember 31, 2008 and requires quarterly principal payments totaling$4,000 in 2005, $5,000 in 2006, $5,000 in 2007 and $6,000 in 2008.

 

***Senior Term Notes***

 

The Senior Term Notes accrued interest, in the case of Eurodollar loansat LIBOR plus a margin ranging from 3.0% to 7.5%, and in the case of base rateloans at the prime rate plus a margin ranging from 2.0% to 6.5%.  The interest margin applicable to theEurodollar and base rate loans varied depending on the level of indebtednessand the time elapsed from the Effective Date. The Senior Term Notes were repaidin February 2004.

 

**8.****                                     ****Derivative Instrument**

 

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

 

10

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The Company has designatedthe swap as a fair value hedge of its fixed rate debt. The terms of theinterest rate swap contract and hedged item are such that effectiveness can bemeasured using the short-cut method defined in SFAS No. 133. Hedge ineffectiveness,as determined in accordance with SFAS No. 133, had no impact on results ofoperations for the three months ended March 31, 2004.

 

In accordance withSFAS No. 133, as of March 31, 2004, the Company recorded a fair valueadjustment to the portion of its fixed rate long-term debt that is hedged. Thisfair value adjustment was recorded as an increase to Long-term obligations,with the related value for the interest rate swap’s non-current portionrecorded in Other assets. Interest rate differentials associated with theinterest rate swap are recorded as an adjustment to a current asset orliability, with the offset to interest expense over the life of the interestrate swap.

 

**9.****                                      StockOptions**

 

In August 2003, the Companyawarded stock option grants to non-employee directors.  Stock option grants are recorded under therecognition and measurement principles of Accounting Principles Board OpinionNo. 25—”Accounting for Stock Issued to Employees” (“APB 25”), and relatedinterpretations. Accordingly, no stock-based compensation cost isreflected in operating results. Pro forma information regarding net operatingresults and per share results is required by Statement of Financial AccountingStandards No. 123—”Accounting for Stock-Based Compensation” (“SFAS No. 123”),which also requires that the information be determined as if stock options weregranted under the fair value method of that statement. The fair value foroptions granted was estimated at the date of grant using a Black-Scholes optionpricing model with the following weighted-average assumptions: risk-freeinterest rate of 2.7%, a dividend yield of 0.0%, volatility factors of theexpected market price of the Company’s common stock of 0.54, and aweighted-average expected life of the options of four years.

 

The Black-Scholes option valuation model was developed for use inestimating the fair value of traded options which have no vesting restrictionsand are fully transferable. In addition, option valuation models require theinput of highly subjective assumptions including the expected stock pricevolatility. Because the Company’s stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the fair value estimate,the existing models do not necessarily provide a reliable single measure of thefair value of the Company’s stock options.

 

The followingtable illustrates the effect on net loss and loss per share if the fair valueexpense recognition requirements of SFAS No. 123 had been applied to allstock options granted under the plans.

 

11

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|                                                                                                                                 |   | **Reorganized  Company**                  |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                                 |   | **Three  Months  Ended  March 31,  2004** |   |
| Net loss, as reported                                                                                                                |   | $                                         | (1,029 | ) |
| Deduct: Total stock-based compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | (155                                      | )      |
| Pro forma net loss                                                                                                                   |   | $                                         | (1,184 | ) |
|                                                                                                                                 |   |                                      |   |
| Basic and diluted loss per share                                                                                                     |   |                                      |   |
| As reported                                                                                                                          |   | $                                         | (0.08  | ) |
|                                                                                                                                 |   |                                      |   |
| Pro forma                                                                                                                            |   | $                                         | (0.09  | ) |

 

**10.****                               IncomeTaxes**

 

The Company’s tax provision relates primarily to its foreignsubsidiaries.  The tax benefits oflosses incurred in the U.S. are fully reserved with a valuation allowance basedon the Company’s current tax position and estimates of taxable income for theforeseeable future.

 

**11.****                               EmployeeBenefit Plans**

 

***401(k) RetirementPlan****.*The401(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 eachemployee’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 theCompany to make matching contributions of 50% for the first 6% of the voluntaryemployee contribution.

 

***Pension Plans.*****The Company’s subsidiaries have hadvarious noncontributory defined benefit pension plans which coveredsubstantially all U.S. employees. The Company froze and combined threenoncontributory defined benefit pension plans through amendments to such planseffective December 31, 1989. All former participants of these plans becameeligible to participate in the 401(k) Retirement Plan effective January 1,1990.

 

The Company’sAustralian subsidiary has a Superannuation Fund established by a Trust Deedwhich operates on a lump sum scheme to provide benefits for its employees. Theprepaid benefit cost is not included in the balance sheet, as the Company hasno legal right to amounts included in this fund.

 

***Other PostretirementBenefits****.*TheCompany has a retirement plan covering both salaried and non-salaried retiredemployees, which provides postretirement health care benefits (medical anddental) and life insurance benefits. The postretirement health care portion iscontributory, with retiree contributions adjusted annually as determined basedon claim costs. The postretirement life insurance portion is noncontributory.The Company recognizes the cost of postretirement benefits

 

12

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on the accrualbasis as employees render service to earn the benefit. The Company continues tofund the cost of health care and life insurance benefits in the year incurred.

