<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 33-96190
AEARO CORPORATION
(Exact name of registrant as specified in its charter)
--------------------
Delaware 13-3840450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Washington Mall, Eighth Floor
Boston, Massachusetts 02108-2610
(Address of principal executive offices) (Zip Code)
(617) 371-4200
(Registrant's telephone number, including area code)
--------------------
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
--- ---
<PAGE> 2
AEARO CORPORATION
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 1998 (UNAUDITED) AND SEPTEMBER 30, 1997 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE MONTH AND SIX MONTH PERIODS
ENDED MARCH 31, 1998 AND 1997 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURE PAGE 20
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
AEARO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS--ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
--------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,271 $ 5,476
Accounts receivable (net of reserve for doubtful accounts of $1,456
and $1,301, respectively) 39,955 45,876
Inventories 40,441 36,693
Deferred and prepaid expenses 3,172 3,397
-------- --------
Total current assets 88,839 91,442
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 61,637 64,948
INTANGIBLE ASSETS, NET 140,476 146,906
OTHER ASSETS 6,629 7,580
-------- --------
Total assets $297,581 $310,876
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
AEARO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
(COMBINED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
--------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 12,256 $ 10,937
Accounts payable and accrued liabilities 33,497 36,186
Accrued interest 3,791 3,769
U.S. and foreign income taxes 3,110 2,734
-------- --------
Total current liabilities 52,654 53,626
-------- --------
LONG-TERM DEBT 227,165 233,729
DEFERRED INCOME TAXES 920 883
OTHER LIABILITIES 2,653 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--101,537.5 and 96,810 shares at
March 31, 1998 and September 30, 1997, respectively 1 1
Additional paid-in capital 32,313 32,476
Retained deficit (7,205) (5,269)
Cumulative foreign currency translation adjustments (10,920) (7,258)
-------- --------
Total stockholders' equity 14,189 19,950
-------- --------
Total liabilities and stockholders' equity $297,581 $310,876
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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AEARO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- ----------------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $71,779 $69,596 $141,491 $136,185
COST OF SALES 39,799 41,123 78,861 79,722
------- ------- -------- --------
Gross profit 31,980 28,473 62,630 56,463
SELLING AND ADMINISTRATIVE 23,382 21,361 44,897 41,829
RESEARCH AND TECHNICAL SERVICES 1,040 1,270 2,311 2,597
AMORTIZATION OF INTANGIBLES 1,699 2,125 3,423 4,316
OTHER CHARGES (INCOME), NET (205) 1,529 (643) 1,979
------- ------- -------- --------
Operating income 6,064 2,188 12,642 5,742
INTEREST EXPENSE, NET 6,604 6,703 13,262 13,246
------- ------- -------- --------
Income (loss) before provision
(benefit) for income taxes (540) (4,515) (620) (7,504)
PROVISION (BENEFIT) FOR INCOME TAXES 647 (1,403) 1,316 (1,823)
------- ------- -------- --------
Net income (loss) (1,187) (3,112) (1,936) (5,681)
PREFERRED STOCK DIVIDEND ACCRUED 1,954 1,721 3,888 3,424
------- ------- -------- --------
Earnings (loss) applicable to
Common Shareholders $(3,141) $(4,833) $ (5,824) $ (9,105)
======= ======= ======== ========
EARNINGS (LOSS) PER COMMON SHARE $(32.16) $(49.03) $ (59.80) $ (91.98)
======= ======= ======== ========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 97,669 98,574 97,399 98,986
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
AEARO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,936) $(5,681)
Adjustments to reconcile net loss to cash provided (used) by
operating activities-
Depreciation 5,873 4,693
Amortization of intangible assets and deferred financing costs 4,377 5,265
Deferred income taxes 214 215
Other, net 5 393
Changes in assets and liabilities-
Accounts receivable 5,879 2,449
Inventory (3,983) (2,889)
Accounts payable and accruals (2,459) (4,681)
Other, net 511 (4,455)
------- -------
Net cash provided (used) by operating activities 8,481 (4,691)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,217) (3,904)
Proceeds provided by disposals of property, plant and equipment 2 811
Purchase of Shoplyne assets -- (242)
------- -------
Net cash used by investing activities (3,215) (3,335)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) revolving credit facility, net (200) 8,450
Repayment of term loans (4,982) (3,866)
Repayment of external long-term debt (93) (620)
Sale of common stock, net 943 37
Decrease (increase) in shareholder notes, net (1,107) 147
------- -------
Net cash provided (used) by financing activities (5,439) 4,148
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (32) 356
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (205) (3,522)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,476 8,540
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,271 $ 5,018
======= =======
CASH PAID FOR:
Interest $12,374 $12,350
======= =======
Income taxes $ 792 $ 1,323
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly, in accordance with generally accepted accounting
principles, the Company's financial position, results of operations and
cash flows for the interim periods presented. Such adjustments consisted
of only normal recurring items. The results of operations for the interim
periods shown in this report are not necessarily indicative of results
for any future interim period or for the entire year. These condensed
consolidated financial statements do not include all disclosures
associated with annual financial statements and accordingly should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10K.
(2) FORMATION ACQUISITION AND FINANCING
Aearo Corporation was formed by Vestar Equity Partners, L.P. (Vestar) in
June, 1995 to effect the acquisition (the Formation Acquisition) of
substantially all of the assets and liabilities of Aearo Company
(formerly Cabot Safety Corporation) and certain affiliates (the
Predecessor). The Predecessor was wholly owned by Cabot Corporation
(Cabot) prior to the Formation Acquisition. The Formation Acquisition
closed on July 11, 1995, when Aearo Corporation acquired substantially
all of the assets and certain liabilities of the Predecessor for cash,
preferred stock and a 42.5% common equity interest in Aearo Corporation.
Aearo Corporation immediately contributed the acquired assets and
liabilities to Aearo Company, a wholly owned subsidiary of Aearo
Corporation, pursuant to an asset transfer agreement dated 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.
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.
(3) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
7
<PAGE> 8
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
(4) SIGNIFICANT ACCOUNTING POLICIES
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Intangible Assets. Intangible assets consist primarily of the costs of
goodwill, patents, and trademarks purchased in business acquisitions.
Intangible assets are amortized on the straight-line basis over either 25
years or an estimated useful life, whichever is shorter.
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.
On October 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share, which improves 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 requires restatement of all
prior-period earnings per share data presented. Prior period earnings
(loss) per share in these financial statements were not affected under
this new pronouncement.
(5) INVENTORIES
Inventories consisted of the following (dollars in thousands):
MARCH 31, SEPTEMBER 30,
1998 1997
--------- -------------
(unaudited)
Raw materials $11,111 $10,031
Work in process 9,547 9,982
Finished goods 19,783 16,680
------- -------
$40,441 $36,693
======= =======
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
(6) DEBT
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 (Term Loans) and (ii) a revolving credit facility
providing for up to $25.0 million (Revolving Credit Facility)
(collectively, the Senior Bank Facilities). Under the terms of both the
Senior Bank Facilities and the Notes indenture, Aearo Company is required
to comply with certain financial covenants and restrictions, with which
Aearo Company was in compliance at March 31, 1998. At March 31, 1998, the
amounts outstanding on the Term Loans and the Revolving Credit Facility
were $124.7 million and $10.0 million, respectively.
8
<PAGE> 9
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1998
(UNAUDITED)
(7) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and administrative
proceedings which are being handled in the ordinary course of business.
In the opinion of management of the Company, these suits and claims
should not result in final judgments or settlements which, in the
aggregate, would have a material adverse effect on the Company's
financial condition or results of operations.
During fiscal 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.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
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.
