<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, 1997
Commission file number 33-96190
AEARO CORPORATION
(Exact name of registrant as specified in its charter)
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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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AEARO CORPORATION
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1997
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 1997 (UNAUDITED) AND SEPTEMBER 30, 1996 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE MONTH AND SIX MONTH PERIODS
ENDED MARCH 31, 1997 AND 1996 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-15
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
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ITEM 2. CHANGES IN SECURITIES 16
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 16
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ITEM 5. OTHER INFORMATION 16
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
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SIGNATURE PAGE 18
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PART I
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
AEARO CORPORATION
BALANCE SHEETS--ASSETS
(DOLLARS IN THOUSANDS)
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
--------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,018 $ 8,540
Accounts receivable, net 43,120 45,890
Inventories 43,443 41,164
Deferred and prepaid expenses 3,774 2,748
-------- --------
Total current assets 95,355 98,342
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 65,249 68,712
INTANGIBLE ASSETS, NET 150,089 161,940
OTHER ASSETS 8,467 9,442
-------- --------
Total assets $319,160 $338,436
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
AEARO CORPORATION
BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
---------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 9,801 $ 8,767
Accounts payable and accrued liabilities 34,822 40,348
Accrued interest 3,838 3,779
U.S. and foreign income taxes 1,821 5,713
-------- --------
Total current liabilities 50,282 58,607
-------- --------
LONG-TERM DEBT 243,989 241,520
DEFERRED INCOME TAXES 942 697
OTHER LIABILITIES 2,782 2,811
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--97,410 and 99,350 shares at
March 31, 1997 and September 30, 1996, respectively 1 1
Additional paid-in capital 32,825 32,640
Retained earnings (deficit) (4,074) 1,607
Cumulative foreign currency translation adjustments (7,587) 553
-------- --------
Total stockholders' equity 21,165 34,801
-------- --------
Total liabilities and stockholders' equity $319,160 $338,436
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
AEARO CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------------- -----------------------------------
1997 1996 1997 1996
------------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
NET SALES $69,596 $58,224 $136,185 $112,716
COST OF SALES 41,123 31,991 79,722 62,340
------- ------- -------- --------
Gross profit 28,473 26,233 56,463 50,376
SELLING AND ADMINISTRATIVE 21,361 16,840 41,829 33,354
RESEARCH AND TECHNICAL SERVICES 1,270 839 2,597 1,593
AMORTIZATION EXPENSE 2,125 1,003 4,316 1,956
OTHER CHARGES (INCOME), NET 1,529 95 1,979 (3)
------- ------- -------- --------
Operating income 2,188 7,456 5,742 13,476
INTEREST EXPENSE, NET 6,703 4,617 13,246 9,068
------- ------- -------- --------
Income (loss) before provision
(benefit) for income taxes (4,515) 2,839 (7,504) 4,408
PROVISION (BENEFIT) FOR INCOME TAXES (1,403) 1,138 (1,823) 1,938
-------- ------- -------- --------
Net income (loss) (3,112) 1,701 (5,681) 2,470
PREFERRED STOCK DIVIDEND ACCRUED 1,721 1,532 3,424 3,033
------- ------- -------- --------
Earnings (loss) applicable to
Common Shareholders (4,833) 169 (9,105) (563)
======= ======= ======== ========
EARNINGS (LOSS) PER COMMON SHARE $(49.03) $ 1.69 $ (91.98) $ (5.63)
======= ======= ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 98,574 100,000 98,986 100,000
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<TABLE>
AEARO CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<CAPTION>
For the Six Months Ended
March 31,
-----------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,681) $ 2,470
Adjustments to reconcile net income (loss) to cash provided
(used) by operating activities--
Depreciation 4,693 3,471
Amortization 5,265 2,587
Deferred income taxes 215 --
Other, net 393 20
Changes in assets and liabilities-
Accounts receivable 2,449 (6,225)
Inventory (2,889) (911)
Accounts payable and accruals (4,681) (1,751)
Other, net (4,455) 1,479
------- -------
Net cash provided (used) by operating activities (4,691) 1,140
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,904) (4,040)
Proceeds provided by disposals of property, plant and equipment 811 --
Purchase of Shoplyne assets (242) --
Cash paid for Eastern -- (6,636)
Eastern escrow deposit -- 3,000
------- -------
Net cash used by investing activities (3,335) (7,676)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility, net 8,450 6,800
Repayment of term loans (3,866) (2,480)
Repayment of external long-term debt (620) (75)
Decrease in shareholder notes, net 147 123
Sale of common stock, net 37 --
------- -------
Net cash provided by financing activities 4,148 4,368
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 356 (92)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (3,522) (2,260)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,540 4,707
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,018 $ 2,447
======= =======
CASH PAID FOR:
Interest $ 9,663 $ 8,914
======= =======
Income taxes $ 1,323 $ 407
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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) FORMATION ACQUISITION AND FINANCING
Aearo Corporation was formed by Vestar Equity Partners, L.P. (Vestar) in
June 1995 to effect the acquisition (the Formation Acquisition) of
substantially all of the assets and liabilities of Aearo Company (formerly
Cabot Safety Corporation) and certain affiliates (the Predecessor). The
Predecessor was wholly owned by Cabot Corporation (Cabot) prior to the
Formation Acquisition. The Formation Acquisition closed on July 11, 1995,
when Aearo Corporation acquired substantially all of the assets and certain
liabilities of the Predecessor for cash, preferred stock and a 42.5% common
equity interest in Aearo Corporation. Aearo Corporation immediately
contributed the acquired assets and liabilities to Aearo Company, a wholly
owned subsidiary of Aearo Corporation, pursuant to an asset transfer
agreement dated July 13, 1995. Aearo Corporation has no other materials
assets, liabilities or operations other than those that result from its
ownership of the common stock of Aearo Company.