 

Net periodicpension and other postretirement benefit costs include the followingcomponents:

 
|                                          |   | **Pension  Benefits**                     |   | **Other  Postretirement Benefits**        |   |
|-----------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
|                                          |   | **Reorganized  Company**                  |   | **Predecessor  Company**                  |   | **Reorganized  Company** |   | **Predecessor  Company** |   |
|                                          |   | **Three  Months  Ended  March 31,  2004** |   | **Three  Months  Ended  March 31,  2003** |   | **Three  Months  Ended  March 31,  2004** |   | **Three  Months  Ended  March 31,  2003** |   |
| Components of the net periodic benefit  cost: |   |                                      |   |                                      |   |   |   |   |   |
| Service Cost                                  |   | $                                         | — |                                      | $      | — |   | $ | 297 |   | $ | 222 |   |
| Interest Cost                                 |   | 299                                       |   | 262                                       |   | 374 |   | 231 |   |
| Expected return on plan assets                |   | (274                                      | )      | (220                                      | )      | — |   | — |   |
| Recognized (gain) loss                        |   | —                                    |   | 70                                        |   | 16 |   | (117 | ) |
| Prior service cost recognized                 |   | —                                    |   | 4                                         |   | — |   | (48 | ) |
| Net periodic benefit cost                     |   | $                                         | 25     |                                      | $      | 116 |   | $ | 687 |   | $ | 288 |   |

 

The Companypreviously disclosed in its financial statements for the year ended December31, 2003 that it expected to contribute $1,300 to its pension plan in 2004. Asof March 31, 2004, $236 has been contributed. The Company presently anticipates contributing an additional $907 to fundits pension plan in 2004.  The expectedcontribution for 2004 has been revised to reflect the provisions of the PensionFunding Equity Act of 2004.

 

**12.****                               SegmentInformation**

 

Although theCompany’s operations are comprised of several product lines and operatinglocations, similarity of products, paths to market, end users, and productionprocesses results in performance evaluation and decisions regarding allocationof resources being made on a combined basis and accordingly, management hasconcluded the Company operates in one segment. Reportable geographic regionsare the United States, Europe and Australia/Asia.

 

Summarized financial information concerning the Company’s geographicsegments is shown in the following table.

 
|                    |   | **Reorganized  Company**                  |    | **Predecessor  Company**                  |   |
|-------------------------|--------|-------------------------------------------|---------|-------------------------------------------|--------|
|                    |   | **Three  Months  Ended  March 31,  2004** |    | **Three  Months  Ended  March 31,  2003** |   |
| Net Sales               |   |                                      |    |                                      |   |
| United States           |   | $                                         | 70,904  |                                      | $      | 60,385 |   |
| Europe                  |   | 16,757                                    |    | 15,295                                    |   |
| Australia / Asia        |   | 16,312                                    |    | 11,960                                    |   |
| All other international |   | 14,758                                    |    | 12,814                                    |   |
|                    |   | $                                         | 118,731 |                                      | $      | 100,454 |   |

 

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|                    |   | **Reorganized  Company** |    | **Reorganized  Company** |   |
|-------------------------|--------|--------------------------|---------|--------------------------|--------|
|                    |   | **March 31,  2004**      |    | **December  31,  2003**  |   |
| Indentifiable assets    |   |                     |    |                     |   |
| United States           |   | $                        | 262,714 |                     | $      | 258,402 |   |
| Europe                  |   | 15,393                   |    | 16,159                   |   |
| Australia / Asia        |   | 11,450                   |    | 11,837                   |   |
| All other international |   | 11,283                   |    | 11,300                   |   |
|                    |   | $                        | 300,840 |                     | $      | 297,698 |   |

 

***Product LineInformation***

 

The Company manufactures a variety of products, substantially all ofwhich are used in the cutting, welding or fabrication of metal. End users ofthe Company’s products are engaged in various applications includingconstruction, automobile manufacturing, repair and maintenance andshipbuilding. The following table shows sales for each of the Company’s keyproduct lines:

 
|                                   |   | **Reorganized  Company**                  |    | **Predecessor  Company**                  |   |
|----------------------------------------|--------|-------------------------------------------|---------|-------------------------------------------|--------|
|                                   |   | **Three  Months  Ended  March 31,  2004** |    | **Three  Months  Ended  March 31,  2003** |   |
|                                   |   |                                      |    |                                      |   |
| Gas apparatus                          |   | $                                         | 43,981  |                                      | $      | 37,004 |   |
| Arc welding equipment                  |   | 19,823                                    |    | 17,651                                    |   |
| Arc welding consumables                |   | 35,723                                    |    | 29,651                                    |   |
| Plasma and automated cutting equipment |   | 18,298                                    |    | 14,812                                    |   |
| All other                              |   | 906                                       |    | 1,336                                     |   |
|                                   |   | $                                         | 118,731 |                                      | $      | 100,454 |   |

 

**13.          Condensed Consolidating FinancialStatements**

 

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 (“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 includesthe accounts of the Company, which has no independent assets or operations, thecombined accounts of the Guarantor Subsidiaries and the combined accounts ofthe non-guarantor subsidiaries for the periods indicated. Separate financialstatements of each of the Guarantor Subsidiaries are not presented becausemanagement has determined such information is not material in assessing thefinancial condition, cash flows or results of operations of the Company and itssubsidiaries. Additionally, consolidating financial statement information priorto the reorganization date was omitted because

 

14

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management has determined such information is not comparable to theReorganized Company. This information was prepared on the same basis as theconsolidated financial statements.

