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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
Commission file number 33-96190
Aearo Corporation
(Formerly Cabot Safety Holdings Corporation)
(Exact name of registrant as specified in its charter)
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Delaware 13-3840450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Washington Mall, Eighth Floor
Boston, Massachusetts 02108-2610
(Address of principal executive offices) (Zip Code)
(617) 371-4200
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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AEARO CORPORATION
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1996
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
JUNE 30, 1996 (UNAUDITED) AND SEPTEMBER 30, 1995 3 - 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1996, THREE MONTHS ENDED
JUNE 30, 1995 (PREDECESSOR COMPANY), NINE MONTHS ENDED JUNE 30,
1996 AND NINE MONTHS ENDED JUNE 30, 1995 (PREDECESSOR COMPANY) 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE NINE MONTHS ENDED JUNE 30, 1996
AND NINE MONTHS ENDED JUNE 30, 1995 (PREDECESSOR COMPANY) 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) 7-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- -------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-14
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 15
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ITEM 2. CHANGES IN SECURITIES 15
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 15
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ITEM 5. OTHER INFORMATION 15
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
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SIGNATURE PAGE 16
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PART I
ITEM 1. FINANCIAL STATEMENTS
AEARO CORPORATION
BALANCE SHEETS--ASSETS
(DOLLARS IN THOUSANDS)
JUNE, 30, SEPTEMBER 30,
1996 1995
----------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 10,764 $ 4,707
Accounts receivable, net 44,652 28,586
Inventories 36,820 25,914
Deferred and prepaid expenses 2,623 2,830
-------- --------
Total current assets 94,859 62,037
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 67,013 53,069
INTANGIBLE ASSETS, NET 164,418 92,445
OTHER ASSETS 10,410 10,712
-------- --------
Total assets $336,700 $218,263
======== ========
The accompanying notes are an integral part of these financial statements.
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AEARO CORPORATION
BALANCE SHEETS--LIABILITIES AND STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE, 30, SEPTEMBER 30,
1996 1995
----------- -------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 8,075 $ 5,837
Accounts payable 15,847 13,208
Accrued liabilities 28,779 18,294
U.S. and foreign income taxes 5,542 262
-------- --------
Total current liabilities 58,243 37,601
-------- --------
LONG-TERM DEBT 238,959 146,460
DEFERRED INCOME TAXES 405 -
OTHER LIABILITIES 2,845 2,248
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--June 30, 1996: 100,100 shares:
September 30, 1995: 100,000 shares 1 1
Additional paid-in capital 32,720 32,530
Retained earnings 2,690 (584)
Foreign currency translation adjustments 837 7
-------- --------
Total stockholders' equity 36,248 31,954
-------- --------
Total liabilities and stockholders' equity $336,700 $218,263
======== ========
The accompanying notes are an integral part of these financial statements.
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AEARO CORPORATION
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
--------- ----------- --------- -----------
NET SALES $64,596 $54,101 $177,312 $151,805
COST OF SALES 35,518 30,333 97,858 85,515
------- ------- -------- --------
Gross profit 29,078 23,768 79,454 66,290
SELLING AND ADMINISTRATIVE 19,408 14,773 52,762 42,977
RESEARCH AND TECHNICAL
SERVICES 678 614 2,271 2,199
AMORTIZATION EXPENSE 1,395 1,396 3,351 4,197
OTHER CHARGES (INCOME), NET 349 694 346 706
------- ------- -------- --------
Operating income 7,248 6,291 20,724 16,211
INTEREST EXPENSE, NET 5,120 1,923 14,188 5,427
------- ------- -------- --------
Income before provision for
income taxes 2,128 4,441 6,536 10,784
PROVISION FOR INCOME TAXES 1,324 1,923 3,262 4,266
------- ------- -------- --------
Net income 804 $ 2,518 3,274 $ 6,518
======= ========
PREFERRED STOCK DIVIDEND ACCRUED 4,615
1,582
------- --------
Earnings (loss) applicable to
Common Shareholders $ (778) $ (1,341)
======= ========
EARNINGS (LOSS) PER COMMON SHARE $ (7.78) $ (13.41)
======= ========
The accompanying notes are an integral part of these financial statements.