1998 COMPARED TO 1997 RESULTS
THREE MONTHS ENDED MARCH 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Change
--------------------------- ------------------------- Increase (Decrease)
March 31, Percent of March 31, Percent of -----------------------
1998 Net Sales 1997 Net Sales Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Safety Products $61,639 85.9 $60,577 87.0 $ 1,062 1.8
Specialty Composites 10,140 14.1 9,019 13.0 1,121 12.4
------- ----- ------- ----- -------
Total net sales 71,779 100.0 69,596 100.0 2,183 3.1
Cost of Sales 39,799 55.4 41,123 59.1 (1,324) (3.2)
------- ----- ------- ----- -------
Gross profit 31,980 44.6 28,473 40.9 3,507 12.3
Operating Expenses
Selling and administrative 23,382 32.6 21,361 30.7 2,021 9.5
Research and technical services 1,040 1.5 1,270 1.8 (230) (18.1)
Amortization of intangibles 1,699 2.4 2,125 3.1 (426) (20.1)
Other charges(income), net (205) (0.3) 1,529 2.2 (1,734) (113.4)
------- ----- ------- ----- -------
Operating income 6,064 8.4 2,188 3.1 3,876 177.2
Interest expense, net 6,604 9.2 6,703 9.6 (99) (1.5)
------- ----- ------- ----- -------
Loss before provision (benefit)
for income taxes (540) (0.8) (4,515) (6.5) (3,975) (88.0)
Provision (benefit) for income taxes 647 0.9 (1,403) (2.0) 2,050 146.1
------- ----- ------- ----- -------
Net loss (1,187) (1.7) (3,112) (4.5) (1,925) (61.9)
Preferred stock dividend accrued 1,954 2.7 1,721 2.4 233 13.5
------- ----- ------- ----- -------
Loss applicable to common shareholders $(3,141) (4.4) $(4,833) (6.9) $ 1,692) (35.0)
======= ===== ======= ===== =======
Loss per common share $(32.16) $(49.03) $(16.87) (34.4)
======= ======= =======
EBITDA $10,685 14.9 $ 7,179 10.3 $ 3,506 48.8
======= ===== ======= ===== =======
</TABLE>
10
<PAGE> 11
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1997
Net Sales. Net sales in the three months ended March 31, 1998 increased 3.1% to
$71.8 million from $69.6 million in the three months ended March 31, 1997. Both
operating segments enjoyed growth with Safety Products net sales in the three
months ended March 31, 1998 increasing 1.8% to $61.6 million from $60.6 million
in the three months ended March 31, 1997 as growth with U.S. Consumer and North
American and European Industrial accounts more than offset the negative effect
of a stronger U.S. Dollar and decline in business with customers in Asia.
Specialty Composites' net sales in the three months ended March 31, 1998
increased 12.4% to $10.1 million from $9.0 million in the three months ended
March 31, 1997. The increase was primarily driven by the strengthening general
aviation and Class 8 truck markets.
Gross Profit. Gross profit in the three months ended March 31, 1998 increased
12.3% to $32.0 million from $28.5 million in the three months ended March 31,
1997. Gross Profit as a percentage of net sales in the three months ended March
31, 1998 was 44.6% as compared to 40.9% in the three months ended March 31,
1997. The Gross Profit amount was favorably impacted by the increased net sales,
and decreased cost of sales reflective of to the realization of operating
improvements as the Company overcame the difficulties triggered by the
conversion to a new management information system and the changes in
manufacturing processes at the Southbridge, Massachusetts facility. These
improvements have resulted in decreased spending at the Southbridge facility.
These decreased operating costs, as well as growth in Peltor products, were the
main determinants in the improvement in the gross profit as a percent of net
sales.
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended March 31, 1998 increased 9.5% to $23.4 million from $21.4
million in the three months ended March 31, 1997. Within this increase is a
reduction of $0.21 million of distribution expenses. Although net sales were up
3.1%, distribution expenses decreased as the Company continued to improve
service levels and overcame the difficulties triggered by the conversion to the
new management information system. Sales and marketing expenses decreased by
$0.25 million. These reductions were more than offset by normalized incentive
accruals as well as $1.6 million for severance and associated charges relative
to changes in senior management and the closing of the Company's Boston
headquarters in the current period compared to the year ago period. Selling and
administrative expenses as a percentage of net sales in the three months ended
March 31, 1998 increased to 32.6% of net sales as compared to 30.7% of net sales
in the three months ended March 31, 1997.
Research and Technical Services Expenses. Research and technical services
expenses in the three months ended March 31, 1998 decreased 18.1% to $1.04
million from $1.27 million in the three months ended March 31, 1997. This
decrease was due primarily to the timing of European development activities
during these interim periods, and to a lesser extent the effect of a stronger
U.S. dollar relative to the Swedish Krona.
Amortization of Intangibles. Amortization expense in the three months ended
March 31, 1998 decreased 20.1% to $1.7 million from $2.1 million in the three
months ended March 31, 1997. The decrease was due to final purchase accounting
adjustments associated with the acquisition of Peltor.
Other Charges (Income), Net. Other Charges (Income), Net improved to income of
$0.2 million for the three months ended March 31, 1998 as compared to expense of
$1.5 million for the three months ended March 31, 1997. This change was
primarily a result of foreign currency transaction gains in the three months
ended March 31, 1998 as compared to foreign currency transaction losses and
charges related to the abandonment of two automation related capital projects
totaling approximately $0.5 million at the Company's Indianapolis, Indiana
facility in the three months ended March 31, 1997.
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<PAGE> 12
Operating Income. Primarily as a result of the factors discussed above,
operating income increased 177.2% to $6.1 million in the three months ended
March 31, 1998 from $2.2 million in the three months ended March 31, 1997.
Operating income as a percentage of net sales in the three months ended March
31, 1998 was 8.5% as compared to 3.1% in the three months ended March 31, 1997.
Provision (Benefit) For Income Taxes. The provision for income taxes in the
three months ended March 31, 1998 was $0.6 million compared to a benefit of $1.4
million in the three months ended March 31, 1997. The Company's foreign
subsidiaries have taxable income in their jurisdictions, but the domestic
subsidiaries have a loss for income tax purposes in the U.S. In the results for
the three months ended March 31, 1998 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.
Interest Expense, Net. Interest expense, net in the three months ended March 31,
1998 decreased 1.5% to $6.6 million from $6.7 million in the three months ended
March 31, 1997.
Net Loss. For the three months ended March 31, 1998 the Company had a net loss
of $1.2 million as compared to a net loss of $3.1 million for the three months
ended March 31, 1997.
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. 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 below 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.
EBITDA CALCULATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended Change
March 31, Favorable (Unfavorable)
1998 1997 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C> <C>
Operating Income $ 6,064 $2,188 $ 3,876 177.2%
Add Backs:
Depreciation 2,952 2,387 565 23.7%
Amortization of Intangibles 1,699 2,125 (426) (20.1%)
Non-operating Costs (Income) (1) (30) 479 (509) (106.3%)
------- ------ --------
EBITDA $10,685 $7,179 $ 3,506 48.8%
======= ====== ========
(1) Other Charges (Income), Net Summary:
Non-operating Costs (Income), Net $ (30) $ 479 $ (509) (106.3%)
Foreign Transaction (Gains) Losses (175) 1,050 (1,225) (116.7%)
------- ------ -------
Total Other Charges (Income), Net $ (205) $1,529 $(1,734) (113.4%)
======= ====== =======
</TABLE>
EBITDA for the three months ended March 31, 1998 was $10.7 million as compared
to $7.2 million for the three months ended March 31, 1997. This increase was due
primarily to the increase in net sales, the Company's
12
<PAGE> 13
improved service levels, the changes in manufacturing at the Southbridge,
Massachusetts facility, and the income from foreign currency transaction gains
(as compared to losses in the three month period ended March 31, 1997), with
some offset due to the increases in selling and administrative, primarily due to
the $1.6 million severance and associated charges relative to changes in senior
management and the closing of the Company's Boston headquarters in the current
period. EBITDA as a percentage of net sales in the three months ended March 31,
1998 was 14.9% as compared to 10.3% in the three months ended March 31, 1997.
Excluding the $1.6 million charge, EBITDA would have been $12.3 million, or
17.1% of net sales for the three months ended March 31, 1998.
1998 COMPARED TO 1997 RESULTS
SIX MONTHS ENDED MARCH 31
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended Change
----------------------- ------------------------ Increase (Decrease)
March 31, Percent of March 31, Percent of ------------------------
1998 Net Sales 1997 Net Sales Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Safety Products $121,564 85.9 $118,642 87.1 $ 2,922 2.5
Specialty Composites 19,927 14.1 17,543 12.9 2,384 13.6
-------- ----- -------- ----- -------
Total net sales 141,491 100.0 136,185 100.0 5,306 3.9
Cost of Sales 78,861 55.7 79,722 58.5 (861) (1.1)
-------- ----- -------- ----- -------
Gross profit 62,630 44.3 56,463 41.5 6,167 10.9
Operating Expenses-
Selling and administrative 44,897 31.7 41,829 30.7 3,068 7.3
Research and technical services 2,311 1.7 2,597 1.9 (286) (11.0)
Amortization of intangibles 3,423 2.4 4,316 3.2 (893) (20.7)
Other charges(income),net (643) (0.4) 1,979 1.5 (2,622) (132.5)
-------- ----- -------- ----- -------
Operating income 12,642 8.9 5,742 4.2 6,900 120.2
Interest expense, net 13,262 9.4 13,246 9.7 16 0.1
-------- ----- -------- ----- -------
Loss before provision (benefit)
for income taxes (620) (0.5) (7,504) (5.5) (6,884) (91.7)
Provision (benefit) for income taxes 1,316 0.9 (1,823) (1.3) 3,139 172.2
-------- ----- -------- ----- -------
Net loss (1,936) (1.4) (5,681) (4.2) (3,745) (65.9)
Preferred stock dividend accrued 3,888 2.7 3,424 2.5 464 13.6
-------- ----- -------- ----- -------
Loss applicable to common
shareholders $ (5,824) (4.1) $ (9,105) (6.7) $(3,281) (36.0)
======== ===== ======== ===== =======
Loss per common share $ (59.80) $ (91.98) $(32.18) (35.0)
======== ======== =======
EBITDA $ 21,900 15.5 $ 15,220 11.2 $ 6,680 43.9
======== ===== ======== ===== =======
</TABLE>
RESULTS OF OPERATIONS -- SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS
ENDED MARCH 31, 1997
Net Sales. Net sales in the six months ended March 31, 1998 increased 3.9% to
$141.5 million from $136.2 million in the six months ended March 31, 1997. Both
operating segments enjoyed growth with Safety Products net sales in the six
months ended March 31, 1998 increasing 2.5% to $121.6 million from $118.6
million in the six months ended March 31, 1997 as growth with U.S. Consumer and
North American and European Industrial accounts more than offset the negative
effect of a stronger U.S. Dollar and decline in business with customers in Asia.
