1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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)
--------------------
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___
2
AEARO CORPORATION
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 2000
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 31, 2000 (UNAUDITED) AND SEPTEMBER 30, 1999 3-4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE MONTH AND SIX MONTH PERIODS
ENDED MARCH 31, 2000 AND 1999 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------------------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-19
---------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE
- -------------------------------------------------------
DISCLOSURES ABOUT MARKET RISK 20
-----------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
- --------------------------------------------
ITEM 2. CHANGES IN SECURITIES 21
- ------------------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 21
- ----------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 21
- ------------------------------------------------------------------------------
ITEM 5. OTHER INFORMATION 21
- --------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
- -----------------------------------------------------------
SIGNATURE PAGE 22
3
PART I
ITEM 1. FINANCIAL STATEMENTS
AEARO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS--ASSETS
(DOLLARS IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
2000 1999
--------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 3,257 $ 4,050
Accounts receivable (net of reserve for doubtful accounts of $1,423
and $1,296 respectively) 44,333 43,801
Inventories, net 35,769 33,286
Deferred and prepaid expenses 4,790 3,750
-------- --------
Total current assets 88,149 84,887
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 55,286 55,881
INTANGIBLE ASSETS, NET 135,009 137,776
OTHER ASSETS 2,803 3,749
-------- --------
Total assets $281,247 $282,293
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
4
AEARO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
2000 1999
--------- -------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 17,844 $ 16,093
Accounts payable and accrued liabilities 38,517 40,528
Accrued interest 3,620 3,400
U.S. and foreign income taxes 4,309 3,758
--------- ---------
Total current liabilities 64,290 63,779
--------- ---------
LONG-TERM DEBT 198,158 198,716
DEFERRED INCOME TAXES 763 825
OTHER LIABILITIES 2,545 2,499
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized--200,000 shares
Issued and outstanding--45,000 shares -- --
Common stock, $.01 par value-
Authorized--200,000 shares
Issued and outstanding--102,218 and 102,538 at
March 31, 2000 and September 30, 1999, respectively 1 1
Additional paid-in capital 32,055 32,566
Accumulated deficit (6,448) (9,662)
Cumulative foreign currency translation adjustments (10,117) (6,431)
--------- ---------
Total stockholders' equity 15,491 16,474
--------- ---------
Total liabilities and stockholders' equity $ 281,247 $ 282,293
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
5
AEARO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2000 1999 2000 1999
----------------------------- -----------------------------
NET SALES $ 77,430 $ 72,406 $ 149,624 $ 141,519
COST OF SALES 41,431 38,869 80,079 77,453
--------- --------- --------- ---------
Gross profit 35,999 33,537 69,545 64,066
SELLING AND ADMINISTRATIVE 23,350 21,802 46,958 43,425
RESEARCH AND TECHNICAL SERVICES 1,391 1,107 2,718 2,244
AMORTIZATION OF INTANGIBLES 1,766 1,702 3,491 3,415
OTHER CHARGES (INCOME), NET (374) 349 (409) 585
--------- --------- --------- ---------
Operating income 9,866 8,577 16,787 14,397
INTEREST EXPENSE, NET 6,212 6,104 12,159 12,428
--------- --------- --------- ---------
Income before provision for income
income taxes 3,654 2,473 4,628 1,969
PROVISION FOR INCOME TAXES 1,113 717 1,414 1,111
--------- --------- --------- ---------
Net income 2,541 1,756 3,214 858
PREFERRED STOCK DIVIDEND ACCRUED 2,544 2,217 5,036 4,412
--------- --------- --------- ---------
Net (Loss) applicable to
Common Shareholders $ (3) $ (461) $ (1,822) $ (3,554)
========= ========= ========= =========
BASIC AND DILUTED NET (LOSS) PER
COMMON SHARE $ (0.03) $ (4.50) $ (17.82) $ (34.70)
========= ========= ========= =========
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES 101,895 102,501 102,218 102,419
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
6
AEARO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
FOR THE SIX MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,214 $ 858
Adjustments to reconcile net income to cash provided by operating
activities-
Depreciation 4,863 4,831
Amortization of intangible assets and deferred financing costs 4,446 4,430
Deferred income taxes (11) (12)
Other, net 37 224
Changes in assets and liabilities-
Accounts receivable (2,431) 2,288
Inventories, net (1,741) 261
Accounts payable and accrued liabilities (779) (3,961)
Other, net (904) (35)
-------- --------
Net cash provided by operating activities 6,694 8,884
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,778) (3,731)
Acquisition of Norhammer (3,620)
Proceeds provided by disposals of property, plant and equipment 10 20
-------- --------
Net cash used by investing activities (8,388) (3,711)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility, net 10,250 50
Repayment of term loans (7,210) (6,198)
Repayment of external long-term debt (161) (1,312)
(Repurchase) sale of common stock, net (286) 50
Increase in shareholder notes, net (226) (42)
-------- --------
Net cash provided (used) by financing activities 2,367 (7,452)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,466) (567)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (793) (2,846)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,050 6,737
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,257 $ 3,891
======== ========
CASH PAID FOR:
Interest $ 11,060 $ 11,696
======== ========
Income taxes $ 845 $ 432
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
7
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly, in accordance with generally accepted accounting
principles, the Company's financial position, results of operations and
cash flows for the interim periods presented. Such adjustments consisted of
only normal recurring items. These condensed consolidated financial
statements do not include all disclosures associated with annual financial
statements and accordingly should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10K.