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AEARO CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(Unaudited)
FOR THE NINE MONTHS ENDED
JUNE 30,
1996 1995
SUCCESSOR PREDECESSOR
COMPANY COMPANY
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,274 $ 6,518
Adjustments to reconcile net income to cash provided by operating activities-
Depreciation and amortization 9,491 9,262
Deferred income taxes - 428
Other, net 26 160
Changes in assets and liabilities-
Accounts receivable (3,470) (3,276)
Inventory 373 813
Accounts payable and accruals 2,578 1,221
Other, net (541) (2,650)
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Net cash provided by operating activities 11,731 12,473
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CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for Acquisitions:
Peltor A.B. (83,555) -
Eastern Safety (6,636) -
Eastern Safety escrow deposit 3,000 -
Additions to property, plant and equipment (6,510) (9,400)
Proceeds provided by disposals of property, plant and equipment - 4
-------- -------
Net cash used by investing activities (93,701) (9,396)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 60
Repayment of shareholder notes 130 -
Decrease in revolving credit facility, net (3,800) -
Increase in term loans, net 96,216 -
Repayment of external long-term debt (5,254) (83)
Increase in note payable to Cabot Corporation, net - 282
Increase in intercompany receivables, net - (3,629)
-------- -------
Net cash provided (used) by financing activities 87,352 (3,430)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 675 116
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,057 (234)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,707 2,020
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,764 $ 1,786
======== =======
CASH PAID FOR:
Interest $ 10,471 $ 1,797
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Income taxes $ 746 $ 3,079
======== =======
The accompanying notes are an integral part of these financial statements.
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly, in accordance with generally accepted accounting
principles, the Company's financial position, results of operations and
cash flows for the interim periods presented. Such adjustments consisted of
only normal recurring items. The results of operations for the interim
periods shown in this report are not necessarily indicative of results for
any future interim period or for the entire year. These condensed
consolidated financial statements do not include all disclosures associated
with annual financial statements and accordingly should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10K.
(2) BASIS OF PRESENTATION
For periods prior to July 11, 1995, the accompanying financial statements
represent the combined results and financial position of Cabot Safety
Corporation (CSC) and certain affiliates (Predecessor) all of which were
wholly owned by Cabot Corporation (Cabot). On July 11, 1995, Cabot sold
substantially all of the assets and certain liabilities of the Predecessor
to Aearo Corporation (formerly Cabot Safety Holdings Corporation) as
described in Note 3 (Formation Acquisition). Financial statements for
periods subsequent to July 11, 1995 represent the consolidated financial
statements of Aearo Corporation and subsidiaries (Successor). References to
the Company refer to the Predecessor prior to the acquisition and the
Successor postacquisition. All significant intercompany transactions and
balances have been eliminated.
Separate financial statements of CSC are not presented because they do not
provide any additional information from what is presented in the financial
statements of Aearo Corporation that would be material to the holders of
the senior subordinated notes (see Note 6).
(3) ACQUISITION AND FINANCING
Aearo Corporation was formed by Vestar Equity Partners, L.P. (Vestar) in
June 1995 to effect the acquisition of substantially all of the assets and
liabilities of CSC and its subsidiaries (the Acquisition). CSC was wholly
owned by Cabot prior to the Acquisition (Old CSC). The Acquisition closed
on July 11, 1995, when Aearo Corporation acquired substantially all of the
assets and certain liabilities of CSC for cash, preferred stock and a 42.5%
common equity interest in Aearo Corporation. Aearo Corporation immediately
contributed the acquired assets and liabilities to CSC, 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 CSC.