Specialty Composites' net sales in the six months ended March 31, 1998 increased
13.6% to $19.9 million from $17.5 million
13
<PAGE> 14
in the six months ended March 31, 1997. The increase was primarily driven by the
strengthening general aviation and Class 8 truck markets.
Gross Profit. Gross profit in the six months ended March 31, 1998 increased
10.9% to $62.6 million from $56.5 million in the six months ended March 31,
1997. Gross Profit as a percentage of net sales in the six months ended March
31, 1998 was 44.3% as compared to 41.5% in the six months ended March 31, 1997.
The Gross Profit amount was favorably impacted by the increased net sales, and
decreased cost of sales reflective of to the realization of operating
improvements as the Company overcame the difficulties triggered by the
conversion to a new management information system and the changes in
manufacturing processes at the Southbridge, Massachusetts facility. These
improvements have resulted in decreased spending at the Southbridge facility.
These decreased operating costs were the main determinants in the improvement in
the gross profit as a percent of net sales.
Selling and Administrative Expenses. Selling and administrative expenses in the
six months ended March 31, 1998 increased 7.3% to $44.9 million from $41.8
million in the six months ended March 31, 1997. Within this increase is a
reduction of $0.43 million of distribution expenses. Although net sales were up
3.9%, distribution expenses decreased as the Company continued to improve
service levels and overcame the difficulties triggered by the conversion to the
new management information system. Sales and marketing expenses decreased by
$0.8 million. These reductions were more than offset by normalized incentive
accruals as well as $1.6 million for severance and associated charges relative
to changes in senior management and the closing of the Company's Boston
headquarters in the current period compared to the year ago period. Selling and
administrative expenses as a percentage of net sales in the six months ended
March 31, 1998 increased to 31.7% of net sales as compared to 30.7% of net sales
in the six months ended March 31, 1997.
Research and Technical Services Expenses. Research and technical services
expenses in the six months ended March 31, 1998 decreased 11.0% to $2.31 million
from $2.60 million in the six months ended March 31, 1997. This decrease was due
primarily to the timing of European development activities during these interim
periods, and to a lesser extent the effect of a stronger U.S. dollar relative to
the Swedish Krona.
Amortization of Intangibles. Amortization expense in the six months ended March
31, 1998 decreased 20.7% to $3.4 million from $4.3 million in the six months
ended March 31, 1997. The decrease was due to final purchase accounting
adjustments associated with the acquisition of Peltor.
Other Charges (Income), Net. Other Charges (Income), Net improved to income of
$0.6 million for the six months ended March 31, 1998 as compared to expense of
$2.0 million for the six months ended March 31, 1997. This change was a result
of foreign currency transaction gains in the six months ended March 31, 1998 as
compared to foreign currency transaction losses and charges related to the
abandonment of two automation related capital projects totaling approximately
$0.5 million at the Company's Indianapolis, Indiana facility in the six months
ended March 31, 1997.
Operating Income. Primarily as a result of the factors discussed above,
operating income increased 120.2% to $12.6 million in the six months ended March
31, 1998 from $5.7 million in the six months ended March 31, 1997. Operating
income as a percentage of net sales in the six months ended March 31, 1998 was
8.9% as compared to 4.2% in the six months ended March 31, 1997.
Provision (Benefit) For Income Taxes. The provision for income taxes in the six
months ended March 31, 1998 was $1.3 million compared to a benefit of $1.8
million in the six months ended March 31, 1997. The Company's foreign
subsidiaries have taxable income in their jurisdictions, but the domestic
subsidiaries have a loss for income tax purposes in the U.S. In the results for
the six months ended March 31, 1998 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.
14
<PAGE> 15
Interest Expense, Net. Interest expense, net in the six months ended March 31,
1998 increased 0.1% to $13.26 million from $13.25 million in the six months
ended March 31, 1997.
Net Loss. For the six months ended March 31, 1998 the Company had a net loss of
$1.9 million as compared to a net loss of $5.7 million for the six months ended
March 31, 1997.
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. 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 below 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.
EBITDA CALCULATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended Change
March 31, Favorable (Unfavorable)
1998 1997 Amount Percent
---- ---- ------ -------
<S> <C> <C> <C> <C>
Operating Income $12,642 $ 5,742 $ 6,900 120.2%
Add Backs:
Depreciation 5,873 4,693 1,180 25.1%
Amortization of Intangibles 3,423 4,316 (893) (20.7%)
Non-operating Costs(Income) (1) (38) 469 (507) (108.1%)
------- ------- -------
EBITDA $21,900 $15,220 $ 6,680 43.9%
======= ======= =======
(1) OTHER CHARGES (INCOME), NET SUMMARY:
Non-operating Costs (Income), Net $ (38) $ 469 $ (507) (108.1%)
Foreign Transaction (Gains) Losses (605) 1,510 (2,115 (140.1%)
------- ------- -------
Total Other Charges (Income), Net $ (643) $ 1,979 $(2,622) (132.5%)
======= ======= =======
</TABLE>
EBITDA for the six months ended March 31, 1998 was $21.9 million as compared to
$15.2 million for the six months ended March 31, 1997. This increase was due
primarily to the increase in net sales, the Company's improved service levels,
the changes in manufacturing at the Southbridge, Massachusetts facility, and the
income from foreign currency transaction gains (as compared to losses in the six
month period ended March 31, 1997), with some offset due to the increases in
selling and administrative, primarily due to the $1.6 million severance and
associated charges relative to changes in senior management and the closing of
the Company's Boston headquarters in the current period. EBITDA as a percentage
of net sales in the six months ended March 31, 1998 was 15.5% as compared to
11.2% in the six months ended March 31, 1997. Excluding the $1.6 million charge,
EBITDA would have been $23.5 million, or 16.6% of net sales for the six months
ended March 31, 1998.
15
<PAGE> 16
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. 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. 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.
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 (Term Loans)
and (ii) a revolving credit facility providing for up to $25.0 million
(Revolving Credit Facility) (collectively, the Senior Bank Facilities). Under
the terms of both the Senior Bank Facilities and the Notes indenture, Aearo
Company is required to comply with certain financial covenants and restrictions,
with which Aearo Company was in compliance at March 31, 1998. At March 31, 1998,
the amounts outstanding on the Term Loans and the Revolving Credit Facility were
$124.7 million and $10.0 million, respectively.
Maturities under the Company's Term Loans are: $5.6 million for the remainder of
fiscal 1998, $13.0 million in fiscal 1999, $15.9 million in fiscal 2000, $20.7
million in fiscal 2001, $34.3 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 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 is required to make interest payments with
respect to both the Senior Bank Facilities and the Notes.
The Company's net cash provided by operating activities for the six months ended
March 31, 1998 totaled $8.5 million as compared to net cash used by operating
activities of $4.7 million for the six months ended March 31, 1997. The primary
factors leading to this improvement include: (i) improved operations which
decreased the net loss by $3.7 million, (ii) comparative improvements in
accounts receivable collections of $3.4 million, and (iii) a favorable $5.0
million change in other assets and liabilities primarily related to income taxes
payable in the year ago period. The Company realized improvements in working
capital in the current period as inventory management, shipping and billing
accuracy improved.
