<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to _____________________
0-28040
-------------------------------
COMMISSION FILE NUMBER
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BACOU USA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 05-0470688
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10 THURBER BOULEVARD, SMITHFIELD, RHODE ISLAND 02917-1896
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(401) 233-0333
----------------------------------------------------
(Registrant's telephone number, including area code)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
The number of shares outstanding of the issuer's Common Stock, $.001 par
value, as of November 12, 1998 was 17,605,965.
<PAGE> 2
BACOU USA, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
-------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets,
September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Income, Three
Months and Nine Months ended September 30, 1998 and 1997 4
Consolidated Condensed Statements of Cash Flows,
Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 17
2
<PAGE> 3
PART I. Financial Information
ITEM I. Financial Statements
BACOU USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, DECEMBER 31,
1998 1997
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,177 $ 1,277
Trade accounts receivable, net 28,825 16,099
Inventories 35,235 23,449
Prepaid expenses 2,968 3,502
Deferred income taxes 1,107 1,426
-------- --------
Total current assets 69,312 45,753
Property and equipment, net 51,357 35,880
Intangible assets, net 172,099 70,718
-------- --------
Total assets $292,768 $152,351
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 15,714 $ --
Accounts payable 7,578 5,523
Accrued compensation and benefits 7,650 2,939
Other accrued expenses 5,693 1,752
Income taxes payable 1,304 1,030
-------- --------
Total current liabilities 37,939 11,244
Long-term debt 98,529 --
Deferred income taxes 6,684 6,051
Other liabilities 2,781 2,704
-------- --------
Total liabilities 145,933 19,999
-------- --------
Common stock subject to a put option 9,450 9,450
-------- --------
Stockholders equity:
Preferred stock, $.001 par value, 5,000
shares authorized, no shares issued and
outstanding -- --
Common stock, $.001 par value, 25,000 shares
authorized, 17,605 shares in 1998 and
17,591 shares in 1997 issued and outstanding
(including shares subject to a put option) 17 17
Additional paid-in capital 63,165 62,588
Retained earnings 74,203 60,297
-------- --------
Total stockholders' equity 137,385 122,902
-------- --------
Total liabilities and stockholders' equity $292,768 $152,351
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 4
BACOU USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
(unaudited) (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales ......................................... $56,899 $35,744 $165,278 $94,455
Cost of sales ..................................... 26,738 17,941 79,284 45,185
------- ------- -------- -------
Gross profit ...................................... 30,161 17,803 85,994 49,270
Operating expenses:
Selling .......................................... 9,273 5,418 26,683 15,359
General and administrative ....................... 5,420 3,016 17,479 7,643
Research and development ......................... 1,211 391 2,943 488
Purchased in-process research and development .... -- 2,421 7,118 3,721
Amortization of intangible assets ................ 2,104 1,093 5,661 2,912
------- ------- -------- -------
Total operating expenses .......................... 18,008 12,339 59,884 30,123
------- ------- -------- -------
Operating income .................................. 12,153 5,464 26,110 19,147
Other expense (income):
Interest expense ................................. 1,808 14 4,601 118
Interest income .................................. (21) (8) (90) (389)
Other ............................................ (120) 86 (159) (210)
------- ------- -------- -------
Total other expense (income) ...................... 1,667 92 4,352 (481)
------- ------- -------- -------
Income before income taxes ........................ 10,486 5,372 21,758 19,628
Income taxes ...................................... 3,811 2,919 7,852 8,798
------- ------- -------- -------
Net income ........................................ $ 6,675 $ 2,453 $ 13,906 $10,830
======= ======= ======== =======
Earnings per share:
Basic ............................................ $ 0.38 $ 0.14 $ 0.79 $ 0.62
======= ======= ======== =======
Diluted .......................................... $ 0.38 $ 0.14 $ 0.79 $ 0.62
======= ======= ======== =======
Weighted average shares outstanding:
Basic ............................................ 17,604 17,318 17,599 17,314
======= ======= ======== =======
Diluted .......................................... 17,788 17,353 17,722 17,329
======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 5
BACOU USA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
--------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,906 $ 10,830
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,427 6,334
Purchased in-process research and development 7,118 3,721
Deferred income taxes (1,699) (18)
Change in assets and liabilities, net of effects
of acquired companies:
Trade accounts receivable (8,392) (2,712)
Inventories (7,151) 761
Prepaid expenses and other current assets 1,434 (1,356)
Accounts payable 568 (2,255)
Accrued expenses 6,034 642
Income taxes 273 (1,212)
--------- --------
Net cash provided by operating activities 22,518 14,735
--------- --------
Cash flows from investing activities:
Capital expenditures (10,104) (3,518)
Acquisition of businesses, including direct costs
of acquisition, net of cash acquired (121,058) (27,921)
--------- --------
Net cash used in investing activities (131,162) (31,439)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt 110,000 8,000
Repayment of long-term debt (13,796) (8,000)
Advances on notes payable, net 12,100 6,355
Repurchase of common stock (46) (8,039)
Proceeds from issuance of common stock 286 60
--------- --------
Net cash provided by (used in) financing activities 108,544 (1,624)
--------- --------
Net decrease in cash and cash equivalents (100) (18,328)
Cash and cash equivalents at beginning of period 1,277 21,033
--------- --------
Cash and cash equivalents at end of period $ 1,177 $ 2,705
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 3,927 $ 118
========= ========
Cash paid during the period for income taxes $ 10,617 $ 9,732
========= ========
Fair value of stock options issued pursuant to
a consulting agreement $ 337 $ --
========= ========
Fair value of common stock issued in connection
with the acquisition of a business $ -- $ 13,500
========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 6
BACOU USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(in thousands, except per share data)
(unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements ("financial
statements") include the accounts of Bacou USA, Inc. and its wholly-owned
subsidiaries (together the "Company"). The Company designs, manufactures and
sells leading brands of products that protect the sight, hearing and respiratory
systems of workers against occupational hazards, as well as related
instrumentation including vision screeners, gas monitors and test equipment for
self-contained breathing apparatus.
The financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for interim financial
information, including the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally required in complete financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. In the
opinion of management these financial statements include all adjustments
necessary for a fair presentation of the results of operations for the interim
periods presented. Results of operations for interim periods may not be
indicative of results expected for a full year.
2. ACQUISITION OF HOWARD LEIGHT INDUSTRIES
Effective February 27, 1998, the Company acquired substantially all assets and
assumed substantially all liabilities of Howard S. Leight & Associates, Inc.
(d/b/a Howard Leight Industries), a California corporation with its principal
business location in San Diego, California ("Howard Leight"), for cash
consideration of $125.9 million, $5.9 million of which represented the
refinancing of Howard Leight indebtedness. Howard Leight is a manufacturer of
hearing protection products including disposable ear plugs, reusable ear plugs
and ear muffs. The acquisition was financed principally by proceeds from bank
debt.
In accordance with generally accepted accounting principles, the total purchase
price has been allocated to the fair value of assets purchased and liabilities
assumed, as shown in the following table. The excess of purchase price over fair
value of net assets acquired has been recorded as goodwill and is being
amortized over 30 years.
<TABLE>
<S> <C>
Working capital $ 3,372
Property and equipment $10,138
Identifiable intangible assets $89,003
Purchased in-process research and development $ 7,118
Long-term debt $(5,939)
Goodwill $16,308
</TABLE>
6
<PAGE> 7
The acquisition was accounted for as a purchase and, accordingly, operating
results of Howard Leight have been included in the accompanying financial
statements of the Company only for the period subsequent to the acquisition
date. The following table presents pro forma results of operations of the
Company as if the acquisition had occurred as of January 1, 1997 (in thousands).
The pro forma operating results include results of operations for the indicated
periods with adjusted depreciation on property and equipment, increased
amortization of intangible assets, and assumed interest expense on the cash
purchase price. The pro forma information given is unaudited, does not purport
to be indicative of the results that actually would have been obtained if the
operations were combined during the periods presented, and is not intended to be
a projection of future results or trends.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---- ----
<S> <C> <C>
Net sales $172,636 $129,427
Net income $ 13,543 $ 12,065
Basic and diluted earnings per share $ 0.77 $ 0.70
</TABLE>
The information shown above includes after-tax non-recurring charges equal to
$6.4 million in 1998 and $4.5 million in 1997.
3. Trade Accounts Receivable
An allowance for doubtful accounts is deducted from trade accounts receivable in
the accompanying financial statements. The allowance for doubtful accounts was
$1,137 at September 30, 1998 and $945 at December 31, 1997.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Raw material and supplies .......... $15,207 $ 8,572
Work-in-process .................... 5,300 4,453
Finished goods ..................... 14,728 10,424
------- -------
$35,235 $23,449
======= =======
</TABLE>
5. Property, Equipment and Intangible Assets
Accumulated depreciation and amortization of property and equipment totaled
$16,314 at September 30, 1998 and $11,585 at December 31, 1997. Accumulated
amortization of intangible assets totaled $18,355 at September 30, 1998 and
$12,694 at December 31, 1997.
7
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. In addition, when used
in this Form 10-Q, words such as "believes," "anticipates," "expects" and
similar expressions are intended to identify forward-looking statements. The
Company cautions that a number of important factors could cause actual outcomes
to differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company. Forward-looking statements involve a number of
risks and uncertainties including, but not limited to, continued demand for
current product lines, the success of new product introductions, the success of
the Company's acquisition strategy, continued availability and favorable pricing
of raw materials, the ability of the Company and its key vendors to successfully
respond to year 2000 issues, competitive pressures, general economic conditions,
and regulatory matters. The Company cannot assure that it will be able to
anticipate or respond timely to changes in any of the factors listed above,
which could adversely affect the operating results in one or more fiscal
quarters. Results of operations in any past period should not be considered
indicative of the results to be expected for future periods. Fluctuations in
operating results may also result in fluctuations in the price of the Company's
common stock.