The 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
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(3) ACQUISITION AND FINANCING (CONT'D)
intangible assets acquired and liabilities assumed, based on their
estimated fair values as of July 11, 1995, which may be revised at a later
date. The valuation of assets and liabilities acquired reflect carryover
basis for the percentage ownership retained by Cabot.
(4) SIGNIFICANT ACCOUNTING POLICIES
Income Taxes. The Company utilizes the liability method to account for
income taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes." This standard determines deferred income taxes based on the
estimated future tax effects of any differences between the financial
statement and the tax basis of assets and liabilities, given the provisions
of the enacted tax laws. The primary difference between the provision
calculated at statutory rates and the amounts reflected in the statements
of operations is attributable to non-deductible goodwill and charges
related to the allocation of the Peltor purchase price to inventory.
Intangible Assets. Intangible assets consist primarily of the costs of
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.
Earnings Applicable to Common Shareholders. Net income per common share has
been computed by dividing earnings applicable to common shareholders for
the period by the weighted average number of common shares outstanding
during the period.
(5) INVENTORIES
Inventories consisted of the following (dollars in thousands):
JUNE 30, SEPTEMBER 30,
1996 1995
(unaudited)
Raw materials $12,731 $ 8,371
Work in process 6,290 3,332
Finished goods 17,799 14,211
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$36,820 $25,914
======= =======
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out method.
(6) DEBT
In July 1995, CSC issued $100.0 million of Senior Subordinated Notes due
2005 (Notes). On May 30, 1996 CSC amended and restated its credit agreement
(the Agreement) that provides for secured borrowings (the Senior Bank
Facilities) from a syndicate of lenders consisting of (i) a secured term
loan facility consisting of an A tranche and a B tranche providing for up
to $90 million of A Term Loans and $50 million of B Term Loans; a portion
of the A tranche is denominated in U.S., British, Canadian and German
currencies and (ii) a Revolving Credit Facility providing for up to $25
million of revolving loans. Under the terms of both the Agreement and the
Note indenture, CSC is required to comply with certain financial covenants
and
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AEARO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
(6) DEBT (CONT'D)
restrictions with which CSC was in compliance at June 30, 1996. At June 30,
1996, the amounts outstanding on Term Loan A and Term Loan B were $91.1
million and $50.0 million, respectively. There was no borrowing on the
Revolving Credit Facility.
(7) PREFERRED STOCK
The 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. At June 30, 1996
the redemption value was $45.0 million plus accrued dividends of $5.9
million.
(8) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits and administrative
proceedings which are being handled in the ordinary course of business. In
the opinion of management of the Company, these suits and claims should not
result in final judgments or settlements which, in the aggregate, would
have a material adverse effect on the Company's financial condition or
results of operations.
During fiscal 1995, the Company became aware that its French subsidiary has
been delinquent in the remittance of value-added tax payments to the French
government. The Company believes that any required tax payments and
attendant penalties will not have a material adverse effect on the
Company's financial condition or results of operations.
(9) ACQUISITION
On January 3, 1996, the Company acquired the stock of Eastern Safety
Equipment Co., Inc. (Eastern) for $6.9 million. In addition, the Company
entered into noncompete and consulting agreements that provide an aggregate
of $1.0 million in consideration to the former controlling stockholder of
Eastern. The transaction has been accounted for using the purchase method
of accounting.
On May 30, 1996, the Company acquired Peltor Holding AB (Peltor) for
approximately $86.0 million, subject to final closing adjustments, as
defined. The transaction was accounted for using the purchase method of
accounting. In connection with the acquisition of Peltor, the
Company borrowed an additional $86.0 million under the Senior Bank
Facilities, as amended.
