<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
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.)
5457 WEST 79TH STREET
INDIANAPOLIS, INDIANA 46268
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(317) 692-6666
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 1, 1999, all voting stock of the Registrant was held by
affiliates of the Registrant.
The number of shares of the Registrant's common stock, par value $.01
per share, outstanding as of December 15, 1999 was 102,537.5.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
Item 1. Business 2
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations 14
Item 7A. Market Risk Disclosure 21
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 45
PART III
Item 10. Directors and Executive Officers 46
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners and Management 53
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 57
</TABLE>
1
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Aearo Corporation, a Delaware corporation ("Aearo"), and its direct wholly-owned
subsidiary, Aearo Company I, doing business as Aearo Company, a Delaware
corporation (the "Subsidiary"), are collectively referred to herein as the
"Company". The Company is one of the leaders in the hearing, eye, face, head and
respiratory protection segments of the personal protection equipment ("PPE")
market worldwide. PPE encompasses all articles of equipment and clothing worn
for the purpose of protecting against bodily injury, including safety eyewear
and goggles, ear muffs and earplugs, respirators, hard hats, gloves, safety
clothing and safety shoes. The Company manufactures and sells hearing protection
devices, communication headsets, prescription and non-prescription safety
eyewear, face shields, reusable and disposable respirators, hard hats and first
aid kits in more than 85 countries under its well-known brand names:
AOSafety(R), E-A-R(R), and Peltor(R). The Company attributes its leading market
positions to:
- Strong, well-recognized brand names
- A reputation for providing innovative, quality products
- Intensive coverage of multiple distribution channels targeting a
wide array of end-users
- One of the industry's broadest product offerings, and
- A commitment to providing the highest level of customer service
The Company also manufactures a wide array of energy-absorbing materials that
are incorporated into other manufacturers' products to control noise, vibration
and shock. These products are marketed under its brand name E-A-R(R) Specialty
Composites.
Aearo derives all of its operating income and cash flow from the Subsidiary, and
its only material assets are the shares of common stock of the Subsidiary that
Aearo owns. Other than its ownership of the Subsidiary and its guarantee of the
indebtedness of the Subsidiary, Aearo has no business or operations. Aearo was
incorporated in the state of Delaware in June 1995. Detailed information with
respect to the Company's segment reporting is presented in Note 15 of Notes to
Consolidated Financial Statements of Aearo Corporation contained in Item 8
hereof.
RECENT DEVELOPMENTS
On October 28, 1999, the Company acquired Ontario, Canada based Norhammer
Limited for approximately Canadian $5.5 million. Norhammer is a market leader in
the earmuff and communication headset segments in Canada and has been in
operation for more than two decades. It has been the exclusive distributor of
the Company's Peltor(R) brand products in Canada and had annual sales of
Canadian $6.2 million in its last fiscal year. Norhammer specializes in adapting
Peltor(R) products for the U.S. and Canada, by linking these products to two-way
radios (made by such companies as Nokia and Motorola). Norhammer also provides
after-sales service. Norhammer will be operated within the Safety Products
segment of the Company.
On August 2, 1999, the Company acquired Safety Optical, Inc. of Athens,
Tennessee for approximately $3.7 million. Safety Optical is the fifth largest
prescription safety eyewear manufacturer in the U.S. with revenues of
approximately $4.5 million and has a history of growth in sales and
profitability. Safety Optical will be operated within the Safety Prescription
Eyewear segment of the Company.
SEGMENTS
The Company operates three business segments. The Safety Products segment
manufactures and sells hearing protection devices, communication headsets,
non-prescription safety eyewear, face shields, reusable and disposable
respirators, hard hats and first aid kits in more than 85 countries under its
well-known brand names: AOSafety(R), E-A-R(R), and Peltor(R). The Safety
Products segment accounted for approximately 73% of the Company's net sales in
fiscal 1999.
The Safety Prescription Eyewear ("SRx") segment manufactures and sells products
that are designed to protect the eyes from the typical hazards encountered in
the industrial work environment. The Company purchases component parts (lenses
and the majority of its frames) from various suppliers, grinds and shapes the
lenses to the customer's prescription, and then assembles
2
<PAGE> 4
the glasses using the customer's choice of frame. The Safety Prescription
Eyewear segment accounted for approximately 12% of the Company's net sales in
fiscal 1999.
The Specialty Composites segment manufactures a wide array of energy-absorbing
materials that are incorporated into other manufacturers' products to control
noise, vibration and shock. Specific product applications for such materials
include noise-reducing and vibration-damping matting used in under hood and cab
treatments of transportation equipment such as Class 8 heavy truck, shock
protection parts for electronic devices such as computer disk drives, servers,
and durable energy-absorbent and cushioning foams used in footwear. Specialty
Composites also produces specially formulated foam used in the manufacture of
the Safety Products segment's polyvinylchloride ("PVC") earplugs. Specialty
Composites accounted for approximately 15% of the Company's net sales in fiscal
1999.
PRODUCTS - SAFETY PRODUCTS SEGMENT
Within Safety Products, the Company classifies its products in five main
categories: hearing protection and communication headsets; eyewear; face and
head protection; respiratory protection; and other protection products.
HEARING PROTECTION. The Company's hearing protection products primarily consist
of disposable earplugs, reusable earplugs, and ear muffs. The Company has been a
leader in hearing conservation research and development since 1972, when it
first introduced the PVC disposable earplug. Today, this product is known as the
"Classic" (R) and its color yellow is a registered trademark of the Company in
the United States and Canada. This product is designed to be "rolled down" or
compressed before being inserted into the ear, and, as a result of its unique
slow recovery characteristics, the plug slowly expands (or "recovers") to fill
the ear canal and provide the desired protection. The Company's PVC earplugs are
available corded and uncorded and in a variety of packaging options. The Company
also produces versions of the PVC plug for many of the international airlines
for inclusion in their amenity kits. In addition the Company manufactures a full
line of polyurethane earplugs, including its E-Z-Fit(R), TaperFit(R),
E-A-Rsoft(TM), Yellow Neons(TM), and E-A-Rsoft(TM) Yellow Neon Blasts(TM)
products. These products serve the same disposable earplug category, but the PVC
earplugs have historically led the market.
In the reusable earplug segment of the market, the Company offers its patented
UltraFit(R) product, and the E-A-R(R) Express(TM), a patented product, which
features a polyurethane pod and a short plastic stem to facilitate sanitary and
easy insertion of the plug into the ear. The Company also offers the "Flex"(TM)
line of "semi-aural" banded products, designed for intermittent use. These
products feature articulating arms which allows for use in multiple positions
and for easy storage around the neck.
The Company sells a full range of ear muffs. Through its Peltor AB subsidiary
("Peltor") acquired on May 30, 1996, the Company manufactures, assembles and
sells a broad line of ear muffs and communication headsets. The Company is a
leader in providing noise attenuating headsets and wireless and hardwire
communication headsets. These products serve a variety of end user markets where
protection from harmful high and low frequency noise is sought or the need for
easy communication in noisy or remote environment exists, such as in the
construction, heavy machinery, airport, forestry, textile and mining industries.
The Company also offers auditory systems products, which are sold to
audiologists and are used in the testing of hearing.
EYE PROTECTION. Non-prescription eye and face protection is used in work
environments where a number of hazards present a danger to the eyes and face,
including dust, flying particles, metal fragments, chemicals, extreme glare and
radiation. The Company offers a large number of task-specific non-prescription
safety eyewear products. The basic categories of non-prescription eyewear
protection are non-prescription safety (or "plano") eyewear and goggles:
- Plano (Non-prescription) Eyewear. Plano eyewear accounts for the
majority of the Company's sales in this category and includes a
wide range of products from disposable visitor safety spectacles
to several lines of fashionable, reusable safety eyewear
available in different colors and with a variety of applications.
As part of the continuing product development efforts the Company
recently introduced its unique Lexa(R) and Fectoids(R) safety
eyewear products which feature a patented contoured lens which
wraps around the wearer's face, improving peripheral vision, and
eliminating the need for separate side shields.
- Goggles. The Company manufactures and sells a broad line of
goggles, which are typically required in work environments where
a higher degree of impact protection is required, where increased
protection against dust, mist or chemical splash is needed and/or
for use in welding operations. To meet these requirements, the
Company manufactures a variety of vented and non-vented goggles
with varying fields of view.
3
<PAGE> 5
FACE AND HEAD PROTECTION. Face and head protection is used in work environments
where a number of hazards present a danger to the eyes, face and head, including
dust, flying particles, metal fragments, chemicals, extreme glare, radiation and
items dropped from above. The basic categories of face and head protection are
faceshields and hard hats:
- Faceshields. Faceshields are designed to protect against heat,
splash and flying particles and are worn in conjunction with
other protective equipment, such as plano eyewear and
respirators. The patented AO TuffMaster(R) line of faceshields is
one of the leading brands in the market.
- Hard Hats. The Company manufactures and sells a broad line of
hard hats, including "bump" caps, full-brim hats and traditional
hard hats, featuring four or six point suspension, ratchet
adjustment, and a wide selection of colors and custom imprinting.
RESPIRATORY PROTECTION. Respiratory protection products are used to protect
against the harmful effects of contamination and pollution caused by dust,
gases, fumes, sprays and other contaminants. The Company offers a broad line of
disposable dust and mist masks, cartridge-equipped quarter-, half- and full-face
respirators, and "escape" respirators (a single-use respirator for emergencies).
OTHER PROTECTION PRODUCTS. The acquisition of Eastern Safety Equipment Co., Inc.
("Eastern") on January 3, 1996 added first aid kits as a new product category
for the Company while also increasing the Company's presence in the
Consumer/Do-It-Yourself(DIY) market. First aid kits are either for general use
or for industrial or commercial uses. Additional products in this group include
safety vests and safety cones.
PRODUCTS - SAFETY PRESCRIPTION EYEWEAR SEGMENT
The Company's safety prescription eyewear ("SRx") products are designed to
protect the eyes from the typical hazards encountered in the industrial work
environment. The Company purchases component parts (lenses and the majority of
its frames) from various suppliers, grinds and shapes the lenses to the end
users's prescription, and then assembles the glasses using the end user's choice
of frame. The Company views its ability to provide individual attention to each
patient through Company-employed, as well as independently contracted, eye care
professionals, as an essential part of its SRx business.
PRODUCTS - SPECIALTY COMPOSITES SEGMENT
The Company's Specialty Composites segment manufactures a wide array of
impact-resistant, shock and energy-absorbing materials for a variety of
applications employing a wide range of technologies, manufacturing processes and
applications know-how. Specialty Composites also produces the specially
formulated foam used in the manufacture of Safety Products' PVC earplugs. The
principal strengths of Specialty Composites are its specialized polyurethane
formulations, its thin-sheet casting capability, its composite technologies and
its applications and materials engineering. These strengths allow the Company to
manufacture in a single process, high value-added composites using casting,
extrusion and molding processes.
Specialty Composites' products fall into three broad categories: barriers and
absorbers for airborne noise control; damping and isolation products for
vibration and shock control; and energy control products for shock and comfort
management. The Company's products include: Isolos(R) LS polyurethane high
density cellular foams, which are manufactured by three production lines in a
variety of thicknesses, widths, colors and densities for reduction of excessive
vibration, noise and shock control and high resilience cushioning and sealing
applications; the Confor(R) heavily damped viscoelastic foam for ergonomic
cushioning applications; the Tufcote polyurethane and PVC thin sheet foams for
acoustical, absorption and noise control applications; and the Isodamp(R) PVC
foams for mechanical vibration reduction and noise and shock control.
Specialty Composites' products are sold into three markets: transportation;
health-related; and original equipment manufacturers ("OEM") in industrial
applications such as electronics and industrial equipment.
TRANSPORTATION MARKET. Specialty Composites' products are incorporated
into heavy trucks, automobiles, yachts, aircrafts, buses, leisure
vehicles and defense, farm and construction equipment in order to control
noise and vibration. For example, the Company supplies durable acoustical
foams and barriers that control sound and help meet noise standards for
Class 8 heavy trucks. The Company also provides complete noise and
vibration control packages for high-end yachts in order to contain engine
room noise and to soundproof passenger quarters. Specialty Composites
applications also exist with respect to executive and commuter aircraft,
where relatively thin, lightweight, multi-function damping composites
efficiently control sound and vibration.
4
<PAGE> 6
HEALTH-RELATED MARKET. Applications for the energy-absorbing
characteristics of Specialty Composites' products, particularly its line
of temperature-reactive foams, have been growing in the health-related
segment. Such materials enhance physical protection and improve comfort
in many devices including orthopedic mattress and pillows, leg braces,
orthotic devices, surgical pillows, wheelchair cushions, bicycle helmets,
keyboard wrist supports and occupational seating.
OEM MARKET. The Company produces an extensive assortment of polyurethane
and PVC die-cut and molded parts for vibration isolation and damping and
for shock protection and noise control in a wide range of other products,
including precision equipment and industrial machinery, computer disk
drives, pagers, industrial compressors and generator sets.
SALES AND MARKETING
The Company divides its sales force into its three business segments, as
follows:
SALES AND MARKETING - SAFETY PRODUCTS SEGMENT
Within Safety Products, sales are managed through four channels: North American
Industrial Distribution; Consumer/Do-It-Yourself ("DIY"); Europe; and
International. Each of these channels has its own sales force and its own
distinct yet synergistic sales strategies. In addition, through the acquisition
of Peltor, the Company has significantly expanded its sales coverage, including
a dedicated effort to serve the specialty communications ear muff market.
- North American Industrial Distribution. This is the largest
sales channel for Safety Products and includes approximately 200
Dialog(TM) industrial distributors and approximately 160
industrial dealers in the U.S., Canada and Mexico. Participation
in the Dialog(TM) program requires minimum purchase levels while
encouraging support across the full product line, in return for
rebates based on growth and volume as well as preferred
treatment regarding shipping terms, new products, field sales
support, and cooperative advertising. The Company also offers
Dialog(TM) distributors financial incentives for establishing
electronic order entry/invoicing interfaces with the Company and
for developing marketing programs which promote the Company's
products.
- Consumer/DIY. The Company is the leading supplier of safety
products to the consumer/DIY market and is the primary supplier
to such leading retailers as ACE, Home Depot, Lowe's, Wal-Mart
and Tru-Serv. The Company offers its AOSafety(R) brand of
industrial grade products in consumer packaging.
- Europe. The Company has a significant presence in Europe with
sales offices in the U.K., Sweden, Germany, France, Italy and
Spain. While the Company's historical strength in this market has
been in hearing protection devices sold through industrial
distributors, the Company has recently been successful in
pursuing sales of safety eyewear and has dedicated a full-time
eyewear product sales manager to lead and train the existing
sales organization.
- International. The Company exports its products around the world,
and this channel is managed through sales representatives located
in Singapore and Hong Kong (covering Asia), Miami (covering Latin
America), Sydney (covering Australia and New Zealand) and South
Africa (covering the Middle East).
SALES AND MARKETING - SAFETY PRESCRIPTION EYEWEAR SEGMENT (SRX)
Approximately 90% of the Company's safety prescription eyewear is sold directly
to more than 15,000 industrial locations, including a majority of the industrial
companies in the Fortune 500. The remainder of the Company's SRx products are
sold through the industrial distribution channel and direct to eye care
professionals. In most states, current laws require that prescription eyewear be
dispensed to the user by a licensed eye care professional, traditionally a local
optician. To ensure quality service to it is customers the Company also employs
its own licensed opticians.
SALES AND MARKETING - SPECIALTY COMPOSITES SEGMENT
The Company relies upon independent manufacturer representatives and the
Company's factory sales representatives to identify OEM applications for
Specialty Composites' products and technologies. Once such applications have
been identified, the Company's sales and technical staffs work closely with OEMs
to provide the customer with a low-cost, integrated solution for its noise,
vibration, shock, cushioning and/or comfort management problems.
5
<PAGE> 7
RESEARCH AND DEVELOPMENT
RESEARCH AND DEVELOPMENT - SAFETY PRODUCTS SEGMENT.
The Company believes that its research and development facilities, personnel and
programs are among the best in the PPE industry. Since its inception in 1972,
the Company's ultimate predecessor, the former E-A-R(R) (Energy Absorbing
Resins) Division of Cabot Corporation ("Cabot"), has been a leader in the
development of technology for understanding and measuring noise and hearing loss
and in developing products and programs to encourage hearing conservation. In
order to test the efficacy of its hearing protection products, the Company owns
and operates a National Voluntary Laboratory Accreditation Program ("NVLAP")
laboratory in the United States which is accredited for testing the efficacy of
hearing protection products. The Company also operates sound chambers and
testing facilities that measure the performance of its materials and designs.
Similarly, the Company believes that it has been a pioneer and leader in the
development and testing of safety eyewear and maintains extensive facilities for
the design and testing of safety eyewear. The research and development personnel
of the Company include recognized experts in the safety products industry.
RESEARCH AND DEVELOPMENT - SAFETY PRESCRIPTION EYEWEAR SEGMENT
This segment shares some of the expertise within the Safety Products Segment and
works extensively with outside suppliers for development of frames, lenses and
coatings.
RESEARCH AND DEVELOPMENT - SPECIALTY COMPOSITES SEGMENT
The research and development efforts of Specialty Composites focus on developing
proprietary materials and enhancing existing products in order to meet customer
needs identified by the Company's sales and technical staff. Products such as
the Isolos(R) LS polyurethane high density cellular foams and the Confor(R)
heavily damped viscoelastic foam are being introduced in a growing number of
applications across all markets served by Specialty Composites.
RAW MATERIALS AND SUPPLIERS
The Company consumes a wide variety of raw materials, supplies and components,
including, among others, paper products, chemicals, eyewear frames and optical
lenses. The paper products category includes corrugated paper, folding cartons
and packaging materials. The chemicals category includes plastic resins such as
polycarbonate and propionate, as well as polyols, plasticizers, substrates,
isocyanates and adhesives. The eyewear frames category includes frames for SRx
products.
The Company has a diversified base of raw material suppliers. The Company does,
however, use single sources for the supply of several raw materials, including
General Electric Plastics, a division of General Electric Company, for
polycarbonate resin, the primary raw material used in the production of the
Company's non-prescription optical lenses. The Company has not experienced any
significant delays or shortages in obtaining raw materials in recent years and
believes that alternative supplies of raw materials can be located on
commercially reasonable terms.
The Company outsources the production of less than 10% of its products to
various manufacturers. Competition among these manufacturers is strong, and,
although a change in manufacturers often results in a period of adjustment
concerning product quality and distribution, the Company, in the past, has
changed manufacturers with respect to certain of its outsourced products.
MANUFACTURING AND DISTRIBUTION OPERATIONS
The Company maintains a high degree of vertical integration, allowing it to
manufacture over 90% of the products that it sells. The Company's strengths
include the manufacture of foams (casting, molding and fabricating) for
Specialty Composites' products (including the foam used in the manufacture of
PVC earplugs); high speed assembly and packaging of earplugs; plastic injection
molding, coating and assembly of non-prescription eyewear; and assembly,
grinding, polishing and coating of prescription eyewear. Consistent across all
of the Company's manufacturing operations is an emphasis on producing high
quality products. Currently, all of the Company's manufacturing facilities have
been awarded ISO 9002 or ISO 9001 certification, indicating that the Company has
achieved and sustained a high degree of quality and consistency with respect to
its products. The Company believes that ISO certification is an increasingly
important selling feature both domestically and internationally, and certain
customers require ISO certification from all their vendors.
The Company's products are generally shipped within several days from the
receipt of a purchase order. As a result, backlog is not material to the
Company's business.
6
<PAGE> 8
MANUFACTURING AND DISTRIBUTION OPERATIONS - SAFETY PRODUCTS SEGMENT
The Company's Indianapolis, Indiana plant is the largest earplug manufacturing
facility in the world. It fabricates, molds and packages hundreds of millions of
pairs of earplugs annually, utilizing automated, high-speed assembly and
packaging equipment. Because the economies of scale present in this operation
are unique in the hearing protection products industry, management believes that
they offer the Company a competitive advantage of lower costs within the
production process. The plant's high-speed robotic fabrication, assembly and
packaging of earplugs facilitate cost-saving, high-volume production and improve
cycle time and inventory management. The Southbridge, Massachusetts facility is
the Company's largest manufacturing site and manufactures a wide variety of
Personnel Protection Equipment. These manufactured safety products include
respiratory, plug and muff type hearing, head and face, and a broad offering of
safety eyewear protection. The Southbridge operation has implemented a number of
World Class Manufacturing initiatives resulting in significant improvements in
the areas of Safety, Quality, Cost, and Customer Service.
The Company's principal international manufacturing operations are located in
Poynton, England; Varnamo, Sweden; and Ettlingen, Germany. The Poynton facility
serves customers in Western Europe, producing and packaging earplugs and other
hearing and eyewear products. The Varnamo, Sweden plant is the principal Peltor
manufacturing location; finished goods and components are shipped to customers
and other subsidiaries from this location. Certain of these products are
received in the Ettlingen, Germany plant that provides an assembly operation for
the components and a stocking facility for finished goods for shipment to
customers.
The Company fills virtually all of its domestic and certain of its international
orders through its state-of-the-art distribution center located in Indianapolis,
Indiana which has efficient bar-coding and scanning capabilities to assure rapid
turn-around time and service levels for customer orders.
MANUFACTURING AND DISTRIBUTION OPERATIONS - SAFETY PRESCRIPTION EYEWEAR
SEGMENT
The SRx production operations are comprised of three U.S. facilities, including
the newly acquired lab in Athens, Tennessee. In Canada, the Mississauga, Ontario
plant fabricates prescription eyewear and, together with a small prescription
eyewear laboratory in Montreal, produces SRx products for the Canadian market.
In Poynton, England the Company has an SRx laboratory that serves primarily the
U.K. market. These facilities possess lens surfacing, edging and grinding
machinery capable of handling glass, plastic and polycarbonate lenses. These are
then fitted into frames and the finished jobs are shipped to customers. These
facilities currently manufacture and distribute approximately 500,000 pairs of
safety prescription glasses annually.
MANUFACTURING AND DISTRIBUTION OPERATIONS - SPECIALTY COMPOSITES SEGMENT
Specialty Composites' products are manufactured in Indianapolis, Indiana and
Newark, Delaware. The Indianapolis plant, which supplies specially formulated
foam for the Company's PVC earplugs, manufactures and fabricates sheet and roll
PVC and polyurethane materials and molds polyurethane foams and solids. This
facility also houses applications engineering, research and development, quality
assurance and customer service support. The Newark, Delaware facility
manufacturers polyurethane foams and films and houses the Company's new
proprietary, thinsheet foam casting line, which will permit the casting of both
sheet and composite materials, including facings and substrates, in a single
pass through the line.
COMPETITION AND THE PERSONAL PROTECTION EQUIPMENT MARKET
A 1998 industry study prepared by Frost & Sullivan estimates that the size of
the U.S. segment of the PPE market in which the Company competes (which excludes
safety clothing, gloves and shoes) was approximately $1.3 billion in 1997.
Management estimates annual sales outside the United States for the segment of
the PPE market in which the Company competes were in excess of $1.2 billion in
1997.
The PPE market is fragmented and highly competitive as a large number of
relatively small, independent manufacturers with limited product lines serve the
PPE. The Company estimates that there are more than 500 manufacturers of PPE
(other than safety clothing, gloves and shoes) in the United States, Europe and
Southeast Asia. Participants in the industry range in size from small,
independent, single-product companies with annual sales of less than $15
million, to a small number of multinational corporations with annual sales in
excess of $100 million. The Company believes that participants in the PPE market
compete primarily on the basis of product characteristics (such as design, style
and functional performance), product quality, service and brand name recognition
and, to a lesser extent, price. From a positive competitive standpoint, the
Company believes it is well situated, primarily because of its large size and
its broad product offerings, to compete in a fragmented industry. The Company
enjoys certain economies of scale which are not available to smaller
competitors. Many of the
7
<PAGE> 9
Company's customers, particularly in the growing consumer/DIY channel, prefer
the type of "one stop shopping" that the Company can provide. The Company's
advanced distribution center further facilitates timely and accurate deliveries.
The specialty composites industry is highly competitive, and participants
compete on the basis of being able to provide cost-effective solutions to the
noise, shock and vibration problems of OEMs.
EMPLOYEES
As of September 30, 1999, the Company had 1,728 employees, of whom 1,139 were
primarily engaged in manufacturing, 405 in sales, marketing and distribution, 64
in research and development and 120 in general and administrative. The Company
believes its employee relations are good. The Company has one facility that
employs union members. This facility, located in Plymouth, Indiana, employs 38
members of the International Union of Electronic, Electrical, Salaried, Maritime
and Furniture Workers (out of a total of 80 employees), and the Company's
relations with these union members are fully satisfactory. The union contract
expires on June 26, 2001.
