<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 December 31, 1996
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 DECEMBER 31, 1996
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1996 (UNAUDITED) AND SEPTEMBER 30, 1996 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1995 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1995 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -----------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-13
---------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
- -------------------------------------
ITEM 2. CHANGES IN SECURITIES 14
- -----------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
- ---------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 14
- -----------------------------------------------------------------------
ITEM 5. OTHER INFORMATION 14
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
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SIGNATURE PAGE 15
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PART I
ITEM 1. FINANCIAL STATEMENTS
AEARO CORPORATION
<TABLE>
BALANCE SHEETS--ASSETS
(DOLLARS IN THOUSANDS)
<CAPTION>
December 31, September 30,
1996 1996
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,474 $ 8,540
Accounts receivable, net 41,992 45,890
Inventories 46,382 41,164
Deferred and prepaid expenses 3,386 2,748
-------- --------
Total current assets 99,234 98,342
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 67,223 68,712
INTANGIBLE ASSETS, NET 157,865 161,940
OTHER ASSETS 8,969 9,442
-------- --------
Total assets $333,291 $338,436
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AEARO CORPORATION
<TABLE>
BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
----------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 9,507 $ 8,767
Accounts payable and accrued liabilities 36,275 40,348
Accrued interest 6,905 3,779
U.S. and foreign income taxes 4,870 5,713
-------- --------
Total current liabilities 57,557 58,607
-------- --------
LONG-TERM DEBT 243,182 241,520
DEFERRED INCOME TAXES 569 697
OTHER LIABILITIES 2,792 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--99,710 and 99,350 shares at
December 31, and September 30, 1996, respectively 1 1
Additional paid-in capital 33,117 32,640
Retained earnings (deficit) (962) 1,607
Cumulative foreign currency translation adjustments (2,965) 553
-------- --------
Total stockholders' equity 29,191 34,801
-------- --------
Total liabilities and stockholders' equity $333,291 $338,436
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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AEARO CORPORATION
<TABLE>
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
<CAPTION>
For the Three Months Ended
December 31,
------------------------
1996 1995
--------- ---------
<S> <C> <C>
NET SALES $ 66,589 $ 54,492
COST OF SALES 38,599 30,349
--------- ---------
Gross profit 27,990 24,143
SELLING AND ADMINISTRATIVE 20,468 16,514
RESEARCH AND TECHNICAL SERVICES 1,327 754
AMORTIZATION EXPENSE 2,191 953
OTHER CHARGES (INCOME), NET 450 (98)
--------- ---------
Operating income 3,554 6,020
INTEREST EXPENSE, NET 6,543 4,451
--------- ---------
Income (loss) before provision for income taxes (2,989) 1,569
PROVISION (BENEFIT) FOR INCOME TAXES (420) 800
--------- ---------
Net income (loss) (2,569) 769
PREFERRED STOCK DIVIDEND ACCRUED 1,703 1,501
--------- ---------
Loss applicable to Common Shareholders (4,272) (732)
========= =========
LOSS PER COMMON SHARE $ (42.98) $ (7.32)
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 99,389 100,000
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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AEARO CORPORATION
<TABLE>
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
(Unaudited)
FOR THE THREE MONTHS ENDED
DECEMBER 31,
----------------------
-------- ----------
1996 1995
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,569) $ 769
Adjustments to reconcile net income to cash provided by operating activities-
Depreciation 2,306 2,007
Amortization 2,665 1,269
Deferred income taxes -- --
Other, net (142) 12
Changes in assets and liabilities-
Accounts receivable 4,373 (3,955)
Inventory (5,156) (1,347)
Accounts payable and accruals (907) 2,477
Other, net (1,578) 709
------- -------
Net cash provided (used) by operating activities (1,008) 1,941
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,835) (2,376)
Proceeds provided by disposals of property, plant and equipment 800 --
------- -------
Net cash used by investing activities (1,035) (2,376)
------- -------
Cash Flows from Financing Activities:
Proceeds from (repayment of) revolving credit facility, net 2,300 (700)
Repayment of term loans (1,933) (1,244)
Repayment of external long-term debt (572) (36)
Sale of common stock, net 488 --
Increase in shareholder notes, net (11) --
------- -------
Net cash provided (used) by financing activities 272 (1,980)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 705 (71)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (1,066) (2,486)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,540 4,707
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,474 $ 2,221
======= =======
CASH PAID FOR:
Interest $ 2,958 $ 1,132
======= =======
Income taxes $ 280 $ 51
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly, in accordance with generally accepted accounting
principles, the Company's financial position, results of operations and
cash flows for the interim periods presented. Such adjustments consisted of
only normal recurring items. The results of operations for the interim
periods shown in this report are not necessarily indicative of results for
any future interim period or for the entire year. These condensed
consolidated financial statements do not include all disclosures associated
with annual financial statements and accordingly should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10K.
