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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 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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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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As of December 15, 1997, all voting stock of the Registrant was held by
affiliates of the Registrant.
The number of shares of the Registrant's common stock, par value $.01 per
share, outstanding as of December 15, 1997 was 97,625.
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TABLE OF CONTENTS
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PAGE
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PART I.................................................................................................. 1
Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 9
Item 3. Legal Proceedings......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders....................................... 10
PART II................................................................................................. 11
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters..................... 11
Item 6. Selected Financial Data................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 13
Item 8. Financial Statements and Supplementary Data............................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................... 49
PART III................................................................................................ 50
Item 10. Directors and Executive Officers.......................................................... 50
Item 11. Executive Compensation.................................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 57
Item 13. Certain Relationships and Related Transactions............................................ 58
PART IV................................................................................................. 62
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 62
Signatures......................................................................................... 68
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PART I
ITEM 1. BUSINESS
GENERAL
Aearo Corporation (formerly Cabot Safety Holdings Corporation), a Delaware
corporation ("Aearo"), and its direct wholly-owned subsidiary, Aearo Company I,
doing business as Aearo Company (formerly Cabot Safety Corporation), a Delaware
corporation (the "Subsidiary"), are collectively referred to herein as the
"Company". The Company is one of the leaders in the hearing, eye, face, head and
respiratory protection segments of the personal protection equipment ("PPE")
market worldwide through its safety products operating unit ("Safety Products"),
which manufactures and sells hearing protection devices, prescription and
non-prescription safety eyewear, face shields, reusable and disposable
respirators, hard hats and first aid kits in more than 85 countries under its
well-known brand names: AOSafety, E-A-R, Eastern, Shoplyne and Peltor. PPE
encompasses all articles of equipment and clothing worn for the purpose of
protecting against bodily injury, including safety eyewear and goggles, ear
muffs and ear plugs, respirators, hard hats, gloves, safety clothing and safety
shoes. Safety Products accounted for approximately 87% of the Company's net
sales in fiscal 1997. The Company attributes its leading market positions to:
o Strong, well-recognized brand names
o A reputation for providing innovative, quality products
o Intensive coverage of multiple distribution channels targeting a wide
array of end-users
o One of the industry's broadest product offerings
o A commitment to providing the highest level of customer service
Through its specialty composites operating unit ("Specialty Composites"), the
Company manufactures a wide array of energy-absorbing materials which are
incorporated into other manufacturers' products to control noise, vibration and
shock. Specific product applications for such materials include noise-reducing
and vibration- dampening matting used in the lining of transportation equipment
such as heavy truck cabs, shock protection parts for electronic devices such as
computer disk drives, and durable energy-absorbent and cushioning foams used in
footwear. Specialty Composites also produces specially formulated foam used in
the manufacture of Safety Products' polyvinylchloride ("PVC") ear plugs.
Specialty Composites accounted for approximately 13% of the Company's net sales
in fiscal 1997.
Aearo derives all of its operating income and cash flow from the Subsidiary, and
its only material assets are the shares of common stock of the Subsidiary that
Aearo owns. Other than its ownership of the Subsidiary and its guarantee of the
indebtedness of the Subsidiary, Aearo has no business or operations. Aearo was
incorporated in the state of Delaware in June 1995. Detailed information with
respect to the Company's revenue, operating profit, and identifiable assets by
geographic area and amount of export sales is presented in Note 17 of Notes to
Financial Statements of Aearo Corporation contained in Item 8 hereof.
PERSONAL PROTECTION EQUIPMENT MARKET
A 1996 industry study prepared by Frost & Sullivan estimates that the size of
the U.S. segment of the PPE market in which the Company competes (which excludes
safety clothing, gloves and shoes) was approximately $1.0 billion in 1995.
Management estimates annual sales outside the United States for the segment of
the PPE market in which the Company competes were in excess of $1.0 billion in
1995. Historically, a large number of relatively small, independent
manufacturers with limited product lines served the PPE market and the industry
remains highly fragmented.
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PRODUCT OVERVIEW
The Company operates through two separate operating units: Safety Products and
Specialty Composites.
SAFETY PRODUCTS
Within Safety Products, the Company classifies its products in five main
categories: hearing protection; safety prescription eyewear; eye, face and head
protection; first aid kits; and respiratory protection.
HEARING PROTECTION. The Company's hearing protection products primarily consist
of disposable ear plugs, reusable ear plugs, and ear muffs. The Company has been
a leader in hearing conservation research and development since 1972, when it
first introduced the PVC disposable ear plug. Today, this product is known as
the "Classic" and its color yellow is a registered trademark of the Company in
the United States and Canada. This product is designed to be "rolled down" or
compressed before being inserted into the ear, and, as a result of its unique
time delay characteristics, the plug slowly expands (or "recovers") to fill the
ear canal and provide the desired protection. The Company's PVC ear plugs are
available corded and uncorded and in a variety of packaging options. The Company
also produces private label versions of the PVC plug for many of the
international airlines for inclusion in their amenity kits. The Company also
manufactures a full line of polyurethane ear plugs, including its E-Z-Fit and
TaperFit products. These products serve the same disposable ear plug category,
but the PVC ear plugs have historically led the market.
In the reusable ear plug segment of the market, the Company offers its patented
UltraFit product, and the E-A- R Express, a patented product, which features a
polyurethane pod and a short plastic stem to facilitate sanitary insertion of
the plug into the ear. The Company also recently introduced the Reflex line of
"semi-aural" plugs designed for intermittent use with a patented feature
allowing for easy storage around the neck.
The Company sells a full range of ear muffs. Through its Peltor AB subsidiary
("Peltor"), acquired on May 30, 1996, the Company manufactures, assembles and
sells a broad line of ear muffs, hard caps/visors, noise attenuation headsets
and wireless and hardwire communication headsets, serving a variety of end user
markets where protection from harmful high and low frequency noise is sought or
the need for easy communication in noisy or remote environment exists, such as
in the construction, heavy machinery, airport, forestry, textile and mining
industries. The Company also offers auditory systems products, which are sold to
audiologists and are used in the testing of hearing.
SAFETY PRESCRIPTION EYEWEAR. The Company's safety prescription eyewear ("SRx")
products are designed to protect the eyes from the typical hazards encountered
in the industrial work environment. The Company purchases component parts
(lenses and the majority of its frames) from various suppliers, grinds and
shapes the lenses to the employee's prescription, and then assembles the glasses
using the employee's choice of frame. The Company views its ability to provide
individual attention to each patient through Company-employed, as well as
independently contracted, eye professionals, as an essential part of its SRx
business.
EYE, FACE AND HEAD PROTECTION. Non-prescription eye and face protection is used
in work environments where a number of hazards present a danger to the eyes and
face, including dust, flying particles, metal fragments, chemicals, extreme
glare and radiation. The Company offers a large number of task-specific
non-prescription safety eyewear products. The three basic categories of
non-prescription eye and face protection are non- prescription safety (or
"plano") eyewear, goggles and faceshields.
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|X| Plano (Non-prescription) Eyewear. Plano eyewear accounts for the
majority of the Company's sales in this category and includes a wide
range of products from disposable visitor safety spectacles to several
lines of fashionable, reusable safety eyewear available in different
colors and with a variety of applications. As part of the continuing
product development efforts the Company introduced its unique Fectoids
safety eyewear which features a lens which wraps around the wearer's
face thereby eliminating the need for separate side shields, and
improving peripheral vision.
|X| Goggles. The Company manufactures and sells a broad line of goggles,
which are typically preferred over plano eyewear in work environments
where a higher degree of impact protection is required, where increased
protection against dust, mist or chemical splash is needed and/or for
use in welding operations. To meet these requirements, the Company
manufactures a variety of vented and non-vented goggles with varying
fields of view.
|X| Faceshields. Faceshields are designed to protect against heat, splash
and flying particles and are often worn in conjunction with other
protective equipment, such as plano eyewear and respirators.
|X| Hard Hats. The Company manufactures and sells a broad line of hard hats,
including "bump" caps, full-brim hats and traditional hard hats,
featuring four or six point suspension, ratchet adjustment, and a wide
selection of colors and custom imprinting.
FIRST AID KITS. The acquisition of Eastern Safety Equipment Co., Inc.
("Eastern") on January 3, 1996 added first aid kits as a new product category
for the Company. First aid kits are either for general use or for industrial or
commercial uses.
RESPIRATORY PROTECTION. Respiratory protection products are used to protect
against the harmful effects of atmospheric contamination and pollution caused by
dust, gases, fumes, sprays and other contaminants. The market for respiratory
protection products is segmented into two types: supplied air and air-purifying.
Supplied air respirators are further segmented into two types: self-contained
breathing apparatuses ("SCBA") and respirators supplied from a remote source of
air through a hose ("air line"). The Company competes in the air- purifying and
air line supplied segments of the respiratory protection market with a broad
line of disposable dust and mist masks, cartridge-equipped quarter-, half- and
full-face respirators, powered air-purifying respirators (whereby a battery
pumps air through cartridges), and "escape" respirators (a single-use respirator
for emergencies).
SPECIALTY COMPOSITES
The Company's Specialty Composites operating unit manufactures a wide array of
impact-resistant, shock- absorbing and energy-absorbing materials for a variety
of noise, vibration and shock control applications using a wide range of
technologies, manufacturing processes and applications know-how. Specialty
Composites also produces the specially formulated foam used in the manufacture
of Safety Products' PVC ear plugs. The principal strengths of Specialty
Composites are its specialized polyurethane chemistry, its thin-sheet casting
capability, its composite technologies and its applications engineering. These
strengths allow the Company to manufacture in a single process, high value-added
materials and components with multiple chemistries and substrates using casting,
extrusion and molding processes.
Specialty Composites' products fall into three broad categories: barriers and
absorbers for noise control; damping and isolation products for vibration and
shock control; and energy control products for shock and comfort management. The
Company's products include: Isoloss LS polyurethane high density cellular foams,
which are manufactured by three production lines in a variety of thicknesses,
widths, colors and densities for mechanical vibration reduction, noise and shock
control and high resilience cushioning and sealing applications; the Confor
heavily damped viscoelastic foam for ergonomic cushioning applications; the
Tufcote
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polyurethane and PVC thin sheet foams for acoustical, absorption and noise
control applications; and the Isodamp PVC foams for mechanical vibration
reduction and noise and shock control.
Specialty Composite's products are sold into four market segments:
transportation; health-related; footwear; and other original equipment
manufacturers ("OEM") in industries such as electronics and communications.
TRANSPORTATION SEGMENT. Specialty Composites' products are incorporated into
heavy trucks, automobiles, yachts, aircrafts, buses, leisure vehicles and
defense, farm and construction equipment in order to control noise and
vibration. For example, the Company supplies durable acoustical foams and
barriers that control sound and help meet noise standards for Class 8 heavy
trucks. The Company also provides complete noise and vibration control packages
for high-end yachts in order to contain engine room noise and to soundproof
passenger quarters. Specialty Composites applications also exist with respect to
executive and commuter aircraft, where relatively thin, lightweight,
multi-function damping composites efficiently control sound and vibration.
HEALTH-RELATED SEGMENT. Applications for the energy-absorbing characteristics of
Specialty Composites' products, particularly its line of temperature-reactive
foams, have been growing in the health-related segment. Such materials enhance
physical protection and improve comfort in many devices including leg braces,
orthotic devices, surgical pillows, wheelchair cushions, bicycle helmets,
keyboard wrist supports and occupational seating.
FOOTWEAR SEGMENT. Specialty Composites supplies a durable and highly
shock-absorbent polyurethane foam, which is incorporated into insoles for
high-wear cushioning applications, such as athletic shoes, dress shoes, military
boots and work boots. Specialty Composites also offers an energy-absorbent
material to help protect against skeletal shock in military boots, work boots
and orthotic insoles.
OEM SEGMENT. The Company produces an extensive assortment of polyurethane and
PVC die-cut and molded parts for vibration isolation and damping and for shock
protection and noise control in a wide range of other products, including
precision equipment and industrial machinery, computer disk drives, pagers,
industrial compressors and generator sets.
SALES AND MARKETING
The Company divides it sales force into two principal categories: Safety
Products and Specialty Composites.
SAFETY PRODUCTS OPERATING UNIT. Within Safety Products, sales are managed
through seven channels: U.S. Industrial Distribution; U.S. Industrial Direct;
Consumer/Do-It-Yourself ("DIY"); Healthcare; Europe; Canada; and Export. Each of
these channels has its own sales force and its own distinct sales strategies. In
addition, through the acquisition of Peltor, the Company has significantly
expanded its sales coverage, including a dedicated effort to serve the specialty
communications ear muff market.
|X| U.S. Industrial Distribution. This is the largest sales channel for
Safety Products and includes approximately 170 Dialog industrial
distributors and approximately 120 industrial dealers. Participation in
the Dialog program requires minimum purchase levels while encouraging
support across the full product line, in return for rebates based on
growth and volume as well as preferred treatment regarding shipping
terms, new products, field sales support, and cooperative advertising.
The Company also offers Dialog distributors financial incentives for
establishing electronic order entry/invoicing interfaces with the
Company and for developing marketing programs which promote the
Company's products.
|X| U.S. Industrial Direct. Approximately 90% of the Company's safety
prescription eyewear is sold directly to more than 40,000 industrial
companies, including a majority of the industrial companies in the
Fortune 500. The remainder of the Company's SRx products are sold
through the industrial
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distribution channel. In most states, current laws require that
prescription eyewear be dispensed to the user by a licensed optical
professional, traditionally a local optician. As an alternative to this
approach, in 1994 the Company introduced its Dispensing Manager program,
whereby the Company employs its own licensed opticians to dispense
prescription safety eyewear.
|X| Consumer/DIY. The Company is the leading supplier of safety products to
the consumer/DIY market and is the primary supplier to such leading
retailers as ACE, Home Depot, Lowe's, Sears and Tru-Serv. The Company
offers both its AOSafety brand of industrial grade products in consumer
packaging and its Eastern and Shoplyne brands of consumer grade products
in consumer packaging.
|X| Healthcare. The Company maintains its own national sales manager and has
an exclusive arrangement with an independent representative group to
pursue the growing use of PPE in the healthcare sector and has developed
a specialized line of healthcare products with the goal of building a
national distribution network. Use of the Company's products can assist
in compliance by healthcare professionals with recently introduced OSHA
regulations designed to reduce the risk of diseases associated with
blood- borne pathogens and dealing with splash control.
|X| Europe. The Company has a significant presence in Europe with sales
offices in the U.K., Sweden, Germany, France, Italy and Spain. While the
Company's historical strength in this market has been in hearing
protection devices sold through industrial distributors, the Company has
recently been successful in pursuing sales of safety eyewear and has
dedicated a full-time eyewear product sales manager to lead and train
the existing sales organization.
|X| Canada. In Canada, the Company has a strong position in both stock
safety products and prescription safety eyewear. Just as in the United
States, prescription safety eyewear is sold primarily on a direct basis
to industrial firms, while stock safety products are sold through
distributors.
|X| Export. The Company exports its products around the world, and this
channel is managed through sales representatives located in Singapore
and Hong Kong (covering Asia), Miami (covering Latin America), Sydney
(covering Australia and New Zealand) and South Africa.
SPECIALTY COMPOSITES OPERATING UNIT. The Company relies upon independent
manufacturer representatives and the Company's factory sales representatives to
identify OEM applications for Specialty Composites' products and technologies.
Once such applications have been identified, the Company's sales and technical
staffs work closely with OEMs to provide the customer with a low-cost,
integrated solution for its noise, vibration, shock, cushioning and/or comfort
management problems.
RESEARCH AND DEVELOPMENT
SAFETY PRODUCTS OPERATING UNIT. The Company believes that its research and
development facilities, personnel and programs are among the best in the PPE
industry. Since its inception in 1972, the Company's ultimate predecessor, the
former E-A-R (Energy Absorbing Resins) Division of Cabot Corporation ("Cabot"),
has been a leader in the development of technology for understanding and
measuring noise and hearing loss and in developing products to protect against
such loss. In order to test the efficacy of its hearing protection products, the
Company owns and operates the only privately-owned National Voluntary Laboratory
Accreditation Program ("NVLAP") laboratory in the United States accredited for
testing the efficacy of hearing protection products. The Company also operates
sound chambers and testing facilities which measure the performance of its
materials and designs. Similarly, the Company believes that it has been a
pioneer and leader in the development and testing of safety eyewear and
maintains extensive facilities for the design and testing of safety eyewear. The
research and development personnel of the Company include recognized experts in
the safety products industry.
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SPECIALTY COMPOSITES OPERATING UNIT. The research and development efforts of
Specialty Composites focus on developing proprietary materials and enhancing
existing products in order to meet customer needs identified by the Company's
sales and technical staff. Products such as the Isoloss LS polyurethane high
density cellular foams and the Confor heavily damped viscoelastic foam are being
introduced in a growing number of applications across all markets served by
Specialty Composites.
The Company does not engage in any customer-sponsored research and development
projects.
RAW MATERIALS AND SUPPLIERS
The Company consumes a wide variety of raw materials, supplies and components,
including, among others, paper products, chemicals, eyewear frames and optical
lenses. The paper products category includes corrugated paper, folding cartons
and packaging materials. The chemicals category includes plastic resins such as
polycarbonate and propionate, as well as polyols, plasticizers, substrates,
isocyanates and adhesives. The eyewear frames category includes frames for SRx
products.
The Company has a diversified base of raw material suppliers. The Company does,
however, use single sources for the supply of several raw materials, including
General Electric Plastics, a division of General Electric Company, for
polycarbonate resin, the primary raw material used in the production of the
Company's non- prescription optical lenses. The Company has not experienced any
significant delays or shortages in obtaining raw materials in recent years and
believes that alternative supplies of raw materials can be located on
commercially reasonable terms.
The Company outsources the production of less than 10% of its products to
various manufacturers. Competition among these manufacturers is strong, and,
although a change in manufacturers often results in a period of adjustment
concerning product quality and distribution, the Company, in the past, has
changed manufacturers with respect to certain of its outsourced products.
MANUFACTURING AND DISTRIBUTION OPERATIONS
The Company maintains a high degree of vertical integration, allowing it to
manufacture over 90% of the products that it sells. The Company's strengths
include the manufacture of foams (casting, molding and fabricating) for
Specialty Composites' products (including the foam used in the manufacture of
PVC ear plugs); high speed assembly and packaging of ear plugs; plastic
injection molding, coating and assembly of non-prescription eyewear; and
assembly, grinding, polishing and coating of prescription eyewear. Consistent
across all of the Company's manufacturing operations is an emphasis on producing
high quality products. Currently, all of the Company's manufacturing facilities
have been awarded ISO 9002 or ISO 9001 certification, indicating that the
Company has achieved and sustained a high degree of quality and consistency with
respect to its products. The Company believes that ISO certification is an
increasingly important selling feature both domestically and internationally,
and certain customers require ISO certification from all their vendors.
The Company's products are generally shipped within several days from the
receipt of a purchase order. As a result, backlog is not material to the
Company's business.
SAFETY PRODUCTS OPERATING UNIT. The Company's Indianapolis, Indiana plant is the
largest ear plug manufacturing facility in the world. It fabricates, molds and
packages hundreds of millions of pairs of ear plugs annually, utilizing
automated, high speed assembly and packaging equipment. Because the economies of
scale present in this operation are unique in the hearing protection products
industry, management believes that they offer the Company a competitive
advantage of lower costs within the production process. The plant's high-speed
robotic fabrication, assembly and packaging of ear plugs facilitate cost-saving,
high-volume production and improve cycle time and inventory management. Other
safety products are manufactured at the Southbridge,
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Massachusetts facility, where during the period 1993 to 1995 the Company
invested over $2 million in industrial robotics and cellular manufacturing to
produce plano eyewear products previously outsourced from southeast Asia. As a
result, the Company is now able to advertise these products as "Made in the
USA."
The Company fills virtually all of its domestic and certain of its international
orders, other than SRx, through its state-of-the-art distribution center located
in Indianapolis, Indiana which has efficient bar-coding and scanning
capabilities to assure rapid turn-around time and service levels for customer
orders.
During 1993 and 1994 the Company completed a major program to consolidate and
retool its SRx laboratory operations. The SRx production operations of six
different manufacturing facilities were consolidated into two U.S. facilities
that possess new lens surfacing, edging and grinding machinery capable of
handling glass, plastic and polycarbonate lenses. These two facilities currently
manufacture and distribute approximately 500,000 pairs of safety prescription
glasses annually.
The Company's principal international manufacturing operations are located in
Poynton, England; Mississauga, Ontario; Varnamo, Sweden; and Ettlingen, Germany.
The Poynton facility serves customers in Western Europe, producing and packaging
ear plugs and other hearing and eyewear products. In addition, Poynton has an
SRx laboratory that primarily serves the U.K. market. The Mississauga plant
fabricates prescription eyewear and, together with a small prescription eyewear
laboratory in Montreal, produces SRx products for the Canadian market. The
Varnamo, Sweden plant is the principal Peltor manufacturing location; finished
goods and components are shipped to customers and other subsidiaries from this
location. Certain of these products are received in the Ettlingen, Germany plant
which provides an assembly operation for the components and a stocking facility
for finished goods for shipment to customers.
SPECIALTY COMPOSITES OPERATING UNIT. Specialty Composites' products are
manufactured in Indianapolis, Indiana and Newark, Delaware. The Indianapolis
plant, which supplies specially formulated foam for the Company's PVC ear plugs,
manufactures and fabricates sheet and roll PVC and polyurethane materials and
molds polyurethane foams and solids. This facility also houses applications
engineering, research and development, quality assurance and customer service
support. The Newark, Delaware facility manufacturers polyurethane foams and
films and houses the Company's new proprietary, thinsheet foam casting line,
which will permit the casting of both sheet and composite materials, including
facings and substrates, in a single pass through the line. The new casting line,
which cost approximately $5.4 million, is operational, but is not yet in full
production mode.
COMPETITION
The PPE market is fragmented and highly competitive. The Company estimates that
there are more than 500 manufacturers of PPE (other than safety clothing, gloves
and shoes) in the United States, Europe and Southeast Asia. Participants in the
industry range in size from small, independent, single-product companies with
annual sales of less than $15 million, to a small number of multinational
corporations with annual sales in excess of $100 million. The Company believes
that participants in the PPE market compete primarily on the basis of product
characteristics (such as design, style and functional performance), product
quality, service and brand name recognition and, to a lesser extent, price. From
a positive competitive standpoint, the Company believes it is well situated,
primarily because of its large size and its broad product offerings, to compete
in a fragmented industry. The Company enjoys certain economies of scale which
are not available to smaller competitors. Many of the Company's customers,
particularly in the growing consumer/DIY channel, prefer the type of "one stop
shopping" that the Company can provide. The Company's advanced distribution
center further facilitates timely and accurate deliveries.
