**Securities and ExchangeCommission**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

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

 

**For the quarterly period ended March 31, 2005**

 

**OR**

 

**o****          ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                                              to                                              **

 

**Commission file number  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 Area Code                **(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, 2005 was 13,313,973.

 

 

----

 

## **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.                                  | Quantitative and Qualitative Disclosures  About Market Risk |
|                                     |   |
| Item 4.                                  | Controls and Procedures |
|                                     |   |
| **PART II – OTHER INFORMATION**     |
| ** **                               | ** ** |
| Item 6.                                  | Exhibits |
|                                     |   |
| **SIGNATURES**                           |

 

2

----

 

**PARTI.  FINANCIAL INFORMATION**

**Item 1.**

 

**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

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

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

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

 

See accompanying notes to condensed consolidated financial statements.

 

4

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**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(Unaudited)**

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

 

See accompanying notes to condensedconsolidated financial statements.

 

5

----

 

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Inthousands, except per share data)**

 

**1.****            ****Basis of Presentation**

 

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

 

Theaccompanying unaudited condensed consolidated financial statements ofThermadyne have been prepared in accordance with U.S. generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by U.S. generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have beenincluded.  The combined results ofoperations of the Company for the three months ended March 31, 2005 are notnecessarily indicative of the results that may be expected for the year endedDecember 31, 2005.  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, 2004.

 

**2.****            ****Significant Accounting Policies**

 

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

 

Goodwilland trademarks are tested for impairment annually and whenever events occur orcircumstances change that would more likely than not reduce the fair value ofthe reporting unit below its carrying value.

 

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

 

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

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

 

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

 

TheCompany designates and documents all relationships between hedging instrumentsand hedged items, as well as its risk management objectives and strategies forundertaking hedge transactions. The Company also assesses, both at theinception of the hedge and on an on-going basis, whether the hedge iseffective.

 

6

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

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

 

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

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

 

***Stock-Based Compensation***. Stock options are granted for a fixed number of shares to employees anddirectors with an exercise price equal to or greater than the fair value of theshares at the date of grant. 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 related interpretations. Accordingly, no stock-based employeecompensation cost is reflected in operating results. Pro forma informationregarding net operating results and per share results is required by SFASNo. 123,*Accounting for Stock-BasedCompensation*(“SFAS No. 123”), which also requires that theinformation be determined as if employee stock options were granted under thefair value method of that statement.

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based Payment*, (“SFAS No. 123(R)”), which is arevision of SFAS No. 123. SFAS No. 123(R) supersedes APB 25, and amendsSFAS No. 95, *Statement of Cash Flows*.Generally, the approach in SFAS No. 123(R) is similar to the approach describedin SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran alternative. In April 2005, the Securities and Exchange Commission delayedthe effective date of SFAS No. 123(R) to January 1, 2006.

 

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

 

7

----

 

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

 

**3.****            ****Reclassifications**

 

Certainprior period amounts have been reclassified to conform to current periodpresentation.  The more significantcategories of reclassifications are outlined below.

 

***Rebates.*** Rebate costs, which the Company had included in cost of goods sold priorto the fourth quarter of 2004, have been reclassified as a reduction insales.  These reclassifications decreasedboth net sales and cost of goods sold approximately $2,043 for the three monthsended March 31, 2004.

 

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

 

***Restructuring Costs.*** Certain period costs previously classified as restructuring costs werereclassified to cost of goods sold. These reclassifications increased cost ofgoods sold and decreased restructuring costs approximately $416 for the threemonths ended March 31, 2004.

 

***Warranty Costs.*** Warranty costs incurred at one of the Company’s distribution operationswere previously classified as other expenses. To conform to currentpresentation of other similar costs, these warranty costs were reclassified ascost of goods sold.  Thesereclassifications increased cost of goods sold and decreased other expensesapproximately $104 for the three months ended March 31, 2004.

 

***Shipping and Other AdministrativeCosts.***  Certain shipping and other administrativecosts incurred to manufacture the Company’s products previously classified asselling, general and administrative have been reclassified to cost of goodssold during the first quarter of 2005. These reclassifications increased cost of goods sold and decreasedselling, general and administrative expenses approximately $3,312 for the threemonths ended March 31, 2004.

 

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

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

 

**4.****            ****Comprehensive Income (Loss)**

 

Comprehensiveincome (loss) totaled ($3,487) and ($2,617) for the three months endedMarch 31, 2005 and 2004, respectively.

 

8

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**5.****            ****Inventories**

 

Thecomposition of inventories was as follows:

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

 

**6.****            ****Intangible Assets**

 

The composition ofintangibles was as follows:

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

 

Amortizationexpense amounted to $902 and $1,035 for the three months ended March 31, 2005and 2004, respectively.  Estimatedamortization expense for each of the next five fiscal years has not changedsignificantly from the amounts disclosed in the Company’s annual report on Form10-K for the year ended December 31, 2004.

 

**7.****            ****Debt and Capital LeaseObligations**

 

Thecomposition of long-term obligations was as follows:

 

9

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

 

***Senior Subordinated Notes***

 

OnFebruary 5, 2004, the Company completed a private placement of $175,000 inaggregate principal of 91/4% Senior Subordinated Notesdue 2014 (the “Senior Subordinated Notes”). The net proceeds from the offering,together with approximately $20,000 of borrowings under a new term loan (the “TermLoan”) added through an amendment and restatement to the General ElectricCapital Corporation (“GECC”) credit agreement (the “Credit Agreement”), wereused to repay all outstanding borrowings under the $180,000 senior term notefacility and to reduce amounts outstanding under the Company’s revolving creditfacility. In May 2004, for the purpose of an exchange offer, the Companyregistered notes with terms identical to the Senior Subordinated Notes underthe Securities Act of 1933.  The Companycompleted the exchange offer in the second quarter and more than 99% of theoriginal notes were exchanged for the registered notes.