 

**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATING BALANCESHEET**

**MARCH 31, 2004**

 
|                                                       |   | **Parent  Thermadyne  Holdings  Corporation** |    | **Guarantors** |   | **Non-  Guarantors** |   | **Eliminations** |    | **Consolidated** |   |
|------------------------------------------------------------|--------|-----------------------------------------------|---------|----------------|--------|----------------------|--------|------------------|---------|------------------|--------|
| **ASSETS**                                                 |   |                                          |    |           |   |                 |   |             |    |             |   |
| Current Assets:                                            |   |                                          |    |           |   |                 |   |             |    |             |   |
| Cash and cash equivalents                                  |   | $                                             | —  |           | $      | (220                 | )      | $                | 11,800  |             | $      | — |   | $ | 11,580 |   |
| Accounts receivable, net                                   |   | —                                        |    | 39,567         |   | 52,170               |   | —           |    | 91,737           |   |
| Inventories                                                |   | —                                        |    | 57,585         |   | 50,518               |   | —           |    | 108,103          |   |
| Prepaid expenses and other                                 |   | —                                        |    | 6,876          |   | 4,964                |   | —           |    | 11,840           |   |
| Total current assets                                       |   | —                                        |    | 103,808        |   | 119,452              |   | —           |    | 223,260          |   |
| Property, plant and equipment, net                         |   | —                                        |    | 43,046         |   | 37,977               |   | —           |    | 81,023           |   |
| Goodwill                                                   |   | —                                        |    | 135,868        |   | —               |   | —           |    | 135,868          |   |
| Intangibles, net                                           |   | —                                        |    | 65,666         |   | 11,511               |   | —           |    | 77,177           |   |
| Other assets                                               |   | 4,978                                         |    | 1,645          |   | 149                  |   | —           |    | 6,772            |   |
| Investment in and advances to subsidiaries                 |   | 179,989                                       |    | —         |   | —               |   | (179,989         | )       | —           |   |
| Total assets                                               |   | $                                             | 184,967 |           | $      | 350,033              |   | $                | 169,089 |             | $      | (179,989 | ) | $ | 524,100 |   |
|                                                       |   |                                          |    |           |   |                 |   |             |    |             |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY  (DEFICIT)**   |   |                                          |    |           |   |                 |   |             |    |             |   |
| Current Liabilities:                                       |   |                                          |    |           |   |                 |   |             |    |             |   |
| Accounts payable                                           |   | $                                             | —  |           | $      | 13,138               |   | $                | 24,079  |             | $      | — |   | $ | 37,217 |   |
| Accrued and other liabilities                              |   | —                                        |    | 24,498         |   | 9,080                |   | —           |    | 33,578           |   |
| Accrued interest                                           |   | 2,328                                         |    | 191            |   | —               |   | —           |    | 2,519            |   |
| Income taxes payable                                       |   | —                                        |    | 889            |   | 3,289                |   | —           |    | 4,178            |   |
| Working capital facility                                   |   | —                                        |    | 13,284         |   | —               |   | —           |    | 13,284           |   |
| Current maturities of long-term obligations                |   | —                                        |    | 2,260          |   | 4,828                |   | —           |    | 7,088            |   |
| Total current liabilities                                  |   | 2,328                                         |    | 54,260         |   | 41,276               |   | —           |    | 97,864           |   |
| Long-term obligations, less current  maturities            |   | 175,463                                       |    | 31,706         |   | 7,609                |   | —           |    | 214,778          |   |
| Other long-term liabilities                                |   | —                                        |    | 34,637         |   | 7,203                |   | —           |    | 41,840           |   |
| Shareholders’ equity (deficit):                       |   |                                          |    |           |   |                 |   |             |    |             |   |
| Common stock                                               |   | 133                                           |    | —         |   | —               |   | —           |    | 133              |   |
| Additional paid-in-capital                                 |   | 183,267                                       |    | —         |   | —               |   | —           |    | 183,267          |   |
| Retained earnings (deficit)                                |   | (18,580                                       | )       | (11,509        | )      | 3,027                |   | 8,482            |    | (18,580          | )      |
| Accumulated other comprehensive income  (loss)             |   | 4,798                                         |    | 11,188         |   | (5,730               | )      | (5,458           | )       | 4,798            |   |
| Total shareholders’ equity (deficit)                  |   | 169,618                                       |    | (321           | )      | (2,703               | )      | 3,024            |    | 169,618          |   |
| Advances to / from subsidiaries                            |   | (162,442                                      | )       | 229,751        |   | 115,704              |   | (183,013         | )       | —           |   |
| Total liabilities and shareholders’ equity  (deficit) |   |                                          |    |           |   |                 |   |             |    |             |   |
|                                                       |   | $                                             | 184,967 |           | $      | 350,033              |   | $                | 169,089 |             | $      | (179,989 | ) | $ | 524,100 |   |

 

15

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**THERMADYNE HOLDINGSCORPORATION**