The Formation 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
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.
(3) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) SIGNIFICANT ACCOUNTING POLICIES
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Intangible Assets. Intangible assets consist primarily of the costs of
goodwill, 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.
Net Income (Loss) per Common Share. Net income (loss) 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) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
In December 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, which is to become effective
for fiscal years beginning after December 15, 1995. SFAS No. 123 requires
employee stock-based compensation to be either recorded or disclosed at its
fair value. Management intends to continue to account for employee
stock-based compensation under Accounting Principles Board Opinion No. 25
and will not adopt the new accounting provision for employee stock-based
compensation under SFAS No. 123, but will include the additional required
disclosures in the fiscal 1997 Form 10-K financial statements.
(6) INVENTORIES
<TABLE>
Inventories consisted of the following (dollars in thousands):
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
----------- -------------
(unaudited)
<S> <C> <C>
Raw materials $11,454 $13,100
Work in process 10,648 11,130
Finished goods 21,341 16,934
------- -------
$43,443 $41,164
======= =======
</TABLE>
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
(7) DEBT
In July 1995, Aearo Company 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, Aearo Company issued $100.0 million
of Senior Subordinated Notes due 2005 (Notes). In May 1996, Aearo Company
and the Syndicated Lenders amended and restated the Senior Bank Facility
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) DEBT (CONTINUED)
to provide (i) Term Loans denominated in U.S., Canadian, British, and
German currencies aggregating $140.0 million and (ii) a Revolving Credit
Facility providing for up to $25.0 million. Under the terms of both the
Agreement and the Note indenture, Aearo Company is required to comply with
certain financial covenants and restrictions. In April 1997, the Credit
Agreement was amended with respect to certain covenants applicable to
periods ending on and after March 31, 1997. Aearo Company was in compliance
with the Credit Agreement as amended at March 31, 1997. At March 31, 1997,
the amounts outstanding on the Term Loans and the Revolving Credit Facility
were $135.2 million and $13.5 million, respectively.
(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 had
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) ACQUISITIONS
On January 10, 1997, the Company acquired inventory and other select assets
of Shoplyne Safety Products (a Division of Mack Products, Inc.) for
$241,600. As part of the purchase price, the Company entered into a
non-compete agreement for $75,000. The transaction was 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.
On May 30, 1996, the Company acquired Peltor Holding AB (the Acquisition)
for approximately $85.6 million. The Acquisition has been accounted for as
a purchase transaction in accordance with Accounting Principles Board
Opinion No. 16, and accordingly, the consolidated financial statements for
the periods subsequent to May 30, 1996, reflect the purchase price,
including transaction costs, allocated to tangible and intangible assets
acquired and liabilities assumed, based on the estimated fair values as of
May 30, 1996. The purchase price allocation is preliminary and may be
revised at a later date, however, the Company does not presently expect
material changes to the allocation of the purchase price.
Unaudited pro forma operating results of the Company for the six months
ended March 31, 1996, as adjusted for the debt financing and estimated
effects of the Acquisition as if it had occurred on October 1, 1995, are as
follows (dollars in thousands except share amounts):
Net sales $135,414
Earnings (loss) applicable to common shareholders (3,307)
Earnings (loss) per common share (33.07)
Weighted average common shares outstanding 100,000
9
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) ACQUISITIONS (CONTINUED)
On January 3, 1996, the Company acquired the stock of Eastern Safety
Equipment Company, Inc. (Eastern) for $6.8 million subject to final closing
adjustments, as defined. In addition, the Company entered into non-compete
and consulting agreements that provide an aggregate of $1.0 million in
consideration to the former controlling stockholder of Eastern. The
transaction was 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. Amounts allocated to the non-compete and consulting
agreements are being charged to expense over the five year term of the
agreements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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. This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1993 and Section 21E of the Securities Exchange Act of
1934. Such statements involve risks and uncertainties that could cause actual
results to differ materially from those set forth in such forward-looking
statements. Among other things, expectations for upcoming periods are based on
assumptions which management believes to be reasonable at this time, including
assumptions concerning the volume and product mix of sales. Moreover, there can
be no assurances when initiatives undertaken by the Company to relieve
operational difficulties related to the conversion to a new computer system and
to improve production planning will be successful. Other significant potential
risks and uncertainties include the following: risks associated with
indebtedness; uncertainties of acquisition strategy; high level of competition
in the Company's markets; importance and costs of product innovation; risks
associated with international operations; product liability exposure;
unpredictability of patent protection and other intellectual property issues;
dependence on key personnel; the risk of adverse effect of economic and
regulatory conditions on sales; and risks associated with environmental matters.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1996
Net Sales. Net sales in the three months ended March 31, 1997 increased 19.5% to
$69.6 million from $58.2 million in the three months ended March 31, 1996. The
increase in net sales was due primarily to the acquisition of Peltor AB during
1996. Safety Products net sales in the three months ended March 31, 1997
increased 23.2% to $60.6 million from $49.2 million in the three months ended
March 31, 1996. The acquisition of Peltor AB contributed approximately $10.2
million. Internal growth was approximately 2.4% as growth in sales in North
America was hampered by difficulties associated with the new management
information system and related difficulties in operations. Specialty Composites'
net sales in the three months ended March 31, 1997 were essentially flat at $9.0
million as softness in the Class 8 truck market was offset by growth in
precision equipment and other health related markets.
