10-Q 1 bacou10q.txt BACOU10Q 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 June 30, 2001 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 ------------------------------- BACOU USA, INC. -------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 05-0470688 ------------------------------- ------------------ (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) ------------------------ 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 August 6, 2001 was 17,682,465. BACOU USA, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Consolidated Condensed Balance Sheets, December 31, 2000 and June 30, 2001 3 Consolidated Condensed Statements of Income, Three and Six Months Ended June 30, 2000 and 2001 4 Consolidated Condensed Statements of Cash Flows, Six Months Ended June 30, 2000 and 2001 5 Notes to Consolidated Condensed Financial Statements 6 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 17 PART I. Financial Information ITEM I. Financial Statements BACOU USA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except share data)

BACOU USA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited)

BACOU USA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

BACOU USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (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, respiratory systems and hands of workers, 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. Certain amounts in 2000 have been reclassified in order to conform to the 2001 presentation. 2. 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 $1,391,000 at December 31, 2000 and $1,266,000 at June 30, 2001. 3. INVENTORIES Inventories consist of the following: December 31, June 30, (in thousands) 2000 2001 --------------- ------------- Raw material and supplies............... $16,103 $17,142 Work-in-process......................... 6,008 5,514 Finished goods.......................... 23,393 16,950 --------------- ------------- $45,504 $39,606 =============== ============= 4. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS Accumulated depreciation and amortization on property and equipment totaled $34,415,000 at December 31, 2000 and $39,789,000 at June 30, 2001. Accumulated amortization on intangible assets totaled $39,923,000 at December 31, 2000 and $44,956,000 at June 30, 2001. 5. EARNINGS PER SHARE Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed by increasing the weighted-average number of common shares by the dilutive potential common shares that were outstanding during the period. Dilutive potential common shares during all periods presented were limited to the effect of outstanding stock options determined by application of the treasury stock method. Dilutive stock options included in the computation of diluted earnings per share totaled 151,000 for the three-month period and 85,000 for the six-month period ended June 30, 2000, and totaled 311,000 for the three-month period and 307,000 for the six-month period ended June 30, 2001. 6. SEGMENT DATA The Company has three reportable segments, which include the safety segment, the hand protection segment and the optical frames and instruments segment. The safety segment consists of businesses that manufacture consumable products (protective eyewear and hearing protection) and technical products (respirators and gas monitors), all of which are sold principally to industrial and fire safety distributors. The hand protection segment consists of businesses that manufacture protective gloves, sleeves, apparel and related items, which are sold principally to industrial safety distributors. The optical frames and instruments segment includes eyeglass frames and components, and vision screening equipment. Eyeglass frames and components are principally purchased by optical laboratory customers who fit frames with prescription lenses to create completed eyewear products. Information presented below as "all other" includes all non-operating entities. The Company evaluates segment performance based upon a measure of profit represented by operating income prior to unusual or infrequent gains and losses, intangible amortization expense, interest and taxes. The Company allocates certain operating expenses for legal, human resource and information system services provided to each segment. Presented below is a summary of financial data for the Company's reportable segments. Adjustments to reconcile segment operating income to consolidated operating income for the three months ended June 30, 2000 and 2001, include amortization expense totaling $2,427,000 in 2000 and $2,515,000 in 2001. Reconciling adjustments also include costs equal to $1,127,000 incurred during 2001 in connection with the ongoing process of evaluating strategic alternatives. Adjustments to reconcile segment operating income to consolidated operating income for the six months ended June 30, 2000 and 2001, include amortization expense totaling $4,832,000 in 2000 and $5,000,000 in 2001. Reconciling adjustments also include costs equal to $1,432,000 incurred during 2001 in connection with the ongoing process of evaluating strategic alternatives. Segment assets exclude intercompany receivables and investments in wholly-owned subsidiaries.