The Company's results are subject to seasonal fluctuations. Therefore, the
results of operations for the interim periods shown in this report are not
necessarily indicative of results for any future interim period or for the
entire year.
(2) FORMATION ACQUISITION AND FINANCING
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 under the brand
names: AOSafety(R), E-A-R(R), and Peltor(R). These products are sold
through three reportable segments, which 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. 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,
shapes and applies coatings to the lenses in accordance with 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. Aearo Corporation
immediately contributed the acquired assets and liabilities to Aearo
Company, a wholly owned subsidiary of Aearo Corporation, pursuant to an
asset transfer agreement dated June 13, 1995. Aearo Corporation has no
other material assets, liabilities or operations other than those that
result from its ownership of the common stock of Aearo Company.
The Formation Acquisition has been accounted for as a purchase transaction
effective as of July 11, 1995, in accordance with Accounting Principles
Board Opinion No. 16, Business Combinations, and EITF Issue No. 88-16,
Basis in Leveraged Buyout Transactions, and accordingly, the consolidated
financial statements for the periods subsequent to July 11, 1995 reflect
the purchase price, including transaction costs, allocated to tangible and
intangible assets acquired and liabilities assumed, based on a portion of
their estimated fair
7
8
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
values as of July 11, 1995. The valuation of assets and liabilities
acquired reflect carryover basis for the percentage ownership retained by
Cabot.
(3) SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.
Reclassifications. Certain amounts included in the prior years' financial
statements may have been reclassified to conform to the current period
presentation. The reclassifications have no impact on net income previously
reported.
Revenue Recognition. The Company generally recognizes revenue upon shipment
of its products to customers.
Foreign Currency Translation. Assets and liabilities of the Company's
foreign operations are translated at period-end exchange rates. Revenues
and expenses are translated at the approximate average monthly rate during
the period. 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.
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Intangible Assets. Intangible assets consist primarily of the costs of
goodwill, patents, and trademarks purchased in business acquisitions.
Intangible assets are amortized on the straight-line basis over either 25
years or an estimated useful life, whichever is shorter.
Loss per Common Share. Basic loss per common share is computed by dividing
net loss by the weighted average number of shares of common stock
outstanding during the year. Diluted loss 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 average share trading
price exceeds exercise price.
Comprehensive Income. The Company's only item of comprehensive income
relates to foreign currency translation adjustments, and is presented
separately on the balance sheet as a component of stockholders' equity as
required. If presented on the statements of operations, comprehensive
income would be approximately $0.9 million less than the reported net
income due to foreign currency translation adjustments for the three months
ended March 31, 2000. For the three months ended March 31, 1999
comprehensive income and the reported net income were the same. For the six
month time period as presented on the statement of operations,
comprehensive income would be approximately $3.7 million and $2.0 million
less than reported net income due to foreign currency translation
adjustments for the six months ended March 31, 2000, and 1999,
respectively.
8
9
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
Accounting for Derivative Instruments and Hedging Activities. The Company
is required to adopt the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities no later than the first
quarter of the fiscal year beginning October 1, 2000.
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.
(4) INVENTORIES, NET
Inventories, net of inventory reserves consisted of the following (dollars
in thousands):
MARCH 31, SEPTEMBER 30,
2000 1999
--------- -------------
(unaudited)
Raw materials $ 9,381 $ 8,725
Work in process 8,111 7,649
Finished goods 18,277 16,912
------- -------
$35,769 $33,286
======= =======
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
(5) DEBT
The Company's debt structure includes $100.0 million of Senior Subordinated
Notes (Notes) due 2005, as well as a senior bank facility comprised of (i)
term loans denominated in U.S., Canadian, British, and German currencies
(Term Loans) and (ii) a revolving credit facility providing for up to $25.0
million (Revolving Credit Facility), (collectively the Senior Bank
Facilities). Under the terms of both the Senior Bank Facilities and the
Notes indenture, Aearo Company is required to comply with certain financial
covenants and restrictions with which Aearo Company was in compliance at
March 31, 2000. At March 31, 2000, the amounts outstanding on the term
loans and the revolving credit facility were approximately $96.9 million
and $16.1 million, respectively.
