<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number 33-96190
CABOT SAFETY HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
--------------------
Delaware 13-3840450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Washington Mall, Eighth Floor
Boston, Massachusetts 02108-2610
(Address of principal executive offices) (Zip Code)
(617) 371-4200
(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
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CABOT SAFETY HOLDINGS CORPORATION
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1996
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 1996 (UNAUDITED) AND SEPTEMBER 30, 1995 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996, THREE MONTHS ENDED
MARCH 31, 1995 (PREDECESSOR COMPANY), SIX MONTHS ENDED MARCH
31, 1996 AND SIX MONTHS ENDED MARCH 31, 1995 (PREDECESSOR COMPANY) 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 1996
AND SIX MONTHS ENDED MARCH 31, 1995 (PREDECESSOR COMPANY) 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
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ITEM 2. CHANGES IN SECURITIES 14
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 14
- ----------------------------------------------------------------------
ITEM 5. OTHER INFORMATION 14
- ------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
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SIGNATURE PAGE 15
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PART I
ITEM 1. FINANCIAL STATEMENTS
CABOT SAFETY HOLDINGS CORPORATION
<TABLE>
BALANCE SHEETS--ASSETS
(DOLLARS IN THOUSANDS)
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
----------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,447 $ 4,707
Accounts receivable, net 35,907 28,586
Inventories 28,087 25,914
Deferred and prepaid expenses 3,075 2,830
-------- --------
Total current assets 69,516 62,037
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 54,111 53,069
INTANGIBLE ASSETS, NET 95,434 92,445
OTHER ASSETS 7,120 10,712
-------- --------
Total assets $226,181 $218,263
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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CABOT SAFETY HOLDINGS CORPORATION
<TABLE>
BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
----------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 7,039 $ 5,837
Accounts payable 13,437 13,208
Accrued liabilities 18,696 18,294
U.S. and foreign income taxes 731 262
-------- --------
Total current liabilities 39,903 37,601
-------- --------
LONG-TERM DEBT 149,073 146,460
DEFERRED INCOME TAXES -- --
OTHER LIABILITIES 2,860 2,248
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized--200,000 shares
Issued and outstanding--45,000 shares -- --
Common stock, $.01 par value-
Authorized--200,000 shares
Issued and outstanding--100,000 shares 1 1
Additional paid-in capital 32,652 32,530
Retained earnings 1,886 (584)
Foreign currency translation adjustments (194) 7
-------- --------
Total stockholders' equity 34,345 31,954
-------- --------
Total liabilities and stockholders' equity $226,181 $218,263
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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CABOT SAFETY HOLDINGS CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995 1996 1995
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $58,224 $51,551 $112,716 $97,704
COST OF SALES 31,991 28,907 62,340 55,182
------- ------- -------- -------
Gross profit 26,233 22,644 50,376 42,522
SELLING AND ADMINISTRATIVE 16,840 14,415 33,354 28,204
RESEARCH AND TECHNICAL
SERVICES 839 832 1,593 1,585
AMORTIZATION EXPENSE 1,003 1,399 1,956 2,801
OTHER CHARGES (INCOME), NET 95 (194) (3) 12
------- ------- -------- -------
Operating income 7,456 6,192 13,476 9,920
INTEREST EXPENSE, NET 4,617 1,875 9,068 3,577
------- ------- -------- -------
Income before provision for
income taxes 2,839 4,317 4,408 6,343
PROVISION FOR INCOME TAXES 1,138 1,531 1,938 2,343
------- ------- -------- -------
Net income 1,701 $ 2,786 2,470 $ 4,000
======= =======
PREFERRED STOCK DIVIDEND ACCRUED 1,532 3,033
------- --------
Earnings (loss) applicable to
Common Shareholders $ 169 $ (563)
======= ========
EARNINGS (LOSS) PER COMMON SHARE $ 1.69 $ (5.63)
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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CABOT SAFETY HOLDINGS CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
1996 1995
SUCCESSOR PREDECESSOR
COMPANY COMPANY
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,470 $ 4,000
Adjustments to reconcile net income to cash provided by operating activities-
Depreciation and amortization 6,058 6,318
Deferred income taxes -- 194
Other, net 20 143
Changes in assets and liabilities-
Accounts receivable (6,225) (2,198)
Inventory (911) (1,235)
Accounts payable and accruals (1,751) (1,055)
Other, net 1,479 1,366
------- -------
Net cash provided by operating activities 1,140 7,533
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for Eastern Safety (6,636) --