16
<PAGE> 17
Net cash used by investing activities, primarily for capital expenditures, was
$3.2 million for the six months ended March 31, 1998 as compared to $3.3 million
for the six months ended March 31, 1997. The six months ended March 31, 1997
included proceeds of $0.8 million from the sale of the Rhode Island facility of
Peltor, Inc. as those operations were consolidated into the Company's
Southbridge, Massachusetts and Indianapolis, Indiana facilities. Generally, the
capital spending is of a relatively short duration, with the complete commitment
process typically involving less than one year. The major items included in
capital expenditures over the past three years were an aggregate of $5.4 million
for a casting line at the Newark, Delaware facility and $8.0 million for the new
management information system.
Net cash used by financing activities for the six months ended March 31, 1998
was $5.4 million as the Company reduced the borrowings under the Revolving
Credit Facility by $0.2 million and made scheduled principal repayments on the
Term Loans totalling $5.0 million. Net cash provided by financing activities for
the six months ended March 31, 1997 was $4.1 million as borrowings under the
Revolving Credit Facility increased by $8.5 million, more than offsetting the
scheduled principal repayments on the Term Loans of $3.9 million.
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 (subject to certain customary drawing conditions) to
meet its liquidity needs. Throughout most of fiscal 1997, borrowing levels
remained high until the difficulties 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 current 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.
17
<PAGE> 18
PART II
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits and claims arise against the Company in the ordinary course of
its business. Most of these lawsuits and claims relate to the Company's safety
eyewear and respiratory product lines and primarily involve accidents and/or
exposures occurring after the 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. The ultimate outcome of this
case and its impact on the Company's financial condition and results of
operations cannot currently be determined.
ITEM 2. CHANGES IN SECURITIES
Effective March 31, 1998 the Company adjusted the preliminary fair market value
of the shares of its common stock sold in the first quarter of this fiscal year.
The preliminary per share sales price of $300 was adjusted to $200 and affected
a total of 865 shares.
Also effective March 31, 1998, the Company exercised its right to repurchase a
total of 3,137.5 shares of its common stock from former members of management
for an aggregate consideration of $627,500.
In addition, effective March 31, 1998 the Company sold 4,050 shares of its
common stock to Michael A. McLain, its President and Chief Executive Officer.
The Company also sold 1,000 shares of common stock each to Joseph C. Marlette,
its Vice President, Manufacturing, James H. Floyd, its Vice President,
Logistics, and Rahul Kapur, its Vice President, Corporate Development. All such
purchases were at a purchase price per share of $200 in a combination of cash
and loans from the Company. The loans are secured by the purchased shares, have
a term of 5 years and bear interest at an annual rate of 7%. The issuance of the
above shares was made pursuant to the Company's 1995 Employee Stock Purchase
Plan and was exempt from the registration requirements of the Securities Act of
1933, as amended (the "Act"), by virtue of Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
18
<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
On February 3, 1998, the Company announced the appointment of Michael A. McLain
as President and Chief Executive Officer. Mr. McLain also joined the Company's
Board of Directors. Mr. McLain, who succeeds John D. Curtin, Jr., was formerly
President and Chief Executive Officer of DowBrands Inc., of Indianapolis,
Indiana, a large manufacturer of household consumer products with annual
revenues of approximately $1 billion.
Mr. Curtin has retired from his role as Chairman and Chief Executive Officer of
the Company, but will continue to serve on the Board and remain active with the
Company as a consultant. Norman W. Alpert, a member of the Company's Board of
Director's and a managing director of Vestar Capital Partners, has assumed the
position of Chairman.
On March 25, 1998, the Company announced plans to close the Boston headquarters
and relocate it to Indianapolis, where the Company has substantial operations.
Effective March 30, 1998, James Jandl, Director of Human Resources, Steven F.
Scott, Vice President, General Counsel, and Mark H. Hague, Vice President,
Operations, have left their positions with the Company. Coinciding with these
departures were the appointments of Joseph C. Marlette as Vice President,
Manufacturing, James H. Floyd as Vice President, Logistics, and Rahul Kapur as
Vice President, Corporate Development. Messrs. Marlette, Floyd, and Kapur were
formerly with DowBrands Inc., of Indianapolis.
On April 7, 1998, John W. Priesing resigned from the Company's Board of
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 -- Employment Agreement between Aearo Corporation and
Michael A. McLain
10.2 -- Agreement between Aearo Corporation and John D. Curtin, Jr.
27.1 -- Financial Data Schedule.
(b) Reports on Form 8-K
None.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 4, 1998 AEARO CORPORATION
/s/ Bryan J. Carey
--------------------------------------------
Bryan J. Carey
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
20
<PAGE> 21
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
10.1 -- Employment Agreement between Aearo Corporation and Michael A.
McLain.
10.2 -- Agreement between Aearo Corporation and John D. Curtin, Jr.
27.1 -- Financial Data Schedule.
21
<PAGE> 1
EXHIBIT 10.1
AEARO CORPORATION
One Washington Mall
Boston, Massachusetts 01550
January 23, 1998
Mr. Michael McLain
325 Willow Spring Road
Indianapolis, Indiana 46240
Dear Mike:
In connection with your employment as the President and Chief Executive
Officer of Aearo Corporation (the "Company"), I have set forth below our
agreement concerning certain benefits to be paid to you while employed, and to
any severance to which you would be entitled in the event of your termination
from the Company. The terms and conditions of such agreement are as follows:
1. The Company agrees to reimburse you for any expenses that you incur during
any temporary relocation you might experience in connection with your employment
with the Company and that are includible in your income but not otherwise
deductible therefrom: the Company also agrees to provide you with compensation
equal to the amount of any income tax you may be required to pay with respect to
such reimbursements, in an amount to be determined by the Company upon your
provision of all necessary information and documentation.
2. Upon a termination of your employment without "Cause" (as defined below) by
the Company or a voluntary termination of employment for "Good Reason" (as
defined below) by you, you will resign from any corporate office you hold with
the Company, and from the Board of Directors of the Company or any of its
subsidiaries or from any committee or subcommittee thereof, effective as of the
date the written notice of your termination of employment (the "Termination
Date") is given.
3. With respect to a termination without "Cause" (defined herein) by the Company
or a voluntary termination for Good Reason (defined herein) by you, the Company
agrees, for the consideration set forth herein subject to your delivery of the
attached Release, to the following provisions:
a. to pay you an amount equal to 1.25 multiplied by the sum of your
base salary and your most recent bonus, payable in substantially equal
installments in accordance with the Company's standard payroll practices
for fifteen (15) months after such termination;
b. during the period beginning on the Termination Date and ending
fifteen (15) months thereafter ("Benefits Period"), the Company agrees to
provide you with the health and welfare benefits (including, but not
limited to, life insurance, medical, and to the extent available, dental
and vision benefits) for which you are then currently eligible at the same
cost to you as if your employment had continued; PROVIDED, HOWEVER, that in
the event you are employed by a subsequent employer within the Benefits
Period and are offered comparable health
<PAGE> 2
2
and welfare benefits thereby, your coverage under the Company's health and
welfare benefit plans shall cease as of the effective date of such
comparable coverage; and
c. to pay you any other compensation and benefits to which you are
otherwise entitled pursuant to the terms of any Company compensation or
benefit plan. Notwithstanding the foregoing, in the event that your
employment with the Company terminates due to your death or disability, the
Company terminates your employment without Cause, or you terminate your
employment for Good Reason, if such event occurs prior to the fifth
anniversary of the date of this Agreement and prior to the vesting of your
interest in any qualified or nonqualified pension plan of the Company, the
Company shall pay you an amount equal to the sum of any unvested portions
of benefits otherwise forfeited by you pursuant to the terms of such
Company pension plans.
As used herein, "Cause" shall be defined as (i) willful malfeasance or
willful misconduct by you in connection with your employment that is injurious
to the Company, (ii) willful, substantial and continuing refusal by you to
perform your duties hereunder or any lawful direction of the Board of Directors
of the Company, which refusal continues beyond ten days after a written demand
for substantial performance is delivered to you by the Company, (iii) an
indictment of you for any felony. Upon a termination for Cause, you shall only
be entitled to those amounts which the Company is required by law to pay. Any
termination for Cause shall be made by delivery to you of a copy of a resolution
of the Board of Directors of the Company finding in their good faith
determination, after giving you an opportunity to be heard, that you have
engaged in conduct constituting "Cause".
