UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-116676
AEARO COMPANY I
(Exact name of registrant as specified in its charter)
Delaware 13-3840356
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5457 West 79th Street 46268
Indianapolis, Indiana (Zip Code)
(Address of principal executive offices)
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
The number of shares of the registrant's common stock, par value $.01
per share, outstanding as of May 9, 2005 was 100.
Explanatory Note
We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2005 for the purpose of amending and restating
Item 1 of Part I, containing our unaudited condensed consolidated financial
statements and related notes as of March 31, 2005 and for the three and six
months ended March 31, 2005. The restatement relates to the correction of four
errors of the final purchase accounting adjustments to deferred income taxes and
to the valuation allowance on deferred tax assets. Our revenue, cash provided by
operating activities and operating income were not affected by the restatement.
First, an entry was recorded based on an analysis that contained a mathematical
error. The correction for the mathematical error is a reduction of goodwill and
deferred tax liabilities by $1.8 million. Second, deferred tax assets were
recorded during the quarter based on estimates of the taxable loss for fiscal
year 2004 rather than actual information. Once the 2004 pre and post merger
short period tax returns were filed, the deferred tax assets required a
correction to reflect actual net operating losses. The correction for the
pre-merger 2004 net operating loss of $2.0 million is recorded as a reduction to
goodwill and a corresponding reduction to deferred tax liability and the
correction for the post-merger 2004 net operating loss of $2.7 million is
recorded as an income tax benefit and a corresponding reduction of deferred tax
liability. Third, a deferred tax asset of $2.6 million related to carryover tax
basis in goodwill was recognized as the Company finalized the purchase
accounting treatment of the merger. Under Statement of Accounting Standards No.
109, Accounting for Income Taxes, no deferred taxes should have been recognized.
As such, goodwill and deferred tax liabilities have each been increased by $2.6
million. Fourth, during the quarter ended March 31, 2005, the $7.5 million
valuation allowance on deferred tax assets was reversed as an income tax
benefit. The amount should have been recorded as a reduction to goodwill because
it was a preacquisition contingency, as such, the Company recorded a reduction
to goodwill of $7.5 million and a corresponding increase to income tax expense.
The net effect of these items on the balance sheet was a reduction of goodwill
of $8.8 million, a reduction of deferred income tax liability of $3.9 million
and a reduction in accumulated deficit of $4.9 million. These items are further
discussed in Note 12 to the restated condensed consolidated financial statements
included herein.
We have also updated Item 2 of Part I, Management's Discussion and Analysis of
Financial Condition and Results of Operations, to give effect to the
restatement, and Item 4 of Part I, Controls and Procedures. In addition, we have
amended Item 6 of Part II to reflect the filing of updated certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and we have filed certifications pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
Other than the changes for the effects of the restatement, no other information
in this Amendment No. 1 has been updated to reflect any subsequent information
of events since the original filing of this Form 10-Q on May 9, 2005. For the
convenience of the reader, the Quarterly Report has been restated in its
entirety.
2
AEARO COMPANY I
TABLE OF CONTENTS
Form 10-Q for the Quarterly Period Ended March 31, 2005
PART I-FINANCIAL INFORMATION.......................................................................................4
Item 1. Financial Statements (Restated)............................................................................4
Condensed Consolidated Balance Sheets - Assets.....................................................................4
Condensed Consolidated Balance Sheets - Liabilities and Stockholder's Equity.......................................5
Condensed Consolidated Statements of Operations....................................................................6
Condensed Consolidated Statement of Stockholder's Equity...........................................................7
Condensed Consolidated Statements of Cash Flows....................................................................8
Notes to Condensed Consolidated Financial Statements...............................................................9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................................27
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................38
Item 4. Controls and Procedures...................................................................................40
PART II - OTHER INFORMATION.......................................................................................41
Item 6. Exhibits and Reports on Form 8-K..........................................................................41
SIGNATURES........................................................................................................42
EXHIBIT INDEX.....................................................................................................43
3
Part I-Financial Information
ITEM 1. FINANCIAL STATEMENTS
AEARO COMPANY I AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - ASSETS
(In Thousands)
(Unaudited)
MARCH 31,
2005
(AS RESTATED, SEPTEMBER 30,
SEE NOTE 12) 2004
----------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $ 40,947 $ 27,724
Accounts receivable (net of allowance for doubtful accounts of
$1,439 and $1,358, respectively) 56,497 54,159
Inventories 40,913 40,849
Deferred and prepaid expenses 6,603 4,146
------------ ----------
Total current assets 144,960 126,878
------------ ----------
LONG TERM ASSETS:
Property, plant and equipment, net 53,213 54,750
Goodwill, net 111,927 133,745
Other intangible assets, net 183,321 185,855
Other assets 15,235 15,144
------------ ----------
Total assets $ 508,656 $ 516,372
============ ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements
4
AEARO COMPANY I AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDER'S EQUITY
(In Thousands, Except for Per Share and Share Amounts)
(Unaudited)
MARCH 31, SEPTEMBER 30,
2005 2004
(AS RESTATED,
SEE NOTE 12)
--------------- ---------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,656 $ 1,639
Accounts payable and accrued liabilities 47,612 46,730
Accrued interest 6,679 6,996
Accrued income taxes 2,179 1,648
--------- ---------
Total current liabilities 58,126 57,013
--------- ---------
LONG TERM LIABILITIES:
Long-term debt 304,044 302,842
Deferred income taxes 36,179 59,699
Other liabilities 14,794 14,726
--------- ---------
Total liabilities 413,143 434,280
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value-
Authorized--100 shares
Issued and outstanding--100 shares -- --
Additional paid in capital 101,630 101,610
Accumulated deficit (7,186) (19,415)
Accumulated other comprehensive income (loss) 1,069 (103)
--------- ---------
Total stockholder's equity 95,513 82,092
--------- ---------
Total liabilities and stockholder's equity $ 508,656 $ 516,372
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements
5
AEARO COMPANY I AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------ ------------------------------
2005 2004 2005 2004
------------- ----------- ------------ -----------
SUCCESSOR SUCCESSOR
AS RESTATED, (AS RESTATED,
(SEE NOTE 12) PREDECESSOR SEE NOTE 12) PREDECESSOR
------------- ----------- ------------ -----------
Net sales $ 104,478 $ 90,378 $ 200,239 $ 169,579
Cost of sales 52,928 47,280 101,633 89,056
--------- --------- --------- ---------
Gross profit 51,550 43,098 98,606 80,523
Selling and administrative 32,680 29,364 64,411 56,835
Research and technical services 2,211 1,883 4,431 3,623
Amortization 1,297 134 2,615 242
Other (income) charges, net 380 535 312 (506)
Restructuring -- (1,091) -- (1,091)
--------- --------- --------- ---------
Operating income 14,982 12,273 26,837 21,420
Interest expense, net 5,688 5,370 10,929 10,836
--------- --------- --------- ---------
Income before provision for income
taxes 9,294 6,903 15,908 10,584
Provision for income taxes 2,083 1,229 3,679 2,020
--------- --------- --------- ---------
Net income $ 7,211 $ 5,674 $ 12,229 $ 8,564
--------- --------- --------- ---------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
The accompanying notes are an integral part of these condensed
consolidated financial statements
6
AEARO COMPANY I AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(In Thousands, Except Share Amounts)
(Unaudited)
Accumulated
Additional Retained Other
Paid Earnings/ Comprehensive Comprehensive
Common In (Accumulated Income Income
PREDECESSOR Shares Amount Capital Deficit) (Loss) Total (Loss)
- ----------- ------- -------- ---------- ----------- ------------- --------- -------------
Balance, October 1, 2003 100 $ - $ 32,531 $ 7,713 $ (6,786) $ 33,458
Net income - - - 8,564 - 8,564 $ 8,564
Foreign currency translation
adjustment 1,688 1,688 1,688
Net minimum pension liability
adjustment 4 4 4
--------
Comprehensive income $ 10,256
========
------ ------ -------- -------- -------- --------
Balance, March 31, 2004 100 $ - $ 32,531 $ 16,277 $ (5,094) $ 43,714
====== ====== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------
SUCCESSOR
---------
Capital contribution 100 $ - $101,610 $ - $ $101,610
Net loss - - - (5,110) - (5,110) $ (5,110)
Foreign currency translation
adjustment - - - - (103) (103) (103)
Dividend to parent for
repayment of debt (14,305) - (14,305) -
--------
Comprehensive loss - - - - - $ (5,213)
------ ------ -------- -------- -------- -------- ========
Balance, September 30, 2004 100 101,610 (19,415) (103) 82,092
------ ------ -------- -------- -------- --------
Net income, as restated, see
note 12 - - - 12,229 - 12,229 $ 12,229
Foreign currency translation
adjustment - - - - 1,172 1,172 1,172
Vesting of restricted stock - - 20 - 20 -
--------
Comprehensive income, as
restated, see note 12 - - - - - - $ 13,401
------ ------ -------- -------- -------- -------- ========
Balance, March 31, 2005, as
restated, see note 12 100 $ - $101,630 $ (7,186) $ 1,069 $ 95,513
====== ====== ======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements
7
AEARO COMPANY I AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
FOR THE SIX MONTHS ENDED
MARCH 31,
--------------------------------
2005 2004
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: SUCCESSOR
(AS RESTATED,
SEE NOTE 12) PREDECESSOR
------------ -----------
Net income $ 12,229 $ 8,564
Adjustments to reconcile net income to cash provided by operating
activities-
Depreciation 5,006 5,931
Amortization of intangible assets 2,615 2,283
Amortization of deferred financing costs 721 (15)
Deferred income taxes 824 --
Stock based compensation 20
Restructuring -- (1,091)
Loss on disposal of assets 61 682
Changes in assets and liabilities-
Accounts receivable (1,556) (1,113)
Inventories 326 (3,464)
Income taxes payable 430 (1,453)
Interest payable (317) 270
Accounts payable and accrued liabilities (2,118) (3,491)
Prepaid expenses and other assets (764) 633
Other liabilities (91) 1,299
------------- ------------
Net cash provided by operating activities 17,386 9,035
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,189) (5,006)
Proceeds provided by disposals of property, plant and equipment 23 12
------------ ------------
Net cash used for investing activities (3,166) (4,994)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility, net -- 3,950
Repayment of term loans (647) (8,949)
Repayment of capital lease obligations (132) (122)
Repayment of long-term debt (248) (119)
------------- -------------
Net cash used for financing activities (1,027) (5,240)
------------- -------------
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS 30 (789)
------------ -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 13,223 (1,988)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 27,724 7,301
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 40,947 $ 5,313
============ ============
CASH PAID FOR:
Interest $ 10,969 $ 8,862
============ ============
Income taxes $ 2,718 $ 3,254
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements
8
AEARO COMPANY I AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Aearo Company I (the "Company")
contain all normal, recurring adjustments necessary to present fairly, in
accordance with accounting principles generally accepted in the United
States of America, the financial position, results of operations and cash
flows for the interim periods presented. 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 10-K.