PATENTS AND TRADEMARKS
The Company owns and has obtained licenses to various domestic and foreign
patents, patent applications and trademarks related to its products, processes
and business. The Company values particularly highly its trademark for the color
yellow for earplugs in the United States and Canada and places significant value
on its overall patent portfolio. However, no single patent or patent application
is material to the Company. The Company's patents expire at various times over
the next 17 to 20 years.
GOVERNMENT REGULATION
As a manufacturer of safety products, the Company is subject to regulation by
numerous governmental bodies. Principal among the federal regulatory agencies in
the United States are: the Occupational Safety and Health Administration
("OSHA"), which regulates the usage of all PPE, with the exception of
respirators; the Environmental Protection Agency ("EPA"), which regulates
hearing protection devices; the Mine Safety and Health Administration ("MSHA")
and the National Institute of Occupational Safety and Health ("NIOSH"), both of
which certify respirators; and the Food and Drug Administration ("FDA"), which
regulates eye, face and respiratory protection products for the healthcare
industry. These agencies generally mandate that the Company's products meet
standards established by private groups, such as American National Standards
Institute ("ANSI"). The Company's products are also subject to foreign laws and
regulations. In particular, they must comply with the Canadian Standards
Association, European Committee for Normalization and Standards Australia. The
Company believes it is in compliance in all material respects with the
regulations and standards of these governmental bodies, and any failures to
comply with such regulations and standards in the past have not had a material
adverse effect on its business.
ENVIRONMENTAL MATTERS
The Company is subject to various evolving federal, state and local
environmental laws and regulations governing, among other things, emissions to
air, discharge to waters and the generation, handling, storage, transportation,
treatment and disposal of hazardous substances and wastes. The Company believes
that it is in substantial compliance with all such laws and regulations.
8
<PAGE> 10
ITEM 2. PROPERTIES
The Company owns and/or leases facilities in the United States, Canada, and
Europe. The following table sets forth the location of each, its square footage
and the principal function of each.
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET FUNCTION
- -------- ----------- --------
<S> <C> <C>
SAFETY PRODUCTS
Southbridge, 295,000 Manufacturing/Administration
Massachusetts................................
Indianapolis, Indiana 220,564 Distribution/Customer Service
(1)..........................................
Indianapolis, Indiana........................ 81,540 Manufacturing/Corporate Headquarters
Poynton, England 56,530 Manufacturing/Distribution/Customer Service
(2)..........................................
Varnamo, Sweden.............................. 125,595 Manufacturing/Distribution/Customer Service
Ettlingen, Germany........................... 45,000 Manufacturing/Distribution/Customer Service
Bognor Regis, England........................ 2,700 Customer Service
Paris, France................................ 1,894 Sales Office
Gravenhurst, Ontario, Canada................. 7,500 Manufacturing/Distribution/Customer Service
Barcelona, Spain............................. (*) Sales Office
Milan, Italy................................. (*) Sales Office
SAFETY PRESCRIPTION EYEWEAR
Chickasha, Oklahoma.......................... 15,000 Manufacturing/Customer Service
Plymouth, Indiana............................ 10,224 Manufacturing/Customer Service
Athens, Tennessee............................ 28,000 Manufacturing/Customer Service
Mississauga, Ontario, Canada................. 28,850 Manufacturing/Customer Service
Montreal, Quebec, Canada..................... 1,800 Manufacturing/Customer Service
SPECIALTY COMPOSITES
Indianapolis, Indiana........................ 156,000 Manufacturing/Distribution
Newark, Delaware............................. 157,300 Manufacturing/Distribution
</TABLE>
- ---------------------
(1) This facility also serves as an international distribution center and
central packaging operation with respect to certain of the Company's
products.
(2) This facility's primary function is manufacturing safety products.
However, the facility has a small prescription safety eyewear lab as
well.
(*) Less than 1,000 square feet.
The Company believes that its facilities are suitable for its operations and
provide sufficient capacity to meet the Company's requirements for the
foreseeable future. All of the Company's facilities are leased except for the
following facilities owned by the Company: (i) the Safety Products manufacturing
facility in Indianapolis, (ii) the Specialty Composites
manufacturing/distribution facility in Indianapolis, (iii) the Specialty
Composites manufacturing facility in Newark, and (iv) the Safety Products
manufacturing facility in Ettlingen, Germany. The Company believes that it will
be able to renew each of its leases upon their respective expiration dates on
commercially reasonable terms. In addition, the Company believes that it would
be able to lease suitable additional or replacement space on commercially
reasonable terms.
9
<PAGE> 11
ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and claims arise against the Company in the ordinary course of
its business. Most of these lawsuits and claims relate to the Company's safety
eyewear and respiratory product lines and primarily involve accidents and/or
exposures occurring after the Company's predecessor acquired the AOSafety(R)
Division from American Optical Corporation in April 1990. The Company is
contingently liable with respect to numerous lawsuits involving respirators sold
by American Optical Corporation prior to the acquisition of the AOSafety(R)
Division in April 1990. These lawsuits typically involve plaintiffs alleging
that they suffer from asbestosis or silicosis, and that such condition results
in part from respirators which were negligently designed or manufactured. The
defendants in these lawsuits are often numerous, and include, in addition to
respirator manufacturers, employers of the plaintiffs and manufacturers of sand
(used in sand blasting) and asbestos. Responsibility for legal costs, as well as
for settlements and judgments, is shared contractually by the Company, American
Optical Corporation and a prior owner of American Optical Corporation. The
Company and Cabot 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(R)) infringes a patented lens shape utilized in the plaintiff's sun
and sporting glasses. On October 22, 1998, the Company announced that it had
entered into a settlement agreement with Gargoyles, Inc. Under the terms of the
settlement, in which the Company expressly denies any liability in the lawsuit,
the Company will continue to manufacture its Fectoids(R) line of eyewear for
sale into safety eyewear markets. The Company also will have the right to sell
into such markets other lines of safety eyewear that Gargoyles contended
infringe its patents. The Company agreed to pay Gargoyles $1.2 million in
exchange for a release of all claims relating to Gargoyles' patents and for
uncontested rights to continue manufacturing and selling its Fectoids(R) and
other lines of eyewear.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 5, 1999, the Company held a special meeting of stockholders. The
stockholders approved the selection of Arthur Andersen LLP as the Company's
independent public accountants with a total of 102,337.5 votes in favor and 250
abstention votes. The stockholders voted to elect the following directors for
the fiscal year ending September 30, 2000 with a total of 102,337.5 votes in
favor of each director and 250 abstention votes for each director: Norman W.
Alpert, Bryan P. Marsal, John D. Curtin, Margaret J. Hanratty, William E.
Kassling, Michael A. McLain, Arthur J. Nagle, Daniel S. O'Connell and Robert
Rothberg.
10
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 15, 1999 there were outstanding 105,537.5 shares of common stock,
par value $0.01 per share, of Aearo ("Aearo Common Stock"). All of the Aearo
Common Stock is held, collectively, by Vestar Equity Partners, L.P. (together
with certain related persons, "Vestar"), Cabot Corporation ("Cabot") and
management. In July 1995, Vestar, Cabot and management effected through the
Company the acquisition of substantially all of the assets and certain
liabilities of Cabot CSC Corporation ("Old Cabot Safety Corporation"), a
wholly-owned subsidiary of Cabot, and certain of its affiliates (the "Formation
Acquisition") for $206.1 million. To finance the Formation Acquisition, the
Company incurred $47.5 million of senior secured debt ("Senior Bank Facilities")
sold $100 million of 12 1/2% senior subordinated notes due 2005 (the "Senior
Subordinated Notes"), issued to Vestar and Cabot an aggregate of $45 million of
12 1/2% redeemable preferred stock (the "Aearo Preferred Stock"), and issued to
Vestar, Cabot and certain members of management and key employees of the Company
(collectively the "Management Investors") an aggregate of 100,000 shares of
Aearo Common Stock. See Item 12, "Security Ownership of Certain Beneficial
Owners and Management." All of the common stock of the Subsidiary is owned by
Aearo, and thus no trading market exists for such stock. Accordingly, no trading
market exists for any capital stock of the Company.
Aearo has never paid cash dividends in the Aearo Common Stock. Payment of
dividends on the Aearo Common Stock is limited by the terms of the Company's
Senior Bank Facilities and Senior Notes. See Note 7 to the Consolidated
Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement data for the period ended July 11, 1995 are
derived from the combined financial statements of Cabot Safety Corporation,
which have been audited by Arthur Andersen LLP, independent public accountants.
The balance sheet data for July 11, 1995 is unaudited but, in the opinion of
management, includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation. The selected historical financial
data as of and for the period ended September 30, 1995 and as of and for the
years ended September 30, 1996, 1997, 1998 and 1999 are derived from the
consolidated financial statements of Aearo Corporation and were also audited by
Arthur Andersen LLP. The data should be read in conjunction with the combined
and consolidated financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information included herein.
11
<PAGE> 13
AEARO CORPORATION
SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
- ---------------------------------------------------------------------------------------------------------------------------------
PERIOD ENDED PERIOD ENDED
JULY 11, SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1995 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales --
Safety Products ................. $ 129.6 $ 40.0 $ 205.2 $ 249.6 $ 216.5 $ 212.1
Safety Prescription Eyewear ..... 36.4 35.5
Specialty Composites ............ 25.1 7.9 38.3 36.2 39.6 42.8
-----------------------------------------------------------------------------------------
Total net sales .............. 154.7 47.9 243.5 285.8 292.5 290.4
Cost of Sales ....................... 87.7 29.3(2) 133.6(4) 163.5 163.9 157.5
-----------------------------------------------------------------------------------------
Gross profit .................... 67.0 18.6 109.9 122.3 128.6 132.9
Operating Expenses --
Selling and inistrative ......... 47.1(1) 13.1 73.6(5) 87.0 88.9 86.0
Research and technical service .. 2.3 0.6 3.2 5.1 4.7 4.7
Amortization expense (3) ........ 4.3 0.8 5.6 7.0 6.8 6.8
Other charges (income), net ..... (0.2) 0.1 0.3 2.5 (0.3) 0.8
Restructuring charge ............ -- -- -- -- 11.6(8) --
-----------------------------------------------------------------------------------------
Operating Income ............. 13.5 4.0 27.2 20.7 16.9 34.6
Interest expense, net (3) .... 5.7 4.1 20.7 26.7 26.1 24.3
-----------------------------------------------------------------------------------------
Income (loss) before income
taxes ........................ 7.8 (0.1) 6.5 (6.0) (9.2) 10.3
Provision for income taxes ...... 3.0 0.5 4.3 0.9 2.2 3.2
-----------------------------------------------------------------------------------------
Net income (loss) ................... $ 4.8 $ (0.6) $ 2.2 $ (6.9) $ (11.4) $ 7.1
=========================================================================================
Preferred stock dividend accrued .... 1.3 6.2 7.1 8.1 9.1
Net loss applicable to common
shareholders ........................ (1.9) (4.1) (14.0) (19.5) (2.1)
Net loss per common share ........... $ (18.67) $ (40.58) $ (142.77) $ (195.60) $ (20.35)
OTHER DATA:
EBITDA (6) .......................... $ 22.9 $ 6.1 $ 39.7 $ 37.8 $ 47.1 $ 51.0
Depreciation and amortization (3) ... 9.2 2.1 13.9 18.6 20.3 18.3
Capital expenditures ................ 10.4 2.7 9.2 8.9 5.8 8.4
Ratio of earnings to fixed
charges (7) ......................... 2.2 - 1.3 - - 1.4
BALANCE SHEET DATA (AT
PERIOD-END):
Total assets ........................ $ 177.5 $ 218.3 $ 338.6 $ 314.1 $ 293.0 $ 282.3
Long-term debt (including
current portion) .................... 78.4 152.3 250.3 244.7 233.2 214.8
Stockholders' equity ................ 40.1 32.0 35.0 23.1 11.1 16.5
</TABLE>
12
<PAGE> 14
NOTES TO SELECTED FINANCIAL DATA:
(1) The period ended July 11, 1995, includes a $1.1 million charge related
to termination of the Old Cabot Safety Corporation stock option plan and
a $0.8 million charge related to a provision for potential value-added
tax penalties by the Company's French subsidiary.
(2) The period ended September 30, 1995, includes a $3.6 million charge
related to allocation of purchase price to inventory.
(3) Operating results subsequent to the Formation Acquisition are comparable
to prior periods, with the exception of cost of sales (due to the $3.6
million and $1.0 million charges in the period and year ended September
30, 1995 and 1996, respectively, related to the allocations of purchase
price to inventory), depreciation expense, amortization of intangible
assets and interest expense.
(4) Includes $1.0 million charged to cost of sales as a result of purchase
price allocated to inventory acquired in the Peltor acquisition. This
amount was recorded in cost of sales as the acquired inventory was sold
during the year ended September 30, 1996.
(5) Includes $0.8 million charged to selling and administrative expense for
costs related to the abandoned effort at an initial public offering.
(6) EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income
or expense is further defined as extraordinary gains or losses, or gains
or losses from sales of assets other than in the ordinary course of
business. While the Company believes EBITDA is a useful indicator of its
ability to service debt, EBITDA should not be considered as a substitute
for net income determined in accordance with generally accepted
accounting principles as an indicator of operating performance or as an
alternative to cash flow as a measure of liquidity. Investors should be
aware that EBITDA as presented above may not be comparable to similarly
titled measures presented by other companies and comparisons could be
misleading unless all companies and analysts calculate this measure in
the same fashion. EBITDA presented for fiscal 1998 is excluding
restructuring charges of $11.6 million recorded during fiscal 1998
(7) Ratio of earnings to fixed charges is defined as pretax income from
continuing operations plus fixed charges divided by fixed charges. Fixed
charges include interest expense (including amortization of debt
issuance costs) and a portion of rental expense assumed to represent
interest. Earnings for the period ended September 30, 1995 and the years
ended September 30, 1997 and 1998 were inadequate to cover fixed charges
by $0.2 million, $6.0 million, and $9.2 million, respectively.
(8) During fiscal 1998 the Company took a restructuring charge of $11.6
million related to the restructuring plans announced by the Company
during the fiscal year. On February 3, 1998, the Company announced the
appointment of Michael A. McLain as President and Chief Executive
Officer and on March 25, 1998 the Company announced plans to close the
Boston headquarters and relocate it to Indianapolis, Indiana, where the
Company has substantial operations. In addition, on September 30, 1998
the Company announced plans to improve profitability through complexity
reduction and restructuring (See Note 16 of Notes to Consolidated
Financial Statements).
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected Financial
Data," and the 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.
GENERAL
In the latter part of fiscal 1996, the Company undertook efforts to implement a
new management information system, integrate the Peltor and Eastern acquisitions
that were acquired earlier in that year, and change the manufacturing
orientation at its Southbridge, Massachusetts facility towards cellular
manufacturing. Difficulties associated with the systems conversion as well as
the other initiatives resulted in problems with production planning and control,
shipping and distribution, and overall customer service. Throughout most of
fiscal 1997 the Company spent significant sums in order to mitigate the effects
of these problems on its customer base. As the year progressed, the Company
realized improvements in service levels as well as a return towards historic
levels of profitability.
During fiscal year 1998 the Company continued to realize these improvements and
experienced four successive quarters of operating profitability improvements,
excluding the $11.6 million restructuring charge and $0.5 million of personnel
relocation costs associated with the move of the corporate headquarters from
Boston, MA to Indianapolis, IN, as compared with the same quarters of the prior
year. A new management team was installed, starting with the appointment of
Michael A. McLain as President and Chief Executive Officer on February 3, 1998.
Greater utilization of the new management information system allowed the Company
to realize additional operating improvements. To further accelerate the
operational benefits of the new management information system, the Company
completed a major update of its SAP management information system to version
3.1H in November, 1998.
During fiscal year 1999 the Company implemented the restructuring plan announced
on Sept. 30, 1999.
1. The Company reorganized into strategic business segments. The reportable
segments are Safety Products, Safety Prescription Eyewear and Specialty
Composites. This change was made to allow greater management attention and
focus.
2. The Company rationalized its product line in Safety Products, discontinuing
over 50% of low volume, low margin stock keeping units. It consolidated its
product offering to retail customers like Home Depot, Lowe's, ACE, etc.
under the AOSafety(R) brand name and introduced improved packaging and new
graphics at the same time. This rationalization has contributed to
manufacturing efficiencies.
3. In the Safety Prescription Eyewear segment the company consolidated it
customer service and distribution operations.
In addition, there has been continued productivity improvements in purchasing,
logistics and manufacturing. These, along with the restructuring efforts, have
resulted in significant improvements in gross margin verses the previous year.
A part of the savings was re-invested in selling and marketing to build brand
equity and introduce new and innovative products. These included E-A-Rsoft(TM)
Yellow Neons(TM), and E-A-Rsoft(TM) Neon Blasts(TM) earplugs, Rave safety
eyewear, new safety prescription eyewear frames and several new Peltor(R)
communication products. Lexa, introduced in 1998, has shown very positive
growth.
14
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth the major components of the Company's
consolidated statements of operations expressed as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1997 1998 1999
-------------------------------------------
<S> <C> <C> <C>
Net sales:.............................................
Safety Products........................................ 87.3 % 74.1 % 73.1 %
Safety Prescription Eyewear 12.4 12.2
Specialty Composites................................... 12.7 13.5 14.7
---------------------------------------------------------
Total net sales........................................ 100.0 100.0 (1) 100.0 (1)
Cost of sales.......................................... 57.2 56.0 54.2
---------------------------------------------------------
Gross profit........................................... 42.8 44.0 45.8
Selling and administrative............................. 30.4 30.4 29.7
Research and technical services........................ 1.8 1.6 1.6
Amortization expense................................... 2.5 2.3 2.3
Other charges (income), net............................ 0.9 (0.1) 0.3
Restructuring charge................................... -- 4.0 --
---------------------------------------------------------
Operating income....................................... 7.2 % 5.8 % 11.9 %
=========================================================
</TABLE>
(1) Effective October 1, 1998 the Company reorganized its financial
reporting into the three reportable segments of Safety Products, Safety
Prescription Eyewear and Specialty Composites. Fiscal year 1998 was
restated to conform to the fiscal year 1999 reporting but fiscal year
1997 was not due to the cost required to restate.
FISCAL 1999 COMPARED TO FISCAL 1998
NET SALES. Net sales in the year ended September 30, 1999 decreased 0.7% to
$290.4 million from $292.5 million in the year ended September 30, 1998. The
Safety Products segment net sales in the year ended September 30, 1999 decreased
$4.4 million to $212.1 million from $216.5 million, or 2.0%. Higher sales in
Europe and to Consumer customers in North America were offset by the effects of
product rationalization, increased competitive activity in the eyewear product
line earlier in the year, the effects of a stronger US dollar, and decline in
business with customers in Asia. The effect of the stronger U.S. dollar as
compared to the European and Canadian currencies, was to decrease sales by
approximately $1.3 million. The Safety Prescription Eyewear segment net sales in
the year ended September 30, 1999 decreased 2.4% to $35.5 million from $36.4
million in the year ended September 30, 1998. The Safety Prescription Eyewear
segment net sales for the year ended September 30, 1999 included $0.7 million of
sales from Safety Optical that was acquired in August 1999. The Specialty
Composites segment net sales in the year ended September 30, 1999 increased $3.2
million to $42.8 million from $39.6 million, or 8.2%. Increased sales were due
to continued growth in sales of engineered products to the general aviation and
precision equipment markets.
GROSS PROFIT. Gross profit in the year ended September 30, 1999 increased 3.3%
to $132.9 million from $128.6 million in the year ended September 30, 1998.
Gross profit as a percentage of net sales in the year ended September 30, 1999
was 45.8% as compared to 44.0% in the year ended September 30, 1998. The
continued productivity improvements in purchasing and manufacturing, especially
in the manufacturing of the eyewear product line were the primary factors behind
a strong improvement in gross profit performance as compared to the previous
year. Product rationalization as a result of the restructuring plan announced
during fiscal year 1998 also contributed to efficiencies in operations due to
reduced complexity.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses in the
year ended September 30, 1999 decreased 3.3% to $86.0 million from $88.9 million
in the year ended September 30, 1998. Within this decrease is an increase of
$5.0 million in selling and marketing expenses as part of the Company's campaign
to build brand awareness and loyalty by more strongly promoting its global
brands. Customer service and distribution expenses decreased as the Company
realized
15
<PAGE> 17
headcount and overhead reductions in the Safety Prescription Eyewear segment
through consolidations of these activities, and achieved productivity
improvements within the Safety Products segment's international distribution
facility in Indianapolis, Indiana. Administrative costs were lower due to
decreased headcount as a result of the restructuring plan announced during
fiscal year 1998. In addition, fiscal year 1998 expenses were higher due to the
costs related to a patent infringement claim by Gargoyles, Inc., which was
settled October 22, 1998, as well as $0.5 million of personnel relocation costs
associated with the move of the corporate headquarters from Boston, MA to
Indianapolis, IN. Selling and administrative expenses as a percentage of net
sales in the year ended September 30, 1999 were 29.7% of net sales, compared to
30.4% in the year ended September 30, 1998.
OTHER CHARGES (INCOME), NET. Other Charges (Income), Net was an expense of $0.8
million for the year ended September 30, 1999 as compared to income of $0.3
million for the year ended September 30, 1998. This change was primarily a
result of foreign currency transaction losses in the year ended September 30,
1999, as compared to foreign currency transaction gains in the year ended
September 30, 1998.
RESTRUCTURING CHARGE. During fiscal 1998 the Company recorded a restructuring
charge of $11.6 million related to the restructuring plans announced by the
Company during that fiscal year. The restructuring included changes in senior
management personnel, relocation of the Company headquarters from Boston to
Indianapolis, and initiatives to improve profitability through complexity
reduction and product line focus. The Company eliminated certain product
offerings in its Eyewear and Respiratory product lines, reduced head count in
its North American operations, and consolidated the branding in its Consumer
product line. For the year ended September 30, 1999, no restructuring charge was
recorded.
OPERATING INCOME. Primarily as a result of the factors discussed above,
operating income excluding the restructuring charge, increased $6.1 million or
21.5% in the year ended September 30, 1999 from $16.9 million in the year ended
September 30, 1998. Operating income as a percentage of net sales in the year
ended September 30, 1999 was 11.9% as compared to 5.8% in the year ended
September 30, 1998.
INTEREST EXPENSE, NET. Interest expense, net in the year ended September 30,
1999 decreased 7.0% to $24.3 million from $26.2 million in the year ended
September 30, 1998. The decrease is attributed to lower average borrowings and a
lower weighted average interest rate in the year ended September 30, 1999 as
compared to the year ended September 30, 1998.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES. Income before provision for
income taxes, excluding the restructuring charge, increased $8.0 million in the
year ended September 30, 1999 to income of $10.3 million compared to income of
$2.3 million in the year ended September 30, 1998 due to the improved operating
income and lower interest expense.
PROVISION FOR INCOME TAXES. The provision for income taxes in the year ended
September 30, 1999 was $3.2 million compared to $2.2 million in the year ended
September 30, 1998.
NET (LOSS) INCOME. For the year ended September 30, 1999, the Company had net
income of $7.1 million as compared to a net loss of $11.4 million for the year
ended September 30, 1998.
16
<PAGE> 18
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 disposition 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>
Year Ended Change
September 30, Favorable (Unfavorable)
1999 1998 Amount Percent
-----------------------------------------------------
<S> <C> <C> <C> <C>
Operating Income (1) $ 34,619 $ 28,495 $ 6,124 21.5%
Add Backs:
Depreciation 9,399 11,537 (2,138) (18.5%)
Amortization of Intangibles 6,793 6,833 (40) (0.6%)
Non-operating Costs (Income) 190 281 (91) (32.4%)
---------------------------------------------------
EBITDA $ 51,001 $ 47,146 $ 3,855 8.2%
===================================================
</TABLE>
(1) Excluding restructuring charge of $11.6 million recorded during fiscal
year 1998.
EBITDA for the year ended September 30, 1999 was $51.0 million, which was $3.9
million higher than September 30, 1998. This increase was due primarily to the
strong gross margin performance combined with reduced selling, general and
administrative costs. EBITDA as a percentage of net sales in the year ended
September 30, 1999 was 17.6% as compared to 16.1% in the year ended September
30, 1998, excluding the 1998 restructuring charge.