ACQUISITIONS
Effective February 27, 1998, the Company acquired substantially all assets and
assumed substantially all liabilities of Howard Leight, a manufacturer of
hearing protection products including disposable ear plugs, reusable ear plugs
and ear muffs, for cash consideration of approximately $125.9 million, $5.9
million of which represented the refinancing of Howard Leight indebtedness (the
"Leight Acquisition"). Operating results of Howard Leight have been included in
the consolidated financial statements of the Company beginning with the
acquisition date.
The Company acquired all of the outstanding capital stock of Comasec Holdings,
Inc. ("Comasec") on May 30, 1997 for cash consideration of $27.4 million. The
assets of Comasec consisted primarily of its wholly owned subsidiary Survivair,
Inc. ("Survivair"), a manufacturer of respiratory protection products. The
Company also acquired all of the capital stock of Biosystems, Inc.
("Biosystems"), a manufacturer of gas monitors and equipment for testing
self-contained breathing apparatus, on September 30, 1997. The initial
acquisition price was approximately $13.5 million payable in common stock of the
Company; however, the initial acquisition price may be increased if the
operating results of Biosystems in the year 2000 exceed certain defined
thresholds. Finally, the Company acquired Lase-R-Shield, Inc. ("Lase-R Shield"),
for $1.0 million in June of 1997. The acquisitions of Survivair, Biosystems and
Lase-R Shield are referred to collectively in the following discussion as the
"1997 Acquisitions". Operating results for the 1997 Acquisitions have been
included in the consolidated financial statements of the Company beginning with
the respective acquisition dates.
The Leight Acquisition and the 1997 Acquisitions are referred to collectively as
"the Acquisitions".
8
<PAGE> 9
In connection with the Leight Acquisition and certain of the 1997 Acquisitions,
a portion of the purchase price was allocated to the fair value of purchased
in-process research and development. These amounts were charged to operating
expenses in full at the date of acquisition and are referred to in the
accompanying discussion as "Acquisition-Related R&D Charges." In connection with
each of the Acquisitions, acquired inventories were adjusted to fair values, and
these adjustments were subsequently charged to cost of sales when the acquired
inventories were sold. These amounts are referred to in the accompanying
discussion as "Acquisition-Related Inventory Adjustments." Cash bonuses in the
amount of $0.6 million were paid to certain senior executives of Howard Leight
in connection with the Leight Acquisition and have been included with general
and administrative expenses (the "Acquisition-Related Bonuses"). These items are
referred to collectively in the following discussion as "Acquisition-Related
Adjustments."
RESULTS OF OPERATIONS
The following table presents certain items from the Company's consolidated
condensed statements of income, and such amounts as percentages of net sales,
for the periods indicated (in thousands, except percentages).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $56,899 100.0% $35,744 100.0% $165,278 100.0% $94,455 100.0%
Cost of sales (1) 26,738 47.0 17,941 50.2 79,284 48.0 45,185 47.8
------- ------ ------- ----- -------- ----- ------- -----
Gross profit 30,161 53.0 17,803 49.8 85,994 52.0 49,270 52.2
Operating expenses:
Selling 9,273 16.3 5,418 15.1 26,683 16.1 15,359 16.3
General and administrative (2) 5,420 9.5 3,016 8.4 17,479 10.6 7,643 8.1
Research and development 1,211 2.2 391 1.1 2,943 1.8 488 0.5
Purchased in-process research
and development (3) -- -- 2,421 6.8 7,118 4.3 3,721 3.9
Amortization of intangible
assets 2,104 3.7 1,093 3.1 5,661 3.4 2,912 3.1
------- ----- ------ ----- -------- ----- ------- -----
Total operating expenses 18,008 31.7 12,339 34.5 59,884 36.2 30,123 31.9
------- ----- ------ ----- -------- ----- ------- -----
Operating income 12,153 21.3 5,464 15.3 26,110 15.8 19,147 20.3
Other expense (income), net 1,667 2.9 92 0.3 4,352 2.6 (481) (0.5)
------- ----- ------ ----- -------- ----- ------- -----
Income before income taxes 10,486 18.4 5,372 15.0 21,758 13.2 19,628 20.8
Income taxes 3,811 6.7 2,919 8.2 7,852 4.8 8,798 9.3
------- ----- ------ ----- -------- ----- ------- -----
Net income (4) $ 6,675 11.7% $ 2,453 6.8% $ 13,906 8.4% $10,830 11.5%
======= ====== ======= ===== ======== ===== ======= =====
</TABLE>
(1) Includes Acquisition-Related Inventory Adjustments totaling $0.8 million
for the three months ended September 30, 1997, $1.0 million for the nine
months ended September 30, 1998, and $1.3 million for the nine months ended
September 30, 1997.
(2) Includes non-recurring charges for termination benefits totaling $1.4
million and Acquisition-Related Bonuses totaling $0.6 million for the nine
months ended September 30, 1998.
(3) Amounts for all periods represent Acquisition-Related R&D Charges.
(4) On an after-tax basis, the non-recurring items described above totaled $2.9
million for the three months ended September 30, 1997, $6.4 million for the
nine months ended September 30, 1998, and $4.5 million for the nine months
ended September 30, 1997.