(2) 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.
7
<PAGE> 8
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>
December 31, September 30,
1996 1996
----------- ------------
(unaudited)
<S> <C> <C>
Raw materials $13,251 $13,100
Work in process 10,355 11,130
Finished goods 22,776 16,934
------- -------
$46,382 $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
8
<PAGE> 9
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) DEBT (CONT'D)
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 with which Aearo Company was
in compliance at December 31, 1996. At December 31, 1996, the amounts
outstanding on the Term Loans and the Revolving Credit Facility were $140.1
million and $7.4 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 has
been delinquent in the remittance of value-added tax payments to the French
government. The Company believes that any required tax payments and
attendant penalties will not have a material adverse effect on the
Company's financial condition or results of operations.
(9) ACQUISITIONS
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 proforma operating results of the Company for the three months
ended December 31, 1995, 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):
<TABLE>
<S> <C>
Net sales $ 65,841
Earnings (loss) applicable to common shareholders (2,104)
Earnings (loss) per common share (21.04)
Weighted average common shares outstanding 100,000
</TABLE>
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.
9
<PAGE> 10
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 DECEMBER 31, 1996 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1995
Net Sales. Net sales in the three months ended December 31, 1996 increased 22.2%
to $66.6 million from $54.5 million in the three months ended December 31, 1995.
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 three months
ended December 31, 1996 increased 34.2% to $58.1 million from $43.3 in the three
months ended December 31, 1995. The acquisition of Peltor, AB and Eastern Safety
contributed $10.9 million and $3.0 million respectively. Internal growth was
approximately 2.1% as growth in sales in North America was hampered by
difficulties associated with the implementation of a new management information
system and related backorders. In addition, sales in Europe were slightly lower,
as sales in the quarter a year ago were positively affected by the adoption of
new Common European (CE) approvals. Specialty Composites' net sales in the three
months ended December 31, 1996 decreased 24.1% to $8.5 million from $11.2
million in the three months ended December 31, 1995. 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.
Gross Profit. Gross Profit in the three months ended December 31, 1996 increased
16.2% to $28.0 million from $24.1 million in the three months ended December 31,
1995. 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 part of the 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 three months ended December 31, 1996 was 42.0% as
compared to 44.3%. Such percentage decreased due to the higher costs in North
American operations as well as the lower sales in Europe.
10
<PAGE> 11
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended December 31, 1996 increased 24.1% to $20.5 million from $16.5
million in the three months ended December 31, 1995. Of this increase,
approximately $2.5 million was due to the acquisitions of Peltor AB and Eastern
Safety. Of the remaining increase, approximately $1.0 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 returns associated
with the conversion to the new management information system. 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 more than offset
by reductions in management and employee incentive accruals in the period.
Selling and administrative expenses as a percentage of net sales in the three
months ended December 31, 1996 increased to 30.8% of sales as compared to 30.3%
of sales in the three months ended December 31, 1995. 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 three months ended December 31, 1996 increased 62.5% to $1.3 million from
$0.8 million in the three months ended December 31, 1995. 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 December
31, 1996 increased 220.0% to $2.2 million from $1.0 million in the three months
ended December 31, 1995 as a result of purchase accounting for the acquisitions
of Peltor AB and Eastern Safety.
Operating Income. As a result of the increases in selling and administrative
expenses, research and technical expenses and amortization expenses which were
only partially offset by the increase in gross profit, operating income declined
40.0% to $3.6 million in the three months ended December 31, 1996 from $6.0
million in the three months ended December 31, 1995.
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 three
months ended December 31, 1996 increased 44.4% to $6.5 million from $4.5 million
in the three months ended December 31, 1995.
Net Loss. For the three months ended December 31, 1996 the Company had a net
loss of $2.6 million as compared to net income of $0.8 million for the three
months ended December 31, 1995.
EFFECTS OF CHANGES IN EXCHANGE RATES
In general, the Company's results of operations are affected by changes in
exchange rates. Subject to market conditions, the Company prices its products in
Europe and 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 $0.1 million in the three months
ended December 31, 1996 compared to the three months ended December 31, 1995.