**CONDENSED CONSOLIDATINGBALANCE SHEET**

**DECEMBER 31, 2003**

 
|                                                       |   | **Parent  Thermadyne  Holdings  Corporation** |    | **Guarantors** |   | **Non-  Guarantors** |   | **Eliminations** |    | **Consolidated** |   |
|------------------------------------------------------------|--------|-----------------------------------------------|---------|----------------|--------|----------------------|--------|------------------|---------|------------------|--------|
|                                                       |   |                                          |    |           |   |                 |   |             |    |             |   |
| **ASSETS**                                                 |   |                                          |    |           |   |                 |   |             |    |             |   |
| Current Assets:                                            |   |                                          |    |           |   |                 |   |             |    |             |   |
| Cash and cash equivalents                                  |   | $                                             | —  |           | $      | 609                  |   | $                | 16,175  |             | $      | — |   | $ | 16,784 |   |
| Accounts receivable, net                                   |   | —                                        |    | 31,947         |   | 52,132               |   | —           |    | 84,079           |   |
| Inventories                                                |   | —                                        |    | 53,162         |   | 46,908               |   | —           |    | 100,070          |   |
| Prepaid expenses and other                                 |   | —                                        |    | 5,941          |   | 4,905                |   | —           |    | 10,846           |   |
| Total current assets                                       |   | —                                        |    | 91,659         |   | 120,120              |   | —           |    | 211,779          |   |
| Property, plant and equipment, net                         |   | —                                        |    | 43,222         |   | 39,298               |   | —           |    | 82,520           |   |
| Goodwill                                                   |   | —                                        |    | 135,868        |   | —               |   | —           |    | 135,868          |   |
| Intangibles, net                                           |   | —                                        |    | 66,593         |   | 11,311               |   | —           |    | 77,904           |   |
| Other assets                                               |   | —                                        |    | 1,205          |   | 201                  |   | —           |    | 1,406            |   |
| Investment in and advances to subsidiaries                 |   | 179,019                                       |    | —         |   | —               |   | (179,019         | )       | —           |   |
| Total assets                                               |   | $                                             | 179,019 |           | $      | 338,547              |   | $                | 170,930 |             | $      | (179,019 | ) | $ | 509,477 |   |
|                                                       |   |                                          |    |           |   |                 |   |             |    |             |   |
| **LIABILITIES AND SHAREHOLDERS’ DEFICIT**             |   |                                          |    |           |   |                 |   |             |    |             |   |
| Current Liabilities:                                       |   |                                          |    |           |   |                 |   |             |    |             |   |
| Accounts payable                                           |   | $                                             | —  |           | $      | 10,799               |   | $                | 25,383  |             | $      | — |   | $ | 36,182 |   |
| Accrued and other liabilities                              |   | —                                        |    | 27,751         |   | 8,714                |   | —           |    | 36,465           |   |
| Accrued interest                                           |   | —                                        |    | 307            |   | —               |   | —           |    | 307              |   |
| Income taxes payable                                       |   | —                                        |    | 1,030          |   | 2,593                |   | —           |    | 3,623            |   |
| Working capital facility                                   |   | —                                        |    | 12,860         |   | —               |   | —           |    | 12,860           |   |
| Current maturities of long-term obligations                |   | 7,500                                         |    | 944            |   | 6,670                |   | —           |    | 15,114           |   |
| Total current liabilities                                  |   | 7,500                                         |    | 53,691         |   | 43,360               |   | —           |    | 104,551          |   |
| Long-term obligations, less current  maturities            |   | 172,500                                       |    | 12,567         |   | 5,337                |   | —           |    | 190,404          |   |
| Other long-term liabilities                                |   | —                                        |    | 34,332         |   | 7,955                |   | —           |    | 42,287           |   |
| Shareholders’ equity (deficit):                       |   |                                          |    |           |   |                 |   |             |    |             |   |
| Common stock                                               |   | 133                                           |    | —         |   | —               |   | —           |    | 133              |   |
| Additional paid-in-capital                                 |   | 183,267                                       |    | —         |   | —               |   | —           |    | 183,267          |   |
| Retained earnings (deficit)                                |   | (17,551                                       | )       | (12,873        | )      | 1,790                |   | (6,386           | )       | (35,020          | )      |
| Accumulated other comprehensive income  (loss)             |   | 6,386                                         |    | 11,406         |   | (5,020               | )      | 11,083           |    | 23,855           |   |
| Total shareholders’ equity (deficit)                  |   | 172,235                                       |    | (1,467         | )      | (3,230               | )      | 4,697            |    | 172,235          |   |
| Net equity and advances to / from  subsidiaries            |   | (173,216                                      | )       | 239,424        |   | 117,508              |   | (183,716         | )       | —           |   |
|                                                       |   |                                          |    |           |   |                 |   |             |    |             |   |
| Total liabilities and shareholders’ equity  (deficit) |   | $                                             | 179,019 |           | $      | 338,547              |   | $                | 170,930 |             | $      | (179,019 | ) | $ | 509,477 |   |

 

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**THERMADYNE HOLDINGSCORPORATION**