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FACTORS THAT MAY AFFECT FUTURE PERFORMANCE 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. We caution you that a number of important factors could cause actual outcomes to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. Forward-looking statements involve a number of risks and uncertainties including, but not limited to: o the impact of our ongoing evaluation of certain strategic alternatives, including the probable sale of Bacou USA and Bacou S.A., our majority owner; o general economic conditions, including the effect of reductions in the number of employees in industries which utilize our products; o continued demand for our current product lines; o the success of our new product introductions; o the success of our acquisition strategy, including our ability to integrate new businesses; o continued availability and favorable pricing of raw materials; o the effect of any work stoppages; o the effect of any business interruption resulting from electricity shortages; o competitive pressures; o fluctuations in interest rates; and o regulatory matters. We cannot assure you that we will be able to anticipate or respond in a timely fashion to changes in any of the factors listed above, which could adversely affect our operating results in one or more fiscal quarters. Our operating results in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in our operating results may also result in fluctuations in the price of our common stock. RECENT DEVELOPMENTS Combination with Christian Dalloz S.A. We announced on May 30, 2001 that Bacou S.A., our majority owner, had agreed to a cash and stock combination with Christian Dalloz S.A., a company domiciled in France and whose shares are publicly traded on the Paris Stock Exchange. We also announced that, in a related U.S. merger transaction, all minority shareholders of Bacou USA, Inc. would receive $28.50 in cash for their shares. On July 16, 2001, we announced that we expected these transactions would be consummated in early September 2001 following the fulfillment of certain applicable conditions. National Economic Conditions During 2001 leading economic indicators have pointed to a slowdown in the United States economy. A number of manufacturing companies and other businesses, including some companies that use our products, have announced layoffs and projections for reduced output in 2001. While it is premature to know the ultimate impact of such events on Bacou USA, it is possible that such actions could affect the volume of purchases of our products by these companies and as a result, there could be an adverse effect on our business and results of operations in 2001. Our domestic sales during the first six months of 2001 were equal to $131.8 million, compared with domestic sales of $134.7 million during the first six months of 2000. We believe that our domestic sales have declined due in part to the slowing U.S. economy. Acquisitions On June 30, 2000, we purchased substantially all of the assets and assumed substantially all of the liabilities of the Whiting + Davis division of WDC Holdings, Inc., a manufacturer and distributor of metal mesh gloves, sleeves and apparel. Operating results of Whiting + Davis have been included in our consolidated financial statements beginning with the acquisition date. RESULTS OF OPERATIONS The following table presents selected operating data and such amounts as percentages of net sales for the periods indicated.

THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001 Net Sales. Our net sales declined from $82.2 million for the three months ended June 30, 2000 to $80.2 million for the three months ended June 30, 2001. Net sales for our safety segment declined 4.5% from $58.5 million in 2000 to $55.8 million in 2001. Net sales for our glove segment increased 4.0% from $15.9 million in 2000 to $16.6 million in 2001. Net sales for our optical frames and instruments segment were $7.8 million in both periods. Our international sales increased 10.8% from $12.0 million for the three months ended June 30, 2000 to $13.3 million for the three months ended June 30, 2001. Domestic sales for the quarter declined from $70.2 million in 2000 to $66.9 million in 2001. We believe the decline in our domestic sales was due in part to the slowing U.S. economy (see "Recent Developments - National Economic Conditions"). Cost of Sales. Our cost of sales was equal to $42.5 million for the three months ended June 30, 2000 compared with $42.8 million for the three months ended June 30, 2001. Gross Profit. Our gross profit declined 5.9% from $39.7 million for the three months ended June 30, 2000 to $37.4 million for the three months ended June 30, 2001. Our gross margin declined from 48.3% in 2000 to 46.6% in 2001. The reduction in our gross margin was primarily a result of lower sales in the safety segment and increased sales in the hand protection segment which products have lower gross margins than the safety segment. Operating Expenses. Our operating expenses increased 5.9% from $22.2 million for the three months ended June 30, 2000 to $23.5 million for the three months ended June 30, 2001. Our 2001 operating expenses included costs totaling $1.1 million incurred in connection with our ongoing evaluation of certain strategic alternatives. This project is continuing into the third quarter and we expect to incur additional costs during 2001; however, the amount of such additional costs is not estimable at this time. Operating Income. As a result of the foregoing, our operating income declined 20.9% from $17.5 million for the three months ended June 30, 2000 to $13.8 million for the three months ended June 30, 2001. Our operating income, excluding costs relating to the evaluation of strategic alternatives, was $17.8 million for the 2000-period and $14.9 million for the 2001-period. Other Expense. Other expense consists principally of net interest expense totaling $2.3 million for the three months ended June 30, 2000 and $1.5 million for the three months ended June 30, 2001. We had debt outstanding