9
10
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
(6) 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.
Contingencies. The Company is a defendant in various lawsuits and
administrative proceedings which are being handled in the ordinary course
of business. In the opinion of management of the Company, these suits and
claims should not result in final judgments or settlements which, in the
aggregate, would have a material adverse effect on the Company's financial
condition or results of operations.
(7) ACQUISITIONS
On October 28, 1999, the Company acquired Ontario based Norhammer Limited
for approximately Canadian $5.5 million. The transaction was accounted for
using the purchase method of accounting, and accordingly, the operating
results of Norhammer have been included with those of the Company
subsequent to October 28, 1999.
(8) SEGMENT REPORTING
The Company manufactures and sells products under the brand names:
AOSafety(R), E-A-R(R), and Peltor(R). These products are sold through three
reportable segments, which are Safety Products, Safety Prescription Eyewear
and Specialty Composites.
NET SALES TO EXTERNAL CUSTOMERS BY BUSINESS SEGMENT (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
Safety Products $ 54,335 $ 51,947 $106,009 $102,690
Safety Prescription Eyewear 10,766 9,424 19,794 17,621
Specialty Composites 12,329 11,035 23,821 21,208
-------- -------- -------- --------
TOTAL $ 77,430 $ 72,406 $149,624 $141,519
======== ======== ======== ========
Intersegment sales of the Specialty Composites segment to the Safety
Products segment totaled $0.7 million and $0.9 million for the three months
ended March 31, 2000 and 1999, respectively. Intersegment sales totaled
$1.6 million and $2.0 million for the six months ended March 31, 2000 and
1999, respectively. The intersegment sales value is determined at fully
absorbed inventory cost at standard rates plus 25%.
10
11
AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
EBITDA BY BUSINESS SEGMENT AND RECONCILIATION TO INCOME BEFORE PROVISION
FOR INCOME TAXES (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
Safety Products $ 11,439 $ 10,580 $ 21,424 $ 18,780
Safety Prescription Eyewear 1,388 1,362 1,928 1,925
Specialty Composites 1,137 909 2,172 1,612
Reconciling items 5 (256) (454) 333
-------- -------- -------- --------
Total EBITDA 13,969 12,595 25,070 22,650
Depreciation 2,423 2,325 4,863 4,831
Amortization 1,766 1,702 3,491 3,415
Non-operating Costs (86) (9) (71) 7
Interest 6,212 6,104 12,159 12,428
-------- -------- -------- --------
INCOME BEFORE TAX PROVISION $ 3,654 $ 2,473 $ 4,628 $ 1,969
======== ======== ======== ========
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.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
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.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1999
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Three Months Ended Change - Favorable
------------------ ------------------ (Unfavorable)
March 31, Percent of March 31, Percent of -------------
2000 Net Sales 1999 Net Sales Amount Percent
Net Sales
Safety Products $ 54,335 70.2 $ 51,947 71.7 $ 2,388 4.6
Safety Prescription Eyewear 10,766 13.9 9,424 13.1 1,342 14.2
Specialty Composites 12,329 15.9 11,035 15.2 1,294 11.7
-------- -------- -------- -------- --------
Total net sales 77,430 100.0 72,406 100.0 5,024 6.9
Cost of Sales 41,431 53.5 38,869 53.7 (2,562) (6.6)
-------- -------- -------- -------- --------
Gross profit 35,999 46.5 33,537 46.3 2,462 7.3
Operating Expenses-
Selling and administrative 23,350 30.2 21,802 30.1 (1,548) (7.1)
Research and technical services 1,391 1.8 1,107 1.5 (284) (25.7)
Amortization of intangibles 1,766 2.3 1,702 2.4 (64) (3.8)
Other charges (income), net (374) (0.5) 349 0.5 723 --
-------- -------- -------- -------- --------
Operating income 9,866 12.7 8,577 11.8 1,289 15.0
Interest expense, net 6,212 8.0 6,104 8.4 (108) (1.8)
-------- -------- -------- -------- --------
Income before provision for income
taxes 3,654 4.7 2,473 3.4 1,181 47.8
Provision for income
taxes 1,113 1.4 717 1.0 (396) (55.2)
-------- -------- -------- --------
Net income 2,541 3.3 1,756 2.4 785 44.7
Preferred stock dividend accrued 2,544 3.3 2,217 3.1 (327) (14.7)
-------- -------- -------- -------- --------
Income (loss) applicable to common
shareholders $ (3) -- $ (461) (0.6) $ 458 --
======== ======== ======== ======== ========
Loss per common share $ (0.03) $ (4.50) $ (4.47) --
======== ======== =======
EBITDA $ 13,969 18.0 $ 12,595 17.4 $ 1,374 10.9
======== ======== ======== ======== ========
12
13
Net Sales. Net sales in the three months ended March 31, 2000 increased 6.9% to
$77.4 million from $72.4 million in the three months ended March 31, 1999.