2) COMPANY BACKGROUND, MERGER AND BASIS OF PRESENTATION
The Company manufactures and sells products under the brand names
AOSafety(R), E-A-R(R), Peltor(R) and SafeWaze(TM). These products are sold
through three reportable segments, which are Safety Products, Safety
Prescription Eyewear and Specialty Composites.
On March 10, 2004, Aearo Corporation ("Parent"), the Company's parent,
entered into a merger agreement ("Merger Agreement") with AC Safety Holding
Corp. and its subsidiary, AC Safety Acquisition Corp. that closed on April
7, 2004 (the "Merger"). Pursuant to the terms of the Merger Agreement, on
April 7, 2004 ("Acquisition Date"), AC Safety Acquisition Corp. merged with
and into Aearo Corporation with Aearo Corporation surviving the Merger as a
wholly-owned subsidiary of AC Safety Holding Corp. The aggregate purchase
price was approximately $409.3 million, including fees and expenses. The
Merger was financed with approximately $303.7 million of debt as discussed
in Note 6, $3.7 million of which was assumed, $4.3 million of cash and
$101.3 million of equity. The Company continues to be wholly-owned by Aearo
Corporation after the Merger. The purpose of the Merger was to effect a
change of control from Aearo Corporation to the Company's ultimate parent
AC Safety Holding Corp.
Approximately $87.0 million of proceeds from the Merger was distributed to
Parent and used to pay the shareholders of the Parent to effect the merger
transaction. An additional $14.3 million distributed to Parent was used to
pay the outstanding debt of the Parent as of April 7, 2004.
The Merger was a business combination under Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and the
purchase price paid for Parent reflects the push down of 100% of the
purchase price resulting from the Merger. Accordingly, the results of
operations subsequent to the Acquisition Date are presented on a different
basis of accounting than the results of operations prior to the Acquisition
Date, and, therefore are not directly comparable. The sale was accounted
for as if it had occurred on March 31, 2004, as management determined that
results of operations were not significant and no material transactions
occurred during the period from April 1, 2004 to April 7, 2004. The periods
prior to April 7, 2004, are referred to as predecessor financial statements
and the periods after April 7, 2004, are referred to as successor financial
statements.
The purchase price is allocated to the Company's tangible and intangible
assets and liabilities based upon estimated fair values as of the date of
the Merger. The adjustment made to deferred tax liabilities and goodwill
during the six months ended March 31, 2005, reflect the adjustment of the
purchase price allocation to identifiable intangible assets and the related
deferred tax liabilities for differences between book and tax basis of
those assets as a result of finalizing the tax basis of certain assets. The
purchase price has been allocated as follows (dollars in thousands):
9
Working capital $ 82,247
Fixed assets 55,139
Other assets and liabilities 16,073
Deferred tax liabilities (41,384)
Finite lived intangible assets 74,104
Indefinite lived intangible assets 114,300
Goodwill 108,865
---------
Purchase price $ 409,344
=========
Of the goodwill resulting from the Merger, $6.8 million is deductible for
tax purposes as a result of carryover tax basis and the remaining amount is
not deductible for income tax purposes.
3) SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates. The preparation of the condensed consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America 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.
Revenue Recognition and Allowance for Doubtful Accounts. The Company
recognizes revenue when title and risk transfer to the customer, which is
generally when the product is shipped to customers. At the time revenue is
recognized, certain provisions may also be recorded including pricing
discounts and incentives. The Company offers its customers three types of
incentive programs: a sales rebate/volume discount program, a marketing
incentive program and a co-operative advertising program. The sales
rebate/volume discount program is based on achieved volume levels along
with growth incentives over the prior year's sales dollars. Rebate
obligations are estimated based on current sales levels and are recorded as
a reduction of revenue when sales to the customer make progress towards the
required sales level. The marketing incentive program provides qualifying
customers with funds to assist the customers with marketing the Company's
products. The funds provided to the qualifying customers are recorded as a
reduction of revenue when sales to the customer make progress towards the
required sales level. The co-operative advertising program provides funds
to specific customers to advertise the Company's products. The qualifying
customers provide specific documentation of the advertising to the Company
to assure that the benefit received is comparable to other arms length
advertising expenditures undertaken by the Company. The amount of
co-operative advertising charged to selling and administrative expenses for
the three months ended March 31, 2005 and 2004 were $0.6 million and $0.5
million, respectively. The amount of co-operative advertising charged to
selling and administrative expenses for the six months ended March 31, 2005
and 2004 were $1.1 million and $0.9 million, respectively.
An allowance for doubtful accounts is generally recorded based on a
percentage of aged receivables. However, management judgment is involved
with the final determination of the allowance based on several factors
including specific analysis of a customer's credit worthiness, historical
bad debt experience, changes in payment history and general economic and
market trends.
10
Foreign Currency Translation. Assets and liabilities of the Company's
foreign subsidiaries are translated at period-end exchange rates. Income
and expenses are translated at the approximate average exchange rate during
the period. Foreign currency translation adjustments are recorded as a
separate component of stockholder's equity.
Foreign Currency Transactions. Foreign currency gains and losses arising
from transactions by any of the Company's subsidiaries are reflected in net
income.
Cost of Goods Sold. Cost of goods sold includes all costs to manufacture
the Company's products including raw materials, which include inbound
freight and import duties, direct labor, plant supervision, maintenance
labor and parts, quality control, receiving, purchasing, production
planning, manufacturing supplies, scrap, rework, utilities, depreciation,
property taxes, sales and use taxes and insurance.
Selling and Administrative Expenses. Selling and administrative expenses
include salaries and benefits for selling, marketing, customer service,
finance and human resources personnel, direct marketing expenses, trade
show expenses, commissions, selling expenses, bad debts, advertising,
travel and entertainment, office supplies, recruiting, relocation, legal
expenses, accounting fees, consulting and warehousing and logistics
expenses incurred after the point of manufacture.
Income Taxes. Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using currently enacted tax rates. The Company is included in
the consolidated tax return filed by AC Safety Holding Corp. All taxes are
recorded as if separate, stand alone returns were filed.
Goodwill and Other Intangibles. Under the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill and intangible assets that
have indefinite useful lives are not amortized but are tested at least
annually for impairment. Intangible assets that have finite useful lives
are amortized over their useful lives and reviewed for impairment at each
reporting date. The following presents a summary of intangibles assets as
of September 30, 2004 and March 31, 2005 (dollars in thousands):
GROSS ACCUMULATED
SEPTEMBER 30, 2004 AMOUNT AMORTIZATION ADDITIONS CARRYING AMOUNT
------------------ ------ ------------ --------- ---------------
Trademarks $ 114,300 $ -- $ -- $ 114,300
Customer Relationship List 73,000 (2,433) -- 70,567
Patents 719 (122) 82 679
Other 385 (76) -- 309
------------ ---------------- ---------- -----------
Total Intangibles $ 188,404 $ (2,631) $ 82 $ 185,855
============ ================ ========== ===========
11
GROSS ACCUMULATED
MARCH 31, 2005 AMOUNT AMORTIZATION ADDITIONS CARRYING AMOUNT
--------------- ------ ------------ --------- ---------------
Trademarks $ 114,300 $ -- $ -- $ 114,300
Customer Relationship List 73,000 (4,867) -- 68,133
Patents 842 (245) 41 638
Other 385 (135) -- 250
------------ ---------------- ---------- -----------
Total Intangibles $ 188,527 $ (5,247) $ 41 $ 183,321
============ ================ ========== ===========
ESTIMATE OF AGGREGATE AMORTIZATION EXPENSE:
Year ending September 30, 2005 $ 5,230
Year ending September 30, 2006 5,225
Year ending September 30, 2007 5,114
Year ending September 30, 2008 4,904
Year ending September 30, 2009 4,913
The following presents the allocation of goodwill resulting from the Merger
and the changes in the carrying amount of goodwill for the six months ended
March 31, 2005 (dollars in thousands):
SIX MONTHS
ENDED
MARCH 31,
2005
------------
Beginning balance $ 133,745
Allocation adjustment (16,733)
Reversal of valuation allowance (7,549)
Translation adjustment 2,464
-----------
Ending balance $ 111,927
-==========
The allocation adjustment in the six months ended March 31, 2005, reflects
the adjustment of the purchase price allocation to identifiable intangible
assets and the related deferred tax liabilities for differences between
book and tax basis of those assets as a result of finalizing the tax bases
of certain assets.
Stock-based Compensation. The Company accounts for stock-based compensation
under the recognition and measurement principles of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, no compensation expense for stock options has been recognized
as all options granted had an exercise price equal to or above the price of
the underlying common stock on the grant date. The Company recognizes
compensation expense related to restricted stock awards and amortizes the
expense over the vesting period based on the estimated fair value of the
stock at the date of grant.
12
The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure," to stock-based
employee compensation (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
---- ---- ---- ----
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
Net income as reported $ 7,211 $ 5,674 $ 12,229 $ 8,564
Stock based compensation expense recorded
under APB No. 25, net of tax -- -- -- --
Stock-based compensation expense
determined under the fair value method,
net of tax (20) (34) (51) (67)
-------- ----------- ---------- -----------
Proforma net income $ 7,191 $ 5,640 $ 12,178 $ 8,497
======== =========== ========== ===========
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" requires
that every derivative instrument be recorded in the balance sheet as either
an asset or a liability measured at its fair value.