FISCAL 1998 COMPARED TO FISCAL 1997
NET SALES. Net sales in the year ended September 30, 1998 increased 2.3% to
$292.5 million from $285.8 million in the year ended September 30, 1997. Both
operating segments enjoyed growth with Safety Products net sales in the year
ended September 30, 1998 increasing 1.3% to $252.9 million from $249.6 million
in the year ended September 30, 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 year ended September 30, 1998 increased
9.4% to $39.6 million from $36.2 million in the year ended September 30, 1997.
The increase was primarily driven by the strengthening general aviation and
Class 8 truck markets.
GROSS PROFIT. Gross profit in the year ended September 30, 1998 increased 5.1%
to $128.6 million from $122.3 million in the year ended September 30, 1997.
Gross profit as a percentage of net sales in the year ended September 30, 1998
was 44.0% as compared to 42.8% in the year ended September 30, 1997. The gross
profit amount was favorably impacted by the increased net sales, and 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, predominantly in the first quarter of 1998 and to lesser extents in
the second and third quarters. 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
year ended September 30, 1998 increased 2.2% to $88.9 million from $87.0 million
in the year ended September 30, 1997. Within this increase is a reduction of
$0.3 million of distribution expenses. Although net sales were up 2.3%,
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 $2.6
million. These reductions were more than offset by normalized incentive
accruals, and an accrual for costs related to a patent infringement claim by
Gargoyles, Inc., which was settled October 22, 1998, as well as $0.5 million of
personnel relocation costs associated with the move of the corporate
headquarters from Boston, MA to Indianapolis, IN in the current period compared
to the year after period; in the current period these accounts increased
17
<PAGE> 19
compared to the prior period. Selling and administrative expenses as a
percentage of net sales in the year ended September 30, 1998 were 30.4% of net
sales, the same as in the year ended September 30, 1997.
RESEARCH AND TECHNICAL SERVICES EXPENSES. Research and technical services
expenses in the year ended September 30, 1998 decreased 8.9% to $4.7 million
from $5.1 million in the year ended September 30, 1997. This decrease was due
primarily to the timing of European development activities, and to a lesser
extent the effect of a stronger U.S. dollar relative to the Swedish Krona.
AMORTIZATION OF INTANGIBLES. Amortization expense remained at a relatively
consistent $6.8 million in the year ended September 30, 1998 compared to $7.0
million in the year ended September 30, 1997.
OTHER CHARGES (INCOME), NET. Other Charges (Income), Net improved to income of
$0.3 million for the year ended September 30, 1998 as compared to expense of
$2.5 million for the year ended September 30, 1997. This change was primarily a
result of foreign currency transaction gains in the year ended September 30,
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 year ended September 30, 1997.
RESTRUCTURING CHARGE. During fiscal 1998 the Company recorded a restructuring
charge of $11.6 million related to the restructuring plans announced by the
Company during the fiscal year. On February 3, 1998, the Company announced the
appointment of Michael A. McLain as President and Chief Executive Officer and on
March 25, 1998 the Company announced plans to close the Boston headquarters and
relocate it to Indianapolis, Indiana, where the Company has substantial
operations. In addition, on September 30, 1998 the Company announced plans to
improve profitability through complexity reduction and restructuring. The
Company is eliminating certain product offerings in its Eyewear and Respiratory
product lines, reducing head count in North America through restructuring and
outsourcing, consolidating the branding in its Consumer product line and
reducing selling and manufacturing cost in its Prescription eyewear product
line.
The $11.6 million charge includes a $6.1 million provision for inventories and
product returns for products that are being discontinued. The charge also
provides $1.1 million for certain property, plant and equipment for which the
Company has determined there is no future use, and $0.1 million related to
intangibles on abandoned product lines. In addition, the charge provides $4.3
million to cover mainly employee severance and other contractual obligations.
OPERATING INCOME. Primarily as a result of the factors discussed above,
operating income decreased 18.3% to $16.9 million in the year ended September
30, 1998 from $20.7 million in the year ended September 30, 1997. Operating
income as a percentage of net sales in the year ended September 30, 1998 was
5.8% as compared to 7.2% in the year ended September 30, 1997.
INTEREST EXPENSE, NET. Interest expense, net in the year ended September 30,
1998 decreased 1.9% to $26.2 million from $26.7 million in the year ended
September 30, 1997.
LOSS BEFORE PROVISION FOR INCOME TAXES. Loss before provision for income taxes
increased $3.3 million in the year ended September 30, 1998 to a loss of $9.2
million compared to a loss of $6.0 million in the year ended September 30, 1997
due to the lower operating income partly offset by lower interest expense.
PROVISION FOR INCOME TAXES. The provision for income taxes in the year ended
September 30, 1998 was $2.2 million compared to $0.9 million in the year ended
September 30, 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 years ended September 30, 1998 and
1997, the Company has not recognized any of the tax benefits that will occur in
future periods if there is taxable income in the U.S.
NET LOSS. For the year ended September 30, 1998, the Company had a net loss of
$11.4 million as compared to a net loss of $6.9 million for the year ended
September 30, 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 disposition 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.
18
<PAGE> 20
EBITDA CALCULATION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended Change
September 30, Favorable (Unfavorable)
1998 1997 Amount Percent
------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Income (1) $ 28,495 $ 20,706 $ 7,789 37.6%
Add Backs:
Depreciation 11,537 9,773 1,764 18.1%
Amortization of Intangibles 6,833 6,957 (124) (1.8%)
Non-operating Costs (Income) 281 404 (123) (30.4%)
-----------------------------------------------------------
EBITDA $ 47,146 $ 37,840 $ 9,306 24.6%
===========================================================
</TABLE>
(1) Excluding restructuring charge of $11.6 million recorded during fiscal
year 1998.
EBITDA for the year ended September 30, 1998 was $47.1 million (excluding the
restructuring charge of $11.6 million recorded during fiscal year 1998) as
compared to $37.8 million for the year ended September 30, 1997. This increase
was due primarily to the increase in operating income (excluding the
restructuring charge of $11.6 million recorded during fiscal year 1998)
described previously partly offset by higher depreciation expense. EBITDA as a
percentage of net sales in the year ended September 30, 1998 was 16.1% as
compared to 13.2% in the year ended September 30, 1997.
EFFECTS OF CHANGES IN EXCHANGE RATES
In general, the Company's results of operations are affected by changes in
exchange rates. Subject to market conditions, the Company prices its products in
Europe and Canada in local currency. While many of the Company's selling and
distribution costs are also denominated in these currencies, a large portion of
product costs are U.S. Dollar denominated. As a result, a decline in the value
of the U.S. Dollar relative to other currencies can have a favorable impact on
the profitability of the Company and an increase in the value of the U.S. Dollar
relative to these other currencies can have a negative effect on the
profitability of the Company. As a result of the acquisition of Peltor AB, the
Company's operations are also affected by changes in exchange rates relative to
the Swedish Krona. A decline in the value of the Krona relative to other
currencies can have a favorable impact on the profitability of the Company and
an increase in the value of the Krona relative to other currencies can have a
negative impact on the profitability of the Company.
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.
YEAR 2000 COMPLIANCE
The "Year 2000 problem" is a flaw existing in many computer hardware and
software programs caused by historical use of dates represented by only two
digits (for example, 99 rather than 1999). This causes computer programs (both
system and application) that perform arithmetic operations, comparisons, or
sorting of data fields to yield incorrect results when working with years
outside the range of 1900-1999. To evaluate the impact of this the Company has
assembled a "Y2K" cross functional team which has assessed the impact of year
2000 compliance with respect to Information Technology (IT) and manufacturing
systems as well as the Company's exposure to significant third party risks.
Accordingly, the Company has initiated and substantially completed a plan to
replace or modify existing systems and technology as required and to assure
itself that major customers and critical vendors are also addressing these
issues.
Y2K readiness activities for those critical IT and manufacturing systems
required to support business operations have been completed. Several ancillary
systems, classified as low risk and having no impact on critical business
operations, will be completed by the end of the calendar year. As it relates to
internal E-mail and desktop hardware and software systems, the Company has
completed a desktop update and standardization effort, which in addition to
providing efficiency tools to the global organization, has addressed year 2000
compliance issues that may have existed in that environment.
19
<PAGE> 21
The Company has contacted its major customers and vendors regarding their
readiness for year 2000 compliance, and efforts continue with the evaluations of
any impact that their readiness may have on the Company's systems. However,
there can be no assurance that year 2000 deficiencies in the systems of other
companies on which the Company's systems rely will be timely corrected or that
any such failure by another Company to correct its deficiencies would not have
an adverse effect on the Company's systems, business or results of operations.
The assessment of other companies on which the Company's systems rely is
substantially complete. Contingencies have been developed to counteract the
possible impact of a lack of readiness of external suppliers who have been
assessed as being high risk.
Since the majority of the Company's products are passive in nature and do not
utilize date sensitive chip technologies, it is not anticipated that product
returns could materially impact the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted primarily of operating cash flow
and debt financing. The Company's uses of those funds consist principally of
debt service, capital expenditures and acquisitions.
The Company's debt structure includes $100.0 million of Senior Subordinated
Notes (Notes) due 2005, as well as a senior bank facility comprised of (i) term
loans denominated in U.S., Canadian, British and German currencies aggregating
$140.0 million at inception (the Term Loans) and (ii) a Revolving Credit
Facility providing for up to $25.0 million (the Senior Bank Facilities).
Maturities under the Company's Term Loans are: $15.9 million in fiscal 2000,
$20.6 million in fiscal 2001, $34.1 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 will also be required to make interest
payments with respect to both the Senior Bank Facilities and the Notes.
The Company typically makes capital expenditures related primarily to the
maintenance and improvement of manufacturing facilities. The Company spent $8.4
million for capital expenditures for the year ended September 30, 1999 as
compared to $5.8 million for capital expenditures for the year ended September
30, 1998 and $8.9 million for the year ended September 30, 1997. Included in the
capital expenditures over the past three years was $8.0 million for a worldwide
management information system. The Company's capital spending is of a relatively
short duration, with the complete commitment process typically involving less
than one year.
The Company's principal source of cash to fund these capital requirements is net
cash provided by operating activities. The Company's net cash provided by
operating activities for the year ended September 30, 1999 totaled $26.0 million
as compared to $20.2 million in 1998. The increase was due primarily to a $6.9
million improvement in Operating Income (excluding the $11.6 million
restructuring charge in 1998), and an increase of $5.6 million in accounts
payable and accrued liabilities. Offsetting this increase was $3.2 million
increase in inventories, a $1.1 million increase in accounts receivable and a
$2.0 million reduction in depreciation and amortization. In fiscal 1997, the
Company's net cash provided by operating activities totaled $9.1 million.
Net cash used by investing activities was $11.8 million for the year ended
September 30, 1999 as compared to $5.8 million for the year ended September 30,
1998 and $8.3 million in the year ended September 30, 1997. Net cash used by
investing activities consisted of $8.4 million of capital expenditures in the
year ended September 30, 1999 as compared to $5.8 million in the year ended
September 30, 1998. In addition the Company invested $3.4 million for the
acquisition of Safety Optical in fiscal 1999. Net cash used by investing
activities in 1997 was $8.3 million consisting of $8.9 million of capital
expenditures, $0.2 million for the acquisition of the Shoplyne assets, offset by
$0.8 million in proceeds from the sale of the Rhode Island facility of Peltor.
Net cash used by financing activities for the year ended September 30, 1999 was
$16.2 million compared with $13.0 million in 1998 and $4.2 million in 1997. The
increase of $3.2 million in fiscal 1999 consisted of $2.4 million for repayment
of term loans, $1.1 million for repayment of long-term debt, $1.0 million for
the repurchase of common stock offset by a $1.3 million repayment of shareholder
notes. In 1997 net cash used for financing activities included $8.3 million for
the repayment of term loans, $0.8 million for the repayment of other long term
debt, partially offset by increased borrowings under the revolving credit
facility of $5.2 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 available under the Senior Bank Facilities, which
provides for borrowings up to $25.0 million, subject to certain customary
drawing conditions, to meet its liquidity needs. At September 30, 1999 the
Company had borrowed $5.9 million under the revolving credit facility.
Throughout most of fiscal 1997, borrowing
20
<PAGE> 22
levels under the revolver 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. As a
result of these improvements, and continued productivity improvements in
purchasing, logistics and manufacturing, revolver balances decreased by
approximately $2.2 million during fiscal year 1998 and fiscal year 1999. The
Company anticipates that operating cash flow will be adequate to meet its debt
service and capital expenditure requirements for the next several years,
although there can be no assurances that existing levels of sales and normalized
profitability, and therefore cash flow, will be maintained in the future. Levels
of sales and profitability may be impacted by service levels, continued new
product development, worldwide economic conditions and competitive pressures. In
addition, the Company may make additional acquisitions in the future and would
rely on internally generated funds and, to the extent necessary, on borrowings
to finance such acquisitions.
The Company's ability to borrow is limited by covenants in the Senior Bank
Facilities and the Notes. In April 1997, the Company amended its credit
agreement with its syndicate of lenders with respect to the financial covenants
applicable to periods ending on and after June 30, 1997. The revised covenants
reflected the reduced profitability that the Company had experienced due to the
operating difficulties that were triggered by the new management information
system. The amendment also provided the Company with the ability to simplify its
corporate structure in Europe in order to further integrate the Peltor
operation. On September 30, 1999, the Senior Bank Facilities were amended to
exclude certain restructuring charges from the calculation of EBITDA, as used in
determining compliance with certain financial covenants, for the year ended
September 30, 1999. On December 4, 1999, the Senior Bank Facilities were amended
with respect to certain covenants applicable to periods ending on and after
December 31, 1999 to reflect the Company's current level of profitability.
ITEM 7A: MARKET RISK DISCLOSURES
The Company is exposed to market risks related to change in foreign currencies,
interest rates and commodity pricing. The Company uses derivatives to mitigate
impact of changes in foreign currencies and interest rates.
FOREIGN CURRENCY RISK
The Company's results of operations are subject to risk associated with
operating in foreign countries, including fluctuations in currency exchange
rates. With a large portion of product sold in Europe produced in the United
States and Sweden a decline in the dollar or krona can have a negative impact on
the profitability of the Company (see Effects of Changes in Exchange Rates). The
Company executes two hedging programs; one for transaction exposures, and the
other for cash flow impact on European operations. The Company utilizes forward
contracts for transaction exposures and a combination of forward contracts and
zero premium collars for cash flow exposures. During 1999 transaction hedge
losses were $.2 million, while cash flow hedges were a gain of $.2 million. In
addition, the Company limits foreign exchange impact on the balance sheet with
foreign denominated debt in Great Britain Pound Sterling (GBP) and German Marks
(DEM). The Company does not consider the notional amount of outstanding hedge
contracts at September 30, 1999 as material. Settlement of outstanding contracts
will not have a material impact on the profitability of the Company.
INTEREST RATES
The Company is exposed to market risk changes in interest rates through its
debt. The Company utilizes a zero premium collar agreement to reduce the impact
of increased interest rates in its floating rate debt. The collar allows the
Company the ability to maintain borrowing at the short end of the yield curve,
while retaining a hedge against an increase in rates. The zero premium collar
was modified in March of 1999 to expire in September 2001. The zero premium
collar has a notional amount of $100 million, a cap of 7.75% and floor of 5.33%
indexed off 3 month LIBOR. During 1999 LIBOR rates dropped to 5.03% and the
Company recorded additional interest expense of $.1 million. At September 30,
1999 LIBOR interest rates had increased to 5.53%. The Company is of the opinion
that it is well positioned to manage interest expense through 2001 and a change
in interest rates will not have a material impact on the profitability of the
Company.
COMMODITY RISK
The Company is subject to market risk with respect to pricing of paperboard
material and polycarbonate (resin). The Company has built price increases into
fiscal year 2000 cost to cover anticipated shortage of paperboard products. The
Company currently manages its polycarbonate exposures through strategic price
negotiations utilizing current market prices from alternative vendors. The
Company does not enter into derivative instruments to manage commodity risk.
21
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(1) Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants -- Arthur Andersen LLP..................... 23
Consolidated Balance Sheets -- September 30, 1998 and 1999.......................... 24
Consolidated Statements of Operations -- Years ended September 30, 1997,
1998, and 1999................................................................. 25
Consolidated Statements of Stockholders' Equity -- Years ended September 30,
1997, 1998, and 1999........................................................... 26
Consolidated Statements of Cash Flows -- Years ended September 30, 1997, 1998,
and 1999....................................................................... 27
Notes to Consolidated Financial Statements.......................................... 28
Valuation and Qualifying Accounts -- Years ended September 30, 1997, 1998 and
1999........................................................................... 63
</TABLE>
22
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Aearo Corporation:
We have audited the accompanying consolidated balance sheets of Aearo
Corporation and subsidiaries (a Delaware corporation) as of September 30, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended September 30, 1997, 1998 and 1999.
These consolidated financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aearo Corporation
and subsidiaries as of September 30, 1998 and 1999, and the results of its
operations and its cash flows for the years ended September 30, 1997, 1998 and
1999, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to the accompanying consolidated financial statements is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not a part of the basic consolidated financial statements. The schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly state, in all
material respects, the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 26, 1999
23
<PAGE> 25
AEARO CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1998 1999
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ...................................................... $ 6,737 $ 4,050
Accounts receivable (net of reserve for doubtful
accounts of $1,239 and $1,296 in 1998 and 1999,
respectively) ............................................................... 44,486 43,801
Inventories .................................................................... 30,466 33,286
Deferred and prepaid expenses .................................................. 3,572 3,750
--------- ---------
Total current assets ........................................................ 85,261 84,887
--------- ---------
Property, plant and equipment, net ............................................. 57,729 55,881
Intangible assets, net ......................................................... 144,057 137,776
Other assets ................................................................ 5,909 3,749
--------- ---------
Total assets ................................................................ $ 292,956 $ 282,293
========= =========
Current Liabilities:
Current portion of long-term debt .............................................. $ 14,573 $ 16,093
Accounts payable and accrued liabilities ....................................... 37,957 40,528
Accrued interest ............................................................... 3,732 3,400
U.S. and foreign income taxes .................................................. 3,506 3,758
--------- ---------
Total current liabilities ................................................... 59,768 63,779
--------- ---------
Long-term debt ..................................................................... 218,592 198,716
Deferred income taxes .............................................................. 959 825
Other liabilities .................................................................. 2,586 2,499
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value --
(Redemption value of $76,834,000 as of
September 30, 1999)
Authorized -- 200,000 shares
Issued and outstanding -- 45,000 shares
Common stock, $.01 par value --
Authorized -- 200,000 shares
Issued and outstanding -- 102,338 and 102,538 shares
in 1998 and 1999, ........................................................... 1 1
Additional paid-in capital ......................................................... 32,383 32,566
Accumulated deficit ................................................................ (16,715) (9,662)
Cumulative foreign currency translation adjustments ................................ (4,618) (6,431)
--------- ---------
Total stockholders' equity .................................................. 11,051 16,474
--------- ---------
Total liabilities and stockholders' equity .................................. $ 292,956 $ 282,293
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 26
AEARO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net Sales ..................................................... $ 285,783 $ 292,459 $ 290,389
Cost of Sales ................................................. 163,460 163,877 157,535
--------- --------- ---------
Gross profit ......................................... 122,323 128,582 132,854
Selling and Administrative .................................... 87,036 88,929 86,043
Research and Technical Services ............................... 5,119 4,661 4,651
Amortization Expense .......................................... 6,957 6,833 6,793
Other Charges (Income), net ................................... 2,505 (336) 748
Restructuring Charge .......................................... -- 11,585 --
--------- --------- ---------
Operating income ..................................... 20,706 16,910 34,619
Interest Expense, net ................................ 26,665 26,152 24,322
--------- --------- ---------
(Loss) Income before provision for
income taxes ..................................... (5,959) (9,242) 10,297
Provision for Income Taxes ........................... 917 2,204 3,244
--------- --------- ---------
Net (loss) income .................................... (6,876) (11,446) 7,053
Preferred Stock Dividend Accrued ..................... 7,112 8,052 9,139
--------- --------- ---------
Net Loss applicable to Common
Shareholders ..................................... $ (13,988) $ (19,498) $ (2,086)
========= ========= =========
Basic and Diluted Net Loss per Common
Share ......................................................... $ (142.77) $ (195.60) $ (20.35)
========= ========= =========
Diluted Weighted average Common Shares ........................ 97,979 99,685 102,502
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 27
AEARO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Cumulative
Foreign Compre-
Preferred Stock Common Stock Additional Currency hensive
--------------- -------------- Paid-in Accumulated Translation (Loss)
Shares Amount Shares Amount Capital Deficit Adjustment Total Income
--------------- --------------- ---------- ----------- ----------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996..... 45,000 $ -- 99,350 $ 1 $32,640 $ 1,607 $ 726 $34,974
Repayment of shareholder
notes....................... -- -- -- -- 258 -- -- 258
Repurchase of common
stock, net.................. -- -- (2,540) -- (422) -- -- (422)
Foreign currency
translation adjustment...... -- -- -- -- -- -- (4,811) (4,811) (4,811)
Net loss...................... -- -- -- -- -- (6,876) -- (6,876) (6,876)
--------
Comprehensive loss for
the year ended
September 30, 1997.......... $(11,687)
------------------------------------------------------------------------------------ ========
Balance, September 30, 1997..... 45,000 -- 96,810 1 32,476 (5,269) (4,085) 23,123
Issuance of shareholder
notes....................... -- -- -- -- (1,157) -- -- (1,157)
Sales of common stock, net.... -- -- 5,528 -- 1,064 -- -- 1,064
Foreign currency
translation adjustment...... -- -- -- -- -- -- (533) (533) $ (533)
Net loss...................... -- -- -- -- -- (11,446) -- (11,446) (11,446)
--------
Comprehensive loss for the
year ended
September 30, 1998.......... $(11,979)
------------------------------------------------------------------------------------- ========
Balance, September 30, 1998.... 45,000 -- 102,338 1 32,383 (16,715) (4,618) 11,051
Repayment of shareholder
notes....................... -- -- -- -- 143 -- -- 143
Sales of common stock, net.... -- -- 200 -- 40 -- -- 40
Foreign currency
translation adjustment...... -- -- -- -- -- -- (1,813) (1,813) $ (1,813)
Net income.................... -- -- -- -- -- 7,053 -- 7,053 7,053
--------
Comprehensive income for
the year ended
September 30, 1999.......... $ 5,240
------------------------------------------------------------------------------------ ========
Balance, September 30, 1999..... 45,000 $ -- 102,538 $ 1 $32,556 $ (9,662) $(6,431) $16,474
=====================================================================================
</TABLE>
======
The accompanying notes are an integral part of these consolidated
financial statements.
26
<PAGE> 28
AEARO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income .................................................. $ (6,876) $(11,446) $ 7,053
Adjustments to reconcile net (loss) income to
cash provided by operating activities --
Depreciation ...................................................... 9,773 11,537 9,399
Amortization ...................................................... 8,858 8,742 8,853
Deferred income taxes ............................................. 109 85 (70)
Provision for restructuring charge ................................ -- 11,585 --
Other non-cash items, net ......................................... 517 262 346
Changes in assets and liabilities --
Accounts receivable .............................................. (479) 1,435 300
Inventories ...................................................... 3,787 62 (3,156)
Accounts payable and accrued liabilities ......................... (3,325) (2,452) 3,126
Other ............................................................ (3,296) 340 147
-------- -------- --------
Net cash provided by operating activities ....................... 9,068 20,150 25,998
-------- -------- --------
Cash Flows from Investing Activities:
Cash paid for Safety Optical ....................................... -- -- (3,425)
Purchase of Shoplyne assets ........................................ (242) -- --
Additions to property, plant and equipment ......................... (8,901) (5,809) (8,355)
Proceeds provided by disposals of property,
plant and equipment ............................................... 818 41 29
-------- -------- --------
Net cash used in investing activities ........................... (8,325) (5,768) (11,751)
-------- -------- --------
Cash Flows from Financing Activities:
(Repurchase) sale of common stock, net ............................. (422) 1,064 40
Repayment (issuance) of shareholder notes .......................... 258 (1,157) 143
Proceeds from (repayment of) revolving
credit facility, net .............................................. 5,150 (2,200) (2,150)
Repayment of term loans ............................................ (8,335) (10,455) (12,853)
Repayment of other long-term debt .................................. (840) (280) (1,386)
-------- -------- --------
Net cash used in financing activities (4,189) (13,028) (16,206)
-------- -------- --------
Effect of Exchange Rate Changes on Cash ............................. 382 (93) (728)
-------- -------- --------
Net (Decrease) Increase in Cash and Cash Equivalents ................ (3,064) 1,261 (2,687)
Cash and Cash Equivalents, beginning of year ........................ 8,540 5,476 6,737
-------- -------- --------
Cash and Cash Equivalents, end of year .............................. $ 5,476 $ 6,737 $ 4,050
======== ======== ========
Cash Paid for:
Interest ........................................................... $ 22,316 $ 24,537 $ 22,641
======== ======== ========
Income taxes ....................................................... $ 3,345 $ 1,299 $ 1,485
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 29
AEARO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(1) BASIS OF PRESENTATION
Aearo Corporation, a Delaware corporation, and its direct wholly-owned
subsidiary, Aearo Company, a Delaware corporation (collectively referred to
herein as "the Company") manufactures and sells products through three
reportable segments. The Company's segments are Safety Products, Safety
Prescription Eyewear and Specialty Composites. The Safety Products segment
manufactures and sells hearing protection devices, non-prescription safety
eyewear, face shields, reusable and disposable respirators, hard hats and first
aid kits under the brand names: AOSafety(R), E-A-R(R), and Peltor(R). The Safety
Prescription Eyewear segment manufactures and sells prescription eyewear
products that are designed to protect the eyes from the typical hazards
encountered in the industrial work environment. The Company's Safety
Prescription Eyewear segment purchases component parts (lenses and the majority
of its frames) from various suppliers, grinds and shapes the lenses to the
customer's prescription, and then assembles the glasses using the customer's
choice of frame. The Specialty Composites segment manufactures and sells a wide
array of energy-absorbing materials that are incorporated into other
manufacturers' products to control noise, vibration and shock.