Gross Profit. Gross Profit in the three months ended March 31, 1997 increased
8.5% to $28.5 million from $26.2 million in the three months ended March 31,
1996. The increase was due to the acquisition of Peltor, AB which was partially
offset by higher costs at the Southbridge, MA manufacturing facility. These
costs included excess freight charges for incoming materials, excess direct
labor costs and overtime premiums and excess material usage. These cost levels
had increased greatly in the beginning of the fiscal year and were significantly
reduced during the month of March. Gross Profit as a percentage of net sales in
the three months ended March 31, 1997 was 40.9% as compared to 45.1%. Such
percentage decreased primarily due to the higher operating costs in Southbridge.
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended March 31, 1997 increased 26.9% to $21.4 million from $16.8
million in the three months ended March 31, 1996. Of this increase,
approximately $2.0 million was due to the acquisition of Peltor AB. Of the
remaining increase, approximately $1.0 million was due to higher distribution
expenses. These expenses include higher freight
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charges as well as labor costs associated with a higher level of backorders
which result in more expensive partial shipments. In addition, higher sales and
marketing expenses from the Company's growth initiatives were partially offset
by reductions in management and employee incentive accruals in the first
quarter. Selling and administrative expenses as a percentage of net sales in the
three months ended March 31, 1997 increased to 30.7% of sales as compared to
28.9% of sales in the three months ended March 31, 1996. This was primarily as a
result of the increase in distribution and sales and marketing expenses relative
to growth in sales.
Research and Technical Service Expenses. Research and technical service expenses
in the three months ended March 31, 1997 increased 51.4% to $1.3 million from
$0.8 million in the three months ended March 31, 1996. This increase was
primarily due to the acquisition of Peltor AB which has a more significant
technical component to its products.
Amortization Expense. Amortization expense in the three months ended March 31,
1997 increased to $2.1 million from $1.0 million in the three months ended March
31, 1996 as a result of purchase accounting for the acquisition of Peltor AB.
Other Charges (Income), Net. Other charges increased to $1.5 million in the
three months ended March 31, 1997 from $0.1 million in the three months ended
March 31, 1996. Approximately $1.0 million of this increase was due to foreign
exchange losses. The remaining charges relate to the abandonment of two
automation-related capital projects totaling approximately $0.5 million at the
Company's Indianapolis, IN facility.
Operating Income. As a result of the increases in selling and administrative
expenses, research and technical expenses, amortization expenses and other
charges which were only partially offset by the increase in gross profit,
operating income declined 70.6% to $2.2 million in the three months ended March
31, 1997 from $7.5 million in the three months ended March 31, 1996.
Interest Expense, Net. As a result of the increased borrowings to finance the
acquisitions of Peltor AB, interest expense, net in the three months ended March
31, 1997 increased 45.2% to $6.7 million from $4.6 million in the three months
ended March 31, 1996.
Net Loss. For the three months ended March 31, 1997 the Company had a net loss
of $3.1 million as compared to net income of $1.7 million for the three months
ended March 31, 1996.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED MARCH 31, 1997 COMPARED TO SIX MONTHS
ENDED MARCH 31, 1996
Net Sales. Net sales in the six months ended March 31, 1997 increased 20.8% to
$136.2 million from $112.7 million in the six months ended March 31,1996. The
increase in net sales was due primarily to the acquisitions of Peltor AB and
Eastern Safety during 1996. Safety Products net sales in the six months ended
March 31, 1997 increased 28.3% to $118.7 million from $92.5 in the six months
ended March 31, 1996. The acquisition of Peltor AB and Eastern Safety
contributed $21.2 million and $3.0 million respectively. Internal growth was
approximately 2.2% as growth in sales in North America was hampered by
difficulties associated with the new management information system and related
backorders. In addition, sales in Europe were slightly lower, as sales in the
first quarter a year ago were positively affected by the adoption of new Common
European (CE) approvals. Specialty Composites' net sales in the six months ended
March 31, 1997 decreased 13.3% to $17.5 million from $20.2 million in the six
months ended March 31, 1996. The decrease was primarily due to the impact of a
$2.3 million shipment related to the Sea Wolf submarine in the three months
ended December 31, 1995 as well as softness in the Class 8 truck market in the
current period.