Eastern Safety escrow deposit 3,000 --
Additions to property, plant and equipment (4,040) (5,320)
Proceeds provided by disposals of property, plant and equipment -- 4
------- -------
Net cash used by investing activities (7,676) (5,316)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of shareholder notes 123 --
Increase in revolving credit facility, net 6,800 --
Repayment of term loans (2,480) --
Repayment of external long-term debt (75) (49)
Increase in note payable to Cabot Corporation, net -- 5,338
Increase in intercompany receivables, net -- (6,898)
------- -------
Net cash provided (used) by financing activities 4,368 (1,609)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (92) 376
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,260) 984
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,707 2,020
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,447 $ 3,004
======= =======
CASH PAID FOR:
Interest $ 8,914 $ 1,041
======= =======
Income taxes $ 407 $ 640
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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CABOT SAFETY HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly, in accordance with generally accepted accounting
principles, the Company's financial position, results of operations and
cash flows for the interim periods presented. Such adjustments consisted
of only normal recurring items. The results of operations for the interim
periods shown in this report are not necessarily indicative of results
for any future interim period or for the entire year. These condensed
consolidated financial statements do not include all disclosures
associated with annual financial statements and accordingly should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10K.
(2) BASIS OF PRESENTATION
For periods prior to July 11, 1995, the accompanying financial statements
represent the combined results and financial position of Cabot Safety
Corporation (CSC) and certain affiliates (Predecessor) all of which were
wholly owned by Cabot Corporation (Cabot). On July 11, 1995, Cabot sold
substantially all of the assets and certain liabilities of the
Predecessor to Cabot Safety Holdings Corporation (Holdings) as described
in Note 3. Financial statements for periods subsequent to July 11, 1995
represent the consolidated financial statements of Holdings and
subsidiaries (Successor). References to the Company refer to the
Predecessor prior to the acquisition and the Successor postacquisition.
All significant intercompany transactions and balances have been
eliminated.
Separate financial statements of CSC are not presented because they do
not provide any additional information from what is presented in the
financial statements of Holdings that would be material to the holders of
the senior subordinated notes (see Note 6).
(3) ACQUISITION AND FINANCING
Holdings was formed by Vestar Equity Partners, L.P. (Vestar) in June 1995
to effect the acquisition of substantially all of the assets and
liabilities of CSC and its subsidiaries (the Acquisition). CSC was wholly
owned by Cabot prior to the Acquisition. The acquisition closed on July
11, 1995, when Holdings acquired substantially all of the assets and
certain liabilities of CSC for cash, preferred stock and a 42.5% common
equity interest in Holdings. Holdings immediately contributed the
acquired assets and liabilities to CSC, a wholly owned subsidiary of
Holdings, pursuant to an asset transfer agreement dated June 13, 1995.
The Company, as the surviving entity, continues to be named Cabot Safety
Corporation. Holdings has no other material assets, liabilities or
operations other than those that result from its ownership of the common
stock of CSC.
The Acquisition has been accounted for as a purchase transaction
effective as of July 11, 1995, in accordance with Accounting Principles
Board Opinion No. 16, Business Combinations, and EITF Issue No. 88-16,
Basis in Leveraged Buyout Transactions, and accordingly, the consolidated
financial statements for the periods subsequent to July 11, 1995 reflect
the purchase price, including transaction costs, allocated to tangible
and
7
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CABOT SAFETY HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(3) ACQUISITION AND FINANCING (CONT'D)
intangible assets acquired and liabilities assumed, based on their
estimated fair values as of July 11, 1995, which may be revised at a
later date. The valuation of assets and liabilities acquired reflect
carryover basis for the percentage ownership retained by Cabot.
(4) SIGNIFICANT ACCOUNTING POLICIES
Income Taxes. The Company utilizes the liability method to account for
income taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes." This standard determines deferred income taxes based on the
estimated future tax effects of any differences between the financial
statement and the tax basis of assets and liabilities, given the
provisions of the enacted tax laws.