11
<PAGE> 12
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 $6.8 million for the remainder of fiscal 1997, $11.1 million in fiscal 1998,
$13.8 million in fiscal 1999, $16.4 million in fiscal 2000, $21.3 million in
fiscal 2001, $34.3 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 three months ended
December 31, 1996 the Company spent $1.8 million for capital expenditures as
compared to $2.4 million in the three months ended December 31, 1995. In the
current period, the most significant expenditures were to support the
introduction of the Company's new Fectoids eyewear product. In the three months
ended December 31, 1995 the most significant expenditures were $0.6 million
spent on the casting line at the Newark, Delaware facility and $1.7 million
spent on the management information systems. Offsetting the spending in the
three months ended December 31, 1996 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.
The Company's principal source of cash to fund debt service and these capital
expenditures is net cash provided by operations. In the three months ended
December 31, 1996 operating activities resulted in net cash used by operating
activities of $1.0 million as compared to net cash provided by operating
activities of $1.9 million in the three months ended December 31, 1995. This
change was a result of the net loss of $2.6 million discussed previously, as
well as an increase in inventory of $5.2 million in the period. The Company
continued to build inventory in 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.
Net cash provided by financing activities for the three months ended December
31, 1996 was $0.3 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 the
mortgage note on the Rhode Island facility of Peltor, Inc. Net cash used by
operating investing activities was largely funded by decreases in cash and cash
equivalents. These decreases were partially offset by the effect of exchange
rate changes on cash.
12
<PAGE> 13
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. In January 1996, the Company
borrowed $6.8 million under the Senior Bank Facilities to finance in part the
$7.8 million Eastern Acquisition purchase price. In May 1996, the Company
amended the Senior Bank Facilities to provide for an additional $86.0 million of
term loans to finance the Peltor acquisition. At December 31, 1996 the Company
had borrowed $7.4 million under the revolving credit facility. The Company will
continue to borrow under the revolver for at least the next two quarters of its
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 Company's next two fiscal
quarters. 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 under its revolving credit facility or from other
sources to finance such acquisitions. The Company's ability to borrow is limited
by covenants in the Senior Bank Facilities and the Notes.
13
<PAGE> 14
PART II
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits and claims arise against the Company in the ordinary course of
its business. Most of these lawsuits and claims relate to the Company's safety
eyewear and respiratory product lines and primarily involve accidents and/or
exposures occurring after 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.
ITEM 2. CHANGES IN SECURITIES
On November 11, 1996, the Company sold 1,050 shares of its common stock, par
value $.01 per share ("Common Stock"), to Mark H. Hague, its Vice President of
Operations, for an aggregate price of $630,000 ($600 per share) paid in cash.
The issuance of said shares was made pursuant to the Company's 1995 Employee
Stock Purchase Plan and was exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Act"), by virtue of Section 4(2) of the
Act. On the same date, the Company granted Mr. Hague options exercisable for
218.75 shares of Common Stock at an exercise price of $600 per share. The grant
was made pursuant to the Company's Executive Stock Option Plan and was 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
None.
Item 6. Exhibits and Reports on Form 8-K
None.
14
<PAGE> 15
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: February 13, 1997 AEARO CORPORATION
/s/ Bryan J. Carey
---------------------------------------------------
Bryan J. Carey
Vice President, Chief Financial Officer, Treasurer
and Assistant Secretary
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS OF AEARO CORPORATION AS OF DECEMBER 31,
1996 (UNAUDITED) AND SEPTEMBER 30, 1996 AND THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31,
1996 AND 1995 CONTAINED IN AEARO CORPORATION'S FORM 10-Q FOR THE QUARTER ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM
10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,474
<SECURITIES> 0
<RECEIVABLES> 41,992
<ALLOWANCES> 0
<INVENTORY> 46,382
<CURRENT-ASSETS> 99,234
<PP&E> 77,893
<DEPRECIATION> 10,616
<TOTAL-ASSETS> 333,291
<CURRENT-LIABILITIES> 57,557
<BONDS> 243,182
0
0
<COMMON> 1
<OTHER-SE> 29,191
<TOTAL-LIABILITY-AND-EQUITY> 333,291
<SALES> 66,589
<TOTAL-REVENUES> 66,589
<CGS> 38,599
<TOTAL-COSTS> 38,599
<OTHER-EXPENSES> 24,436
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,543
<INCOME-PRETAX> (2,989)
<INCOME-TAX> (420)
<INCOME-CONTINUING> (2,569)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,569)
<EPS-PRIMARY> (42.98)
<EPS-DILUTED> (42.98)
</TABLE>