9
<PAGE> 10
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net Sales. Net sales increased 59.2% from $35.7 million for the three months
ended September 30, 1997 to $56.9 million for the three months ended September
30, 1998. Of this increase, $17.7 million was attributable to net sales of
Howard Leight and Biosystems. The operating results of Howard Leight and
Biosystems were not included in the 1997 quarter but were included for all three
months during the 1998 quarter. The remainder of the increase resulted from
increased shipment of respiratory products and, to a lesser extent, increased
shipment of uvex(R) brand eyewear.
Export sales represented 14.1% of net sales in the 1998 period and 11.5% of net
sales in the 1997 period, and increased by 96.5% from 1997 to 1998. Excluding
the effect of acquired businesses, the Company's export sales increased by 8.7%
from the 1997 period to the 1998 period.
Cost of Sales. Cost of sales increased 49.0% from $17.9 million for the three
months ended September 30, 1997, to $26.7 million for the three months ended
September 30, 1998. The increase was due to increased volume, primarily
attributable to net sales of acquired businesses.
Gross Profit. Gross profit increased 69.4% from $17.8 million for the three
months ended September 30, 1997, to $30.2 million for the three months ended
September 30, 1998. Excluding Acquisition-Related Inventory Adjustments during
the 1997 period, the Company's gross margin improved from 52.0% in the 1997
period to 53.0% in the 1998 period. This improvement is principally due to sales
of Howard Leight(R) brand hearing protection products during the 1998 period
which have higher gross margins than the Company's combined gross margin during
the 1997 period.
Operating Expenses. Operating expenses increased 45.9% from $12.3 million for
the three months ended September 30, 1997 to $18.0 million for the three months
ended September 30, 1998, primarily due to operating expenses of acquired
businesses.
In September 1997, in connection with its acquisition of Biosystems, the Company
recorded a non-recurring charge equal to $2.4 million (the "Biosystems R&D
Charge") for purchased research and development. Excluding this charge,
operating expenses as a percentage of net sales increased from 27.7% for the
three months ended September 30, 1997 to 31.7% for the three months ended
September 30, 1998. This increase was due to (i) higher levels of spending for
research and development at acquired businesses; (ii) increased amortization
expense as a result of intangible assets recorded in connection with the
Leight Acquisition; (iii) higher general and administrative costs relating to
staff added since the third quarter of 1997 and required to manage the expanded
business of the Company following the Acquisitions, the effect of increased
profitability on bonus plans, and costs totaling $300,000 relating to a
secondary offering of common shares that was initiated and then withdrawn during
the third quarter of 1998; and (iv) increased selling expenses primarily due to
the timing of certain expenses.
10
<PAGE> 11
Operating Income. As a result of the foregoing, the Company's operating income
increased 122.4% from $5.5 million for the three months ended September 30, 1997
to $12.2 million for the three months ended September 30, 1998. Excluding
Acquisition-Related Adjustments during the 1997 period, the Company's operating
margin declined from 24.2% for the three months ended September 30, 1997 to
21.3% for the three months ended September 30, 1998. This decline was due to
increased operating expenses described above.
Other Expense (Income), Net. Other expense (income), net was $1.7 million for
the three months ended September 30, 1998 and $92,000 for the three months ended
September 30, 1997. The 1998 period includes net interest expense totaling $1.8
million, whereas there was no significant interest expense in the 1997 period.
The increase in net interest expense from the 1997 period to the 1998 period is
due principally to debt incurred in connection with the Leight Acquisition. See
"Liquidity and Capital Resources."
Income Taxes. The Company's effective income tax rate was 36.3% in the 1998
period and 54.3% in the 1997 period. The effective rate in both periods was
higher than the federal statutory rate of 35.0% due to state and local income
taxes. In addition, the effective rate in the 1997 period was higher because a
tax benefit could not be recorded for Acquisition-Related R&D Charges totaling
$2.4 million. Excluding the effect of the Acquisition-Related R&D Charges, the
Company's effective income tax rate in the 1997 period would have been 37.4%.
Net Income. As a result of the foregoing, the Company's net income increased
172.1% from $2.5 million in the 1997 period to $6.7 million in the 1998 period.
Excluding Acquisition-Related Adjustments incurred in the 1997 period, the
Company's net income increased 24.7% from $5.4 million in the 1997 period to
$6.7 million in the 1998 period.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Net Sales. Net sales increased 75.0% from $94.4 million for the nine months
ended September 30, 1997 to $165.3 million for the nine months ended September
30, 1998. Of this increase, approximately $63.0 million related to operating
results of acquired businesses. Operating results of Howard Leight were included
for seven months in 1998 and operating results of Survivair and Biosystems were
included for nine months in 1998, compared to the 1997 period which only
included operating results of Survivair and only for four months. The remainder
of the increase resulted from increased shipment of respiratory products and
uvex(R) brand eyewear.