Intangible Assets. Intangible assets consist primarily of the costs of
patents and trademarks purchased in business acquisitions. Intangible
assets are amortized on the straight-line basis over either 25 years or
an estimated useful life, whichever is shorter.
Earnings Applicable to Common Shareholders. Net income per common share
has been computed by dividing earnings applicable to common shareholders
for the period by the weighted average number of common shares
outstanding during the period.
(5) INVENTORIES
<TABLE>
Inventories consisted of the following (dollars in thousands):
<CAPTION>
MARCH 31, SEPTEMBER 30,
1996 1995
(unaudited)
<S> <C> <C>
Raw materials $10,606 $ 8,371
Work in process 3,598 3,332
Finished goods 13,883 14,211
------- -------
$28,087 $25,914
======= =======
</TABLE>
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
(6) DEBT
In July 1995, CSC entered into a credit agreement (the Agreement) that
provides for secured borrowings from a syndicate of lenders consisting of
(i) a Revolving Credit Facility providing for up to $25.0 million and
(ii) Term Loans denominated in U.S., Canadian, and British currencies
aggregating $45.0 million. In addition, CSC issued $100.0 million of
Senior Subordinated Notes due 2005 (Notes). Under the terms of both the
Agreement and the Note indenture, CSC is required to comply with certain
financial covenants and
8
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CABOT SAFETY HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(6) DEBT (CONT'D)
restrictions with which CSC was in compliance at March 31, 1996. At March
31, 1996, the amounts outstanding on the Term Loans and the Revolving
Credit Facility were $40.8 million and $10.6 million, respectively.
(7) PREFERRED STOCK
The preferred stock is cumulative redeemable $.01 par value stock.
Dividends accrue whether or not dividends are declared or funds are
available at an annual rate of 12.5%, compounded daily. At March 31, 1996
the redemption value was $45.0 million plus accrued dividends of $4.3
million.
(8) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and administrative
proceedings which are being handled in the ordinary course of business.
In the opinion of management of the Company, these suits and claims
should not result in final judgments or settlements which, in the
aggregate, would have a material adverse effect on the Company's
financial condition or results of operations.
During fiscal 1995, the Company became aware that its French subsidiary
has been delinquent in the remittance of value-added tax payments to the
French government. The Company believes that any required tax payments
and attendant penalties will not have a material adverse effect on the
Company's financial condition or results of operations.
(9) ACQUISITION
On January 3, 1996, the Company acquired the stock of Eastern Safety
Equipment Co., Inc. (Eastern) for $6.9 million. In addition, the Company
entered into noncompete and consulting agreements that provide an
aggregate of $1.0 million in consideration to the former controlling
stockholder of Eastern. The transaction has been accounted for using the
purchase method of accounting. The pro forma impact of the transaction is
not material to the results of the periods presented and therefore has
not been included.
At December 31, 1995, the Company had $3.0 million in deposit pursuant to
an escrow agreement with the former stockholders of Eastern. These funds
together with additional borrowings under the revolving credit agreement
were used to fund the acquisition.
(10) SUBSEQUENT EVENT
On April 25, 1996, the Company announced the signing of a definitive
agreement to acquire Peltor Holding AB, of Varnamo, Sweden for total
consideration of $90 million, subject to due diligence, regulatory
approvals and other customary conditions. It is anticipated that the
transaction will be completed before the end of June, 1996. The Company
intends to finance the purchase through additional bank borrowings.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the consolidated
Financial Statements and Notes thereto appearing elsewhere in this report.
The consolidated balance sheet of the Company at March 31, 1996 reflects
allocation of the purchase price to the assets acquired. Operating results
subsequent to the Acquisition are comparable to prior periods, with the
exception of depreciation expense and amortization of intangible assets.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Net Sales. Net sales in the three months ended March 31, 1996 increased 12.9% to
$58.2 million from $51.6 million in the three months ended March 31, 1995. The
increase in net sales was due to increased sales by both Safety Products and
Specialty Composites. Safety Products' net sales in the three months ended March
31, 1996 increased 13.3% to $49.2 million from $43.4 million in the three months
ended March 31, 1995. This increase was primarily the result of (i) the
acquisition of Eastern Safety which contributed $3.3 million in revenues, (ii)
an increase in hearing product sales due to the continued success of the
company's Express product and better pricing, and (iii) increased pricing of Eye
& Face and Respiratory products. Specialty Composites' net sales in the three
months ended March 31, 1996 increased 11.0% to $9.0 million from $8.1 million in
the three months ended March 31, 1995. This increase was primarily the result of
increased demand for the Company's products by precision equipment manufacturers
and health care product manufacturers.