The specialty composites industry is highly competitive, and participants
compete on the basis of being able to provide cost-effective solutions to the
noise, shock and vibration problems of OEMs.
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EMPLOYEES
As of September 30, 1997, the Company had 2,151 employees, of whom 1,459 were
primarily engaged in manufacturing, 453 in sales, marketing and distribution, 70
in research and development and 169 in general and administrative. The Company
believes its employee relations are good. The Company has one facility that
employs union members. This facility, located in Plymouth, Indiana, employs 67
members of the International Union of Electronic, Electrical, Salaried, Maritime
and Furniture Workers (out of a total of 92 employees), and the Company's
relations with these union members are fully satisfactory. The union contract
expires on June 30, 1998.
PATENTS AND TRADEMARKS
The Company owns and has obtained licenses to various domestic and foreign
patents, patent applications and trademarks related to its products, processes
and business. The Company values particularly highly its trademark for the color
yellow for ear plugs in the United States and Canada and places significant
value on its overall patent portfolio. However, no single patent or patent
application is material to the Company. The Company's patents expire at various
times over the next 17 to 20 years.
GOVERNMENT REGULATION
As a manufacturer of safety products, the Company is subject to regulation by
numerous governmental bodies. Principal among the federal regulatory agencies in
the United States are: the Occupational Safety and Health Administration
("OSHA"), which regulates the usage of all PPE, with the exception of
respirators; the Environmental Protection Agency ("EPA"), which regulates
hearing protection devices; the Mine Safety and Health Administration ("MSHA")
and the National Institute of Occupational Safety and Health ("NIOSH"), both of
which certify respirators; and the Food and Drug Administration ("FDA"), which
regulates eye, face and respiratory protection products for the healthcare
industry. These agencies generally mandate that the Company's products meet
standards established by private groups, such as American National Standards
Institute ("ANSI"). The Company's products are also subject to foreign laws and
regulations. In particular, they must comply with the Canadian Standards
Association, European Committee for Normalization and Standards Australia. The
Company believes it is in compliance in all material respects with the
regulations and standards of these governmental bodies, and any failures to
comply with such regulations and standards in the past have not had a material
adverse effect on its business.
ENVIRONMENTAL MATTERS
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous substances and wastes. The Company believes
that it is in substantial compliance with all such laws and regulations.
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ITEM 2. PROPERTIES
The Company owns and/or leases facilities in the United States, Canada, and
Europe. The following table sets forth the location of each, its square footage
and the principal function of each.
<TABLE>
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APPROXIMATE
LOCATION SQUARE FEET FUNCTION
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<S> <C> <C>
CORPORATE OFFICES
Boston, Massachusetts..................... 8,031 Corporate Headquarters
U.S. SAFETY PRODUCTS
Southbridge, Massachusetts................ 295,000 Manufacturing/Administration
Indianapolis, Indiana(1).................. 220,564 Distribution/Customer Service
Indianapolis, Indiana..................... 81,540 Manufacturing
Chickasha, Oklahoma....................... 15,000 Manufacturing/Customer Service
Plymouth, Indiana......................... 10,224 Manufacturing/Customer Service
INTERNATIONAL SAFETY PRODUCTS
Poynton, England.......................... 56,530 Manufacturing/Distribution/Customer Service
Varnamo, Sweden........................... 125,595 Manufacturing/Distribution/Customer Service
Mississauga, Ontario, Canada.............. 28,850 Manufacturing/Customer Service
Ettlingen, Germany........................ 45,000 Manufacturing/Distribution/Customer Service
Bognor Regis, England..................... 2,700 Customer Service
Paris, France............................. 1,894 Sales Office
Montreal, Quebec, Canada.................. 1,800 Manufacturing/Customer Service
Barcelona, Spain.......................... (*) Sales Office
Milan, Italy.............................. (*) Sales Office
SPECIALTY COMPOSITES
Indianapolis, Indiana..................... 156,000 Manufacturing/Distribution
Newark, Delaware.......................... 82,300 Manufacturing/Distribution
- ----------------
</TABLE>
(1) This facility also serves as an international distribution center and
central packaging operation with respect to certain of the Company's
products.
(*) Less than 1,000 square feet.
The Company believes that its facilities are suitable for its operations and
provide sufficient capacity to meet the Company's requirements for the
foreseeable future. All of the Company's facilities are leased except for the
following facilities owned by the Company: (i) the Safety Products manufacturing
facility in Indianapolis, (ii) the Specialty Composites
manufacturing/distribution facility in Indianapolis, (iii) the Specialty
Composites manufacturing facility in Newark, and (iv) the Safety Products
manufacturing facility in Ettlingen, Germany. The Company believes that it will
be able to renew each of its leases upon their respective expiration dates on
commercially reasonable terms. In addition, the Company believes that it would
be able to lease suitable additional or replacement space on commercially
reasonable terms.
9
<PAGE> 12
ITEM 3. 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 Company's predecessor acquired the AOSafety
Division from American Optical Corporation 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 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 have entered into an arrangement
relating to certain respirator claims asserted after July 11, 1995 (the date of
the Company's formation) whereby, so long as the Company pays to Cabot an annual
fee of $400,000, which the Company has elected to pay, Cabot will retain
responsibility and liability for, and indemnify the Company against, certain
legal claims alleged to arise out of the use of respirators manufactured prior
to July 1995. The Company has the right to discontinue the payment of such
annual fee at any time, in which case the Company will assume responsibility for
and indemnify Cabot with respect to such claims.
During fiscal 1997 the Company 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. The Company is defending this allegation vigorously and the
matter is expected to go to trial in fiscal 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 28, 1997, the Company held a special meeting of stockholders to act on
and approve the Company's 1997 Stock Option Plan and to approve the selection of
Arthur Andersen LLP as the Company's independent public accountants.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the common stock, par value $0.01 per share, of Aearo ("Aearo Common
Stock") is held, collectively, by Vestar Equity Partners, L.P. (together with
certain related persons, "Vestar"), Cabot Corporation ("Cabot") and management.
In July 1995, Vestar, Cabot and management effected through the Company the
acquisition of substantially all of the assets and certain liabilities of Cabot
CSC Corporation ("Old Cabot Safety Corporation"), a wholly-owned subsidiary of
Cabot, and certain of its affiliates (the "Formation Acquisition") for $206.1
million. To finance the Formation Acquisition, the Company incurred $47.5
million of senior secured debt ("Senior Bank Facilities") sold $100 million of
12 1/2% senior subordinated notes due 2005 (the "Subordinated Notes"), issued to
Vestar and Cabot an aggregate of $45 million of 12 1/2% redeemable preferred
stock (the "Aearo Preferred Stock"), and issued to Vestar, Cabot and certain
members of management and key employees of the Company (collectively the
"Management Investors") an aggregate of 100,000 shares of Aearo Common Stock.
See Item 12, "Security Ownership of Certain Beneficial Owners and Management."
All of the common stock of the Subsidiary is owned by Aearo, and thus no trading
market exists for such stock. Accordingly, no trading market exists for any
capital stock of the Company.
ITEM 6. SELECTED FINANCIAL DATA
The selected historical financial data for each of the two years in the period
ended September 30, 1994 are derived from the combined financial statements of
Cabot Safety Corporation, which have been audited by Coopers & Lybrand LLP,
independent public accountants. The selected income statement data for the
period ended July 11, 1995 are also derived from the combined financial
statements of Cabot Safety Corporation, which have been audited by Arthur
Andersen LLP, independent public accountants. The balance sheet data for July
11, 1995 is unaudited but, in the opinion of management, includes all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation. The selected historical financial data for the period ended
September 30, 1995 and the years ended September 30, 1996 and 1997 are derived
from the consolidated financial statements of Aearo Corporation and were also
audited by Arthur Andersen LLP. The data should be read in conjunction with the
combined and consolidated financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included herein.
11
<PAGE> 14
AEARO CORPORATION
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------------------------- -----------------------------------------
YEAR ENDED SEPTEMBER 30, PERIOD ENDED PERIOD ENDED YEAR ENDED SEPTEMBER 30,
---------------------------- JULY 11, SEPTEMBER 30, -------------------------
1993 1994 1995 1995 1996 1997
--------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C>
Net Sales--
Safety Products.............. $ 143.9 $ 149.7 $ 129.6 $ 40.0 $ 205.2 $ 249.6
Speciality Composites........ 25.7 28.6 25.1 7.9 38.3 36.2
------- -------- ------- -------- -------- --------
Total net sales............ 169.6 178.3 154.7 47.9 243.5 285.8
Cost of Sales................... 96.6 99.5 87.7 29.3(1) 133.6 163.5
------- -------- ------- -------- -------- --------
Gross profit................. 73.0 78.8 67.0 18.6 109.9 122.3
Operating Expenses--
Selling and administrative... 45.3 51.7 47.1(2) 13.1 73.6 87.0
Research and technical service 2.3 2.7 2.3 0.6 3.2 5.1
Amortization expense......... 5.7 5.6 4.3 0.8 5.6 7.0
Other charges (income), net.. 0.1 -- (0.2) 0.1 0.3 2.5
------- -------- ------- -------- -------- --------
Operating income........... 19.6 18.8 13.5 4.0 27.2 20.7
Interest expense, net........... 4.8 5.8 5.7 4.1 20.7 26.7
------- -------- ------- -------- -------- --------
Income (loss) before income
taxes and cumulative effect
of accounting change........ 14.8 13.0 7.8 (0.1) 6.5 (6.0)
Provision for income taxes...... 5.7 5.0 3.0 0.5 4.3 0.9
------- -------- ------- -------- -------- --------
Income (loss) before
cumulative effect of
accounting change........... 9.1 8.0 4.8 (0.6) 2.2 (6.9)
Cumulative effect of
accounting change.............. .3 -- -- -- -- --
------- -------- ------- -------- -------- --------
Net income (loss)............... $ 9.4 $ 8.0 $ 4.8 $ (0.6) $ 2.2 $ (6.9)
======= ======== ======= ======= ======== ========
Preferred stock dividend
accrued........................ 1.3 6.2 7.1
Earnings (loss) applicable to
common shareholders............ (1.9) (4.0) (14.0)
Earnings (loss) per common
share.......................... $ (18.67) $ (40.58) $(142.77)
OTHER DATA:
EBITDA(3)....................... $ 31.0 $ 30.6 $ 22.9 $ 6.1 $ 39.7 $ 37.8
Depreciation and amortization... 11.8 11.7 9.2 2.1 13.9 18.6
Capital expenditures............ 9.0 4.5 10.4 2.7 9.2 8.9
Ratio of earnings to fixed
charges(4)..................... 3.4 2.8 2.2 -- 1.3 --
BALANCE SHEET DATA (AT
PERIOD-END):
Total assets.................... $ 163.4 $ 171.2 $ 177.5 $ 218.3 $ 338.4 $ 310.9
Long-term debt (including
current portion)............... 82.4 76.9 78.4 152.3 250.3 244.7
Stockholders' equity............ 51.0 35.2 40.1 32.0 34.8 20.0
</TABLE>
12
<PAGE> 15
AEARO CORPORATION
SELECTED FINANCIAL DATA - (CONTINUED)
NOTES TO SELECTED FINANCIAL DATA:
(1) For the period ended September 30, 1995, includes a $3.6 million charge
related to allocation of purchase price to inventory.
(2) For the period ended July 11, 1995, includes a $1.1 million charge related
to termination of the Old Cabot Safety Corporation stock option plan and a
$0.8 million charge related to a provision for potential value-added tax
penalties by the Company's French subsidiary.
(3) EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or
losses from sales of assets other than in the ordinary course of business.
While the Company believes EBITDA is a useful indicator of its ability to
service debt, EBITDA should not be considered as a substitute for net income
determined in accordance with generally accepted accounting principles as an
indicator of operating performance or as an alternative to cash flow as a
measure of liquidity. Investors should be aware that EBITDA as presented
above may not be comparable to similarly titled measures presented by other
companies and comparisons could be misleading unless all companies and
analysts calculate this measure in the same fashion.
(4) Ratio of earnings to fixed charges is defined as pretax income from
continuing operations plus fixed charges divided by fixed charges. Fixed
charges include interest expense (including amortization of debt issuance
costs) and a portion of rental expense assumed to represent interest.
Earnings for the period ended September 30, 1995 and the year ended
September 30, 1997 were inadequate to cover fixed charges by $0.2 million
and $6.0 million, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected Financial
Data," and the financial statements of the Company, including notes thereto,
appearing elsewhere in this Report. This Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in such forward-looking statements.
The factors that might cause such a difference include, among others, the
following: risks associated with indebtedness; risks related to acquisitions;
risks associated with the conversion to a new management information system;
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.
GENERAL
Prior to the Formation Acquisition in July 1995, Old Cabot Safety Corporation
was a wholly-owned subsidiary of Cabot. In 1990, Cabot combined into Old Cabot
Safety Corporation the operations of its E-A-R Division with the operations of
the AOSafety Division, which Cabot acquired from American Optical Corporation at
such time. The combined financial statements of the Company include the results
of Old Cabot Safety Corporation and certain of its affiliates whose operations
are partially or exclusively related to the business of the Company.
13
<PAGE> 16
The Company experienced a decline in profitability in fiscal 1993 and the early
part of fiscal 1994 following the combination of the E-A-R Division and the
AOSafety Division. While the combination resulted in a larger company with
broader product offerings, giving E-A-R distributors access to AOSafety products
and vice versa, it resulted in some long-standing relationships among the
Company, distributors and end-users being undermined. In addition, as part of
the combination the Company reduced its sales force while expanding the product
line, which resulted in decreased distribution focus and support of the
Company's products by distributors. During the late 1980s the Company had also
suffered from a prolonged lack of investment in product innovation and
development. Because end-users are relatively slow to switch products or brands,
the combined effect of the deteriorating distributor relations and the lack of
new products did not adversely affect financial results in fiscal 1991 and 1992.
However, the combined effect of such problems, coinciding with the introduction
of new products by competitors, began to result in some loss of market share in
fiscal 1992. In an effort to retain market share, the Company began to offer
price promotions and reduced the prices of several products. While this aided
financial performance in fiscal 1992, it largely did so at the expense of fiscal
1993 results by pulling business forward. The reduction in pricing, however, did
not stem the market share erosion, as many end-users are more interested in
product performance and increased safety compliance than they are in discounted
prices. Operating profit in fiscal 1993 and the first half of fiscal 1994 was
also negatively affected by the costs of consolidating the prescription eyewear
manufacturing facilities in the U.S. from six locations to two and consolidating
the Company's other manufacturing facilities at its Southbridge, Massachusetts
location.
The Company's current senior management team was installed in mid-1994 to
address operational issues that had adversely affected the Company's sales and
profitability. Management focused on four primary areas: (i) strengthening
relationships with distributors and product end-users, (ii) increasing the
Company's participation in projected high-growth markets, such as the
consumer/DIY and catalog supply markets and the emerging international markets
of Latin America and the Pacific Rim, (iii) expanding product innovation and
development efforts and (iv) pursuing acquisitions. These initiatives were
largely successful in fiscal 1996. In addition, the Company completed the
acquisitions of Peltor and Eastern in fiscal 1996. Each of these acquisitions
were key contributions to the Company's overall strategy.
In the latter part of fiscal 1996, the Company undertook efforts to implement a
new management information system, integrate the Peltor and Eastern
acquisitions, and change the manufacturing orientation at its Southbridge,
Massachusetts facility towards cellular manufacturing. Difficulties associated
with the systems conversion as well as the other initiatives resulted in
problems with production planning and control, shipping and distribution, and
overall customer service. Throughout most of fiscal 1997 the Company spent
significant sums in order to mitigate the effects of these problems on its
customer base. As the year progressed, the Company realized improvements in
service levels as well as a return towards historic levels of profitability.
Management believes the efforts undertaken over the last fiscal year will
eventually lead to improved service levels and improvements in profitability in
future periods.
14
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth the major components of the Company's combined
statements of income expressed as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1995 1996 1997
----------- ------------ --------
<S> <C> <C> <C>
Net sales:
Safety Products.......................................... 83.7% 84.3% 87.3%
Speciality Composites.................................... 16.3 15.7 12.7
----- ----- -----
Total net sales........................................ 100.0 100.0 100.0
Cost of sales............................................ 56.0(1) 54.5(3) 57.2
----- ----- -----
Gross profit............................................. 44.0(1) 45.5(3) 42.8
Selling and administrative............................... 28.8(2) 29.9(4) 30.4
Research and technical service........................... 1.4 1.3 1.8
Amortization expense..................................... 2.5 2.3 2.5
Other charges (income), net.............................. (0.1) 0.1 0.9
----- ----- -----
Operating income....................................... 11.4%(1)(2) 11.9%(3)(4) 7.2%
===== ===== =====
</TABLE>
- ----------
(1) Excludes $3.6 million charged to cost of sales as a result of purchase price
allocated to acquired inventory. This amount was recorded in cost of sales
as the acquired inventory was sold during the period ended September 30,
1995.
(2) Excludes $1.1 million charged to selling and administrative expense for the
termination of the Old Cabot Safety Corporation stock option plan and $0.8
million charged to selling and administrative expense attributable to
penalties incurred by the Company's French subsidiary relative to delinquent
value added tax payments.
(3) Excludes $1.0 million charged to cost of sales as a result of purchase price
allocated to inventory acquired in the Peltor acquisition. This amount was
recorded in cost of sales as the acquired inventory was sold during the year
ended September 30, 1996.
(4) Excludes $0.8 million charged to selling and administrative expense for
costs related to the abandoned effort at an initial public offering.
The Company's business is slightly seasonal. Traditionally, net sales during the
first fiscal quarter (October 1 -- December 31) are slightly lower than the
other quarters. This is generally attributable to stock reductions by
distributors and plant shutdowns by end-users towards the end of each calendar
year.
15
<PAGE> 18
OVERVIEW
The combined financial statements of the Company for the periods prior to July
12, 1995 have been prepared on the historical cost basis. The consolidated
balance sheets of the Company at September 30, 1995 and 1996 reflect allocation
of the purchase price to the assets acquired and thus are not comparable with
the historical balance sheets presented for prior periods. Operating results
subsequent to the Formation Acquisition are comparable to prior periods, with
the exception of cost of sales (due to the $3.6 million and $1.0 million charges
in the period and year ended September 30, 1995 and 1996, respectively, related
to the allocations of purchase price to inventory), depreciation expense,
amortization of intangible assets and interest expense.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. Net sales in the year ended September 30, 1997 increased 17.4% to
$285.8 million from $243.5 million in the year ended September 30, 1996. The
increase in net sales was primarily due to the acquisitions of Peltor and
Eastern which were only included for four months of fiscal 1996 and nine months
of fiscal 1996, respectively, as well as internal growth at Safety Products.
Safety Products net sales increased 21.6% from $205.2 million to $249.6 million.
Of this $44.4 million increase, the acquisitions of Peltor and Eastern
contributed $28.6 million and $3.0 million respectively, and $12.8 million was
from internal growth. There was growth in net sales of eye & face products due
to increased volumes and successful new products, as well as in hearing
protection due to increased volumes, a portion of which was due to larger
purchases from the U.S. military in order to increase inventories. Comparisons
to last year were particularly strong in the fourth fiscal quarter when sales at
Safety Products increased by 14.1% as the Company continued to improve service
levels and overcome the difficulties triggered by the conversion to a new
management information system in the fourth quarter of last year. Net Sales in
last year's fourth quarter were hampered by the conversion to the new management
information system. The conversion effort resulted in inaccurate production
planning, backorders and missed shipments particularly in eye & face products
manufactured at the Company's Southbridge, Massachusetts facility. Specialty
Composites net sales decreased 5.5% from $38.3 million to $36.2 million. This
decrease was largely due to the impact of a $2.3 million shipment related to the
Sea Wolf Submarine in the year ended September 30, 1996 and, to a lesser extent,
softness in the Class 8 truck market.
GROSS PROFIT. Gross profit in the year ended September 30, 1997 increased 11.3%
to $122.3 million from $109.9 million in the year ended September 30, 1996.
Excluding the $1.0 million negative effect of purchase accounting for the Peltor
acquisition in fiscal 1996, gross profit would have increased 10.3% from an
adjusted gross profit of $110.9 million. The increase was primarily due to the
acquisitions of Peltor and Eastern which were partially offset by higher costs
in the Southbridge, Massachusetts manufacturing facility and, to a lesser
extent, the Indianapolis, Indiana central packaging operation in the first
quarter. These costs included temporary labor, overtime and excess material
usage and were significantly increased by efforts to correct difficulties
associated with the conversion to the new management information system as well
as changes in manufacturing. Gross profit as a percentage of sales in the year
ended September 30, 1997 was 42.8% as compared to gross profit as a percentage
of sales, on an adjusted basis, of 45.6% in the year ended September 30, 1996.
The percentage decrease was primarily due to the increased costs at the
Southbridge, Massachusetts facility. Gross profit as a percentage of sales
increased towards historical levels in the second half of the year as
improvements in operations were realized.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses in the
year ended September 30, 1997 increased 18.2% to $87.0 million from $73.6
million in the year ended September 30, 1996. Of this increase, approximately
$5.0 million was due to the acquisitions of Peltor and Eastern. Of the remaining
increase, approximately $2.5 million was due to higher distribution expenses.
These expenses include higher freight charges as well as excess labor costs
associated with a higher level of backorders and partial shipments as well as a
higher level of product returns. In addition, the Company incurred higher costs
in customer service in order to mitigate operational difficulties relating to
the new management information system. Also there were higher sales and
marketing expenses from the Company's growth initiatives which were partially
offset
16
<PAGE> 19
by reductions in management and employee incentive accruals. Selling and
administrative expenses as a percentage of net sales were 30.5% in fiscal 1997
compared to 30.2% in fiscal 1996. Excluding the $0.8 million of costs of an
abandoned equity offering in fiscal 1996, such percentage would have been 29.9%.
RESEARCH AND TECHNICAL EXPENSES. Research and technical expenses in the year
ended September 30, 1997 increased 54.5% to $5.1 million from $3.3 million in
the year ended September 30, 1996. The increase was primarily due to the
acquisition of Peltor which spends proportionately more on research and
technical services because there is a more significant technical component to
this product line.