Export sales represented 14.6% of net sales in the 1998 period compared with
11.0% of net sales in the 1997 period, and increased by 132.5% from 1997 to
1998. Excluding the effect of acquired businesses, the Company's export sales
during the nine-month period ended September 30, 1998 increased by approximately
22.0% compared with the comparable period in 1997.
11
<PAGE> 12
Cost of Sales. Cost of sales increased 75.5% from $45.2 million for the nine
months ended September 30, 1997 to $79.3 million for the nine months ended
September 30, 1998. The increase was due to increased sales volume, primarily
attributable to net sales of acquired businesses.
Gross Profit. Gross profit increased 74.5% from $49.3 million for the nine
months ended September 30, 1997, to $86.0 million for the nine months ended
September 30, 1998. Excluding Acquisition-Related Inventory Adjustments, the
Company's gross margin declined from 53.6% in the 1997 period to 52.6% in the
1998 period, principally due to the effect of acquired businesses.
Operating Expenses. Operating expenses increased 98.8% from $30.1 million for
the nine months ended September 30, 1997 to $59.9 million for the nine months
ended September 30, 1998, primarily as a result of operating expenses
attributable to acquired businesses.
The 1998 period includes (i) estimated termination benefits totaling $1.4
million recorded during the second quarter of 1998 in connection with the
resignation of the president and chief operating officer of Bacou USA Safety,
Inc. (the "Severance Charge"), (ii) Acquisition-Related R&D Charges totaling
$7.1 million and (iii) Acquisition-Related Bonuses totaling $0.6 million. The
1997 period includes Acquisition-Related R&D Charges totaling $3.7 million.
Excluding these charges, operating expenses as a percentage of net sales
increased from 28.0% for the nine months ended September 30, 1997 to 30.7% for
the nine months ended September 30, 1998. This increase was due primarily to (i)
higher levels of spending for research and development at acquired businesses
and (ii) increased general and administrative expenses (see discussion of "Three
Months Ended September 30, 1998 Compared To Three Months Ended September 30,
1997" above).
Operating Income. As a result of the foregoing, the Company's operating income
increased 36.4% from $19.1 million for the nine months ended September 30, 1997
to $26.1 million for the nine months ended September 30, 1998. Excluding the
Severance Charge in the 1998 period and all Acquisition-Related Adjustments in
both periods, the Company's operating income increased 49.9% from $24.2 million
for the nine months ended September 30, 1997 to $36.3 million for the nine
months ended September 30, 1998. Excluding the aforementioned items, the
Company's operating margin declined from 25.6% for the nine months ended
September 30, 1997 to 21.9% for the nine months ended September 30, 1998.
Operating margins attributable to the operations of Survivair and Biosystems
historically have been lower than the Company's operating margin prior to the
acquisition of these businesses. Integration of these businesses into the
Company's existing business has resulted in a decline in the Company's overall
operating margin.
12
<PAGE> 13
Other Expense (Income), Net. Other expense (income), net was $4.4 million for
the nine months ended September 30, 1998 and ($481,000) for the nine months
ended September 30, 1997. The 1998 period includes net interest expense totaling
$4.5 million, whereas the 1997 period includes net interest income totaling
$271,000. The increase in net interest expense from the 1997 period to the 1998
period is due principally to debt incurred in connection with the Leight
Acquisition. See "Liquidity and Capital Resources."
Income Taxes. The Company's effective income tax rate was 36.1% in the 1998
period and 44.8% in the 1997 period. The effective rate in both periods was
higher than the federal statutory rate of 35.0% due to state and local income
taxes. In addition, the effective rate in the 1997 period was higher because a
tax benefit could not be recorded for Acquisition-Related R&D Charges totaling
$3.7 million. Excluding the effect of Acquisition-Related R&D Charges, the
Company's effective income tax rate in the 1997 period would have been 37.7%.
Net Income. As a result of the foregoing, the Company's net income increased
28.4% from $10.8 million in the 1997 period to $13.9 million in the 1998 period.
Excluding the Severance Charge in the 1998 period, and excluding
Acquisition-Related Adjustments incurred during both periods, the Company's net
income increased 32.1% from $15.4 million in the 1997 period to $20.3 million in
the 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity historically has been derived from cash flow provided by
operations and, periodically, from bank borrowings utilized to finance the
acquisition of businesses. The Company utilizes EBITDA (earnings before
interest, taxes, depreciation and amortization) as a measure of cash flow
provided by operations. EBITDA increased 53.0% from $30.5 million for the nine
months ended September 30, 1997 to $46.7 million for the nine months ended
September 30, 1998, excluding the Severance Charge in the 1998 period, and
excluding Acquisition-Related Adjustments in both periods. This increase was
principally due to inclusion of the operating results of acquired businesses.
The Company used working capital totaling $7.2 million during the nine months
ended September 30, 1998. Working capital uses were principally related to
increases in accounts receivable and inventories which, after adjustment for the
effect of the Leight Acquisition, increased by $8.4 million and $7.2 million,
respectively. Accounts receivable of the Company generally increase in the
second and third quarter due to higher sales volume during these periods. The
increase in inventories was primarily related to planned increases at certain
divisions in response to higher order rates.