 

The Senior Subordinated Notes are unsecured seniorsubordinated 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 91/4% per annum and is payablesemiannually in arrears on February 1 and August 1.

 

***Credit Agreement***

 

On November 22, 2004, theCompany entered into the Amended Credit Agreement. The Amended Credit Agreementthat matures on November 22, 2009 added the Company’s foreign subsidiaries inAustralia, the United Kingdom and Canada as credit collateral parties, andchanged the determination of the borrowing base from a cash flow-based formulato an asset-based formula.  Under theAmended Credit Agreement, the total loan commitment was increased from $70,000to $91,300 (subject to the limitation described below), with a revolving loancommitment of $80,000 (the “Working Capital Facility”) and term loancommitments of $11,300 (subject to the limitation described below). The termloan commitments consist of a $9,250 Term A Loan and a maximum $2,050 DelayedDraw Term Loan dependent upon the final evaluation of certain real propertylocated in Australia. Up to $25,000 of the Working Capital Facility isavailable for letters of credit. The Amended Credit Agreement is secured bysubstantially all of the assets of the Company’s domestic subsidiaries and theCompany’s foreign subsidiaries in Australia, the United Kingdom and Canada,including a pledge of the capital stock of substantially all of the Company’ssubsidiaries, subject to certain limitations with respect to foreignsubsidiaries. Borrowings under the revolving loan commitment may not exceed 85%of eligible receivables plus the lesser of (i) 85% of the net orderlyliquidation value of eligible inventories or (ii) 65% of the book value ofinventories less customary reserves. The Amended Credit Agreement containsfinancial covenants, including minimum levels of EBITDA (as defined in theCredit Agreement and determined on a consolidated basis) and other customaryprovisions and requires the Second-Lien Facility to be paid or refinanced 60days prior to its maturity.  Inconnection with the Amended Credit Agreement, the Company’s foreignsubsidiaries in Australia, the United Kingdom and Canada granted secondsecurity interests in their assets to the lenders under the

 

10

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Company’s$20,000 Second-Lien Facility and guaranteed the Company’s $175,000 91/4%Senior Subordinated Notes.  Interestrates on the Amended Credit Agreement are, at the Company’s option, LIBOR plus2.25% or the prime rate plus 0.5% on the revolving facility, and LIBOR plus2.50% or the prime rate plus 0.75% on the term loan facilities. All of thesepercentages are subject to an interest rate grid and will decline if certainconditions are met. Principal payments on the term loan facilities are equalquarterly payments based on a seven-year amortization schedule, with theremaining amount paid at maturity. Unused portions of the revolving creditfacility bear interest at the rate of 0.5% per annum.  The Amended Credit Agreement limits total borrowingsunder the facility to $75,000 until the Second-Lien Facility is paid orrefinanced with long-term debt. The Amended Credit Agreement does under certainconditions allow for the use of the revolving facility to repay the Second-LienFacility.  As of March 31, 2005, theCompany had outstanding borrowings of $24,926 and issued letters of credittotaling $12,095 under the revolving facility. The Company had availability of $20,158 under the revolving facility atMarch 31, 2005. The revolving facility terminates on November 22, 2009.  The Term A Loan requires equal quarterlyprincipal payments of $330 per quarter, which began December 31, 2004 andcontinues through October 31, 2009, with the balance of the outstandingprincipal being payable on November 22, 2009. As of March 31, 2005 the Company did not have access to the Delayed DrawTerm Loan.

 

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

 

OnMarch 16, 2005 and March 30, 2005, the Company amended the Amended CreditAgreement to modify certain financial covenants and enable the Company toextend its Second-Lien Facility.

 

***Second-Lien Facility***

 

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

 

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

 

InFebruary 2004, the Company entered into an interest rate swap arrangement toconvert a portion of the fixed rate exposure on its Senior Subordinated Notesto variable rates. Under the terms of the interest rate swap contract, whichhas a notional amount of $50,000, the Company receives interest at a fixed rateof 91/4% and pays interest at a variable rate equal toLIBOR plus a spread of 442 basis points. The six-month LIBOR rate on eachsemi-annual reset date determines the variable portion of the interest rateswap.  The six-month LIBOR rate for eachsemi-annual reset date is determined in arrears.

 

11

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The Company has designatedthe interest rate swap as a fair value hedge of its fixed rate debt. The termsof the interest rate swap contract and hedged item meet the criteria to bemeasured using the short-cut method defined in SFAS No. 133 and thereforeperfect effectiveness is assumed over the term of the swap.

 

In accordance withSFAS No. 133, as of March 31, 2005, the Company recorded a fair valueadjustment to the portion of its fixed rate long-term debt that is hedged. Thisfair value adjustment of $1,430 was recorded as a decrease to long-termobligations, with the related value for the interest rate swap’s non-currentportion recorded in other long-term liabilities. Interest rate differentialsassociated with the interest rate swap are recorded as an adjustment to acurrent asset or liability, with the offset to interest expense over the lifeof the interest rate swap.  For the threemonths ended March 31, 2005, the Company realized a reduction in its expense asa result of the interest rate swap of $141.