**CONDENSED CONSOLIDATING  STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED MARCH 31,2004**

 
|                                          |   | **Parent  Thermadyne  Holdings  Corporation** |   | **Guarantors** |   | **Non-  Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|-----------------------------------------------|--------|-----------------------------------------------|--------|----------------|--------|----------------------|--------|------------------|--------|------------------|--------|
|                                          |   |                                          |   |           |   |                 |   |             |   |             |   |
| Net sales                                     |   | $                                             | — |           | $      | 84,115               |   | $                | 52,973 |             | $      | (18,357 | ) | $ | 118,731 |   |
| Operating expenses:                           |   |                                          |   |           |   |                 |   |             |   |             |   |
| Cost of goods sold                            |   | —                                        |   | 57,357         |   | 41,082               |   | (18,314          | )      | 80,125           |   |
| Selling, general and administrative  expenses |   | —                                        |   | 22,441         |   | 9,741                |   | —           |   | 32,182           |   |
| Amortization of intangibles                   |   | —                                        |   | 926            |   | 186                  |   | —           |   | 1,112            |   |
| Net periodic postretirement benefits          |   | —                                        |   | 687            |   | —               |   | —           |   | 687              |   |
| Operating income (loss)                       |   | —                                        |   | 2,704          |   | 1,964                |   | (43              | )      | 4,625            |   |
| Other income (expense)                        |   |                                          |   |           |   |                 |   |             |   |             |   |
| Interest                                      |   | (3,513                                        | )      | (915           | )      | (343                 | )      | —           |   | (4,771           | )      |
| Amortization of deferred financing costs      |   | (74                                           | )      | (146           | )      | —               |   | —           |   | (220             | )      |
| Equity in net income (loss) of subsidiaries   |   | 2,558                                         |   | —         |   | —               |   | (2,558           | )      | —           |   |
| Other , net                                   |   | —                                        |   | (269           | )      | 533                  |   | —           |   | 264              |   |
| Income (loss) before income tax provision     |   | (1,029                                        | )      | 1,374          |   | 2,154                |   | (2,601           | )      | (102             | )      |
| Income tax provision                          |   | —                                        |   | 10             |   | 917                  |   | —           |   | 927              |   |
| Net income (loss)                             |   | $                                             | (1,029 | )              | $      | 1,364                |   | $                | 1,237  |             | $      | (2,601 | ) | $ | (1,029 | ) |

 

**THERMADYNE HOLDINGSCORPORATION**

**CONDENSED CONSOLIDATINGSTATEMENT OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 31,2004**

 
|                                                       |   | **Parent  Thermadyne  Holdings  Corporation** |   | **Guarantors** |   | **Non-  Guarantors** |   | **Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------------|--------|-----------------------------------------------|--------|----------------|--------|----------------------|--------|------------------|--------|------------------|--------|
|                                                       |   |                                          |   |           |   |                 |   |             |   |             |   |
| Net cash provided by (used in) operating  activities       |   | $                                             | (955   | )              | $      | (5,734               | )      | $                | (1,420 | )                | $      | (2,601 | ) | $ | (10,710 | ) |
| Cash flows from investing activities:                      |   |                                          |   |           |   |                 |   |             |   |             |   |
| Capital expenditures                                       |   | —                                        |   | (3,169         | )      | (869                 | )      | —           |   | (4,038           | )      |
| Net cash used in investing activities                      |   | —                                        |   | (3,169         | )      | (869                 | )      | —           |   | (4,038           | )      |
| Cash flows from financing activities:                      |   |                                          |   |           |   |                 |   |             |   |             |   |
| Net borrowings under revolving credit  facility            |   | —                                        |   | 424            |   | —               |   | —           |   | 424              |   |
| Net (repayments) borrowings of long-term  obligations      |   | (5,000                                        | )      | 20,455         |   | 534                  |   | —           |   | 15,989           |   |
| Changes in net equity and advances to /  from subsidiaries |   | 5,955                                         |   | (7,630         | )      | (926                 | )      | 2,601            |   | —           |   |
| Financing fees and other                                   |   | —                                        |   | (5,175         | )      | (1,694               | )      | —           |   | (6,869           | )      |
| Net cash provided (used in) financing  activities          |   | 955                                           |   | 8,074          |   | (2,086               | )      | 2,601            |   | 9,544            |   |
|                                                       |   |                                          |   |           |   |                 |   |             |   |             |   |
| Net decrease in cash and cash equivalents                  |   | —                                        |   | (829           | )      | (4,375               | )      | —           |   | (5,204           | )      |
| Cash and cash equivalents at beginning of  period          |   | —                                        |   | 609            |   | 16,175               |   | —           |   | 16,784           |   |
| Cash and cash equivalents at  end of period           |   | $                                             | — |           | $      | (220                 | )      | $                | 11,800 |             | $      | — |   | $ | 11,580 |   |

 

17

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**14.          Selling, General and AdministrativeExpenses**

 

In 2003, the Company initiated a plan to relocate and consolidate certain U.S. manufacturing facilities.  During the three months ended March 31, 2004 and 2003 the Company incurred costs of $2,577 and $99, respectively, which were included in Selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.  Of the amount recorded in the first quarter of 2004, $270 related to severance costs for approximately 50 employees.  The Company also recorded $2,307 related to incentive bonuses, employee relocation costs, costs to relocate equipment, and other expenses associated with the relocation and consolidation of these facilities.  As of March 31, 2004 a liability of approximately $1,236 is recorded in the accompanying condensed consolidated balance sheet for severance costs and incentive bonuses earned but not paid.  Through March 31, 2004, the Company has incurred cumulative costs of approximately $5,160 in connection with these activities.  Currently, the Company expects to complete these activities in the third quarter of 2004 with additional costs of approximately $5,200 to be incurred.

 

Selling, general and administrative expenses for the three months ended March 31, 2003 also includes $277 of costs incurred related to an information technology project.

 

18

 

**Item 2**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

We are a leadingglobal designer and manufacturer of cutting and welding products, includingequipment, accessories and consumables. Our products are used by manufacturing,construction and foundry operations to cut, join and reinforce steel, aluminumand other metals. Common applications for our products include shipbuilding,railcar manufacturing, offshore oil and gas rig construction, fabrication, andthe repair and maintenance of manufacturing equipment and facilities. Weldingand cutting products are critical to the operations of most businesses thatfabricate metal, and we have well established and widely recognized brands.