Safety Products net sales in the three months ended March 31, 2000 increased
4.6% to $54.3 million from $51.9 million in the three months ended March 31,
1999. This increase was driven by growth in sales of the hearing, eyewear, head
and respiratory protection product lines. The success of product introductions
led by the Lexa(R) eyewear and E-A-Rsoft(TM) hearing protection lines, as well
as growth of the Peltor(R) brand in Europe, drove the strong volume growth which
was offset somewhat by changes in foreign exchange. The strength of the US
dollar relative to European currencies had the impact of reducing sales by
approximately $2.3 million in the three months ended March 31, 2000, as compared
to the three months ended March 31, 1999. The Safety Products segment sales for
the three months ended March 31, 2000 included $0.8 million of incremental sales
due to the acquisition of Norhammer that was purchased on October 28, 1999. The
Safety Prescription Eyewear segment net sales in the three months ended March
31, 2000 increased 14.2% to $10.8 million from $9.4 million in the three months
ended March 31, 1999. The Safety Prescription Eyewear segment net sales for the
three months ended March 31, 2000 included approximately $1.1 million of sales
from Safety Optical that was acquired in August 1999. Specialty Composites' net
sales in the three months ended March 31, 2000 increased 11.7% to $12.3 million
from $11.0 million in the three months ended March 31, 1999. The increase was
primarily driven by continued growth in the electronic segments of the precision
equipment market, including computer and personal communication system (PCS)
applications, as well as growth in the transportation market.
Gross Profit. Gross Profit in the three months ended March 31, 2000 increased
7.3% to $36.0 million from $33.5 million in the three months ended March 31,
1999. Gross Profit as a percentage of net sales in the three months ended March
31, 2000 was 46.5% as compared to 46.3% in the three months ended March 31,
1999. This improvement in the Gross Profit percentage of net sales is primarily
due to increased productivity in the manufacturing plants which was strong
enough to offset the negative impact of changes in foreign exchange rates. The
strong US dollar relative to European currencies negatively affects gross
profits as the impact on the majority of Europe's manufacturing costs are not
proportional to the impact on net sales due the majority of Europe's
manufacturing costs occurring outside of the European Monetary Union.
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended March 31, 2000 increased 7.1% to $23.4 million from $21.8
million in the three months ended March 31, 1999. Selling and administrative
expenses as a percentage of net sales in the three months ended March 31, 2000
was 30.2% as compared to 30.1% in the three months ended March 31,1999. The
spending increase is primarily due to an increase in selling and marketing
spending as part of the Company 's campaign to build brand awareness and loyalty
by more strongly promoting its global brands.
Research and Technical Service Expenses. Research and technical service expenses
in the three months ended March 31, 2000 increased 25.7% to $1.4 million from
$1.1 million in the three months ended March 31, 2000. The increase is
attributed to additional focus in the design and development of new products and
technologies.
Amortization of Intangibles. Amortization expense in the three months ended
March 31, 2000 increased 3.8% to $1.8 million from $1.7 million in the three
months ended March 31, 2000. The increase is mostly attributed to the
amortization of additional goodwill associated with the recent acquisitions of
Safety Optical and Norhammer.
Other Charges (Income), Net. Other Charges (Income), Net was income of $0.4
million for the three months ended March 31, 2000 as compared to expense of $0.3
million for the three months ended March 31, 1999. This change was primarily a
result of net foreign currency transaction gains in the three months ended March
31, 2000 as compared to net foreign currency transaction losses in the three
months ended March 31, 1999.
Operating Income. Operating income improved 15.0% to $9.9 million in the three
months ended March 31, 2000 from $8.6 million in the three months ended March
31, 1999. This improvement was due primarily to increases in sales and the
change in net foreign currency transaction gains and losses, partially offset by
increased spending in
13
14
Selling, Administrative, and Technical expenses. Operating income as a
percentage of net sales in the three months ended March 31, 2000 was 12.7% as
compared to 11.8% in the three months ended March 31, 1999.
Interest Expense, Net. Interest expense, net in the three months ended March 31,
2000 increased 1.8% to $6.2 million from $6.1 million in the three months ended
March 31, 1999. The increase in interest expense was due to an increase in the
weighted average interest rates in effect for the three months ended March 31,
2000 as compared to the three months ended March 31, 1999, somewhat offset by a
reduction in average borrowings.