 

**9.****            ****Warrants**

 

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

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

 

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

 

TheClass C Warrants were issued to the former majority equity holders of theCompany. The former equity holders received no other significant disbursementsor consideration upon emergence from Chapter 11. These warrants have beentreated as an exchange of old equity securities for new equity securities inconnection with recording the reorganization entries and establishing theopening fresh-start balance sheet.

 

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

 

**10.****         ****Stock Options**

 

The 2004 Non-EmployeeDirectors Stock Option Plan (the “Directors Plan”) was adopted in May 2004 forthe Company’s board of directors. Up to 200,000 shares of the Company’s commonstock may be issued pursuant to awards granted by the Compensation Committeeunder the Directors Plan.

 

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

 

12

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

 

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

 

The following table illustrates the effect on netincome (loss) per share if the fair value expense recognition requirements ofSFAS No. 123 had been applied to all stock options granted under theplans:

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

 

**11.****         ****Income Taxes**

 

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

 

**12.****         ****Employee Benefit Plans**

 

***401(k)Retirement Plan****.*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.

 

***PensionPlans.*****TheCompany’s subsidiaries have had various noncontributory defined benefit pensionplans which covered substantially all U.S. employees. The Company froze andcombined three noncontributory defined benefit pension plans through amendmentsto such plans effective December 31, 1989 into one plan (the “Retirement Plan”).All former participants of these plans became eligible to participate in the401(k) Retirement Plan effective January 1, 1990.

 

The Company’s Australian subsidiary has aSuperannuation Fund (the “Fund”) established by a Trust Deed. Pension benefitsare actuarially determined and are funded through mandatory participantcontributions and the Company’s actuarially determined contributions.  The prepaid benefit cost is not included inthe table below or in the balance sheet, as the Company has no legal right toamounts included in this fund. In addition, upon dissolution of the Fund, anyexcess funds are required to be allocated to the participants as determined bythe actuary. Accordingly, the Company accounts for this fund as a definedcontribution plan. The actuarial assumptions used to determine the Company’scontribution, the funded status, and the retirement benefits are consistentwith previous years.

 

13

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***OtherPostretirement Benefits****.*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 on the accrual basisas employees render service to earn the benefit. The Company continues to fundthe cost of health care and life insurance benefits in the year incurred.

 

Net periodic pension andother postretirement benefit costs include the following components:

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

 

The Company previouslydisclosed in its financial statements for the year ended December 31, 2004 thatit expected to contribute $1,172 to its Retirement Plan in 2005. As of March31, 2005, $221 has been contributed.  TheCompany presently anticipates contributing an additional $951 to fund itspension plan in 2005.

 

**13.****         ****Segment Information**

 

Although the Company’soperations are comprised of several product lines and operating locations,similarity of products, paths to market, end users, and production processesresults in performance evaluation and decisions regarding allocation ofresources 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.

 

Summarizedfinancial information concerning the Company’s geographic regions is shown inthe following table:

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

 

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

 

***Product Line Information***

 

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

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

 

**14.****         ****Condensed Consolidating 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 and the Company’s foreign subsidiaries in Australia, the United Kingdom and Canada (“Guarantor Subsidiaries”) fully and unconditionally guarantee the Senior Subordinated Notes and are jointly and severally liable for all payments under the Senior Subordinated Notes. Each of the Guarantor Subsidiaries is wholly owned by the Company.

 

Thefollowing condensed consolidating financial information includes the accountsof the Company, which has no independent assets or operations, the combinedaccounts of the Guarantor Subsidiaries and the combined accounts of thenon-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.  This information wasprepared on the same basis as the consolidated financial statements:

 

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**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**MARCH 31, 2005**

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

 

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**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATING BALANCE SHEET**

**DECEMBER 31, 2004**

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

 

17

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**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED MARCH 31, 2005**

 
| ** **                                    | ** ** | **Parent  Thermadyne  Holdings  Corporation** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                          |       |                                          |       |           |       |                 |       |             |       |             |       |
| Net sales                                     |       | $                                             | —     |           | $          | 113,257              |       | $                | 32,644     |             | $          | (19,860 | ) | $ | 126,041 |   |
| Cost of goods sold                            |       | —                                        |       | 81,672         |       | 25,956               |       | (19,605          | )          | 88,023           |       |
| Gross Margin                                  |       | —                                        |       | 31,585         |       | 6,688                |       | (255             | )          | 38,018           |       |
|                                          |       |                                          |       |           |       |                 |       |             |       |             |       |
| Selling, general and administrative  expenses |       | —                                        |       | 22,021         |       | 6,011                |       | —           |       | 28,032           |       |
| Amortization of intangibles                   |       | —                                        |       | 784            |       | 118                  |       | —           |       | 902              |       |
| Net periodic postretirement benefits          |       | —                                        |       | 615            |       | —               |       | —           |       | 615              |       |
| Restructuring costs                           |       | —                                        |       | 136            |       | —               |       | —           |       | 136              |       |
| Operating income (loss)                       |       | —                                        |       | 8,029          |       | 559                  |       | (255             | )          | 8,333            |       |
| Other income (expense):                       |       |                                          |       |           |       |                 |       |             |       |             |       |
| Interest, net                                 |       | (3,771                                        | )          | (1,447         | )          | (346                 | )          | —           |       | (5,564           | )          |
| Amortization of deferred financing costs      |       | (125                                          | )          | (305           | )          | —               |       | —           |       | (430             | )          |
| Equity in net income (loss) of subsidiaries   |       | 4,886                                         |       | —         |       | —               |       | (4,886           | )          | —           |       |
| Other, net                                    |       | —                                        |       | 77             |       | (475                 | )          | —           |       | (398             | )          |
| Income (loss) before income tax provision     |       | 990                                           |       | 6,354          |       | (262                 | )          | (5,141           | )          | 1,941            |       |
| Income tax (benefit) provision                |       | —                                        |       | (76            | )          | 1,027                |       | —           |       | 951              |       |
| Net income (loss)                             |       | $                                             | 990        |           | $          | 6,430                |       | $                | (1,289     | )                | $          | (5,141 | ) | $ | 990 |   |