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Gross Profit. Gross Profit in the six months ended March 31, 1997 increased
12.1% to $56.5 million from $50.4 million in the six months ended March 31,
1996. The increase was due to the acquisitions of Peltor, AB and Eastern Safety
which were partially offset by higher costs in the Southbridge, MA manufacturing
facility and, to a lesser extent, the Indianapolis, IN central packaging
operation in the first quarter. These costs included temporary labor, overtime
and excess material usage and were significantly increased by the conversion to
the new management information system. Gross Profit as a percentage of net sales
in the six months ended March 31, 1997 was 41.5% as compared to 44.7% for the
six months ended March 31, 1996. Such percentage decreased due to the higher
costs in North American operations as well as the lower sales in Europe in the
first quarter.
Selling and Administrative Expenses. Selling and administrative expenses in the
six months ended March 31, 1997 increased 25.4% to $41.8 million from $33.4
million in the six months ended March 31, 1996. Of this increase, approximately
$4.5 million was due to the acquisitions of Peltor AB and Eastern Safety. Of the
remaining increase, approximately $2.0 million was due to higher distribution
expenses. These expenses include higher freight charges as well as labor costs
associated with a higher level of backorders and partial shipments as well as
higher returns. In addition, the Company incurred higher costs in customer
service in order to mitigate operational difficulties for its customer base.
Finally, higher sales and marketing expenses from the Company's growth
initiatives were partially offset by reductions in management and employee
incentive accruals in the first quarter. Selling and administrative expenses as
a percentage of net sales in the six months ended March 31, 1997 increased to
30.7% of sales as compared to 29.6% of sales in the six months ended March 31,
1996. This was primarily as a result of the higher distribution and customer
service expenses.
Research and Technical Service Expenses. Research and technical service expenses
in the six months ended March 31, 1997 increased 63.0% to $2.6 million from $1.6
million in the six months ended March 31, 1996. This increase was primarily due
to the acquisition of Peltor AB which has a more significant technical component
to its products.
Amortization Expense. Amortization expense in the six months ended March 31,
1997 increased to $4.3 million from $2.0 million in the six months ended March
31, 1996 as a result of purchase accounting for the acquisitions of Peltor AB
and Eastern Safety.
Other Charges (Income), Net. Other charges increased to $2.0 million in the six
months ended March 31, 1997 from $0.0 million in the six months ended March 31,
1996. Approximately $1.5 million of this increase was due to foreign exchange
losses. The remaining charges relate to the abandonment of two
automation-related capital projects totaling approximately $0.5 million at the
Company's Indianapolis, IN facility.
Operating Income. As a result of the increases in selling and administrative
expenses, research and technical expenses, amortization expenses and other
charges which were only partially offset by the increase in gross profit,
operating income declined 57.4% to $5.7 million in the six months ended March
31, 1997 from $13.5 million in the six months ended March 31, 1996.
Interest Expense, Net. As a result of the increased borrowings to finance the
acquisitions of Peltor AB and Eastern Safety, interest expense, net in the six
months ended March 31, 1997 increased 46.1% to $13.2 million from $9.1 million
in the six months ended March 31, 1996.
Net Loss. For the six months ended March 31, 1997 the Company had a net loss of
$5.7 million as compared to net income of $2.5 million for the six months ended
March 31, 1996.
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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 Canada in local currency. While many of the Company's selling and
distribution costs are also denominated in these currencies, a large portion of
product costs are dollar denominated. As a result, a decline in the value of the
dollar relative to the other currencies can have a favorable impact 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. As a result of the acquisition of Peltor, AB the Company's operations
are also affected by changes in exchange rates relative to the Swedish Krona. A
decline in the value of the Krona relative to other currencies can have a
favorable impact on the profitability of the Company and an increase in the
value of the Krona relative to other currencies can have a negative impact on
the profitability of the Company. The Company estimates that these changes had
the effect of decreasing operating profit by $1.5 million in the six months
ended March 31, 1997 compared to the six months ended March 31, 1996.
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, capital expenditures and acquisitions.
The required amortization payments under the Company's Senior Bank Facilities
are $4.5 million for the remainder of fiscal 1997, $10.7 million in fiscal 1998,
$13.1 million in fiscal 1999, $16.1 million in fiscal 2000, $20.9 million in
fiscal 2001, $34.6 million in fiscal 2002 and $35.3 million in fiscal 2003.
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
Notes until maturity. The Company will also be 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 as well as for the
support of new products. The Company's capital spending is of a relatively short
duration, with the complete commitment process involving less than one year.
Included in capital expenditures over the past two years was an aggregate of
$5.0 million for a casting line in the Newark, Delaware facility and $7.0
million for a worldwide management information system. In the six months ended
March 31, 1997 the Company spent $3.9 million for capital expenditures as
compared to $4.0 million in the six months ended March 31, 1996. In the current
period, the most significant expenditures were to support the introduction of
the Company's new Fectoids eyewear product. In the six months ended March 31,
1996 the most significant expenditures were $1.2 million spent on the casting
line at the Newark, Delaware facility and $1.8 million spent on the management
information systems. Offsetting the spending in the six months ended March 31,
1997 was $0.8 million in proceeds from the sale of the Rhode Island facility of
Peltor, Inc. as those operations were consolidated into the Company's
Southbridge, MA and Indianapolis, IN facilities.