Provision For Income Taxes. The provision for income taxes in the three months
ended March 31, 2000 was $1.1 million compared to $0.7 million in the three
months ended March 31, 1999, reflecting an increased level of income before
provision for income taxes.
Net Income. Net income for the three months ended March 31, 2000 increased 44.7%
to $2.5 million from $1.8 million for the three months ended March 31, 1999.
EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. While the
Company believes EBITDA is a useful indicator of its ability to service debt,
EBITDA should not be considered as a substitute for net income determined in
accordance with generally accepted accounting principles as an indicator of
operating performance or as an alternative to cash flow as a measure of
liquidity. Investors should be aware that EBITDA as presented below may not be
comparable to similarly titled measures presented by other companies and
comparisons could be misleading unless all companies and analysts calculate this
measure in the same fashion.
EBITDA CALCULATION
UNAUDITED
(DOLLARS IN THOUSANDS)
Three Months Ended Change
March 31, Favorable (Unfavorable)
2000 1999 Amount Percent
---- ---- ------ -------
Operating Income $ 9,866 $ 8,577 $ 1,289 15.0%
Add Backs:
Depreciation 2,423 2,325 98 4.2%
Amortization of Intangibles 1,766 1,702 64 3.8%
Non-operating income, net (86) (9) (77) --
-------- -------- --------
EBITDA $ 13,969 $ 12,595 $ 1,374 10.9%
======== ======== ========
EBITDA for the three months ended March 31, 2000 was $14.0 million as compared
to $12.6 million for the three months ended March 31, 1999. This improvement was
due primarily to increased levels of sales and foreign currency transaction
gains, partially offset by increased spending in selling, administrative and
technical Services. EBITDA as a percentage of net sales in the three months
ended March 31, 2000 was 18.0% as compared to 17.4% in the three months ended
March 31, 2000.
14
15
RESULTS OF OPERATIONS -- SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS
ENDED MARCH 31, 1999
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Six Months Ended Six Months Ended Change - Favorable
---------------- ---------------- (Unfavorable)
March 31, Percent of March 31, Percent of -------------
2000 Net Sales 1999 Net Sales Amount Percent
Net Sales
Safety Products $ 106,009 70.9 $ 102,690 72.5 $ 3,319 3.2
Safety Prescription Eyewear 19,794 13.2 17,621 12.5 2,173 12.3
Specialty Composites 23,821 15.9 21,208 15.0 2,613 12.3
--------- ------ --------- ------ ---------
Total net sales 149,624 100.0 141,519 100.0 8,105 5.7
Cost of Sales 80,079 53.5 77,453 54.7 (2,626) (3.4)
--------- ------ --------- ------ ---------
Gross profit 69,545 46.5 64,066 45.3 5,479 8.6
Operating Expenses-
Selling and administrative 46,958 31.4 43,425 30.7 (3,533) (8.1)
Research and technical services 2,718 1.8 2,244 1.6 (474) (21.1)
Amortization of intangibles 3,491 2.3 3,415 2.4 (76) 2.2
Other charges (income), net (409) (0.3) 585 0.4 994 --
--------- ------ --------- ------ ---------
Operating income 16,787 11.2 14,397 10.2 2,390 16.6
Interest expense, net 12,159 8.1 12,428 8.8 269 2.2
--------- ------ --------- ------ ---------
Income before provision
for income taxes 4,628 3.1 1,969 1.4 2,659 135.0
Provision for income
taxes 1,414 0.9 1,111 0.8 (303) (27.3)
--------- ------ --------- ------ ---------
Net income 3,214 2.1 858 0.6 2,356 274.6
Preferred stock dividend accrued 5,036 3.4 4,412 3.1 (624) (14.1)
--------- ------ --------- ------ ---------
Loss applicable to common
shareholders $ (1,822) (1.2) $ (3,554) (2.5) $ 1,732 48.7
========= ====== ========= ====== =========
Loss per common share $ (17.82) $ (34.70) $ 16.88 48.6
========= ========= =========
EBITDA $ 25,070 16.8 $ 22,650 16.0 $ 2,420 10.7
========= ====== ========= ====== =========
Net Sales. Net sales in the six months ended March 31, 2000 increased 5.7%to
$149.6 million from $141.5 million in the six months ended March 31, 1999.
Safety Products net sales in the six months ended March 31, 2000 increased 3.2%
to $106.0 million from $102.7 million in the six months ended March 31, 1999.