 

**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED MARCH 31, 2004**

 
| ** **                                    | ** ** | **Parent  Thermadyne  Holdings  Corporation** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                          |       |                                          |       |           |       |                 |       |             |       |             |       |
| Net sales                                     |       | $                                             | —     |           | $          | 108,909              |       | $                | 26,136     |             | $          | (18,357 | ) | $ | 116,688 |   |
| Cost of goods sold                            |       | —                                        |       | 78,942         |       | 21,363               |       | (18,314          | )          | 81,991           |       |
| Gross Margin                                  |       | —                                        |       | 29,967         |       | 4,773                |       | (43              | )          | 34,697           |       |
|                                          |       |                                          |       |           |       |                 |       |             |       |             |       |
| Selling, general and administrative  expenses |       | —                                        |       | 21,609         |       | 4,704                |       | —           |       | 26,313           |       |
| Amortization of intangibles                   |       | —                                        |       | 995            |       | 40                   |       | —           |       | 1,035            |       |
| Net periodic postretirement benefits          |       | —                                        |       | 687            |       | —               |       | —           |       | 687              |       |
| Restructuring costs                           |       | —                                        |       | 2,141          |       | —               |       | —           |       | 2,141            |       |
| Operating income (loss)                       |       | —                                        |       | 4,535          |       | 29                   |       | (43              | )          | 4,521            |       |
| Other income (expense):                       |       |                                          |       |           |       |                 |       |             |       |             |       |
| Interest, net                                 |       | (3,513                                        | )          | (983           | )          | (275                 | )          | —           |       | (4,771           | )          |
| Amortization of deferred financing costs      |       | (74                                           | )          | (146           | )          | —               |       | —           |       | (220             | )          |
| Equity in net income (loss) of subsidiaries   |       | 2,558                                         |       | —         |       | —               |       | (2,558           | )          | —           |       |
| Other, net                                    |       | —                                        |       | 329            |       | 39                   |       | —           |       | 368              |       |
| Income (loss) before income tax provision     |       | (1,029                                        | )          | 3,735          |       | (207                 | )          | (2,601           | )          | (102             | )          |
| Income tax provision                          |       | —                                        |       | 245            |       | 682                  |       | —           |       | 927              |       |
| Net income (loss)                             |       | $                                             | (1,029     | )              | $          | 3,490                |       | $                | (889       | )                | $          | (2,601 | ) | $ | (1,029 | ) |

 

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**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 31, 2005**

 
| ** **                                                    | ** ** | **Parent  Thermadyne  Holdings  Corporation** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
|                                                          |       |                                          |       |           |       |                 |       |             |       |             |       |
| Net cash provided by (used in) operating  activities          |       | $                                             | (2,770     | )              | $          | 2,313                |       | $                | (1,308     | )                | $          | (5,141 | ) | $ | (6,906 | ) |
| Cash flows from investing activities:                         |       |                                          |       |           |       |                 |       |             |       |             |       |
| Capital expenditures                                          |       | —                                        |       | (1,052         | )          | (804                 | )          | —           |       | (1,856           | )          |
| Net cash used in investing activities                         |       | —                                        |       | (1,052         | )          | (804                 | )          | —           |       | (1,856           | )          |
| Cash flows from financing activities:                         |       |                                          |       |           |       |                 |       |             |       |             |       |
| Net borrowings under revolving credit  facility               |       | —                                        |       | 14,102         |       | —               |       | —           |       | 14,102           |       |
| Net (repayments) borrowings of long-term  obligations         |       | —                                        |       | (948           | )          | (958                 | )          | —           |       | (1,906           | )          |
| Changes in net equity and advances to /  from subsidiaries    |       | 2,770                                         |       | (12,844        | )          | 4,933                |       | 5,141            |       | —           |       |
| Financing fees and other                                      |       | —                                        |       | (657           | )          | (95                  | )          | —           |       | (752             | )          |
| Net cash provided by (used in) financing  activities          |       | 2,770                                         |       | (347           | )          | 3,880                |       | 5,141            |       | 11,444           |       |
|                                                          |       |                                          |       |           |       |                 |       |             |       |             |       |
| Effect of exchange rate changes on cash and  cash equivalents |       | —                                        |       | (90            | )          | 107                  |       | —           |       | 17               |       |
| Net increase in cash and cash equivalents                     |       | —                                        |       | 824            |       | 1,875                |       | —           |       | 2,699            |       |
| Cash and cash equivalents at beginning of  period             |       | —                                        |       | 5,558          |       | 1,092                |       | —           |       | 6,650            |       |
| Cash and cash equivalents at end of period                    |       | $                                             | —     |           | $          | 6,382                |       | $                | 2,967      |             | $          | — |   | $ | 9,349 |   |