Aearo Corporation was formed by Vestar Equity Partners, L.P. (Vestar) in June
1995 to effect the acquisition of substantially all of the assets and
liabilities of Cabot Safety Corporation and certain affiliates (the Predecessor)
all of which were wholly owned by Cabot Corporation (Cabot), (the Formation
Acquisition). The Formation Acquisition closed on July 11, 1995, when Aearo
Corporation acquired substantially all of the assets and certain liabilities of
the Predecessor for cash, preferred stock and a 42.5% common equity interest in
Aearo Corporation, as more fully described in Note 12. 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. Separate financial statements of Aearo Company
are not presented because they do not provide any additional information from
what is presented in the consolidated financial statements of Aearo Corporation
that would be meaningful to the holders of the Senior Subordinated Notes (see
Note 7).
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 reflect
carryover basis for the percentage ownership retained by Cabot.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. All significant
intercompany balances and transactions have been eliminated. The significant
accounting policies of the Company are described below.
USE OF ESTIMATES
The preparation of the consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts included in the prior years' consolidated financial statements
may have been reclassified to conform to the current period presentation.
28
<PAGE> 30
REVENUE RECOGNITION
The Company generally recognizes revenue upon shipment of its products to
customers.
ADVERTISING
The Company expenses the costs of advertising as incurred. These expenses were
approximately $5,171,000, $4,827,000, and $7,507,000 in the years ended
September 30, 1997, 1998, and 1999, respectively.
CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all time deposits and short-term investments with an original maturity of three
months or less at time of purchase to be cash equivalents.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are translated at
year-end exchange rates. Revenues and expenses are translated at the average
rate during the year. Translation gains and losses are reflected as a separate
component of stockholders' equity. Foreign currency gains and losses arising
from transactions by any of the Company's subsidiaries are reflected in net
income. For the years ended September 30, 1997, 1998, and 1999 the accompanying
consolidated statements of operations include approximately $2,101,000,
($617,000), and $559,000 respectively, of transaction (gains) and losses
included in other charges (income), net. During 1997, the Company initiated the
use of forward foreign currency contracts to mitigate the effects of changes in
foreign currency rates on profitability related to trade accounts receivable and
trade accounts payable denominated in foreign currencies. During 1999, the
Company initiated the use of Great Britain Pound Sterling (GBP) forward
contracts and Euro Zero Premium Collar contracts to mitigate the impact of the
effects of changes in foreign currency rates on profitability related to cash
flows from European operations. For the year ended September 30, 1999, the
consolidated statement of operation included approximately $191,000 of gains
related to these instruments. Cash flow hedges are placed for a three to six
month time frame and a portion is unwound monthly based on forecasted cash
flows. At September 30, 1999, cash flow hedges were approximately 3,100,000 GBP
for coverage to December 23, 1999 and approximately 3,100,000 GBP for coverage
to March 31, 1999.
As of September 30, 1999, the Company had forward foreign currency contracts
open in the following amounts:
<TABLE>
<CAPTION>
Contract
Currency Amount (000s) Position
-------- ------------- --------
<S> <C> <C>
British Pound 4,263 Buy
Canadian Dollar 1,846 Buy
Norwegian Krona 5,198 Sell
Swedish Krona 61,814 Buy
Swiss Franc 1,668 Buy
Euro 4,639 Sell
Danish Krona 1,385 Sell
</TABLE>
As of September 30, 1999, the Company has recorded an unrealized gain of $49,000
associated with the above forward foreign currency contract commitments.
INVENTORIES
Inventories, which include materials, labor and manufacturing overhead, are
stated at the lower of cost or market, cost being determined using the first-in,
first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation of property,
plant and equipment is calculated using the straight-line method based on
estimated economic useful lives. Expenditures for maintenance and repairs and
minor renewals are charged to expense. Expenses for maintenance and repairs
totaled approximately $2,783,000, $3,198,000, and $2,902,000 for the years ended
September 30, 1997, 1998, and 1999, respectively.
29
<PAGE> 31
Property, plant and equipment and their estimated useful lives consist of the
following:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Buildings 25-40 Years
Leasehold improvements Life of the lease or useful
life, whichever is shorter
Machinery and equipment, furniture and fixtures 3-10 Years
</TABLE>
Upon the sale or retirement of assets, the cost and related accumulated
depreciation are removed from the consolidated financial statements, and any
resultant gain or loss is recognized.
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
currently enacted tax rates.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, patents and trademarks
purchased in business acquisitions. Intangible assets are amortized over their
estimated useful life.
The Company accounts for long-lived and intangible assets in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of. The
Company continually reviews its intangible assets for events or changes in
circumstances that might indicate the carrying amount of the assets may not be
recoverable. The Company assesses the recoverability of the assets by
determining whether the amortization of such intangibles over their remaining
lives can be recovered through projected undiscounted future cash flows. The
amount of impairment, if any, is measured based on projected discounted future
cash flows using a discount rate reflecting the Company's average cost of funds.
At September 30, 1998 and 1999, no such impairment of assets was indicated.
A summary of the estimated lives by major category of intangible assets at
September 30, 1999 is as follows:
<TABLE>
<S> <C>
Goodwill............................................. 25 Years
Patents.............................................. 17 Years
Non-compete agreements............................... Life of agreements (up to 5 years)
Trademarks, Tradenames and
Other.............................................. Varies from 15 to 25 Years
</TABLE>
DEFERRED FINANCING COSTS
Deferred financing costs are stated at cost as a component of other assets and
amortized over the life of the related debt. Amortization of deferred financing
costs is included in interest expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with the requirements of SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, the Company has determined the estimated fair
value of its financial instruments using appropriate market information and
valuation methodologies. Considerable judgment is required to develop the
estimates of fair value; thus, the estimates are not necessarily indicative of
the amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash, accounts receivable, accounts payable,
Senior Subordinated Notes, bank debt (including term loans, revolving credit
facility and other debt) and interest rate collars. The carrying value of these
assets and liabilities is a reasonable estimate of their fair market value at
September 30, 1999, except for the Senior Subordinated Notes, for which the
Company estimates the fair market value to approximate $105 million at September
30, 1999, and except for interest rate collars for which the Company estimates
the fair market value to approximate $71,000 at September 30, 1999.
30
<PAGE> 32
LOSS PER COMMON SHARE
In 1998, the Company adopted SFAS No. 128, Earnings Per Share. Basic earnings
per common share is computed by dividing net (loss) income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per common share is calculated the same as basic except, if not
antidilutive, stock options are included using the treasury stock method to the
extent that the average share trading price exceeds the exercise price. As of
September 30, 1997, 1998, and 1999 there were 5,025, 7,154, and 7,729 options
outstanding, respectively. Of these potentially dilutive securities, none
qualified for inclusion in the diluted earnings per share calculation for the
years ended September 30, 1997, 1998, and 1999, respectively. The implementation
of this standard did not have an effect on earnings per common share in 1997
and, therefore, did not require restatement. Basic and diluted earnings per
common share for the years ended September 30, 1997,1998 and 1999 were equal;
therefore, no reconciliation between basic and diluted earnings per common share
is required.
ACCOUNTING FOR STOCK-BASED COMPENSATION
On October 1, 1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 addresses accounting and reporting requirements for
stock options and other equity instruments issued or granted based on their fair
market values. The Company intends to continue accounting for its stock based
compensation plans for employees in accordance with Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Under SFAS No.
123, companies choosing to continue to use APB No. 25 to account for stock based
compensation plans for employees must make footnote disclosure of the pro forma
effects on earnings per share had the principles contained within SFAS No. 123
been applied (See Note 12).
COMPREHENSIVE (LOSS) INCOME
On October 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income, which requires the reporting of comprehensive (loss) income and its
components in the consolidated financial statements. Comprehensive (loss) income
includes net earnings and unrealized gains and losses from currency translations
and minimum pension liability adjustments. The components of the Company's
comprehensive (loss) income and the effect on earnings, for the three years
ended September 30, 1999, are detailed in the accompanying consolidated
statements of stockholders' equity.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities- Deferral of the Effective Date of SFAS No. 133 - an
Amendment of SFAS No. 133 issued in June 1999, is effective for fiscal quarters
of all fiscal years beginning after June 15, 2000. A company may implement SFAS
No. 133 as of the beginning of any fiscal quarter after issuance (that is,
fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be
applied retroactively. SFAS No. 133, as amended by SFAS No. 137, must be applied
to (a) derivative instruments and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired or substantially modified after
either January 1, 1998 or January 1, 1999, as selected by the company.
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or a
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
The Company has not yet quantified the impact of adopting SFAS No. 133 on the
consolidated financial statements and has not determined the timing of or method
of the adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility
in earnings and other comprehensive income.
31
<PAGE> 33
(3) INVENTORIES
Inventories consisted of the following at September 30 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
-------------------------------------
<S> <C> <C>
Raw materials............................... $ 9,113 $ 8,725
Work in process............................. 9,257 7,649
Finished goods.............................. 12,096 16,912
-------------------------------------
$ 30,466 $ 33,286
=====================================
</TABLE>
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
-------------------------------------
<S> <C> <C>
Land........................................ $ 2,669 $ 2,649
Buildings and Improvements.................. 17,640 18,186
Machinery and equipment..................... 45,566 49,031
Furniture and fixtures...................... 16,799 17,700
Construction in progress.................... 3,120 5,570
-------------------------------------
85,794 93,136
Less -- Accumulated depreciation............ 28,065 37,255
-------------------------------------
$ 57,729 $ 55,881
=====================================
</TABLE>
(5) INTANGIBLE ASSETS
Intangible assets consist of the following at September 30 (dollars in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------------------------------------
<S> <C> <C>
Goodwill.................................... $ 88,652 $ 88,593
Patents..................................... 1,638 1,638
Trademarks and tradenames................... 74,122 74,122
Non-compete agreement....................... 194 834
Other....................................... 585 228
-------------------------------------
165,191 165,415
Less -- Accumulated depreciation............ 21,134 27,639
-------------------------------------
$ 144,057 $ 137,776
=====================================
</TABLE>
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at September
30 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
-------------------------------
<S> <C> <C>
Accounts payable -- trade................................ $ 15,131 $ 15,407
Accrued Liabilities --
Employee compensation and benefits (Note 9).......... 10,615 13,874
Restructuring reserve (Note 16)...................... 2,990 52
Product liability accruals........................... 4,063 4,097
Other................................................ 5,158 7,098
-------------------------------
$ 37,957 $ 40,528
===============================
</TABLE>
32
<PAGE> 34
(7) DEBT
The long-term debt balances consisted of the following at September 30 (dollars
in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revolving credit facility $ 8,000 $ 5,850
Term loans, due 2003 120,590 105,786
Senior subordinated notes, due 2005, 12.5% 100,000 100,000
Note payable, other 555 447
Mortgage note, due 1998 - 2006, 10.1% 2,410 2,358
Industrial Revenue Bonds, due 1998 - 2003, 6.4% less
advance deposit of $122 368 368
Industrial Revenue Bonds, due 2002, 13.0% 1,000 --
Capitalized lease obligations 242 --
-------- --------
233,165 214,809
Less -- Current portion of long-term debt 14,573 16,093
======== ========
Total $218,592 $198,716
======== ========
</TABLE>
Senior Bank Facilities
The Company's Senior Bank Facilities consist of Term Loans and a Revolving
Credit Facility as hereinafter defined. In July 1995, Aearo Company entered into
a credit agreement (the Agreement) that provides for secured borrowings from a
syndicate of lenders. On May 30, 1996, Aearo Company and the Syndicated Lenders
amended and restated the Agreement. The amended and restated Agreement consists
of (a) a secured term loan facility consisting of A and B term loans providing
for up to $90.0 million of A term loans and $50.0 million of B term loans
(collectively, the Term Loans); a portion of the A term loans is denominated in
an equivalent amount of foreign currencies and (b) a secured revolving credit
facility (the Revolving Credit Facility) providing for up to $25.0 million of
revolving loans, a portion of which may be denominated in foreign currencies,
for general corporate purposes and, as to $15.0 million thereof, to finance
permitted acquisitions. The Revolving Credit Facility provides for the issuance
of letters of credit in an aggregate face amount of up to $5.0 million. Term A
and B Loans amortize quarterly over five and six year periods, respectively.
Amounts repaid or prepaid in respect of the Term Loans may not be reborrowed.
Loans and letters of credit under the Revolving Credit Facility will be
available until the Revolving Loan Maturity Date, which is May 30, 2002.
At the Company's option, the interest rates per annum applicable to the Senior
Bank Facilities are either (a) an adjusted rate based on the London Interbank
Offered Rate (LIBOR) plus a margin of 2.25% in the case of A Term Loans and
Revolving Loans and 2.75% in the case of B Term Loans; or (b) the Base Rate, as
defined plus a margin of 1.00% in the case of A Term Loans and Revolving Loans
and 1.50% in the case of B Term Loans. The Base Rate is the higher of Bankers
Trust Company's announced prime lending rate and the Overnight Federal Funds
rate plus 0.50%. The Company must pay certain fees in connection with the Senior
Bank Facilities, including a commitment fee ranging from 0.375% to 0.50% on the
undrawn portion of the commitments in respect of the Revolving Credit Facility
based upon the Company's leverage ratio, and fees relating to the issuance of
letters of credit.
Under the terms of the Senior Bank Facilities, Aearo Company is required to
comply with a number of affirmative and negative covenants. Among other things,
Aearo Company must satisfy certain financial covenants and ratios, including
interest coverage ratios, leverage ratios and fixed charge coverage ratios. In
April 1997, the Senior Bank Facilities were amended with respect to certain
covenants applicable to periods ending on and after June 30, 1997. On September
30, 1998, the Senior Bank Facilities were amended to exclude certain
restructuring charges from the calculation of EBITDA, as used in determining
compliance with certain financial covenants, for the year ended September 30,
1998. On December 4, 1998, the Senior Bank Facilities were amended with respect
to certain covenants applicable to periods ending on and after December 31,
1998. The Senior
33
<PAGE> 35
Bank Facilities also impose limitations on certain business activities of Aearo
Company. The Senior Bank Facilities restrict, among other things, the incurrence
of additional indebtedness, creation of certain liens, sales of certain assets
and limitations on transactions with affiliates. As of September 30, 1999, Aearo
Company is in compliance with the covenants of the Senior Bank Facilities. The
Senior Bank Facilities are unconditionally guaranteed by Aearo Corporation and
secured by first priority security interests in substantially all the capital
stock and tangible and intangible assets of the Company.
Term Loans
At September 30, 1999 the total balance outstanding on the Term Loans was $105.8
million U.S. dollars and interest rates were 7.7% for the US Dollar Term A Loan
($21.9 million U.S. Dollars outstanding at September 30, 1999), 4.9% for the
German Deutsche Mark Term A Loan (19.4 million German Deutsche Marks outstanding
at September 30, 1999), 7.5% for the British Pound Term A Loan (8.3 million
British Pounds outstanding at September 30, 1999), 7.2% for the Canadian Term A
Loan (6.2 million Canadian Dollars outstanding at September 30, 1999), 7.5% for
the British Pound Term A Loan (4.4 million British Pounds outstanding at
September 30, 1999) and 8.2% for the US Dollar Term B Loan ($48.4 million U.S.
Dollars outstanding at September 30, 1999). For the year ended September 30,
1999 the weighted average interest rates paid were 7.5%, 5.4%, 8.5%, 7.3%, 8.5%
and 7.9% for the US Dollar Term A Loan, for the German Deutsche Mark Term A
Loan, for the British Pound Term A Loan, for the Canadian Term A Loan, for the
British Pound Term A Loan and for the US Dollar Term B Loan, respectively.
At September 30, 1998 the total balance outstanding on the Term Loans was $120.6
million U.S. dollars and interest rates were 7.9% for the US Dollar Term A Loan,
5.8% for the German Deutsche Mark Term A Loan, 10.1% for the British Pound Term
A Loan, 7.4% for the Canadian Term A Loan, 10.1% for the British Pound Term A
Loan and 8.4% for the US Dollar Term B Loan. For the year ended September 30,
1998 the weighted average interest rates paid were 8.0%, 5.9%, 9.8%, 6.8%, 9.8%
and 8.5% for the US Dollar Term A Loan, for the German Deutsche Mark Term A
Loan, for the British Pound Term A Loan, for the Canadian Term A Loan, for the
British Pound Term A Loan and for the US Dollar Term B Loan, respectively.
At September 30, 1997 the total balance outstanding on the Term Loans was $129.6
million U.S. dollars and interest rates were 8.0% for the US Dollar Term A Loan,
5.6% for the German Deutsche Mark Term A Loan, 9.6% for the British Pound Term A
Loan, 5.9% for the Canadian Term A Loan, 9.6% for the British Pound Term A Loan
and 8.5% for the US Dollar Term B Loan. For the year ended September 30, 1997
the weighted average interest rates paid were 7.9%, 5.5%, 8.7%, 5.6%, 8.7% and
8.4% for the US Dollar Term A Loan, for the German Deutsche Mark Term A Loan,
for the British Pound Term A Loan, for the Canadian Term A Loan, for the British
Pound Term A Loan and for the US Dollar Term B Loan, respectively.
Revolving Credit Facility
At September 30, 1999 the balance outstanding on the Revolving Credit Facility
was $5.9 million, of which $3.0 million bears interest at LIBOR (7.6% at
September 30, 1999) and $2.9 million bears interest at the Base Rate (9.3% at
September 30,1999). For the year ended September 30, 1999, the maximum amount
outstanding was $14.8 million, the average was $7.3 million, and the weighted
average interest rate paid was 8.3%.
At September 30, 1998 the balance outstanding on the Revolving Credit Facility
was $8.0 million, and the interest rate was 9.3%. For the year ended September
30, 1998, the maximum amount outstanding was $16.3 million, the average was $9.9
million, and the weighted average interest rate paid was 8.7%.
At September 30, 1997 the balance outstanding on the Revolving Credit Facility
was $10.2 million, and the interest rate was 9.5%. For the year ended September
30, 1997, the maximum amount outstanding was $20.3 million, the average was
$12.9 million, and the weighted average interest rate paid was 9.4%.
Senior Subordinated Notes
In connection with the acquisition, Aearo Company issued $100.0 million of
Senior Subordinated Notes due 2005 (Notes) which are unsecured obligations of
Aearo Company. The Notes bear interest at a rate of 12.5% per annum and interest
is payable semiannually on each January 15 and July 15.
The Notes are redeemable at the option of Aearo Company, on or after July 15,
2000. From and after July 15, 2000, the Notes will be subject to redemption at
the option of Aearo Company, in whole or in part, at various redemption prices,
declining from 106.3% of the principal amount to par on and after July 15, 2004.
34
<PAGE> 36
The Note indenture contains affirmative and negative covenants and restrictions
similar to those required under the terms of the Senior Bank Facilities
discussed above. As of September 30, 1999, Aearo Company is in compliance with
the various covenants of the Note agreement. The Notes are unconditionally
guaranteed on an unsecured, senior subordinated basis by Aearo Corporation.
Maturities
The following is a summary of maturities of all of the Company's debt
obligations due after September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Amount
------
<S> <C>
2000 .............................. $ 16,093
2001 .............................. 20,923
2002 .............................. 40,160
2003 .............................. 35,347
2004 .............................. 90
Thereafter ........................ 102,196
---------
$ 214,809
=========
</TABLE>
(8) INTEREST EXPENSE, NET
Interest expense (income) comprises the following items (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
1997 1998 1999
-------- -------- -------
<S> <C> <C> <C>
Expense ......................... $ 26,896 $ 26,406 $24,553
Income .......................... (231) (254) (231)
-------- -------- -------
Interest expense, net............ $ 26,665 $ 26,152 $24,322
======== ======== =======
</TABLE>
(9) EMPLOYEE BENEFIT PLANS
On October 1, 1998, the Company adopted SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes the
disclosure requirements about pensions and other postretirement benefits to the
extent practicable.
The Company previously had two noncontributory defined benefit pension plans
(collectively, the plans), the Aearo Company Employees' Retirement Account Plan
(the Aearo Plan), which is a cash balance plan, and the E-A-R(R) Specialty
Composites Division of Aearo Company Non-Union Employees Retirement Plan (the
Specialty Composites Plan). Benefits provided under these plans are primarily
based on years of service and the employee's compensation. Effective December
31, 1997, net assets available for benefits totaling $1,499,027 held by the
Specialty Composites Plan were transferred to the Aearo Plan in a merger of the
two plans.
The Aearo Plan, effective May 1, 1990, covers most employees in the United
States and is funded quarterly based on actuarial and economic assumptions
designed to achieve adequate funding of projected benefit obligations. Plan
assets are invested in a portfolio consisting primarily of debt and equity
securities. The Specialty Composites Plan resulted from a 1989 acquisition. As
of March 31, 1989, the benefits under this plan were frozen. Plan assets were
invested in fixed-income investments. Benefits earned under the Specialty
Composites Plan are payable from the Aearo Plan. The Aearo Plan was amended to
incorporate the vesting, forms of payment, commencement dates, and actuarial
equivalence provisions which existed in the Specialty Composites Plan
immediately prior to the merger, for purposes of determining such benefit.
However, the lump sum present values of benefits accrued under the Specialty
Composites Plan will be based on the actuarial equivalence methodology specified
in the Aearo Plan.
35
<PAGE> 37
The tables that follow provides a reconciliation of benefit obligation, plan
assets and funded status of both the Aearo plan and the Specialty Composites
plan (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
CHANGE IN BENEFIT OBLIGATION 1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Benefit obligation at beginning of year $ 6,316 $ 7,064 $ 9,650
Service Cost 1,273 1,348 1,414
Interest Cost 393 523 624
Plan amendments -- -- 115
Acquisitions/divestitures -- 1,444 --
Benefits Paid (516) (694) (1,306)
Actuarial (gain) or loss (402) (35) (997)
------ ------ ------
Benefit obligation at end of year $ 7,064 $ 9,650 $ 9,500
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
CHANGE IN PLAN ASSETS 1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Fair value of plan assets at beginning of year $ 5,303 $ 6,173 $ 8,732
Actual return of plan assets 1,218 575 1,327
Acquisitions/divestitures -- 1,418 --
Employer contributions 168 1,260 350
Benefits Paid (516) (694) (1,306)
------- ------- -------
Fair value of plan assets at end of year $ 6,173 $ 8,732 $ 9,103
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------------------
FUNDED STATUS AND STATEMENT OF FINANCIAL POSITION 1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Fair value of plan assets at end of year 6,173 8,732 9,103
Benefit obligations at end of year 7,064 9,650 9,500
------- ------- -------
Funded status $ (891) $ (918) $ (397)
Unrecognized actuarial (gain) or loss (1,493) (1,412) (2,924)
------- ------- -------
Net pension liability included in accrued liabilities $(2,384) $(2,330) $(3,321)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL YEAR END INFORMATION FOR PENSION AS OF SEPTEMBER 30,
PLANS WITH ACCUMULATED BENEFIT OBLIGATIONS --------------------------
IN EXCESS OF PLAN ASSETS: 1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Project benefit obligation $7,064 $9,650 $9,500
Accumulated benefit obligation 7,001 9,557 9,324
Fair value of plan assets 6,173 8,732 9,103
</TABLE>
Net periodic benefit cost for the Plans is comprised of the following elements:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Service Cost $ 1,273 $ 1,348 $ 1,414
Interest Cost 394 523 624
Expected return on plan assets (403) (566) (670)
Recognized actuarial (gain) or obligation -- (61) (28)
------- ------- --------
Net periodic benefit cost $ 1,264 $ 1,244 $ 1,340
======= ======= =======
</TABLE>
36
<PAGE> 38
The weighted average assumptions used in determining net periodic benefit cost
and the projected benefit obligation are as follows:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30
-------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Discount rate 7.00% 7.00% 6.75%
Expected long-term rate of return on plan assets 8.00 8.00 8.00
Rate of compensation increase 4.00 4.00 4.00
</TABLE>
In addition, the Company has an unfunded, noncontributory defined benefit
pension plan, the Aearo Company Supplemental Executive Retirement Plan (the SERP
Plan) which is also a cash balance plan. The SERP Plan, effective January 1,
1994, covers certain employees in the United States. The costs to the Company
for the SERP Plan were $90,000, $61,000, and $81,000 for the years ended
September 30, 1997, 1998 and 1999, respectively.