This increase was driven by growth in sales of the hearing, eyewear and
respiratory protection product lines. The success of product introductions led
by the Lexa(R) eyewear and E-A-Rsoft(TM) hearing protection lines, as well as
growth of the Peltor(R) brand in Europe, drove the strong volume growth which
was offset somewhat by changes in foreign exchange. The strength of the US
dollar relative to European currencies had the impact of reducing sales by
approximately $3.5 million in the six months ended March 31, 2000, as compared
to the six months ended March 31, 1999. The Safety Products segment sales for
the six months ended March 31, 2000 included $1.2 million of incremental sales
due to the acquisition of Norhammer that was purchased on October 28, 1999. The
Safety Prescription Eyewear segment net sales in the six months ended March 31,
2000 increased 12.3% to $19.8 million from $17.6 million in the six months ended
March 31, 1999. The Safety Prescription Eyewear segment net sales for the six
months ended March 31, 2000 included approximately $2.0 million of sales from
Safety Optical that was acquired in August 1999. Specialty Composites' net sales
in the six months ended March 31, 2000 increased
15
16
12.3% to $23.8 million from $21.2 million in the six months ended March 31,
1999. The increase was primarily driven by continued growth in the electronic
segments of the precision equipment market, including computer and personal
communication system (PCS) applications, as well as growth in the transportation
market.
Gross Profit. Gross Profit in the six months ended March 31, 2000 increased 8.6%
to $69.5 million from $64.1 million in the six months ended March 31, 1999.
Gross Profit as a percentage of net sales in the six months ended March 31, 2000
was 46.5% as compared to 45.3% in the six months ended March 31, 1999. This
significant improvement in the Gross Profit percentage of net sales is primarily
due to increased productivity in the manufacturing plants which was strong
enough to offset the negative impact of changes in foreign exchange rates. The
strong US dollar relative to European currencies negatively affects gross
profits as the impact on the majority of Europe's manufacturing costs are not
proportional to the impact on net sales due the majority of Europe's
manufacturing costs occurring outside of the European Monetary Union.
Selling and Administrative Expenses. Selling and administrative expenses in the
six months ended March 31, 2000 increased 8.1% to $47.0 million from $43.4
million in the six months ended March 31, 1999. Selling and administrative
expenses as a percentage of net sales in the six months ended March 31, 2000
increased to 31.4% of net sales as compared to 30.7% of net sales in the six
months ended March 31, 1999. The spending increase is primarily due to an
increase in selling and marketing spending as part of the Company 's campaign to
build brand awareness and loyalty by more strongly promoting its global brands.
Research and Technical Service Expenses. Research and technical service expenses
in the six months ended March 31, 2000 increased 21.1% to $2.7 million from $2.2
million in the six months ended March 31, 1999. The increase is attributed to
additional focus in the design and development of new products and technologies.
Amortization of Intangibles. Amortization expense in the six months ended March
31, 2000 increased 2.2% to $3.5 million from $3.4 million in the six months
ended March 31, 1999. The increase is mostly attributed to the amortization of
additional goodwill associated with the recent acquisitions of Safety Optical
and Norhammer.
Other Charges (Income), Net. Other Charges (Income), Net was income of $0.4
million for the six months ended March 31, 2000 as compared to an expense of
$0.6 million for the six months ended March 31, 1999. This change was primarily
a result of net foreign currency transaction gains in the six months ended March
31, 2000 as compared to net foreign currency transaction losses in the six
months ended March 31, 1999.
Operating Income. Operating income improved 16.6% to $16.8 million in the six
months ended March 31, 2000 from $14.4 million in the six months ended March 31,
1999. This improvement was due primarily to increases in sales, productivity
improvements in the manufacturing plants and the change in net foreign currency
transaction gains and losses, partially offset by increased spending in Selling,
Administrative, and Technical expenses. Operating income as a percentage of net
sales in the six months ended March 31, 2000 was 11.2% as compared to 10.2% in
the six months ended March 31, 1999.
Interest Expense, Net. Interest expense, net in the six months ended March 31,
2000 decreased 2.2% to $12.2 million from $12.4 million in the six months ended
March 31, 1999. The reduction in interest expense was due to a reduction in
average borrowings offset somewhat by an increase in the weighted average
interest rates in effect for the six months ended March 31, 2000 as compared to
the six months ended March 31, 1999.
Provision For Income Taxes. The provision for income taxes in the six months
ended March 31, 2000 was $1.4 million compared to $1.1 million in the six months
ended March 31, 1999, reflecting an increased level of income before provision
for income taxes.
Net Income. Net income for the six months ended March 31, 2000 increased 274.6%
to $3.2 million from $0.9 million for the six months ended March 31, 1999.
16
17
EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, and non-operating income or expense. Non-operating income or
expense is further defined as extraordinary gains or losses, or gains or losses
from sales of assets other than in the ordinary course of business. While the
Company believes EBITDA is a useful indicator of its ability to service debt,
EBITDA should not be considered as a substitute for net income determined in
accordance with generally accepted accounting principles as an indicator of
operating performance or as an alternative to cash flow as a measure of
liquidity. Investors should be aware that EBITDA as presented below may not be
comparable to similarly titled measures presented by other companies and
comparisons could be misleading unless all companies and analysts calculate this
measure in the same fashion.