14
<PAGE> 15
The Company's principal source of cash to fund debt service and these capital
expenditures is net cash provided by operations. In the six months ended March
31, 1997 operating activities resulted in net cash used by operating activities
of $4.7 million as compared to net cash provided by operating activities of $1.1
million in the six months ended March 31, 1996. This change was a result of the
net loss of $5.7 million discussed previously, as well as an increase in
inventory of $2.9 million in the period. The Company continued to build
inventory in the earlier part of the period both as a result of difficulties in
production planning as well as a result of an effort to minimize the risks of
backorders with its customers. Inventories were reduced in the months of
February and March due to greater management focus as well as better utilization
of the new information system.
Net cash provided by financing activities for the six months ended March 31,
1997 was $4.1 million as increased borrowings under the revolving credit
facility and proceeds from the sale of common stock to a new officer were
partially offset by the repayment of term loans and the repayment of a mortgage
note on the Rhode Island facility of Peltor, Inc. upon the sale of the facility.
Net cash used by operating and investing activities was partially funded by
decreases in cash and cash equivalents. These decreases were partially offset by
the effect of exchange rate changes on cash.
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. At March 31, 1997 the Company
had borrowed $13.5 million under the revolving credit facility. The Company will
continue to borrow under the revolver for at least the balance of the fiscal
year to support higher levels of inventory and receivables. These borrowing
levels will remain high until the difficulties associated with the conversion to
the new computer system are completely resolved and the improvements in
production planning are realized. While there can be no certainty when these
operational difficulties will be overcome, Management believes that improvements
will be realized during the balance of the fiscal year. The Company anticipates
that operating cash flow will be adequate to meet its debt service and capital
expenditure requirements for the next several years, although there can be no
assurances that existing levels of sales and normalized profitability, and
therefore cash flow, will be maintained in the future. Levels of sales and
profitability will be impacted by service levels, continued new product
development, worldwide economic conditions and competitive pressures. In
addition, the Company may make additional acquisitions in the future and would
rely on internally generated funds and, to the extent necessary, on borrowings
to finance such acquisitions.
The Company's ability to borrow is limited by covenants in the Senior Bank
Facilities and the Notes. In April 1997, the Company amended its credit
agreement with its syndicate of lenders with respect to the financial covenants
applicable to periods ending on and after March 31, 1997. The revised covenants
reflect the reduced profitability that the Company has been experiencing due to
the operating difficulties which have been triggered by the new computer
system. The amendment also provides the Company with the ability to simplify
its corporate structure in Europe in order to proceed with the further
integration of Peltor AB.
15
<PAGE> 16
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 the acquisition of the AOSafety (R) 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 (R) 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 pursuant to
which the Company is indemnified in respect of such claims.
The Company recently received a complaint from Gargoyles, Inc. alleging that one
of the Company's recently introduced plano eyewear products (Fectoids) infringes
a patented lens shape utilized in the plaintiff's sun and sporting glasses. In
April 1997, a federal district court denied the plaintiff's motion for a
preliminary injunction against the Company. The Company believes the Gargoyles
claim to be without merit and continues to defend this allegation vigorously.
ITEM 2. CHANGES IN SECURITIES
On March 28, 1997, the Company granted certain of its employees stock options
exercisable for a total of 375 shares of Common Stock at an exercise price of
$600 per share. The grants were made pursuant to the Company's Executive Stock
Option Plan and were exempt from the registration requirements of the Act by
virtue of Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
On January 24, 1997, the Company announced the resignation of Albert F. Young,
Jr. as President, Chief Operating Officer and Director of Aearo Company. John D.
Curtin, Jr., Chairman and Chief Executive Officer of the Company, assumed Mr.
Young's duties. The Company purchased from Mr. Young a total of 2,250 shares of
common stock for a total consideration of $439,201.
Effective on April 28, 1997, Mark V.B. Tremallo resigned as Vice President,
General Counsel and Secretary of the Company. The Company is currently seeking a
new general counsel.
16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 -- Amended and Restated Certificate of Incorporation of
Aearo Corporation (formerly, Cabot Safety Holdings
Corporation). (Incorporated by reference to Exhibit No.
3.(i).2 to the Registration statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
3.2 -- By-Laws of Aearo Corporation (formerly, Cabot Safety
Holdings Corporation). (Incorporated by reference to
Exhibit No. 3(ii).2 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly,
Cabot Safety Corporation) and Aearo Corporation.)
4.1 -- Indenture dated as of July 11, 1995 between Aearo
Company (formerly, Cabot Safety Corporation), Aearo
Corporation (formerly, Cabot Safety Holdings
Corporation) , and Fleet National Bank of Connecticut
(formerly, Shawmut Bank Connecticut, National
Association), as Trustee. (Incorporated by reference to
Exhibit No. 4.1 to the Registration Statement on Form
S-4, No. 33-96190, of Aearo Company and Aearo
Corporation.)
4.2 -- Form of Note. (Incorporated by reference to Exhibit
No. 4.2 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation (formerly, Cabot
Safety Holdings Corporation).)