AMORTIZATION EXPENSE. Amortization expense in the year ended September 30, 1997
increased to $7.0 million from $5.6 million in the year ended September 30, 1996
as a result of purchase accounting for the acquisitions of Peltor and Eastern.
OTHER CHARGES (INCOME), NET. Other charges increased to $2.5 million in the year
ended September 30, 1997 from $0.3 million in the year ended September 30,1996.
Approximately $1.7 million of this increase was due to foreign exchange losses
primarily during the first three fiscal quarters. During the fourth quarter the
Company initiated the use of forward contracts to mitigate the effects of
changes in foreign currency rates on profitability. This program has been
successful in significantly reducing these effects. The remaining charges relate
to the abandonment of two automation-related capital projects totaling
approximately $0.5 million at the Company's Indianapolis, Indiana Safety
Products manufacturing facility.
OPERATING INCOME. Primarily as a result of the factors discussed above,
operating income in the year ended September 30, 1997 decreased 23.9% to $20.7
million from $27.2 million in the year ended September 30, 1996.
INTEREST EXPENSE, NET. As a result of the increased borrowings to finance the
acquisitions of Peltor and Eastern, interest expense, net in the year ended
September 30, 1997 increased 29.0% to $26.7 million from $20.7 million in the
year ended September 30, 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes in the year ended
September 30, 1997 was $0.9 million. The Company's subsidiaries have taxable
income in foreign jurisdictions, but a loss for income tax purposes in the U.S.
In the results for the year ended September 30, 1997 the Company has not
recognized any of the tax benefits which will occur in future periods if there
is taxable income in the U.S.
NET INCOME (LOSS). As a result of the decrease in operating income as well as
the higher interest expense the Company incurred a net loss of $6.9 million for
the year ended September 30, 1997 as compared to net income of $2.2 million for
the year ended September 30, 1996.
EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. EBITDA for
the year ended September 30, 1997 was $37.8 million as compared to $39.7 million
for the year ended September 30, 1996. This decrease was due to fact that the
contribution from the acquisitions of Peltor and Eastern were more than offset
by the combined effects of higher costs in the Company's Southbridge,
Massachusetts manufacturing facility, higher selling and administrative costs
and the foreign exchange losses. EBITDA as a percentage of sales declined from
15.7% to 13.2% due to the decreased profitability in the first three fiscal
quarters of fiscal 1997. In the fourth fiscal quarter of 1997 EBITDA was $12.2
million or 16.3% of sales as compared to $10.4 million or 16.3% of sales in the
fourth fiscal quarter of fiscal 1996. This increase was due to the favorable
effect of higher volume in the period as well as improvements in profitability.
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Net sales in the year ended September 30, 1996 increased 20.2% to
$243.5 million from $202.6
17
<PAGE> 20
million in the year ended September 30, 1995. The increase in net sales was due
to the acquisition of Peltor and Eastern as well as internal growth at Safety
Products and Specialty Composites. Safety Products net sales increased 20.9%
from $169.7 million to $205.2 million. Of this $35.5 million increase, $12.8
million resulted from owning Peltor for four months, $10.9 million resulted from
owning Eastern for nine months, and $11.8 million was from internal growth.
There was growth in revenue of hearing products due to better realized prices
and new products, in eye and face products due to increased volumes and new
products, and in prescription safety eyewear as a result of higher volume from
new accounts. Growth in the fourth quarter of fiscal 1996 was hampered by the
conversion to a new management information system. The conversion effort
resulted in inaccurate production planning, backorders and missed shipments,
particularly in eye and face products manufactured at the Company's Southbridge,
Massachusetts facility. Specialty Composites net sales increased 16.3% from
$32.9 million to $38.3 million. This increase was due to a $2.3 million contract
in December of 1995 to supply materials for the Sea Wolf submarine and growth in
sales to the transportation markets.
GROSS PROFIT. Gross profit in the year ended September 30, 1996 increased 28.4%
to $109.9 million from $85.6 million in the year ended September 30, 1995. Gross
profit, adjusted for the impact of inventory purchase accounting adjustment
charges of $3.6 million and $1.0 million in fiscal 1995 and 1996, respectively,
increased 24.3% to $110.9 million from $89.2 million. The increase was a result
of the acquisitions, improved pricing and margins, and internal sales growth. On
an adjusted basis, gross profit as a percentage of sales in the year ended
September 30, 1996 would have been 45.6% as compared to 44.0% in the year ended
September 30, 1995. The percentage increase was due to the combined effect of
the Peltor acquisition, as the Peltor product line has higher gross margins, and
improved margins in the base business which more than offset the effect of the
Eastern product line, which has lower gross margins.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses in the
year ended September 30, 1996 increased 22.1% to $73.6 million from $60.3
million in the year ended September 30, 1995. In the year ended September 30,
1996, the Company incurred $0.8 million of costs associated with the abandoned
efforts at an initial public offering (IPO). Excluding these costs, as well as
$1.1 million in costs in fiscal 1995 related to the termination of the old Cabot
Safety Corporation stock option plan and a $0.8 million charge relating to a
provision for penalties by the Company's French subsidiary, selling and
administrative expenses would have increased 24.7% to $72.8 million from an
adjusted $58.4 million in fiscal 1995. Such expenses as a percentage of net
sales would have been 29.8% as compared to 28.8% in fiscal 1995. The increase in
expenses is partially attributable to higher selling expenses from the Company's
expanded sales programs, higher distribution and administrative expenses during
the fourth quarter as a result of partial shipments and back orders and the
direct costs incurred in absorbing the conversion to a new management
information system.
RESEARCH AND TECHNICAL EXPENSES. Research and technical expenses in the year
ended September 30, 1996 increased 15.1% to $3.3 million from $2.8 million in
the year ended September 30, 1995. The increase was the result of the
acquisition of Peltor as well as increased expenses for product development.
OPERATING INCOME. Primarily as a result of the factors discussed above,
operating income in the year ended September 30, 1996 increased 55.6% to $27.2
million from $17.5 million in the year ended September 30, 1995. Excluding the
inventory charges related to purchase accounting as well as the costs of the
abandoned IPO effort in fiscal 1996, and the costs of the Old Cabot Safety
Corporation stock option plan and charges related to the French subsidiary in
fiscal 1995, operating income would have been $29.0 million in the year ended
September 30, 1996 and $23.0 million in the year ended September 30, 1995
representing an increase of 26.2%.
INTEREST EXPENSE, NET. Interest expense, net is not comparable with prior
periods as a result of the financing related to the Formation Acquisition and
the Peltor acquisition. Interest expense, net in the year ended September 30,
1996 was $20.7 million.
18
<PAGE> 21
PROVISION FOR INCOME TAXES. The provision for income taxes in the year ended
September 30, 1996 was $4.3 million or 66.2% of income before provision for
income taxes. Such rate was higher than the Company's normalized rate of 40% as
the interest expense on the borrowings for the Peltor acquisition could not be
used to offset income taxes in Sweden until after September 30, 1996.
NET INCOME (LOSS). The increase in interest expense and the higher tax provision
resulted in a 48.1% decrease in net income to $2.2 million from $4.2 million.
EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. EBITDA for
the year ended September 30, 1996 was $39.7 million as compared to $29.0 million
for the year ended September 30, 1995. Excluding the inventory charges related
to purchase accounting as well as the costs of the abandoned IPO effort in
fiscal 1996, and the costs of the Old Cabot Safety Corporation stock option plan
and charges related to the French subsidiary in fiscal 1995, EBITDA would have
been $41.5 million in the year ended September 30, 1996 and $34.5 million in the
year ended September 30, 1995. This increase was due to the contribution of the
Peltor and Eastern acquisitions, as well as internal sales growth, but dampened
somewhat by the additional costs incurred in absorbing the conversion to the new
management information system.
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 U.S. Dollar denominated. As a result, a decline in the value
of the U.S. Dollar relative to other currencies can have a favorable impact on
the profitability of the Company and an increase in the value of the U.S. 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 exchange rate changes had the effect of decreasing operating profit by
$2.1 million in the year ended September 30, 1997 compared to $0.3 million in
the year ended September 30, 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 Company's debt structure includes $100.0 million of Senior Subordinated
Notes (Notes) due 2005, as well as a senior bank facility comprised of (i) term
loans denominated in U.S., Canadian, British and German currencies aggregating
$140.0 million (the Term Loans) and (ii) a Revolving Credit Facility providing
for up to $25.0 million (the Senior Bank Facilities).
Maturities under the Company's Term Loans are: $10.6 million in fiscal 1998,
$12.9 million in fiscal 1999, $15.9 million in fiscal 2000, $20.6 million in
fiscal 2001, $34.4 million in fiscal 2002 and $35.2 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
19
<PAGE> 22
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. The Company spent $8.9
million for capital expenditures for the year ended September 30, 1997 as
compared to $9.3 million for capital expenditures for the year ended September
30, 1996 and $13.2 million for the year ended September 30, 1995. Included in
the capital expenditures over the past three years was an aggregate of $5.4
million for a casting line at the Newark, Delaware facility and $8.0 million for
a worldwide management information system. The Company's capital spending is of
a relatively short duration, with the complete commitment process typically
involving less than one year.
The Company's principal source of cash to fund these capital requirements is net
cash provided by operating activities. The Company's net cash provided by
operating activities for the year ended September 30, 1997 totaled $9.1 million
as compared to $4.5 million for the year ended September 30, 1996. The increase
was due to comparative improvements in accounts receivables collections of $4.0
million and a reduction in inventories of $3.8 million in fiscal 1997 compared
to an increase of $3.8 million in fiscal 1996. The Company realized improvements
in working capital as shipping and billing accuracy improved and as inventory
management and accuracy improved throughout the second half of fiscal 1997.
These improvements were offset by a deterioration in operating profitability
mainly in the early part of fiscal 1997. In fiscal 1995, the Company's net cash
provided by operating activities totaled $24.9 million.
Net cash used by investing activities was $8.3 million for the year ended
September 30, 1997 as compared to $96.4 million for the year ended September 30,
1996 and $16.2 million (excluding the Formation Acquisition) in the year ended
September 30, 1995. Net cash used by investing activities consisted of $8.9
million of capital expenditures in the year ended September 30, 1997 as compared
to $9.2 million in the year ended September 30, 1996. In the current period, the
most significant expenditures were to support the introduction of the Company's
new Fectoids eyewear product. Offsetting the spending in the year ended
September 30, 1997 was $0.8 million in proceeds from the sale of the Rhode
Island facility of Peltor as those operations were consolidated into the
Company's Southbridge, Massachusetts and Indianapolis, Indiana facilities. In
the year ended September 30, 1996, excluding the $83.6 million invested in the
Peltor acquisition, the $6.6 million invested in the Eastern acquisition and the
escrow for the Eastern acquisition, net cash used by investing activities would
have been $9.3 million.
Net cash used by financing activities for the year ended September 30, 1997 was
$4.2 million as repayment of term loans of $8.3 million and repayment of other
long term debt of $0.8 million were partially offset by increased borrowings
under the revolving credit facility of $5.2 million. Net cash provided by
financing activities for the year ended September 30, 1996 was $95.5 million as
compared to $164.5 million in the year ended September 30, 1995. In fiscal 1996
net cash provided by financing activities consisted primarily of proceeds from
the amended and restated senior bank facility which were used to finance the
acquisitions of Peltor and Eastern. In fiscal 1995 the primary activity was the
financing of the Formation Acquisition. The Formation Acquisition was financed
by the issuance of common and preferred stock totaling $32.5 million, the
issuance of the Notes totaling $100.0 million, borrowing of $45.0 million in
Term Loans, as well as borrowings of $3.1 million under the Senior Bank
Facilities. The financings totaled $180.6 million and were used to finance the
cash paid for Cabot Safety Corporation of $169.2 million as well as financing
costs of $11.4 million. Excluding these amounts, net cash used by financing
activities would have been $4.6 million for the year ended September 30, 1995 as
compared to $13.6 million for the year ended September 30, 1994. This decrease
was due to the increase in net cash used by investing activities.
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 September 30, 1997 the
Company had borrowed $10.2 million under the revolving credit facility.
Throughout most of fiscal 1997, borrowing levels remained high until the
difficulties
20
<PAGE> 23
associated with the conversion to the new management information system were
largely resolved and the improvements in production planning were beginning to
be realized. Management believes that improvements will continue to be realized
during the next 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 may 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 June 30, 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 management
information 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(1) Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Public Accountants-- Arthur Andersen LLP................. 22
Balance Sheets -- September 30, 1996 and 1997................................... 24
Statements of Operations-- Period ended July 11, 1995, Period ended
September 30, 1995 and Years ended September 30, 1996 and 1997............... 25
Statements of Stockholders' Equity -- Period ended July 11, 1995, Period
ended September 30, 1995 and Years ended September 30, 1996 and 1997.......... 26
Statements of Cash Flows -- Period ended July 11, 1995, Period ended
September 30, 1995 and Years ended September 30, 1996 and 1997................ 27
Notes to Financial Statements................................................... 28
Valuation and Qualifying Accounts -- Period ended July 11, 1995, Period ended
September 30, 1995 and years ended September 30, 1996 and 1997.................. 67
</TABLE>
21
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Aearo Corporation:
We have audited the accompanying consolidated balance sheets of Aearo
Corporation and subsidiaries (a Delaware corporation) as of September 30, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended, and for the period ended
September 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aearo Corporation
and subsidiaries as of September 30, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, and for the period ended
September 30, 1995, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
accompanying financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state, in all material respects, the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 14, 1997
22
<PAGE> 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Aearo Company:
We have audited the accompanying combined statement of operations, stockholders'
equity and cash flows of Aearo Company, formerly Cabot Safety Corporation (the
"Predecessor") for the period October 1, 1994 through July 11, 1995, inclusive.
These combined financial statements are the responsibility of the Predecessor's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
the Predecessor for the period October 1, 1994 through July 11, 1995, inclusive,
in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to the
accompanying financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state, in all material respects, the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 29, 1995
23
<PAGE> 26
AEARO CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1996 1997
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............................. $ 8,540 $ 5,476
Accounts receivable (net of reserve for doubtful accounts of 45,890 45,876
$1,301 and $1,200 in 1997 and 1996, respectively)...
Inventories............................................ 41,164 36,693
Deferred and prepaid expenses.......................... 2,748 3,397
-------- --------
Total current assets........................... 98,342 91,442
-------- --------
Property, Plant and Equipment, net....................... 68,712 64,948
Intangible Assets, net................................... 161,940 146,906
Other Assets............................................. 9,442 7,580
-------- --------
Total assets................................... $338,436 $310,876
======== ========
Current Liabilities:
Current portion of long-term debt...................... $ 8,767 $ 10,937
Accounts payable and accrued liabilities............... 40,348 36,186
Accrued interest....................................... 3,779 3,769
U.S. and foreign income taxes.......................... 5,713 2,734
Total current liabilities...................... 58,607 53,626
-------- --------
Long-term Debt........................................... 241,520 233,729
Deferred Income Taxes.................................... 697 883
Other Liabilities........................................ 2,811 2,688
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-- 96,810 and 99,350 shares in 1997 1 1
and 1996, respectively..............................
Additional paid-in capital............................. 32,640 32,476
Retained earnings (deficit)............................ 1,607 (5,269)
Cumulative foreign currency translation adjustments.... 553 (7,258)
-------- ---------
Total stockholders' equity..................... 34,801 19,950
-------- --------
Total liabilities and stockholders' equity..... $338,436 $310,876
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 27
AEARO CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
----------------- ---------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 11, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales........................... $154,712 $ 47,900 $243,459 $285,783
Cost of Sales (Note 3).............. 87,674 29,319 133,551 163,460
-------- -------- -------- --------
Gross profit..................... 67,038 18,581 109,908 122,323
Selling and Administrative.......... 47,149 13,146 73,614 87,036
Research and Technical Services..... 2,273 551 3,250 5,119
Amortization Expense................ 4,361 838 5,563 6,957
Other Charges (Income), net......... (233) 70 301 2,505
-------- -------- -------- --------
Operating income................. 13,488 3,976 27,180 20,706
Interest Expense, net............... 5,673 4,135 20,703 26,665
-------- -------- -------- --------
Income (loss) before provision
for income taxes................ 7,815 (159) 6,477 (5,959)
Provision for Income Taxes.......... 3,009 425 4,286 917
-------- -------- -------- --------
Net income (loss)................ $ 4,806 (584) 2,191 (6,876)
========
Preferred Stock Dividend
Accrued............................ 1,283 6,248 7,112
-------- -------- --------
Loss applicable to Common
Shareholders....................... $ (1,867) $(4,057) $(13,988)
======== ======= ========
Loss per Common Share............... $ (18.67) $(40.58) $(142.77)
======== ======= ========
Weighted average Common
Shares outstanding................. 100,000 99,980 97,979
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 28
AEARO CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY
----------------- --------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS TOTAL
------ ------ ------ ------ ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY
Balance, September 30, 1994..... $ -- 9,500 $ 1 $ 21,228 $18,249 $(4,274) $35,204
Foreign currency translation
adjustments................ -- -- -- -- -- 75 75
Net income................... -- -- -- -- 4,806 -- 4,806
------- ------- ----- -------- ------- ------- -------
Balance, July 11, 1995.......... $ -- 9,500 $ 1 $ 21,228 $23,055 $(4,199) $40,085
======= ======= ===== ======== ======= ======= =======
SUCCESSOR COMPANY
Issuance of common and
preferred stock in
connection with
acquisition, net........... 45,000 $ -- 100,000 $ 1 $ 32,530 $ -- $ -- $32,531
Foreign currency translation
adjustments................ -- -- -- -- -- -- 7 7
Net loss..................... -- -- -- -- -- (584) -- (584)
------ ------- ------- ----- -------- ------- ------- -------
Balance, September 30, 1995..... 45,000 -- 100,000 1 32,530 (584) 7 31,954
Repayment of shareholders
notes...................... -- -- -- -- 260 -- -- 260
Repurchase of common stock,
net........................ -- -- (650) -- (150) -- -- (150)
Foreign currency translation
adjustment................. -- -- -- -- -- -- 546 546
Net income................... -- -- -- -- -- 2,191 -- 2,191
------ ------- ------- ----- -------- ------- ------- -------
Balance, September 30, 1996..... 45,000 -- 99,350 1 32,640 1,607 553 34,801
Repayment of shareholders
notes...................... -- -- -- -- 258 -- -- 258
Repurchase of common
stock, net................. -- -- (2,540) -- (422) -- -- (422)
Foreign currency translation
adjustment................. -- -- -- -- -- -- (7,811) (7,811)
Net loss..................... -- -- -- -- -- (6,876) -- (6,876)
------ ------- ------- ----- -------- ------- ------- -------
Balance, September 30, 1997..... 45,000 $ -- 96,810 $ 1 $ 32,476 $(5,269) $(7,258) $19,950
====== ======= ======= ===== ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 29
AEARO CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
------------ -------------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 11, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996 1997
------------ ------------- ------------- ----------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................ $ 4,806 $ (584) $ 2,191 $(6,876)
Adjustments to reconcile net income (loss)
to cash provided by operating activities--
Depreciation................... 4,855 1,247 6,908 9,773
Amortization................... 4,361 1,117 7,028 8,858
Deferred income taxes.......... 1,851 -- -- 109
Other, net..................... 160 (27) 423 517
Changes in assets and liabilities--
Accounts receivable............ (410) (1,523) (4,431) (479)
Inventory...................... 903 4,190 (3,748) 3,787
Accounts payable and accruals.. 991 7,229 (3,040) (3325)
Other, net..................... (3,610) (640) (855) (3,296)
-------- --------- -------- -------
Net cash provided by operating activities 13,907 11,009 4,476 9.068
-------- --------- -------- -------
Cash Flows from Investing Activities:
Cash paid for Cabot Safety Corporation -- (169,200) -- --
Cash paid for Peltor AB and Eastern -- -- (90,204) --
Eastern escrow deposit........... -- (3,000) 3,000 --
Purchase of Shoplyne assets...... -- -- -- (242)
Additions to property, plant and equipment (10,448) (2,719) (9,249) (8901)
Proceeds provided by disposals of
property, plant and equipment.. 4 -- 26 818
-------- --------- -------- -------
Net cash used by investing
activities.................. (10,444) (174,919) (96,427) (8,325)
-------- --------- -------- -------
Cash Flows from Financing Activities:
Issuance of common and preferred stock
in connection with acquisition, net -- 32,531 -- --
Proceeds from sale of notes...... -- 100,000 -- --
Repurchase of common stock, net.. -- -- (150) (422)
Repayment of shareholder notes... -- -- 260 258
Proceeds from term loans......... -- 45,000 -- --
Proceeds from Amended and Restated
Senior Bank Facilities, net.... -- -- 94,311 --
Proceeds from revolving credit facility, net -- 3,800 1,250 5,150
Payment of financing costs....... -- (11,382) -- --
Repayment of term loans.......... -- (1,249) -- (8,339)
Repayment of external long-term debt (122) (109) (218) (840)
Increase in note payable to
Cabot Corporation, net......... 1,412 -- -- --
Increase in intercompany receivables, net (5,381) -- -- --
-------- --------- -------- -------
Net cash (used) provided
by financing activities... (4,091) 168,591 95,453 (4,189)
-------- --------- -------- -------
Effect of Exchange Rate Changes on Cash 78 26 331 382
-------- --------- -------- -------
Increase (Decrease) in Cash and Cash Equivalents (550) 4,707 3,883 (3,064)
Cash and Cash Equivalents, beginning of period 2,020 -- 4,707 8,540
-------- --------- -------- -------
Cash and Cash Equivalents, end of period $ 1,470 $ 4,707 $ 8,540 $ 5,476
======== ========= ======== =======
Noncash Investing and Financing Activities:
Capital lease obligations........ $ 128 $ -- $ -- $ --
======== ========= ======== =======
Cash Paid for:
Interest......................... $ 1,734 $ 794 $ 18,879 $22,316
======== ========= ======== =======
Income taxes..................... $ 2,265 $ 37 $ 1,138 $ 3,345
======== ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 30
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) BASIS OF PRESENTATION
For periods prior to July 11, 1995, the accompanying financial statements
represent the combined results and financial position of Aearo Company (formerly
Cabot Safety Corporation) and certain affiliates (the Predecessor) all of which
were wholly owned by Cabot Corporation (Cabot). On July 11, 1995, Cabot sold
substantially all of the assets and certain liabilities of the Predecessor to
Aearo Corporation (formerly Cabot Safety Holdings, Inc.) as described in Note 3
(Formation Acquisition). Financial statements for periods subsequent to July 11,
1995 represent the consolidated financial statements of Aearo Corporation and
subsidiaries (the Successor). References to the Company refer to the Predecessor
prior to the Formation Acquisition and the Successor post acquisition.