Unaudited pro forma operating results of the Company for the nine months
ended June 30, 1996 as adjusted for the debt financing and estimated
effects of the Peltor and Eastern acquisitions as if they occurred on
October 1, 1995, are as follows (dollars in thousands):
Net Sales $207,576
Net Income $ 1,604
Loss Applicable to
Common Shareholders $ (3,011)
Net Loss per Share $ (30.11)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the consolidated
Financial Statements and Notes thereto appearing elsewhere in this report.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
Net Sales. Net sales in the three months ended June 30, 1996 increased 19.4% to
$64.6 million from $54.1 million in the three months ended June 30, 1995. The
increase in net sales was due to increased sales by both Safety Products and
Specialty Composites. Safety Products' net sales in the three months ended June
30, 1996 increased 22.1% to $55.2 million from $45.2 million in the three months
ended June 30, 1995. This increase was primarily the result of the acquisition
of Eastern and Peltor which contributed $3.8 million and $3.9 million,
respectively, in revenues and increased pricing and volume of Eye & Face
products. Specialty Composites' net sales in the three months ended June 30,
1996 increased 4.9% to $9.4 million from $8.9 million in the three months ended
June 30, 1995. This increase was primarily the result of increased demand for
the Company's products by precision equipment manufacturers which was partially
offset by decreased demand from transportation manufacturers.
Gross Profit. Gross profit in the three months ended June 30, 1996 increased
22.3% to $29.1 million from $23.8 million in the three months ended June 30,
1995. This increase was due to a combination of increased volumes and higher
prices which more than offset material cost increases which occurred in earlier
periods. Gross profit as a percentage of net sales in the three months ended
June 30, 1996 was 45.0% as compared to 43.9% in the three months ended June 30,
1995. Such percentage increased as the benefit of higher volumes and prices more
than offset the inclusion of Eastern's sales which are at lower margins and a
$0.5 million charge reflecting the allocation of the purchase price of Peltor to
inventory.
Selling and Administrative Expenses. Selling and administrative expenses in the
three months ended June 30, 1996 increased 31.4% to $19.4 million from $14.8
million in the three months ended June 30, 1995. This increase was the result of
increases in the Company's sales force which primarily occurred throughout
Fiscal 1995, higher incentive costs, and increases in administrative expenses
resulting from the Formation Acquisition and $0.8 million of costs associated
with the company's abandoned efforts at an initial public offering (IPO).
Selling and administrative expenses as a percentage of sales in the three months
ended June 30, 1996 increased to 30.0% of sales as compared to 27.3% of sales in
the three months ended June 30, 1995. This was primarily a result of the higher
incentive and administrative costs including the abandoned IPO.
Research and Technical Service Expenses. Research and technical service expenses
in the three months ended June 30, 1996 were essentially flat at $0.6 million.
While the Company has increased its product development efforts, this has been
partially funded by decreased work on process and production engineering.
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Operating Income. Primarily as a result of the factors discussed above,
operating income in the three months ended June 30, 1996 increased 15.2% to $7.2
million from $6.3 million in the three months ended June 30, 1995.
Interest Expenses, Net. Interest expense, net, is not comparable with prior
periods as a result of the financing related to the Formation Acquisition.
Interest expense for the successor company for the three months ended June 30,
1996 was $5.1 million, reflecting the increased levels of debt.
Net Income. The significant improvement in operating results was more than
offset by higher interest expense resulting in net income for the three months
ended June 30, 1996 decreasing 68.1% to $0.8 million from $2.5 million in the
three months ended June 30, 1995.
NINE MONTHS ENDED JUNE 30, 1996 COMPARED TO NINE MONTHS ENDED JUNE 30, 1995
Net Sales. Net sales in the nine months ended June 30, 1996 increased 16.8% to
$177.3 million from $151.8 million in the nine months ended June 30, 1995. The
increase in net sales was due to increased sales by both Safety Products and
Specialty Composites. Safety Products' net sales in the nine months ended June
30, 1996 increased 15.9% to $147.3 million from $127.1 million in the nine
months ended June 30, 1995. This increase was primarily the result of (i) the
acquisitions of Eastern and Peltor which contributed $11.0 million in revenue,
(ii) an increase in hearing product sales due to the continued success of the
Company's Express product and better pricing, and (iii) increased pricing and
volume of Eye & Face products. Growth at Safety Products was also aided by
continued growth in sales to the Far East and Latin America. Specialty
Composites' net sales in the nine months ended June 30, 1996 increased 19.9% to
$30.0 million from $24.7 million in the nine months ended June 30, 1995. This
increase was partially the result of a $2.3 million shipment to a supplier of
Sea Wolf submarines as well as to increased demand for the Company's products by
precision equipment manufacturers and health care product manufacturers.