Gross Profit. Gross profit in the three months ended March 31, 1996 increased
15.8% to $26.2 million from $22.6 million in the three months ended March 31,
1995. This increase was due to a combination of increased volumes and higher
prices which more than offset material cost increases which occurred in earlier
periods. Gross profit as a percentage of net sales in the three months ended
March 31, 1996 was 45.1% as compared to 43.9% in the three months ended March
31, 1995. Such percentage increased as the benefit of higher volumes and prices
more than offset the inclusion of Eastern Safety's sales which are at lower
margins.
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended March 31, 1996 increased 16.8% to $16.8 million from $14.4
million in the three months ended March 31, 1995. This increase was the result
of increases in the Company's sales force which primarily occurred throughout
Fiscal 1995, higher incentive costs, and increases in administrative expenses
resulting from the Formation Acquisition. Selling and administrative expenses as
a percentage of sales in the three months ended March 31, 1996 increased to
28.9% of sales as compared to 28.0% of sales in the three months ended March 31,
1995. This was primarily a result of the higher incentive and administrative
costs.
Research and Technical Service Expenses. Research and technical service expenses
in the three months ended March 31, 1996 were essentially flat at $0.8 million.
While the Company has increased the product development effort towards new
products this has been partially funded by decreased work on process and
production engineering.
10
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Operating Income. Primarily as a result of the factors discussed above,
operating income in the three months ended March 31, 1996 increased 20.4% to
$7.5 million from $6.2 million in the three months ended March 31, 1995.
Interest Expenses, Net. Interest expense, net, is not comparable with prior
periods as a result of the financing related to the Formation Acquisition.
Interest expense for the successor company for the three months ended March 31,
1996 was $4.6 million, reflecting the increased levels of debt.
Net Income. The significant improvement in operating results was more than
offset by higher interest expense resulting in net income for the three months
ended March 31, 1996 decreasing 39.0% to $1.7 million from $2.8 million in the
three months ended March 31, 1995.
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
Net Sales. Net sales in the six months ended March 31, 1996 increased 15.4% to
$112.7 million from $97.7 million in the six months ended March 31, 1995. The
increase in net sales was due to increased sales by both Safety Products and
Specialty Composites. Safety Products' net sales in the six months ended March
31, 1996 increased 12.9% to $92.5 million from $82.0 million in the six months
ended March 31, 1995. This increase was primarily the result of (i) the
acquisition of Eastern Safety which contributed $3.3 million in revenue, (ii) an
increase in hearing product sales due to the continued success of the Company's
Express product and better pricing, and (iii) increased pricing of Eye & Face
and Respiratory products. Growth at Safety Products was also aided by continued
growth in sales to the Far East and Latin America as well as growth in new areas
such as Health Care distributors. Specialty Composites' net sales in the six
months ended March 31, 1996 increased 28.5% to $20.2 million from $15.7 million
in the six months ended March 31, 1995. This increase was primarily the result
of a $2.3 million shipment to a supplier of Sea Wolf submarines as well as to
increased demand for the Company's products by precision equipment manufacturers
and health care product manufacturers.
Gross Profits. Gross profits in the six months ended March 31, 1996 increased
18.5% to $50.4 million from $42.5 million in the six months ended March 31,
1995. This increase was due to a combination of increased volumes and higher
prices, which more than offset material cost increases that occurred in earlier
periods. Gross profit as a percentage of net sales in the six months ended March
31, 1996 was 44.7% as compared to 43.5% in the six months ended March 31, 1995.
Such percentage increased as the benefit of higher volumes and prices more than
offset the inclusion of Eastern Safety's sales which are at lower margins.