 

**THERMADYNE HOLDINGS CORPORATION**

**CONDENSED CONSOLIDATING STATEMENT 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       | )              | $          | (5,199               | )          | $                | (1,955     | )                | $          | (2,601 | ) | $ | (10,710 | ) |
| Cash flows from investing activities:                         |       |                                          |       |           |       |                 |       |             |       |             |       |
| Capital expenditures                                          |       | —                                        |       | (3,510         | )          | (528                 | )          | —           |       | (4,038           | )          |
| Net cash used in investing activities                         |       | —                                        |       | (3,510         | )          | (528                 | )          | —           |       | (4,038           | )          |
| Cash flows from financing activities:                         |       |                                          |       |           |       |                 |       |             |       |             |       |
| Net borrowings under revolving credit  facility               |       | —                                        |       | 424            |       | —               |       | —           |       | 424              |       |
| Net (repayments) borrowings of long-term  obligations         |       | (5,000                                        | )          | 20,416         |       | 573                  |       | —           |       | 15,989           |       |
| Changes in net equity and advances to /  from subsidiaries    |       | 5,955                                         |       | (11,698        | )          | 3,142                |       | 2,601            |       | —           |       |
| Financing fees and other                                      |       | —                                        |       | (5,173         | )          | (1,900               | )          | —           |       | (7,073           | )          |
| Net cash provided by financing activities                     |       | 955                                           |       | 3,969          |       | 1,815                |       | 2,601            |       | 9,340            |       |
|                                                          |       |                                          |       |           |       |                 |       |             |       |             |       |
| Effect of exchange rate changes on cash and  cash equivalents |       | —                                        |       | 139            |       | 65                   |       | —           |       | 204              |       |
| Net decrease in cash and cash equivalents                     |       | —                                        |       | (4,601         | )          | (603                 | )          | —           |       | (5,204           | )          |
| Cash and cash equivalents at beginning of  period             |       | —                                        |       | 10,033         |       | 6,751                |       | —           |       | 16,784           |       |
| Cash and cash equivalents at end of period                    |       | $                                             | —     |           | $          | 5,432                |       | $                | 6,148      |             | $          | — |   | $ | 11,580 |   |

 

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**15.****         ****Restructuring Costs**

 

In 2003, the Company initiated a plan to relocate and consolidate certain U.S. manufacturing facilities.  During the three months ended March 31, 2004 the Company incurred costs of $2,141, which were included in Restructuring costs in the accompanying condensed consolidated statements of operations.  These activities were completed in the first quarter of 2005 and the remaining payments will be made in the balance of the year.

 

The following table provides the activity in therestructuring accrual during the three months ended March 31, 2005:

 
| **Restructuring accrual:**                    | ** ** | **December 31,  2004** | ** ** | **Provision** | ** ** | **Payments** | ** ** | **March 31,  2005** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|---------------|------------|--------------|------------|---------------------|------------|
|                                          |       |                   |       |          |       |         |       |                |       |
| Plant Consolidation - Employee Severance  and |       |                   |       |          |       |         |       |                |       |
| Incentive Bonuses                             |       | $                      | 214        |          | $          | 136          |       | $                   | (214       | ) | $ | 136 |   |
| Domestic Workforce Reorganization -  Employee |       |                   |       |          |       |         |       |                |       |
| Severance                                     |       | 1,093                  |       | —        |       | (583         | )          | 510                 |       |
|                                          |       | $                      | 1,307      |          | $          | 136          |       | $                   | (797       | ) | $ | 646 |   |

 

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**Item 2.**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF****FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

#### **Overview**

#### ** **

We are a leading global designer and manufacturer of gas and arccutting and welding products, including equipment, accessories and consumables.Our products are used by manufacturing, construction and foundry operations tocut, join and reinforce steel, aluminum and other metals. Common applicationsfor our products include shipbuilding, railcar manufacturing, offshore oil andgas rig construction, fabrication, and the repair and maintenance ofmanufacturing equipment and facilities. Welding and cutting products arecritical to the operations of most businesses that fabricate metal, and we havewell established and widely recognized brands.

 

#### **Forward-looking Statements**

#### ** **

Thestatements in this Quarterly Report on Form 10-Q that relate to future plans,events or performance are forward-looking statements.  Actual results could differ materially due toa variety of factors and the other risks described in this Quarterly Report andthe other documents we file from time to time with the Securities and ExchangeCommission (“SEC”).  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.

 

**FactorsThat Could Affect Future Results**

** **

Factors that could affectfuture results also include a potential risk related to compliance with therequirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404Rules”).  Beginning on December 31, 2004,our system of internal control over financial reporting must comply with therequirements of Section 404 Rules. We completed a comprehensive effort todocument and test our internal controls and confirm that such controls aredesigned appropriately and operating effectively for the year ending December31, 2004. For our report on internal control over financial reporting, see Item9A. *Controls and Procedures* in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2004.Until we have fully remediated the material weaknesses in our internal controlover financial reporting summarized in our report, investor confidence in ourinternal controls over financial reporting could be damaged and cause our stockor publicly traded bond price to decline.

 

Additionalrisk factors are described in our Annual Report on Form 10-K for thefiscal year ended December 31, 2004.