The Company has formally documented its hedging relationships, including
identification of the hedging instruments and the hedge items, as well as
its risk management objectives and strategies for undertaking each hedge
transaction. From time to time the Company enters into foreign currency
exchange contracts and interest rate swap agreements, which are derivatives
as defined by SFAS No. 133. The Company enters into forward foreign
currency contracts to mitigate the effects of changes in foreign currency
rates on profitability and enters into interest rate swap agreements to
hedge its variable interest rate risk. These derivatives are cash flow
hedges. For all qualifying and highly effective cash flow hedges, the
changes in the fair value of the derivatives are recorded in other
comprehensive income. Amounts accumulated in other comprehensive income
will be reclassified as earnings when the related product sales affect
earnings for forward foreign currency contracts or when related interest
payments affect earnings for interest rate swaps. At March 31, 2005, the
Company had no forward foreign currency contracts or interest rate
derivatives as defined under SFAS No. 133. For the three and six month
periods ended March 31, 2004, the Company reclassified into earnings net
losses of $0.4 million and $0.5 million, respectively resulting from the
exercise of forward foreign currency contracts. All forward foreign
currency contracts were determined to be highly effective whereby no
ineffectiveness was recorded in earnings.
The Company had approximately $30.5 million of variable rate debt protected
under an interest rate cap arrangement, which expired December 31, 2004.
The Company did not elect hedge accounting treatment for the interest rate
cap as defined under SFAS No. 133, and, as a result, any fair value
adjustment was charged directly to other charges (income), net. There was a
$0.1 million impact on earnings for the six month period ended March 31,
2004.
The Company also executes forward foreign currency contracts for up to 30
day terms to protect against the adverse effects that exchange rate
fluctuations may have on the foreign-currency-denominated trade activities
(receivables, payables and cash) of foreign subsidiaries. These contracts
have not been designated as hedges under SFAS No. 133, and accordingly, the
gains and losses on the derivatives are recorded as transaction adjustments
in current earnings. The impact on earnings was a loss of approximately
$0.1 million and $0.2 million for the three and six months period ending
March 31, 2005, respectively, compared to net loss of $0.2 million and $0.4
million, respectively for the three and six months ended, March 31, 2004,
respectively.
13
The Company's Senior Subordinated Notes contain an embedded call option
that requires bifurcation because it was determined to not be clearly and
closely related to the debt host contract. As a result of the valuation of
the embedded call option, the Company has recorded a derivative asset of
approximately $2.0 million and a corresponding liability as of September
30, 2004. The derivative asset will be marked to market each quarter with a
corresponding (gain) or loss to the statement of operations. The
corresponding liability is amortized using the effective interest method
over the term of the senior subordinated notes. For the three and six month
period ended March 31, 2005, the mark to market revaluation of the embedded
call option was a loss of approximately $0.1 million in other (income)
charges, net. The resulting amortization of the corresponding liability
resulted in a reduction in interest expense of approximately $0.2 million
for the six months ended March 31, 2005.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB enacted SFAS No. 123R, "Share-Based Payment"
("SFAS No. 123R") which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123R requires the
measurement of all employee share-based payments to employees, including
grants of employee stock options, using a fair-value-based method and the
recording of such expense in our results of operations. The accounting
provisions of SFAS No. 123R will be adopted by the Company on October 1,
2005. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. The
Company is in the process of evaluating the impact of SFAS 123R on its
financial position and results of operations.
4) OTHER COMPREHENSIVE INCOME
The following table presents the reclassification amounts related to
unrealized holding gains and losses presented in the statement of
stockholder's equity for the three and six month periods ended March 31,
2005 and 2004, respectively (dollars in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
---- ---- ---- ----
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
Unrealized holding losses on derivatives
during the period $ -- $ (390) $ -- $ (522)
Less: reclassification adjustment for
gains (losses) included in the statement
of operations -- (390) (522)
-------- ------------ ---------- ------------
Total other comprehensive income $ -- $ -- $ -- $ --
======== =========== ========== ===========
14
5) INVENTORIES
Inventories consisted of the following (dollars in thousands):
MARCH 31, SEPTEMBER 30,
2005 2004
------------------- -------------------
Raw materials $ 10,105 $ 9,302
Work in process 9,130 12,087
Finished goods 21,678 19,460
------------------- -------------------
$ 40,913 $ 40,849
=================== ===================
Inventories, which include materials, labor and manufacturing overhead, are
stated at the lower of cost or market, cost being determined using the
first-in, first-out method.
6) DEBT
The Company's debt structure includes: (a) $175.0 million of 8.25% Senior
Subordinated Notes ("8.25% Notes") due 2012, which are publicly held and
redeemable at the option of the Company, in whole or in part at various
redemption prices, (b) up to an aggregate of $175.0 million under its
Credit Agreement with various banks comprised of (i) a secured term loan
facility consisting of loans providing for up to $125.0 million of term
loans (collectively the "Term Loans") with a portion of the Term Loans
denominated in Euros, (ii) a secured revolving credit facility ("Revolving
Credit Facility") providing for up to $50.0 million of revolving loans for
general corporate purposes, and (iii) an uncommitted incremental term loan
facility of up to $60.0 million for acquisitions (collectively, the "Senior
Bank Facilities"). Since the Acquisition Date, the Company's debt has been
negatively impacted by $3.9 million related to the fluctuation of the Euro
relative to the U.S dollar as of March 31, 2005. The Company does not plan
to take any measure to minimize the foreign exchange impact of its Euro
denominated debt. The amounts outstanding on the Term Loans and Revolving
Credit Facility at March 31, 2005, were approximately $127.6 and $0
million, respectively compared to $126.0 million and $0 million,
respectively at September 30, 2004. The Revolving Credit Facility provides
for the issuance of letters of credit in an aggregate face amount of up to
$15.0 million. The Company had approximately $1.4 million and $1.6 million
of letters of credit outstanding at September 30, 2004 and March 31, 2005,
respectively. The Term Loans amortize quarterly over a seven year period.
Amounts repaid or prepaid in respect of the Term Loans may not be
re-borrowed. Loans and letters of credit under the Revolving Credit
Facility will be available until the Revolving Loan Maturity Date, which is
April 7, 2010. The Term Loans mature on April 7, 2011. Effective December
31, 2004, the Company received a 0.25% reduction in the interest rate paid
on its Term Loans for meeting certain financial covenants. The Company was
in compliance with all financial covenants and restrictions as of March 31,
2005.
7) COMMITMENTS AND CONTINGENCIES
Lease Commitments. The Company leases certain transportation vehicles,
warehouse facilities, office space, and machinery and equipment under
cancelable and non-cancelable leases, most of which expire within 10 years
and may be renewed by the Company.
15
Contingencies. Various lawsuits and claims arise against the Company in the
ordinary course of its business. Most of these lawsuits and claims are
products liability matters that arise out of the use of safety eyewear and
respiratory product lines manufactured by the Company as well as products
purchased for resale.
The Company is a defendant in lawsuits by plaintiffs alleging that they
suffer from respiratory medical conditions, such as asbestosis or
silicosis, relating to exposure to asbestos and silica, and that such
conditions result, in part, from the use of respirators that, allegedly,
were negligently designed or manufactured. The defendants in these lawsuits
are often numerous, and include, in addition to manufacturers and
distributors of respirators, manufacturers, distributors and installers of
sand (used in sand blasting), asbestos and asbestos-containing products.
Many of these claims are covered by the Asset Transfer Agreement entered
into on June 13, 1995 by the Company and Aearo Corporation, on the one
hand, and Cabot Corporation and certain of its subsidiaries (the
"Sellers"), on the other hand (the "1995 Asset Transfer Agreement"). In the
1995 Asset Transfer Agreement, so long as Aearo Corporation makes an annual
payment of $400,000 to Cabot, the Sellers agreed to retain, and Cabot and
the Sellers agreed to defend and indemnify Aearo Corporation and its
subsidiaries against, any liability or obligation relating to or otherwise
arising under any proceeding or other claim against Aearo Corporation and
its subsidiaries or Cabot or their respective affiliates or other parties
with whom any Seller directly or indirectly has a contractual liability
sharing arrangement which sounds in product liability or related causes of
action arising out of actual or alleged respiratory medical conditions
caused or allegedly caused by the use of respirators or similar devices
sold by Sellers or their predecessors (including American Optical
Corporation and its predecessors) prior to July 11, 1995. To date, Aearo
Corporation has elected to pay the annual fee and intends to continue to do
so. In addition, under the terms of the Merger Agreement with AC Safety
Acquisition Corp., Aearo Corporation agreed to make the annual payment to
Cabot for a minimum of seven years from the Acquisition Date. Aearo
Corporation and its subsidiaries could potentially be liable for claims
currently retained by Sellers if Aearo Corporation elects to cease paying
the annual fee or if Cabot and the Sellers no longer are able to perform
their obligations under the 1995 Asset Transfer Agreement. Cabot
acknowledged in a stock purchase agreement that it and Aearo Corporation
entered into on June 27, 2003 (providing for the sale by Cabot to Aearo
Corporation of all of the common and preferred stock of Aearo Corporation
owned by Cabot) that the foregoing provisions of the 1995 Asset Transfer
Agreement remain in effect. The 1995 Asset Transfer Agreement does not
apply to claims relating to the business of Eastern Safety Equipment, the
stock of which the Company acquired in 1996.
In fiscal 2003 and 2004, Aearo settled 259 claims in which it was named as
a defendant for an average settlement amount of $24.36 in silica claims and
$83.24 in asbestos claims, while an additional 200 claims were dismissed
without any payment (43.6% of cases closed), because Aearo was not a proper
defendant or did not make the product in question. As of September 30,
2004, the number of open claims where Aearo was named as a defendant in
silica and asbestos related matters was 11,002 and 4,261, respectively. For
the six months ended March 31, 2005, the increases in number of claims
where Aearo was named as a defendant in silica and asbestos related matters
was 106 and 1,200 respectively. The 1,200 new asbestos claims include 1,148
claims that allege exposure from clothing, which the Company never
manufactured. No claims were settled where Aearo was named as a defendant
in silica and asbestos related matters during the six months ended March
31, 2005. As of March 31, 2005, the number of open claims where Aearo was
named as a defendant in silica and asbestos related matters was 11,108 and
5,461, respectively.