Separate financial statements of Aearo Company are not presented because they do
not provide any additional information from what is presented in the financial
statements of Aearo Corporation that would be meaningful to the holders of the
senior subordinated notes (see Note 9).
(2) ORGANIZATION
The Company manufactures and sells personal safety equipment, as well as
energy-absorbing, vibration-damping and impact-absorbing products for industrial
noise control and environment enhancement. Included in personal safety equipment
are hearing protection, safety eyewear and respiratory equipment.
(3) FORMATION ACQUISITION AND FINANCING
Aearo Corporation was formed by Vestar Equity Partners, L.P. (Vestar) in June
1995 to effect the acquisition of substantially all of the assets and
liabilities of the Predecessor (the Formation Acquisition). The Predecessor was
wholly owned by 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,
as more fully described in Note 14. 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 June 13,
1995. Aearo Corporation has no other material assets, liabilities or operations
other than those that result from its ownership of the common stock of Aearo
Company.
28
<PAGE> 31
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
The total financing related to the Formation Acquisition was $217.5 million
(including transaction fees and expenses of $11.2 million), including the
assumption of certain debt. A summary of the Formation Acquisition financing is
as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Implied fair value of equity issued(a)................... $ 65.0
Issuance of stockholder loans............................ (0.9)
Borrowings under revolving credit facility............... 2.5
Borrowings under term loans.............................. 45.0
Borrowings under notes................................... 100.0
Assumed debt............................................. 4.8
Closing adjustment paid to Cabot......................... 1.1
------
$217.5
======
</TABLE>
- ----------
(a) The implied fair value of equity represents the implicit fair value of Aearo
Corporation's equity based on the cash paid by Vestar and management for
their equity interest in Aearo Corporation. The actual amount recorded for
Aearo Corporation's equity was reduced by approximately $31.5 million to
reflect Predecessor basis for the portion of equity retained by Cabot.
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 a portion of their estimated fair
values as of July 11, 1995. The valuation of assets and liabilities acquired
reflect carryover basis for the percentage ownership retained by Cabot.
29
<PAGE> 32
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
The allocation of the $206.1 million purchase price plus $2.1 million of direct
acquisition costs is summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Cash paid to Cabot............................................................... $169.2
Debt assumed..................................................................... 4.8
Closing adjustment paid to Cabot................................................. 1.1
Fair value of 42.5% equity interest in Holdings issued to Cabot.................. 31.0
------
Total.................................................................. 206.1
Direct acquisition costs......................................................... 2.1
------
Total consideration and direct acquisition costs....................... 208.2
Predecessor historical cost of net assets acquired............................... 134.0
------
Excess of consideration paid over predecessor historical cost.......... 74.2
Less -- Adjustment to reflect predecessor basis for the 42.5% equity
interest retained by Cabot..................................................... 31.5
------
Fair market value step up.............................................. 42.7
Debt issuance costs.............................................................. 9.3
------
Net adjustment......................................................... $ 52.0
======
Allocation of net adjustment --
Inventories.................................................................... $ 3.6
Property, plant and equipment, net............................................. 13.6
Intangible assets.............................................................. 31.7
Deferred charges............................................................... 9.3
Liabilities and other.......................................................... (6.2)
------
$ 52.0
======
</TABLE>
The $3.6 million allocated to inventory was charged to cost of sales in the
period ended September 30, 1995 as the inventory was sold to customers.
(4) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. The significant accounting policies of
the Company are described below.
PRINCIPLES OF COMBINATION AND CONSOLIDATION
The combined financial statements of the Company for the period from October 1,
1994 through July 11, 1995 include Aearo Company and the results of certain
affiliates of the Company whose operations are partially or exclusively related
to the business of the Company. All significant transactions and balances
between affiliates have been eliminated. Transactions with Cabot and its
subsidiaries are reflected as intercompany balances.
The consolidated financial statements of the Company as of and for the years
ended September 30, 1997 and 1996 and the period from July 12, 1995 through
September 30, 1995 include the accounts of Aearo Company and its subsidiaries.
All significant intercompany balances and transactions have been eliminated.
30
<PAGE> 33
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
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.
REVENUE RECOGNITION
The Company generally recognizes revenue upon shipment of its products to
customers.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all time
deposits and short-term investments with an original maturity of three months or
less at time of purchase to be cash equivalents.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are translated at
year-end exchange rates. Revenues and expenses are translated at the average
rate during the year. Translation gains and losses are reflected as a separate
component of stockholders' equity. Foreign currency gains and losses arising
from transactions by any of the Company's subsidiaries are reflected in net
income. For the periods ended July 11, 1995 and September 30, 1995 and the years
ended September 30, 1996 and 1997, the accompanying statements of operations
include approximately ($448,000), $60,000, $286,000 and $2,101,000,
respectively, of transaction (gains) and losses.
During the fourth quarter of fiscal 1997, the Company initiated the use of
forward foreign currency contracts to mitigate the effects of changes in foreign
currency rates on profitability, which has to date been successful in
significantly reducing such effects.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
using the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation of property,
plant and equipment is calculated using the straight-line method based on
estimated economic useful lives. Expenditures for maintenance and repairs and
minor renewals are charged to expense.
Property, plant and equipment and their estimated useful lives consist of the
following:
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
Buildings 25--40 Years
Leasehold improvements Life of the lease or useful
life, whichever is shorter
Machinery and equipment, furniture and fixtures 3--10 Years
31
<PAGE> 34
Upon the sale or retirement of assets, the cost and related accumulated
depreciation are removed from the financial statements, and any resultant gain
or loss is recognized.
32
<PAGE> 35
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
INCOME TAXES
For the year ended September 30, 1997, as in the year ended September 30, 1996
and the period ended September 30, 1995, the Company will file a consolidated
federal income tax return. The Company filed a consolidated federal income tax
return with Cabot for the period ended July 11, 1995. The provision for federal
income taxes reflected in these financial statements for which the Company filed
consolidated returns with Cabot have been determined as if the Company filed a
separate federal income tax return.
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.
The Company accounts for long-lived and intangible assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of. The
Company continually reviews its intangible assets for events or changes in
circumstances which might indicate the carrying amount of the assets may not be
recoverable. The Company assesses the recoverability of the assets by
determining whether the amortization of such intangibles over their remaining
lives can be recovered through projected undiscounted future cash flows. The
amount of impairment, if any, is measured based on projected discounted future
cash flows using a discount rate reflecting the Company's average cost of funds.
At September 30, 1997, no such impairment of assets was indicated.
A summary of the estimated lives by major category of intangible assets at
September 30, 1997 is as follows:
Goodwill................................... 25 Years
Patents.................................... 17 Years
Non-compete agreements..................... Life of agreements (up to 5 years)
Trademarks, Tradenames and
Other.................................... Various from 15 to 25 Years
DEFERRED FINANCING COSTS
Deferred financing costs are stated at cost as a component of other assets and
amortized over the life of the related debt. Amortization of deferred financing
costs is included in interest expense.
33
<PAGE> 36
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of SFAS No. 107. Disclosures About Fair
Value of Financial Instruments, the Company has determined the estimated fair
value of its financial instruments using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value; thus, the estimates are not necessarily indicative of
the amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash, accounts receivable, accounts payable,
senior subordinated notes and bank debt. The carrying value of these assets and
liabilities is a reasonable estimate of their fair market value at September 30,
1997.
LOSS PER COMMON SHARE
Loss per common share has been computed by dividing loss applicable to common
shareholders for the period by the weighted average number of common shares
outstanding during the period.
In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
128, Earnings per Share, which supersedes Accounting Principles Board Opinion
(APB) No. 15, the existing authoritative guidance. SFAS No. 128 is designed to
improve the earnings per share information provided in the financial statements
by simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of earnings per share on an
international basis. SFAS No. 128 is effective for financial statements for both
interim and annual periods ending after December 15, 1997, and requires
restatement of all prior-period earnings per share data presented. Earnings per
share in these consolidated financial statements would not be affected under the
new pronouncement.
SFAS NO. 123 -- ACCOUNTING FOR STOCK-BASED COMPENSATION
On October 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 addresses accounting and reporting requirements for
stock options and other equity instruments issued or granted based on their fair
market values. The Company intends to continue accounting for its stock based
compensation plans for employees in accordance with APB No. 25. Under SFAS No.
123, companies choosing to continue to use APB No. 25 to account for stock based
compensation plans for employees must make footnote disclosure of the pro forma
effects on earnings per share had the principles in SFAS No. 123 been applied
(see Note 14).
(5) INVENTORIES
Inventories consisted of the following at September 30 (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
------------------------
1996 1997
------- -------
<S> <C> <C>
Raw materials........................................ $13,100 $10,031
Work in process...................................... 11,130 9,982
Finished goods....................................... 16,934 16,680
------- -------
$41,164 $36,693
======= =======
</TABLE>
34
<PAGE> 37
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
(6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30
(dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
----------------------
1996 1997
------- -------
<S> <C> <C>
Land.................................................. $ 2,637 $ 2,669
Buildings and improvements............................ 17,584 16,171
Machinery and equipment............................... 35,501 43,069
Furniture and fixtures................................ 10,957 15,485
Construction in progress.............................. 10,343 4,768
------- -------
77,022 82,162
Less-- Accumulated depreciation....................... 8,310 17,214
------- -------
$68,712 $64,948
======= =======
</TABLE>
(7) INTANGIBLE ASSETS
Intangible assets consist of the following at September 30 (dollars in
thousands):
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
-------------------------
1996 1997
-------- --------
<S> <C> <C>
Goodwill............................................. $ 81,195 $ 84,800
Patents.............................................. 1,638 1,638
Trademarks and tradenames............................ 74,122 74,122
Non-compete agreement................................ 10,592 269
Other................................................ 585 585
-------- --------
168,132 161,414
Less-- Accumulated amortization...................... 6,192 14,508
-------- --------
$161,940 $146,906
======== ========
</TABLE>
At September 30, 1997, the gross book value of the non-compete agreements was
$0.3 million as compared to $10.6 million at September 30, 1996. The decrease
was primarily due to a reclassification of the non-compete agreement relative to
the Peltor acquisition into goodwill.
(8) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at September
30 (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
----------------------
1996 1997
------- -------
<S> <C> <C>
Accounts payable -- trade.............................. $19,806 $18,378
Accrued liabilities -- 8,603 9,169
Employee compensation and benefits (Note 11).........
Other................................................ 11,939 8,639
------- -------
$40,348 $36,186
======= =======
</TABLE>
35
<PAGE> 38
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
(9) DEBT
The long-term debt balances consisted of the following at September 30 (dollars
in thousands):
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
--------------------
1996 1997
-------- --------
<S> <C> <C>
Revolving credit facility................................. $ 5,050 $ 10,200
Term loans, due 2003...................................... 139,436 129,592
Senior subordinated notes, due 2005, 12.5%................ 100,000 100,000
Note payable, other....................................... 1,281 646
Mortgage note, due 1997-- 2006, 10.1%..................... 2,500 2,458
Industrial Revenue Bonds, due 1997 -- 2003, 6.4% less
advance deposit of $122................................. 598 448
Industrial Revenue Bonds, due 2002, 13.0%................. 1,000 1,000
Capitalized lease obligations-- 329 286
Lease term ends 2003, 6.5%..............................
Lease term ends 1997, 8.9%.............................. 24 --
Lease term ends 1998, 9.0%.............................. 69 36
-------- --------
250,287 244,666
Less-- Current portion of long-term debt.................. 8,767 10,937
-------- --------
Total........................................... $241,520 $233,729
======== ========
</TABLE>
Revolving Credit and Term Loans
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
five-year revolving credit facility providing for up to $25.0 million in
revolving loans, $5.0 million of which may be used for letters of credit (the
Revolving Credit Facility) and (ii) a term loan facility providing for $45.0
million in term loans, consisting of a $28.5 million U.S. term loan, a $4.5
million term loan designated in Canadian dollars and a $12.0 million term loan
designated in Sterling (collectively, the Old Term Loans).
On May 30, 1996, Aearo Company and the Syndicated Lenders amended and restated
the Agreement. The amended and restated Agreement consists of (a) a secured term
loan facility consisting of A and B term loans providing for up to $90.0 million
of A term loans and $50.0 million of B term loans (collectively, the Term
Loans); a portion of the A term loans is denominated in an equivalent amount of
foreign currencies and (b) a secured revolving credit facility (the Revolving
Credit Facility) providing for up to $25.0 million of revolving loans, a portion
of which may be denominated in foreign currencies, for general corporate
purposes and, as to $15.0 million thereof, to finance permitted acquisitions
(collectively the Senior Bank Facilities). The Revolving Credit Facility
provides for the issuance of letters of credit in an aggregate face amount of up
to $5.0 million. The Term Loans will amortize quarterly over a seven-year
period. Amounts repaid or prepaid in respect of the Term Loans may not be
reborrowed. Loans and letters of credit under the Revolving Credit Facility will
be available at any time prior to the maturity date of the Senior Bank
Facilities, which is May 30, 2002. The amount outstanding at September 30, 1997
and 1996 on the Term Loans was $129.6 million and $139.4 million, respectively.
36
<PAGE> 39
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
At the Company's option, the interest rates per annum applicable to the Senior
Bank Facilities are either (a) an adjusted rate based on the London Interbank
Offered Rate plus a margin of 2.25% in the case of A Term Loans and Revolving
Loans and 2.75% in the case of B Term Loans; or (b) the Base Rate, as defined
plus a margin of 1.00% in the case of A Term Loans and Revolving Loans and 1.50%
in the case of B Term Loans. The Base Rate is the higher of Bankers Trust
Company's announced prime lending rate and the Overnight Federal Funds rate plus
0.50%. The Company must pay certain fees in connection with the Senior Bank
Facilities, including a commitment fee ranging from 0.375% to 0.50% on the
undrawn portion of the commitments in respect of the Revolving Credit Facility
based upon the Company's leverage ratio, and fees relating to the issuance of
letters of credit.
At September 30, 1997 interest rates on Term Loans were 8.0% for the US Dollar
Term A Loan, 5.6% for the US DEM Term A Loan, 9.6% for the US Sterling Term A
Loan, 5.9% for the Canadian Term A Loan, 9.6% for the Sterling Term A Loan and
8.5% for the US Dollar Term B Loan. For the year ended September 30, 1997 the
weighted average interest rates paid were 7.9%, 5.5%, 8.7%, 5.6%, 8.7% and 8.4%
for the US Dollar Term A Loan, for the US DEM Term A Loan, for the US Sterling
Term A Loan, for the Canadian Term A Loan, for the Sterling Term A Loan and for
the US Dollar Term B Loan, respectively.
At September 30, 1996 interest rates on Term Loans were 7.8% for the US Dollar
Term A Loan, 5.4% for the US DEM Term A Loan, 8.1% for the US Sterling Term A
Loan, 6.4% for the Canadian Term A Loan, 8.1% for the Sterling Term A Loan and
8.3% for the US Dollar Term B Loan. During the period of May 30, 1996 to
September 30, 1996 the weighted average interest rates paid were 7.7%, 5.6%,
8.1%, 6.8%, 8.1% and 8.2% for the US Dollar Term A Loan, for the US DEM Term A
Loan, for the US Sterling Term A Loan, for the Canadian Term A Loan, for the
Sterling Term A Loan and for the US Dollar Term B Loan, respectively.
The weighted average interest rates on the Old Term Loans during fiscal 1995
were 7.9%, 8.5% and 8.7% for the US term loan, Canadian term loan and Sterling
term loan, respectively.
At September 30, 1997 Aearo Company had $10.2 million outstanding on the
Revolving Credit Facility. At September 30, 1997, the rate on the Revolving
Credit Facility was 9.5%. For the year ended September 30, 1997, the maximum
amount outstanding under the Revolving Credit Facility was $20.3 million with
the average being $12.9 million. The weighted average interest rate paid during
fiscal 1997 on the Revolving Credit Facility was 9.4%.
At September 30, 1996 Aearo Company had $5.1 million outstanding on the
Revolving Credit Facility. At September 30, 1996, the rate on the Revolving
Credit Facility was 9.25%. During the period from May 30, 1996 to September 30,
1996, the maximum amount outstanding under the Revolving Credit Facility was
$8.9 million with the average being $1.0 million. The weighted average interest
rate paid during fiscal 1996 on the Revolving Credit Facility was 9.3%.
During the period from July 11, 1995 to September 30, 1995, the maximum amount
outstanding under the Revolving Credit Facility was $5.5 million with the
average being $2.7 million and the weighted average interest rate during such
period was 9.5%.
Under the terms of the Senior Bank Facilities, Aearo Company is required to
comply with a number of affirmative and negative covenants. Among other things,
Aearo Company must satisfy certain financial covenants and ratios, including
interest coverage ratios, leverage ratios and fixed charge coverage ratios. In
April 1997, the Senior Bank Facilities were amended with respect to
certain covenants applicable to periods ending on and after June 30, 1997. The
Senior Bank Facilities also impose limitations on certain business activities of
Aearo Company. The Senior Bank Facilities restrict, among other things, the
incurrence of additional indebtedness, creation of certain liens, sales of
certain assets and limitations on transactions with
37
<PAGE> 40
affiliates. As of September 30, 1997, Aearo Company is in compliance with the
covenants of the Senior Bank Facilities. The Senior Bank Facilities are
unconditionally guaranteed by Aearo Corporation and secured by first priority
security interests in substantially all the capital stock and tangible and
intangible assets of the Company.
Senior Subordinated Notes
In connection with the acquisition, Aearo Company issued $100.0 million of
Senior Subordinated Notes due 2005 (the Subordinated Notes). The Subordinated
Notes are unsecured obligations of Aearo Company. The Subordinated Notes bear
interest at a rate of 12.5% per annum and are payable semiannually on each
January 15 and July 15 commencing on January 15, 1996.
The Subordinated Notes are redeemable at the option of Aearo Company, on or
after July 15, 2000. From and after July 15, 2000, the Subordinated Notes will
be subject to redemption at the option of Aearo Company, in whole or in part, at
various redemption prices, declining from 106.3% of the principal amount to par
on and after July 15, 2004. In addition, on or prior to July 15, 1998, the
Company may use the net cash proceeds of one or more equity offerings to redeem
up to 35% of the aggregate principal amount of the Subordinated Notes originally
issued at a redemption price of 112.5% of the principal amount thereof plus
accrued interest to the date of redemption.
The Subordinated Note indenture contains affirmative and negative covenants and
restrictions similar to those required under the terms of the Senior Bank
Facilities discussed above. As of September 30, 1997, Aearo Company is in
compliance with the various covenants of the Subordinated Note agreement. The
Subordinated Notes are unconditionally guaranteed on an unsecured, senior
subordinated basis by Aearo Corporation.
The following is a summary of maturities of all of the Company's debt
obligations due after September 30, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT
------
<C> <C>
1998........................................... $ 10,937
1999........................................... 13,078
2000........................................... 16,165
2001........................................... 20,914
2002........................................... 45,867
Thereafter..................................... 137,705
--------
$244,666
========
</TABLE>
38
<PAGE> 41
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
(10) INTEREST EXPENSE, NET
Interest expense (income) comprises the following items (dollars in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
---------------- --------------------------------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED
PERIOD ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
JULY 11, 1995 1995 1996 1997
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Expense --
Note payable to Cabot
Corporation................... $ 5,058 $ -- $ -- $ --
External........................ 1,802 4,160 20,975 26,896
------- ------ ------- -------
Total interest expense........ 6,860 4,160 20,975 26,896
------- ------ ------- -------
Income-- (1,164) -- -- --
Intercompany....................
External........................ (23) (25) (272) (231)
------- ------ ------- -------
Total interest income......... (1,187) (25) (272) (231)
------- ------ ------- -------
Interest expense, net.......... $ 5,673 $4,135 $20,703 $26,665
======= ====== ======= =======
</TABLE>
(11) EMPLOYEE BENEFIT PLANS
The Company has two noncontributory defined benefit pension plans, the Aearo
Company Employees' Retirement Account Plan (the Aearo Plan), which is a cash
balance plan, and the Eo Ao R Specialty Composites Division of Aearo Company
Non-Union Employees Retirement Plan (the Specialty Composites Plan). Benefits
provided under these plans are primarily based on years of service and the
employee's compensation.
The Aearo Plan, effective May 1, 1990, covers most employees in the United
States and is funded quarterly based on actuarial and economic assumptions
designed to achieve adequate funding of projected benefit obligations. Plan
assets are invested in a portfolio consisting primarily of debt and equity
securities. The Specialty Composites Plan resulted from a 1989 acquisition. As
of March 31, 1989, the benefits under this plan were frozen. Plan assets are
invested in fixed-income investments.
Net periodic pension cost for these plans comprises the following elements
(dollars in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
------------- -------------------------------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED
PERIOD ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
JULY 11, 1995 1995 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Service cost.............. $ 748 $ 217 $1,180 $1,273
Interest cost............. 272 79 415 485
Return on plan assets..... (527) (251) (718) (1,283)
Net amortization and deferral 207 160 266 783
----- ----- ------ ------
Net periodic pension cost $ 700 $ 205 $1,143 $1,258
===== ===== ====== ======
</TABLE>
39
<PAGE> 42
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
The following table sets forth the funded status of the pension plans at
September 30 (dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
-------------------
1996 1997
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations --
Vested benefit obligation................................. $(6,264) $(6,458)
======= =======
Accumulated benefit obligation............................ $(7,690) $(8,350)
======= =======
Projected benefit obligation.............................. $(7,690) $(8,413)
Plan assets at fair value................................. 6,714 7,551
------- -------
Excess of projected benefit obligation over plan
assets........................................ (976) (862)
Unrecognized net gain....................................... (291) (1,488)
------- -------
Pension liability (included in accrued liabilities)......... $(1,267) $(2,350)
======= =======
</TABLE>
At September 30, 1997, the pension liability of $2,350,000 comprised a liability
of $2,384,000 related to the Aearo Plan and a prepaid pension asset of $34,000
related to the Specialty Composites Plan. The pension liability of $1,267,000 at
September 30, 1996 comprised a liability of $1,288,000 related to the Aearo Plan
and a prepaid pension asset of $21,000 related to the Specialty Composites Plan.