4.3 -- Form of Exchange Note. (Incorporated by reference to
Exhibit No. 4.3 to the Registration Statement on Form
S-4, No. 33-96190, of Aearo Company (formerly, Cabot
Safety Corporation) and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
4.4 -- Registration Rights Agreement, dated as of July 11,
1995, among Cabot Safety Acquisition Corporation, Aearo
Corporation (formerly, Cabot Safety Holdings
Corporation), BT Securities Corporation and Chemical
Securities Inc. (Incorporated by reference to Exhibit
No. 4.4 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation. )
4.5 -- First Supplemental Indenture, dated December 6,
1995. (Incorporated by reference to Exhibit 4.5 to the
Annual Report on Form 10-K of Aearo Corporation
(formerly, Cabot Safety Holdings Corporation) for the
fiscal year ended September 30, 1995.)
10.26 -- Second Amendment to Credit Agreement, dated as of
April 25, 1997, among Aearo Corporation, Aearo Company,
certain of its subsidiaries, various banks, and Bankers
Trust Company, as Administrative Agent.
27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K
Report dated February 5, 1997 in connection with resignation of
executive officer and release of first quarter earnings.
17
<PAGE> 18
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.
Date: May 14, 1997 AEARO CORPORATION
/s/ Bryan J. Carey
------------------
Bryan J. Carey
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
18
<PAGE> 19
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
3.1 -- Amended and Restated Certificate of Incorporation of Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).
(Incorporated by reference to Exhibit No. 3.(i).2 to the
Registration statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
3.2 -- By-Laws of Aearo Corporation (formerly, Cabot Safety
Holdings Corporation). (Incorporated by reference to Exhibit
No. 3(ii).2 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
4.1 -- Indenture dated as of July 11, 1995 between Aearo Company
(formerly, Cabot Safety Corporation), Aearo Corporation
(formerly, Cabot Safety Holdings Corporation) , and Fleet
National Bank of Connecticut (formerly, Shawmut Bank
Connecticut, National Association), as Trustee.
(Incorporated by reference to Exhibit No. 4.1 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company and Aearo Corporation.)
4.2 -- Form of Note. (Incorporated by reference to Exhibit No. 4.2
to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
4.3 -- Form of Exchange Note. (Incorporated by reference to Exhibit
No. 4.3 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
4.4 -- Registration Rights Agreement, dated as of July 11, 1995,
among Cabot Safety Acquisition Corporation, Aearo
Corporation (formerly, Cabot Safety Holdings Corporation),
BT Securities Corporation and Chemical Securities Inc.
(Incorporated by reference to Exhibit No. 4.4 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation. )
4.5 -- First Supplemental Indenture, dated December 6, 1995.
(Incorporated by reference to Exhibit 4.5 to the Annual
Report on Form 10-K of Aearo Corporation (formerly, Cabot
Safety Holdings Corporation) for the fiscal year ended
September 30, 1995.)
10.26 -- Second Amendment to Credit Agreement, dated as of April 25,
1997, among Aearo Corporation, Aearo Company, certain of its
subsidiaries, various banks, and Bankers Trust Company, as
Administrative Agent.
27.1 -- Financial Data Schedule.
19
<PAGE> 1
SECOND AMENDMENT
----------------
SECOND AMENDMENT (this "Amendment"), dated as of April 25, 1997, among
AEARO CORPORATION, a Delaware corporation ("Holdings"), AEARO COMPANY I (f/k/a
Cabot Safety corporation), a Delaware corporation (the "Company"), each
Subsidiary Borrower (together with the Company, each a "Borrower" and
collectively, the "Borrowers"), the lending institutions from time to time party
to the Credit Agreement referred to below (the "Banks"), and BANKERS TRUST
COMPANY, as Administrative Agent (the "Administrative Agent"). All capitalized
terms used herein and not otherwise defined shall have the respective meanings
provided such terms in the Credit Agreement referred to below.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Holdings, the Borrowers, the Banks and the Administrative Agent
are parties to an Amended and Restated Credit Agreement, dated as of May 30,
1996 (the "Credit Agreement"), as amended by the First Amendment thereto dated
as of July 1, 1996 (as so amended, the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein
provided:
NOW, THEREFORE, it is agreed:
1. Section 8.02(iii) of the Credit Agreement is hereby amended by
deleting the second proviso appearing therein in its entirety and inserting in
lieu thereof the following proviso:
", and PROVIDED FURTHER, that notwithstanding any other provision of this
clause (iii), including the preceding proviso, (x) Swedish Newco may sell
or otherwise transfer the capital stock of its Subsidiaries to Cabot
Intermediate and (y) Cabot Intermediate and its Subsidiaries may enter into
the transactions contemplated by Section 8.02(vii);"
2. Section 8.02(vii) of the Credit Agreement is hereby amended by
deleting the proviso contained therein and replacing it with the following new
proviso:
"PROVIDED that, notwithstanding the foregoing, (1)(a) any of the companies
which comprise Peltor and any of their Subsidiaries may merge with and into
Swedish Newco, including by way of the sale or transfer of the shares or
assets of any of the companies which comprise Peltor or of such Subsidiary
of Peltor to Swedish Newco, with Swedish Newco being the surviving
corporation of such merger, (b) any of the companies which comprise Peltor
may merge with and into any of its Subsidiaries, including by way of the
sale or transfer of the shares or assets of any of the companies which
comprise Peltor into such Subsidiaries, (c) any Subsidiary of any of the
companies which comprise Peltor may merge with and into any of the
companies which comprise Peltor, including by way of the sale or transfer
of the shares or assets of such Subsidiary of Peltor into such Subsidiary
of Peltor, (d)
<PAGE> 2
Peltor Forsaljnings AB may merge with and into Peltor AB, (e) Peltor, Inc.