In addition to the above claims, Aearo may agree to pay a share of the
settlement and defense costs in particular cases even though the company is
not named as a defendant because of agreements with prior owners of the
brand and/or because of allegations that Aearo has some risk of legal
liability as a successor ("additional claims"). During the six months ended
March 31, 2005, Aearo paid a total of $1.67 million for settlement,
administrative and defense costs resulting in the settlement of 4,325
silica and asbestos claims that were settled between October 1, 2002 and
September 30, 2004 involving both claims in which Aearo was named as a
defendant and additional claims. During the period October 1, 2004 to March
31, 2005 Aearo paid a total of one hundred dollars for one additional claim
that was settled during that time period. In addition, Aearo may receive
the benefit of releases in some additional cases settled by the AO Defense
Group regardless of whether any claim was made against Aearo.
16
All data was provided by an outside law firm which tracks numbers of cases
and settlements on behalf of the "AO Defense Group" and is believed to be
materially accurate. The AO Defense Group is a voluntary association of
current and former manufacturers of the "AO Safety" brand of respirators
and certain of their insurers in which Aearo participates and through which
all of its settlements have been handled in the relevant years. Also,
between October 1, 2004 and March 31, 2005, there may have been claims
settled by and fully funded by the insurers of Eastern Safety Equipment
Co., Inc., a dissolved former subsidiary of Aearo.
At March 31, 2005 and September 30, 2004, the Company has recorded
liabilities of approximately $4.3 million and $5.4 million, respectively,
which represents reasonable estimates of its probable liabilities for
product liabilities substantially related to asbestos and silica-related
claims as determined by the Company in consultation with an independent
consultant. The $0.7 million reduction in the reserve, net of new accruals
which added to the reserve, since September 30, 2004 is primarily
attributed to the payment of $1.67 million, as referenced above, to pay
costs attributed to settlement, administrative and defense costs that had
been reached over a two year time period. This reserve is re-evaluated
periodically and additional charges or credits to results of operations may
result as additional information becomes available. Various factors
increase the difficulty in determining the Company's potential liability,
if any, in such claims, including the fact that the defendants in these
lawsuits are often numerous and the claims generally do not specify the
amount of damages sought. Additionally, the bankruptcy filings of other
companies with asbestos and silica-related litigation could increase the
Company's cost over time. In light of these and other uncertainties
inherent in making long-term projections, the Company has determined that
the five-year period through fiscal 2009 is the most reasonable time period
for projecting asbestos and silica-related claims and defense costs. It is
possible that the Company may incur liabilities in an amount in excess of
amounts currently reserved. However, taking into account currently
available information, historical experience, and the 1995 Asset Transfer
Agreement, but recognizing the inherent uncertainties in the projection of
any future events, it is management's opinion that these suits or claims
should not result in final judgments or settlements in excess of the
Company's reserve that, in the aggregate, would have a material effect on
the Company's financial condition, liquidity or results of operations.
8) SEGMENT REPORTING
The Company manufactures and sells products under the brand names
AOSafety(R), E-A-R(R), Peltor(R) and SafeWaze(TM). 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, communication headsets,
non-prescription safety eyewear, face shields, reusable and disposable
respirators, hard hats, fall protection 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 a wide array of energy-absorbing
materials that are incorporated into other manufacturers' products to
control noise, vibration and shock. The factors used for determining the
Company's reportable segments were predominantly based on the nature and
type of product sold.
17
NET SALES BY BUSINESS SEGMENT (DOLLARS IN THOUSANDS):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- --------------------------
2005 2004 2005 2004
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
Safety Products $ 78,612 $ 68,184 $ 149,765 $ 127,964
Safety Prescription Eyewear 10,239 10,873 19,213 20,337
Specialty Composites 15,627 11,321 31,261 21,278
------------ ----------- ------------ -----------
Total $ 104,478 $ 90,378 $ 200,239 $ 169,579
============ =========== ============ ===========
Inter-segment sales from the Specialty Composites segment to the Safety
Products segment totaled $1.0 million and $0.8 million for the three months
ended March 31, 2005 and 2004, respectively. Inter-segment sales from the
Specialty Composites segment to the Safety Products segment totaled $2.1
million and $1.5 million for the six months ended March 31, 2005 and 2004,
respectively. The inter-segment sales value is determined at fully absorbed
inventory cost at standard rates plus 25%. The Company does not have a
single customer in any of its three reportable segments that accounts for
more than 10% of segment revenues in any of the periods presented.
PROFIT (LOSS) BY BUSINESS SEGMENT AND RECONCILIATION TO INCOME BEFORE
INCOME TAXES (DOLLARS IN THOUSANDS):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2005 2004 2005 2004
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
Safety Products $ 15,634 $ 12,474 $ 27,848 $ 23,704
Safety Prescription Eyewear (16) 157 (341) (57)
Specialty Composites 3,090 1,687 6,951 2,855
------------ ------------- ------------ ------------
Segment profit 18,708 14,318 34,458 26,502
Depreciation 2,429 3,002 5,006 5,931
Amortization of intangibles 1,297 134 2,615 242
Restructuring -- (1,091) -- (1,091)
Interest 5,688 5,370 10,929 10,836
------------ ------------- ------------ ------------
Income before income taxes $ 9,294 $ 6,903 $ 15,908 $ 10,584
============ ============= ============ ============
18
Segment profit is defined as operating income (loss) before depreciation,
amortization, interest expense and income taxes and represents the measure
used by the chief operating decision maker to assess segment performance
and make decisions about the allocation of resources to business segments.
9) PENSION
The following table presents the components of net periodic pension cost
for the three and six month periods ended March 31, 2005 and 2004 (dollars
in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- --------------------------
2005 2004 2005 2004
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
Service cost $ 364 $ 335 $ 725 $ 670
Interest cost 206 186 412 371
Expected return on plan assets (184) (166) (368) (332)
Amortization of prior service cost -- 2 -- 5
------------ ----------- ------------ -----------
Total $ 386 $ 357 $ 769 $ 714
============ =========== ============ ===========
The Company previously disclosed in its Annual Report on Form 10-K for the
year ended September 30, 2004, that it expected to contribute $1.2 million
to its pension plan in 2005. As of March 31, 2005, the Company has not made
any contributions to its pension plan and plans to contribute the entire
$1.2 million in the fourth quarter of fiscal 2005.
10) SUBSEQUENT EVENTS
On April 28, 2005, the Company amended its credit agreement to allow the
Company to make, prior to September 30, 2005, up to $35 million of cash
distributions to Aearo Corporation, its parent corporation for the purpose
of paying cash dividends to AC Safety Holding Corp., its parent, to be used
by AC Safety Holding Corp. primarily to redeem, pro rata, its outstanding
preferred shares and to pay accrued dividends on the preferred shares.
On May 5, 2005, the Company's Board of Directors declared and paid a cash
dividend to the Company's parent, Aearo Corporation, the sole holder of
common stock, par value $.01 per share, of approximately $35 million. Aearo
Corporation will in turn pay a cash dividend to AC Safety Holding Corp.,
the Company's ultimate parent, who will use the proceeds to make a partial
redemption of its preferred stock, par value $.01 per share. The Company
will use available cash to fund the dividend.
19
11) SUMMARIZED FINANCIAL INFORMATION
The Company's 8.25% Senior Subordinated Notes due 2012 are fully and
unconditionally guaranteed, on a joint and several basis, by substantially
all of the Company's wholly-owned domestic subsidiaries ("Subsidiary
Guarantors"). The non-guarantor subsidiaries are the Company's foreign
subsidiaries.
The following financial information illustrates the composition of the
combined Subsidiary Guarantors. The Company believes that the separate,
complete financial statements of the respective guarantors would not
provide additional material information which would be useful in assessing
the financial composition of the Subsidiary Guarantors (dollars in
thousands).
CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
SIX MONTHS ENDED MARCH 31, 2005
(AS RESTATED, SEE NOTE 12)
SUCCESSOR
--------------------------------------------------------------------
NON-
AEARO GUARANTOR GUARANTOR
COMPANY I SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
Net sales................................. $148,332 $ -- $ 73,602 $ (21,695) $ 200,239
Cost of sales............................. 83,479 -- 39,797 (21,643) 101,633
-------- -------- -------- ---------- ---------
Gross profit............................ 64,853 -- 33,805 (52) 98,606
Selling and administrative................ 46,215 2,527 15,669 -- 64,411
Research and technical services........... 2,785 -- 1,646 -- 4,431
Amortization.............................. 1,851 124 640 -- 2,615
Other charges (income), net............... 8,552 (13,364) 5,124 -- 312
-------- --------- -------- --------- ---------
Operating income (loss)................ 5,450 10,713 10,726 (52) 26,837
Interest expense (income)................. 10,687 (1,641) 1,883 -- 10,929
-------- --------- -------- --------- ---------
Income (loss) before taxes................ (5,237) 12,354 8,843 (52) 15,908
Income tax provision (benefit)............ (4,781) 5,092 3,368 -- 3,679
Equity in subsidiaries' earnings.......... 12,737 5,475 (18,212) --
-------- -------- -------- ---------- ---------
Net income............................. $ 12,281 $ 12,737 $ 5,475 $ (18,264) $ 12,229
======== ======== ======== ========== =========
20
CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
SIX MONTHS ENDED MARCH 31, 2004
PREDECESSOR
-------------------------------------------------------------------
NON-
AEARO GUARANTOR GUARANTOR
COMPANY I SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
Net sales................................. $122,913 $ -- $ 65,030 $ (18,364) $ 169,579
Cost of sales............................. 71,142 -- 36,348 (18,434) 89,056
-------- -------- -------- ---------- ---------
Gross profit............................ 51,771 -- 28,682 70 80,523
Selling and administrative................ 42,612 674 13,549 -- 56,835
Research and technical services........... 2,351 -- 1,272 -- 3,623
Amortization.............................. 168 74 -- -- 242
Other charges (income), net............... 6,815 (12,283) 4,962 -- (506)
Restructuring charges (income)............ (1,091) -- -- -- (1,091)
--------- -------- -------- --------- ----------
Operating income....................... 916 11,535 8,899 70 21,420
Interest expense (income), net............ 10,117 (983) 1,702 -- 10,836
-------- --------- -------- --------- ---------
Income (loss) before taxes................ (9,201) 12,518 7,197 70 10,584
Income tax provision (benefit)............ (4,642) 5,022 1,640 -- 2,020
Equity in subsidiaries' earnings.......... 13,053 5,557 (18,610) --
-------- -------- -------- ---------- ---------
Net income............................. $ 8,494 $ 13,053 $ 5,557 $ (18,540) $ 8,564
======== ======== ======== ========== =========
CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED MARCH 31, 2005
(AS RESTATED, SEE NOTE 12)
SUCCESSOR
--------------------------------------------------------------------
NON-
AEARO GUARANTOR GUARANTOR
COMPANY I SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
Net sales................................. $ 76,633 $ -- $ 38,558 $ (10,713) $ 104,478
Cost of Sales............................. 43,045 -- 20,552 (10,669) 52,928
-------- -------- -------- ---------- ---------
Gross profit........................... 33,588 -- 18,006 (44) 51,550
Selling and administrative................ 24,437 127 8,116 -- 32,680
Research and technical services........... 1,442 -- 769 -- 2,211
Amortization.............................. 917 60 320 -- 1,297
Other charges (income), net............... 4,573 (6,905) 2,712 -- 380
-------- --------- -------- --------- ---------
Operating income....................... 2,219 6,718 6,089 (44) 14,982
Interest expense (income)................. 5,569 (1,294) 1,413 -- 5,688
-------- --------- -------- --------- ---------
Income (loss) before taxes................ (3,350) 8,012 4,676 (44) 9,294
Income tax provision (benefit)............ (3,003) 3,049 2,037 -- 2,083
Equity in subsidiaries' earnings.......... 7,602 2,639 (10,241) --
-------- -------- -------- ---------- ---------
Net income............................. $ 7,255 $ 7,602 $ 2,639 $ (10,285) $ 7,211
======== ======== ======== ========== =========
21
CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
THREE MONTHS ENDED MARCH 31, 2004
PREDECESSOR
--------------------------------------------------------------------
NON-
AEARO GUARANTOR GUARANTOR
COMPANY I SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
Net sales................................. $ 64,726 $ -- $ 34,388 $ (8,736) $ 90,378
Cost of sales............................. 37,627 -- 18,507 (8,854) 47,280
-------- -------- -------- ---------- ---------
Gross profit............................ 27,099 -- 15,881 118 43,098
Selling and administrative................ 22,075 445 6,844 -- 29,364
Research and technical services........... 1,195 -- 688 -- 1,883
Amortization.............................. 84 50 -- -- 134
Other charges (income), net............... 3,728 (5,718) 2,525 -- 535
Restructuring charges (income)............ (1,091) -- -- -- (1,091)
-------- -------- -------- --------- ---------
Operating income....................... 1,108 5,223 5,824 118 12,273
Interest expense (income), net............ 4,988 (448) 830 -- 5,370
-------- -------- -------- --------- ---------
Income (loss) before taxes................ (3,880) 5,671 4,994 118 6,903
Income tax provision (benefit)............ (1,893) 2,078 1,044 -- 1,229
Equity in subsidiaries' earnings.......... 7,543 3,950 (11,493) --
-------- -------- -------- ---------- ---------
Net income............................. $ 5,556 $ 7,543 $ 3,950 $ (11,375) $ 5,674
======== ======== ======== ========== =========
22
CONSOLIDATING BALANCE SHEET INFORMATION
MARCH 31, 2005
(AS RESTATED, SEE NOTE 12)
NON-
AEARO GUARANTOR GUARANTOR
COMPANY I SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
Current Assets:
Cash and cash equivalents.............. $ 32,803 $ 191 $ 7,953 $ -- $ 40,947
Receivables, net....................... 36,942 -- 19,555 -- 56,497
Inventories............................ 29,778 -- 11,496 (361) 40,913
Deferred and prepaid expenses.......... 5,330 -- 1,273 -- 6,603
-------- -------- -------- --------- ---------
Total current assets...................... 104,853 191 40,277 (361) 144,960
-------- -------- -------- ---------- ---------
Long Term Assets:
Property plant and equipment........... 38,214 -- 14,999 -- 53,213
Goodwill and other intangibles, net.... 82,358 122,273 90,617 -- 295,248
Inter-company receivables (payables)... (52,476) 95,877 (43,401) -- --
Investment in subsidiaries ............ 247,066 67,292 (734) (313,624) --
Other assets........................... 15,224 -- 11 -- 15,235
-------- -------- -------- --------- ---------
Total assets.............................. $435,239 $285,633 $101,769 $(313,985) $ 508,656
======== ======== ======== ========== =========
Current Liabilities:
Current portion of long-term debt...... $ 1,656 $ -- $ -- $ -- $ 1,656
Accounts payable and accrued
liabilities............................ 33,347 333 13,932 -- 47,612
Accrued interest....................... 6,679 -- -- -- 6,679
Income tax payables (receivables)...... 2,451 (2,482) 2,210 2,179
-------- --------- -------- --------- ---------
Total current liabilities................. 44,133 (2,149) 16,142 -- 58,126
-------- --------- -------- --------- ---------
Long Term Liabilities:
Long-term debt......................... 304,044 -- -- -- 304,044
Deferred income taxes.................. (919) 23,860 13,238 -- 36,179
Other liabilities...................... 14,794 -- -- -- 14,794
-------- -------- -------- --------- ---------
Total liabilities......................... 362,052 21,711 29,380 -- 413,143
-------- -------- ------ --------- ---------
Stockholder's Equity:
Common stock........................... -- -- 4,222 (4,222) --
Additional paid in capital............. 101,630 267,796 41,765 (309,561) 101,630
Accumulated deficit.................... (25,282) (8,961) 31,643 (4,586) (7,186)
Accumulated other comprehensive income
(loss)................................. (3,161) 5,087 (5,241) 4,384 1,069
--------- -------- --------- --------- ---------
Total stockholder's equity................ 73,187 263,922 72,389 (313,985) 95,513
-------- -------- -------- ---------- ---------
Total liabilities and stockholder's equity $435,239 $285,633 $101,769 $(313,985) $ 508,656
======== ======== ======== ========== =========
23
CONSOLIDATING BALANCE SHEET INFORMATION
SEPTEMBER 30, 2004
NON-
AEARO GUARANTOR GUARANTOR
COMPANY I SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
Current Assets:
Cash and cash equivalents.............. $ 18,309 $ 140 $ 9,275 $ -- $ 27,724
Receivables, net....................... 34,823 -- 19,336 -- 54,159
Inventories............................ 29,956 -- 11,202 (309) 40,849
Deferred and prepaid expenses.......... 3,014 -- 1,132 -- 4,146
-------- -------- -------- --------- ---------
Total current assets...................... 86,102 140 40,945 (309) 126,878
-------- -------- -------- ---------- ---------
Long Term Assets:
Property plant and equipment........... 40,040 -- 14,710 -- 54,750
Goodwill and other intangibles, net.... 134,567 131,786 53,247 -- 319,600
Inter-company receivables (payables)... 64,478 (12,147) (52,331) -- --
Investment in subsidiaries ............ 154,350 40,981 (713) (194,618) --
Other assets........................... 15,133 -- 11 -- 15,144
-------- -------- -------- --------- ---------
Total Assets.............................. $494,670 $160,760 $ 55,869 $(194,927) $ 516,372
======== ======== ======== ========== =========
Current Liabilities:
Current portion of long-term debt...... $ 1,618 $ -- $ 21 $ -- $ 1,639
Accounts payable and accrued
liabilities............................ 32,623 577 13,530 -- 46,730
Accrued interest....................... 6,996 -- -- -- 6,996
Income tax payables (receivables)...... 2,324 (2,317) 1,641 -- 1,648
-------- --------- -------- --------- ---------
Total current liabilities................. 43,561 (1,740) 15,192 -- 57,013
-------- --------- -------- --------- ---------
Long Term Liabilities:
Long-term debt......................... 302,662 -- 180 -- 302,842
Deferred income taxes.................. 58,073 -- 1,626 -- 59,699
Other liabilities...................... 14,726 -- -- -- 14,726
-------- -------- -------- --------- ---------
Total liabilities......................... 419,022 (1,740) 16,998 -- 434,280
-------- --------- ------ --------- ---------
Stockholder's Equity:
Common stock........................... -- -- 7,396 (7,396) --
Additional paid in capital............. 101,610 167,519 12,280 (179,799) 101,610
Accumulated deficit.................... (24,824) (8,664) 26,168 (12,095) (19,415)
Accumulated other comprehensive income
(loss)................................. (1,138) 3,645 (6,973) 4,363 (103)
--------- -------- --------- --------- ----------
Total stockholder's equity................ 75,648 162,500 38,871 (194,927) 82,092
-------- -------- -------- ---------- ---------
Total liabilities and stockholder's equity $494,670 $160,760 $ 55,869 $(194,927) $ 516,372
======== ======== ======== ========== =========
24
CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
SIX MONTHS ENDED MARCH 31, 2005
SUCCESSOR
---------------------------------------------------
NON-
AEARO GUARANTOR GUARANTOR
COMPANY I SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------ ------------
Net cash provided by operating activities. $ 9,516 $ 6,169 $ 1,701 $ 17,386
Net cash used for investing activities.... (1,978) -- (1,188) (3,166)
Net cash provided by (used for) financing
activities............................. 6,734 (7,560) (201) (1,027)
Effect of exchange rate on cash and cash
equivalents............................ 222 1,442 (1,634) 30
-------- -------- --------- ---------
Increase (decrease) in cash and cash
equivalents............................ 14,494 51 (1,322) 13,223
Cash and cash equivalents at the
beginning of the period................ 18,309 140 9,275 27,724
-------- -------- -------- ---------
Cash and cash equivalents at the end of
the period............................. $ 32,803 $ 191 $ 7,953 $ 40,947
======== ======== ======== =========
CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
SIX MONTHS ENDED MARCH 31, 2004
PREDECESSOR
---------------------------------------------------
NON-
AEARO GUARANTOR GUARANTOR
COMPANY I SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
--------- ------------ ------------ ------------
Net cash provided by (used for) operating
activities............................. $ (1,359) $ 6,407 $ 3,987 $ 9,035
Net cash used for investing activities.... (3,326) -- (1,668) (4,994)
Net cash provided by (used for) financing
activities............................. 3,255 (6,840) (1,655) (5,240)
Effect of exchange rate on cash and cash
equivalents............................ 779 978 (2,546) (789)
-------- -------- --------- ----------
Increase (decrease) in cash and cash
equivalents............................ (651) 545 (1,882) (1,988)
Cash and cash equivalents at the
beginning of the period................ 1,544 206 5,551 7,301
-------- -------- -------- ---------
Cash and cash equivalents at the end of
the period............................. $ 893 $ 751 $ 3,669 $ 5,313
======= ======= ======= ========
12) RESTATEMENT
Subsequent to the issuance of the Company's condensed consolidated
financial statements for the three and six month periods ended March 31,
2005, the Company's management determined that the tax effects of the
Merger were accounted for incorrectly, as follows: a the valuation
allowance that was recorded as an income tax benefit and should have been
recorded as a reduction of goodwill, a mathematical error in the deferred
tax calculation, pre and post Merger net operating loss carryforwards were
not properly adjusted to reflect actual 2004 taxable loss amounts from
income tax returns filed during the quarter, and deferred tax asset and
goodwill for carryover tax basis goodwill was incorrect. As a result the
accompanying condensed consolidated financial statements have been restated
from amounts previously reported. A summary of the significant effects of
the restatement is as follows:
25
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2005 MARCH 31, 2005
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
For the period ended: ------------- ----------- -------------- -----------
Provision (benefit) for $ (2,807) $2,083 $ (1,211) $3,679
income taxes
Net Income 12,101 7,211 17,119 12,229
As of March 31, 2005:
Goodwill, net 120,691 111,927
Total assets 517,420 508,656
Deferred income taxes 40,053 36,179
Total liabilities 417,017 413,143
Accumulated deficit (2,296) (7,186)
Total stockholder's equity 100,403 95,513
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The accompanying management's discussion and analysis of financial
condition and results of operations gives effect to the restatement of the
condensed consolidated financial statements as of and for the three and six
months ended March 31, 2005 as discussed in Note 12 to the Company's
condensed financial statements in Item 1 of Form 10-Q/A.