The following weighted average rates were used in the calculations at September
30:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
------------------------
1996 1997
------------ ---------
<S> <C> <C>
Discount rate -- projected benefit obligation............... 6.5% 7.0%
Expected rate of return on plan assets..................... 7.8 7.8
Assumed rate of increase in compensation................... 4.0 4.0
</TABLE>
In addition, the Company has an unfunded, noncontributory defined benefit
pension plan, the Aearo Company Supplemental Executive Retirement Plan (the SERP
Plan) which is also a cash balance plan. The SERP Plan, effective January 1,
1994, covers certain employees in the United States. The costs to the Company
for this Plan were $90,000, $83,000, $9,000, and $32,000 for the years ended
September 30, 1997 and 1996, and the periods ended September 30, 1995 and July
11, 1995, respectively.
A 401(k) plan, the Aearo Company Employees' 401(k) Savings Plan, was established
as of May 1, 1990. Employees can join the plan after six months of service,
during which they work at least 500 hours and may contribute up to 15% of their
compensation. The Company contributes amounts equal to 50% of the employee's
contribution to a maximum of 3% of the employee's pay. Prior to January 1, 1997,
the Company provided a 40% match to a maximum of 2% of pay. The costs to the
Company for this Plan were $717,000, $425,000, $100,000, and $345,000 for the
years ended September 30, 1997 and 1996, and the periods ended September 30,
1995 and July 11, 1995, respectively.
The Company has a defined contribution savings plan for U.K. employees, under
which eligible employees are allowed to contribute up to 15% of their
compensation. The Company contributes 5% of pay for all eligible employees and
additional amounts equal to 40% of the employee's contribution to a maximum of
2% of the employee's pay. For the years ended September 30, 1997 and 1996, and
the periods ended September 30, 1995 and July 11, 1995, the Company contributed
approximately $158,000, $131,000, $27,000, and $79,000, respectively.
40
<PAGE> 43
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
Postretirement Benefits
The Company does not provide defined benefit postretirement plans for retirees
after age 65. All employees who elect early retirement at age 62 or older are
eligible to receive life insurance coverage that terminates on their 65th
birthday. In addition, employees who were age 55 or older with 10 years of
service as of April 1, 1990 are eligible to receive limited health care and life
insurance coverage for themselves and their eligible dependents upon early
retirement at age 62 or older. These coverages terminate on the 65th birthday of
the retiree or his or her spouse. The health care benefit is a fixed dollar
contribution and the life insurance benefit is a fixed coverage amount.
As of September 30, 1997 and 1996, the accrued postretirement benefit cost was
$104,000 and $168,000, respectively.
(12) RELATED PARTY TRANSACTIONS
An annual management fee, which is to be shared by Cabot and Vestar, will be
paid in aggregate amounts with respect to each fiscal year equal to the greater
of (i) $400,000 or (ii) 1.25% of the consolidated net income of the Company and
its subsidiaries before cash interest, taxes, depreciation and amortization for
such fiscal year. This annual management fee is shared by Cabot and Vestar based
on their relative equity ownership of the Company.
The Company and Cabot have entered into an arrangement relating to certain
respirator claims asserted after the Formation Acquisition whereby, so long as
the Company pays to Cabot an annual fee of $400,000, which the Company has
elected to pay, Cabot will retain responsibility and liability for, and
indemnify the Company against, certain legal claims alleged to arise out of the
use of respirators manufactured prior to July 1995. The Company has the right to
discontinue the payment of such annual fee at any time, in which case the
Company will assume responsibility for and indemnify Cabot with respect to such
claims.
The Company has made available to certain members of management (Management
Investors) loans in order to provide such Management Investors with funds to be
applied to a portion of the purchase price of the Common Stock purchased by such
Management Investors under the Stock Purchase Plan. Such loans (i) are secured
by Common Stock purchased with the proceeds thereof, (ii) have a term of from 5
to 10 years, (iii) bear interest at an annual rate determined pursuant to
Section 7872(f)(2) of the 1986 Internal Revenue Code, and (iv) will be subject
to mandatory prepayment in the event the employment of such Management Investors
terminates. The aggregate amount of these loans was approximately $415,000 and
$673,000 at September 30, 1997, and September 30, 1996, respectively.
Prior to the Formation Acquisition, the Company engaged in various transactions
with Cabot and its affiliates that are characteristic of a combined group under
common control. Cabot had historically provided the Company with various
financial and administrative functions and services, including the continued
participation of the Company in certain insurance policies maintained by Cabot,
for which the Company was charged associated direct costs and expenses. In
addition, certain indirect administrative costs were allocated to the various
business units of Cabot, including the Company, principally based on a formula
that considered such proportionate variables as revenue, payroll and property
balances. Administrative costs of doing business on a stand-alone basis may have
been significantly different. Cabot also provided financing and cash management
for the Company through a centralized treasury system. Operating expenses, as
described above, were $1,728,000 for the period ended July 11, 1995.
41
<PAGE> 44
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
(13) INCOME TAXES
Income (loss) before provision for income taxes is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
------------- -------------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 11, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996 1997
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Domestic.................. $1,258 $(1,064) $5,614 $(7,126)
Foreign................... 9,073 905 863 1,167
------ ------- ------ -------
Total........... $7,815 $ (159) $6,477 $(5,959)
====== ======= ====== =======
</TABLE>
A summary of provision (benefit) for income taxes is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
---------------- ---------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 11, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996 1997
---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Federal and State --
Current........................... $(2,335) $ 47 $ 155 $123
Deferred.......................... 1,851 -- 2,135 --
------ ---- ----- ----
Total..................... (484) 47 2,290 123
------ ---- ----- ----
Foreign --
Current........................... 3,493 378 1,996 608
Deferred.......................... -- -- -- 186
------ ---- ----- ----
3,493 378 1,996 794
------ ---- ----- ----
Total..................... $3,009 $425 $4,286 $917
====== ==== ====== ====
</TABLE>
The provision (benefit) for income taxes at the Company's effective tax rate
differed from the provision (benefit) for income taxes at the statutory rate as
follows (dollars in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
---------------- ----------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 11, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Computed tax expense at the expected
statutory rate......................... $2,735 $ (56) $2,267 $(2,086)
(22) 81
State taxes, net of federal effect....... 61 31 371 (917)
Foreign income taxed at different rates 454 70
Goodwill amortization.................... -- -- 159 139
Non-deductible expenses.................. -- -- 106 112
Increase in valuation allowance.......... -- 362 1,357 3,551
Other, net............................... (241) 18 48 37
------ ----- ------ ------
Provision for income taxes............. $3,009 $ 425 $4,286 $ 917
====== ===== ====== ======
</TABLE>
42
<PAGE> 45
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
Significant components of deferred income taxes are as follows at September 30
(dollars in thousands):
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
--------------------
1996 1997
--------- --------
<S> <C> <C>
Deferred tax assets
Pension and other benefits............................................. $ 1,842 $ 2,295
Property, plant and equipment.......................................... 1,309 (3,095)
Intangible assets...................................................... 5,143 3,312
Restructuring charges.................................................. 495 270
Inventory.............................................................. 329 2,519
Net operating loss--foreign............................................. 1,357 2,671
Net operating loss carryforwards--domestic.............................. 100 6,642
Other.................................................................. 995 321
-------- --------
Subtotal............................................................ 11,570 14,935
Valuation allowances..................................................... (12,267) (15,818)
-------- --------
Total deferred tax liability........................................ $ (697) $ (883)
======== ========
</TABLE>
The valuation allowance at September 30, 1997 and 1996 relates to the
uncertainty of realizing the tax benefits of reversing temporary differences and
net operating loss carryforwards. The gross amount of domestic net operating
loss carry forwards, before the tax effect, is approximately $19.0 million. Of
the valuation allowance, approximately $10.7 million will be used to reduce
goodwill or other intangibles related to the purchase if the benefits are
realized.
(14) STOCKHOLDERS' EQUITY
Stock Ownership and Stockholders' Agreement
Prior to the Formation Acquisition, Cabot owned 100% of the outstanding shares
of the Company. Currently, (i) Cabot owns 43.9% of Common Stock and 50% of
Redeemable Preferred Stock, (ii) Vestar owns 43.9% of Common Stock and 50% of
Redeemable Preferred Stock and (iii) the Management Investors and certain other
employees of the Company own 12.2% of Common Stock. Vestar, Cabot and Management
entered into a stockholders' agreement (the Stockholders' Agreement) as of the
Formation Acquisition date. The Stockholders' Agreement contains stock transfer
restrictions, as well as provisions granting certain tag-along rights,
drag-along rights, registration rights and participation rights.
Common and Preferred Stock
To finance a portion of the Formation Acquisition, Aearo Corporation issued
100,000 (42,500 each to Vestar and Cabot and 15,000 to Management Investors)
shares of Common Stock and 45,000 shares of Redeemable Preferred Stock (22,500
each to Vestar and Cabot). Management Investors received a loan from the Company
in the amount of $934,000 to fund a portion of its cost of the Formation
Acquisition. This amount was reflected as a reduction to additional paid-in
capital related to the issuance of Common Stock. (See Note 12.)
43
<PAGE> 46
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
The Redeemable Preferred Stock is cumulative redeemable $.01 par value stock.
Dividends accrue whether or not dividends are declared or funds are available at
an annual rate of 12.5%, compounded daily. Accrued dividends may be paid in cash
or in additional shares of preferred stock. Shares are redeemable for cash at
any time, subject to certain exceptions, at the option of the Company at a
redemption price equal to the actual or implied purchase price ($45 million)
plus a redemption payment based on the dividend rate.
Aearo Company is permitted to pay cash dividends to Aearo Corporation for taxes
and expenses in the ordinary course of business. The maximum amount of cash
dividends paid to Aearo Corporation for ordinary business expenses may not
exceed $500,000 in any fiscal year. As long as no event of default would result,
Aearo Corporation and Aearo Company are permitted to pay dividends consisting of
shares of qualified capital stock as defined in the Senior Bank Facilities, and
Aearo Corporation may redeem or purchase shares of its capital stock held by
former employees of Aearo Corporation or any of its subsidiaries following the
termination of their employment, provided that the aggregate amount paid by
Aearo Corporation in respect to such purchases or redemptions does not exceed
$1.5 million; Aearo Company may pay cash dividends to Aearo Corporation for the
latter purpose. Additionally, Aearo Corporation may pay dividends on its
preferred stock in additional shares of preferred stock.
Executive Stock Option Plan
On June 27, 1996, the Company adopted the Executive Stock Option Plan (the
Executive Plan) whereby the Company, subject to approval of the Board of
Directors, may grant up to 5,000 non-qualified options with an exercise price of
$600 per share, to certain members of management. The options will vest and
become exercisable upon the earlier of the date on which a stipulated return (as
defined) is achieved by Vestar and Cabot on their investment in the Company and
the tenth anniversary of the date of grant. The option term will be ten years
except that options shall expire in certain instances of termination of
employment and upon the sale of the Company.
1997 Stock Option Plan
In July 1997, the Company's Board of Directors adopted and the stockholders
subsequently approved the 1997 Stock Option Plan (the "1997 Option Plan") under
which 10,000 shares of Aearo Common Stock have been reserved for issuance. Under
the 1997 Option Plan non-qualified and qualified options may be granted to
employees of the Company. As of December 15, 1997 no options had been granted
under the 1997 Option Plan.
Pro Forma Stock-Based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which sets forth a fair-value-based
method of recognizing stock-based compensation expense. As permitted by SFAS No.
123, the Company has elected to continue to apply APB No. 25 to account for its
stock-based compensation plans. Had compensation cost for awards granted in
fiscal 1997 and fiscal 1996 under the Company's stock-based compensation plans
been determined based on the fair value at the grant dates consistent with the
method set forth under SFAS No. 123, reported net income (loss) and earnings
(loss) per share would not have been affected for both fiscal 1997 and fiscal
1996 as the Black-Scholes option pricing model calculated no value for the
options granted in fiscal 1997 and fiscal 1996.
The fair value of each option grant was estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:
44
<PAGE> 47
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rate..................... 6.10% 6.33%
Expected life of option grants.............. 10 years 10 years
Expected volatility of underlying stock..... 0% 0%
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option pricing models require input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
the Company's stock options.
Stock Option Activity
Stock Option data are summarized as follows for the years ended September 30,
1996 and 1997:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding, September 30, 1995 -- --
Granted 5,000 $600.00
Exercised -- --
Forfeited -- --
Expired -- --
------ -------
Outstanding, September 30, 1996 5,000 $600.00
Granted 701 $600.00
Exercised -- --
Forfeited (1,283) $600.00
Expired -- --
------ -------
Outstanding, September 30, 1997 4,418 $600.00
====== =======
</TABLE>
45
<PAGE> 48
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
The following table sets forth information regarding options outstanding at
September 30, 1997:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Number Weighted Average Exercise Price
Number of Range of Currently Average Remaining for Currently
Options Exercise Prices Exercisable Exercise Price Contractual Life Exercisable
------- --------------- ----------- -------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
4,418 $600.00 0 $600.00 8.8 years N/A
</TABLE>
At September 30, 1996 and 1997, none of the shares were currently exercisable.
At September 30, 1996 and 1997, there were 0 and 10,582 options available for
grant.
(15) COMMITMENTS AND CONTINGENCIES
Compensation Plans
The Company provides performance-based compensation awards to executive officers
and key employees for achievement during each year as part of an annual bonus
plan. Such compensation awards are a function of individual performance and
consolidated operating results. Business unit performance is also a factor used
in determining compensation awards with respect to key employees who are not
executive officers. The Company also has an overall incentive plan which
provides performance-based compensation awards to all employees based on
consolidated operating results.
Supplemental Severance Pay Plan
Upon consummation of the Formation Acquisition, the Company adopted a
supplemental severance pay plan providing certain executive officers and key
employees with salary continuation, based on years of service, in the event of
an eligible termination. The plan provides for one month's base pay for each
full year of service with a minimum amount payable of three months and a maximum
amount payable of 12 months.
46
<PAGE> 49
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
Lease Commitments
The Company leases certain transportation vehicles, warehouse facilities, office
space, and machinery and equipment under cancelable and noncancelable leases,
most of which expire within 10 years and may be renewed by the Company. Rent
expense under such arrangements totaled $2,805,000, $768,000, $4,395,000 and
$5,315,000 for the periods ended July 11 1995 and September 30, 1995 and the
years ended September 30, 1996 and 1997, respectively. Future minimum rental
commitments under noncancelable leases in effect at September 30, 1997 are as
follows (dollars in thousands):
<TABLE>
<S> <C>
1998 $ 3,393
1999 3,312
2000 3,385
2001 3,164
2002 2,711
2003 and thereafter 7,267
-------
$23,232
=======
</TABLE>
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 1997 the Company 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. The Company is defending this allegation vigorously and the
matter is expected to go to trial in fiscal 1998. The ultimate outcome of this
case and its impact on the Company's financial condition and results of
operations cannot currently be determined.
(16) 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 their estimated fair values as of May 30, 1996.
47
<PAGE> 50
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
The allocation of the $85.6 million purchase price and direct acquisition costs
is summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
Cash paid for Peltor.................................................... $ 81,100
Acquisition costs....................................................... 4,500
--------
Total consideration and acquisition costs..................... 85,600
Historical Cost of Net Assets Acquired.................................. 12,516
--------
Excess of consideration paid over historical cost.................. $ 73,084
========
Allocation of Excess of Consideration Paid over Historical Cost:
Inventories........................................................ $ 1,000
Property, plant and equipment, net................................. 2,500
Deferred financing costs........................................... 3,500
Intangible assets.................................................. 68,084
Accrued liabilities................................................ (2,000)
--------
$ 73,084
========
</TABLE>
Unaudited pro forma operating results of the Company for the year ended
September 30, 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:
<TABLE>
<S> <C>
Net sales (000s)...................................................... $273,723
Earnings (loss) applicable to common shareholders(000s).............. (7,716)
Earnings (loss) per common share....................................... (77.17)
Weighted average common shares outstanding............................. 99,980
</TABLE>
On January 3, 1996, the Company acquired the stock of Eastern Safety Equipment,
Inc. (Eastern) for $6.8 million, subject to final closing adjustments, as
defined. In addition, the Company entered into noncompete and consulting
agreements that provide an aggregate of $1.0 million in consideration to the
former controlling stockholder of Eastern. The transaction 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 will be charged to expense over the
five year term of the agreements.
48
<PAGE> 51
AEARO CORPORATION
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
SEPTEMBER 30, 1997
(17) FINANCIAL INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
All of Aearo Corporation's operations are included in the Safety and Energy
Absorbing Products industry segment. For the periods ended July 11, 1995 and
September 30, 1995 and the years ended September 30, 1996 and 1997, no single
customer accounted for more than 10% of sales. Transfers between geographic
areas are recorded at cost plus markup or at market. Financial information by
geographic area for the periods ended July 11, 1995 and September 30, 1995 and
the years ended September 30, 1996 and 1997, is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
------------- ---------------------------------------------
PERIOD ENDED PERIOD ENDED YEAR ENDED YEAR ENDED
JULY 11, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996 1997
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales:
United States --
Sales, excluding export sales.... $118,474 $ 36,366 $163,963 $182,732
Export sales..................... 9,599 3,818 29,692 32,035
-------- -------- -------- --------
Total U.S. sales............. 128,073 40,184 193,655 214,767
Canada............................. 10,098 3,102 14,686 14,727
Europe............................. 25,914 7,425 50,282 78,850
-------- -------- -------- --------
Total........................ 164,085 50,711 258,623 308,344
Less -- Eliminations............... 9,373 2,811 15,164 22,561
-------- -------- -------- --------
Net sales.................... $154,712 $ 47,900 $243,459 $285,783
======== ======== ======== ========
Operating Profit:
United States...................... $ 10,855 $ 4,624 $ 30,412 $ 18,744
Canada............................. 1,078 73 191 1,581
Europe............................. 6,585 1,208 4,919 9,741
-------- -------- -------- --------
Total operating profit....... 18,518 5,905 35,522 30,066
Interest Expense, net................. 5,673 4,135 20,703 26,665
Unallocated corporate expenses(a)..... 5,478 1,869 8,056 7,259
Foreign exchange gain (loss).......... (448) 60 286 2,101
-------- -------- -------- --------
Income (loss) before income
taxes.................... $ 7,815 $ (159) $ 6,477 $ (5,959)
======== ======= ======== ========
Identifiable Assets:
United States...................... $189,328 $212,544 $203,489
Canada............................. 8,609 7,911 6,963
Europe............................. 20,326 117,981 100,424
-------- -------- --------
Total identifiable assets.... $218,263 $338,436 $310,876
======== ======== ========
</TABLE>
- --------------
(a) Unallocated corporate expenses are corporate management costs and include
services provided by Cabot Corporation for the Predecessor.
49
<PAGE> 52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
<PAGE> 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the directors
and executive officers of the Company as of December 15, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --------- -------------------------------------------
<S> <C> <C>
John D. Curtin, Jr. 64 Chairman of the Board of Directors, Chief
Executive Officer, and President
Bryan J. Carey 37 Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
James D. Hall 47 Vice President, Product Management
Mark H. Hague 46 Vice President, Operations
M. Rand Mallitz 55 Vice President and General Manager, E-A-R
Specialty Composites
Daniel P. O'Connor 53 Vice President, Sales
Steven F. Scott 43 Vice President, General Counsel and Secretary
Norman W. Alpert* 39 Director
Daniel S. O'Connell 43 Director
Arthur J. Nagle 59 Director
John W. Priesing 68 Director
Samuel L. Hayes, III 62 Director
William J. Brady 36 Director
Margaret J. Hanratty* 50 Director
</TABLE>
- ----------
* Member of Audit Committee
John D. Curtin, Jr. joined Cabot in 1989 as Chief Financial Officer. Mr. Curtin
was named Chief Executive Officer of the Company in April 1994, became a
director of the Company in July 1995, and assumed the role as President in
February 1997. Prior to joining Cabot he was President, Chief Executive Officer
and Director of Curtin & Co., Inc., a private investment banking firm. Mr.
Curtin is also a trustee of Eastern Enterprises and a director of Imperial Holly
Corporation.
Bryan J. Carey joined the Company as Chief Financial Officer in April 1994 from
Cabot, where he had been Director of Strategic Planning since August 1992. Prior
to joining Cabot, he was a principal with Chase Capital Partners and its
predecessor.
James D. Hall joined the Company in October 1994 and served as a consultant to
the Company from July 1994 to October 1994. Mr. Hall was Executive Vice
President of Uvex Safety L.L.C. from 1993 to July 1994 and Vice President-Safety
of Uvex Winter Optical, Inc. from 1990 to 1993.
Mark H. Hague joined the Company in November 1996. He was Vice President and
General Manager of Cabot's North American Carbon Black Division from October
1993 through October 1996, and prior to that was Vice President and General
Manager of Cabot's Performance Materials Division.
M. Rand Mallitz joined the Company in January 1992 as Vice President and General
Manager, E-A-R Specialty Composites. He was Vice President and General Manager
of the Caulk Cartridge Division of Sonoco Products in
51
<PAGE> 54
1991, and prior to that he was President/CEO of Roth Office Products.
Daniel P. O'Connor joined the Company in 1991 and has held the positions of Vice
President, Sales & Distribution; Vice President, Global Sales & Marketing; and
Vice President and General Manager, Prescription Eyewear. Prior to joining the
Company in 1991, he was Vice President of Sales and Marketing, Residential and
Small Businesses Services Division, of Northern Telecom.
Steven F. Scott joined the Company as Vice President, General Counsel and
Secretary in May 1997. Prior to joining the Company, Mr. Scott was an associate
at Ropes & Gray where he had practiced law for ten years.
John W. Priesing served as Chairman, President and Chief Executive Officer of
Russell-Stanley Corporation from 1993 until November 1996. He continues as
Chairman. Prior to joining Russell-Stanley Corporation, he was a private
investor. He became a director of the Company in December 1995.
Norman W. Alpert is a Managing Director of Vestar Capital Partners and was a
founding partner of Vestar at its inception in 1988. Mr. Alpert is Chairman of
the Board of Directors of International AirParts Corporation and a director of
Clark-Schwebel, Inc., Remington Products Company, L.L.C. and Russell-Stanley
Corporation, all companies in which Vestar or its affiliates have a significant
equity interest. He became a director of the Company in July 1995.