Also as used herein, "Good Reason" shall be deemed to exist for you to
voluntarily terminate your employment if any of the following events occur: (i)
the Company materially reduces your duties, authority or responsibilities
(except in connection with any other termination of your employment) to a level
materially inconsistent with the duties, authority and responsibilities which
would generally be performed or held by a chief executive officer of
corporations commensurate in size, type and nature to the Company, or otherwise
materially changes your secretarial support, office accommodations or other
aspects of your working conditions in ways which are inconsistent in any
significant respect with or otherwise demeaning to your position with the
Company (other than in connection with similar reductions generally affecting
other executives of the Company); (ii) the Company reduces your employee
benefits, any bonus opportunities you have, or base salary, other than a
reduction in base salary which is part of a general cost reduction affecting
substantially all of the employees of the Company which does not exceed ten
percent (10%) of your base salary; (iii) the Company fails to make, in respect
of any fiscal year, contributions in the aggregate amount of $30,000 to the
various Company qualified and nonqualified pension plans in which you will be
participating; or (iv) you give notice of your intention to terminate your
employment for any reason at any time during the 30-day period immediately
following the first anniversary of a Change in Control (as hereinafter defined).
For these purposes, a "Change in Control" shall mean, prior to the time the
Company has publicly traded common securities, (1) there occurs: (A) the sale of
more than fifty percent (50%) of the voting securities in the Company to a third
party (other than Vestar Capital Partners, L.P. ("Vestar") or an affiliate of
Vestar or an entity under the control of Vestar); (B) the sale of all or
substantially all of the assets of the Company to a third party (other than
Vestar or an affiliate of Vestar or an entity under the control of Vestar); or
(C) a merger, recapitalization, reorganization or other corporate restructuring
(any of the foregoing, a "Transaction") and (2) following such Transaction,
Vestar or an affiliate of
<PAGE> 3
3
Vestar no longer has the authority (by virtue of voting securities ownership or
by agreement with other voting securities owners) to elect or to designate the
election of the members of the Board of Directors of the Company (or of the
governing board of the entity resulting from such Transaction) or the entity
controlling the Company (or such resulting entity).
In order to terminate your employment for Good Reason, you must give the Company
written notice not less than thirty (30) days prior to your intended termination
and the Company must not have cured such breach within such 30-day period.
4. In the event of your voluntary termination of employment for other than Good
Reason, given with 60 days prior written notice, your death or Permanent
Disability (as defined under the long-term disability benefit plans applicable
to you as in effect on the date hereof), the Company agrees to pay you or your
beneficiary all accrued but unpaid compensation in a cash lump sum payment and
other amounts as due under the applicable Company benefit plans or as required
by law.
5. With respect to confidentiality, noncompetition, and other related issues, as
a condition of the Company's performance of its obligations arising from this
Agreement, you agree to the following:
a. You will not, without prior written consent of the Company,
divulge, disclose or make accessible to any other person, firm,
partnership, corporation or other entity any Confidential Information
pertaining to the business of the Company or any group, division,
subsidiary or affiliate of the Company or Vestar and its affiliates (the
"Restricted Group"), except when required to do so by a court of competent
jurisdiction, by any governmental agency having supervisory authority over
the business of the Restricted Group, or by any administrative body or
legislative body (including a committee thereof) with jurisdiction to order
you to divulge, disclose or make accessible such information. "Confidential
Information" will mean non-public information concerning financial data,
strategic business plans, product development (or other proprietary product
data), customer lists, marketing plans, personnel information pertaining to
present and former employees of the Restricted Group, and any other
non-public, proprietary and protected information of the Restricted Group
or their customers. Nothing herein will prevent you from using information
generally known to you or generally by persons employed in the industry so
long as it does not involved confidential information.
b. During the period of your employment and for one year after the
Termination Date, you will not, directly or indirectly, (i) either as
principal, manager, agent, consultant, officer, stockholder, partner,
investor, lender or employee or in any other capacity, carry on, be engaged
in or have any financial interest in, any business which is in competition
with the business of the Restricted Group as of the Termination Date or
with any business acquired or established by any member of the Restricted
Group thereafter if such acquisition or establishment was actively planned
or in progress while you were employed by the Company or (ii) on your own
behalf or on behalf of any person, firm or company, hire any person who has
been employed by any member of the Restricted Group at any time during the
12 months immediately preceding such hiring.
<PAGE> 4
4
For purposes of this paragraph, a business will be deemed to be in
competition with the Restricted Group if it is principally involved in the sale,
or other dealing in any property or the rendering of any service sold, dealt in
or rendered by the Restricted Group as a part of the business of the Company at
the Termination Date within the same geographic area in which the Restricted
Group effects such sales or dealings or renders such services. Nothing in this
paragraph will be construed so as to preclude you from (a) investing in any
publicly or privately held company, provided your beneficial ownership of any
class of such company's securities does not exceed 1% of the outstanding
securities of such class or (b) working in any sector of the safety industry
where, at the time of your termination of employment, the Company is not (i)
marketing or manufacturing products or (ii) acquiring, establishing or planning
to acquire or establish a company that markets or manufactures such products in
that sector of the market.
You agree that the covenant not to compete set forth herein is reasonable
under the circumstances and will not interfere with your ability to earn a
living or to otherwise meet your financial obligations. You and the Company
agree that if in the opinion of any court of competent jurisdiction such
restraint is not reasonable in any respect, such court will have the right,
power and authority to excise and modify such provision or provisions of this
covenant as so amended. You agree that any breach of the covenants contained in
this paragraph would irreparably injure the Company. Accordingly, you agree that
the Company may, in addition to pursuing any remedies it may have in law or in
equity, cease making any payments otherwise required by this Agreement and
obtain an injunction against you from any court having jurisdiction over the
matter restraining any further violation of this Agreement by you. This covenant
restricting your ability to compete with any member of the Restricted Group
shall supersede any other such covenants with the Restricted Group that have
been entered into on or before the date of this Agreement.
d. You will return to the Company any letters, files, documents,
equipment, supplies, security access passes, property or other items in
your possession or control which were entrusted or issued to you during the
course of your employment with the Company.
e. You will not make any material disparaging statements about the
Company, its affiliates, or their employees, officers, directors and
shareholders, or any of their policies or practices to any of their
customers, competitors, suppliers, employees, former employees, or the
press or other media in any country.
6. The Company agrees that it will not issue any press release or other public
statement containing, and will use its reasonable best efforts to prevent its
officers and directors from making, any material disparaging statements about
you.
7. If all documents relating to your employment with the Company are executed
and you commence employment therewith prior to or by January 31, 1998, the
Company agrees to pay the reasonable legal fees and expenses (as shown on
appropriate documentation) incurred by you in connection with the negotiation
and preparation of this Agreement in an amount not to exceed $30,000; PROVIDED,
HOWEVER, that in the event that such documents are not executed and you do not
commence employment with the Company, the Company will only pay up to
twenty-five percent (25%) of such legal fees and expenses.
<PAGE> 5
5
8. You agree to execute a release in the form attached hereto as a condition to
the receipt of any payment due under the terms of this Agreement.
9. This Agreement will be construed and interpreted, and the rights and
liabilities of the parties hereto shall be determined, in accordance with the
laws of the State of New York without regard to rules pertaining to conflict of
laws. In respect of any suit, action or proceeding arising out of or relating to
this Agreement, each of the parties hereby submits to the exclusive jurisdiction
of and hereby irrevocably waives any objection that may now or hereafter exist
to the laying of venue in any court of competent jurisdiction in the State of
Indiana, and hereby waives any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.
10. The Agreement may be executed in counterparts.
If the foregoing is acceptable and agreed to by you, please sign on
the line provided below to signify such acceptance and agreement and return the
executed copy to Norm Alpert.
AEARO CORPORATION
[s/Norman W. Alpert]
-------------------------------
By: N.W. Alpert
Title: Chairman
Accepted and Agreed
[s/Michael A. McLain]
- --------------------------------
Mike McLain
<PAGE> 1
Exhibit 10.2
AGREEMENT
This Agreement (the "Agreement") is made by and between Aearo
Corporation ("Aearo") (f/k/a Cabot Safety Holdings Corporation), a Delaware
corporation, and John D. Curtin, Jr. ("Mr. Curtin"). The "Execution Date" of
this Agreement is the date of signing by the last party to sign it. The
Agreement shall become effective on the eighth (8th) day following the Execution
Date (the "Effective Date").
WITNESSETH
WHEREAS, Mr. Curtin has been employed by Aearo and has held the offices
of Chairman of the Board of Directors, President and Chief Executive Officer;
and
WHEREAS, Aearo highly values Mr. Curtin's past contributions to Aearo
and believes that he can make significant future contributions to Aearo; and
WHEREAS, Mr. Curtin and Aearo seek to establish an amicable arrangement
for Mr. Curtin to resign from his current offices, continue his employment with
Aearo on a more limited basis, establish an at-will arrangement for Mr. Curtin
to provide additional assistance on special projects, and to perform other
responsibilities as specified in this Agreement in exchange for terms specified
in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, Mr. Curtin and Aearo agree as follows:
1. RESIGNATION FROM OFFICES. Effective as of the opening of business on
March 23, 1998 ("Officer Resignation Date"), Mr. Curtin shall be considered to
have resigned from his positions as Chairman of the Board of Directors,
President and Chief Executive Officer of Aearo and any similar office he holds
with any subsidiary of Aearo at that time; provided that Mr. Curtin shall not be
considered to have resigned from his affiliations with Aearo as an employee or
as a member of the Boards of Directors of Aearo and its direct wholly-owned
subsidiary Aearo Company (f/k/a Cabot Safety Corporation).