Gross Profits. Gross profits in the nine months ended June 30, 1996 increased
19.9% to $79.5 million from $66.2 million in the nine months ended June 30,
1995. This increase was due to a combination of increased volumes and higher
prices, which more than offset material cost increases that occurred in earlier
periods. Gross profit as a percentage of net sales in the nine months ended June
30, 1996 was 44.8% as compared to 43.7% in the nine months ended June 30, 1995.
Such percentage increased as the benefit of higher volumes and prices more than
offset the inclusion of Eastern's sales which are at lower margins and a $0.5
million charge reflecting the allocation of the purchase price of Peltor to
inventory.
Selling and Administrative Expenses. Selling and administrative expenses in the
nine months ended June 30, 1996 increased 22.8% to $52.8 million from $43.0
million in the nine months ended June 30, 1995. This increase was the result of
increases in the Company's sales force which primarily occurred throughout
Fiscal 1995, higher incentive costs, and increases in administrative expenses
resulting from the Formation Acquisition and $0.8 million of costs associated
with the company's abandoned efforts at an IPO. Selling and administrative
expenses as a percentage of sales in the nine months ended June 30, 1996
increased to 29.8% of sales as compared to 28.3% of sales in the nine months
ended June 30, 1995. This was primarily a result of the higher incentive and
administrative costs including the abandoned IPO.
Research and Technical Service Expenses. Research and technical service expenses
in the nine months ended June 30, 1996 were essentially flat at $2.2 million.
While the Company has increased the product development effort towards new
products, this has been partially funded by decreased work on process and
production engineering.
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Amortization Expense. Amortization expense decreased by 20.2% to $3.4 million as
the increase in amortization resulting from the allocation of the purchase price
to intangibles was more than offset by the absence of amortization of a
non-compete with the former owner of the AOSafety[Registered Trademark]
Division due to its expiration in May, 1995.
Operating Income. Primarily as a result of the factors discussed above,
operating income in the nine months ended June 30, 1996 increased 27.8% to $20.7
million from $16.2 million in the nine months ended June 30, 1995.
Interest Expense, Net. Interest expense, net, is not comparable with prior
periods as a result of the financing related to the Formation Acquisition.
Interest expense for the successor company for the nine months ended June 30,
1996 was $14.2 million, reflecting the increased levels of debt.
Net Income. The significant improvement in operating results was more than
offset by higher interest expense resulting in net income for the nine months
ended June 30, 1996 decreasing 49.8% to $3.3 million from $6.5 million in the
nine months ended June 30, 1995.
EFFECTS OF CHANGES IN EXCHANGE RATES
In general, the Company's results of operations are affected by changes in
exchange rates. Subject to market conditions, the Company prices its products
in Europe and in Canada in local currency. While many of the Company's selling
and distribution costs are also denominated in these currencies, a large
portion of the product costs are dollar denominated. As a result, a decline in
the value of the dollar relative to these other currencies can have a favorable
effect on the profitability of the Company and an increase in the value of the
dollar relative to these other currencies can have a negative effect on the
profitability of the Company. In the nine months ended June 30, 1996, the
dollar strengthened in value relative to most other currencies. The Company
estimates that these changes had the effect of decreasing operating profit by
$0.4 million in the three months ended June 30, 1996 compared to the three
months ended June 30, 1995 and decreasing operating profit by $0.2 million in
the nine months ended June 30, 1996 compared to the nine months ended
June 30, 1995.
EFFECTS OF INFLATION
In recent years, inflation has been modest and has not had a material impact
upon the results of the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted primarily of operating cash flow
and debt financing. The Company's uses of those funds consist principally of
debt service and capital expenditures.