Daniel S. O'Connell is the Chief Executive Officer and founder of Vestar Capital
Partners. Mr. O'Connell is a director of Clark-Schwebel, Inc., Pinnacle
Automation, Inc., Sun Apparel, Inc., Reid Plastics Holdings, Inc., Remington
Products Company, L.L.C. and Russell-Stanley Corporation, all companies in which
Vestar or its affiliates have a significant equity interest. He became a
director of the Company in July 1995.
Arthur J. Nagle is a Managing Director of Vestar Capital Partners and was a
founding partner of Vestar at its inception in 1988. Mr. Nagle is a director of
Chart House Enterprises, Inc., Clark-Schwebel, Inc., La Petite Holdings
Corporation, Remington Products Company, L.L.C., and Russell-Stanley
Corporation, all companies (other than Chart House Enterprises, Inc.) in which
Vestar or its affiliates have a significant equity interest. He became a
director of the Company in July 1995.
Samuel L. Hayes, III was elected a director of the Company in May 1996. Since
1971, he has taught at the Harvard Business School, and he currently holds the
Jacob H. Schiff Chair in Investment Banking. His teaching and research have
focused on the capital markets and corporate financial management. Mr. Hayes is
also a director of Tiffany & Co., Ernst Home Centers, and certain Eaton Vance
mutual funds.
William J. Brady has been with Cabot for eleven years and is currently Vice
President and General Manager, Specialty Carbon Black Division. He became a
director of the Company in October 1997.
Margaret J. Hanratty has been Vice President and Treasurer of Cabot since
September 1993, and served previously as Director of Corporate Development.
Prior to joining Cabot in 1990, she served as Vice President, Mergers and
Acquisitions for The First Boston Corporation. She became a director of the
Company in July 1995.
The number of directors of the Company is fixed at nine with one position
currently vacant. Under a stockholders' agreement among Aearo, Vestar, Cabot,
and the Management Investors dated July 11, 1995 (the "Stockholders'
Agreement"), Vestar has the right to designate five directors, Cabot has the
right to designate two directors, and the Management Investors have the right to
designate two directors. Messrs. Alpert, O'Connell, Nagle, Priesing and Hayes
are the directors designated thus far by Vestar. Mr. Brady and Ms. Hanratty are
the directors designated by Cabot. Mr. Curtin is currently the only director
designated by the Management Investors. See Item 13, "Certain Relationships and
Related Transactions -- Stock Ownership and Stockholders' Agreement -- Election
and Removal of Directors." The term in office of each director ends when his or
her successor has been elected at the next following annual meeting of
stockholders and qualified or upon his or her removal or resignation.
The Board of Directors has established an audit committee consisting of Margaret
J. Hanratty and Norman W. Alpert (the "Audit Committee"). The Audit Committee
recommends the firm to be appointed as independent accountants to audit
financial statements and to perform services related to the audit, reviews the
scope and results
52
<PAGE> 55
of the audit with the independent accountants, reviews with management and the
independent accountants the Company's annual operating results, considers the
adequacy of the internal accounting procedures, considers the effect of such
procedures on the accountants' independence and establishes policies for
business values, ethics and employee relations.
Officers and directors of Aearo and the Subsidiary are not subject to Section 16
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
ITEM 11. EXECUTIVE COMPENSATION
The compensation of executive officers of the Company is determined by the Board
of Directors. The following table sets forth certain information concerning
compensation received by the Chief Executive Officer and the other four most
highly-compensated executive officers of the Company (the "Named Executive
Officers") for services rendered to the Company in all capacities (including
service as an officer or director) in fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
ALL OTHER
FISCAL ANNUAL
YEAR SALARY BONUS COMPENSATION
---- ------ ----- ------------
<S> <C> <C> <C> <C>
John D. Curtin, Jr. 1997 $393,750 0 $29,186(1)
Chairman of the Board of Directors, 1996 $375,000 $200,000 $30,791
Chief Executive Officer, and President 1995 $375,000(2) $150,000 $56,024
Albert F. Young, Jr. 1997 $ 86,668 0 $415,909(3)
President and Chief Operating 1996 $250,834 $ 90,000 $ 44,048
Officer 1995 $230,004 $ 80,000 $ 13,758
Daniel P. O'Connor 1997 $199,333 $ 44,000 $ 19,661(4)
Vice President, Sales 1996 $178,100 $ 65,000 $ 36,976
1995 $160,483 $ 60,000 $ 46,332
Bryan J. Carey 1997 $177,667 $ 30,000 $ 17,066(5)
Vice President, Chief Financial Officer 1996 $159,164 $ 55,000 $ 15,227
Treasurer and Assistant Secretary 1995 $146,387 $ 50,000 $ 12,323
James D. Hall 1997 $179,750 $ 41,000 $ 19,740(6)
Vice President, Product Management 1996 $157,080 $ 50,000 $ 14,720
1995 $150,000 $ 40,000 $ 7,968
Mark H. Hague 1997 $196,429 $ 44,000 $ 2,650(7)
Vice President, Operations
</TABLE>
- ----------
(1) Includes contributions made on behalf of Mr. Curtin to the Company's 401(k)
Savings Plan ($2,375); to the Company's Cash Balance Plan ($6,400); and to
the Company's Supplemental Executive Retirement Plan ($20,411).
(2) Mr. Curtin's compensation for Fiscal 1995 represents $78,125 paid by the
Company after July 11, 1995 and $296,875 paid by Cabot for the earlier
period of the Fiscal year and billed to the Company.
(3) Mr. Young served as President and Chief Operating Officer until his
resignation in January 1997. Includes contributions made on behalf of Mr.
Young to the company's 401(k) savings plan ($688); to the Company's cash
balance plan ($1,324); and to the Company's supplemental executive
retirement plan ($6,193). Also includes payments associated with the
termination of his employment as severance ($397,512) and outstanding
vacation pay ($10,192).
(4) Includes contributions made on behalf of Mr. O'Connor to the Company's
401(k) Savings Plan ($4,904); to the company's cash balance plan ($6,773);
and to the Company's supplemental executive retirement plan
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<PAGE> 56
($7,984).
(5) includes contributions made on behalf of Mr. Carey to the Company's 401(k)
Savings Plan ($3,668); to the Company's cash balance plan ($6,680); and to
the Company's Supplemental Executive Retirement Plan ($6,718).
(6) Includes contributions made on behalf of Mr. Hall to the Company's 401(k)
Savings Plan ($6,289); to the Company's Cash Balance Plan ($6,850); and to
the Company's Supplemental Executive Retirement Plan ($6,601).
(7) Includes contributions made on behalf of Mr. Hague to the Company's 401(k)
Savings Plan ($1,650); and to the Company's Cash Balance Plan ($1,000).
The following table sets forth information concerning the individual grant of
options to purchase Aearo Common Stock to the Named Executive Officers during
Fiscal 1997.
<TABLE>
<CAPTION>
OPTION GRANTS DURING FISCAL 1997
POTENTIAL REALIZABLE
VALUES AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
% OF APPRECIATION FOR
TOTAL OPTIONS OPTION TERM
GRANTED TO EXERCISE (10 YEARS)(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR PER SHARE DATE 5% ($) 10% ($)
- ------------------ ---------- ----------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Mark H. Hague............ 218.75 55.0% $600.00 11/10/06 82,542 209,179
</TABLE>
- ------------------
(1) The options will vest and become exercisable upon the earlier of: (i) the
date on which certain financial performance benchmarks (which depend in part
on the future market value of the Aearo Common Stock) are achieved by the
Company and (ii) the tenth anniversary of the date of grant (November 11,
2006). All options are subject to the employee's continued employment and
terminate ten years after the grant date, subject to earlier termination in
accordance with the Company's Executive Stock Option Plan and the applicable
option agreement.
(2) This column shows the hypothetical gain or "option spreads" of the options
granted based on both the fair market value of the Aearo Common Stock for
financial reporting purposes and assumed annual compound stock appreciation
rates of 5% and 10% over the term of the options. The 5% and 10% assumed
rates of appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent the Company's estimate or
projection of future Aearo Common Stock prices. The gains shown are net of
the option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise of the option or the sale of the
underlying shares, or reflect nontransferability, vesting or termination
provisions. The actual gains, if any, on the exercises of stock options will
depend on the actual future performance of the Aearo Common Stock.
54
<PAGE> 57
The following table sets forth information concerning the number and value of
unexercised options to purchase Aearo Common Stock held by the Named Executive
Officers at the end of fiscal 1997. None of the Named Executive Officers
exercised any stock options during fiscal 1997.
<TABLE>
<CAPTION>
VALUE OF OUTSTANDING
NUMBER OF BENEF IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Curtin, Jr...... -- -- -- 812 $ 0 $ 0
Daniel P. O'Connor...... -- -- -- 250 0 0
Bryan J. Carey.......... -- -- -- 313 0 0
James D. Hall........... -- -- -- 250 0 0
Mark H. Hague........... -- -- -- 219 0 0
</TABLE>
(1) There was no public market for the Aearo Common Stock as of September 30,
1997. Accordingly, these values have been calculated on the basis of an
assumed fair market value of $300 per share.
DIRECTOR COMPENSATION
Directors (other than two Directors unaffiliated with Cabot or Vestar (the
"Outside Directors")) serve without compensation (other than reimbursement of
expenses) in connection with rendering services as such. The Outside Directors
receive $10,000 annually for their service as Directors and an additional $2,500
per meeting, plus reimbursement of expenses. In connection with their
appointment, Outside Directors were given the opportunity to purchase a limited
amount of shares of Aearo Common Stock; during fiscal 1996, John W. Priesing,
one of the Outside Directors, purchased 100 shares at a price of $200 per share
and Samuel L. Hayes, III, the other Outside Director, purchased 100 shares at a
price of $600 per share. In connection with such purchases Messrs. Priesing and
Hayes became parties to the Stockholders' Agreement. See Item 13, "Certain
Relationships and Related Transactions -- Stock Ownership and Stockholders'
Agreement."
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
STOCK PURCHASE PLAN. In connection with the Formation Acquisition, the Company
adopted the Cabot Safety Holdings Corporation 1995 Stock Purchase Plan, as
amended and restated (the "Stock Purchase Plan"), in order to encourage
ownership of Aearo Common Stock by selected officers and employees and
independent directors of the Company. Under the Stock Purchase Plan, 15,000
shares of Aearo Common Stock have been reserved for purchase by the Company's
executive officers and other senior members of management as determined by the
Board of Directors. As of December 15, 1997, 12,425 of such shares were issued
and outstanding.
Aearo Common Stock acquired under the Stock Purchase Plan is subject to
forfeiture through various puts and calls. In the event of death, permanent
disability or retirement, which retirement occurs at age 65 or older with at
least 3 years of service, such stock may be put to the Company by the holder at
fair market value and the Company has a call on such stock at the same price. In
the event of termination for cause, the Company has a call at the lesser of
initial cost and fair market value. In the event of termination by the Company
other than for cause and in the case of voluntary resignation, the Company has a
call (i) with respect to a percentage of such stock equal to the number of years
elapsed since the Formation Acquisition multiplied by 20% at fair market value,
and (ii) with respect to the remainder of such stock at the lesser of initial
cost and fair market value. Shares repurchased by the Company are held in
reserve, and may be issued to existing and future employees or non-employee
directors. These puts and calls expire (i) on the date on which certain
financial performance benchmarks (which, following an initial public offering of
the Aearo Common Stock, depend in part on the future market value of the Aearo
Common Stock) are achieved by the Company or (ii) the fifth anniversary of the
Formation Acquisition. Each Management Investor is also required to be a party
to the Stockholders' Agreement. See Item 13, "Certain Relationships and Related
Transactions -- Stockholders' Agreement."
EXECUTIVE STOCK OPTION PLAN. In June 1996, the Company's Board of Directors
adopted and the stockholders subsequently approved the Executive Stock Option
Plan (the "Executive Plan") under which 5,000 shares of Aearo Common Stock have
been reserved for issuance. Non-qualified options to acquire all 5,000 shares at
a price of $600 per share have been granted to officers and key employees of the
Company; of these options, 2,062 in the aggregate were granted to executive
officers, including Mr. Curtin (812 options), Mr. Hague (219 options), Mr.
55
<PAGE> 58
O'Connor (250 options), Mr. Hall (250 options), Mr. Carey (313 options), Mr.
Mallitz (156 options), and Mr. Scott (250 options).
The Executive Plan is administered by a committee of the Board of Directors
consisting of all non-employee directors. As of December 15, 1997 no such
options were exercisable and no options remained available for future grant
under the Executive Plan. The options will vest and become exercisable upon the
earlier of: (i) the date on which certain financial performance benchmarks
(which depend in part on the future market value of the Aearo Common Stock) are
achieved by the Company and (ii) the tenth anniversary of the date of grant. The
option term is 10 years; provided, however, that unexercised options expire
earlier in certain instances of termination of employment of the option holder
and may expire in the event of a merger or liquidation of the Company or a sale
of substantially all the assets of the Company. Aearo Common Stock acquired upon
exercise of options granted under the Executive Plan is subject to the same
restrictions, including puts and calls and drag-along rights as Aearo Common
Stock acquired under the Stock Purchase Plan. See "Stock Purchase Plan."
1997 STOCK OPTION PLAN. In July 1997, the Company's Board of Directors adopted
and the stockholders subsequently approved the 1997 Stock Option Plan (the "1997
Option Plan") under which 10,000 shares of Aearo Common Stock have been reserved
for issuance. Under the 1997 Option Plan non-qualified and qualified options may
be granted to employees of the Company. As of December 15, 1997 no options had
been granted under the 1997 Option Plan.
The 1997 Option Plan is administered by a committee of the Board of the
Directors consisting of all non-employee directors. The options are issuable at
fair market value of the underlying Aearo Common Stock and will vest ratably
over five years. Aearo Common Stock acquired upon exercise of the options
granted under the 1997 Option Plan will be subject to the same restrictions,
including puts and calls and drag along rights, as Aearo Common Stock acquired
under the Stock Purchase Plan. See "Stock Purchase Plan."
ANNUAL BONUS. The Company provides performance-based compensation awards to
executive officers and key employees for achievement during each year as part of
an annual bonus plan. Such compensation awards are a function of individual
performance and consolidated corporate results. Business unit performance also
is a factor in determining compensation awards with respect to key employees who
are not executive officers. The specified qualitative and quantitative criteria
employed by the Board of Directors of the Company in determining bonus awards
varies for each individual and from year to year.
SUPPLEMENTAL SEVERANCE PAY PLAN. The Company has adopted a supplemental
severance pay plan providing certain executive officers and key employees with
salary continuation in the event of an eligible termination based on years of
service. The plan provides for one month's base pay for each full year of
service with a minimum amount payable of three months and a maximum amount
payable of twelve months.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Company has adopted a supplemental
executive retirement plan, which is a non-qualified plan under the Code, and
which provides unfunded deferred compensation benefits to certain executive
officers and key employees. Pursuant to the plan, participants are credited
annually with amounts representing 4% of compensation in excess of that amount
of compensation subject to social security taxes.
401(k) PLAN. The Company has adopted a savings plan (the "Saving Plan"), which
is qualified under Section 401(a) and 401(k) of the Code. All regular employees
of the Company in the United States are eligible to participate in the Savings
Plan after six months of service. For each employee who elects to participate in
the Savings Plan and makes a contribution thereto, the Company will make a
matching contribution. The Company matches 50.0% of the first 6.0% of
compensation contributed. The maximum contribution for any participant for any
year is 15.0% of such participant's eligible compensation. Contributions to the
Savings Plan will be invested, as the employee directs, in a money market fund,
income fund, growth and income fund, growth fund, or asset allocation fund.
PENSION PLAN. The Company has adopted a cash balance plan. Under such plan, the
Company will provide participants with annual credits of 4% of eligible
compensation. All balances in the accounts of participants will be credited with
interest based on the prior year's U.S. Treasury bill rate. At retirement,
participants eligible for benefits may receive the balance standing in their
account in a lump sum or as a monthly pension having equivalent actuarial value.
The following table sets forth, for the Named Executive Officers, the estimated
annual benefits payable upon retirement at normal retirement age, assuming in
each case that such officer elects payment over time
56
<PAGE> 59
rather than in a lump sum:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION ANNUAL BENEFITS PAYABLE
--------------------------- -----------------------
<S> <C>
John D. Curtin, Jr................................................ $ 1,916
Chairman of the Board of Directors
and Chief Executive Officer
Mark H. Hague.....................................................
$ 21,615
Vice President, Operations
Daniel P. O'Connor................................................
$ 17,663
Vice President, Sales
Bryan J. Carey....................................................
$ 50,076
Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary
James D. Hall.....................................................
$ 22,957
Vice President, Product Management
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee. Since July 1995, all
executive officer compensation decisions have been made by the full Board of
Directors of the Company, with Mr. Curtin abstaining with respect to decisions
affecting his own compensation. Mr. Curtin, one of the directors of the Company,
is the Chairman of the Board and Chief Executive Officer of the Company. On July
11, 1995, Mr. Curtin acquired 4,950 shares of Aearo Common Stock under the Stock
Purchase Plan at a price of $990,000. Mr. Brady and Ms. Hanratty, two directors
of the Company, are officers of Cabot. On July 11, 1995, as part of the
Formation Acquisition, Cabot and its subsidiaries sold assets to the Company for
aggregate consideration of approximately $206.1 million. Messrs. Alpert,
O'Connell and Nagle, three directors of the Company, are officers of Vestar. On
July 11, 1995, as part of the Formation Acquisition, Vestar invested $31.0
million in capital stock of the Company.
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<PAGE> 60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Aearo Common Stock, including beneficial ownership by
each person or entity known by the Company to own beneficially 5% or more of the
Company's voting capital stock, the Directors, the Named Executive Officers and
all of the Company's Directors and executive officers as a group as of December
15, 1997. All of the Subsidiary's issued and outstanding capital stock is owned
by Aearo.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF
OF AEARO OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK SHARES
- ------------------------------------ ------------ -------------
<S> <C> <C>
Vestar Equity Partners, L.P.(1)........................................ 42,500 43.53%
245 Park Avenue
New York, New York 10017
Cabot CSC Corporation(2)............................................... 42,500 43.53%
75 State Street, 13 Floor
Boston, Massachusetts 02109
John D. Curtin, Jr..................................................... 4,950 5.07%
Bryan J. Carey......................................................... 1,500 1.54%
James D. Hall.......................................................... 1,050 1.08%
Daniel P. O'Connor..................................................... 1,050 1.08%
Mark H. Hague.......................................................... 1,050 1.08%
Norman W. Alpert(3).................................................... 42,500 43.53%
Daniel S. O'Connell(3)................................................. 42,500 43.53%
Arthur J. Nagle(3)..................................................... 42,500 43.53%
William J. Brady(4).................................................... 42,500 43.53%
Margaret J. Hanratty(4)................................................ 42,500 43.53%
John W. Priesing....................................................... 100 *
Samuel L. Hayes, III................................................... 100 *
Directors and executive officers as a group (14 persons)(5)............ 11,375 11.65%
</TABLE>
- ----------
* Less than 1%.
(1) The general partner of Vestar is Vestar Associates L.P., a limited
partnership whose general partner is Vestar Associates Corporation
("V.A.C."). In such capacity, V.A.C. exercises sole voting and investment
power with respect to all of the shares held of record by Vestar. Messrs.
Alpert, O'Connell and Nagle, who are directors of the Company, are
affiliated with Vestar in the capacities described under "Management --
Directors and Executive Officers" and are stockholders of V.A.C.
Individually, no stockholder, director or officer of V.A.C. is deemed to
have or share such voting or investment power within the meaning of Rule
13d-3 under the Exchange Act. Accordingly no part of the shares of Aearo
Common Stock owned of record by Vestar is beneficially owned by Messrs.
Alpert, O'Connell or Nagle or any other stockholder, director or officer of
V.A.C.
(2) The board of directors of Old Cabot Safety Corporation controls the voting
and investment of the shares of Aearo Common Stock held by Old Cabot Safety
Corporation. Old Cabot Safety Corporation is a wholly-owned subsidiary of
Cabot. Cabot appoints the directors of Old Cabot Safety Corporation and
exercises ultimate voting and investment power with respect to all shares
held of record by Old Cabot Safety Corporation. Cabot is a publicly held
company and, accordingly, no single stockholder, director or officer of
Cabot is deemed to have or share such voting or investment power within the
meaning of Rule 13d-3 under the Exchange Act. Accordingly, no part of the
shares of Aearo Common Stock owned of record by Old Cabot Safety
Corporation is beneficially owned by any stockholder, director or officer
of Cabot.
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<PAGE> 61
(3) Messrs. Alpert, O'Connell and Nagle are affiliated with Vestar in the
capacities described under "Management -- Directors and Executive
officers." Ownership of Aearo Common Stock for these individuals includes
42,500 shares of Aearo Common Stock included in the above table
beneficially owned by Vestar, of which such persons disclaim beneficial
ownership. Each such person's business address is c/o Vestar Equity
Partners, L.P. at the address set forth above.
(4) Mr. Brady and Ms. Hanratty are affiliated with Cabot, the parent of Old
Cabot Safety Corporation, in the capacities described under "Directors and
Executive Officers." Ownership of Aearo Common Stock for these individuals
includes 42,500 shares of Aearo Common Stock included in the above table
beneficially owned by Old Cabot Safety Corporation, of which such persons
disclaim beneficial ownership. Each such person's business address is c/o
Cabot CSC Corporation at the address set forth above.
(5) Cabot, Vestar and the Management Investors have entered into a
Stockholders' Agreement, the terms of which are described more fully under
Item 13, "Certain Relationships and Related Transactions -- Stock Ownership
and Stockholders' Agreement." Does not include 1,250 shares of Aearo Common
Stock held by Management Investors who are not executive officers.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE ASSET TRANSFER AGREEMENT
The Company is a party to an asset transfer agreement dated as of June 13, 1995
with Cabot and certain of its subsidiaries (including Old Cabot Safety
Corporation) (the "Asset Transfer Agreement") entered into in connection with
the Formation Acquisition. The Asset Transfer Agreement contains customary
representations, warranties and covenants. Cabot and certain of its
subsidiaries, on the one hand, and Aearo and the Subsidiary on the other, have
also agreed to indemnify and hold each other and their affiliates harmless
against certain breaches of representations or covenants and certain other
liabilities.