Selling and Administrative Expenses. Selling and administrative expenses in the
six months ended March 31, 1996 increased 18.3% to $33.4 million from $28.2
million in the six months ended March 31, 1995. This increase was the result of
increases in the Company's sales force which primarily occurred throughout
Fiscal 1995, higher incentive costs, and increases in administrative expenses
resulting from the Formation Acquisition. Selling and administrative expenses as
a percentage of sales in the six months ended March 31, 1996 increased to 29.6%
of sales as compared to 28.9% of sales in the six months ended March 31, 1995.
This was primarily a result of the higher incentive and administrative costs.
Research and Technical Service Expenses. Research and technical service expenses
in the six months ended March 31, 1996 were essentially flat at $1.6 million.
While the Company has increased the product development effort towards new
products, this has been partially funded by decreased work on process and
production engineering.
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<PAGE> 12
Amortization Expense. Amortization expense decreased by 30.2% to $2.0 million
as the increase in amortization resulting from the allocation of the purchase
price to intangibles was more than offset by the absence of amortization of a
non-compete with the former owner of the AOSafety[Registered Trademark]
Division due to its expiration in May, 1995.
Operating Income. Primarily as a result of the factors discussed above,
operating income in the six months ended March 31, 1996 increased 35.9% to $13.5
million from $9.9 million in the six months ended March 31, 1995.
Interest Expense, Net. Interest expense, net, is not comparable with prior
periods as a result of the financing related to the Formation Acquisition.
Interest expense for the successor company for the six months ended March 31,
1996 was $9.1 million, reflecting the increased levels of debt.
Net Income. The significant improvement in operating results was more than
offset by higher interest expense resulting in net income for the six months
ended March 31, 1996 decreasing 38.3% to $2.5 million from $4.0 million in the
six months ended March 31, 1995.
EFFECTS OF CHANGES IN EXCHANGE RATES
In general, the Company's results of operations are affected by changes in
exchange rates. Subject to market conditions, the Company prices its products in
Europe and in Canada in local currency. While many of the Company's selling and
distribution costs are also denominated in these currencies, a large portion of
the product costs are dollar denominated. As a result, a decline in the value of
the dollar relative to these other currencies can have a favorable effect on the
profitability of the Company and an increase in the value of the dollar relative
to these other currencies can have a negative effect on the profitability of the
Company. In the six months ended March 31, 1996, the dollar declined in value
relative to most other currencies. The Company estimated that these changes had
the effect of increasing operating profit by $0.3 million in the six months
ended March 31, 1996 compared to the six months ended March 31, 1995.
EFFECTS OF INFLATION
In recent years, inflation has been modest and has not had a material impact
upon the results of the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted primarily of operating cash flow
and debt financing. The Company's uses of those funds consist principally of
debt service and capital expenditures.
The required amortization payments under the senior secured credit facilities
provided to the Company by Bankers Trust Corporation, the First National Bank of
Boston, Chemical Bank and Fleet Bank of Connecticut, N.A. (the "Senior Bank
Facilities") will be: $3.2 million in the remaining period in fiscal 1996, $8.1
million in fiscal 1997, $10.0 million in fiscal 1998, $10.6 million in fiscal
1999, and $9.4 million in fiscal 2000. Other than upon a change of control or as
a result of certain asset sales, or in the event that certain excess funds exist
at the end of a fiscal year, the Company will not be required to make any
principal payments in respect of the Company's outstanding 12 1/2% Senior
Subordinated Notes Due 2005 (the "Notes") until maturity. The Company will also
be
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<PAGE> 13
required to make interest payments with respect to both the Senior Bank
Facilities and the Notes. The Company typically makes capital expenditures
related primarily to the maintenance and improvement of manufacturing
facilities. The Company spent $4.0 million for the six months ended March 31,
1996, as compared to $5.3 million for the six months ended March 31, 1995.
Included in capital expenditures for the six months ended March 31, 1996 were
$1.2 million spent on the casting line under construction at the Company's
Newark, Delaware facility and $1.8 million spent on management information
systems.
The Company's capital spending is of a relatively short duration, with the
complete commitment process involving less than one year. Exceptions to this
circumstance are the Company's casting line at its Newark, Delaware facility,
with respect to which an additional $0.4 million is scheduled to be spent during
the Company's 1996 fiscal year, and the worldwide information system to which an
additional $0.5 million to $0.75 million is anticipated to be spent during the
Company's 1996 fiscal year.