may merge into and distribute its assets to Peltor AB, (f)(1) Peltor
Elektronick HB, (2) Peltor Pressarverkstad HB, (3) Peltor Platsprutning HB,
(4) Peltor Plastsvetsning HB, (5) Peltor Mekanik HB, (6) Peltor Montering
HB and (7) Peltor Utveckling HB may each be dissolved or liquidated, (g)
Peltor Service AB may merge with and into Peltor AB and, (h) as part of a
share-for-share exchange and merger between such companies, (1) Cabot
Intermediate may transfer shares of E-A-R Arbeitsschutz GmbH to Peltor GmbH
and E-A-R Arbeitsschutz GmbH and Peltor GmbH may merge into each other, (2)
Cabot Intermediate may transfer shares of Aearo Limited to Peltor Ltd. and
Aearo Limited and Peltor Ltd. may merge into each other and (3) Cabot
Intermediate may transfer shares of E-A-R SARL to Peltor SARL and E-A-R
SARL and Peltor SARL may merge into each other and (II) except for those
transactions described in clause (I)(h)(2) above, no Subsidiary Borrower
may enter into any such transactions with Swedish Newco or its Subsidiaries
or with any other Wholly-Owned Subsidiary of the Company, other than with
respect to the transfer of assets to such Subsidiary Borrower, in an
aggregate amount not to exceed $2,500,000 in any fiscal year of the
Company;"
3. Section 8.05 of the Credit Agreement is hereby amended by (a) deleting
the word "and" appearing at the end of clause (xv) thereof, (b) deleting the
period at the end of clause (xvi) thereof and inserting "; and" in lieu thereof
and (c) inserting at the end thereof the following new clause (xvii);
"(xvii) Swedish Newco and any of its Subsidiaries and Cabot Intermediate
may enter into those transactions not otherwise permitted under this
Section 8.05 to the extent they are permitted under Section 8.02(vii)."
4. Section 8.08 of the Credit Agreement is hereby amended by (i) deleting
the chart appearing therein in its entirety and (ii) inserting in lieu thereof
the following new chart:
Date Ratio
---- -----
June 30, 1997 6.85:1.00
September 30, 1997 6.75:1.00
December 31, 1997 6.50:1.00
March 31, 1998 6.00:1.00
June 30, 1998 5.50:1.00
September 30, 1998 5.25:1.00
December 31, 1998 4.50:1.00
March 31, 1998 6.00:1.00
June 30, 1998 5.50:1.00
September 30, 1998 5.25:1.00
2
<PAGE> 3
December 31, 1998 4.50:1.00
March 31, 1999 4.50:1.00
June 30, 1999 4.25:1.00
September 30, 1999 4.25:1.00
December 31, 1999 4.00:1.00
March 31, 2000 4.00:1.00
June 30, 2000 3.75:1.00
September 30, 2000 3.75:1.00
December 31, 2000 3.50:1.00
March 31, 2001 3.50:1.00
June 30, 2001 3.25:1.00
September 30, 2001 3.25:1.00
The last day of fiscal quarter
ended thereafter 3.00:1.00
5. Section 8.09 is hereby amended by (i) deleting the chart appearing
therein in its entirety and (ii) inserting in lieu thereof the following new
chart:
Date Ratio
---- -----
June 30, 1997 1.50:1.00
September 30, 1997 1.50:1.00
December 31, 1997 1.50:1.00
March 31, 1998 1.60:1.00
June 30, 1998 1.80:1.00
September 30, 1998 1.90:1.00
December 31, 1998 2.20:1.00
March 31, 1999 2.30:1.00
June 30, 1999 2.30:1.00
September 30, 1999 2.40:1.00
December 31, 1999 2.40:1.00
March 31, 2000 2.50:1.00
June 30, 2000 2.60:1.00
September 30, 2000 2.70:1.00
December 31, 2000 2.70:1.00
3
<PAGE> 4
March 31, 2001 2.80:1.00
June 30, 2001 2.90:1.00
The last day of each fiscal
quarter ended thereafter 3.00:1.00
6. Section 8.10 is hereby amended by (i) deleting the chart appearing
therein in its entirety and (ii) inserting in lieu thereof the following new
chart:
Date Ratio
---- -----
June 30, 1997 0.85:1.00
September 30, 1997 0.85:1.00
December 31, 1997 0.90:1.00
March 31, 1998 0.95:1.00
June 30, 1998 1.00:1.00
September 30, 1998 1.00:1.00
December 31, 1998 1.00:1.00
March 31, 1999 1.00:1.00
June 30, 1999 1.10:1.00
September 30, 1999 1.10:1.00
December 31, 1999 1.10:1.00
March 31, 2000 1.10:1.00
June 30, 2000 1.10:1.00
September 30, 2000 1.10:1.00
The last day of each fiscal
quarter ended thereafter 1.20:1.00
7. Notwithstanding anything to the contrary contained in the Credit
Agreement, the Banks hereby waive any Default or Event of Default which may have
occurred or which may arise due to lack of compliance with any of Sections 8.08,
8.09 and 8.10 of the Credit Agreement, before giving effect to this Amendment,
for the Test Period ending on the Borrower's fiscal quarter which ends on the
date closest to March 31, 1997.