The Company has the right to pay an annual fee of $400,000 to Old Cabot Safety
Corporation, and has elected to make this payment, with the result that Old
Cabot Safety Corporation will retain responsibility and liability for, and
indemnify the Company against, certain legal claims alleged to arise out of the
use of respirators manufactured prior to June 1995. The Company has the right to
discontinue the payment of such annual fee at any time, in which case the
Company will assume responsibility for and indemnify Cabot and Old Cabot Safety
Corporation with respect to such claims.
STOCK OWNERSHIP AND STOCKHOLDERS' AGREEMENT
Prior to the Formation Acquisition, Cabot owned 100% of the outstanding shares
of the Subsidiary, which enabled Cabot to elect all of the directors of the
Subsidiary. After the consummation of the Formation Acquisition, (i) Cabot
indirectly owned 42.5% of the Aearo Common Stock outstanding and 50% of the
Aearo Preferred Stock outstanding, (ii) Vestar owned 42.5% of the Aearo Common
Stock outstanding and 50% of the Aearo Preferred Stock outstanding and (iii)
15.0% of the Aearo Common Stock has been reserved for issuance to management and
certain independent directors (collectively the Management Investors) of which
12,625 shares out of a total of 15,000 shares of Aearo Common Stock reserved for
the Management Investors are issued and outstanding. Cabot, Vestar and the
Management Investors (the "Stockholders") own 100% of the outstanding shares of
Aearo Common Stock and will elect all of the directors of Aearo and determine
the outcome of all matters requiring stockholder approval, including mergers,
consolidations and the sale of all or substantially all of the assets of Aearo,
and to prevent or cause a change in control of Aearo, in each case subject to
such restrictions, limitations and conditions as may be imposed under the
Stockholders' Agreement. There can be no assurance as to how long any of Cabot,
Vestar or the Management Investors will hold their shares of Aearo Common Stock.
Cabot, Vestar, and the Management Investors have entered into the Stockholders'
Agreement which provides for,
59
<PAGE> 62
among other things, the matters described below.
ELECTION AND REMOVAL OF DIRECTORS. The Stockholders' Agreement provides that the
Board of Directors of the Company shall consist of nine members. Currently there
are eight directors serving. The parties agreed to vote all shares of Aearo
Common Stock owned or controlled by them so as to elect as members of the Board
of Directors persons designated as follows: (i) Vestar designates three
directors so long as the Vestar Relative Percentage (as defined below) is at
least 75% or Vestar and its affiliates beneficially own on a fully diluted basis
at least 21,250 shares of Aearo Common Stock (50% of the shares of Aearo Common
Stock acquired by them in the Formation Acquisition), (ii) Cabot may designate
two directors so long as the Cabot Relative Percentage (as defined below) is at
least 75% or Cabot and its affiliates own beneficially on a fully diluted basis
at least 21,250 shares of Aearo Common Stock (50% of the shares of Aearo Common
Stock acquired by them in the Formation Acquisition), (iii) Vestar may designate
two additional directors who are not partners, officers or employees of any of
Vestar or its affiliates so long as the Vestar Relative Percentage is as least
75% or Vestar and its affiliates beneficially own at least 31,875 shares of
Aearo Common Stock (75% of the shares of Aearo Common Stock acquired by them in
the Formation Acquisition), provided that Vestar must notify Cabot in writing in
advance of the identities of these director nominees and obtain Cabot's approval
thereof, which may not be unreasonably withheld, and (iv) the Management
Investors may designate two directors so long as the Management Investors
together own beneficially on a fully diluted basis at least 3,750 shares of
Aearo Common Stock (25% of the shares of Aearo Common Stock acquired by all
Management Investors in the Formation Acquisition), provided that the two
designees of the Management Investors must be the principal executive officer
and the principal operating officer of the Company. Currently only one designee
of the Management Investors is serving on the Board of Directors. The foregoing
provisions relating to the election of directors terminate in the event that
both Cabot and its affiliates, on the one hand, and Vestar and its affiliates,
on the other hand, own on a fully diluted basis fewer than 4,250 shares of Aearo
Common Stock (10% of the shares of Aearo Common Stock acquired by them in the
Formation Acquisition). The term "Vestar Relative Percentage" means a percentage
reflecting (a)(i) $31 million plus (ii) the amount paid for capital stock of
Aearo by Vestar and its Affiliates after the Formation Acquisition less (iii)
the value (based on price per share) of all shares of Aearo Common Stock and
Aearo Preferred Stock acquired by Vestar and its affiliates in the Formation
Transaction and no longer held by them, less (iv) the value of all shares of the
Aearo Common Stock and Aearo Preferred Stock acquired by Vestar and its
affiliates after the Formation Acquisition and no longer held by them, as a
percentage of (b) the amount calculated pursuant to clause (a) for Cabot and its
affiliates for such date. The term "Cabot Relative Percentage" has a correlative
meaning focused on Cabot's remaining investment in Aearo capital stock relative
to Vestar's.
Messrs. Alpert, O'Connell and Nagle were designated by Vestar as described in
clause (i) above, Mr. Brady and Ms. Hanratty were designated by Cabot as
described in clause (ii) above, Messrs. Priesing and Hayes were designated by
Vestar as described in clause (iii) above and Mr. Curtin was designated by the
Management Investors as described in clause (iv) above. All directors can be
removed, with or without cause, and replaced by the stockholders who have the
right to designate them.
TAG-ALONG RIGHTS. So long as a public offering of Aearo Common Stock shall not
have occurred and subject to certain exceptions, with respect to any proposed
transfer of Aearo Common Stock or Aearo Preferred Stock by Vestar, other than
transfers to affiliates, each other stockholder will have the right to require
that the proposed transferee purchase a certain percentage of the shares owned
by such stockholder at the same price and upon the same terms and conditions.
DRAG-ALONG RIGHTS. The Stockholders' Agreement provides that, so long as Vestar
and its affiliates beneficially own at least 21,250 shares of Aearo Common Stock
(50% of the shares of Aearo Common Stock acquired by them in the Formation
Acquisition) or the Vestar Relative Percentage is at least 75%, if Vestar
receives an offer from a third party to purchase all but not less than all
outstanding shares of Aearo Common Stock and Aearo Preferred Stock and such
offer is accepted by Vestar, then each party to the Stockholders' Agreement will
transfer all shares of Aearo Common Stock and Aearo Preferred Stock owned or
controlled by such party on the terms of the offer so accepted by Vestar,
provided that all such transfers occur on substantially identical terms and the
number of shares to be acquired by the third party after giving effect to all
such transfers would be sufficient under the certificate of incorporation and
by-laws of the Company, any applicable agreements and applicable law to permit
60
<PAGE> 63
such third party to eliminate all remaining minority interests through a merger
opposed by such minority interests. These so-called "drag-along" rights do not
apply to sales in a public offering or to stock that has been sold by a party to
the Stockholders' Agreement in a public offering or pursuant to Rule 144.
If Vestar intends to transfer Aearo Common Stock to a third party in any
transaction in which these drag-along rights are invoked, Vestar must give Cabot
30 days' advance written notice and, at the request of Cabot must discuss the
possibility of Cabot, in lieu of the third party, acquiring such Aearo Common
Stock, provided that this provision does not obligate Cabot to purchase such
Aearo Common Stock or Vestar to sell such Aearo Common Stock either to Cabot or
to the third party.
OTHER VOTING MATTERS. So long as the drag-along rights are in effect, the
parties to the Stockholders' Agreement are obligated to vote all shares of Aearo
Common Stock owned or controlled by them to ratify, approve and adopt the
following actions to the extent that they are adopted and approved by the Board
of Directors: (i) any merger or consolidation involving the Company that is, in
substance, an acquisition of another company by the Company or a sale of the
Company and in either case does not affect in any way the relative rights of
Cabot and Vestar or result in any benefit to Vestar other than the benefits to
it as a stockholder of the Company equal to the benefits received by other
stockholders, share for share, and (ii) any amendment to the certificate of
incorporation of the Company whereby such amendment does not adversely affect
such stockholder in a manner different from that in which any other stockholder
is affected. In addition, so long as the voting agreements providing for the
election of directors remain in effect, the parties to the Stockholders'
Agreement agreed not to vote to approve, ratify or adopt any amendment to the
by-laws of the Company unless such amendment is expressly authorized by the
Stockholders' Agreement or recommended by the Board of Directors.
TRANSFERS OF COMMON STOCK. Subject to certain limitations, transfers of Aearo
Common Stock and Aearo Preferred Stock by parties to the Stockholders' Agreement
are restricted unless the transferee agrees to become a party to, and be bound
by, the Stockholders' Agreement, provided that such restrictions do not apply to
sales in a public offering or pursuant to Rule 144. In addition, subject to
certain limitations, Cabot and the Management investors agreed not to transfer
their shares of Aearo Common Stock or Aearo Preferred Stock without the prior
written consent of Vestar. Under certain circumstances, the transfer of Aearo
Common Stock or Aearo Preferred Stock by Vestar, Cabot and their affiliates is
permitted.
PARTICIPATION RIGHTS. Under certain circumstances, if Aearo proposes to issue
any capital stock to Vestar, Cabot or any of their respective affiliates, each
other stockholder shall have the opportunity to purchase such capital stock on a
pro rata basis.
APPROVAL OF AFFILIATE TRANSACTIONS. The Stockholders' Agreement provides that
the Company shall not, and shall cause its subsidiaries not to, enter into any
transaction with any affiliate of the Company unless such transaction (i) is on
fair and reasonable terms no less favorable to the Company or such subsidiary
than it could obtain in a comparable arm's length transaction, (ii) is
contemplated by the Stockholders' Agreement, the Asset Transfer Agreement or the
management advisory agreement among the Company and Vestar and Cabot or (iii) is
for the payment of reasonable and customary regular fees to outside directors.
In no event will the Company issue Aearo Common Stock or other equity securities
to Vestar or Cabot or any affiliate of the Company, subject to certain
limitations, below the fair market value of such shares of Aearo Common Stock or
equity securities.
REGISTRATION RIGHTS. The Stockholders' Agreement provides that, subject to
certain limitations, upon a written request by Vestar or a written request by
Cabot (but only in the event that a period of one year or more has elapsed since
a public offering of Aearo Common Stock without Cabot having an opportunity to
participate), the Company will use its best efforts to effect the registration
of all or part of the Aearo Common Stock owned by such requesting stockholder,
provided that (i) the Company will not be required to effect more than one
registration within any 360 day period and (ii) neither Vestar nor Cabot will be
entitled to request more than two registrations. Under certain circumstances, if
the Company proposes to register shares of Aearo Common Stock, it will, upon the
written request of any stockholder, use all reasonable efforts to effect the
registration of such stockholders' Aearo Common Stock.
61
<PAGE> 64
TERMINATION. The Stockholders' Agreement will terminate as to any Aearo Common
Stock or Aearo Preferred Stock, subject to certain limitations, on the date such
Aearo Common Stock is sold in a public offering or pursuant to Rule 144. The
rights of Vestar will terminate under the Stockholders' Agreement when Vestar
and its affiliates own no Aearo Common Stock, common stock equivalents or Aearo
Preferred Stock. The rights of Cabot under the Stockholders' Agreement will
terminate on the earliest date when Cabot or its affiliates own no Aearo Common
Stock, common stock equivalents or Aearo Preferred Stock.
MANAGEMENT ADVISORY AGREEMENT. In connection with the Formation Acquisition, the
Company became a party to a management advisory agreement with Vestar and Cabot
(the "Management Advisory Agreement"), pursuant to which the Company is
obligated to pay an annual management fee in an aggregate amount with respect to
each fiscal year equal to the greater of (i) $400,000 and (ii) 1.25% of the
consolidated net income of the Company before cash interest, taxes, depreciation
and amortization for such fiscal year to be shared by Cabot and Vestar based on
their relative equity ownership of the Company. Pursuant to the Management
Advisory Agreement, each of Vestar and Cabot received $311,949 (including
$55,975 to each party as an advisory fee adjustment relative to fiscal 1996)
with respect to fiscal 1997, and $200,000 to each party with respect to fiscal
1996. Messrs. Alpert, O'Connell and Nagle, three of the directors of the
Company, are affiliated with Vestar in the capacities described under Item 11,
"Management -- Directors and Executive Officers" and, accordingly, benefit from
any payments received by Vestar. Mr. Brady and Ms. Hanratty, two of the
directors for the Company, are affiliated with Cabot in the capacities described
under Item 11, "Management -- Directors and Executive Officers" and,
accordingly, benefit indirectly from any payments received by Cabot.
MANAGEMENT LOANS. The Company has made available to certain Management Investors
loans in order to provide such Management Investors with funds to be applied to
a portion of the purchase price of the Common Stock purchased by such Management
Investors under the Stock Purchase Plan. Such loans (i) are secured by the Aearo
Common Stock purchased with the proceeds thereof, (ii) have a term of between 5
and 10 years, (iii) bear interest at an annual rate of 7%, and (iv) are subject
to mandatory prepayment in the event the employment of such Management Investor
terminates. At September 30, 1997, amounts outstanding under such loans to
Messrs. Carey, O'Connor, Hall, and Mallitz were $100,000, $81,000, $89,803, and
$85,305, respectively.
62
<PAGE> 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
2.1 -- Asset Transfer Agreement, dated as of June 13, 1995, among Aearo Company (formerly, Cabot Safety
Corporation), Cabot Canada Ltd., Cabot Safety Limited, Cabot Corporation, Aearo Corporation (formerly,
Cabot Safety Holdings Corporation), and Cabot Safety Acquisition Corporation. (Incorporated by reference to
Exhibit No. 2.1 to the Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo
Corporation.)
2.2 -- Trademark Coexistence Agreement, dated July 11, 1995, between Cabot Corporation and Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.2 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).)
Subscription Agreement, dated July 11, 1995, between Aearo Corporation (formerly, Cabot Safety Holdings
2.3 -- Corporation) and Vestar Equity Partners, L.P. (Incorporated by reference to Exhibit No. 2.3 to the Registration
Statement on Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
2.4 -- Stockholders' Agreement, dated as of July 11, 1995, among Vestar Equity Partners, L.P., Cabot CSC
Corporation, Aearo Corporation (formerly, Cabot Safety Holdings Corporation), Cabot Corporation, and the
Management Investors. (Incorporated by reference to Exhibit No. 2.4 to the Registration Statement on Form S-
4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.5 -- Form of Executive Security Purchase Agreement, dated as of July 11, 1995, between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation) and the Management Investors (Senior Management).
(Incorporated by reference to Exhibit No. 2.5 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.6 -- Form of Executive Security Purchase Agreement, dated as of July 11, 1995, between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation) and the Management Investors (Middle Management).
(Incorporated by reference to Exhibit No. 2.6 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.7 -- Assignment and Assumption Agreement, dated as of July 11, 1995, by and between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition Corporation and Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.7 to the Registration Statement on Form
S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.8 -- Assignment and Assumption Agreement, dated as of July 11, 1995, by and between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition Corporation and Cabot Safety
Acquisition Limited (UK). (Incorporated by reference to Exhibit No. 2.8 to the Registration Statement on Form
S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.9 -- Assignment and Assumption Agreement, dated as of July 11, 1995, by and between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition Corporation and Cabot Safety
Canada Acquisition Ltd. (Canada). (Incorporated by reference to Exhibit No. 2.9 to the Registration Statement
on Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.10 -- Bill of Sale and Assignment, dated as of July 11, 1995, made by Aearo Company (formerly,
Cabot Safety Corporation), Cabot Canada Ltd., and Cabot Safety Limited in favor of Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition Corporation, Cabot Safety
Intermediate Corporation, Cabot Safety Acquisition Limited and Cabot Safety Canada Acquisition Ltd.
(Incorporated by reference to Exhibit No. 2.10 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company and Aearo Corporation.)
</TABLE>
63
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
2.11 -- Assumption Agreement, dated as of July 11, 1995, by Aearo Corporation (formerly, Cabot
Safety Holdings Corporation), Cabot Safety Acquisition Corporation, Cabot Safety Intermediate Corporation,
Cabot Safety Acquisition Limited and Cabot Safety Canada Acquisition Ltd. in favor of Cabot Corporation,
Aearo Company (formerly, Cabot Safety Corporation), Cabot Canada Ltd. and Cabot Safety Limited.
(Incorporated by reference to Exhibit No. 2.11 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company and Aearo Corporation.)
2.12 -- Worldwide Trademark Assignment, dated July 11, 1995, by Aearo Company (formerly, Cabot Safety
Corporation) to Cabot Safety Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.12 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.13 -- Worldwide Copyright Assignment, dated July 11, 1995, by Aearo Company (formerly, Cabot Safety
Corporation) to Cabot Safety Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.13 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.14 -- Worldwide Patent Assignment, dated July 11, 1995, by Aearo Company (formerly, Cabot Safety Corporation)
to Cabot Safety Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.14 to the Registration
Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
2.15 -- Management Advisory Agreement made as of July 11, 1995, among Aearo Company (formerly, Cabot Safety
Corporation), Aearo Corporation (formerly, Cabot Safety Holdings Corporation), Certain Subsidiaries of
Aearo Corporation, Vestar Capital Partners and Cabot Corporation. (Incorporated by reference to Exhibit No.
2.15 to the Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation.)
2.16 -- Aearo Corporation (formerly, Cabot Safety Holdings Corporation) 1995 Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit No. 2.16 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.17 -- Assignment and Assumption Agreement dated July 11, 1995, by and between Aearo Company
(formerly, Cabot Safety Corporation) and Cabot Safety Acquisition Corporation with Respect to the
Installment Sale Agreement dated September 1, 1978 by and between the Department of Community Affairs
and Economic Development of the State of Delaware and Specialty Composites Corporation (Predecessor to
Cabot Safety Corporation) Pertaining to Real Property Located in New Castle County, Delaware, Tax Parcel
Number 11- 010.00-003 (Delaware IRB). (Incorporated by reference to Exhibit No. 2.17 to the Registration
Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
2.18 -- Assignment and Assumption Agreement dated July 11, 1995, by and between Cabot Corporation and Cabot Safety
Acquisition Corporation with Respect to that Certain Loan Agreement dated as of June 1, 1982 by and between the
City of Indianapolis, Indiana and Cabot Corporation (Indianapolis IRB). (Incorporated by reference to Exhibit
No. 2.18 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).)
2.19 -- Stock Purchase Agreement by and among Aearo Company (formerly, Cabot Safety Corporation), Peltor Holding AB,
Leif Palmaer Invest AB, Leif Anderzon Invest AB and Active i Malmo All, dated April 25, 1996. (Incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K of Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) dated May 30, 1996.)
2.20* -- Stock Purchase Agreement by and among Aearo Company (formerly, Cabot Safety Corporation), Eastern Safety
Equipment Co., Inc., Alfred H. Jacobson and William Klein and Jack P. Hecht as Trustees of a certain Trust,
dated September 19, 1995.
2.21* -- Amendment to Stockholder's Agreement dated as of July 3, 1996, by and among Vestar Equity Partners, L.P., Cabot
CSC Corporation, Aearo Corporation (formerly, Cabot Safety Holdings Corporation) Cabot Corporation, and certain
other stockholders of Aearo Corporation.
</TABLE>
64
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
2.22* -- Amendment to Stock Purchase Agreement by and among Aearo Company (formerly, Cabot Safety Corporation), Peltor
Holding AB, Leif Palmaer Invest AB, Leif Anderzon Invest AB and Active i Malmo AB, dated May 15, 1996.
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 No. 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.)
10.1* -- Credit Agreement, dated as of July 11, 1995, and amended and restated as of May 30, 1996, among Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Aearo Company (formerly, Cabot Safety Corporation),
Certain of its Subsidiaries, Various Banks, and Bankers Trust Company as Co- Arranger and Administrative Agent.
10.2* -- Amended and Restated US Pledge Agreement dated as of July 11, 1995, as made by Cabot Safety Acquisition
Corporation, Aearo Corporation (formerly, Cabot Safety Holdings Corporation), Cabot Safety Intermediate
Corporation and CSC FSC, Inc., in favor of Bankers Trust Company as Collateral Agent for the Benefit of the
Secured Creditors.
10.3* -- Amended and Restated Foreign Pledge Agreement as of July 11, 1995, amended and restated as of May 30, 1996, made
by Cabot Safety Canada Acquisition Limited and Cabot Safety Acquisition Limited in favor of Bankers Trust
Company as Collateral Agent for the Benefit of the Secured Creditors.
10.4 -- Charge Over United Kingdom Patents and Trademarks made the 11th Day of July, 1995, by Cabot Safety Intermediate
Corporation and the Bankers Trust Company as Collateral Agent for Itself and for the Secured Creditors.
(Incorporated by reference to Exhibit No. 10.4 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).)
10.5* -- Amended and Restated US Security Agreement dated as of July 11, 1995, as amended and restated as of May 30,
1996, among Aearo Corporation (formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition
Corporation, Cabot Safety Intermediate Corporation, CSC FSC, Inc., and Bankers Trust Company as Collateral Agent
for the Benefit of the Secured Creditors.
10.6* -- Amended and Restated Canadian Security Agreement dated as of July 11, 1995, as amended and restated as of May
30, 1996, granted by Cabot Safety Canada Acquisition Limited in favor of Bankers Trust Company as Collateral
Agent for the Benefit of the Secured Creditors. 10.7 -- English Security Agreement (The Debenture) made on the
11th Day of July, 1995 between the Cabot Safety Acquisition Limited and Bankers Trust Company as Collateral
Agent for Itself and for the Secured Creditors. (Incorporated by reference to Exhibit No. 10.7 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).)
</TABLE>
65
<PAGE> 68
<TABLE>
<S> <C> <C>
10.8 -- Mortgage and Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement, and Fixture
Filing made by Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers Trust Company, as Collateral
Agent, as Mortgagee (recorded in Marion County, Indiana) pertaining to Real Property located at 7911 Zionsville
Road, Indianapolis, Indiana. (Incorporated by reference to Exhibit No. 10.8 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).)
10.9 -- Mortgage and Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement, and Fixture
Filing made by Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers Trust Company, as Collateral
Agent, as Mortgagee (recorded in New Castle County, Delaware) pertaining to l0 Acre Site of Unimproved Land
adjacent to 5457 West 79th Street, Indianapolis, Indiana. (Incorporated by reference to Exhibit No. 10.9 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).)
10.10 -- Mortgage and Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement, and Fixture
Filing made by Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers Trust Company, as Collateral
Agent, as Mortgagee (recorded in New Castle County, Delaware) pertaining to Real Property located at 650 Dawson
Drive, Newark, Delaware. (Incorporated by reference to Exhibit No. 10.10 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).)