totaling $132.5 million at June 30, 2000, and $109.6 million at June 30, 2001, with interest rates on most of this debt variable based upon three-month LIBOR. Our interest expense declined from the 2000-period to 2001 due to lower average debt balances outstanding as well as lower average interest rates. Income Taxes. Our effective income tax rate was 36.5% for the three months ended June 30, 2000 and 38.9% for the three months ended June 30, 2001. The effective rate in both periods was higher than the federal statutory rate of 35.0% due to state and local income taxes. Also, we have not recorded a tax benefit on any of the costs incurred in connection with our evaluation of strategic alternatives, thereby resulting in an increase to our effective tax rate from 2000 to 2001. Net Income. As a result of the foregoing, our net income declined from $9.4 million ($0.53 per diluted share) for the three months ended June 30, 2000 to $7.5 million ($0.42 per diluted share) for the three months ended June 30, 2001. Our net income, excluding costs relating to our evaluation of strategic alternatives, was $9.4 million ($0.53 per diluted share) for the three months ended June 30, 2000 and $8.7 million ($0.48 per diluted share) for the three months ended June 30, 2001. SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001 Net Sales. Our net sales were equal to $157.0 million for both the six months ended June 30, 2001 and 2000. Net sales for our safety segment were $105.7 million in 2001 compared to $108.6 million in 2000. Net sales for our hand protection segment increased 11.3% from $31.8 million in 2000 to $35.4 million in 2001, due primarily to inclusion of sales for our recently acquired Whiting + Davis business. Net sales for our optical frames and instruments segment declined from $16.6 million in 2000 to $15.9 million in 2001. International sales increased 12.4% from $22.3 million for the six months ended June 30, 2000 to $25.1 million for the six months ended June 30, 2001. Domestic sales for the six-month period declined from $134.7 million in 2000 to $131.9 million in 2001. We believe the decline in our domestic sales was due in part due to the slowing U.S. economy (see "Recent Developments - National Economic Conditions"). Cost of Sales. Our cost of sales increased 3.2% from $82.7 million for the six months ended June 30, 2000 to $85.4 million for the six months ended June 30, 2001, due to product mix and slightly higher labor costs. Gross Profit. Our gross profit declined 3.7% from $74.3 million for the six months ended June 30, 2000 to $71.5 million for the six months ended June 30, 2001. Our gross margin declined from 47.3% in 2000 to 45.6% in 2001. Our gross margin for the 2001-period was adversely affected due to: o increases in the sale of our glove products, which have lower gross margins than our other product lines; o higher first quarter labor costs resulting from employment levels at certain of our manufacturing facilities that were higher than necessary for the reduced demand; and o product mix. Operating Expenses. Our operating expenses increased 4.0% from $43.4 million for the six months ended June 30, 2000 to $45.1 million for the six months ended June 30, 2001. Our 2001 operating expenses included costs totaling $1.4 million incurred in connection with our ongoing evaluation of certain strategic alternatives. Operating Income. As a result of the foregoing, our operating income declined 14.4% from $30.9 million for the six months ended June 30, 2000 to $26.4 million for the six months ended June 30, 2001. Our operating income, excluding costs relating to our evaluation of strategic alternatives, was $30.9 million for the six months ended June 30, 2000 and $27.9 million for the six months ended June 30, 2001. Other Expense. Other expense consists principally of net interest expense totaling $4.6 million for the six months ended June 30, 2000 and $3.5 million for the six months ended June 30, 2001. We had debt outstanding totaling $132.5 million at June 30, 2000, and $109.6 million at June 30, 2001, with interest rates on most of this debt variable based upon three-month LIBOR. Our interest expense declined from the 2000-period to 2001 due to lower average debt balances outstanding as well as lower average interest rates. Income Taxes. Our effective income tax rate was 36.4% for the six months ended June 30, 2000 and 38.0% for the six months ended June 30, 2001. The effective rate in both periods was higher than the federal statutory rate of 35.0% due to state and local income taxes. Also, we have not recorded a tax benefit on any of the costs incurred in connection with our evaluation of strategic alternatives, thereby resulting in an increase to our effective tax rate from 2000 to 2001. Net Income. As a result of the foregoing, our net income declined from $16.4 million ($0.93 per diluted share) for the six months ended June 30, 2000 to $14.2 million ($0.79 per diluted share) for the six months ended June 30, 2001. Our net income, excluding costs relating to the evaluation of strategic alternatives, was $16.4 million ($0.93 per diluted share) for the six months ended June 30, 2000 and $15.7 million ($0.87 per diluted share) for the six months ended June 30, 2001. LIQUIDITY AND CAPITAL RESOURCES Our liquidity historically has been derived from cash flow provided by operations and, periodically, from bank borrowings utilized to finance the acquisition of businesses and certain capital expenditures. We utilize EBITDA (earnings before interest, taxes, depreciation and amortization) as a measure of our cash flow provided by operations. EBITDA should not be