EBITDA CALCULATION
UNAUDITED
(DOLLARS IN THOUSANDS)
Six Months Ended Change
March 31, Favorable (Unfavorable)
2000 1999 Amount Percent
---- ---- ------ -------
Operating Income $ 16,787 $ 14,397 $ 2,390 16.6%
Add Backs:
Depreciation 4,863 4,831 32 0.7%
Amortization of Intangibles 3,491 3,415 76 2.2%
Non-operating costs (income), net (71) 7 (78) --
-------- -------- --------
EBITDA $ 25,070 $ 22,650 $ 2,420 10.7%
======== ======== ========
EBITDA for the six months ended March 31, 2000 was $25.1 million as compared to
$22.7 million for the six months ended March 31, 1999. This improvement was due
primarily to improvements in sales volume, gross profit, net foreign currency
transaction gains and losses, partially offset by increased spending in Selling,
Administrative, and Technical expenses. EBITDA as a percentage of net sales in
the six months ended March 31, 2000 was 16.8% as compared to 16.0% in the six
months ended March 31, 1999.
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, the
Company's operations are also affected by changes in exchange rates relative to
the Swedish Krona. A decline in the value of the Krona relative to other
currencies can have a favorable impact on the profitability of the Company and
an increase in the value of the Krona relative to other currencies can have a
negative impact on the profitability of the Company. The Company utilizes
forward foreign currency contracts to mitigate the effects of changes in foreign
currency rates on profitability.
17
18
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, 98 rather than 1998). 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 had
assembled a "Y2K" cross functional team which 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.
The Company had completed its Y2K preparations on all critical business
applications prior to December 31, 1999 and has experienced no significant Y2K
related problems to date. As of April 30, 2000, the Company is not aware of any
significant Y2K related problems associated with our internal systems or the
systems of our vendors, distributors, or customers. The costs associated with
making its information systems year 2000 compliant were not material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted primarily of operating cash flow
and debt financing. The Company's uses of those funds consist principally of
debt service, capital expenditures and acquisitions.
The Company's debt structure includes $100.0 million of Senior Subordinated
Notes (Notes) due 2005, as well as a senior bank facility comprised of (i) term
loans denominated in U.S., Canadian, British and German currencies (Term Loans)
and (ii) a revolving credit facility providing for up to $25.0 million
(Revolving Credit Facility), (collectively the Senior Bank Facilities). Under
the terms of both the Senior Bank Facilities and the Notes indenture, Aearo
Company is required to comply with certain financial covenants and restrictions
with which Aearo Company was in compliance at March 31, 2000. At March 31, 2000
the amounts outstanding on the Term Loans and the Revolving Credit Facility were
approximately $96.9 million and $16.1 million, respectively.
Maturities under the Company's Term Loans are: $8.2 million for the remainder of
fiscal 2000, $19.9 million in fiscal 2001, $33.5 million in fiscal 2002, and
$35.2 million in fiscal 2003. Other than upon a change of control or as a result
of certain asset sales, or in the event that certain excess funds exist at the
end of a fiscal year, the Company will not be required to make any principal
payments in respect of the Notes until maturity. The Company is required to make
interest payments with respect to both the Senior Bank Facilities and the Notes.
The Company's net cash provided by operating activities for the six months ended
March 31, 2000 totaled $6.7 million as compared to $8.9 million for the six
months ended March 31, 1999. The decrease was due primarily to a decrease of
$4.4 million in the Company's net changes in assets and liabilities, partially
offset by a $2.4 million improvement in net income. The Company's net changes in
assets and liabilities were primarily driven by growth in inventories and
receivables attributable to the increased level of sales, the acquisition of
Norhammer Limited, and some residual inventory growth due to the Company's Y2K
contingency planning which included some increases in safety stock levels for
some strategic raw materials.
Net cash used by investing activities was $8.4 million for the six months ended
March 31, 2000 as compared to $3.7 million for the six months ended March 31,
1999. The increase in net cash used by investing activities is
18
19
attributed to the acquisition of Ontario based Norhammer Limited for $3.6
million and a higher level of capital expenditures in the six months ended March
31, 2000 as compared to the six months ended March 31, 1999.
Net cash provided by financing activities for the six months ended March 31,
2000 was $2.4 million compared with net cash used by financing activities for
the six months ended March 31, 1999 of $7.5 million. The increase of cash
provided from financing activities of $9.8 million is primarily attributed to
increased borrowings under the revolving credit facility of $10.3 million for
the six months ended March 31, 2000 compared to borrowings of $0.05 million in
the six months ended March 31, 1999, a decrease in the repayment of long term
debt of $1.2 million, and an increase of $1.0 million in the scheduled principal
repayments on the Term Loans. Scheduled principal repayments on the Term Loans
were $7.2 million and $6.2 million for the six months ended March 31, 2000 and
1999, respectively.