The required amortization payments under the Senior Bank Facilities are: $2.0
million for the balance of fiscal 1996, $8.2 million in fiscal 1997, $10.6
million in fiscal 1998, $13.0 million in fiscal 1999, and $16.0 million in
fiscal 2000, $20.7 million in fiscal 2001, $34.4 in fiscal 2002 and $35.3
million in fiscal 2003. Other than upon a change of control or as a result of
certain asset sales, or in the event that certain excess funds exist at the end
of a fiscal year, the Company will not be required to make any principal
payments in respect of the Notes until maturity. The Company will also be
required to make interest payments with respect to both the Senior Bank
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Facilities and the Notes. The Company typically makes capital expenditures
related primarily to the maintenance and improvement of manufacturing
facilities. The Company spent $13.2 million for the year ended September 30,
1995 and $6.5 million for the nine months ended June 30, 1996 as compared to
$4.5 million for the year ended September 30, 1994 and $9.4 million for the nine
months ended June 30, 1995. Included in capital expenditures for the year ended
September 30, 1995 and the nine months ended June 30, 1996 are $3.6 and $1.4
million, respectively, spent on the casting line under construction at the
Company's Newark, Delaware facility and $4.1 million and $2.4 million,
respectively, spent on management information systems. In fiscal 1992 and 1993,
capital expenditures were $5.1 million and $9.0 million, respectively.
The Company's capital spending is of a relatively short duration, with the
complete commitment process involving less than one year. Exceptions to this
circumstance are the Company's casting line at its Newark, Delaware facility,
with respect to which an additional $0.2 million is scheduled to be spent during
the balance of the Company's 1996 fiscal year, and the worldwide information
system to which an additional $0.2 million to $0.3 million is anticipated to be
spent during the same period. The Company does not have any other material
commitments for capital expenditures.
The Company's principal source of cash to fund these capital requirements are
net cash provided by operating activities. The Company's net cash provided by
operating activities for the year ended September 30, 1995 and the nine months
ended June 30, 1996 totaled $24.9 million and $11.7 million, respectively, as
compared to $17.9 million and $12.5 million, respectively, for the year ended
September 30, 1994 and for the nine months ended June 30, 1995. The increase
for fiscal 1995 was due to a reduction in inventories of $5.1 million (of which
$3.6 million was due to the purchase accounting effect), as compared to an
increase in inventory of $3.6 million in 1994. The decrease for the nine months
ended June 30, 1996 was primarily due to lower net income as a result of
increased interest expense. In fiscal 1992, 1993 and 1994, the Company's net
cash provided by operating activities totaled $22.6 million, $25.8 million, and
$17.9 million, respectively. The decrease in net cash provided by operating
activities in fiscal 1994 was primarily caused by a $4.1 million increase in
non-cash working capital in fiscal 1994, as compared to a $1.6 million decrease
in non-cash working capital in fiscal 1993.
Net cash used by investing activities for the nine months ended June 30, 1996
was $93.7 million, as compared to $9.4 million for the nine months ended June
30, 1995, principally due to the acquisitions of Eastern and Peltor. For the
year ended September 30, 1995, net cash used by investing activities (excluding
the Formation Acquisition) was $16.2 million as compared to $4.5 million for the
year ended September 30, 1994. The increase was due to significantly higher
levels of capital spending including amounts related to the new casting line at
the Newark, Delaware facility, the installation of a new worldwide information
system and an escrow deposit for the acquisition of Eastern. In fiscal 1992 and
1993, net cash used by investing activities was $5.0 million and $8.9 million,
respectively. Spending was higher during fiscal 1993 principally due to the
consolidation of the Company's prescription eyewear facilities from four
locations into two locations.