considered in isolation or as a substitute for net earnings or cash provided by operating activities, each prepared in accordance with generally accepted accounting principles. EBITDA as reported by us is equal to operating income plus depreciation and amortization, adjusted (when applicable) for unusual or infrequent items. EBITDA as reported by us may not be comparable to similarly titled measures presented by other companies and comparisons could be misleading. Our adjusted EBITDA was $38.2 million for the six months ended June 30, 2001 and $40.7 million for the three months ended June 30, 2000. Our working capital increased by $12.1 million from $51.1 million at December 31, 2000, to $63.2 million at June 30, 2001. Improvement in our cash position was the primary cause for the increase in working capital, as cash balances increased by $17.7 million and we repaid outstanding principal on our line of credit equal to $5.2 million. We reduced inventories by $5.9 million and reduced trade accounts receivable by $1.8 million during the six-month period ended June 30, 2001. Our key working capital (accounts receivable, plus inventories, less accounts payable) improved by $9.3 million from December 31, 2000 to June 30, 2001. Cash used for investing activities was equal to $1.8 million during the six months ended June 30, 2001, consisting entirely of capital expenditures. Cash used for investing activities was equal to $13.9 million during the six months ended June 30, 2000, consisting of capital expenditures of $8.6 million and cash paid for the acquisition of businesses of $5.3 million. Payments in the 2000-period relating to the acquisition of businesses consisted principally of a final payment of contingent consideration due on the acquisition of Perfect Fit Glove Co., Inc. ("Perfect Fit"). Pursuant to our stock purchase agreement with Biosystems, Inc., the initial purchase price for our 1997 acquisition of that company may be increased if the operating results of this business during the year ended December 31, 2000, exceed certain defined thresholds of profitability. If defined profitability levels are not achieved, no contingent payment is required. If, however, the operating results of this business meet these defined profitability levels then a minimum contingent payment equal to $5.0 million will be due, increasing based upon a sliding scale thereafter. Based upon our analysis we believe a contingent payment is not due. According to the purchase agreement, our determination of contingent payments due is subject to arbitration provisions which have been invoked by the former shareholders of Biosystems, Inc. Contingent payments (if any) would be payable in unregistered shares of our common stock, except that the former stockholders of Biosystems, Inc. have the option to receive all or part of any payment in cash. Any contingent payment would be due in 2001 and would result in additional goodwill. We expect to finance the cash portion of any such payment from operations or bank borrowings. In connection with certain acquisitions, we entered into two credit agreements with Banque Nationale de Paris ("BNP"). Pursuant to the credit agreements, BNP made term loans to Bacou USA in the original principal amount of $110.0 million (in February 1998) and $50.0 million (in March 1999). Both loans require principal repayments in equal quarterly installments over seven years and require quarterly interest payments at annual rates equal to three-month LIBOR plus 0.50% and 0.60%, respectively. We have entered into a credit agreement with Fleet National Bank (f/k/a BankBoston, N.A.) as agent for participating banks ("Fleet"). Under this credit agreement the bank established a revolving line of credit facility with a maximum principal limit of $36.0 million ("Fleet Revolving Facility"). Principal outstanding under the Fleet Revolving Facility will bear interest at our option at either (a) a fixed rate equal to LIBOR plus 0.70%, or (b) a floating rate equal to Fleet's base rate. There were no amounts outstanding on the Fleet Revolving Facility at June 30, 2001. Fleet also has agreed to purchase up to $30.0 million of economic development revenue bonds issued by Rhode Island Industrial Facilities Corporation ("RIIFC Revenue Bonds"). At June 30, 2001, there was a principal balance outstanding equal to $11.2 million under the RIIFC Revenue Bonds. Principal outstanding bears interest at fixed rates ranging from LIBOR plus 0.70% to LIBOR plus 0.95%. Repayment of principal under the RIIFC Revenue Bonds is due in quarterly installments of $500,000 beginning February 1, 2002, increasing to $1,500,000 beginning February 1, 2005, with a final payment of any remaining principal due on August 1, 2006. In connection with our acquisition of Perfect Fit we assumed indebtedness outstanding under Wilkes County Industrial Development Revenue Bonds in the principal amount of $6.3 million. Principal outstanding under these revenue bonds bears interest at a variable rate, which averaged 3.3% during the six months ended June 30, 2001. In March 2000, we restructured the repayment terms of these bonds such that the remaining principal balance of $5.6 million is now due in full on December 31, 2006. We believe that cash flow provided by our operating activities together with unused borrowing capacity will be sufficient to fund our working capital requirements, debt service requirements and capital expenditures for the foreseeable future. Seasonality Our business has been subject to slight seasonal variations, which we have attributed to fluctuations in industrial activity and annual weather patterns. Historically, our