 

On January 17,2003, our Predecessor Company and certain of its subsidiaries filed with theUnited States Bankruptcy Court for the Eastern District of Missouri (the Court)the First Amended and Restated Joint Plan of Reorganization (the “Plan”) andthe First Amended and Restated Disclosure Statement describing the Plan (the “DisclosureStatement”).  The Plan and theDisclosure Statement were filed with the SEC on Form 8-K on February 7,2003.  On April 3, 2003, the Courtconfirmed the Plan.  The Plan wasconsummated on May 23, 2003 (the “Effective Date”) as all conditions necessaryfor the Plan to become effective were satisfied or waived, and we emerged fromChapter 11 bankruptcy protection.

 

Effective June 1, 2003, we adopted the principles of “fresh-start”accounting pursuant to which our assets were recorded at their reorganizationvalue, which is defined as the fair value of the assets of the reorganizedcompany.  As part of our fresh-startrevaluation, we also recorded significant goodwill (reorganization value inexcess of identifiable assets).  Inaddition, as part of the reorganization, we significantly reduced our long-termdebt and eliminated our preferred stock. As a result of the foregoing, our financial data for the three monthsended March 31, 2003, as presented in the condensed consolidated financialstatements, is not comparable to prior periods.

 

**Overview**

 

The statements in this Quarterly Report on Form 10-Q that relate tofuture plans, events or performance are forward-looking statements.  Actual results could differ materially dueto a variety of factors and the other risks described in this Quarterly Reportand the other documents we file from time to time with the Securities andExchange Commission.  Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date hereof. We undertake no obligation to publicly release the result of anyrevisions to these forward-looking statements that may be made to reflectevents or circumstances after the date hereof or that reflect the occurrence ofunanticipated events.

 

###### **RESULTS OF OPERATIONS**

 

***Three Months Ended March 31, 2004 Compared toThree Months Ended March 31, 2003***

 

Net sales for the three-month period ended March 31, 2004 were $118.7million, which was an 18.2% increase over net sales of $100.5 million for the samethree-month period in 2003.  Domesticsales were $66.7 million for the first quarter of 2004, compared to $55.7million for the same period last year, which is an increase of 19.7%.  The increase in the domestic sales wasdriven primarily by a stronger industrial economy in the U.S.  International sales were $52.0 million forthe three months ended March 31, 2004

 

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compared to $44.8 million for the first quarter of 2003, or an increaseof 16.1%.  A weaker U.S. dollar was theprimary reason for the sales increase for the quarter.  Excluding the increase in sales resultingfrom changes in foreign currency, our international sales would have been down2.4% compared to the first quarter of 2003. The overall impact of pricing on our sales for the first quarter incomparison to the same period in 2003 was minimal.

 

Cost of goods sold for the first quarter of 2004 increased by 3.2percentage points to 67.5% from 64.3% for the first quarter last year.  The increase relates to additionaldepreciation expense resulting from fresh-start accounting of 0.8 percentagepoints, higher material costs of 1.2 percentage points related to priceincreases for base metals such as copper, brass, and steel used in many of theCompany’s products as well as higher prices for purchased components andfinished goods, and higher distributor rebate allowances of 0.4 percentagepoints.  Also contributing to theincrease in cost of goods sold was additional inventory reserves related to ourbuild in inventory of 0.4 percentage points, and higher overhead spending forsupplies, repairs and maintenance, overtime and utilities related to theincrease in production of 0.4 percentage points.  The effect of translating the local currency results of ourinternational business units into U.S. dollars, which does not affect cost ofgoods sold expressed as a percentage of sales, resulted in an increase in costof goods sold of approximately $5.9 million for the three months endedMarch 31, 2004.

 

Selling, general and administrative expenses were $32.2 million for thethree-month period ended March 31, 2004, or 24.1% more than the samethree-month period in 2003.  As apercentage of sales, selling, general and administrative expenses were 27.1%for the quarter ended March 31, 2004, versus 25.8% for the three months endedMarch 31, 2003.  Selling, general andadministrative expenses increased in the first quarter of 2004 as compared tothe same period in 2003 partly as a result of changes in foreign currency. Thethree-month period ended March 31, 2004 included increases in selling, generaland administrative expenses of $1.6 million as a result of changes inforeign currency rates. Also contributing to the higher selling, general andadministrative expenses was increased spending associated with ourrestructuring of certain domestic manufacturing facilities. During thethree-month period ended March 31, 2004 we incurred costs of $2.6 millionrelated to the relocation and consolidation of certain U.S. manufacturingfacilities, compared to $0.1 million incurred in the same period in 2003.  Selling, general and administrative expensesfor the first quarter of 2003 includes $0.2 million related to an informationtechnology project.  The remainingincrease in selling, general and administrative expenses in the first quarterof 2004 compared to the first quarter of 2003 relates primarily to expensesthat fluctuate with sales such as commissions.

 

Reorganization items for the three-month period ended March 31, 2003consisted of $2.0 million of professional fees and expenses, and $0.2 millionof other reorganization costs.

 

Interest expense for the first quarter of 2004 was $4.8 million, whichcompares to $5.2 million for the first quarter of 2003.  The difference results primarily from areduction in long-term debt.

 

An income taxprovision of $0.9 million was recorded on a pretax loss of $0.1 million for thethree months ended March 31, 2004.  Anincome tax provision of $0.9 million was recorded on a pretax income of $2.1million for the quarter ended March 31, 2003. The income tax provision for both periods primarily relates to incomegenerated in certain foreign jurisdictions, and differs from that determined byapplying the U.S. federal statutory rate primarily due to nondeductibleexpenses and the disallowance of losses.