13
<PAGE> 14
Cash used in investing activities totaled $131.2 million for the nine months
ended September 30, 1998, and $31.4 million for the nine months ended September
30, 1997. The nine-month period ended September 30, 1998, includes cash payments
for the Leight Acquisition totaling $120.0 million. Cash payments for the
acquisition of Survivair, totaling $27.4 million, are included in the nine-month
period ended September 30, 1997. Capital expenditures totaled $10.1 million for
the nine months ended September 30, 1998, and $3.5 million for the nine months
ended September 30, 1997.
In connection with the Biosystems acquisition the Company provided to former
shareholders of Biosystems put options covering 578,560 of the shares issued in
connection with that acquisition. The put options may be exercised at any time
through September 30, 1999, at a price equal to approximately $16.38 per share.
If the put options were exercised in full, the Company would be required to make
cash payments totaling approximately $9.5 million to repurchase these shares,
and expects that such payment would be funded by bank borrowings.
In February 1998 the Company entered into an agreement with Banque Nationale de
Paris pursuant to which the bank made a term loan to the Company (the "BNP
Loan") in the principal amount of $110.0 million. The BNP Loan requires
quarterly payments at an effective annual rate equal to three month LIBOR plus
0.5% and requires principal repayments in equal quarterly installments over
seven years. The Company also maintains a $31.0 million revolving line of credit
facility (the "Revolving Facility") with Citizens Bank of Rhode Island. The
Revolving Facility is available to fund acquisitions and for other general
corporate purposes, bears interest at a rate per annum equal to three month
LIBOR plus 0.7% and is due in full on May 31, 2000.
In connection with the Leight Acquisition the Company borrowed a total of $124.3
million, consisting of the $110.0 million BNP Loan and $14.3 million on the
Revolving Facility. Principal repayments during the nine months ended September
30, 1998, totaled $16.0 million, and included repayment of $5.9 million of
indebtedness assumed in connection with the Leight Acquisition. At September 30,
1998, the Company had debt outstanding totaling $114.2 million consisting of
$102.1 million on the BNP Loan and $12.1 million on the Revolving Facility.
The Company is pursuing a business strategy which includes acquisitions as an
important element. As a result, the Company may incur additional indebtedness,
may be required to negotiate additional credit facilities, or may issue
additional common or preferred stock in order to fund potential future
investments resulting from its acquisition strategy. The Company believes it
would have access to sufficient capital if necessary to consummate future
acquisitions. Except for cash requirements to fund acquisitions, the Company
believes that its cash flow provided by operating activities together with
unused borrowing capacity will be sufficient to fund working capital
requirements, debt service requirements and capital expenditures for the
foreseeable future.
14
<PAGE> 15
SEASONALITY
The Company's business has been subject to slight seasonal variations which the
Company has attributed to fluctuations in industrial activity and annual weather
patterns. Historically, net sales from October through December have been
somewhat lower than other periods due to anticipated lower demand in the more
inclement winter months and planned inventory reductions by major distributors.
In addition to seasonality, the Company's business has been variable period to
period because of other factors, including promotional activity undertaken by
the Company in response to competitive pressures, market demand, production
capacity, inventory levels, and other considerations.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without consideration of
the impact of the upcoming change in century. If not corrected, many computer
applications could fail or create erroneous results at or before the year 2000.
The Company initiated a comprehensive project in June 1997 to address its year
2000 compliance. The project consists of four phases, including (i) assessment
phase - identification of areas of non-compliance (based upon a combination of
the Company's own analysis and direct communication with the vendor that
developed and supports the software) and evaluation of risk; (ii) planning phase
- - development of specific steps to correct non-compliance, including a
timetable; (iii) implementation phase - execution of steps developed during the
planning phase and (iv) testing phase - conducting tests to validate year 2000
compliance. The project considers both the Company's primary information systems
(software for all financial systems, network software and equipment, personal
computers and incumbent software, etc.) and other applications dependent upon
embedded software (manufacturing equipment, telephone systems, security systems,
etc.). The Company has completed the assessment and planning phases of its
evaluation of its primary information systems and has identified applications,
principally at its Survivair and Uvex Safety business units, that are not
currently year 2000 compliant.
During 1997, the Company initiated a project to install and implement common
software at all of its business units and signed a license agreement with J.D.
Edwards & Company for such software in September 1997. Full implementation at
the Survivair and Uvex Safety divisions, including a significant period of
pre-testing, is expected to be completed during or prior to the second quarter
of 1999. J.D. Edwards & Company has represented that this software is year 2000
compliant and that its processes used to achieve year 2000 readiness are
certified by the Information Technology Association of America. The Company
believes that, upon full implementation at its Survivair and Uvex Safety
business units within such time frame, all of the Company's material year 2000
deficiencies will have been corrected. The Company has incurred costs totaling
$2.0 million through September 30, 1998 for implementation of the software at
the Survivair and Uvex Safety business units and estimates the remaining costs
necessary to complete full implementation to be approximately $0.8 million.