 

###### **RESULTSOF OPERATIONS**

 

***Three Months Ended March 31,2005 Compared to Three Months Ended March 31, 2004***

 

Netsales for the three months ended March 31, 2005 were $126.0 million, which wasan 8.0% increase over net sales of $116.7 million for the same three months in2004.  Domestic sales were $66.0 millionfor the first quarter of 2005, compared to $65.3 million for the same periodlast year, which is an increase of 1.0%. International sales were $60.0 million for the three months ended March 31,2005 compared to $51.4 million for the first quarter of 2004, or an increase of16.9%.  A weaker U.S. dollar was acontributing factor to the sales increase for the quarter.  Excluding the impact of favorable currencytranslation, international sales increased 11.4% compared to the first quarterof 2004. The increase in international sales was attributable mainly to solidgrowth in Asia-Pacific, Canada and South Africa.

 

Grossmargin for the first quarter of 2005 was $38.0 million, or 30.2% of sales,compared to $34.7 million, or 29.7% of sales, for the same period in 2004,which is an increase of 9.6%.  Incomparing these periods, marked improvements in labor efficiencies contributed$1.1 million, pricing net of increased rebate costs (which are

 

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anticipatedto be earned more evenly through the year) contributed $2.2 million,overhead spending and volume leverage contributed $4.2 million and other itemscontributed $0.8 million. These improvements were partially offset by highermaterial costs of $5.0 million. The effect of translating the localcurrency results of our international business units into U.S. dollars, whichdoesn’t affect gross margin expressed as a percentage of sales, resulted in anincrease in gross margin of $0.9 million for the first quarter.

 

Selling,general and administrative expenses were $28.0 million for the three monthsended March 31, 2005, or 6.5% more than the same three months in2004.  As a percentage of sales, selling,general and administrative expenses were 22.2% for the quarter ended March 31,2005, versus 22.5% for the three months ended March 31, 2004.  Included in the first quarter of 2005 are$0.5 million of unfavorable currency translation and $0.7 million of severancerelated to changes in senior management.

 

Duringthe three months ended March 31, 2005 we incurred restructuring costs of$0.1 million related to the relocation and consolidation of certain U.S.manufacturing facilities, compared to $2.1 million for the same period in2004.

 

Interestexpense for the first quarter of 2005 was $5.6 million, which compares to $4.8million for the first quarter of 2004. The difference results primarily from an overall increase in debtobligations as well as an increase in our average borrowing rate.

 

An income tax provision of $1.0 million was recorded on pretax incomeof $1.9 million for the three months ended March 31, 2005.  An income tax provision of $0.9 million wasrecorded on a pretax loss of $0.1 million for the quarter ended March 31,2004.  The income tax provision for bothperiods primarily relates to income generated in certain foreign jurisdictions,and differs from that determined by applying the U.S. federal statutory rateprimarily due to nondeductible expenses and the disallowance of losses.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

***Working Capital and Cash Flows***

 

Operatingactivities used $6.9 million of cash during the first three months of 2005,compared to $10.7 million of cash used during the same time period in 2004.Operating assets and liabilities used $14.5 million of cash during the threemonths ended March 31, 2005, compared to $16.8 million of cash used in thefirst quarter of 2004.

 

•      Accounts receivable used $7.5 million duringthe three months ended March 31, 2005, compared to $7.8 million used during thesame period in 2004. The increase in accounts receivable during the threemonths ended March 31, 2005 resulted from higher sales, particularlyinternational sales, which typically have longer payment terms than domesticsales.

•      Inventory used $3.1 million of cash throughthe first three months of 2005, as compared to a $7.8 million use of cash inthe same three month period last year. Inventory used less cash in 2005 as a result of an increase in safetystock levels during the first three months of 2004 at two of our U.S.production facilities that were in the process of consolidating, and atemporary increase in stock levels as part of an initiative to improvefill-rates.

•      Accounts payable provided $5.6 million ofcash in the first quarter of 2005, which compares to cash provided of $1.3million in the first quarter of 2004.  The increase in payables results in part fromefforts to obtain more favorable payment terms from vendors.

•      Accrued liabilitiesused $2.8 million of cash in the first quarter of 2005 compared to $2.9 millionof cash used in the first quarter of 2004. Cash used in the first quarter of 2005 related primarily to the paymentof distributor rebates, while cash used by accruals in the first quarter of2004 included $2.2 million of payments made to our unsecured creditors underthe terms of our plan of reorganization.

•      Accrued interest used$4.3 million in the first quarter of 2005 and relates primarily to our seniorsubordinated notes.

 

22

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Cashused for capital expenditures was $1.9 million during the three months endedMarch 31, 2005, compared to $4.0 million in the same three months ended in2004. In 2004 a significant portion of our capital investments were maintenancein nature. Our investment plan for 2005 provides for a higher percentagerelated to growth and cost reduction initiatives.

 

Financingactivities provided $11.4 million of cash during the first quarter of 2005compared to cash provided of $9.3 million during the same period last year Netborrowings were $12.2 million for the three months ended March 31, 2005compared to $16.4 million for the same quarter last year. The current yearborrowings were used primarily to fund working capital requirements and to fundthe semi-annual payment on the Senior Subordinated Notes made in February.