This report contains forward-looking statements within the meaning of the
federal securities laws. Statements that are not historical facts,
including statements about the Company's beliefs and expectations, are
forward-looking statements. Forward-looking statements included statements
preceded by, followed by or that include the words "may," "could," "would,"
"should," "believe," "expect," "anticipate," "plan," "estimate," "target,"
"project," "intend," or similar expressions. These statements include,
among others, statements regarding the Company's expected business outlook,
anticipated financial and operating results, the Company's business
strategy and means to implement the strategy, the Company's objectives, the
amount and timing of future capital expenditures, future acquisitions, the
likelihood of the Company's success in developing and introducing new
products and expanding its business, the timing of the introduction of new
and modified products or services, financing plans, working capital needs
and sources of liquidity.
Forward-looking statements are only predictions and are not guarantees of
performance. These statements are based on management's beliefs and
assumptions, which in turn are based on currently available information.
Important assumptions relating to the forward-looking statements include,
among others, assumptions regarding demand for our products, the cost,
timing and success of product upgrades and new product introductions,
expected pricing levels, the timing and cost of planned capital
expenditures and expected synergies relating to acquisitions. These
assumptions could prove inaccurate. Forward-looking statements also involve
risks and uncertainties, which could cause actual results to differ
materially from those contained in any forward-looking statements. Many of
these factors are beyond the Company's ability to control or predict. You
should read this report in conjunction with the more detailed risks
included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30,2004..
The Company believes these forward-looking statements are reasonable;
however, undue reliance should not be placed on any forward-looking
statements, which are based on current expectations. Further,
forward-looking statements speak only as of the date they are made, and
except as otherwise required by the federal securities laws, the Company
undertakes no obligation to update any of them publicly in light of new
information or future events.
MERGER AGREEMENT
On March 10, 2004, Aearo Corporation ("Parent"), the Company's parent,
entered into a Merger Agreement with AC Safety Holding Corp. and its
subsidiary, AC Safety Acquisition Corp. that closed on April 7, 2004 (the
"Merger"). Pursuant to the terms of the Merger Agreement, AC Safety
Acquisition Corp. merged with and into Aearo Corporation with Aearo
Corporation surviving the Merger as a wholly-owned subsidiary of AC Safety
Holding Corp. The aggregate purchase price was approximately $409.3
million, including estimated fees and expenses. The Merger was financed
with approximately $303.7 million of debt, of which $3.7 million was
assumed, $4.3 million of cash and $101.3 million of equity.
The merger was a business combination under SFAS No. 141, "Business
Combinations," and the purchase price paid for our Parent was pushed down
to the Company. Accordingly, the results of operations subsequent to the
Acquisition Date are presented on a different basis of accounting than the
results of operations prior to the Acquisition Date, and therefore, are not
directly comparable. The sale was accounted for as if it had occurred on
March 31, 2004, as management determined that results of operations were
not significant and no material transactions occurred during the period
from April 1, 2004 to April 7, 2004.
27
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2004.
The following discussion provides a comparison of the results of operations
for the successor company and that of the predecessor company for the three
months ended March 31, 2005 and 2004, respectively. The discussion is
provided for comparative purposes only, but the value of such comparison
may be limited. Material variances that are caused by the different basis
of accounting have been disclosed where applicable.
The following table sets forth the major components of the Company's
consolidated statements of operations expressed as a percentage of net
sales.
RESULTS OF OPERATIONS
(Dollars in Thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 (1) % 2004 %
-------------- --------- -------------- --------
SUCCESSOR PREDECESSOR
-------------------------- ---------------------------
Net sales:
Safety Products $ 78,612 75.2 $ 68,184 75.5
Safety Prescription Eyewear 10,239 9.8 10,873 12.0
Specialty Composites 15,627 15.0 11,321 12.5
-------------- --------- -------------- --------
Total net sales 104,478 100.0 90,378 100.0
Cost of sales 52,928 50.7 47,280 52.3
-------------- --------- -------------- --------
Gross profit 51,550 49.3 43,098 47.7
-------------- --------- -------------- --------
Operating expenses:
Selling and administrative 32,680 31.3 29,364 32.5
Research and technical services 2,211 2.1 1,883 2.1
Amortization 1,297 1.2 134 0.1
Other charges, net 380 0.4 535 0.6
Restructuring -- -- (1,091) (1.2)
-------------- --------- --------------- ---------
Total operating expense 36,568 35.0 30,825 34.1
Operating income 14,982 14.3 12,273 13.6
Interest expense, net 5,688 5.4 5,370 5.9
-------------- --------- -------------- --------
Income before income taxes 9,294 8.9 6,903 7.6
Provision for income taxes 2,083 2.0 1,229 1.3
-------------- --------- -------------- --------
Net income $ 7,211 6.9 $ 5,674 6.3
============== ========= ============== ========
(1) Reflects a new basis of accounting subsequent to April 7, 2004 due to the
Merger.
28
Net sales for the three months ended March 31, 2005 increased 15.6% to
$104.5 million from $90.4 million in the three months ended March 31, 2004.
The increase in net sales was primarily driven by organic growth in the
Safety Products and Specialty Composites segments and foreign currency
translation. The weakness of the U.S. dollar favorably impacted net sales
by $2.5 million. The Safety Products segment net sales for the three months
ended March 31, 2005 increased 15.3% to $78.6 million from $68.2 million in
the three months ended March 31, 2004. The increase in net sales resulted
from an 11.8% increase in organic growth and a 3.5% increase due to foreign
currency translation. Organic sales growth for the Safety Products segment,
defined as net sales less the impact of foreign currency translation and
acquisitions, has increased for eleven consecutive quarters. The Company
attributes this growth to an improved economy and its ability to
successfully introduce new products into the markets it serves. The Safety
Prescription Eyewear segment net sales for the three months ended March 31,
2005 decreased 5.8% to $10.2 million from $10.9 million for the three
months ended March 31, 2004. The decrease in net sales resulted from a 6.6%
reduction in volume partially offset by 0.8% increase from foreign currency
translation. Specialty Composites' net sales for the three months ended
March 31, 2005 increased 38.0% to $15.6 million from $11.3 million in three
months ended March 31, 2004. The increase was primarily driven by market
share gains and an improving economy driving volume increases in the
precision electronics, truck, aircraft and industrial markets. The Company
tracks measures such as computer and electronic production data and truck
build rates to gauge the momentum in the Specialty Composites segment,
which has been experiencing positive sales trends in the last seven
quarters.
Gross profit for the three months ended March 31, 2005 increased 19.6% to
$51.6 million from $43.1 million for the three months ended March 31, 2004.
Gross profit as a percentage of net sales for the three months ended March
31, 2005 was 49.3% as compared to 47.7% for the three months ended March
31, 2004. The improvement in the gross profit percentage is primarily due
to a 1.4 % improvement due to product mix and a 0.3% improvement due to the
impact of foreign currency translation. The Company's gross profit may not
be comparable to the gross profit of other entities who record shipping and
handling expenses as a component of cost of sales. The Safety Products
segment gross profit in the three months ended March 31, 2005 increased
20.6% to $40.3 million from $33.4 million in the three months ended March
31, 2004. The increase in gross profit is primarily due to an improvement
in sales volume due to an improved economy and the Company's ability to
successfully introduce new products into the markets it serves,
productivity improvements and the favorable impact of foreign currency
translation. Volume and productivity improvements contributed approximately
18.9% of the increase in gross profit with foreign currency translation
contributing the remaining 1.7% of the increase. The Safety Prescription
Eyewear segment gross profit in the three months ended March 31, 2005
decreased 10.4% to $4.7 million from $5.2 million in the three months ended
March 31, 2004. The decrease was primarily the result of a 5.8% reduction
due to a decrease in sales volume and a 4.6% reduction due to product mix.
Specialty Composites' gross profit in the three months ended March 31, 2005
increased 46.5% to $6.6 million from $4.5 million in the three months ended
March 31, 2004. The increase was primarily driven by market share gains and
an improving economy driving volume increases in the precision electronics,
truck, aircraft and industrial markets, aided by productivity and improved
manufacturing absorption. Approximately 38.0% of the increase in the
Specialty Composites gross profit was due to volume increases with the
remaining 8.5% of the increase due to product mix.
Operating expenses for the three months ended March 31, 2005 increased
18.6% to $36.6 million from $30.8 million for the three months ended March
31, 2004. The increase in operating expenses was primarily driven by an
increase in selling and administrative, amortization expense, restructuring
and research and technical partially offset by other charges, net. Selling
and administrative expenses included approximately $0.6 million due to
performance based incentives related to the increase in sales volume, $0.5
million due to foreign currency translation and $0.3 million related to
freight and distribution with the remaining increase consistent with the
increase in sales volume. Selling and administrative expenses as a
percentage of net sales improved to 31.3% for the three months ended March
31, 2005 as compared to 32.5% for the three months ended March 31, 2004.