Except for the cost of training, these costs will be capitalized and depreciated
over the estimated useful life of the software. The cost of training is
estimated to be $0.2 million and will be expensed as incurred.
15
<PAGE> 16
Although there can be no assurance that the Company will successfully complete
implementation of the common software at its Survivair and Uvex Safety business
units by dates critical for year 2000 compliance, these projects are currently
progressing in accordance with timetables established by the Company. Although
failure to complete implementation on a timely basis may have material adverse
financial and operational impacts on the Company, the Company believes such
failure is not reasonably likely. The possible effects of unsuccessful
implementation of this software by Survivair and Uvex Safety include the
following for those business units: (i) an inability to process transactions,
(ii) a temporary inability to order raw materials or (iii) a temporary inability
to process orders and billings and to deliver finished products to customers on
a timely basis.
The assessment and planning phases for other applications with embedded software
are substantially complete. Implementation is ongoing and expected to be
completed by the end of the second quarter of 1999. The cost of modifying or
correcting deficiencies in these applications is currently estimated to be
immaterial.
The Company's business is also dependent upon the systems of third parties. With
the exception of a few significant vendors, the Company believes that year 2000
deficiencies in these systems would not represent a material financial or
business risk to the Company. With regard to these few vendors, the Company is
assessing their year 2000 readiness based upon direct communication with each
such vendor.
The Company believes that its most reasonably likely worst-case result relating
to year 2000 would be the failure of certain of its applications with embedded
software, or the failure of third party systems on which the Company's systems
rely. Failure of applications with embedded software could result in temporary
disruption to certain aspects of the Company's operations, such as disruption in
operation of certain manufacturing equipment. Failure of the information systems
of a vendor could result in the temporary interruption of supply of material or
services to the Company. Although there can be no assurance that these failures
would not have an adverse effect on the Company's business, the Company believes
the effect of such failures would not be material to its business. The Company
has developed informal contingency plans relating to any such failures which
include reliance upon redundant systems of the Company, short-term reliance upon
manual systems and reliance upon alternate vendors.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
- -------------- ----------------------
Exhibit 10.1* First Amendment to Employment Agreement of Thomas Klein
Exhibit 10.2* Second Amendment to Employment Agreement of Walter Stepan
Exhibit 11 Statement Re: Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
* Management contract or compensatory plan or arrangement.
(b) The Registrant filed one report on Form 8-K during the quarterly period
ended September 30, 1998, that was filed on August 5, 1998. That report
presented pro-forma financial information giving effect to the acquisitions of
Howard Leight and Survivair as if each acquisition had been consummated on
January 1, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1998
BACOU USA, INC.
(Registrant)
/s/ Philip B. Barr /s/ Jeffrey T. Brown
- ------------------------------- --------------------------------
Philip B. Barr Jeffrey T. Brown
Executive Vice President and Treasurer and
Chief Financial Officer Chief Accounting Officer
17
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT made as of the 3rd day of
August, 1998 by and between Thomas W. Klein (the "Executive"), currently
residing at 4580 Blackhawk Road, Eagan, Minnesota 55122, and Bacou USA Safety,
Inc., a corporation organized under the laws of the state of Delaware (the
"Company"), with its principal offices at 10 Thurber Boulevard, Smithfield, RI
02917.
WITNESSETH:
WHEREAS, the Executive and the Company entered into that certain Employment
Agreement as of the 3rd day of June, 1998 (the "Employment Agreement"); and
WHEREAS, the Company wishes to appoint the Executive to another position
within the Company and accordingly, to amend the terms of the Employment
Agreement; and
WHEREAS, the Employee wishes to undertake another position within the
Company and accordingly, to amend the terms of the Employment Agreement.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the Company and the Executive hereby agree as follows:
1. The first "WHEREAS" clause of the Employment Agreement shall be
amended to read as follows:
"WHEREAS, Company wishes to secure the services of Executive as
President of the Howard Leight division of the Company for the period
provided in this Agreement."
2. The first two sentences of Section 1 of the Employment Agreement are
hereby deleted and the following language is inserted in lieu thereof:
"During the period of employment set forth in Section 2 of this
Agreement, Company shall employ Executive, and Executive shall serve
as President of the Company's Howard Leight division. Executive shall
promptly relocate his permanent residence to the San Diego, California
area."
1
<PAGE> 2
3. The first sentence of Section 2 of the Employment Agreement shall be
amended by deleting the date "June 30, 1998" and by inserting "August
6, 1998" in lieu thereof.
4. Section 3(iv) of the Employment Agreement shall be amended by deleting
the words "Smithfield, Rhode Island" and inserting "San Diego,
California" in lieu thereof.
5. Section 4(a) of the Employment Agreement shall be amended by deleting
the term "One Hundred Ninety Thousand Dollars ($190,000)" and
inserting "Two Hundred Twenty Thousand Dollars ($220,000)" in lieu
thereof.