 

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**LIQUIDITY AND CAPITALRESOURCES**

 

***Working Capital andCash Flows***

 

Operating activities used $10.7 million of cash during the first threemonths of 2004, compared to $2.8 million of cash used during the same timeperiod in 2003. Operating assets and liabilities used $16.9 million of cashduring the three-month period ended March 31, 2004, compared to $8.0 million ofcash used in the first quarter of 2003. Accounts receivable used $7.8 million during the three months endedMarch 31, 2004, compared to $3.0 million used during the same period in 2003.The increase in accounts receivable during the three months ended March 31,2004 resulted from higher sales. Inventory used $7.8 million of cash throughthe first three months of 2004, as compared to a $4.4 million use of cash inthe same three-month period last year. The increase in inventory during the first quarter of 2004 resultedprimarily from a provisional increase in safety stock levels at two of our U.S.production facilities that we are in the process of consolidating, and atemporary increase in stock levels as part of our initiative to improvefill-rates.  Accounts payable provided$1.3 million of cash in the first quarter of 2004, which compares to cashprovided of $3.8 million in the same period in 2003.  Accrued liabilities used $2.9million of cash in both the first quarter of 2004 and the comparable quarter in2003.  Included in the $2.9 million ofcash used in the first quarter of 2004 was approximately $2.2 million paid toour unsecured creditors.  Ourreorganization plan called for a total of $7.5 million to be paid to theunsecured creditors, of which $3.6 million has been paid as of March 31,2004.  We anticipate the majority of theremaining amount owed to the unsecured creditors will be paid prior to the endof the year.  Accrued interest increased$2.2 million in the first quarter of 2004 and relates primarily to our seniorsubordinated notes.

 

Capitalexpenditures were $4.0 million during the three months ended March 31, 2004,which is $1.8 million more than was spent during the same period last year.

 

Financing activities provided $9.5 million of cash during the firstquarter of 2004 compared to cash provided of $0.8 million during the sameperiod last year.  Net borrowings were$16.4 million for the three months ended March 31, 2004 compared to $0.2million for the same quarter last year. The increase in borrowings was used to pay approximately $5.2 million offees associated with the refinancing completed in February 2004 and to fundoperating activities.

 

***Liquidity***

 

Our principaluses of cash will be capital expenditures, working capital and debt servicerequirements under the Senior Subordinated Notes, the Working Capital Facilityand the New Term Loan described below. We expect that ongoing requirements for debt service, capitalexpenditures and working capital will be funded from operating cash flow andborrowings under the Working Capital Facility.

 

*Senior SubordinatedNotes*

 

On February 5, 2004, we completed a private placement of $175.0 millionin aggregate principal of 91⁄4% Senior Subordinated Notes due 2014 (the “SeniorSubordinated Notes”). The net proceeds from the offering, together withapproximately $20.0 million of borrowings under a new term loan (the “New TermLoan”) added through an amendment and restatement to the our GECC creditagreement (the “New Credit Agreement”), were used to repay all outstandingborrowings under the existing $180.0 million senior term loan facility and toreduce amounts outstanding under the New Credit Agreement. The notes wereoffered in reliance upon an exemption from registration under the SecuritiesAct of 1933 for an offer and sale of securities that does not involve a publicoffering. In May we registered, under the Securities Act of 1933,

 

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notes with terms identical to the Senior Subordinated Notes in regardsto an exchange offer.  We expect tocomplete the exchange offer by the end of the second quarter.

 

The Senior Subordinated Notes are unsecuredsenior subordinated obligations and are subordinated in right of payment to allexisting and future Senior Indebtedness (as defined in the indenture). Interestwill accrue at the rate of 9.25% per annum and will be payable semiannually inarrears on February 1 and August 1, commencing on August 1,2004.

 

*New Credit Agreement*

 

The New Credit Agreement consists of the New Term Loan and a $50 million revolving credit facility (the “Working CapitalFacility”).  Up to $20 million of the Working Capital Facility may be used forletters of credit.  Actual borrowingavailability is subject to a borrowing base calculation, which is equal to 1.5times Adjusted EBITDA.  The New CreditAgreement defines Adjusted EBITDA as 100% of the EBITDA for us and our domesticsubsidiaries plus 65% of the EBITDA of our Canadian subsidiaries.  EBITDA is defined in the New CreditAgreement as net income less income tax credits, interest income, gains fromextraordinary items, any aggregate net gain on the sale of tangible assets, andany other non-cash gains added in determining net income; plus, provision forincome taxes, interest expense, depreciation, amortization of intangibles,amortization of deferred financing costs, any amount deducted from net incomeas a result of stock or stock option grants, the accrual net of any payments incash related to net periodic post-retirement benefit costs, losses from extraordinaryitems, reorganization costs related to the Chapter 11 cases, and anynon-recurring employee severance expenses and non-recurring cash expensesrelated to plant reorganizations, not to exceed $5.0 million in the aggregate,the non-cash portion of any expense or loss attributable to any interestrate agreement or arrangement permitted under the New Credit Agreement prior to the termination or expiration ofsuch agreement or arrangement, and $8.9 million of non-cash reservesrecorded at December 31, 2003 related to the implementation of a revisedreserve methodology for inventory and accounts receivable and implementation ofan additional accrual for warranty obligations. Availability under the WorkingCapital Facility may also be limited if we fail to meet certain levels ofAdjusted EBITDA. Borrowings under the New Term Loan and the Working CapitalFacility accrue interest, at our option, at the prime lending rate plus 2.25%,in the case of index rate loans, or at theLondon Interbank Offered Rate (“LIBOR”) plus 3.25%, in the case of LIBORloans. Unused portions of the WorkingCapital Facility are charged 75 basis points as of March 31, 2004. The NewCredit Agreement is secured by substantially all of the assets of our domesticsubsidiaries, including a pledge of the capital stock of substantially all ofour subsidiaries, subject to certain limitations with respect to foreignsubsidiaries.  The New Credit Agreementcontains financial covenants, including minimum levels of EBITDA (determined ona consolidated basis) and other customary provisions.  As of March 31, 2004, we had outstanding borrowings of $13.3million and issued letters of credit totaling $11.0 million under the WorkingCapital Facility.  We had availabilityof $25.7 million under the Working Capital Facility at March 31, 2004. TheWorking Capital Facility terminates on May 23, 2006.  The New Term Loan matures on December 31, 2008 andrequires quarterly principal payments totaling $4.0 million in 2005, $5.0million in 2006, $5.0 million in 2007 and $6.0 million in 2008.