2. CONTINUED EMPLOYMENT.
(a) TERM AND TITLE. Beginning effective on the day following the
Officer Resignation Date, Aearo shall employ Mr. Curtin and Mr. Curtin agrees
that he shall be employed by Aearo as Senior Advisor. Mr. Curtin's employment
with Aearo shall terminate effective as of the two-year anniversary of the
Officer Resignation Date (unless terminated earlier pursuant to Section 2(d)
(Early Termination) below).
(b) DUTIES. As Senior Advisor, Mr. Curtin shall perform such
responsibilities as may be reasonably requested by the Chief Executive Officer
of Aearo and that are consistent with Mr. Curtin's expertise and experience
("Advisory Services") including, without implication of
<PAGE> 2
limitation, responding to requests for assistance concerning transitional
matters and responding to requests for advice concerning business management
matters; provided that Mr. Curtin shall not be required to provide advice or
assistance directly related to potential mergers or acquisitions except as a
Special Projects Consultant as set forth more fully below.
(c) SCHEDULING. Mr. Curtin shall provide Advisory Services to the
extent and when reasonably requested by the Chief Executive Officer of Aearo;
provided that Mr. Curtin shall not be required to provide Advisory Services in
excess of twenty (20) hours per month, nor shall Mr. Curtin be required to
provide Advisory Services at any time that would unreasonably interfere with
other personal or professional commitments that Mr. Curtin may have.
(d) EARLY TERMINATION. Notwithstanding the foregoing, Mr. Curtin may
resign from employment as Senior Advisor at any time upon notice to Aearo. Aearo
may terminate Mr. Curtin's employment as Senior Advisor only for cause. For
purposes of this Agreement, "cause" shall mean willful misconduct which
continues for a period of thirty (30) days after written notice to Mr. Curtin
and an opportunity to address the Board of Directors with respect to the
specific conduct that constitutes the basis for termination. If Mr. Curtin's
employment is terminated by reason of his death or permanent disability
incapacitating him to perform his duties hereunder, Mr. Curtin, or his estate,
as the case may be, shall be entitled to the continued payment of compensation
and other benefits hereunder for the balance of the term of this Agreement.
3. SPECIAL PROJECTS.
(a) DUTIES, TERM AND TITLE. Aearo shall retain Mr. Curtin and Mr.
Curtin agrees to be retained by Aearo to consult on an as needed basis as a
"Special Projects Consultant" with respect to identified projects as may be
reasonably requested by the Chief Executive Officer of Aearo, consistent with
Mr. Curtin's expertise and experience ("Special Projects Services"). Special
Project Services are currently expected to include the following: providing
general business and financial analysis, including transaction feasibility
analysis, with respect to mergers and acquisitions and other transactions;
assisting in the preparation of materials for consideration by the Board of
Directors of Aearo in connection with mergers and acquisitions and other
transactions; developing a list of potential parties which might be interested
in mergers and acquisitions transactions and contacting parties on such list as
approved by Aearo; and consulting with and advising Aearo concerning
opportunities for merger and acquisitions transactions which have been
identified and, if so requested by Aearo, participating in negotiations for such
transactions. Either Aearo or Mr. Curtin, in its or his sole discretion, may
terminate such engagement by written notice at any time. During such period when
Mr. Curtin is otherwise employed by Aearo as Senior Advisor and also continues
to be engaged by Aearo as Special Projects Consultant, Mr. Curtin's services as
Special Projects Consultant shall be considered to be performed as an employee
of Aearo. For any period following Mr. Curtin's employment as Senior Advisor
during which Mr. Curtin continues to be engaged as
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Special Projects Consultant, Mr. Curtin's services as Special Projects
Consultant shall be considered to be performed as an independent contractor.
(b) SCHEDULING OF SPECIAL PROJECTS SERVICES. Mr. Curtin shall perform
Special Projects Services to the extent and when reasonably requested by the
Chief Executive Officer of Aearo; provided that Mr. Curtin shall not be required
to perform Special Projects Services at any time that would unreasonably
interfere with personal or other professional commitments he may have; and
provided further that during such period when Mr. Curtin is a Special Projects
Consultant, Mr. Curtin shall not undertake personal or professional commitments
that would have the effect of precluding him from being available to perform up
to twelve (12) days of consulting services during any calendar quarter at such
reasonable times as Aearo may request.
4. PAYMENTS AND BENEFITS.
(a) CURRENT SALARY. Mr. Curtin shall be entitled to receive his base
salary as Chairman of the Board, Chief Executive Officer and President effective
to and including the Officer Resignation Date. Thereafter Mr. Curtin shall be
entitled to the salary, bonus, benefits or other compensation set forth in this
Agreement.
(b) BONUS. No later than the regular payroll date for salaried
employees next following the Effective Date ("First Payroll Date"), Aearo shall
pay to Mr. Curtin a lump sum bonus of Four Hundred Thousand Dollars ($400,000).
(c) VACATION PAY. Notwithstanding the continuation of Mr. Curtin's
employment with Aearo as set forth in this Agreement and without implied
limitation of the second sentence of Section 4(a) (Current Salary), Mr. Curtin
acknowledges and agrees that he shall not be entitled to accrue vacation time
after the Officer Resignation Date. Aearo acknowledges that Mr. Curtin accrued
and has not used accrued vacation time as of the Officer Resignation Date. No
later than the First Payroll Date, Aearo shall pay to Mr. Curtin on account of
such accrued and unused vacation time the amount of $47,000 in cash.
(d) SALARY AS SENIOR ADVISOR. Aearo shall pay Mr. Curtin at the salary
rate of One Hundred Thousand Dollars ($100,000) per year for his services as
Senior Advisor, with such salary to be paid in periodic installments on Aearo's
regular payroll dates, commencing no later than the First Payroll Date.
(e) BENEFITS AS AN EMPLOYEE.
(i) GENERAL. Based on the time commitment and/or nature of Mr. Curtin's
employment with Aearo following the Officer Resignation Date, Mr. Curtin
acknowledges that he shall not be eligible to continue his participation as an
active employee in any employee benefit plans, programs or policies of Aearo
following the Officer Resignation Date except the following: the Aearo Company
Employees' Retirement Account Plan, the Aearo Company
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<PAGE> 4
Employee 401(k) Savings Plan, and the Aearo Company Supplemental Executive
Retirement Plan. Mr. Curtin's participation in the foregoing plans shall
continue for the full term of Aearo's agreement to employ Mr. Curtin as Senior
Advisor hereunder and shall be on the then applicable terms of the relevant
plans, as they apply to the executive employees of Aearo as a group from time to
time.
(ii) HEALTH BENEFITS. Aearo shall use all commercially reasonable
efforts to obtain a waiver from the insurer of its medical and dental benefit
plans to permit Mr. and Mrs. Curtin to retain coverage under such plans while
Mr. Curtin is employed as a Senior Advisor. If such waiver cannot be obtained,
then as soon as practicable following the Officer Resignation Date, Aearo shall
offer Mrs. Curtin the ability to participate in Aearo's group medical and dental
benefit plans pursuant to the law known as "COBRA" and Aearo shall contribute to
the cost of COBRA coverage in an amount not to exceed the amount that Aearo
regularly pays for medical and dental benefits for a full time employee with
single coverage. Aearo shall provide Mr. Curtin during Mr. Curtin's employment
as Senior Advisor with an additional cash payment in an amount reasonably
determined by Aearo to be sufficient to enable Mr. Curtin to secure Medicare
supplement insurance on his own, as well as any federal and state taxes
associated with such cash payment.
(f) SPECIAL PROJECTS SERVICES COMPENSATION. As compensation for Mr.
Curtin's availability for and performance of services as Special Projects
Consultant, Aearo shall pay to Mr. Curtin Twenty-Five Thousand Dollars ($25,000)
per calendar quarter, provided that for the period beginning on the Officer
Resignation Date and ending on March 31, 1998, Mr. Curtin's compensation as
Special Projects Consultant shall be $16,667. Aearo shall make such payment on
the regular payroll date next following the end of each quarter during which Mr.