A 401(k) plan, the Aearo Company Employees' 401(k) Savings Plan, was established
as of May 1, 1990. Employees can join the plan after six months of service,
during which they work at least 500 hours and may contribute up to 15% of their
compensation. The Company contributes amounts equal to 50% of the employee's
contribution to a maximum of 3% of the employee's pay. Prior to January 1, 1997,
the Company provided a 40% match to a maximum of 2% of pay. The costs to the
Company for this Plan were $717,000, $710,000, and $765,000 for the years ended
September 30, 1997, 1998 and 1999, respectively.
The Company has a defined contribution savings plan for U.K. employees, under
which eligible employees are allowed to contribute up to 15% of their
compensation. The Company contributes 5% of pay for all eligible employees and
additional amounts equal to 40% of the employee's contribution to a maximum of
2% of the employee's pay. For the years ended September 30, 1997, 1998, and
1999, the Company contributed approximately $158,000, $160,000, and $197,000,
respectively.
Postretirement Benefits
The Company does not provide defined benefit postretirement plans for retirees
after age 65 except that all employees who elect early retirement at age 62 or
older are eligible to receive life insurance coverage that terminates on their
65th birthday. In addition, employees who were age 55 or older with 10 years of
service as of April 1, 1990 are eligible to receive limited health care and life
insurance coverage for themselves and their eligible dependents upon early
retirement at age 62 or older. These coverages terminate on the 65th birthday of
the retiree or his or her spouse. The health care benefit is a fixed dollar
contribution and the life insurance benefit is a fixed coverage amount.
As of September 30, 1998 and 1999, the accrued postretirement benefit cost was
$62,000 and $0, respectively.
(10) RELATED PARTY TRANSACTIONS
An annual management fee, which is to be shared by Cabot and Vestar, is paid in
aggregate amounts with respect to each fiscal year equal to the greater of (i)
$400,000 or (ii) 1.25% of the consolidated net income of the Company and its
subsidiaries before cash interest, taxes, depreciation and amortization for such
fiscal year. This annual management fee is shared by Cabot and Vestar based on
their relative equity ownership of the Company and totaled approximately
$624,000, $434,000 and $706,000 for the years ended September 30, 1997, 1998 and
1999, respectively.
The Company and Cabot have entered into an arrangement relating to certain
respirator claims asserted after the Formation Acquisition whereby, so long as
the Company pays to Cabot an annual fee of $400,000, which the Company has
elected to pay, Cabot will retain responsibility and liability for, and
indemnify the Company against, certain legal claims alleged to arise out of the
use of respirators manufactured prior to July 1995. The Company has the right to
discontinue the payment of such annual fee at any time, in which case the
Company will assume responsibility for and indemnify Cabot with respect to such
claims.
The Company has made available to certain members of management (Management
Investors) loans in order to provide such Management Investors with funds to be
applied to a portion of the purchase price of the Common Stock purchased by such
Management Investors under the Stock Purchase Plan. Such loans (i) are secured
by Common Stock purchased with the proceeds thereof, (ii) have a term of from 5
to 10 years, (iii) bear interest at an annual rate determined pursuant to
Section
37
<PAGE> 39
7872(f)(2) of the 1986 Internal Revenue Code, and (iv) are subject to mandatory
prepayment in the event the employment of such Management Investors terminates.
The aggregate amount of these loans was approximately $1,572,000 and $1,429,000
at September 30, 1998 and 1999, respectively and are reflected as a reduction of
the additional paid-in capital account in the consolidated statements of
stockholders' equity.
(11) INCOME TAXES
Income (loss) before provision for income taxes is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Domestic ............ $(7,126) $(12,685) $ 3,836
Foreign ............. 1,167 3,443 6,461
--------------------------------
Total ............. $(5,959) $ (9,242) $10,297
================================
</TABLE>
A summary of provision (benefit) for income taxes is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------
1997 1998 1999
----------------------------
<S> <C> <C> <C>
U.S. Federal and State --
Current ......................... $123 $ 231 $ 347
Deferred ........................ -- -- 716
----------------------------
123 231 1,063
----------------------------
Foreign --
Current ......................... 608 1,897 2,315
Deferred ........................ 186 76 (134)
----------------------------
794 1,973 2,181
----------------------------
Total ............................ $917 $2,204 $ 3,244
============================
</TABLE>
The provision (benefit) for income taxes at the Company's effective tax rate
differed from the provision (benefit) for income taxes at the statutory rate as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1997 1998 1999
--------------------------------
<S> <C> <C> <C>
Computed tax expense (benefit) at the
expected statutory rate .................. $(2,086) $(3,143) $ 3,502
State taxes, net of
federal effect ............................. 81 (201) 322
Foreign income taxed at different rates .... (1,890) 296 (147)
Foreign dividends .......................... -- -- 1,888
Goodwill amortization ...................... 1,112 871 1,076
Non-deductible expenses .................... 112 96 90
Increase / (decrease) in valuation
allowance ................................. 3,551 4,185 (3,708)
Other, net ................................. 37 100 221
--------------------------------
Provision for income taxes ............... $ 917 $ 2,204 $ 3,244
================================
</TABLE>
38
<PAGE> 40
Significant components of deferred income taxes are as follows at September 30
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1999
----------------------
<S> <C> <C>
Deferred tax assets
Pension and other benefits ................. $ 2,786 $ 2,367
Property, plant and equipment .............. (4,739) (5,046)
Intangible assets .......................... 2,697 1,572
Restructuring charges ...................... 3,564 71
Inventory .................................. 1,876 1,652
Net operating loss -- foreign .............. 1,690 895
Net operating loss carryforwards -- domestic 9,410 11,155
Other ...................................... 469 1,101
----------------------
Subtotal .................................... 17,753 13,767
Valuation allowances ........................ (18,712) (14,592)
======== ========
Total deferred tax liability ................ $ (959) $ (825)
======== ========
</TABLE>
The valuation allowance at September 30, 1998 and 1999 relates to the
uncertainty of realizing the tax benefits of reversing temporary differences and
net operating loss carryforwards. The gross amount of domestic and foreign net
operating loss carryforwards, before the tax effect, is approximately $32.8
million and $3.2 million, respectively, as of September 30, 1999. Of the
valuation allowance recorded as of September 30, 1999, approximately $10.0
million will be used to reduce goodwill related to the purchase if the benefits
are realized. During the current year, approximately $0.7 million of valuation
allowances originally established through purchase accounting have been reversed
through goodwill.
(12) STOCKHOLDERS' EQUITY
Stock Ownership and Stockholders' Agreement
As of September 30, 1999, Cabot owns 41.4% of common stock (42,500 shares) and
50% of redeemable preferred stock (22,500 shares), Vestar owns 41.4% of common
stock (42,500 shares) and 50% of redeemable preferred stock (22,500 shares) and
the Management Investors and certain other employees of the Company own 17.2% of
common stock (17,538 shares). Vestar, Cabot and the Management Investors are
parties to a stockholders' agreement (the Stockholders' Agreement). The
Stockholders' Agreement contains stock transfer restrictions, as well as
provisions granting certain tag-along rights, drag-along rights, registration
rights and participation rights.
The redeemable preferred stock is cumulative redeemable $.01 par value stock.
Dividends accrue whether or not dividends are declared or funds are available at
an annual rate of 12.5%, compounded daily. Accrued dividends may be paid in cash
or in additional shares of preferred stock. Shares are redeemable for cash at
any time, subject to certain exceptions, at the option of the Company at a
redemption price equal to the actual or implied purchase price ($45 million)
plus a redemption payment based on the dividend rate. As of September 30, 1999,
the redemption value of the preferred stock is $76,834,000.
Aearo Company is permitted to pay cash dividends to Aearo Corporation for taxes
and expenses in the ordinary course of business. The maximum amount of cash
dividends paid to Aearo Corporation for ordinary business expenses may not
exceed $500,000 in any fiscal year. As long as no event of default would result,
Aearo Corporation and Aearo Company are permitted to pay dividends consisting of
shares of qualified capital stock as defined in the Senior Bank Facilities, and
Aearo Corporation may redeem or purchase shares of its capital stock held by
former employees of Aearo Corporation or any of its subsidiaries following the
termination of their employment, provided that the aggregate amount paid by
Aearo Corporation in respect to such purchases or redemptions does not exceed
$1.5 million; Aearo Company may pay cash dividends to Aearo Corporation for the
latter purpose. Additionally, Aearo Corporation may pay dividends on its
preferred stock in additional shares of preferred stock.
Stock Option Plans
On June 27, 1996, the Company adopted the Executive Stock Option Plan (the
Executive Plan) whereby the Company, subject to approval of the Board of
Directors, may grant up to 5,000 non-qualified options to certain members of
management. In July 1997, the Company's Board of Directors adopted and the
stockholders subsequently approved the 1997 Stock Option Plan (the
39
<PAGE> 41
"1997 Option Plan") under which 10,000 shares of Aearo Common Stock have been
reserved for issuance. Under the 1997 Option Plan non-qualified and qualified
options may be granted to employees of the Company. Options granted under the
Executive Plan and the 1997 Option Plan will vest and become exercisable upon
the earlier of the date on which a stipulated return (as defined) is achieved by
Vestar and Cabot on their investment in the Company and the tenth anniversary of
the date of grant. The option term will be ten years except that options shall
expire in certain instances of termination of employment and upon the sale of
the Company. As of September 30, 1999, a total of 7,729 options were outstanding
under the Executive Plan and 1997 Option Plan and a total of 7,271 options were
available for grant.
Pro Forma Stock-Based Compensation Expense
SFAS No. 123, Accounting for Stock-Based Compensation, sets forth a
fair-value-based method of recognizing stock-based compensation expense. As
permitted by SFAS No. 123, the Company has elected to continue to apply APB No.
25 to account for its stock-based compensation plans. Had compensation cost for
awards granted in fiscal 1997, fiscal 1998 and fiscal 1999 under the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates consistent with the method set forth under SFAS No. 123, reported
net (loss) income and net (loss) income per share would not have been affected
for fiscal 1997, fiscal 1998 and fiscal 1999 as the Black-Scholes option pricing
model calculated no value for the options granted in those years.
The fair value of each option grant was estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.10% 5.52% 4.99%
Expected life of options granted 10 years 10 years 10 years
Expected volatility of underlyling stock 0% 0% 0%
Dividend Yield 0% 0% 0%
</TABLE>
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option pricing models require input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
the Company's stock options.
40
<PAGE> 42
Stock Option Activity
Stock option data are summarized as follows for the Executive Plan and the 1997
Option Plan for the years ended September 30, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
Outstanding, September 30, 1996 5,000 $600
Granted 1,344 600
Exercised -- --
Forfeited (1,319) 600
Expired -- --
------ ----
Outstanding, September 30, 1997 5,025 $600
Granted 3,529 600
Exercised -- --
Forfeited (1,400) 600
Expired -- --
------ ----
Outstanding, September 30, 1998 7,154 $600
Granted 1,044 600
Exercised -- --
Forfeited (469) 600
Expired -- --
------ ----
Outstanding, September 30, 1999 7,729 $600
====== ====
</TABLE>
The following table sets forth information regarding options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Number Weighted Average Exercise Price
Number of Currently Average Remaining for Currently
Options Exercise Price Exercisable Exercise Price Contractual Life Exercisable
<S> <C> <C> <C> <C> <C>
7,729 $600.00 0 $600.00 7.94 years N/A
At September 30, 1997, 1998 and 1999, none of the shares were currently exercisable. At September 30, 1999, there were 7,271 options
available for grant.
</TABLE>
41
<PAGE> 43
(13) COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain transportation vehicles, warehouse facilities, office
space, and machinery and equipment under cancelable and noncancelable leases,
most of which expire within 10 years and may be renewed by the Company. Rent
expense under such arrangements totaled $5,315,000, $5,553,000, and $5,544,000
for the years ended September 30, 1997, 1998, and 1999 respectively. Future
minimum rental commitments under noncancelable leases in effect at September 30,
1999 are as follows (dollars in thousands):
<TABLE>
<S> <C>
2000 $ 4,856
2001 4,759
2002 4,213
2003 3,536
2004 3,151
2005 and thereafter 5,205
--------
Total $ 25,720
========
</TABLE>
Contingencies
The Company is a defendant in various lawsuits and administrative proceedings
that 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 (R)) infringes a patented lens shape utilized in the plaintiff's sun
and sporting glasses. On October 22, 1998, the Company announced that it had
entered into a settlement agreement with Gargoyles, Inc. Under the terms of the
settlement, in which the Company expressly denies any liability in the lawsuit,
the Company will continue to manufacture its Fectoids (R) line of eyewear for
sale into safety eyewear markets. The Company also will have the right to sell
into such markets other lines of safety eyewear that Gargoyles contended
infringe its patents. The Company agreed to pay Gargoyles $1.2 million in
exchange for a release of all claims relating to Gargoyles' patents and for
uncontested rights to continue manufacturing and selling its Fectoids (R) and
other lines of eyewear.
(14) ACQUISITIONS
On August 2, 1999, the Company acquired Safety Optical, Inc. of Athens,
Tennessee. The acquisition has been accounted for as a purchase transaction in
accordance with Accounting Principles Board Opinion No. 16, and accordingly, the
consolidated financial statements for the periods subsequent to August 2, 1999
reflect the purchase price, including transaction costs, allocated to tangible
and intangible assets acquired and liabilities assumed, based on their estimated
fair values as of August 2, 1999.
The allocation of the $3.7 million purchase price and direct acquisition costs
is summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
Cash paid for Safety Optical, Inc .............................. $ 3,425
Acquisition costs .............................................. 300
-------
Total consideration and acquisition costs .................... 3,725
Historical Cost of Net Assets Acquired ......................... 1,029
-------
Excess of consideration paid over historical cost ............ $ 2,696
=======
</TABLE>
Allocation of Excess of Consideration Paid over Historical Cost:
<TABLE>
<S> <C>
Property, plant and equipment, net ........................... $ 193
Intangible assets ............................................ 3,429
Accrued liabilities .......................................... (926)
-------
$ 2,696
=======
</TABLE>
42
<PAGE> 44
(15) SEGMENT DATA
Effective October 1, 1998 the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company's three
reportable segments are Safety Products, Safety Prescription Eyewear and
Specialty Composites. Fiscal year 1998 was restated to conform to the fiscal
year 1999 reporting but fiscal year 1997 was not due to the cost required to
restate. The Safety Products segment manufactures and sells hearing protection
devices, non-prescription safety eyewear, face shields, reusable and disposable
respirators, hard hats and first aid kits under its well-known brand names:
AOSafety(R), E-A-R(R), and Peltor(R). The Safety Prescription Eyewear segment
manufactures and sells prescription eyewear products that are designed to
protect the eyes from the typical hazards encountered in the industrial work
environment. The Company's Safety Prescription Eyewear segment purchases
component parts (lenses and the majority of its frames) from various suppliers,
grinds and shapes the lenses to the customer's prescription, and then assembles
the glasses using the customer's choice of frame. The Specialty Composites
segment manufactures a wide array of energy-absorbing materials that are
incorporated into other manufacturers' products to control noise, vibration and
shock.
NET SALES TO EXTERNAL CUSTOMERS BY BUSINESS SEGMENT (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Safety Products $216,546 $212,118
Safety Prescription Eyewear 36,362 35,489
Specialty Composites 39,551 42,782
-------- --------
TOTAL $292,459 $290,389
======== ========
</TABLE>
EBITDA BY BUSINESS SEGMENT AND RECONCILIATION TO (LOSS) INCOME BEFORE PROVISION
FOR INCOME TAXES (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Safety Products $ 41,365 $42,246
Safety Prescription Eyewear 2,730 3,491
Specialty Composites 3,054 2,954
Reconciling items (11,588) 2,310
-------- -------
Total EBITDA $ 35,561 $51,001
Depreciation 11,537 9,399
Amortization of Intangibles 6,833 6,793
Non-operating Costs (Income) 281 190
Interest, net 26,152 24,322
-------- -------
(Loss) Income before provision for
income taxes $ (9,242) $10,297
======== =======
</TABLE>
EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. While the
Company believes EBITDA is a useful indicator of its ability to service debt,
EBITDA should not be considered as a substitute for net income determined in
accordance with generally accepted accounting principles as an indicator of
operating performance or as an alternative to cash flow as a measure of
liquidity. Investors should be aware that EBITDA as presented above may not be
comparable to similarly titled measures presented by other companies and
comparisons could be misleading unless all companies and analysts calculate this
measure in the same fashion.
43
<PAGE> 45
Intersegment sales of the Specialty Composites segment to the Safety Products
segment totaled $4,323 and $4,635 for the years ended September 30, 1998 and
1999, respectively. The intersegment sales value is generally determined at
fully absorbed inventory cost at standard rates plus 25%.
Reconciling items for both years include unallocated selling, administrative,
research and technical expenses as well as manufacturing profit realized on
intercompany transactions not allocable to a specific segment. Reconciling items
for 1998 include $10,550 for restructuring and restructuring related items
primarily attributed to the Safety Products segment.
DEPRECIATION BY BUSINESS SEGMENT (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Safety Products $ 8,926 $6,898
Safety Prescription Eyewear 746 682
Specialty Composites 1,865 1,819
------- ------
TOTAL $11,537 $9,399
======= ======
</TABLE>
CAPITAL EXPENDITURES BY BUSINESS SEGMENT (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Safety Products $4,513 $5,088
Safety Prescription Eyewear 6 883
Specialty Composites 739 1,804
Reconciling items 551 580
------ ------
TOTAL $5,809 $8,355
====== ======
</TABLE>
Reconciling items for both years include corporate level expenditures for items
such as enterprise wide information technology systems.
NET SALES BY PRINCIPAL GEOGRAPHIC AREAS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
United States $197,341 $204,309 $201,531
Canada 16,656 16,791 16,233
United Kingdom 18,264 18,636 17,438
Germany 10,441 10,977 11,892
Sweden 10,506 6,175 9,601
France 7,437 7,504 8,014
Italy 5,205 5,065 5,320
All others 19,933 23,002 20,360
-------- -------- --------
TOTAL $285,783 $292,459 $290,389
======== ======== ========
</TABLE>
The sales as shown above represent the value of shipments into the customer's
country of residence. For the years ended September 30, 1997, 1998, and 1999, no
single customer accounted for more than 10% of sales.
NET IDENTIFIABLE ASSETS BY PRINCIPAL GEOGRAPHIC AREAS (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
United States $203,489 $183,397 $184,603
Canada 6,963 6,787 5,693
United Kingdom 21,129 19,972 17,458
Germany 2,836 2,124 1,830
Sweden 78,125 79,863 72,027
All others 1,507 813 682
-------- -------- --------
TOTAL $314,049 $292,956 $282,293
======== ======== ========
</TABLE>
44
<PAGE> 46
(16) RESTRUCTURING CHARGE
During fiscal 1998 the Company recorded a restructuring charge of $11.6 million
related to the restructuring plans announced by the Company during that fiscal
year. The restructuring included changes in senior management personnel,
relocation of the Company headquarters from Boston to Indianapolis, and
initiatives to improve profitability through complexity reduction and product
line focus. The Company eliminated certain product offerings in its Eyewear and
Respiratory product lines, reduced head count in its North American operations,
and consolidated the branding in its Consumer product line.
The $11.6 million charge included a $6.1 million provision for inventories and
product returns for products that were discontinued. The charge also provided
$1.1 million for certain property, plant, and equipment for which the Company
determined there was no future use, and $0.1 million related to intangibles for
an abandoned product line. In addition, the charge provided $4.3 million to
cover employee severance and other contractual obligations.
As of September 30, 1999, these restructuring initiatives were substantially
completed and the associated accruals had been depleted.
(17) SUBSEQUENT EVENTS
On October 28, 1999, the Company acquired Ontario, Canada based Norhammer
Limited for approximately Canadian $5.5 million. The transaction was accounted
for using the purchase method of accounting.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
<PAGE> 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the directors
and executive officers of the Company as of November 30, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Michael A. McLain 49 Chief Executive Officer, President, and Director
Bryan J. Carey 39 Executive Vice President, Chief Financial Officer,
Treasurer, Assistant Secretary, and Managing
Director - Europe
James D. Hall 49 Senior Vice President, Chief Marketing Officer, Managing
Director - Peltor(R) Communications, North
America
James H. Floyd 44 Vice President, Logistics and Business Director - Consumer
Joseph P. Marlette 56 Vice President, Manufacturing and Research and Development
M. Rand Mallitz 57 Senior Vice President and General Manager, E-A-R(R)
Specialty Composites
D. Garrad (Gary) Warren 47 Vice President, North American Industrial Safety Sales and
Managing Director - International
James M. Phillips 47 Vice President, Human Resources
Rahul Kapur 48 Vice President, Corporate Development and Business
Manager - SRx
Norman W. Alpert* 41 Chairman of the Board of Directors
Daniel S. O'Connell 45 Director
Arthur J. Nagle 61 Director
Bryan P. Marsal 48 Director
William E. Kassling 55 Director
Robert Rothberg 50 Director
Margaret J. Hanratty* 51 Director
John D. Curtin, Jr. 66 Director
</TABLE>
* Member of Audit Committee and Compensation Committee
Michael A. McLain has been President and Chief Executive Officer of Aearo
Corporation since January 1998. Prior to joining Aearo he was President and
Chief Executive Officer of DowBrands, Inc., a large manufacturer of household
consumer products. Mr. McLain is also a director of Auburn University, Park
Tudor School, Pleasant Run Children's Homes and Little Rapids Corporation.
46
<PAGE> 48
Bryan J. Carey joined the Company as Chief Financial Officer in April 1994 from
Cabot, where he had been Director of Strategic Planning since August 1992. Prior
to joining Cabot, he was a principal with Chase Capital Partners and its
predecessor.
James D. Hall joined the Company in October 1994 and served as a consultant to
the Company from July 1994 to October 1994. Mr. Hall was Executive Vice
President of Uvex Safety L.L.C. from 1993 to July 1994 and Vice President-Safety
of Uvex Winter Optical, Inc. from 1990 to 1993.
James H. Floyd joined the Company in April 1998 as Vice President, Logistics.
Prior to April 1998, he was responsible for global logistics and packaging
functions at DowBrands. He began his career at Procter and Gamble where he
worked for seven years.
Joseph P. Marlette joined the Company in April 1998 as Vice President,
Manufacturing. Prior to joining Aearo, he spent 33 years in various
manufacturing positions with the Dow Chemical Company.
M. Rand Mallitz joined the Company in January 1992 as Vice President and General
Manager, E-A-R(R) Specialty Composites. He was Vice President and General
Manager of the Caulk Cartridge Division of Sonoco Products in 1991, and prior to
that he was President/CEO of Roth Office Products.
D. Garrad (Gary) Warren joined the Company in November 1999 and holds the
position of Vice President, North American Industrial Safety Sales. Most
recently, he was Senior Vice President - Marketing and New Business Development
for Spectrum Brands in St. Louis, Missouri. Prior to that, Gary was Senior Vice
President, Sales and Customer Development for International Home Foods in
Parsippany, New Jersey.
James M. Phillips joined the Company in May 1998 as Vice President, Human
Resources. He worked for Dow Chemical Company for more than 20 years and has
worked in recruiting, training and compensation for many diverse divisions of
Dow.
Rahul Kapur joined the Company in April 1998 as Vice President of Corporate
Development. He joined DowBrands in 1985 in New Product Development and was
Director of Marketing for Europe. He began his career with Richardson Vicks and
Unilever.