The Company's principal source of cash to fund these capital requirements is net
cash provided by operating activities. The Company's net cash provided by
operating activities for the six months ended March 31, 1996 totaled $1.1
million as compared to $7.5 million for the six months ended March 31, 1995.
This decrease was primarily due to the semi-annual interest payment on the
Notes.
Net cash used by investing activities for the six months ended March 31, 1996
was $7.7 million, as compared to $5.3 million for the six months ended March 31,
1995, principally due to the acquisition of Eastern Safety Equipment Co. Inc.
Net cash provided by financing activities for the six months ended March 31,
1996 was $4.4 million as compared to a use of $1.6 million for the six months
ended March 31, 1995. This increase was primarily due to additional borrowing in
order to finance the acquisition of Eastern Safety Equipment Co. Inc.
The Company has a substantial amount of indebtedness. The Company relies on
internally generated funds and, to the extent necessary, on borrowings under the
revolving credit facility available under the Senior Bank Facilities, which
provides for borrowings up to $25.0 million, subject to certain customary
drawing conditions, to meet its liquidity needs. The Company anticipates that
operating cash flow will be adequate to meet its debt service and capital
expenditure requirements in the long term, although there can be no assurances
that existing levels of sales and profitability, and therefore cash flow, will
be maintained in the future. While softness in certain European economies may
impede the Company's growth there, the outlook for most other operations remains
positive. Levels of sales and profitability will be impacted by continued new
product development, worldwide economic conditions, and competitive pressures.
In addition, the Company may make selective acquisitions and would rely on
internally generated funds, and, to the extent necessary, on borrowings up to
$15.0 million under such revolving credit facility or from other sources to
finance such acquisitions. In January 1996, the Company borrowed $6.8 million
under the revolving credit facility available under the Senior Bank Facilities
to finance in part the $8.0 million acquisition of all of the outstanding
capital stock of Eastern Safety Equipment Co., Inc., whose annual revenues are
approximately $14 million. The Company's ability to borrow is limited by
covenants in the Senior Bank Facilities and the Notes.
The terms of the Senior Credit Facilities generally prohibit the Company from
declaring or paying dividends, and from making loans or advances, to Holdings,
except for de minimis funds, which the Company may pay to Holdings to cover
taxes and expenses incurred by Holdings in the ordinary course of business. The
Company is similarly restricted under the terms of the Notes.
13
<PAGE> 14
PART II
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits and claims arise against the Company in the ordinary course of
its business. Most of these lawsuits and claims relate to the Company's safety
eyewear and respiratory product lines and primarily involve accidents and/or
exposures occurring after Old Cabot Safety Corporation's acquisition of the
AOSafety[Registered Trademark] Division in April 1990. The Company is
contingently liable with respect to numerous lawsuits involving respirators
manufactured by American Optical Corporation prior to the acquisition of
the AOSafety[Registered Trademark] Division in April 1990. These lawsuits
typically involve plaintiffs alleging that they suffer from asbestosis or
silicosis, and that such condition results in part from respirators which were
negligently designed or manufactured. The defendants in these lawsuits are
often numerous, and include, in addition to respirator manufacturers, employers
of the plaintiffs and manufacturers of sand (used in sand blasting) and
asbestos. Responsibility for legal costs, as well as for settlements and
judgments, is shared contractually by the Company, American Optical Corporation
and a prior owner of American Optical Corporation. The Company and Cabot
Corporation have entered into an arrangement relating to certain respirator
claims asserted prior to the Acquisition closing date, pursuant to which the
Company is indemnified by Old Cabot Safety Corporation in respect of such
claims.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security-Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None
14
<PAGE> 15
SIGNATURES
<TABLE>
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.
<S> <C>
Date: May 15, 1996 CABOT SAFETY HOLDINGS CORPORATION
/s/ Bryan J. Carey
----------------------------------------
Bryan J. Carey
Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary
/s/ Bryan J. Carey
Date: May 15, 1996 ----------------------------------------
Bryan J. Carey
Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary (Principal Financial Officer)
</TABLE>
15
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