6. The Relocation Assistance Agreement referenced in Section 4(f)(v) of
the Employment Agreement as EXHIBIT A to the Employment Agreement
shall be amended (i) by striking the words "Smithfield, Rhode Island"
in the third line of the first paragraph and inserting "San Diego,
California" in lieu thereof; and (ii) by amending the paragraph
entitled "INTERIM LIVING" to read as follows:
"The Company shall arrange or provide up to three months of
interim living arrangements for Executive in San Diego,
California commencing with the date on which he first begins work
in San Diego. Such arrangements have been made for Unit 306 at
The Landing on Coronado Island in San Diego until expiration of
the rental agreement for such premises or the conclusion of the
three-month period provided herein, whichever is first to occur.
If the rental agreement for such premises expires prior to the
end of the three-month period allowed for Executive, then the
Company shall provide other accommodations for the remainder of
such period. The Company will also provide a rental car for the
use of Executive in San Diego while Executive and the Company
arrange for his Company-leased vehicle.
7. The changes set forth in the foregoing sections shall be effective on
the later to occur of August 6, 1998 or the date on which Executive
first begins his duties in San Diego, California.
In all other respects, the Employment Agreement shall remain in full force
and effect.
2
<PAGE> 3
IN WITNESS WHEREOF, Company and the Executive have duly executed this First
Amendment to Employment Agreement as of the day and year first above written.
BACOU USA SAFETY, INC.
By: /s/ W. Stepan By: /s/ Philip B. Barr
------------------------------ ------------------------------
Walter Stepan, Chairman, Philip B. Barr, Vice Chairman,
President and Chief Executive Secretary and Treasurer
Officer
EXECUTIVE:
/s/ Thomas W. Klein
---------------------
Thomas W. Klein
3
<PAGE> 1
EXHIBIT 10.2
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT ("Amendment") is made as
of the 25th day of August, 1998 by and between Walter Stepan of 215 Old River
Road, Lincoln, Rhode Island 02865 ("Employee") and Bacou USA, Inc., a
corporation organized and existing under the laws of Delaware (the "Company").
WITNESSETH:
Whereas, Employee and the Company are parties to that certain
Employment Agreement dated as of the 1st day of January, 1996, as amended by
that certain First Amendment to Employment Agreement dated October 24, 1997
(together the "Agreement"); and
Whereas, the parties wish to amend the Agreement regarding its term.
NOW THEREFORE, in consideration of the mutual promises herein
contained, Employee and the Company hereby agree to amend the Agreement from and
after the date hereof as follows:
1. Section 5 of the Agreement is hereby amended to read as
follows:
5. TERM: The term of employment of the Employee pursuant
to this Agreement shall commence as of January 1, 1996 and terminate on
December 31, 1999. This Agreement automatically will be extended for a
single twelve month term ending December 31, 2000 unless either party
notifies the other by June 30, 1999 of his/its election not to renew,
in which case this Agreement shall terminate on December 31, 1999. The
parties agree that, prior to June 30, 1999, they will negotiate an
amendment and extension of this Agreement, with the Employee serving in
a different capacity, at a different salary level and subject to a
different bonus structure effective January 1, 2000. In any event, the
Company agrees that it will cause the Employee to be nominated to serve
as a Director of the Company at its annual meetings of stockholders in
the years 2001 through 2005.
In all other respects, the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the Employee and the Company have duly executed
this Amendment as of the day and year first above written.
BACOU USA, INC. EMPLOYEE
By: /s/ Philippe Bacou /s/ Walter Stepan
------------------------------ -------------------------
Philippe Bacou, Chairman Walter Stepan
<PAGE> 1
EXHIBIT 11
BACOU USA, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------
(in thousands,except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic:
Weighted average shares outstanding 17,604 17,318 17,599 17,314
======= ======= ======= ========
Net income $ 6,675 $ 2,453 $13,906 $ 10,830
======= ======= ======= ========
Per share amount $ 0.38 $ 0.14 $ 0.79 $ 0.62
======= ======= ======= ========
Diluted:
Weighted average shares outstanding 17,604 17,318 17,599 17,314
Net effect of dilutive stock options
based on the treasury stock method
using the average market price 184 35 123 15
------- ------- ------- -------
Total diluted shares 17,788 17,353 17,722 17,329
======= ======= ======= =======
Net income $ 6,675 $ 2,453 $13,906 $10,830
======= ======= ======= =======
Per share amount $ 0.38 $ 0.14 $ 0.79 $ 0.62
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,177
<SECURITIES> 0
<RECEIVABLES> 28,825
<ALLOWANCES> 1,137
<INVENTORY> 35,235
<CURRENT-ASSETS> 69,312
<PP&E> 51,357
<DEPRECIATION> 0
<TOTAL-ASSETS> 292,768
<CURRENT-LIABILITIES> 37,939
<BONDS> 98,529
0
0
<COMMON> 17
<OTHER-SE> 137,368
<TOTAL-LIABILITY-AND-EQUITY> 292,768
<SALES> 165,278
<TOTAL-REVENUES> 165,278
<CGS> 79,284
<TOTAL-COSTS> 79,284
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,601
<INCOME-PRETAX> 21,758
<INCOME-TAX> 7,852
<INCOME-CONTINUING> 13,906
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,906
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.79
</TABLE>