Norman W. Alpert is a Managing Director of Vestar Capital Partners and was a
founding partner of Vestar at its inception in 1988. Mr. Alpert is Chairman of
the Board of Directors of Advanced Organics, Inc. and a director of Siegel &
Gale Corporation, Cluett American Corp., Remington Products Company, L.L.C. and
Russell-Stanley Corporation, all companies in which Vestar or its affiliates
have a significant equity interest. He became a director of the Company in July
1995 and Chairman in February 1998.
Daniel S. O'Connell is the Chief Executive Officer and founder of Vestar Capital
Partners. Mr. O'Connell is a director of Advanced Organics, Inc., Cluett
American Corp., Remington Products Company, L.L.C. and Russell-Stanley
Corporation, and is a member of the partnership committee of Insight
Communications Company, L.P., all companies in which Vestar or its affiliates
have a significant equity interest. He became a director of the Company in July
1995.
Arthur J. Nagle is a Managing Director of Vestar Capital Partners and was a
founding partner of Vestar at its inception in 1988. Mr. Nagle is a director of
Advanced Organics, Inc., Remington Products Company, L.L.C., and Russell-Stanley
Corporation, all companies in which Vestar or its affiliates have a significant
equity interest. He became a director of the Company in July 1995.
Bryan P. Marsal is Chairman and Chief Executive Officer of Cluett American Corp.
Mr. Marsal is a director of Timex Corporation and Long Manufacturing Corp.
Cluett is an apparel manufacturer of Gold Toe socks and Arrow shirts. Mr. Marsal
has served as Chief Executive Officer for many other companies on a temporary
basis including Republic Health, Anthony Manufacturing, Gitano Corporation and
Alexanders Department Store. He became a director of the Company in October
1998.
William E. Kassling is Chairman and Chief Executive Officer of Wabtec
Corporation, a manufacturer of value added equipment for locomotives, railway
freight cars and passenger transit vehicles. Prior to joining Westinghouse Air
Brake Company in 1984, Mr. Kassling was with American Standard Incorporated,
Clark Equipment Company and Boston Consulting Group. Mr. Kassling is a director
of Commercial Intertech, DRAVO Corporation, the Historical Society of Western
Pennsylvania, La Rouche College and Scientific Atlanta, Inc. He became a
director of the Company in July 1998.
47
<PAGE> 49
Robert Rothberg has been Vice President and General Counsel of Cabot Corporation
since October 1993. Prior to joining Cabot in 1993, Mr. Rothberg was with
Choate, Hall & Stewart from 1976 -1993. He became a director of the Company in
December 1998.
Margaret J. Hanratty has been Vice President and Treasurer of Cabot since
September 1993, and served previously as Director of Corporate Development.
Prior to joining Cabot in 1990, she served as Vice President, Mergers and
Acquisitions for The First Boston Corporation. She became a director of the
Company in July 1995.
John D. Curtin, Jr. joined Cabot in 1989 as Chief Financial Officer. Mr. Curtin
was named Chief Executive Officer of the Company in April 1994, became a
director of the Company in July 1995, and assumed the role as President in
February 1997. Mr. Curtin retired as President and Chief Executive Officer of
the Company in February, 1998. Prior to joining Cabot he was President, Chief
Executive Officer and Director of Curtin & Co., Inc., a private investment
banking firm. Mr. Curtin is also a trustee of Eastern Enterprises and a director
of Imperial Holly Corporation.
The number of directors of the Company is fixed at nine. Under a stockholders'
agreement among Aearo, Vestar, Cabot, and the Management Investors dated July
11, 1995 (the "Stockholders' Agreement"), Vestar has the right to designate five
directors, Cabot has the right to designate two directors, and the Management
Investors have the right to designate two directors. Messrs. Alpert, O'Connell,
Nagle, Kassling and Marsal are the directors designated by Vestar. Mr. Rothberg
and Ms. Hanratty are the directors designated by Cabot. Mr. McLain and Mr.
Curtin are currently the directors designated by the Management Investors. See
Item 13, "Certain Relationships and Related Transactions -- Stock Ownership and
Stockholders' Agreement -- Election and Removal of Directors." The term of
office of each director ends when his or her successor has been elected at the
next following annual meeting of stockholders and qualified or upon his or her
removal or resignation.
The Board of Directors has established an audit committee consisting of Margaret
J. Hanratty and Norman W. Alpert (the "Audit Committee"). The Audit Committee
recommends the firm to be appointed as independent accountants to audit
financial statements and to perform services related to the audit, reviews the
scope and results of the audit with the independent accountants, reviews with
management and the independent accountants the Company's annual operating
results, considers the adequacy of the internal accounting procedures, considers
the effect of such procedures on the accountants' independence and establishes
policies for business values, ethics and employee relations.
Officers and directors of Aearo and the Subsidiary are not subject to Section 16
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
48
<PAGE> 50
ITEM 11. EXECUTIVE COMPENSATION
The compensation of executive officers of the Company is determined by the Board
of Directors. The following table sets forth certain information concerning
compensation received by the Chief Executive Officer and the other four most
highly-compensated executive officers of the Company (the "Named Executive
Officers") for services rendered to the Company in all capacities (including
service as an officer or director) in fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
ALL OTHER
FISCAL ANNUAL
YEAR SALARY BONUS COMPENSATION
---------------------------------------------
<S> <C> <C> <C> <C>
Michael A. McLain 1999 $439,754 $191,309 $ 56,416(1)
Chief Executive Officer, President, and Director 1998 $283,336 $120,000 $ 53,239
Daniel P. O'Connor 1999 $223,668 $ 80,784 $542,911(2)
Formerly Vice President, Sales -- North America 1998 $220,008 $ 79,200 $ 37,333
1997 $199,333 $ 44,000 $ 19,661
M. Rand Mallitz 1999 $187,500 $ 69,552 $ 19,069(3)
Senior Vice President and General Manager, 1998 $180,000 $ 64,800 $ 15,641
E-A-R(R) Specialty Composites 1997 $163,666 $ 50,000 $ 17,618
Bryan J. Carey 1999 $213,668 $ 80,811 $ 43,614(4)
Executive Vice President, Chief Financial Officer, 1998 $197,502 $ 73,800 $ 15,512
Treasurer, Assistant Secretary and Managing 1997 $177,667 $ 30,000 $ 17,066
Director -- Europe
James D. Hall 1999 $213,588 $ 77,939 $ 20,307(5)
Senior Vice President, Chief Marketing Officer 1998 $205,008 $ 73,800 $ 18,365
and Managing Director -- Peltor Communications, 1997 $179,750 $ 41,000 $ 19,740
North America
</TABLE>
(1) Includes contributions made on behalf of Mr. McLain to the Company's
401(k) Savings Plan ($7,800); to the Company's Cash Balance Plan
($7,422); and to the Company's Supplemental Executive Retirement Plan
($41,194).
(2) Includes contributions made on behalf of Mr. O'Connor to the Company's
401(k) Savings Plan ($5,478); to the Company's Cash Balance Plan
($7,422); to the Company's Supplemental Executive Retirement Plan
($11,731); and $518,280 attributed to Mr. O'Connor's separation from the
Company.
(3) Includes contributions made on behalf of Mr. Mallitz to the Company's
401(k) Savings Plan ($5,169); to the Company's Cash Balance Plan
($8,422); and to the Company's Supplemental Executive Retirement Plan
($5,478).
(4) Includes contributions made on behalf of Mr. Carey to the Company's
401(k) Savings Plan ($7,650); to the Company's Cash Balance Plan
($7,872); and to the Company's Supplemental Executive Retirement Plan
($11,008). Also includes relocation allowance payment associated with
the relocation of the Corporate Headquarters ($17,084).
(5) Includes contributions made on behalf of Mr. Hall to the Company's 401(k)
Savings Plan ($4,964); to the Company's Cash Balance Plan ($7,672); and
to the Company's Supplemental Executive Retirement Plan ($7,671).
During fiscal 1999 there were no grants of options to purchase Aearo Common
Stock issued to named executive officers.
49
<PAGE> 51
The following table sets forth information concerning the number and value of
unexercised options to purchase Aearo Common Stock held by the Named Executive
Officers at the end of fiscal 1999. None of the Named Executive Officers
exercised any stock options during fiscal 1999.
<TABLE>
<CAPTION>
VALUE OF OUTSTANDING
SHARES NUMBER OF BENEFICIAL IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael A. McLain -- -- -- 1,100 $0 $0
Daniel P. O'Connor -- -- -- 250 0 0
M. Rand Mallitz -- -- -- 156 0 0
Bryan J. Carey -- -- -- 313 0 0
James D. Hall -- -- -- 250 0 0
</TABLE>
(1) There was no public market for the Aearo Common Stock as of September
30, 1999. Accordingly, these values have been calculated on the basis of
an assumed fair market value of $600 per share.
DIRECTOR COMPENSATION
Directors (other than two Directors unaffiliated with Cabot or Vestar (the
"Outside Directors")) serve without compensation (other than reimbursement of
expenses) in connection with rendering services as such. The Outside Directors
receive $10,000 annually for their service as Directors and an additional $2,500
per meeting, plus reimbursement of expenses. In connection with their
appointment, Outside Directors were given the opportunity to purchase a limited
number of shares of Aearo Common Stock; during fiscal 1999, Bryan Marsal, one of
the Outside Directors, purchased 250 shares at a price of $200 per share. In
connection with such purchases Mr. Marsal became party to the Stockholders'
Agreement. See Item 13, "Certain Relationships and Related Transactions -- Stock
Ownership and Stockholders' Agreement."
EMPLOYEE STOCK AND OTHER BENEFIT PLANS
STOCK PURCHASE PLAN. In connection with the Formation Acquisition, the Company
adopted the Cabot Safety Holdings Corporation 1995 Stock Purchase Plan, as
amended and restated (the "Stock Purchase Plan"), in order to encourage
ownership of Aearo Common Stock by selected officers and employees and
independent directors of the Company. In connection with Mr. Curtin's retirement
as President and Chief Executive Officer, neither the Company nor Mr. Curtin
exercised their right to require repurchase of 3,712.5 of the shares of common
stock owned by Mr. Curtin. Such shares are no longer deemed to be covered by the
Stock Purchase Plan. Under the Stock Purchase Plan, 15,000 shares of Aearo
Common Stock have been reserved for purchase by the Company's executive officers
and other senior members of management as determined by the Board of Directors.
As of December 15, 1999, 13,825 of such shares were issued and outstanding.
Aearo Common Stock acquired under the Stock Purchase Plan is subject to
forfeiture through various puts and calls. In the event of death, permanent
disability or retirement, which retirement occurs at age 65 or older with at
least 3 years of service, such stock may be put to the Company by the holder at
fair market value and the Company has a call on such stock at the same price. In
the event of termination for cause, the Company has a call at the lesser of
initial cost and fair market value. In the event of termination by the Company
other than for cause and in the case of voluntary resignation, the Company has a
call (i) with respect to a percentage of such stock equal to the number of years
elapsed since the Formation Acquisition multiplied by 20% at fair market value,
and (ii) with respect to the remainder of such stock at the lesser of initial
cost and fair market value. Shares repurchased by the Company are held in
reserve, and may be issued to existing and future employees or non-employee
directors. These puts and calls expire (i) on the date on which certain
financial performance benchmarks (which, following an initial public offering of
the Aearo Common Stock, depend in part on the future market value of the Aearo
Common Stock) are achieved by the Company or (ii) the fifth anniversary of the
Formation Acquisition. Each Management Investor is also required to be a party
to the Stockholders' Agreement. See Item 13, "Certain Relationships and Related
Transactions -- Stockholders' Agreement."
STOCK OPTION PLANS. In June 1996, the Company's Board of Directors adopted and
the stockholders subsequently approved the Executive Stock Option Plan (the
"Executive Plan") under which 5,000 shares of Aearo Common Stock have been
reserved for issuance. In July 1997, the Company's Board of Directors adopted
and the stockholders subsequently approved the 1997 Stock Option Plan (the "1997
Option Plan") under which 10,000 shares of Aearo Common Stock have been reserved
for issuance. Under the 1997 Option Plan non-qualified and qualified options may
be granted to employees of the Company.
50
<PAGE> 52
Each of the Executive Plan and the 1997 Option Plan is administered by a
committee of the Board of Directors consisting of all non-employee directors. As
of December 1, 1999, Non-qualified options to acquire 7,666.25 shares at a price
of $600 per share, and 1,466.25 shares at a price of $800 per share have been
granted to officers and key employees of the Company under the Company's stock
option plans and 5,867.5 options remain available for issuance; of outstanding
options, 2,568.75 in the aggregate have been granted to executive officers,
including Mr. McLain (1,100 options), Mr. O'Connor (250 options), Mr. Hall (400
options), Mr. Carey (562.5 options) and Mr. Mallitz (256.25 options). The
options will vest and become exercisable upon the earlier of: (i) the date on
which certain financial performance benchmarks (which depend in part on the
future market value of the Aearo Common Stock) are achieved by the Company and
(ii) the tenth anniversary of the date of grant. The option term is 10 years;
provided, however, that unexercised options expire earlier in certain instances
of termination of employment of the option holder and may expire in the event of
a merger or liquidation of the Company or a sale of substantially all the assets
of the Company. Aearo Common Stock acquired upon exercise of options granted
under the Executive Plan or 1997 Option Plan is subject to the same
restrictions, including puts and calls and drag-along rights as Aearo Common
Stock acquired under the Stock Purchase Plan. See "Stock Purchase Plan."
ANNUAL BONUS. The Company provides performance-based compensation awards to
executive officers and key employees for achievement during each year as part of
an annual bonus plan. Such compensation awards are a function of individual
performance and consolidated corporate results. Business unit performance also
is a factor in determining compensation awards with respect to key employees who
are not executive officers. The specified qualitative and quantitative criteria
employed by the Board of Directors of the Company in determining bonus awards
varies for each individual and from year to year.
SUPPLEMENTAL SEVERANCE PAY PLAN. The Company has adopted a severance pay policy
providing certain executive officers and key employees with salary continuation
in the event of a termination. The plan generally provides for one month's base
pay for each full year of service with a minimum amount payable of three months
and a maximum amount payable of twelve months.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The Company has adopted a supplemental
executive retirement plan, which is a non-qualified plan under the Code, and
which provides unfunded deferred compensation benefits to certain individuals
who's salary exceeds the Qualified Plan Compensation Limit set forth by the
Internal Revenue Service (IRS). Pursuant to the plan, participants are credited
annually with amounts representing 8% of compensation in excess of that amount
of compensation in excess of the Qualified Plan Compensation Limit.
DEFERRED COMPENSATION PLAN. The Company has adopted a Deferred Compensation Plan
which is a non-qualified savings plan under the IRS code and which provides
officers and paid directors the opportunity to defer the receipt of base salary
and/or bonus. The plan is effective for fiscal years beginning with fiscal year
2000 and provides unfunded deferred compensation payments upon a participant's
retirement or termination from the Company. Participant deferrals are credited
annually with amounts based upon long-term bond rates and with amounts
replicating the Company match in the 401(K) for savings from income above the
qualified plan limits.
401(k) PLAN. The Company has adopted a savings plan (the "Savings Plan"), which
is qualified under Section 401(a) and 401(k) of the Code. All regular employees
of the Company in the United States are eligible to participate in the Savings
Plan after six months of service. For each employee who elects to participate in
the Savings Plan and makes a contribution thereto, the Company will make a
matching contribution. The Company matches 50.0% of the first 6.0% of
compensation contributed. The maximum contribution for any participant for any
year is 15.0% of such participant's eligible compensation, not to exceed the
401(k) plan elective deferral limit set forth by the IRS. Contributions to the
Savings Plan will be invested, as the employee directs, in a money market fund,
income fund, growth and income fund, growth fund, or asset allocation fund.
51
<PAGE> 53
PENSION PLAN. The Company has adopted a cash balance plan. Under such plan, the
Company will provide participants with annual credits of 4.0% of eligible
compensation up to the Social Security Wage Base as set forth annually by the
Social Security Administration and Department of Health and Human Services. An
additional annual credit of 8.0% of eligible compensation from the Social
Security Wage Base up to the Qualified Plan Compensation Limit set forth by the
Internal Revenue Service (IRS) is provided. All balances in the accounts of
participants will be credited with interest based on the prior year's U.S
Treasury bill rate. At retirement, participants eligible for benefits may
receive the balance standing in their account in a lump sum or as a monthly
pension having equivalent actuarial value. The following table sets forth, for
the Named Executive Officers, the estimated annual benefits payable upon
retirement at normal retirement age, assuming in each case that such officers
elects payment over time rather that in a lump sum:
<TABLE>
<CAPTION>
ANNUAL
BENEFITS
NAME AND PRINCIPAL POSITION PAYABLE
--------------------------- ---------
<S> <C>
Michael A. McLain .................................... $23,404
President and Chief Executive Officer
Daniel P. O'Connor ................................... $20,731
Formerly Vice President, Sales
M. Rand Mallitz ...................................... $17,098
Senior Vice President and General Manager,
E-A-R(R) Specialty Composites
Bryan J. Carey ....................................... $64,231
Executive Vice President, Chief Financial
Officer, Treasurer, Assistant Secretary and
Managing Director -- Europe
James D. Hall ........................................ $29,496
Senior Vice President, Chief Marketing Officer
and Managing Director -- Peltor Communications,
North America
</TABLE>
- --------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has a compensation committee of the Board of Directors. As of
December 1, 1999 the committee consists of Messrs. Alpert and McLain and Ms.
Hanratty, three directors of the Company. This committee makes all executive
officer compensation decisions, with Mr. McLain abstaining with respect to
decisions affecting his own compensation, and reviews them with the full Board
of Directors of the Company.
52
<PAGE> 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Aearo Common Stock, including beneficial ownership by
each person or entity known by the Company to own beneficially 5% or more of the
Company's voting capital stock, the Directors, the Named Executive Officers and
all of the Company's Directors and executive officers as a group as of December
15, 1999. All of the Subsidiary's issued and outstanding capital stock is owned
by Aearo.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE OF
OF AEARO OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK SHARES
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Vestar Equity Partners, L.P.(1) ........................... 42,500 41.44%
245 Park Avenue
New York, New York ...................................... 10017
Cabot CSC Corporation(2) .................................. 42,500 41.44%
75 State Street, 13th Floor
Boston, Massachusetts ................................... 02109
Michael A. McLain ......................................... 4,050 3.95%
John D. Curtin, Jr ........................................ 3,713 3.62%
Bryan J. Carey ............................................ 1,500 1.46%
James D. Hall ............................................. 1,050 1.02%
Daniel P. O'Connor ........................................ 1,050 1.02%
Norman W. Alpert(3) ....................................... 42,500 41.44%
Daniel S. O'Connell(3) .................................... 42,500 41.44%
Arthur J. Nagle(3) ........................................ 42,500 41.44%
Robert Rothberg(4) ........................................ 42,500 41.44%
Margaret J. Hanratty(4) ................................... 42,500 41.44%
Bryan P. Marsal ........................................... 250 *
William E. Kassling ....................................... 250 *
M. Rand Mallitz ........................................... 950 *
Directors and executive officers as a group (14 persons)(5) 101,313 98.81%
</TABLE>
- -------------------------------------
* Less than 1%.
(1) The general partner of Vestar is Vestar Associates L.P., a limited
partnership whose general partner is Vestar Associates Corporation
("V.A.C."). In such capacity, V.A.C. exercises sole voting and
investment power with respect to all of the shares held of record by
Vestar. Messrs. Alpert, O'Connell and Nagle, who are directors of the
Company, are affiliated with Vestar in the capacities described under
"Management -- Directors and Executive Officers" and are stockholders of
V.A.C. Individually, no stockholder, director or officer of V.A.C. is
deemed to have or share such voting or investment power within the
meaning of Rule 13d-3 under the Exchange Act. Accordingly no part of the
shares of Aearo Common Stock owned of record by Vestar is beneficially
owned by Messrs. Alpert, O'Connell or Nagle or any other stockholder,
director or officer of V.A.C.
(2) The board of directors of Cabot CSC Corporation controls the voting and
investment of the shares of Aearo Common Stock held by Cabot CSC
Corporation. Cabot CSC Corporation is a wholly-owned subsidiary of
Cabot. Cabot appoints the directors of Cabot CSC Corporation and
exercises ultimate voting and investment power with respect to all
shares held of record by Cabot CSC Corporation. Cabot is a publicly held
company and, accordingly, no single stockholder, director or officer of
Cabot is deemed to have or share such voting or investment power within
the meaning of Rule 13d-3 under the Exchange Act. Accordingly, no part
of the shares of Aearo Common Stock owned of record by Cabot CSC
Corporation is beneficially owned by any stockholder, director or
officer of Cabot.
(3) Messrs. Alpert, O'Connell and Nagle are affiliated with Vestar in the
capacities described under "Management -- Directors and Executive
officers." Ownership of Aearo Common Stock for these individuals
includes 42,500 shares of Aearo Common Stock included in the above table
beneficially owned by Vestar, of which such persons disclaim
53
<PAGE> 55
beneficial ownership. Each such person's business address is c/o Vestar
Equity Partners, L.P. at the address set forth above.
(4) Mr. Rothberg and Ms. Hanratty are affiliated with Cabot, the parent of
Old Cabot Safety Corporation, in the capacities described under
"Directors and Executive Officers." Ownership of Aearo Common Stock for
these individuals includes 42,500 shares of Aearo Common Stock included
in the above table beneficially owned by Old Cabot Safety Corporation,
of which such persons disclaim beneficial ownership. Each such person's
business address is c/o Cabot CSC Corporation at the address set forth
above.
(5) Cabot, Vestar and the Management Investors have entered into a
Stockholders' Agreement, the terms of which are described more fully
under Item 13, "Certain Relationships and Related Transactions -- Stock
Ownership and Stockholders' Agreement." Does not include 1,225 shares of
Aearo Common Stock held by Management Investors who are not executive
officers.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE ASSET TRANSFER AGREEMENT
The Company is a party to an asset transfer agreement dated as of June 13, 1995
with Cabot and certain of its subsidiaries (including Old Cabot Safety
Corporation) (the "Asset Transfer Agreement") entered into in connection with
the Formation Acquisition. The Asset Transfer Agreement contains customary
representations, warranties and covenants. Cabot and certain of its
subsidiaries, on the one hand, and Aearo and the Subsidiary on the other, have
also agreed to indemnify and hold each other and their affiliates harmless
against certain breaches of representations or covenants and certain other
liabilities.
The Company has the right to pay an annual fee of $400,000 to Old Cabot Safety
Corporation, and has elected to make this payment, with the result that Old
Cabot Safety Corporation will retain responsibility and liability for, and
indemnify the Company against, certain legal claims alleged to arise out of the
use of respirators sold prior to June 1995. The Company has the right to
discontinue the payment of such annual fee at any time, in which case the
Company will assume responsibility for and indemnify Cabot and Old Cabot Safety
Corporation with respect to such claims.
STOCK OWNERSHIP AND STOCKHOLDERS' AGREEMENT
Prior to the Formation Acquisition, Cabot owned 100% of the outstanding shares
of the Subsidiary, which enabled Cabot to elect all of the directors of the
Subsidiary. As of December 15, 1999, (i) Cabot indirectly owns 41.4% of the
Aearo Common Stock outstanding and 50% of the Aearo Preferred Stock outstanding,
(ii) Vestar owns 41.4% of the Aearo Common Stock outstanding and 50% of the
Aearo Preferred Stock outstanding and (iii) 17.2% of the Aearo Common Stock has
been issued to management and certain directors (collectively the Management
Investors). Cabot, Vestar and the Management Investors (the "Stockholders") own
100% of the outstanding shares of Aearo Common Stock and will elect all of the
directors of Aearo and determine the outcome of all matters requiring
stockholder approval, including mergers, consolidations and the sale of all or
substantially all of the assets of Aearo, and will have the power to prevent or
cause a change in control of Aearo, in each case subject to such restrictions,
limitations and conditions as may be imposed under the Stockholders' Agreement.
There can be no assurance as to how long any of Cabot, Vestar or the Management
Investors will hold their shares of Aearo Common Stock.
Cabot, Vestar, and the Management Investors have entered into the Stockholders'
Agreement which provides for, among other things, the matters described below.