8. In order to induce the undersigned Banks to enter into this Amendment,
the Borrower hereby represents and warrants that (x) no Default or Event of
Default exists on the Second Amendment Effective Date after giving effect to
this Amendment and (y) all of the representations and warranties contained in
the Credit Agreement shall be true and correct in all material respects as of
the Second Amendment Effective Date after giving effect to this Amendment, with
the same effect as though such representations and warranties had been made
4
<PAGE> 5
on and as of the Second Amendment effective Date (it being understood that any
representation or warranty made as of a specified date shall be required to be
true and correct in all material respects only as of such specific date);
PROVIDED, however, that the date "March 31, 1996" appearing in the last sentence
of Section 6.05(a) of the Credit Agreement shall be deemed to be "December 31,
1996" appearing in the last sentence of Section 6.05(a) of the Credit Agreement
shall be deemed to be "December 31, 1996" for the purposes of confirming such
representations and warranties.
9. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
10. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Administrative Agent.
11. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK.
12. This Amendment shall become effective on the date (the 'Second
amendment Effective Date") when (x) the Borrower and the Required Banks (i)
shall have signed a counterpart hereof (whether the same or different
counterparts) and (ii) shall have delivered (including by way of telecopier) the
same to the Administrative Agent at the Notice Office and (y) the Borrower shall
have paid to the Administrative Agent for distribution to each Bank which has
signed a counterpart of this Amendment on or prior to April 25, 1997, an
amendment fee equal to 0.05% of the sum of such Bank's (a) Revolving Loan
Commitment and (b) outstanding Term Loans.
13. From and after the Second Amendment Effective Date all references in
the Credit Agreement and the other Credit Documents to the Credit Agreement
shall be deemed to be references to the Credit Agreement as modified hereby.
IN WITNESS WHEREOF, each of the parties hereto has cause a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
AEARO CORPORATION
By /s/
---------------------------------------
Title:
5
<PAGE> 6
AEARO Company I
By /s/
---------------------------------------
Title:
AEARO CANADA LIMITED
By /s/
---------------------------------------
Title:
AEARO LIMITED
By /s/
---------------------------------------
Title:
By /s/
---------------------------------------
Title:
BANKERS TRUST COMPANY
Individually, and as Administrative Agent
By /s/
---------------------------------------
Title:
THE CHASE MANHATTAN BANK
By /s/
---------------------------------------
Title:
THE FIRST NATIONAL BANK OF BOSTON
By /s/
---------------------------------------
Title:
6
<PAGE> 7
MASSACHUSETTS LIFE INSURANCE
COMPANY
By /s/
---------------------------------------
Title:
FLEET NATIONAL BANK
By /s/
---------------------------------------
Title:
MELLON BANK, N.A.
By /s/
---------------------------------------
Title:
NEW YORK LIFE INSURANCE COMPANY
By /s/
---------------------------------------
Title:
NEW YORK LIFE INSURANCE & ANNUITY
CORPORATION
By /s/
---------------------------------------
Title:
7
<PAGE> 8
CRESCENT/MACH I PARTNERS, L.P.
By TCW ASSET MANAGEMENT COMPANY,
Its Investment Manager
By /s/
---------------------------------------
Title:
ABN AMRO BANK N.V.
By /s/
---------------------------------------
Title:
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS OF AEARO CORPORATION AS OF MARCH 31, 1997
(UNAUDITED) AND SEPTEMBER 30, 1996 AND THE CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
CONTAINED IN AEARO CORPORATION'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 5,018
<SECURITIES> 0
<RECEIVABLES> 43,120
<ALLOWANCES> 0
<INVENTORY> 43,443
<CURRENT-ASSETS> 95,355
<PP&E> 77,463
<DEPRECIATION> 12,214
<TOTAL-ASSETS> 319,160
<CURRENT-LIABILITIES> 50,282
<BONDS> 243,989
0
0
<COMMON> 1
<OTHER-SE> 21,164
<TOTAL-LIABILITY-AND-EQUITY> 319,160
<SALES> 136,185
<TOTAL-REVENUES> 136,185
<CGS> 79,722
<TOTAL-COSTS> 79,722
<OTHER-EXPENSES> 50,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,246
<INCOME-PRETAX> (7,504)
<INCOME-TAX> (1,823)
<INCOME-CONTINUING> (5,681)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,681)
<EPS-PRIMARY> (91.98)
<EPS-DILUTED> (91.98)
</TABLE>