 

# ***Liquidity***

#  

We expect our operating cashflow, together with borrowings under our revolving credit facility, will besufficient to meet our anticipated future operating expenses, capitalexpenditures and the debt service requirements of the Amended Credit Agreement,Second-Lien Facility and the Senior Subordinated Notes.  However, our ability to generate sufficientcash flow to meet our operating needs will be affected by general economic,financial, competitive, legislative, regulatory, business and other factorsbeyond our control.

 

*SeniorSubordinated Notes*

 

OnFebruary 5, 2004, the Company completed a private placement of $175.0 millionin aggregate principal of 91/4% Senior Subordinated Notesdue 2014 (the “Senior Subordinated Notes”). The net proceeds from the offering,together with approximately $20.0 million of borrowings under a new term loan(the “Term Loan”) added through an amendment and restatement to the Company’sGECC credit agreement (the “Credit Agreement”), were used to repay alloutstanding borrowings under the $180.0 million senior term note facility andto reduce amounts outstanding under the Company’s revolving credit facility. InMay 2004, for the purpose of an exchange offer, the Company registered noteswith terms identical to the Senior Subordinated Notes under the Securities Actof 1933.  The Company completed theexchange offer in the second quarter of 2004 and more than 99% of the originalnotes were exchanged for the registered notes.

 

TheSenior Subordinated 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 91/4%per annum and is payable semiannually in arrears on February 1 andAugust 1.

 

*CreditAgreement*

 

On November 22, 2004, the Company entered into the Amended CreditAgreement. The Amended Credit Agreement, which matures on November 22, 2009added the Company’s foreign subsidiaries in Australia, the United Kingdom andCanada as credit collateral parties, and changed the determination of theborrowing base from a cash flow-based formula to an asset-based formula.  Under the Amended Credit Agreement, the totalloan commitment was increased from $70.0 million to $91.3 million (subject tothe limitation described below), with a revolving loan commitment of $80.0million (the “Working Capital Facility”) and term loan commitments of$11.3 million (subject to the limitation described below). The term loancommitments consist of a $9.3 million Term A Loan and a maximum $2.0 millionDelayed Draw Term Loan dependent upon the final evaluation of certain realproperty located in Australia. Up to $25.0 million of the Working CapitalFacility is available for letters of credit. The Amended Credit Agreement issecured by substantially all of the assets of the Company’s domesticsubsidiaries and the Company’s foreign subsidiaries in Australia, the UnitedKingdom and Canada, including a pledge of the capital stock of substantiallyall of the Company’s subsidiaries, subject to certain limitations with respectto foreign subsidiaries. Borrowings under the revolving loan commitment may notexceed 85% of eligible receivables plus the lesser of (i) 85% of the netorderly liquidation value of eligible inventories or (ii) 65% of the book valueof inventories less customary reserves. The Amended Credit Agreement containsfinancial covenants, including minimum levels of EBITDA (as defined in theCredit Agreement and determined on a consolidated basis) and other customaryprovisions and requires the Second-Lien Facility to be paid or refinanced 60days prior to its

 

23

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maturity.  In connection with the Amended CreditAgreement, the Company’s foreign subsidiaries in Australia, the United Kingdomand Canada granted second security interests in their assets to the lendersunder the Company’s $20.0 million Second-Lien Facility and guaranteed theCompany’s $175.0 million 9 1/4% Senior Subordinated Notes.  Interest rates on the Amended CreditAgreement are, at the Company’s option, LIBOR plus 2.25% or the prime rate plus0.5% on the revolving facility, and LIBOR plus 2.50% or the prime rate plus0.75% on the term loan facility. All of these percentages are subject to aninterest rate grid and will decline if certain conditions are met. Principalpayments on the term loan facilities are equal quarterly payments based on aseven-year amortization schedule, with the remaining amount paid at maturity.Unused portions of the revolving credit facility bear interest at the rate of0.5% per annum.  The Amended Credit Agreementlimits total borrowings under the facility to $75.0 million until theSecond-Lien Facility is paid or refinanced with long-term debt. The AmendedCredit Agreement does under certain conditions allow for the use of therevolving facility to repay the Second-Lien Facility.  As of March 31, 2005, the Company hadoutstanding borrowings of $25.0 million and issued letters of credit totaling$12.1 million under the revolving facilities. The Company had availability of $20.2 million under the revolving facilityat March 31, 2005. The revolving facility terminates on November 22, 2009.  The Term A Loan requires equal quarterlyprincipal payments of $0.3 million per quarter, which began December 31, 2004and continues through October 31, 2009, with the balance of the outstandingprincipal being payable on November 22, 2009. As of March 31, 2005 the Company did not have access to the Delayed TermLoan.

 

OnMarch 16, 2005 and March 30, 2005, the Company amended the Amended CreditAgreement to modify certain financial covenants and enable the Company toextend its Second-Lien Facility.

 

*Second-LienFacility*

 

On July 29, 2004 the Companyentered into a new $20.0 million second-lien term loan facility (the “Second-LienFacility”). Borrowings under the facility were used to repay a portion of theamount outstanding under the Working Capital Facility. On November 5, 2004 theCompany entered into an amendment to the Second-Lien Facility to extend itsmaturity to July 22, 2005 and modified a financial covenant.  The Second-Lien Facility is secured by asecond lien on substantially all of the assets of the Company. The Second-LienFacility accrues interest at the Company’s option, at LIBOR plus 6.00%, or analternative base rate of the greater of a) the Prime Rate or b) the federalfunds rate plus one half of 1.00% plus 5.00%. The Second-Lien Facilityrestricts how much long-term debt the Company may have and has other customaryprovisions including financial and non-financial covenants. On March 16, 2005and March 30, 2005, the Second-Lien Facility was amended to modify a financialcovenant and extend its maturity until April 30, 2006.