10.11 -- Aearo Company (formerly, Cabot Safety Corporation) Employees' Retirement Account Plan, dated as of May l, 1990,
as amended. (Incorporated by reference to Exhibit No. 10.11 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)
10.12 -- Fidelity Corporate (401(k)) Plan for Retirement, dated August l, 1993, as amended. (Incorporated by reference to
Exhibit No. 10.12 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).)
10.13 -- Aearo Company (formerly, Cabot Safety Corporation) Supplemental Executive Retirement Plan, dated May l, 1993.
(Incorporated by reference to Exhibit No. 10.13 to the Registration Statement on Form S-4, No. 33- 96190, of
Aearo Company and Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)
10.14 -- Sublease, dated June 4, 1994, between C.W. Kay-Bee Inc. and Aearo Company (formerly, Cabot Safety Corporation),
pertaining to 8001-8003 Woodland Drive, Indianapolis, Indiana, as amended. (Incorporated by reference to Exhibit
No. 10.14 to the Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation
(formerly, Cabot Safety Holdings Corporation).)
10.15 -- Sublease, dated April 16, 1990, between American Optical Corporation and Aearo Company (formerly, Cabot Safety
Corporation), pertaining to South- bridge, Massachusetts manufacturing facility. (Incorporated by reference to
Exhibit No. 10.15 to the Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
10.16* -- Aearo Corporation (formerly, Cabot Safety Holdings Corporation) Amended and Restated 1995 Employee and Non-
Employee Director Stock Purchase Plan.
10.17* -- Form of Executive Security Purchase Agreement.
10.18* -- Aearo Corporation (formerly, Cabot Safety Holdings Corporation) Executive Stock Option Plan.
10.19* -- Amended and Restated US Subsidiary Guaranty dated July 11, 1995 delivered by Cabot Safety Intermediate
Corporation, CSC FSC, Inc. and Eastern Safety Equipment Co., Inc. in favor of Bankers Trust Company.
10.20* -- Aearo Corporation (formerly, Cabot Safety Holdings Corporation) 1996 Stock Option Plan.
10.21* -- Form of Incentive Stock Option Agreement under the Aearo Corporation (formerly, Cabot Safety Holdings
Corporation)1996 Stock Option Plan.
10.22* -- Form of Non-Qualified Stock Option Agreement for Company Employees under the Aearo Corporation (formerly,
Cabot Safety Holdings Corporation) 1996 Stock Option Plan.
10.23* -- Employment Agreement between Peltor AB and Leif Palmact, dated January 1, 1996.
10.24* -- Employment Agreement between Peltor AB and Leif Anderzon, dated January 1, 1996.
</TABLE>
66
<PAGE> 69
<TABLE>
<C> <C> <C>
10.25* -- Amended and Restated US Subsidiary Guaranty dated July 11, 1995 as amended and restated as of
May 30, 1996, delivered by Cabot Safety Intermediate Corporation, CSC FSC, Inc. and Eastern Safety
Equipment Co., Inc. in favor of Bankers Trust Company.
12.1** -- Statements re: Computation of Ratios.
21.1* -- List of Subsidiaries.
24.1** -- Powers of Attorney (see page 67 of this report).
27.1** -- Financial Data Schedule.
</TABLE>
- ----------------
* Incorporated by reference to the same numbered exhibit to the registration
statement on Form S-l, No. 333-05047, of Aearo Corporation (formerly, Cabot
Safety Holdings Corporation).
** Filed herewith.
(b) Financial Statement Schedules
See next page.
(c) Reports on Form 8-K
None.
67
<PAGE> 70
SCHEDULE I
AEARO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIODS ENDED JULY 11, AND SEPTEMBER 30, 1995 AND THE YEARS ENDED
SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
(Dollars in Thousands)
---------------------ADDITIONS--------------------
Net
Balance at Provisions Charged Deductions Balance
Beginning Charged to to Other From at End
of Period Operations Accounts Allowances of Period
<S> <C> <C> <C> <C> <C>
Period ended July 11, 1995
Bad Debt Reserve 1,021 170 -- (199) 992
Sales Returns & Allowances Reserve -- -- -- -- --
Period ended September 30, 1995
Bad Debt Reserve 992 115 170(A) (56) 1,221
Sales Returns & Allowances Reserve -- -- -- -- --
Year ended September 30, 1996
Bad Debt Reserve 1,221 620 186(B) (827) 1,200
Sales Returns & Allowances Reserve -- 1,519 -- -- 1,519
Year ended September 30, 1997
Bad Debt Reserve 1,200 622 100(C) (621) 1,301
Sales Returns & Allowances Reserve 1,519 203 -- (838) 884
</TABLE>
NOTES:
Goodwill.
Acquisition date balance at acquired companies.
Accrued liabilities.
68
<PAGE> 71
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
Aearo Corporation
Date: December 29, 1997 By: /s/ John D. Curtin, Jr.
-----------------------
John D. Curtin, Jr.
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Aearo Corporation hereby severally constitute John D. Curtin, Jr.,
Bryan J. Carey and Steven F. Scott, and each of them singly, our true and lawful
attorney with full power to him to sign for us and in our names in the
capacities indicated below, the Annual Report on Form 10-K filed herewith and
any and all amendments to said Annual Report on Form 10-K, and generally to do
all such things in our names and in our capacities as officers and directors to
enable Aearo Corporation to comply with the provisions of the Securities
Exchange Act of 1934, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorney, to said Annual Report on Form 10-K and any and all
amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: December 29, 1997 /s/ John D. Curtin, Jr.
-------------------------------------------------
John D. Curtin, Jr.
Chairman and Chief Executive Officer (Principal
Executive Officer)
Date: December 29, 1997 /s/ Bryan J. Carey
-------------------------------------------------
Bryan J. Carey
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Accounting Officer)
Date: December 29, 1997 /s/ Norman W. Alpert
-------------------------------------------------
Norman W. Alpert, Director
Date: December 29, 1997 /s/ William J. Brady
-------------------------------------------------
William J. Brady, Director
Date: December 29, 1997 /s/ Margaret J. Hanratty
-------------------------------------------------
Margaret J. Hanratty, Director
Date: December 29, 1997 /s/ Arthur J. Nagle
-------------------------------------------------
69
<PAGE> 72
Arthur J. Nagle, Director
Date: December __, 1997
-------------------------------------------------
Daniel S. O'Connell, Director
Date: December 23, 1997 /s/ John W. Priesing
-------------------------------------------------
John W. Priesing, Director
Date: December 29, 1997 /s/ Samuel L. Hayes, III
-------------------------------------------------
Samuel L. Hayes, III, Director
70
<PAGE> 73
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material relating to the Registrant's fiscal
year ended September 30, 1997 has been sent to security holders of the
Registrant.
71
<PAGE> 74
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
2.1 -- Asset Transfer Agreement, dated as of June 13, 1995, among Aearo Company (formerly, Cabot Safety
Corporation), Cabot Canada Ltd., Cabot Safety Limited, Cabot Corporation, Aearo Corporation (formerly,
Cabot Safety Holdings Corporation), and Cabot Safety Acquisition Corporation. (Incorporated by reference to
Exhibit No. 2.1 to the Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo
Corporation.)
2.2 -- Trademark Coexistence Agreement, dated July 11, 1995, between Cabot Corporation and Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.2 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).)
2.3 -- Subscription Agreement, dated July 11, 1995, between Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) and Vestar Equity Partners, L.P. (Incorporated by reference to Exhibit No. 2.3 to the Registration
Statement on Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
2.4 -- Stockholders' Agreement, dated as of July 11, 1995, among Vestar Equity Partners, L.P., Cabot CSC
Corporation, Aearo Corporation (formerly, Cabot Safety Holdings Corporation), Cabot Corporation, and the
Management Investors. (Incorporated by reference to Exhibit No. 2.4 to the Registration Statement on Form S-
4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.5 -- Form of Executive Security Purchase Agreement, dated as of July 11, 1995, between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation) and the Management Investors (Senior Management).
(Incorporated by reference to Exhibit No. 2.5 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.6 -- Form of Executive Security Purchase Agreement, dated as of July 11, 1995, between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation) and the Management Investors (Middle Management).
(Incorporated by reference to Exhibit No. 2.6 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.7 -- Assignment and Assumption Agreement, dated as of July 11, 1995, by and between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition Corporation and Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.7 to the Registration Statement on Form
S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.8 -- Assignment and Assumption Agreement, dated as of July 11, 1995, by and between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition Corporation and Cabot Safety
Acquisition Limited (UK). (Incorporated by reference to Exhibit No. 2.8 to the Registration Statement on Form
S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.9 -- Assignment and Assumption Agreement, dated as of July 11, 1995, by and between Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition Corporation and Cabot Safety
Canada Acquisition Ltd. (Canada). (Incorporated by reference to Exhibit No. 2.9 to the Registration Statement
on Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.10 -- Bill of Sale and Assignment, dated as of July 11, 1995, made by Aearo Company (formerly,
Cabot Safety Corporation), Cabot Canada Ltd., and Cabot Safety Limited in favor of Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition Corporation, Cabot Safety
Intermediate Corporation, Cabot Safety Acquisition Limited and Cabot Safety Canada Acquisition Ltd.
(Incorporated by reference to Exhibit No. 2.10 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company and Aearo Corporation.)
</TABLE>
72
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
2.11 -- Assumption Agreement, dated as of July 11, 1995, by Aearo Corporation (formerly, Cabot
Safety Holdings Corporation), Cabot Safety Acquisition Corporation, Cabot Safety Intermediate Corporation,
Cabot Safety Acquisition Limited and Cabot Safety Canada Acquisition Ltd. in favor of Cabot Corporation,
Aearo Company (formerly, Cabot Safety Corporation), Cabot Canada Ltd. and Cabot Safety Limited.
(Incorporated by reference to Exhibit No. 2.11 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company and Aearo Corporation.)
2.12 -- Worldwide Trademark Assignment, dated July 11, 1995, by Aearo Company (formerly, Cabot Safety
Corporation) to Cabot Safety Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.12 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.13 -- Worldwide Copyright Assignment, dated July 11, 1995, by Aearo Company (formerly, Cabot Safety
Corporation) to Cabot Safety Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.13 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.14 -- Worldwide Patent Assignment, dated July 11, 1995, by Aearo Company (formerly, Cabot Safety Corporation)
to Cabot Safety Intermediate Corporation. (Incorporated by reference to Exhibit No. 2.14 to the Registration
Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
2.15 -- Management Advisory Agreement made as of July 11, 1995, among Aearo Company (formerly, Cabot Safety
Corporation), Aearo Corporation (formerly, Cabot Safety Holdings Corporation), Certain Subsidiaries of
Aearo Corporation, Vestar Capital Partners and Cabot Corporation. (Incorporated by reference to Exhibit No.
2.15 to the Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation.)
2.16 -- Aearo Corporation (formerly, Cabot Safety Holdings Corporation) 1995 Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit No. 2.16 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo Corporation.)
2.17 -- Assignment and Assumption Agreement dated July 11, 1995, by and between Aearo Company
(formerly, Cabot Safety Corporation) and Cabot Safety Acquisition Corporation with Respect to the
Installment Sale Agreement dated September 1, 1978 by and between the Department of Community Affairs
and Economic Development of the State of Delaware and Specialty Composites Corporation (Predecessor to
Cabot Safety Corporation) Pertaining to Real Property Located in New Castle County, Delaware, Tax Parcel
Number 11- 010.00-003 (Delaware IRB). (Incorporated by reference to Exhibit No. 2.17 to the Registration
Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
2.18 -- Assignment and Assumption Agreement dated July 11, 1995, by and between Cabot Corporation and Cabot Safety
Acquisition Corporation with Respect to that Certain Loan Agreement dated as of June 1, 1982 by and between the
City of Indianapolis, Indiana and Cabot Corporation (Indianapolis IRB). (Incorporated by reference to Exhibit
No. 2.18 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).)
2.19 -- Stock Purchase Agreement by and among Aearo Company (formerly, Cabot Safety Corporation), Peltor Holding AB,
Leif Palmaer Invest AB, Leif Anderzon Invest AB and Active i Malmo All, dated April 25, 1996. (Incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K of Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) dated May 30, 1996.)
2.20* -- Stock Purchase Agreement by and among Aearo Company (formerly, Cabot Safety
Corporation), Eastern Safety Equipment Co., Inc., Alfred H. Jacobson and William Klein and Jack P. Hecht as
Trustees of a certain Trust, dated September 19, 1995.
2.21* -- Amendment to Stockholder's Agreement dated as of July 3, 1996, by and among Vestar Equity Partners, L.P., Cabot
CSC Corporation, Aearo Corporation (formerly, Cabot Safety Holdings Corporation) Cabot Corporation, and certain
other stockholders of Aearo Corporation.
</TABLE>
73
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
2.22* -- Amendment to Stock Purchase Agreement by and among Aearo Company (formerly, Cabot Safety Corporation), Peltor
Holding AB, Leif Palmaer Invest AB, Leif Anderzon Invest AB and Active i Malmo AB, dated May 15, 1996.
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 No. 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.)
10.1* -- Credit Agreement, dated as of July 11, 1995, and amended and restated as of May 30, 1996, among Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Aearo Company (formerly, Cabot Safety Corporation),
Certain of its Subsidiaries, Various Banks, and Bankers Trust Company as Co- Arranger and Administrative Agent.
10.2* -- Amended and Restated US Pledge Agreement dated as of July 11, 1995, as made by Cabot Safety Acquisition
Corporation, Aearo Corporation (formerly, Cabot Safety Holdings Corporation), Cabot Safety Intermediate
Corporation and CSC FSC, Inc., in favor of Bankers Trust Company as Collateral Agent for the Benefit of the
Secured Creditors.
10.3* -- Amended and Restated Foreign Pledge Agreement as of July 11, 1995, amended and restated as of May 30, 1996, made
by Cabot Safety Canada Acquisition Limited and Cabot Safety Acquisition Limited in favor of Bankers Trust
Company as Collateral Agent for the Benefit of the Secured Creditors.
10.4 -- Charge Over United Kingdom Patents and Trademarks made the 11th Day of July, 1995, by Cabot Safety Intermediate
Corporation and the Bankers Trust Company as Collateral Agent for Itself and for the Secured Creditors.
(Incorporated by reference to Exhibit No. 10.4 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).)
10.5* -- Amended and Restated US Security Agreement dated as of July 11, 1995, as amended and restated as of May 30,
1996, among Aearo Corporation (formerly, Cabot Safety Holdings Corporation), Cabot Safety Acquisition
Corporation, Cabot Safety Intermediate Corporation, CSC FSC, Inc., and Bankers Trust Company as Collateral Agent
for the Benefit of the Secured Creditors.
10.6* -- Amended and Restated Canadian Security Agreement dated as of July 11, 1995, as amended and restated as of May
30, 1996, granted by Cabot Safety Canada Acquisition Limited in favor of Bankers Trust Company as Collateral
Agent for the Benefit of the Secured Creditors.
10.7 -- English Security Agreement (The Debenture) made on the 11th Day of July, 1995 between the Cabot Safety
Acquisition Limited and Bankers Trust Company as Collateral Agent for Itself and for the Secured Creditors.
(Incorporated by reference to Exhibit No. 10.7 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).)
</TABLE>
74
<PAGE> 77
<TABLE>
<S> <C> <C>
10.8 -- Mortgage and Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement, and Fixture
Filing made by Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers Trust Company, as Collateral
Agent, as Mortgagee (recorded in Marion County, Indiana) pertaining to Real Property located at 7911 Zionsville
Road, Indianapolis, Indiana. (Incorporated by reference to Exhibit No. 10.8 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).)
10.9 -- Mortgage and Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement, and Fixture
Filing made by Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers Trust Company, as Collateral
Agent, as Mortgagee (recorded in New Castle County, Delaware) pertaining to l0 Acre Site of Unimproved Land
adjacent to 5457 West 79th Street, Indianapolis, Indiana. (Incorporated by reference to Exhibit No. 10.9 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).)
10.10 -- Mortgage and Security Agreement, Assignment of Leases, Rents and Profits, Financing Statement, and Fixture
Filing made by Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers Trust Company, as Collateral
Agent, as Mortgagee (recorded in New Castle County, Delaware) pertaining to Real Property located at 650 Dawson
Drive, Newark, Delaware. (Incorporated by reference to Exhibit No. 10.10 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).)
10.11 -- Aearo Company (formerly, Cabot Safety Corporation) Employees' Retirement Account Plan, dated as of May l, 1990,
as amended. (Incorporated by reference to Exhibit No. 10.11 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)
10.12 -- Fidelity Corporate (401(k)) Plan for Retirement, dated August l, 1993, as amended. (Incorporated by reference to
Exhibit No. 10.12 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).)
10.13 -- Aearo Company (formerly, Cabot Safety Corporation) Supplemental Executive Retirement Plan, dated May l, 1993.
(Incorporated by reference to Exhibit No. 10.13 to the Registration Statement on Form S-4, No. 33- 96190, of
Aearo Company and Aearo Corporation (formerly, Cabot Safety Holdings Corporation).)
10.14 -- Sublease, dated June 4, 1994, between C.W. Kay-Bee Inc. and Aearo Company (formerly, Cabot Safety Corporation),
pertaining to 8001-8003 Woodland Drive, Indianapolis, Indiana, as amended. (Incorporated by reference to Exhibit
No. 10.14 to the Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation
(formerly, Cabot Safety Holdings Corporation).)
10.15 -- Sublease, dated April 16, 1990, between American Optical Corporation and Aearo Company (formerly, Cabot Safety
Corporation), pertaining to South- bridge, Massachusetts manufacturing facility. (Incorporated by reference to
Exhibit No. 10.15 to the Registration Statement on Form S-4, No. 33-96190, of Aearo Company and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
10.16* -- Aearo Corporation (formerly, Cabot Safety Holdings Corporation) Amended and Restated 1995 Employee and Non-
Employee Director Stock Purchase Plan.
10.17* -- Form of Executive Security Purchase Agreement.
10.18* -- Aearo Corporation (formerly, Cabot Safety Holdings Corporation) Executive Stock Option Plan.
10.19* -- Amended and Restated US Subsidiary Guaranty dated July 11, 1995 delivered by Cabot Safety Intermediate
Corporation, CSC FSC, Inc. and Eastern Safety Equipment Co., Inc. in favor of Bankers Trust Company.
10.20* -- Aearo Corporation (formerly, Cabot Safety Holdings Corporation) 1996 Stock Option Plan.
10.21* -- Form of Incentive Stock Option Agreement under the Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) 1996 Stock Option Plan.
10.22* -- Form of Non-Qualified Stock Option Agreement for Company Employees under the Aearo Corporation (formerly,
Cabot Safety Holdings Corporation) 1996 Stock Option Plan.
10.23* -- Employment Agreement between Peltor AB and Leif Palmact, dated January 1, 1996.
10.24* -- Employment Agreement between Peltor AB and Leif Anderzon, dated January 1, 1996.
</TABLE>
75
<PAGE> 78
<TABLE>
<S> <C> <C>
10.25* -- Amended and Restated US Subsidiary Guaranty dated July 11, 1995 as amended and restated as of
May 30, 1996, delivered by Cabot Safety Intermediate Corporation, CSC FSC, Inc. and Eastern Safety
Equipment Co., Inc. in favor of Bankers Trust Company.
12.1** -- Statements re: Computation of Ratios.
21.1* -- List of Subsidiaries.
24.1** -- Powers of Attorney (see page 67 of this report).
27.1** -- Financial Data Schedule.
</TABLE>
- ----------------
* Incorporated by reference to the same numbered exhibit to the registration
statement on Form S-l, No. 333-05047, of Aearo Corporation (formerly, Cabot
Safety Holdings Corporation).
** Filed herewith.
76
<PAGE> 1
Exhibit 12.1
AEARO CORPORATION
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
-------PREDECESSOR COMPANY---- ---------------------SUCCESSOR COMPANY--------------
PERIOD
ENDED PERIOD ENDED YEAR ENDED
----YEAR ENDED SEPTEMBER 30,-- JULY 11, SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Pre-tax income from continuing operations $14,814 $13,004 $ 7,815 $ (159) $ 6,477 $(5,959)
Fixed charges (see below) 6,223 7,242 6,599 4,388 22,153 28,419
------- ------- ------- ------ ------- -------
Earnings as defined $21,037 $20,246 $14,414 $4,229 $28,630 $22,460
======= ======= ======= ====== ======= =======
FIXED CHARGES:
Interest expense, net $ 4,769 $ 5,819 $ 5,673 $4,135 $20,703 $26,665
Interest component of operating leases 1,454 1,423 926 253 1,450 1,754
------- ------- ------- ------ ------- -------
Fixed charges as defined $ 6,223 $ 7,242 $ 6,599 $4,388 $22,153 $28,419
======= ======= ======= ====== ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 3.4 2.8 2.2 -- 1.3 --
======= ======= ======= ====== ======= =======
</TABLE>
NOTE: Ratio of earnings to fixed charges is defined as pre-tax income from
continuing operations plus fixed charges divided by fixed charges.
Fixed charges include interest (including amortization of debt issuance
costs) and a portion of rental expense assumed to represent interest.
Earnings for the period ended September 30, 1995 and the year ended
September 30, 1997 were insufficient to cover fixed charges by $0.2
million and $6.0 million respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF AEARO CORPORATION AS OF SEPTEMBER 30, 1997 AND THE STATEMENT OF
OPERATIONS OF AEARO CORPORATON FOR THE YEAR ENDED SEPTEMBER 30, 1997 CONTAINED
IN AEARO CORPORATION'S FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 5,476
<SECURITIES> 0
<RECEIVABLES> 45,876
<ALLOWANCES> 0
<INVENTORY> 36,693
<CURRENT-ASSETS> 91,442
<PP&E> 82,162
<DEPRECIATION> 17,214
<TOTAL-ASSETS> 310,876
<CURRENT-LIABILITIES> 53,626
<BONDS> 233,729
0
0
<COMMON> 1
<OTHER-SE> 19,949
<TOTAL-LIABILITY-AND-EQUITY> 310,876
<SALES> 285,783
<TOTAL-REVENUES> 285,783
<CGS> 163,460
<TOTAL-COSTS> 163,460
<OTHER-EXPENSES> 101,617
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,665
<INCOME-PRETAX> (5,959)
<INCOME-TAX> 917
<INCOME-CONTINUING> (6,876)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,876)
<EPS-PRIMARY> (142.77)
<EPS-DILUTED> (142.77)
</TABLE>