Net cash provided by financing activities for the nine months ended June 30,
1996 was $87.4 million as compared to net cash used for financing activities of
$3.4 million for the nine months ended June 30, 1995. This change was primarily
due to the requirement for financing the acquisitions of Eastern and Peltor. For
the year ended September 30, 1995 the primary activity was the financing of the
cash portion of the Formation Acquisition. The Formation Acquisition was
financed by the issuance of common and preferred stock totaling $32.5 million,
the issuance of subordinated notes totaling $100.0 million, borrowing of $45.0
million in term loans, as well as borrowings of $3.1 million under the Senior
Bank Facilities. These financings totaled $180.6 million and were used to
finance the cash paid for Cabot Safety Corporation of $169.2 million as well as
financing costs of $11.4 million. Excluding these amounts, net cash used by
financing activities would have been $4.6 million for the year ended September
30, 1995 as compared to $13.6 million for the year ended September 30, 1994.
This decrease was due to the increase in net cash used by investing activities.
In fiscal 1992 and 1993, net cash used by financing activities was $25.2 million
and $15.8 million, respectively. The decrease of cash used by financing
activities in 1993 was due to higher levels of capital spending.
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The Company has a substantial amount of indebtedness. The Company relies on
internally generated funds and, to the extent necessary, on borrowings under
the revolving credit facility available under the Senior Bank Facilities, which
provides for borrowings up to $25.0 million, subject to certain customary
drawing conditions, to meet its liquidity needs. In January, 1996, the Company
borrowed $6.8 million under the Senior Bank Facilities to finance in part the
$7.8 million Eastern acquisition purchase price. In May 1996, the Company
amended the Senior Bank Facilities to provide an additional $86.0 million of
term loans to finance the Peltor acquisition. Upon completion of this
acquisition, the entire amount of the $25.0 million revolving credit facility
was unused and remains available for short term liquidity requirements. While
over the next several months, the Company's operations may be negatively
impacted by the continued conversion to a new worldwide information system and
the integration of Peltor, the short term outlook for operations remains
moderately positive. 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 profitability, and therefore cash flow, will be maintained in the
future. While softness in certain European economies may impede the Company's
growth in those markets, the outlook for most other operations remains positive
and liquidity appears to be adequate over the next several years. Levels of
sales and profitability will be impacted by continued new product development,
worldwide economic conditions, and competitive pressures. In addition, the
Company may make other acquisitions in the future and would rely on internally
generated funds and, to the extent necessary, on borrowings under such
revolving credit facility or from other sources to finance such acquisitions.
The Company's ability to borrow is limited by covenants in the Senior Bank
Facilities and the Notes.
The terms of the Senior Credit Facilities generally prohibit the Company from
declaring or paying dividends, and from making loans or advances, to its parent
company, except for de minimis funds, which the Company may pay to its parent
company to cover taxes and expenses incurred by its parent company in the
ordinary course of business. The Company is similarly restricted under the terms
of the Notes.
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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 Old CSC's acquisition of the AOSafety [Registered
Trademark] Division in April 1990. The Company is contingently liable with
respect to numerous lawsuits involving respirators manufactured by American
Optical Corporation prior to the acquisition of the AOSafety [Registered
Trademark] 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 prior to the Acquisition closing
date, pursuant to which the Company is indemnified by Old CSC in respect of
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
Special Meeting of the Stockholders of the Company, held May 29, 1996,
for the purpose of changing the name of the Company to Aearo Corporation.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Report on Form 8-K, dated May 7, 1996, regarding intent to acquire
Peltor Holding AB.
Report on Form 8-K, dated June 12, 1996, regarding (i) closing of
Peltor Holding AB acquisition; (ii) election of new director; (iii) change of
Company name; (iv) amended and restated Credit Agreement; and (v) filing of
Registration Statement with respect to proposed Initial Public Offering (since
canceled).
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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: August 14, 1996 AEARO CORPORATION
/s/ Bryan J. Carey
------------------------------------------
Bryan J. Carey
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
/s/ Bryan J. Carey
Date: August 14, 1996 ------------------------------------------
Bryan J. Carey
Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Accounting Officer)
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