 

**Item 3****. Quantitative and Qualitative Disclosures About Market Risk**

 

Ourprimary financial market risk relates to fluctuations in currency exchangerates, commodity price risk and interest rates.

 

Wedo not believe our exposure to transaction gains or losses resulting fromchanges in foreign currency exchange rates are material to our financialresults. As a result, we do not actively try to manage our exposure throughforeign currency forward or option contracts.

 

Inorder to manage interest costs, we entered into an interest rate swaparrangement on February 24, 2004 to convert $50.0 million of the SeniorSubordinated Notes into variable rate debt. We pay interest on the swap at LIBOR plus a spread of 442 basispoints.  Interest rate risk managementagreements are not held or issued for speculative or trading purposes.

 

#### **Item 4**.  Controls and Procedures

#### ** **

The Company maintains disclosure controls and procedures that aredesigned to provide reasonable assurance to the Company’s management and boardof directors regarding the preparation and fair presentation of publishedfinancial statements.

 

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Asof December 31, 2004, management evaluated the effectiveness of the design andoperation of our disclosure controls and procedures and concluded thosecontrols and procedures were not effective because of the material weaknessesdescribed in Management’s Report onInternal Control Over Financial Reporting in Item 9A. *Controls and Procedures* in our Annual Report onForm 10-K for the fiscal year ended December 31, 2004 (“Management’sReport”).

 

To ensure that our condensed consolidated financial statements for thethree month period ended March 31, 2005 are fairly presented and were preparedin accordance with U.S. generally accepted accounting principles, we conductedin-depth analysis of all our key operations, and obtained quarterlyquestionnaires from all of our functional business units and reportinglocations, which request information on significant transactions, contracts andcommitments, business trends, changes in internal controls, and other itemsthat should be considered for disclosure in our financial statements.  In addition, as more fully described below,new processes and procedures were implemented during the first quarter toaddress our material weaknesses in internal controls over financialreporting.  Consequently, managementbelieves that the financial statements included in this report fairlyrepresent, in all material respects, our financial condition, results ofoperations and cash flows for the periods presented.

 

**Remediation of Material Weaknesses**

 

Asdiscussed above, as of December 31, 2004, we identified material weaknesses inour internal control over financial reporting. We are currently addressingthese material weaknesses as described below and expect to have them remediatedby the end of the year.

 

Inorder to remediate our ineffective controls relating to the oversight andmonitoring of our smaller international locations, we are developing a moreextensive internal audit program for 2005 that will include work performed atour smaller foreign locations and additional audit resources. We have alsoperformed our first quarterly off-site reviews to better identify significantvariances, non-recurring transactions, significant business trends, and otheritems of importance that could require disclosure in the Company’s financialstatements or impact the reported financial condition and results ofoperations.

 

Withrespect to our ineffective controls over property, plant and equipment, weperformed a comprehensive analytical review of property, plant and equipmentand examined the accounting for all new or modified leases. Additionally, wehave initiated on-site financial reviews at our operating units which furtherenable us to identify and address certain other insufficient controls relatingto the accounting for property, plant, and equipment, such as depreciationexpense, and non-recurring transactions, such as significant leasingtransactions.

 

Toaddress our material weakness for insufficient controls relating to the timelyreview and capitalization of inventory variances for interim reporting, duringthe first quarter we began the process of analyzing our inventory variances ona monthly basis to determine the need for capitalization.

 

Regardingour insufficient controls relating to the determination and reporting of theprovision for income taxes and related deferred income tax balances, we havebegun performing a more comprehensive analysis of components of the income taxprovision of certain foreign subsidiaries on a quarterly basis. This willinclude the quarterly off-site and periodic on-site reviews referred to above.Additionally, a more formal process is being established to monitor thedifferences between the income tax basis and the financial reporting basis ofassets and liabilities to effectively reconcile the deferred income taxbalances.

 

**Changes in Internal Control Over Financial Reporting**

 

Except as otherwise discussed above, there have been no changes in theCompany’s internal control over financial reporting during the three monthsended March 31, 2005 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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

#### ** **

**Item 6****. Exhibits**

 

31.1         Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002

31.2         Certification Pursuant to Section 302 of theSarbanes-Oxley Act of 2002

32.1         Certification Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

32.2         Certification Pursuant to Section 906 of theSarbanes-Oxley Act of 2002

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                           | **THERMADYNE HOLDINGS CORPORATION** |
|--------------------------------|-------------------------------------|
|                           |                                |
|                           |                                |
|                           | By:                                 |   | /s/ Paul D. Melnuk |   |
|                           |                                |   |
|                           |                                | Paul D. Melnuk |
|                           |                                | Chief Executive Officer |
|                           |                                | (Principal Executive  Officer) |
|                           |                                |
|                           |                                |
|                           | By:                                 |   | /s/ David L. Dyckman |   |
|                           |                                |   |
|                           |                                | David L. Dyckman |
|                           |                                | Executive Vice President  and |
|                           |                                | Chief Financial Officer |
|                           |                                | (Principal Financial and  Accounting Officer) |
|                           |                                |
| Date:  May 10,  2005 |                                |

 

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