The Company has a substantial amount of indebtedness. The Company relies on
internally generated funds, and to the extent necessary, on borrowings under the
Revolving Credit Facility (subject to certain customary drawing conditions) to
meet its liquidity needs. The Company anticipates that operating cash flow will
be adequate to meet its operating 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 particular, the Company expects that profitability
over the remainder of fiscal 2000 will be adversely affected by the strength of
the U.S. Dollar relative to the Euro. 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.
It is also anticipated that over the next several years the level of debt
service and the requirements placed on the Company's Senior Bank Facilities will
require that the Company amend its credit agreement with its syndicate of
lenders, or otherwise change its capital structure.
19
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
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. In particular, the Company expects that sales and
profitability over the remainder of fiscal year 2000 will be adversely affected
by the strength of the U.S. Dollar relative to the Euro. To mitigate the impacts
of changes in exchange rates the Company executes two hedging programs: one for
transaction exposures, and the other for the cash flow impact on European
operations. The Company utilizes forward contracts for transaction exposures and
a combination of forward contracts, put options and zero premium collars for
cash flow exposures. During the three months ended March 31, 2000 transaction
hedge losses were $0.1 million, while cash flow hedges were a gain of $0.4
million. In addition, the Company limits foreign exchange impacts 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 March 31, 2000 as material. It is anticipated
that the 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 interest rate swaps to reduce the impact of increased
interest rates in its floating rate debt. With the continuing increases in
interest rates since June of 1999 the Company unwound its zero premium collar on
February 28, 2000, rolling gains into a new interest rate swap that matches the
notional amounts of the credit agreement by loan currency. The new interest rate
swap will expire August 31, 2001. The Company is of the opinion that it is well
positioned to manage interest expense through August 2001 and have mitigated the
risks of continued interest rate hikes and related profit impact from the
Company's Financial Statements through these efforts.
COMMODITY RISK
The Company is subject to market risks with respect to industry pricing in paper
and crude oil as it relates to various commodity items. Items with potential
impact are paperboard, packaging films, nylons, resins, propylene, ethylene,
plasticizer and freight. In conjunction with purchase agreements that allow for
limited pricing movements the Company has built anticipated commodity price
increases into the fiscal year 2000 cost structure to cover industry-pricing
pressures. The Company manages pricing exposures on larger volume commodities
such as polycarbonate, polyols and polyvinyl chloride via price negotiations
utilizing alternative supplier competitive pricing. The Company sources some
products and parts from Far East sources where resource availability,
competition, and infrastructure stability has provided a favorable purchasing
environment. The Company does not enter into derivative instruments to manage
commodity risk.
20
21
PART II
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits and claims arise against the Company in the ordinary course of
its business. Most of these lawsuits and claims relate to the Company's safety
eyewear and respiratory product lines and primarily involve accidents and/or
exposures occurring after the Company's predecessor acquired the AOSafety
Division from American Optical Corporation in April 1990. The Company is
contingently liable with respect to numerous lawsuits involving respirators
manufactured by American Optical Corporation prior to the acquisition of the
AOSafety Division in April 1990. These lawsuits typically involve plaintiffs
alleging that they suffer from asbestosis or silicosis, and that such condition
results in part from respirators which were negligently designed or
manufactured. The defendants in these lawsuits are often numerous, and include,
in addition to respirator manufacturers, employers of the plaintiffs and
manufacturers of sand (used in sand blasting) and asbestos. Responsibility for
legal costs, as well as for settlements and judgments, is shared contractually
by the Company, American Optical Corporation and a prior owner of American
Optical Corporation. The Company and Cabot have entered into an arrangement
relating to certain respirator claims asserted after July 11, 1995 (the date of
the Company's formation) whereby, so long as the Company pays to Cabot an annual
fee of $400,000, which the Company has elected to pay, Cabot will retain
responsibility and liability for, and indemnify the Company against, certain
legal claims alleged to arise out of the use of respirators manufactured prior
to July 1995. The Company has the right to discontinue the payment of such
annual fee at any time, in which case the Company will assume responsibility for
and indemnify Cabot with respect to such claims.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
None
21
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 11, 2000 AEARO CORPORATION
/s/ Bryan J. Carey
-----------------------------------
Bryan J. Carey
Executive Vice President, Chief
Financial Officer, Treasurer,
Assistant Secretary and
Managing Director - Europe
22
23
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
27.1* -- Financial Data Schedule.
*Filed herewith.
23