Amortization expense increased approximately $1.2 million due to the
allocation of purchase price to finite lived intangible assets required by
SFAS No. 141 due to the Merger Agreement. The slight decrease in other
charges, net was attributed to a $0.2 million favorable impact of foreign
currency transaction expenses in the three months ended March 31, 2005 as
compared to March 31, 2004.
29
Interest expense, net, for the three months ended March 31, 2005 increased
to $5.7 million from $5.4 million for the three months ended March 31,
2004. The increase is due to the increase in the level of the Company's
debt partially offset by lower weighted average interest rates under the
Company's new credit facility and the 8.25% senior subordinated notes.
The provision for income taxes for the three months ended March 31, 2005
was an expense of $2.1 million compared to expense of $1.2 million for the
three months ended March 31, 2004.
RESULTS OF OPERATIONS
(Dollars in Thousands)
SIX MONTHS ENDED MARCH 31,
--------------------------
2005 (1) % 2004 %
-------------------------- ---------------------------
SUCCESSOR PREDECESSOR
--------- -----------
Net sales:
Safety Products $ 149,765 74.8 $ 127,964 75.5
Safety Prescription Eyewear 19,213 9.6 20,337 12.0
Specialty Composites 31,261 15.6 21,278 12.5
-------------- --------- -------------- --------
Total net sales 200,239 100.0 169,579 100.0
Cost of sales 101,633 50.8 89,056 52.5
-------------- --------- -------------- --------
Gross profit 98,606 49.2 80,523 47.5
-------------- --------- -------------- --------
Operating expenses:
Selling and administrative 64,411 32.2 56,835 33.5
Research and technical services 4,431 2.2 3,623 2.1
Amortization 2,615 1.3 242 0.1
Other charges (income), net 312 0.2 (506) (0.2)
Restructuring -- -- (1,091) (0.6)
-------------- --------- --------------- ---------
Total operating expense 71,769 35.8 59,103 34.9
Operating income 26,837 13.4 21,420 12.6
Interest expense, net 10,929 5.5 10,836 6.4
-------------- --------- -------------- --------
Income before income taxes 15,908 7.9 10,584 6.2
Provision for income taxes 3,679 1.8 2,020 1.1
-------------- --------- -------------- --------
Net income $ 12,229 6.1 $ 8,564 5.1
============== ========= ============== ========
(1) Reflects a new basis of accounting subsequent to April 7, 2004 due to the
Merger.
30
Net sales for the six months ended March 31, 2005 increased 18.1% to $200.2
million from $169.6 million in the six months ended March 31, 2004. The
increase in net sales was primarily driven by organic growth in the Safety
Products and Specialty Composites segments and foreign currency
translation. The weakness of the U.S. dollar favorably impacted net sales
by $5.2 million. The Safety Products segment net sales for the six months
ended March 31, 2005 increased 17.0% to $149.8 million from $128.0 million
in the six months ended March 31, 2004. The increase in net sales resulted
from a 13.1% increase in organic growth and a 3.9% increase due to foreign
currency translation. Organic sales growth for the Safety Products segment,
defined as net sales less the impact of foreign currency translation and
acquisitions, has increased for eleven consecutive quarters. The Company
attributes this growth to an improved economy and its ability to
successfully introduce new products into the markets it serves. The Safety
Prescription Eyewear segment net sales for the six months ended March 31,
2005 decreased 5.5% to $19.2 million from $20.3 million for the six months
ended March 31, 2004. The decrease in net sales resulted from a 6.4%
reduction in volume partially offset by 0.9% increase from foreign currency
translation. Specialty Composites' net sales for the six months ended March
31, 2005 increased 46.9% to $31.3 million from $21.3 million in six months
ended March 31, 2004. The increase was primarily driven by market share
gains and an improving economy driving volume increases in the precision
electronics, truck, aircraft and industrial markets. The Company tracks
measures such as computer and electronic production data and truck build
rates to gauge the momentum in the Specialty Composites segment, which has
been experiencing positive sales trends in the last seven quarters.
Gross profit for the six months ended March 31, 2005 increased 22.5% to
$98.6 million from $80.5 million for the six months ended March 31, 2004.
Gross profit as a percentage of net sales for the six months ended March
31, 2005 was 49.2% as compared to 47.5% for the six months ended March 31,
2004. The improvement in the gross profit percentage is primarily due to a
1.5 % improvement due to product mix and a 0.3% improvement due to the
impact of foreign currency translation. The Company's gross profit may not
be comparable to the gross profit of other entities who record shipping and
handling expenses as a component of cost of sales. The Safety Products
segment gross profit in the six months ended March 31, 2005 increased 21.4%
to $76.2 million from $62.8 million in the six months ended March 31, 2004.
The increase in gross profit is primarily due to an improvement in sales
volume due to an improved economy and the Company's ability to successfully
introduce new products into the markets it serves, productivity
improvements and the favorable impact of foreign currency translation.
Volume and productivity improvements contributed approximately 16.3% of the
increase in gross profit with foreign currency translation contributing the
remaining 5.1% of the increase. The Safety Prescription Eyewear segment
gross profit in the six months ended March 31, 2005 decreased 8.9% to $8.7
million from $9.6 million in the six months ended March 31, 2004. The
decrease was primarily the result of a 6.4% reduction due to a decrease in
sales volume and a 2.5% reduction due to product mix. Specialty Composites'
gross profit in the six months ended March 31, 2005 increased 67.2% to
$13.6 million from $8.2 million in the six months ended March 31, 2004. The
increase was primarily driven by market share gains and an improving
economy driving volume increases in the precision electronics, truck,
aircraft and industrial markets, aided by productivity and improved
manufacturing absorption. Approximately 46.9% of the increase in the
Specialty Composites gross profit was due to volume increases with the
remaining 20.3% of the increase due to product mix.
Operating expenses for the six months ended March 31, 2005 increased 21.4%
to $71.8 million from $59.1 million for the six months ended March 31,
2004. The increase in operating expenses was primarily driven by an
increase in selling and administrative, amortization expense, restructuring
and research and technical partially offset by other charges, net. Selling
and administrative expenses included approximately $1.9 million due to
performance based incentives related to the increase in sales volume, $1.2
million due to foreign currency translation and $0.7 million related to
freight and distribution with the remaining increase consistent with the
increase in sales volume. Selling and administrative expenses as a
percentage of net sales improved to 32.2% for the six months ended March
31, 2005 as compared to 33.5% for the six months ended March 31, 2004.
Amortization expense increased approximately $2.4 million due to the
allocation of purchase price to finite lived intangible assets required by
SFAS No. 141 due to the Merger Agreement. The increase in other charges,
net was attributed to foreign currency transaction expenses in addition to
$0.3 million of gain from the sale of assets in the six months ended March
31, 2004.
31
Interest expense, net, for the six months ended March 31, 2005 increased to
$10.9 million from $10.8 million for the six months ended March 31, 2004.
The increase is due to the increase in the level of the Company's debt
partially offset by lower weighted average interest rates under the
Company's new credit facility and the 8.25% senior subordinated notes.
The provision for income taxes for the six months ended March 31, 2005 was
an expense of $3.7 million compared to expense of $2.0 million for the six
months ended March 31, 2004.
EFFECTS OF CHANGES IN EXCHANGE RATES
In general, the Company's results of operations are affected by changes in
exchange rates. Subject to market conditions, the Company prices its
products in Europe and Canada in local currency. While many of the
Company's selling and distribution costs are also denominated in these
currencies, a large portion of product costs are U.S. Dollar denominated.
As a result, a decline in the value of the U.S. Dollar relative to other
currencies can have a favorable impact on the profitability of the Company,
and an increase in the value of the U.S. Dollar relative to these other
currencies can have a negative effect on the profitability of the Company.
The Company's Swedish operations are also affected by changes in exchange
rates relative to the Swedish Krona. In contrast to the above, 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, from time to time, will utilize
forward foreign currency contracts and other hedging instruments to
mitigate the effects of changes in foreign currency rates on profitability.
EFFECTS OF INFLATION
In recent years, inflation has been modest and has not had a material
impact upon the results of the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds have consisted primarily of operating cash
flow and debt financing. The Company's uses of those funds consist
principally of debt service, capital expenditures, dividends and
acquisitions.
The Company's debt structure includes: (a) $175.0 million of 8.25% Senior
Subordinated Notes ("8.25% Notes") due 2012, which are publicly held and
redeemable at the option of the Company, in whole or in part at various
redemption prices, (b) up to an aggregate of $175.0 million under its
Credit Agreement with various banks comprised of (i) a secured term loan
facility consisting of loans providing for up to $125.0 million of term
loans (collectively the "Term Loans") with a portion of the Term Loans
denominated in Euros, (ii) a secured revolving credit facility ("Revolving
Credit Facility") providing for up to $50.0 million of revolving loans for
general corporate purposes, and (iii) an uncommitted incremental term loan
facility of up to $60.0 million for acquisitions (collectively, the "Senior
Bank Facilities"). Since the Acquisition Date, the Company's debt has been
negatively impacted by $3.9 million related to the fluctuation of the Euro
relative to the U.S dollar as of March 31, 2005. The Company does not plan
to take any measure to minimize the foreign exchange impact of its Euro
denominated debt. The amounts outstanding on the Term Loans and Revolving
Credit Facility at March 31, 2005, were approximately $127.6 and $0
million, respectively compared to $126.0 million and $0 million,
respectively at September 30, 2004. The Revolving Credit Facility provides
for the issuance of letters of credit in an aggregate face amount of up to
$15.0 million. The Company had approximately $1.4 million and $1.6 million
of letters of credit outstanding at September 30, 2004 and March 31, 2005,
respectively. The Term Loans amortize quarterly over a seven year period.
Amounts repaid or prepaid in respect of the Term Loans may not be
re-borrowed. Loans and letters of credit under the Revolving Credit
Facility will be available until the Revolving Loan Maturity Date, which is
April 7, 2010. The Term Loans mature on April 7, 2011. Effective December
31, 2004, the Company received a 0.25% reduction in the interest rate paid
on its Term Loans for meeting certain financial covenants. The Company was
in compliance with all financial covenants and restrictions as of March 31,
2005.