ELECTION AND REMOVAL OF DIRECTORS. The Stockholders' Agreement provides that the
Board of Directors of the Company shall consist of nine members. Currently there
are nine directors serving. The parties agreed to vote all shares of Aearo
Common Stock owned or controlled by them so as to elect as members of the Board
of Directors persons designated as follows: (i) Vestar designates three
directors so long as the Vestar Relative Percentage (as defined below) is at
least 75% or Vestar and its affiliates beneficially own on a fully diluted basis
at least 21,250 shares of Aearo Common Stock (50% of the shares of Aearo Common
Stock acquired by them in the Formation Acquisition), (ii) Cabot may designate
two directors so long as the Cabot Relative Percentage (as defined below) is at
least 75% or Cabot and its affiliates own beneficially on a fully diluted basis
at least 21,250 shares of Aearo Common Stock (50% of the shares of Aearo Common
Stock acquired by them in the Formation Acquisition),
54
<PAGE> 56
(iii) Vestar may designate two additional directors who are not partners,
officers or employees of any of Vestar or its affiliates so long as the Vestar
Relative Percentage is as least 75% or Vestar and its affiliates beneficially
own at least 31,875 shares of Aearo Common Stock (75% of the shares of Aearo
Common Stock acquired by them in the Formation Acquisition), provided that
Vestar must notify Cabot in writing in advance of the identities of these
director nominees and obtain Cabot's approval thereof, which may not be
unreasonably withheld, and (iv) the Management Investors may designate two
directors so long as the Management Investors together own beneficially on a
fully diluted basis at least 3,750 shares of Aearo Common Stock (25% of the
shares of Aearo Common Stock acquired by all Management Investors in the
Formation Acquisition), provided that the two designees of the Management
Investors must be the principal executive officer and the principal operating
officer of the Company. Currently only one designee of the Management Investors
is serving on the Board of Directors. The foregoing provisions relating to the
election of directors terminate in the event that both Cabot and its affiliates,
on the one hand, and Vestar and its affiliates, on the other hand, own on a
fully diluted basis fewer than 4,250 shares of Aearo Common Stock (10% of the
shares of Aearo Common Stock acquired by them in the Formation Acquisition). The
term "Vestar Relative Percentage" means a percentage reflecting (a)(i) $31
million plus (ii) the amount paid for capital stock of Aearo by Vestar and its
Affiliates after the Formation Acquisition less (iii) the value (based on price
per share) of all shares of Aearo Common Stock and Aearo Preferred Stock
acquired by Vestar and its affiliates in the Formation Transaction and no longer
held by them, less (iv) the value of all shares of the Aearo Common Stock and
Aearo Preferred Stock acquired by Vestar and its affiliates after the Formation
Acquisition and no longer held by them, as a percentage of (b) the amount
calculated pursuant to clause (a) for Cabot and its affiliates for such date.
The term "Cabot Relative Percentage" has a correlative meaning focused on
Cabot's remaining investment in Aearo capital stock relative to Vestar's.
Messrs. Alpert, O'Connell and Nagle were designated by Vestar as described in
clause (i) above, Mr. Rothberg and Ms. Hanratty were designated by Cabot as
described in clause (ii) above, Messrs. Kassling and Marsal were designated by
Vestar as described in clause (iii) above and Mr. McLain and Mr. Curtin were
designated by the Management Investors as described in clause (iv) above. All
directors can be removed, with or without cause, and replaced by the
stockholders who have the right to designate them.
TAG-ALONG RIGHTS. So long as a public offering of Aearo Common Stock shall not
have occurred and subject to certain exceptions, with respect to any proposed
transfer of Aearo Common Stock or Aearo Preferred Stock by Vestar, other than
transfers to affiliates, each other stockholder will have the right to require
that the proposed transferee purchase a certain percentage of the shares owned
by such stockholder at the same price and upon the same terms and conditions.
DRAG-ALONG RIGHTS. The Stockholders' Agreement provides that, so long as Vestar
and its affiliates beneficially own at least 21,250 shares of Aearo Common Stock
(50% of the shares of Aearo Common Stock acquired by them in the Formation
Acquisition) or the Vestar Relative Percentage is at least 75%, if Vestar
receives an offer from a third party to purchase all but not less than all
outstanding shares of Aearo Common Stock and Aearo Preferred Stock and such
offer is accepted by Vestar, then each party to the Stockholders' Agreement will
transfer all shares of Aearo Common Stock and Aearo Preferred Stock owned or
controlled by such party on the terms of the offer so accepted by Vestar,
provided that all such transfers occur on substantially identical terms and the
number of shares to be acquired by the third party after giving effect to all
such transfers would be sufficient under the certificate of incorporation and
by-laws of the Company, any applicable agreements and applicable law to permit
such third party to eliminate all remaining minority interests through a merger
opposed by such minority interests. These so-called "drag-along" rights do not
apply to sales in a public offering or to stock that has been sold by a party to
the Stockholders' Agreement in a public offering or pursuant to Rule 144.
If Vestar intends to transfer Aearo Common Stock to a third party in any
transaction in which these drag-along rights are invoked, Vestar must give Cabot
30 days' advance written notice and, at the request of Cabot must discuss the
possibility of Cabot, in lieu of the third party, acquiring such Aearo Common
Stock, provided that this provision does not obligate Cabot to purchase such
Aearo Common Stock or Vestar to sell such Aearo Common Stock either to Cabot or
to the third party.
OTHER VOTING MATTERS. So long as the drag-along rights are in effect, the
parties to the Stockholders' Agreement are obligated to vote all shares of Aearo
Common Stock owned or controlled by them to ratify, approve and adopt the
following actions to the extent that they are adopted and approved by the Board
of Directors: (i) any merger or consolidation involving the Company that is, in
substance, an acquisition of another company by the Company or a sale of the
Company and in either case does not affect in any way the relative rights of
Cabot and Vestar or result in any benefit to Vestar other than the benefits to
it as a stockholder of the Company equal to the benefits received by other
stockholders, share for share, and (ii) any amendment to the certificate of
incorporation of the Company whereby such amendment does not adversely affect
such stockholder in a manner different from that in which any other stockholder
is affected. In addition, so long as the voting agreements providing for the
election of directors remain in effect, the parties to the Stockholders'
Agreement agreed not to vote to approve, ratify or adopt any amendment to the
by-laws of the Company unless such amendment is expressly authorized by the
Stockholders' Agreement or recommended by the Board of Directors.
55
<PAGE> 57
TRANSFERS OF COMMON STOCK. Subject to certain limitations, transfers of Aearo
Common Stock and Aearo Preferred Stock by parties to the Stockholders' Agreement
are restricted unless the transferee agrees to become a party to, and be bound
by, the Stockholders' Agreement, provided that such restrictions do not apply to
sales in a public offering or pursuant to Rule 144. In addition, subject to
certain limitations, Cabot and the Management investors agreed not to transfer
their shares of Aearo Common Stock or Aearo Preferred Stock without the prior
written consent of Vestar. Under certain circumstances, the transfer of Aearo
Common Stock or Aearo Preferred Stock by Vestar, Cabot and their affiliates is
permitted.
PARTICIPATION RIGHTS. Under certain circumstances, if Aearo proposes to issue
any capital stock to Vestar, Cabot or any of their respective affiliates, each
other stockholder shall have the opportunity to purchase such capital stock on a
pro rata basis.
APPROVAL OF AFFILIATE TRANSACTIONS. The Stockholders' Agreement provides that
the Company shall not, and shall cause its subsidiaries not to, enter into any
transaction with any affiliate of the Company unless such transaction (i) is on
fair and reasonable terms no less favorable to the Company or such subsidiary
than it could obtain in a comparable arm's length transaction, (ii) is
contemplated by the Stockholders' Agreement, the Asset Transfer Agreement or the
management advisory agreement among the Company and Vestar and Cabot or (iii) is
for the payment of reasonable and customary regular fees to outside directors.
In no event will the Company issue Aearo Common Stock or other equity securities
to Vestar or Cabot or any affiliate of the Company, subject to certain
limitations, below the fair market value of such shares of Aearo Common Stock or
equity securities.
REGISTRATION RIGHTS. The Stockholders' Agreement provides that, subject to
certain limitations, upon a written request by Vestar or a written request by
Cabot (but only in the event that a period of one year or more has elapsed since
a public offering of Aearo Common Stock without Cabot having an opportunity to
participate), the Company will use its best efforts to effect the registration
of all or part of the Aearo Common Stock owned by such requesting stockholder,
provided that (i) the Company will not be required to effect more than one
registration within any 360 day period and (ii) neither Vestar nor Cabot will be
entitled to request more than two registrations. Under certain circumstances, if
the Company proposes to register shares of Aearo Common Stock, it will, upon the
written request of any stockholder, use all reasonable efforts to effect the
registration of such stockholders' Aearo Common Stock.
TERMINATION. The Stockholders' Agreement will terminate as to any Aearo Common
Stock or Aearo Preferred Stock, subject to certain limitations, on the date such
Aearo Common Stock is sold in a public offering or pursuant to Rule 144. The
rights of Vestar will terminate under the Stockholders' Agreement when Vestar
and its affiliates own no Aearo Common Stock, common stock equivalents or Aearo
Preferred Stock. The rights of Cabot under the Stockholders' Agreement will
terminate on the earliest date when Cabot or its affiliates own no Aearo Common
Stock, common stock equivalents or Aearo Preferred Stock.
MANAGEMENT ADVISORY AGREEMENT. In connection with the Formation Acquisition, the
Company became a party to a management advisory agreement with Vestar and Cabot
(the "Management Advisory Agreement"), pursuant to which the Company is
obligated to pay an annual management fee in an aggregate amount with respect to
each fiscal year equal to the greater of (i) $400,000 and (ii) 1.25% of the
consolidated net income of the Company before cash interest, taxes, depreciation
and amortization for such fiscal year to be shared by Cabot and Vestar based on
their relative equity ownership of the Company. Pursuant to the Management
Advisory Agreement, each of Vestar and Cabot received $352,806 (including
$58,144 to each party as an advisory fee relative to fiscal year 1998) with
respect to fiscal 1999, $217,063 (including a $19,456 reduction to each party as
an advisory fee adjustment for fiscal 1997) with respect to fiscal 1998,
$311,949 (including $55,975 to each party as an advisory fee adjustment relative
to fiscal 1996) with respect to fiscal 1997 and $200,000 to each party with
respect to fiscal 1996. Messrs. Alpert, O'Connell and Nagle, three of the
directors of the Company, are affiliated with Vestar in the capacities described
under Item 11, "Management -- Directors and Executive Officers" and,
accordingly, benefit from any payments received by Vestar. Mr. Rothberg and Ms.
Hanratty, two of the directors for the Company, are affiliated with Cabot in the
capacities described under Item 11, "Management -- Directors and Executive
Officers" and, accordingly, benefit indirectly from any payments received by
Cabot.
MANAGEMENT LOANS. The Company has made available to certain Management Investors
loans in order to provide such Management Investors with funds to be applied to
a portion of the purchase price of the Common Stock purchased by such Management
Investors under the Stock Purchase Plan. Such loans (i) are secured by the Aearo
Common Stock purchased with the proceeds thereof, (ii) have a term of between 5
and 10 years, (iii) bear interest at an annual rate between 6..31% and 7%, and
(iv) are subject to mandatory prepayment in the event the employment of such
Management Investor terminates. At September 30, 1999, amounts outstanding under
such loans to Messrs. McLain, Kapur, Marlette, Floyd, Carey, O'Connor, Mallitz,
Hall, and Phillips were $607,500, $123,916, $123,916, $123,916, $100,000,
$81,000, $75,780, $60,955 and $61,958, respectively.
56
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
2.1 -- Asset Transfer Agreement, dated as of June 13, 1995, among
Aearo Company (formerly, Cabot Safety Corporation), Cabot Canada
Ltd., Cabot Safety Limited, Cabot Corporation, Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), and Cabot Safety
Acquisition Corporation. (Incorporated by reference to Exhibit
No. 2.1 to the Registration Statement on Form S-4, No. 33-96190,
of Aearo Company and Aearo Corporation.)
2.2 -- Trademark Coexistence Agreement, dated July 11, 1995, between
Cabot Corporation and Cabot Safety Intermediate Corporation.
(Incorporated by reference to Exhibit No. 2.2 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
2.3 -- Subscription Agreement, dated July 11, 1995, between Aearo
Corporation (formerly, Cabot Safety Holdings Corporation) and
Vestar Equity Partners, L.P. (Incorporated by reference to
Exhibit No. 2.3 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety Corporation)
and Aearo Corporation.)
2.4 -- Stockholders' Agreement, dated as of July 11, 1995, among
Vestar Equity Partners, L.P., Cabot CSC Corporation, Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Cabot
Corporation, and the Management Investors. (Incorporated by
reference to Exhibit No. 2.4 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.5 -- Form of Executive Security Purchase Agreement, dated as of
July 11, 1995, between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation) and the Management Investors (Senior
Management). (Incorporated by reference to Exhibit No. 2.5 to
the Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
2.6 -- Form of Executive Security Purchase Agreement, dated as of
July 11, 1995, between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation) and the Management Investors (Middle
Management). (Incorporated by reference to Exhibit No. 2.6 to
the Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
2.7 -- Assignment and Assumption Agreement, dated as of July 11,
1995, by and between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation), Cabot Safety Acquisition Corporation and
Cabot Safety Intermediate Corporation. (Incorporated by
reference to Exhibit No. 2.7 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.8 -- Assignment and Assumption Agreement, dated as of July 11,
1995, by and between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation), Cabot Safety Acquisition Corporation and
Cabot Safety Acquisition Limited (UK). (Incorporated by
reference to Exhibit No. 2.8 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.9 -- Assignment and Assumption Agreement, dated as of July 11,
1995, by and between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation), Cabot Safety Acquisition Corporation and
Cabot Safety Canada Acquisition Ltd. (Canada). (Incorporated by
reference to Exhibit No. 2.9 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.10 -- Bill of Sale and Assignment, dated as of July 11, 1995, made
by Aearo Company (formerly, Cabot Safety Corporation), Cabot
Canada Ltd., and Cabot Safety Limited in favor of Aearo
Corporation (formerly, Cabot
57
<PAGE> 59
Safety Holdings Corporation), Cabot Safety Acquisition
Corporation, Cabot Safety Intermediate Corporation, Cabot Safety
Acquisition Limited and Cabot Safety Canada Acquisition Ltd.
(Incorporated by reference to Exhibit No. 2.10 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company and Aearo Corporation.)
2.11 -- Assumption Agreement, dated as of July 11, 1995, by Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Cabot
Safety Acquisition Corporation, Cabot Safety Intermediate
Corporation, Cabot Safety Acquisition Limited and Cabot Safety
Canada Acquisition Ltd. in favor of Cabot Corporation, Aearo
Company (formerly, Cabot Safety Corporation), Cabot Canada Ltd.
and Cabot Safety Limited. (Incorporated by reference to Exhibit
No. 2.11 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation.)
2.12 -- Worldwide Trademark Assignment, dated July 11, 1995, by Aearo
Company (formerly, Cabot Safety Corporation) to Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit
No. 2.12 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.13 -- Worldwide Copyright Assignment, dated July 11, 1995, by Aearo
Company (formerly, Cabot Safety Corporation) to Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit
No. 2.13 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.14 -- Worldwide Patent Assignment, dated July 11, 1995, by Aearo
Company (formerly, Cabot Safety Corporation) to Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit
No. 2.14 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.15 -- Management Advisory Agreement made as of July 11, 1995, among
Aearo Company (formerly, Cabot Safety Corporation), Aearo
Corporation (formerly, Cabot Safety Holdings Corporation),
Certain Subsidiaries of Aearo Corporation, Vestar Capital
Partners and Cabot Corporation. (Incorporated by reference to
Exhibit No. 2.15 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation.)
2.16 -- Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) 1995 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit No. 2.16 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.17 -- Assignment and Assumption Agreement dated July 11, 1995, by
and between Aearo Company (formerly, Cabot Safety Corporation)
and Cabot Safety Acquisition Corporation with Respect to the
Installment Sale Agreement dated September 1, 1978 by and
between the Department of Community Affairs and Economic
Development of the State of Delaware and Specialty Composites
Corporation (Predecessor to Cabot Safety Corporation) Pertaining
to Real Property Located in New Castle County, Delaware, Tax
Parcel Number 11-010.00-003 (Delaware IRB). (Incorporated by
reference to Exhibit No. 2.17 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation
(formerly, Cabot Safety Holdings Corporation).)
2.18 -- Assignment and Assumption Agreement dated July 11, 1995, by
and between Cabot Corporation and Cabot Safety Acquisition
Corporation with Respect to that Certain Loan Agreement dated as
of June 1, 1982 by and between the City of Indianapolis, Indiana
and Cabot Corporation (Indianapolis IRB). (Incorporated by
reference to Exhibit No. 2.18 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
2.19 -- Stock Purchase Agreement by and among Aearo Company (formerly,
Cabot Safety Corporation), Peltor Holding AB, Leif Palmaer
Invest AB, Leif Anderzon Invest AB and Active i Malmo All, dated
April 25, 1996. (Incorporated by reference to Exhibit 2.1 to the
Current Report on Form 8-K of Aearo Corporation (formerly, Cabot
Safety Holdings Corporation) dated May 30, 1996.)
58
<PAGE> 60
2.20* -- Stock Purchase Agreement by and among Aearo Company (formerly,
Cabot Safety Corporation), Eastern Safety Equipment Co., Inc.,
Alfred H. Jacobson and William Klein and Jack P. Hecht as
Trustees of a certain Trust, dated September 19, 1995.
2.21* -- Amendment to Stockholder's Agreement dated as of July 3, 1996,
by and among Vestar Equity Partners, L.P., Cabot CSC
Corporation, Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) Cabot Corporation, and certain other stockholders
of Aearo Corporation.
2.22* -- Amendment to Stock Purchase Agreement by and among Aearo
Company (formerly, Cabot Safety Corporation), Peltor Holding AB,
Leif Palmaer Invest AB, Leif Anderzon Invest AB and Active i
Malmo AB, dated May 15, 1996.
3.1 -- Amended and Restated Certificate of Incorporation of Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).
(Incorporated by reference to Exhibit No. 3.(i).2 to the
Registration statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
3.2 -- By-Laws of Aearo Corporation (formerly, Cabot Safety Holdings
Corporation). (Incorporated by reference to Exhibit No. 3(ii).2
to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
4.1 -- Indenture dated as of July 11, 1995 between Aearo Company
(formerly, Cabot Safety Corporation), Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), and Fleet
National Bank of Connecticut (formerly, Shawmut Bank
Connecticut, National Association), as Trustee. (Incorporated by
reference to Exhibit No. 4.1 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation.)
4.2 -- Form of Note. (Incorporated by reference to Exhibit No. 4.2 to
the Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
4.3 -- Form of Exchange Note. (Incorporated by reference to Exhibit
No. 4.3 to the Registration Statement on Form S-4, No. 33-96190,
of Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
4.4 -- Registration Rights Agreement, dated as of July 11, 1995,
among Cabot Safety Acquisition Corporation, Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), BT Securities
Corporation and Chemical Securities Inc. (Incorporated by
reference to Exhibit No. 4.4 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
4.5 -- First Supplemental Indenture, dated December 6, 1995.
(Incorporated by reference to Exhibit No. 4.5 to the Annual
Report on Form 10-K of Aearo Corporation (formerly, Cabot Safety
Holdings Corporation) for the fiscal year ended September 30,
1995.)
10.1* -- Credit Agreement, dated as of July 11, 1995, and amended and
restated as of May 30, 1996, among Aearo Corporation (formerly,
Cabot Safety Holdings Corporation), Aearo Company (formerly,
Cabot Safety Corporation), Certain of its Subsidiaries, Various
Banks, and Bankers Trust Company as Co-Arranger and
Administrative Agent.
10.2* -- Amended and Restated US Pledge Agreement dated as of July 11,
1995, as made by Cabot Safety Acquisition Corporation, Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Cabot
Safety Intermediate Corporation and CSC FSC, Inc., in favor of
Bankers Trust Company as Collateral Agent for the Benefit of the
Secured Creditors.
10.3* -- Amended and Restated Foreign Pledge Agreement as of July 11,
1995, amended and restated as of May 30, 1996, made by Cabot
Safety Canada Acquisition Limited and Cabot Safety Acquisition
Limited in favor of Bankers Trust Company as Collateral Agent
for the Benefit of the Secured Creditors.
59
<PAGE> 61
10.4 -- Charge Over United Kingdom Patents and Trademarks made the
11th Day of July, 1995, by Cabot Safety Intermediate Corporation
and the Bankers Trust Company as Collateral Agent for Itself and
for the Secured Creditors. (Incorporated by reference to Exhibit
No. 10.4 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety Corporation)
and Aearo Corporation (formerly, Cabot Safety Holdings
Corporation).)
10.5* -- Amended and Restated US Security Agreement dated as of July
11, 1995, as amended and restated as of May 30, 1996, among
Aearo Corporation (formerly, Cabot Safety Holdings Corporation),
Cabot Safety Acquisition Corporation, Cabot Safety Intermediate
Corporation, CSC FSC, Inc., and Bankers Trust Company as
Collateral Agent for the Benefit of the Secured Creditors.
10.6* -- Amended and Restated Canadian Security Agreement dated as of
July 11, 1995, as amended and restated as of May 30, 1996,
granted by Cabot Safety Canada Acquisition Limited in favor of
Bankers Trust Company as Collateral Agent for the Benefit of the
Secured Creditors.
10.7 -- English Security Agreement (The Debenture) made on the 11th
Day of July, 1995 between the Cabot Safety Acquisition Limited
and Bankers Trust Company as Collateral Agent for Itself and for
the Secured Creditors. (Incorporated by reference to Exhibit No.
10.7 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
10.8 -- Mortgage and Security Agreement, Assignment of Leases, Rents
and Profits, Financing Statement, and Fixture Filing made by
Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers
Trust Company, as Collateral Agent, as Mortgagee (recorded in
Marion County, Indiana) pertaining to Real Property located at
7911 Zionsville Road, Indianapolis, Indiana. (Incorporated by
reference to Exhibit No. 10.8 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
10.9 -- Mortgage and Security Agreement, Assignment of Leases, Rents
and Profits, Financing Statement, and Fixture Filing made by
Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers
Trust Company, as Collateral Agent, as Mortgagee (recorded in
New Castle County, Delaware) pertaining to l0 Acre Site of
Unimproved Land adjacent to 5457 West 79th Street, Indianapolis,
Indiana. (Incorporated by reference to Exhibit No. 10.9 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
10.10 -- Mortgage and Security Agreement, Assignment of Leases, Rents
and Profits, Financing Statement, and Fixture Filing made by
Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers
Trust Company, as Collateral Agent, as Mortgagee (recorded in
New Castle County, Delaware) pertaining to Real Property located
at 650 Dawson Drive, Newark, Delaware. (Incorporated by
reference to Exhibit No. 10.10 to the Registration Statement
on Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot
Safety Corporation) and Aearo Corporation (formerly, Cabot
Safety Holdings Corporation).)
10.11 -- Aearo Company (formerly, Cabot Safety Corporation) Employees'
Retirement Account Plan, dated as of May 1, 1990, as amended.
(Incorporated by reference to Exhibit No. 10.11 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company and Aearo Corporation (formerly, Cabot Safety Holdings
Corporation).)
10.12 -- Fidelity Corporate (401(k)) Plan for Retirement, dated August
1, 1993, as amended. (Incorporated by reference to Exhibit No.
10.12 to the Registration Statement on Form S-4, No. 33-96190,
of Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
10.13 -- Aearo Company (formerly, Cabot Safety Corporation)
Supplemental Executive Retirement Plan, dated May 1, 1993.
(Incorporated by reference to Exhibit No. 10.13 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company and Aearo Corporation (formerly, Cabot Safety Holdings
Corporation).)
10.14 -- Sublease, dated June 4, 1994, between C.W. Kay-Bee Inc. and
Aearo Company (formerly, Cabot Safety Corporation), pertaining
to 8001-8003 Woodland Drive, Indianapolis, Indiana, as amended.
(Incorporated by reference to Exhibit No. 10.14 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company and Aearo Corporation (formerly, Cabot Safety Holdings
Corporation).)
60
<PAGE> 62
10.15 -- Sublease, dated April 16, 1990, between American Optical
Corporation and Aearo Company (formerly, Cabot Safety
Corporation), pertaining to Southbridge, Massachusetts
manufacturing facility. (Incorporated by reference to Exhibit
No. 10.15 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
10.16* -- Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) Amended and Restated 1995 Employee and Non-Employee
Director Stock Purchase Plan.
10.17* -- Form of Executive Security Purchase Agreement.
10.18* -- Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) Executive Stock Option Plan.
10.19* -- Amended and Restated US Subsidiary Guaranty dated July 11,
1995 delivered by Cabot Safety Intermediate Corporation, CSC
FSC, Inc. and Eastern Safety Equipment Co., Inc. in favor of
Bankers Trust Company.