Curtin has served as Special Projects Consultant. In addition, if the Chief
Executive Officer of Aearo requests that Mr. Curtin perform Special Projects
Services for more than twelve (12) full business days during any calendar
quarter (or eight (8) full business days during the period beginning on the
Officer Resignation Date and ending on March 31, 1998), Aearo shall pay Mr.
Curtin additional compensation at the rate of Two Thousand Dollars ($2,000) per
day.
(g) INCENTIVE COMPENSATION. In consideration of the fact that a
material component of Mr. Curtin's services as Senior Advisor and/or Special
Projects Consultant is expected to consist of advice and assistance relating to
Aearo's acquisitions program, the Chief Executive Officer and Board of Directors
of Aearo may provide Mr. Curtin with additional compensation as a bonus if they,
or any compensation committee of the Board, in their discretion, determine that
Mr. Curtin's contribution in relation to acquisitions or dispositions of
businesses or assets warrants such additional payment.
5. BOARD OF DIRECTORS MEMBERSHIP. Reference is made to that certain
Stockholders' Agreement dated as of July 11, 1995 (the "Stockholders'
Agreement") among Vestar Equity Partners, L.P. ("Vestar"), Cabot CSC
Corporation, formerly known as Cabot Safety Corporation ("Cabot"), Aearo, Cabot
Corporation ("Cabot Parent") and the parties identified
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<PAGE> 5
on the signature pages hereto or to the supplementary agreements referred to in
Section 5.14 thereof as Management Investors (the "Management Investors"). Aearo
and, by their execution of a counterpart hereof, Vestar, Cabot and Cabot Parent,
hereby agree and acknowledge as follows (all capitalized terms used in this
Section 5 and not otherwise defined shall have the respective meanings set forth
in the Stockholders' Agreement):
(a) For purposes of Section 2.1 of the Stockholders' Agreement,
following the Officer Resignation Date Mr. Curtin shall continue to serve as a
member of the Board of Directors of Holdings and each Subsidiary of Holdings as
a designee of the Management Investors until and unless he resigns from the
Board, or is removed by the Management Investors in accordance with Section
2.1(b) of the Stockholders' Agreement.
(b) Mr. Curtin shall continue to be a party to the Stockholders'
Agreement as a "Management Investor" and all shares of Common Stock currently or
in the future owned by Mr. Curtin shall remain subject to the provisions of, and
entitled to the benefits of the Stockholders' Agreement, including without
limitation Section 3 (Transfers and Issuances) and Section 4 (Registration
Rights).
6. STOCK OPTION AND STOCK.
(a) STOCK OPTION. Reference is made to that certain Non-Qualified
Option to Purchase Shares of Common Stock (the "Option") under the Aearo
Corporation Executive Stock Option Plan dated June 26, 1996 (the "1996 Plan")
whereby Mr. Curtin was granted an option to purchase prior to June 26, 2006 (the
"Expiration Date") at an exercise price of $600.00 per share 812.5 shares of
common stock, $.01 par value per share ("Common Stock"), of Aearo. Aearo and Mr.
Curtin agree to the following amendments to the Option effective as of the
Effective Date:
(i) The number of shares of Common Stock subject to the Option shall be
decreased from 812.5 to 325; the exercise price shall remain unchanged;
(ii) If and when the Board of Directors of Aearo, or any compensation
committee of the Board, resolves to (A) reduce with respect to other options
granted under the 1996 Plan held by the executive employees of Aearo the
compounded annual rate to be used for calculating whether and when the
Vestar/Cabot Return has been achieved for purposes of the vesting schedule set
forth in Paragraph 1 (Vesting Schedule) and EXHIBIT A of the Option, or (B) make
other modifications to other options granted under the 1996 Plan held by the
executive employees of Aearo which improve the terms of such options for the
holders, then the Option shall be deemed amended simultaneously with analogous
amendments to such other options in order to extend the benefits of such
reduction or other modifications to Mr. Curtin. The Option shall otherwise
remain unchanged;
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<PAGE> 6
(iii) The provisions of Paragraphs 3(a), 3(b) and 3(d), but not
Paragraph 3(d), of the Option shall be deleted in their entirety.
(iv) The provisions of Paragraphs 9 (Company's Right to Purchase
Shares) and 10 (Executive's Right to Put Shares) and all definitions of the
terms set forth in Paragraph 8 (Certain Definitions) other than "Stockholders'
Agreement" shall be deleted in their entirety.
(b) STOCK. Reference is made to that certain Executive Security
Purchase Agreement dated as of July 11, 1995 by and between Aearo Corporation
(f/k/a Cabot Safety Holdings Corporation) and Mr. Curtin (the "ESPA") pursuant
to which Mr. Curtin purchased from the Company 4,950 shares of Common Stock.
Aearo and Mr. Curtin agree to the following amendments to the ESPA effective as
of the Effective Date:
(i) The definitions set forth in the ESPA as Sections 1.1 (Applicable
Percentage), 1.3 (Cause), 1.5 (Cost), 1.6 (Fair Market Value), 1.7 (Permanent
Disability), 1.9 (Retirement), 1.10 (Seasoned Shares), 1.12 (Termination of
Employment or Service), 1.13 (Unseasoned Shares) and 1.14 (Realization of Vestar
Return) shall be deleted in their entirety.
(ii) Simultaneously with the effectiveness of this Agreement, Aearo is
repurchasing from Mr. Curtin 1,237.5 shares of Common Stock at a price of
$200.00 per share paid in cash.
(iii) Sections 3.1 (Company's Right to Purchase Purchased Shares) and
3.2 (Executive's Right to Put Purchased Shares) shall be deleted in their
entirety.
7. EXPENSES. Subject to proper documentation, Aearo shall reimburse Mr.
Curtin for all reasonable business expenses that he may incur in the performance
of services as Senior Advisor or Special Projects Consultant.
8. LITIGATION COOPERATION. During and after Aearo's employment of Mr.
Curtin, Mr. Curtin agrees to cooperate fully with Aearo in the defense or
prosecution of any claims or actions which already have been brought or which
may be brought in the future against or on behalf of Aearo which relate to
events or occurrences that transpired during his employment or other affiliation
with Aearo or which may transpire during Mr. Curtin's work as Senior Advisor or
Special Projects Consultant. Mr. Curtin's full cooperation in connection with
such claims or actions shall include, but not be limited to, being available to
meet with counsel to prepare for discovery or trial and to act as a witness when
requested by Aearo at reasonable times designated by Aearo. Aearo shall
reimburse Mr. Curtin for any reasonable out-of-pocket expenses incurred in
connection with such cooperation, subject to reasonable documentation.
9. TAX TREATMENT. All payments and other consideration provided to Mr.
Curtin pursuant to this Agreement shall be subject to any deductions,
withholdings, and tax reporting that Aearo reasonably determines to be required
for tax purposes.
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10. OTHER AGREEMENTS. Except to the extent specifically provided in
this Agreement, this Agreement represents the entire agreement between the
parties and no previous contracts, promises, arrangements or agreements shall be
effective or enforceable. Notwithstanding the foregoing, nothing herein shall be
construed to affect any rights to indemnification of Mr. Curtin pursuant to and
subject to Aearo's charter and by-laws.
11. RELEASES.
(a) RELEASE BY MR. CURTIN. Mr. Curtin hereby irrevocably and
unconditionally releases, acquits and forever discharges Aearo and its
affiliates and the predecessors, successors, assigns, agents, directors,
officers, employees, representatives, and attorneys of Aearo and its affiliates,
and all persons acting by, through, under, or in concert with any of the
foregoing (collectively referred to herein as "Releasees"), from any and all
charges, complaints, claims, liabilities, obligations, promises, agreements,
damages, causes of action, suits, demands, losses, debts, and expenses of any
nature whatsoever, known or unknown ("Claims") which Mr. Curtin now has, owns,
or holds, or claims to have, own, or hold against each of any of the Releasees
through and including the Effective Date. This General Release of Claims shall
include, without implication of limitation: all Claims relating to Mr. Curtin's
employment with Aearo; all Claims relating to the resignations set forth in
Section 1 (Resignation from Offices) or the establishment of the other terms of
this Agreement; all Claims of intentional interference with advantageous or
contractual relations; all Claims of wrongful termination of employment; all
Claims of termination in violation of public policy; all Claims of breach of
either express or implied contract; all Claims of breach of any express or
implied covenant of employment, including the covenant of good faith and fair
dealing; all Claims of discrimination under any federal or state statute or the
common law, including but not limited to Mass. Gen. Laws ch. 151B, Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act, and the
Americans with Disabilities Act; all Claims for indemnification of legal fees
and expenses; and all Claims for interest, attorneys' fees and costs. This
General Release shall not be construed to impair Mr. Curtin's right to enforce
the terms of this Agreement.