sales from November through February 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, our business has been variable period to period due to other factors, including promotional activity undertaken by us in response to competitive pressures, market demand, production capacity, inventory levels and other considerations. Effects of Inflation Inflation during recent years has been modest and has not had a material impact upon the results of our operations. New Accounting Pronouncements In September 2000, the FASB Emerging Issues Task Force ("EITF") discussed Issue No. 00-22 "Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future". A consensus has not yet been reached on any of the matters outlined in Issue No. 00-22. Issue No. 00-22 addresses the accounting for future offers to customers of free product, discounts or rebates which will be awarded only if the customer completes a specified cumulative level of revenue transactions or remains a customer for a specified time period. This pronouncement may result in a reclassification of certain costs within our income statement, but is not expected to have a material impact on our financial condition or results of operations. In April 2001, the EITF reached a consensus on Issue No. 00-25 "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products". Issue No. 00-25 addresses whether certain consideration offered by a vendor to a distributor, including slotting fees, cooperative advertising arrangements and "buy-down" programs, should be characterized as operating expenses or reductions of revenue. This pronouncement may result in a reclassification of certain costs within our income statement, but is not expected to have a material impact on our financial condition or results of operations. We must adopt the provisions of this pronouncement on or before January 1, 2002. In July 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations ("Statement 141"), and Statement No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective lives to their estimated residual values and be reviewed for impairment. The Company is required to immediately adopt the provisions of Statement 141 and must adopt the provisions of Statement 142 effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Statement 141 will require, upon adoption of Statement 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk can result from fluctuations in interest rates, foreign currency exchange rates, commodity prices or other market exposures. Uncertainties that are either non-financial or non-quantifiable, such as political, economic, tax, other regulatory or credit risks are not included in the following assessment of our market risks. We believe our only material market risk exposure is the risk of adverse fluctuations in interest rates. At June 30, 2001, we had debt outstanding totaling $109.6 million. Interest rates on principally all of this debt are variable based upon three-month LIBOR. Three-month LIBOR approximated 3.8% at June 30, 2001. We have prepared sensitivity analyses of our interest rate exposure to assess the future impact of hypothetical changes in interest rates. Based upon the results of these analyses, we believe that a 10% adverse change from current interest rates would result in the potential loss of after-tax earnings over the next twelve months equal to approximately $270,000, or $0.02 per share. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On May 30, 2001, four putative class action complaints were filed in the Delaware Court of Chancery on behalf of our public stockholders against us, our directors and Bacou S.A. One of the complaints also includes Christian Dalloz S.A. as a defendant. Each of the complaints alleges, among other things, that the defendants breached their fiduciary duties in setting an unreasonably low price to be paid to our public stockholders in the merger. The complaints seek a preliminary and permanent injunction enjoining the proposed transaction, rescission in the event that the transaction is completed, damages and attorneys' fees. Bacou USA and Christian Dalloz believe that these claims are without merit and intend to defend them vigorously. As reported in our Report on Form 10-K/A for the year ended December 31, 2000, we instituted a civil action for a declaratory judgment in the Rhode Island Superior Court. A second defendant has been added and this case has been removed to the U.S. District Court for the District of Rhode Island. The defendants have recently filed responses to discovery requests alleging damages against us totaling $8.9 million, which we have denied. Discovery proceedings in this case have been completed. Various dispositive motions are pending and should be decided during the third quarter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Index EXHIBIT NUMBER DESCRIPTION OF EXHIBIT -------------- --------------------- None (b) Reports on Form 8-K The Company filed two reports on Form 8-K during the quarterly period ended June 30, 2001. The first report, dated May 4, 2001, was filed for the purpose of announcing the Company's financial results for the quarterly period ended March 31, 2001. The second report, dated May 30, 2001, was filed for the purpose of announcing a merger agreement resulting in the combination of Bacou USA, Inc., Bacou S.A. and Christian Dalloz, S.A. 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: August 14, 2001 BACOU USA, INC. (Registrant) /s/ Adrien W. Hebert /s/ Jeffrey T. Brown ------------------------------- ---------------------------- Adrien W. Hebert Jeffrey T. Brown Chief Financial Officer Chief Accounting Officer

BACOU USA INC 10-Q