 

We expect ouroperating cash flow, together with borrowings under the Working CapitalFacility, will be sufficient to meet our anticipated future operating expenses,capital expenditures and the debt service requirements of the New CreditAgreement and the Senior Subordinated Notes. However, our ability to generate sufficient cash flow to meet ouroperating needs will be affected by general economic, financial, competitive,legislative, regulatory, business and other factors beyond our control.

 

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***Contractual Obligations and CommercialCommitments***

 

In the normalcourse of business, we enter into contracts and commitments that obligate us tomake payments in the future. The table below sets forth our significant futureobligations by time period.

 

Payments Due by Period

(Amounts in thousands)

 
| **Contractual  Obligations** |   | **Total** |    | **Remaining  2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008 and  Beyond** |   |
|------------------------------|--------|-----------|---------|---------------------|--------|----------|--------|----------|--------|----------|--------|----------------------|--------|
|                         |   |      |    |                |   |     |   |     |   |     |   |                 |   |
| Long-term debt               |   | $         | 214,479 |                | $      | 19,016   |   | $        | 4,000  |     | $      | 5,000                |   | $ | 5,000 |   | $ | 181,463 |   |
| Capital leases               |   | 32,638    |    | 3,687               |   | 4,187    |   | 3,327    |   | 2,869    |   | 18,568               |   |
| Operating leases             |   | 27,804    |    | 4,086               |   | 4,788    |   | 3,931    |   | 3,322    |   | 11,677               |   |
| Purchase obligations         |   | 26,406    |    | 12,704              |   | 5,279    |   | 4,206    |   | 4,200    |   | 17                   |   |
| Total                        |   | $         | 301,327 |                | $      | 39,493   |   | $        | 18,254 |     | $      | 16,464               |   | $ | 15,391 |   | $ | 211,725 |   |

 

The amounts shownfor capital leases include the effective interest expense component, which was$11,967 at March 31, 2004. Our purchase obligations relate primarily toinventory purchase commitments. At March 31, 2004, we had issued letters ofcredit totaling $11,007 under our Working Capital Facility.

 

**Item 3.**** Market Risk**

 

There have been no changes in our exposure to foreign currencyrisk.  We are exposed to changes ininterest rates related to our variable rate debt.  We do not believe that changes in interest rates will have amaterial effect on our financial condition or results of operations.

 

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

 

**Item 4.****  Controls andProcedures**

 

Our chief executive officer and chieffinancial officer, with the participation of management, evaluated ourdisclosure controls and procedures as of March 31, 2004. Based on thatevaluation, our chief executive officer and chief financial officer concludedour disclosure controls and procedures were, as of March 31, 2004,(i) designed to ensure that material information relating to us and ourconsolidated subsidiaries is made known to the chief executive officer andchief financial officer by others within those entities, particularly duringthe period in which this report was being prepared, and (ii) effective, inthat they provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act are recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms.

 

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There have not been changes in our internal control over financialreporting that occurred during our three months ended March 31, 2004 that havematerially affected or are reasonably likely to materially affect our internalcontrol over financial reporting.

 

#### **PART II.** OTHER INFORMATION

 

 

**Item 6.****  Exhibits and Reports on Form 8-K**

 

a)                                      Exhibits

 

31.1                           Certification Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

31.2                           Certification Pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

32.1                           Certification Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

32.2                           Certification Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

 

 

b)                                     Reportson Form 8-K

 

On January 20, 2004, theregistrant filed a current report on Form 8-K dated January 20, 2004 toannounce that it intended to offer $165 million of Senior Subordinated Notesdue 2014 in a private placement.

 

On January 30, 2004,the registrant filed a current report on Form 8-K dated January 29, 2004to announce the pricing of its offering of $175 million in aggregate principalamount of Senior Subordinated Notes due 2014.

 

On February 5, 2004,the registrant filed a current report on Form 8-K dated February 5,2004 to announce the completion of its sale of $175 million in aggregateprincipal amount of Senior Subordinated Notes due 2014.

 

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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 theundersigned thereunto duly authorized.

 

 
|                                | **THERMADYNE HOLDINGS  CORPORATION** |
|-------------------------------------|--------------------------------------|
|                                |                                 |
|                                | By:                                  |   | /s/ Paul D. Melnuk |   |
|                                |                                 |   |   |
|                                |                                 |   | Paul D. Melnuk |
|                                |                                 |   | 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:   May 10, 2004 |                                 |   |   |

 

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