(b) ACKNOWLEDGMENTS AND OTHER TERMS. Mr. Curtin acknowledges that he
has been advised in writing to consult with an attorney prior to executing this
Agreement, that he has carefully read and fully understands all of the
provisions of this Agreement, and that he is voluntarily entering into this
Agreement. Mr. Curtin acknowledges that he has been given the opportunity, if he
so desired, to consider this Agreement for twenty-one (21) days before executing
it. In the event that Mr. Curtin has executed this Agreement within less than
twenty-one (21) days of the date of its delivery to him, Mr. Curtin acknowledges
that such decision was entirely voluntary and that he had the opportunity to
consider this Agreement for the entire twenty-one day period. Aearo acknowledges
that for a period of seven (7) days from the date that it is executed, Mr.
Curtin shall retain the right to revoke this Agreement by written notice that is
received by the Vice President and General Counsel of Aearo before the end of
such period, and that this Agreement shall not become effective or enforceable
until after the
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expiration of such revocation period. Mr. Curtin represents and acknowledges in
executing this Agreement that he does not rely and has not relied upon any
representation or statement made by any of the Releasees or by any of the
Releasees' agents, representatives, or attorneys with regard to the subject
matter, basis or effect of this Agreement. Mr. Curtin further represents that he
has not filed any complaints or charges against Aearo with any court or
governmental agency and that he has not transferred any Claim to any person or
entity.
(c) RELEASE BY AEARO. Aearo hereby irrevocably and unconditionally
releases, acquits and forever discharges Mr. Curtin from any Claims which Aearo
now has, owns, or holds, or claims to have, own, or hold against Mr. Curtin
through and including the Effective Date, including, without implication of
limitation, all Claims relating to Mr. Curtin's employment with Aearo or service
as a member of the Board of Directors of Aearo and any of its subsidiaries. This
General Release shall not be construed to impair Aearo's right to enforce its
terms of this Agreement.
12. NON-COMPETITION.
(a) Mr. Curtin acknowledges that under the terms of this
Agreement: (i) he will be allowed to retain beneficial ownership of a larger
number of shares of Common Stock, including shares subject to the Option, than
he would otherwise be entitled to retain under the various agreements presently
in effect with Aearo, (ii) he will be retained as an employee of Aearo for two
years after the Effective Date and as a consultant to Aearo for a potentially
unlimited period of time (subject to the termination provisions hereof) and
(iii) he will continue to have access to valuable trade secrets and confidential
information regarding the strategies, business and operations of Aearo and its
subsidiaries which are of substantial and material value. In consideration of
the foregoing, Mr. Curtin hereby covenants and agrees that until the later to
occur of (A) the third anniversary of the Effective Date or (B) the first
anniversary of the last to occur of the termination of his employment with Aearo
as Senior Advisor, his engagement by Aearo as Special Projects Consultant or his
service as a member of the Board of Directors of Aearo (the "Expiration Date"),
he shall not, either directly or indirectly, for himself, or through, on behalf
of, or in conjunction with, any person, firm, partnership, corporation, or other
entity:
(I) divert or attempt to divert any business or customer,
or potential business or customer, of Aearo or any of its subsidiaries to any
competitor, by direct or indirect inducement or otherwise;
(II) solicit or induce any present or future employee of
Aearo or any of its subsidiaries to accept employment with Mr. Curtin or with
any business, corporation, partnership, association or other person with which
Mr. Curtin may be associated or induce such person to leave his or her
employment without Aearo's prior written consent; or
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(III) own, maintain, operate, engage in, advise, help, make
loans to, or have any interest in, either directly or indirectly, any business
(x) in the Designated Industries (as defined below) or (y) directly competitive
with any business outside the Designated Industries that is acquired or
developed (or the acquisition or development of which is being actively pursued)
by Aearo and its subsidiaries between the Effective Date and the Expiration
Date; PROVIDED, HOWEVER, that this Section 12(a)(III)(y) shall not apply to any
businesses acquired or developed by Aearo and its subsidiaries following the
Effective Date if, prior to the date of such acquisition or development, Mr.
Curtin has acquired a direct or indirect interest in a business that is
competitive with such acquired or developed business.
The term "Designated Industries" means, collectively: (AA) the
manufacture and/or sale of personal protection equipment ("PPE"), including but
not limited to the hearing, eye, face, head and respiratory segments of the PPE
market in which Aearo and its subsidiaries are presently engaged (disposable and
reusable hearing protection devices, prescription and non-prescription safety
eyewear, goggles, face shields, reusable and disposable respirators, hard hats
and first aid kits) and any other segments of the PPE market, such as protective
clothing (safety garments, gloves, shoes and boots) or fall protection
equipment, and (BB) the manufacture and sale of impact-resistant,
shock-absorbing or energy absorbing materials for noise, vibration and shock
control applications in which Aearo's Specialty Composites operating unit is
presently engaged.
(b) There is no geographical limitation on the restrictions set
forth in Section 12(a). The restrictions set forth in this Section 12, however,
shall not apply to legal or beneficial ownership by Mr. Curtin of less than a 5%
of the outstanding equity securities of any publicly held business entity.
(c) If any part of the restrictions set forth in this Section 12
is found to be unreasonable in time or distance, each month of time or mile of
distance may be deemed a separate unit so that the time or distance may be
reduced by appropriate order of the court to that deemed reasonable. Aearo shall
have the right, in its sole discretion, to reduce the scope of these
restrictions effective immediately upon receipt by Mr. Curtin of written notice,
and Mr. Curtin agrees that he shall comply forthwith with the reduced
restrictions, so long as any such reduction does not add additional burden,
limitation or restriction on Mr. Curtin.
(d) Mr. Curtin acknowledges that any failure to comply with the
requirements of this Section 12 will cause Aearo irreparable injury, and Mr.
Curtin hereby accordingly consents to the entry of an order by any court of
competent jurisdiction for specific performance of, or for an injunction against
violation of, the requirements of this Section 12. Aearo may further avail
itself of any other legal or equitable rights and remedies that it may have
under this Agreement or otherwise.
13. WAIVER. No waiver of any provision hereof shall be effective
unless made in writing and signed by the waiving party. The failure of any party
to require the performance
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of any term or obligation of this Agreement, or the waiver by any party of any
breach of this Agreement, shall not prevent any subsequent enforcement of such
term or obligation or be deemed a waiver of any subsequent breach.
14. NOTICES. Any notices, requests, demands, and other
communications provided for by this Agreement shall be sufficient if in writing
and delivered in person or sent by registered or certified mail, postage
prepaid, by personal delivery, or by a nationally recognized overnight mail
service to Mr. Curtin at the last address he has filed in writing with Aearo or,
in the case of Aearo, at its main offices, attention of the Chairman.
15. AMENDMENT. This Agreement may be amended or modified only by a
written instrument signed by Mr. Curtin and by a duly authorized representative
of Aearo.
16. SEVERABILITY. Should any provision of this Agreement be
declared or be determined by any court to be illegal or invalid, the validity of
the remaining parts, terms, or provisions shall not be affected thereby and said
illegal or invalid part, term, or provision shall be deemed not to be a part of
this Agreement.
17. NO ADMISSION. Nothing in this Agreement shall be construed as
an admission or acknowledgment that either party violated any legal or other
obligation to the other or to anyone else.
18. INTERPRETATION. The language of all parts of the Agreement
shall in all cases be construed as a whole, according to its fair meaning, and
not strictly for or against any of the parties.
19. GOVERNING LAW. This is a Massachusetts contract and shall be
construed under and be governed in all respects by the laws of the Commonwealth
of Massachusetts, without giving effect to the conflict of laws provisions of
Massachusetts law.
20. COUNTERPARTS. This Agreement may be executed in counterparts.
Each counterpart shall have the efficacy of a signed original.
21. BINDING NATURE OF AGREEMENT. This Agreement shall be binding
upon each of the parties and upon their heirs, administrators, representatives,
executors, successors and assigns, and shall inure to the benefit of each party
and to their heirs, administrators, representatives, executors, successors, and
assigns.
[END OF TEXT]
10
<PAGE> 11
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by Aearo, by its duly authorized officer, and by Mr. Curtin, on the
date or dates indicated below.
AEARO CORPORATION
Date: March 23, 1998 By: /s/
----------------------------------------
Name:
Title:
Date: March 23, 1998 /s/ John D. Curtin, Jr.
--------------------------------------------
JOHN D. CURTIN, JR.
11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS OF AEARO CORPORATION AS OF MARCH 31, 1998
(UNAUDITED) AND SEPTEMBER 30, 1997 AND THE CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
CONTAINED IN AEARO CORPORATION'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 5,271
<SECURITIES> 0
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0
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