10.20* -- Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) 1996 Stock Option Plan.
10.21* -- Form of Incentive Stock Option Agreement under the Aearo
Corporation (formerly, Cabot Safety Holdings Corporation) 1996
Stock Option Plan.
10.22* -- Form of Non-Qualified Stock Option Agreement for Company
Employees under the Aearo Corporation (formerly, Cabot Safety
Holdings Corporation) 1996 Stock Option Plan.
10.23* -- Employment Agreement between Peltor AB and Leif Palmact, dated
January 1, 1996.
10.24* -- Employment Agreement between Peltor AB and Leif Anderzon,
dated January 1, 1996.
10.25* -- Amended and Restated US Subsidiary Guaranty dated July 11,
1995 as amended and restated as of May 30, 1996, delivered by
Cabot Safety Intermediate Corporation, CSC FSC, Inc. and Eastern
Safety Equipment Co., Inc. in favor of Bankers Trust Company.
10.26 -- Fourth Amendment to Credit Agreement, dated as of December 4,
1998, by and among Aearo Corporation, Aearo Company, certain of
its Subsidiaries, Various Banks, and Bankers Trust Company as
Administrative Agent (incorporated by reference to the same
numbered exhibit of the Company's Annual Report on 1998 10-K for
the year ended September 30, 1998).
10.27 -- Aearo Corporation 1997 Stock Option Plan Agent (incorporated
by reference to the same numbered exhibit of the Company's
Annual Report on 1998 10-K for the year ended September 30,
1998).
12.1** -- Statements re: Computation of Ratios.
21.1* -- List of Subsidiaries.
24.1** -- Powers of Attorney (see page 64 of this report).
27.1** -- Financial Data Schedule.
- ----------------
* Incorporated by reference to the same numbered exhibit to the registration
statement on Form S-1, No. 333-05047, of Aearo Corporation (formerly, Cabot
Safety Holdings Corporation).
** Filed herewith.
(b) Financial Statement Schedules
See page 63 of this report
61
<PAGE> 63
(c) Reports on Form 8-K
On October 2, 1998, the Company filed a Current Report on Form 8-K containing
its press release regarding certain restructuring charges.
On October 22, 1998, the Company filed a Current Report on Form 8-K containing
its press release regarding settlement of the Gargoyles litigation.
On August 2, 1999, the Company filed a Current Report on Form 8-K containing
its press release regarding certain the acquisition of Safety Optical, Inc of
Athens, Tennessee.
On November 3, 1999, the Company filed a Current Report on Form 8-K containing
its press release regarding the acquisition of Norhammer Limited of Ontario,
Canada.
62
<PAGE> 64
SCHEDULE II
AEARO CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended September 30, 1997, 1998, and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Additions
----------------------- Net
Balance at Provisions Charged Deductions Balance
beginning Charged to to Other From at end
of Period Operations Accounts Allowances of Period
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997
Bad Debt Reserve 1,200 622 100 A (621) 1,301
Sales Returns & Allowances Reserve 1,519 203 -- (838) 884
Year ended September 30, 1998
Bad Debt Reserve 1,301 497 -- (559) 1,239
Sales Returns & Allowances Reserve 884 -- -- (285) 599
Restructure Reserve -- 11,585 -- (8,595) 2,990
Year ended September 30, 1999
Bad Debt Reserve 1,239 594 -- (537) 1,296
Sales Returns & Allowances Reserve 599 -- -- (26) 573
Restructure Reserve 2,990 -- -- (2,938) 52
</TABLE>
NOTES:
A. Accrued liabilities.
63
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Aearo Corporation
Date: December 1, 1999 By: /s/ Michael A. McLain
-------------------------------------
Michael A. McLain
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Aearo Corporation hereby severally constitute Michael A. McLain and
Bryan J. Carey, and each of them singly, our true and lawful attorney with full
power to him to sign for us and in our names in the capacities indicated below,
the Annual Report on Form 10-K filed herewith and any and all amendments to said
Annual Report on Form 10-K, and generally to do all such things in our names and
in our capacities as officers and directors to enable Aearo Corporation to
comply with the provisions of the Securities Exchange Act of 1934, and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney, to said
Annual Report on Form 10-K and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: November 3, 1999 /s/ Michael A. McLain
--------------------------------------------
Michael A. McLain
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: November 3, 1999 /s/ Bryan J. Carey
--------------------------------------------
Bryan J. Carey
Vice President, Chief Financial
Officer, Treasurer and Assistant
Secretary (Principal Accounting Officer)
Date: November 8, 1999 /s/ John D. Curtin, Jr.
--------------------------------------------
John D. Curtin, Jr., Director
Date: November 3, 1999 /s/ Norman W. Alpert, Director
--------------------------------------------
Date: November 3, 1999 /s/ Robert Rothberg
--------------------------------------------
Robert Rothberg, Director
Date: November 3, 1999 /s/ Margaret J. Hanratty
--------------------------------------------
Margaret J. Hanratty, Director
64
<PAGE> 66
Date: November 3, 1999 /s/ Arthur J. Nagle, Director
--------------------------------------------
Date: November 3, 1999 /s/ Daniel S. O'Connell, Director
--------------------------------------------
Date: November 3, 1999 /s/ William Kassling, Director
--------------------------------------------
Date: November 3, 1999 /s/ Bryan Marsal
--------------------------------------------
Bryan Marsal, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material relating to the Registrant's fiscal
year ended September 30, 1999 has been sent to security holders of the
Registrant.
65
<PAGE> 67
INDEX OF EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.1 -- Asset Transfer Agreement, dated as of June 13, 1995, among
Aearo Company (formerly, Cabot Safety Corporation), Cabot Canada
Ltd., Cabot Safety Limited, Cabot Corporation, Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), and Cabot Safety
Acquisition Corporation. (Incorporated by reference to Exhibit
No. 2.1 to the Registration Statement on Form S-4, No. 33-96190,
of Aearo Company and Aearo Corporation.)
2.2 -- Trademark Coexistence Agreement, dated July 11, 1995, between
Cabot Corporation and Cabot Safety Intermediate Corporation.
(Incorporated by reference to Exhibit No. 2.2 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
2.3 -- Subscription Agreement, dated July 11, 1995, between Aearo
Corporation (formerly, Cabot Safety Holdings Corporation) and
Vestar Equity Partners, L.P. (Incorporated by reference to
Exhibit No. 2.3 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety Corporation)
and Aearo Corporation.)
2.4 -- Stockholders' Agreement, dated as of July 11, 1995, among
Vestar Equity Partners, L.P., Cabot CSC Corporation, Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Cabot
Corporation, and the Management Investors. (Incorporated by
reference to Exhibit No. 2.4 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.5 -- Form of Executive Security Purchase Agreement, dated as of
July 11, 1995, between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation) and the Management Investors (Senior
Management). (Incorporated by reference to Exhibit No. 2.5 to
the Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
2.6 -- Form of Executive Security Purchase Agreement, dated as of
July 11, 1995, between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation) and the Management Investors (Middle
Management). (Incorporated by reference to Exhibit No. 2.6 to
the Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
2.7 -- Assignment and Assumption Agreement, dated as of July 11,
1995, by and between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation), Cabot Safety Acquisition Corporation and
Cabot Safety Intermediate Corporation. (Incorporated by
reference to Exhibit No. 2.7 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.8 -- Assignment and Assumption Agreement, dated as of July 11,
1995, by and between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation), Cabot Safety Acquisition Corporation and
Cabot Safety Acquisition Limited (UK). (Incorporated by
reference to Exhibit No. 2.8 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.9 -- Assignment and Assumption Agreement, dated as of July 11,
1995, by and between Aearo Corporation (formerly, Cabot Safety
Holdings Corporation), Cabot Safety Acquisition Corporation and
Cabot Safety Canada Acquisition Ltd. (Canada). (Incorporated by
reference to Exhibit No. 2.9 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.10 -- Bill of Sale and Assignment, dated as of July 11, 1995, made
by Aearo Company (formerly, Cabot Safety Corporation), Cabot
Canada Ltd., and Cabot Safety Limited in favor of Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Cabot
Safety Acquisition Corporation, Cabot Safety Intermediate
Corporation, Cabot Safety Acquisition Limited and Cabot Safety
Canada Acquisition Ltd. (Incorporated by reference to Exhibit
No. 2.10 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation.)
66
<PAGE> 68
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.11 -- Assumption Agreement, dated as of July 11, 1995, by Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Cabot
Safety Acquisition Corporation, Cabot Intermediate Corporation,
Cabot Safety Acquisition Limited and Cabot Safety Canada
Acquisition Ltd. in favor of Cabot Corporation, Aearo Company
(formerly, Cabot Safety Corporation), Cabot Canada Ltd. and
Cabot Safety Limited. (Incorporated by reference to Exhibit No.
2.11 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company and Aearo Corporation.)
2.12 -- Worldwide Trademark Assignment, dated July 11, 1995, by Aearo
Company (formerly, Cabot Safety Corporation) to Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit
No. 2.12 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.13 -- Worldwide Copyright Assignment, dated July 11, 1995, by Aearo
Company (formerly, Cabot Safety Corporation) to Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit
No. 2.13 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.14 -- Worldwide Patent Assignment, dated July 11, 1995, by Aearo
Company (formerly, Cabot Safety Corporation) to Cabot Safety
Intermediate Corporation. (Incorporated by reference to Exhibit
No. 2.14 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
2.15 -- Management Advisory Agreement made as of July 11, 1995, among
Aearo Company (formerly, Cabot Safety Corporation), Aearo
Corporation (formerly, Cabot Safety Holdings Corporation),
Certain Subsidiaries of Aearo Corporation, Vestar Capital
Partners and Cabot Corporation. (Incorporated by reference to
Exhibit No. 2.15 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation.)
2.16 -- Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) 1995 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit No. 2.16 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
2.17 -- Assignment and Assumption Agreement dated July 11, 1995, by
and between Aearo Company (formerly, Cabot Safety Corporation)
and Cabot Safety Acquisition Corporation with Respect to the
Installment Sale Agreement dated September 1, 1978 by and
between the Department of Community Affairs and Economic
Development of the State of Delaware and Specialty Composites
Corporation (Predecessor to Cabot Safety Corporation) Pertaining
to Real Property Located in New Castle County, Delaware, Tax
Parcel Number 11-010.00-003 (Delaware IRB). (Incorporated by
reference to Exhibit No. 2.17 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation
(formerly, Cabot Safety Holdings Corporation).)
2.18 -- Assignment and Assumption Agreement dated July 11, 1995, by
and between Cabot Corporation and Cabot Safety Acquisition
Corporation with Respect to that Certain Loan Agreement dated as
of June 1, 1982 by and between the City of Indianapolis, Indiana
and Cabot Corporation (Indianapolis IRB). (Incorporated by
reference to Exhibit No. 2.18 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
2.19 -- Stock Purchase Agreement by and among Aearo Company (formerly,
Cabot Safety Corporation), Peltor Holding AB, Leif Palmaer
Invest AB, Leif Anderzon Invest AB and Active i Malmo All, dated
April 25, 1996. (Incorporated by reference to Exhibit 2.1 to the
Current Report on Form 8-K of Aearo Corporation (formerly, Cabot
Safety Holdings Corporation) dated May 30, 1996.)
2.20* -- Stock Purchase Agreement by and among Aearo Company (formerly,
Cabot Safety Corporation), Eastern Safety Equipment Co., Inc.,
Alfred H. Jacobson and William Klein and Jack P. Hecht as
Trustees of a certain Trust, dated September 19, 1995.
2.21* -- Amendment to Stockholder's Agreement dated as of July 3, 1996,
by and among Vestar Equity Partners, L.P., Cabot CSC
Corporation, Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) Cabot Corporation, and certain other stockholders
of Aearo Corporation.
67
<PAGE> 69
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.22* -- Amendment to Stock Purchase Agreement by and among Aearo
Company (formerly, Cabot Safety Corporation), Peltor Holding AB,
Leif Palmaer Invest AB, Leif Anderzon Invest AB and Active i
Malmo AB, dated May 15, 1996.
3.1 -- Amended and Restated Certificate of Incorporation of Aearo
Corporation (formerly, CabotSafety Holdings Corporation).
(Incorporated by reference to Exhibit No. 3.(i).2 to the
Registration statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
3.2 -- By-Laws of Aearo Corporation (formerly, Cabot Safety Holdings
Corporation). (Incorporated by reference to Exhibit No. 3(ii).2
to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation.)
4.1 -- Indenture dated as of July 11, 1995 between Aearo Company
(formerly, Cabot Safety Corporation), Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), and Fleet
National Bank of Connecticut (formerly, Shawmut Bank
Connecticut, National Association), as Trustee. (Incorporated by
reference to Exhibit No. 4.1 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company and Aearo Corporation.)
4.2 -- Form of Note. (Incorporated by reference to Exhibit No. 4.2 to
the Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
4.3 -- Form of Exchange Note. (Incorporated by reference to Exhibit
No. 4.3 to the Registration Statement on Form S-4, No. 33-96190,
of Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
4.4 -- Registration Rights Agreement, dated as of July 11, 1995,
among Cabot Safety Acquisition Corporation, Aearo Corporation
(formerly, Cabot Safety Holdings Corporation), BT Securities
Corporation and Chemical Securities Inc. (Incorporated by
reference to Exhibit No. 4.4 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation.)
4.5 -- First Supplemental Indenture, dated December 6, 1995.
(Incorporated by reference to Exhibit No. 4.5 to the Annual
Report on Form 10-K of Aearo Corporation (formerly, Cabot Safety
Holdings Corporation) for the fiscal year ended September 30,
1995.)
10.1* -- Credit Agreement, dated as of July 11, 1995, and amended and
restated as of May 30, 1996, among Aearo Corporation (formerly,
Cabot Safety Holdings Corporation), Aearo Company (formerly,
Cabot Safety Corporation), Certain of its Subsidiaries, Various
Banks, and Bankers Trust Company as Co- Arranger and
Administrative Agent.
10.2* -- Amended and Restated US Pledge Agreement dated as of July 11,
1995, as made by Cabot Safety Acquisition Corporation, Aearo
Corporation (formerly, Cabot Safety Holdings Corporation), Cabot
Safety Intermediate Corporation and CSC FSC, Inc., in favor of
Bankers Trust Company as Collateral Agent for the Benefit of the
Secured Creditors.
10.3* -- Amended and Restated Foreign Pledge Agreement as of July 11,
1995, amended and restated as of May 30, 1996, made by Cabot
Safety Canada Acquisition Limited and Cabot Safety Acquisition
Limited in favor of Bankers Trust Company as Collateral Agent
for the Benefit of the Secured Creditors.
10.4 -- Charge Over United Kingdom Patents and Trademarks made the
11th Day of July, 1995, by Cabot Safety Intermediate Corporation
and the Bankers Trust Company as Collateral Agent for Itself and
for the Secured Creditors. (Incorporated by reference to Exhibit
No. 10.4 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company (formerly, Cabot Safety Corporation)
and Aearo Corporation (formerly, Cabot Safety Holdings
Corporation).)
10.5* -- Amended and Restated US Security Agreement dated as of July
11, 1995, as amended and restated as of May 30, 1996, among
Aearo Corporation (formerly, Cabot Safety Holdings Corporation),
Cabot Safety Acquisition
68
<PAGE> 70
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
Corporation, Cabot Safety Intermediate Corporation, CSC FSC,
Inc., and Bankers Trust Company as Collateral Agent for the
Benefit of the Secured Creditors.
10.6* -- Amended and Restated Canadian Security Agreement dated as of
July 11, 1995, as amended and restated as of May 30, 1996,
granted by Cabot Safety Canada Acquisition Limited in favor of
Bankers Trust Company as Collateral Agent for the Benefit of the
Secured Creditors.
10.7 -- English Security Agreement (The Debenture) made on the 11th
Day of July, 1995 between the Cabot Safety Acquisition Limited
and Bankers Trust Company as Collateral Agent for Itself and for
the Secured Creditors. (Incorporated by reference to Exhibit No.
10.7 to the Registration Statement on Form S-4, No. 33-96190, of
Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
10.8 -- Mortgage and Security Agreement, Assignment of Leases, Rents
and Profits, Financing Statement, and Fixture Filing made by
Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers
Trust Company, as Collateral Agent, as Mortgagee (recorded in
Marion County, Indiana) pertaining to Real Property located at
7911 Zionsville Road, Indianapolis, Indiana. (Incorporated by
reference to Exhibit No. 10.8 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
10.9 -- Mortgage and Security Agreement, Assignment of Leases, Rents
and Profits, Financing Statement, and Fixture Filing made by
Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers
Trust Company, as Collateral Agent, as Mortgagee (recorded in
New Castle County, Delaware) pertaining to l0 Acre Site of
Unimproved Land adjacent to 5457 West 79th Street, Indianapolis,
Indiana. (Incorporated by reference to Exhibit No. 10.9 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
10.10 -- Mortgage and Security Agreement, Assignment of Leases, Rents
and Profits, Financing Statement, and Fixture Filing made by
Cabot Safety Acquisition Corporation, as Mortgagor, to Bankers
Trust Company, as Collateral Agent, as Mortgagee (recorded in
New Castle County, Delaware) pertaining to Real Property located
at 650 Dawson Drive, Newark, Delaware. (Incorporated by
reference to Exhibit No. 10.10 to the Registration Statement on
Form S-4, No. 33-96190, of Aearo Company (formerly, Cabot Safety
Corporation) and Aearo Corporation (formerly, Cabot Safety
Holdings Corporation).)
10.11 -- Aearo Company (formerly, Cabot Safety Corporation) Employees'
Retirement Account Plan, dated as of May 1, 1990, as amended.
(Incorporated by reference to Exhibit No. 10.11 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company and Aearo Corporation (formerly, Cabot Safety Holdings
Corporation).)
10.12 -- Fidelity Corporate (401(k)) Plan for Retirement, dated August
1, 1993, as amended. (Incorporated by reference to Exhibit No.
10.12 to the Registration Statement on Form S-4, No. 33-96190,
of Aearo Company (formerly, Cabot Safety Corporation) and Aearo
Corporation (formerly, Cabot Safety Holdings Corporation).)
10.13 -- Aearo Company (formerly, Cabot Safety Corporation)
Supplemental Executive Retirement Plan, dated May 1, 1993.
(Incorporated by reference to Exhibit No. 10.13 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company and Aearo Corporation (formerly, Cabot Safety Holdings
Corporation).)
10.14 -- Sublease, dated June 4, 1994, between C.W. Kay-Bee Inc. and
Aearo Company (formerly, Cabot Safety Corporation), pertaining
to 8001-8003 Woodland Drive, Indianapolis, Indiana, as amended.
(Incorporated by reference to Exhibit No. 10.14 to the
Registration Statement on Form S-4, No. 33-96190, of Aearo
Company and Aearo Corporation (formerly, Cabot Safety Holdings
Corporation).)
10.15 -- Sublease, dated April 16, 1990, between American Optical
Corporation and Aearo Company (formerly, Cabot Safety
Corporation), pertaining to Southbridge, Massachusetts
manufacturing facility. (Incorporated by reference to Exhibit
No. 10.15 to the Registration Statement on Form S-4, No.
33-96190, of Aearo Company and Aearo Corporation (formerly,
Cabot Safety Holdings Corporation).)
69
<PAGE> 71
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
10.16* -- Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) Amended and Restated 1995 Employee and Non-Employee
Director Stock Purchase Plan.
10.17* -- Form of Executive Security Purchase Agreement.
10.18* -- Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) Executive Stock Option Plan.
10.19* -- Amended and Restated US Subsidiary Guaranty dated July 11,
1995 delivered by Cabot Safety Intermediate Corporation, CSC
FSC, Inc. and Eastern Safety Equipment Co., Inc. in favor of
Bankers Trust Company.
10.20* -- Aearo Corporation (formerly, Cabot Safety Holdings
Corporation) 1996 Stock Option Plan.
10.21* -- Form of Incentive Stock Option Agreement under the Aearo
Corporation (formerly, Cabot Safety Holdings Corporation) 1996
Stock Option Plan.
10.22* -- Form of Non-Qualified Stock Option Agreement for Company
Employees under the Aearo Corporation (formerly, Cabot Safety
Holdings Corporation) 1996 Stock Option Plan.
10.23* -- Employment Agreement between Peltor AB and Leif Palmact, dated
January 1, 1996.
10.24* -- Employment Agreement between Peltor AB and Leif Anderzon,
dated January 1, 1996.
10.25* -- Amended and Restated US Subsidiary Guaranty dated July 11,
1995 as amended and restated as of May 30, 1996, delivered by
Cabot Safety Intermediate Corporation, CSC FSC, Inc. and Eastern
Safety Equipment Co., Inc. in favor of Bankers Trust Company.
10.26 -- Fourth Amendment to Credit Agreement, dated as of December 4,
1998, by and among Aearo Corporation, Aearo Company, certain of
its Subsidiaries, Various Banks, and Bankers Trust Company as
Administrative Agent (incorporated by reference to the same
numbered exhibit of the Company's Annual Report on 1998 10-K for
the year ended September 30, 1998).
10.27 -- Aearo Corporation 1997 Stock Option Plan (incorporated by
reference to the same numbered exhibit of the Company's Annual
Report on 1998 10-K for the year ended September 30, 1998).
12.1** -- Statements re: Computation of Ratios.
21.1* -- List of Subsidiaries.
24.1** -- Powers of Attorney. (See page 64 of this report)
27.1** -- Financial Data Schedule.
- ------------------------
* Incorporated by reference to the same numbered exhibit to the
registration statement on Form S-1, No. 333-05047, of Aearo Corporation
(formerly, Cabot Safety Holdings Corporation).
** Filed herewith.
70
<PAGE> 1
EXHIBIT 12.1
AEARO CORPORATION
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY SUCCESSOR COMPANY
------------ -------------------------------------------------------------------
PERIOD ENDED PERIOD ENDED
JULY 11, SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1995 1995 1996 1997 1998 1999
------------ -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Pre-tax income (loss) from
continuing operations ............... $ 7,815 $ (159) $ 6,477 $ (5,959) $ (9,242) $ 10,297
Fixed charges (see below) ........... 6,599 4,388 22,153 28,419 27,984 26,152
-------- -------- -------- -------- -------- --------
Earnings as defined ................. $ 14,414 $ 4,229 $ 28,630 $ 22,460 $ 18,742 $ 36,449
-------- -------- -------- -------- -------- --------
Fixed Charge:
Interest expense, net ............... $ 5,673 $ 4,135 $ 20,703 $ 26,665 $ 26,152 $ 24,322
Interest component of operating lease 926 253 1,450 1,754 1,832 1,830
-------- -------- -------- -------- -------- --------
Fixed charges as defined ............ $ 6,599 $ 4,388 $ 22,153 $ 28,419 $ 27,984 $ 26,152
-------- -------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges .. 2.2 -- 1.3 -- -- 1.4
-------- -------- -------- -------- -------- --------
</TABLE>
Note: Ratio of earnings to fixed charges is defined as
pre-tax income from continuing operations plus fixed
charges divided by fixed charges. Fixed charges
included interest (including amortization of debt
issuance costs) and a portion of rental expense
assumed to represent interest. Earnings for the
period ended September 30, 1995 and the years ended
September 30, 1997, and 1998 were insufficient to
cover fixed charges by $0.2 million, $6.0 million,
and $9.2 million, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
BALANCE SHEET OF AEARO CORPORATION AS OF SEPTEMBER 30, 1999 AND THE STATEMENT OF
OPERATIONS OF AEARO CORPORATION FOR THE YEAR ENDED SEPTEMBER 30, 1999 CONTAINED
IN AEARO CORPORATION'S FORM 10-K-405 FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K-405.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 4,050
<SECURITIES> 0
<RECEIVABLES> 43,801
<ALLOWANCES> 0
<INVENTORY> 33,286
<CURRENT-ASSETS> 84,887
<PP&E> 93,136
<DEPRECIATION> 37,255
<TOTAL-ASSETS> 282,293
<CURRENT-LIABILITIES> 63,779
<BONDS> 198,716
0
0
<COMMON> 1
<OTHER-SE> 16,473
<TOTAL-LIABILITY-AND-EQUITY> 282,293
<SALES> 290,389
<TOTAL-REVENUES> 290,389
<CGS> 157,535
<TOTAL-COSTS> 157,535
<OTHER-EXPENSES> 98,235
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,322
<INCOME-PRETAX> 10,297
<INCOME-TAX> 3,244
<INCOME-CONTINUING> 7,053
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,053
<EPS-BASIC> (20.35)
<EPS-DILUTED> (20.35)
</TABLE>