32
On April 28, 2005, the Company amended its credit agreement to allow the
Company to make, prior to September 30, 2005, up to $35 million of cash
distributions to Aearo Corporation, its parent corporation for the purpose
of paying cash dividends to AC Safety Holding Corp., its parent, to be used
by AC Safety Holding Corp. primarily to redeem, pro rata, its outstanding
preferred shares and to pay accrued dividends on the preferred shares.
On May 5, 2005, the Company's Board of Directors declared a cash dividend
to be paid to the Company's parent, Aearo Corporation, the sole holder of
common stock, par value $.01 per share, of approximately $35 million. Aearo
Corporation will in turn pay a cash dividend to AC Safety Holding Corp.,
the Company's ultimate parent, who will use the proceeds to make a partial
redemption of its preferred stock, par value $.01 per share. The Company
will use available cash to fund the dividend.
The Company typically makes capital expenditures related primarily to the
maintenance and improvement of manufacturing facilities. The Company's
principal source of cash to fund these capital requirements is cash from
operations. The Company spent $3.2 million and $5.0 million, respectively
for capital expenditures for the six months ended March 31, 2005 and 2004,
respectively. The Company anticipates it will spend approximately $10.0
million for capital expenditures in its fiscal year ending September 30,
2005.
The Company's net cash provided by operating activities for the six months
ended March 31, 2005 totaled $17.4 million as compared to $9.0 million for
the six months ended March 31, 2004. The increase of $8.3 million was
primarily due to a $3.7 million improvement in net income adjusted for cash
and non-cash charges (depreciation, amortization, deferred taxes and
other), and a $4.6 million improvement in the net changes in assets and
liabilities.
Net cash used for investing activities was $3.2 million for the six months
ended March 31, 2005 as compared to $5.0 million for the six months ended
March 31, 2004. The decrease in net cash used by investing activities is
primarily attributed to reduced spending for property, plant and equipment.
Net cash used for financing activities for the six months ended March 31,
2005 was $1.0 million compared with $5.2 million for the six months ended
March 31, 2004. The change is primarily due to the lower debt servicing
requirement under the Company's new credit facility as compared to the debt
servicing requirements under the old credit facility.
The Company maintains a non-contributory defined benefit cash balance
pension plan. The Company utilizes an outside actuarial firm to estimate
pension expense and funding based on various assumptions including the
discount rate and the expected long-term rate of return on plan assets. To
develop the expected long-term rate of return on assets assumption, the
Company considered historical returns and future expectations for returns
for each asset class, as well as the target asset allocation of the pension
portfolio. Over the 11 year period ended September 30, 2004, the returns on
the portfolio, assuming it was invested at the current target asset
allocation in prior periods, would have been a compound annual average
return of 9.3%. Considering this information and the potential for lower
future returns, the Company selected an 8.0% rate of return on plan asset
assumption. Actual asset returns for the Company's pension plan improved in
the last two fiscal years after two years of negative returns. The
estimated effect of a 1% change in the expected long-term rate of return on
plan assets results in a $0.1 million impact on annual pension expense. The
discount rate was also unchanged at 6.0% for the fiscal year ended
September 30, 2004. The Company bases the discount rate on the AA Corporate
bond yields. The estimated impact of a 1% change in the discount rate
results in a $0.1 million impact on annual pension expense.
33
The variability of asset returns and discount rates may have either a
favorable or unfavorable impact on the Company's pension expense and the
funded status of the pension plan. Under minimum funding rules, no
additional pension contributions were required to be made in fiscal 2004.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands of dollars):
Fiscal year 2005 $ 1,121
Fiscal year 2006 466
Fiscal year 2007 618
Fiscal year 2008 830
Fiscal year 2009 1,214
Fiscal year 2010 - 2014 6,784
The Company's business is affected by macroeconomic activity, mainly
manufacturing output in developed nations. In addition, significant changes
in product mix and volume can impact the Company's liquidity and capital
resources in both the short and long term. As such, the Company's liquidity
and capital resources are more likely to be impacted by macroeconomic
factors. The Company believes that its disciplined approach to cost
control, its diversification into consumer and other channels and the
available capacity on its revolving credit facility will enable the Company
to maintain adequate liquidity and capital resources in an economic
downturn. The introduction of new products is likely to continue to
favorably impact liquidity and capital resources in periods of economic
growth although there are no assurances that these trends will continue in
the future.
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, capital
expenditures and debt service 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.
PRODUCT LIABILITY CLAIMS
The Company is a defendant in lawsuits by plaintiffs alleging that they
suffer from respiratory medical conditions, such as asbestosis or
silicosis, relating to exposure to asbestos and silica, and that such
conditions result, in part, from the use of respirators that, allegedly,
were negligently designed or manufactured. The defendants in these lawsuits
are often numerous, and include, in addition to manufacturers and
distributors of respirators, manufacturers, distributors and installers of
sand (used in sand blasting), asbestos and asbestos-containing products.
Many of these claims are covered by the Asset Transfer Agreement entered
into on June 13, 1995 by the Company and Aearo Corporation, on the one
hand, and Cabot Corporation and certain of its subsidiaries (the
"Sellers"), on the other hand (the "1995 Asset Transfer Agreement"). In the
1995 Asset Transfer Agreement, so long as Aearo Corporation makes an annual
payment of $400,000 to Cabot, the Sellers agreed to retain, and Cabot and
the Sellers agreed to defend and indemnify Aearo Corporation and its
subsidiaries against, any liability or obligation relating to or otherwise
arising under any proceeding or other claim against Aearo Corporation and
its subsidiaries or Cabot or their respective affiliates or other parties
with whom any Seller directly or indirectly has a contractual liability
sharing arrangement which sounds in product liability or related causes of
action arising out of actual or alleged respiratory medical conditions
caused or allegedly caused by the use of respirators or similar devices
sold by Sellers or their predecessors (including American Optical
Corporation and its predecessors) prior to July 11, 1995. To date, Aearo
Corporation has elected to pay the annual fee and intends to continue to do
so. In addition, under the terms of the Merger Agreement with AC Safety
Acquisition Corp., Aearo Corporation agreed to make the annual payment to
Cabot for a minimum of seven years from the Acquisition Date. Aearo
Corporation and its subsidiaries could potentially be liable for claims
currently retained by Sellers if Aearo Corporation elects to cease paying
the annual fee or if Cabot and the Sellers no longer are able to perform
their obligations under the 1995 Asset Transfer Agreement. Cabot
acknowledged in a stock purchase agreement that it and Aearo Corporation
entered into on June 27, 2003 (providing for the sale by Cabot to Aearo
Corporation of all of the common and preferred stock of Aearo Corporation
owned by Cabot) that the foregoing provisions of the 1995 Asset Transfer
Agreement remain in effect. The 1995 Asset Transfer Agreement does not
apply to claims relating to the business of Eastern Safety Equipment, the
stock of which the Company acquired in 1996.
34
In fiscal 2003 and 2004, Aearo settled 259 claims in which it was named as
a defendant for an average settlement amount of $24.36 in silica claims and
$83.24 in asbestos claims, while an additional 200 claims were dismissed
without any payment (43.6% of cases closed), because Aearo was not a proper
defendant or did not make the product in question. As of September 30,
2004, the number of open claims where Aearo was named as a defendant in
silica and asbestos related matters was 11,002 and 4,261, respectively. For
the six months ended March 31, 2005, the increases in number of claims
where Aearo was named as a defendant in silica and asbestos related matters
was 106 and 1,200 respectively. The 1,200 new asbestos claims include 1,148
claims that allege exposure from clothing, which the Company never
manufactured. No claims were settled where Aearo was named as a defendant
in silica and asbestos related matters during the six months ended March
31, 2005. As of March 31, 2005, the number of open claims where Aearo was
named as a defendant in silica and asbestos related matters was 11,108 and
5,461, respectively.
In addition to the above claims, Aearo may agree to pay a share of the
settlement and defense costs in particular cases even though the company is
not named as a defendant because of agreements with prior owners of the
brand and/or because of allegations that Aearo has some risk of legal
liability as a successor ("additional claims"). During the six months ended
March 31, 2005, Aearo paid a total of $1.67 million for settlement,
administrative and defense costs resulting in the settlement of 4,325
silica and asbestos claims that were settled between October 1, 2002 and
September 30, 2004 involving both claims in which Aearo was named as a
defendant and additional claims. During the period October 1, 2004 to March
31, 2005 Aearo paid a total of one hundred dollars for one additional claim
that was settled during that time period. In addition, Aearo may receive
the benefit of releases in some additional cases settled by the AO Defense
Group regardless of whether or not any claim was made against Aearo.
All data was provided by an outside law firm which tracks numbers of cases
and settlements on behalf of the "AO Defense Group" and is believed to be
materially accurate. The AO Defense Group is a voluntary association of
current and former manufacturers of the "AO Safety" brand of respirators
and certain of their insurers in which Aearo participates and through which
all of its settlements have been handled in the relevant years. Also,
between October 1, 2004 and March 31, 2005, there may have been claims
settled by and fully funded by the insurers of Eastern Safety Equipment
Co., Inc., a dissolved former subsidiary of Aearo.
35
At March 31, 2005 and September 30, 2004, the Company has recorded
liabilities of approximately $4.3 million and $5.4 million, respectively,
which represents reasonable estimates of its probable liabilities for
product liabilities substantially related to asbestos and silica-related
claims as determined by the Company in consultation with an independent
consultant. The $0.7 million reduction in the reserve, net of new accruals
which added to the reserve, since September 30, 2004, is primarily
attributed to the payment of $1.67 million, as referenced above, to pay
costs attributed to settlement, administrative and defense costs that had
been reached over a two year time period. This reserve is re-evaluated
periodically and additional charges or credits to results of operations may
result as additional information becomes available. Various factors
increase the difficulty in determining the Company's potential liability,
if any, in such claims, including the fact that the defendants in these
lawsuits are often numerous and the claims generally do not specify the
amount of damages sought. Additionally, the bankruptcy filings of other
companies with asbestos and silica-related litigation could increase the
Company's cost over time. In light of these and other uncertainties
inherent in making long-term projections, the Company has determined that
the five-year period through fiscal 2009 is the most reasonable time period
for projecting asbestos and silica-related claims and defense costs. It is
possible that the Company may incur liabilities in an amount in excess of
amounts currently reserved. However, taking into account currently
available information, historical experience, and the 1995 Asset Transfer
Agreement, but recognizing the inherent uncertainties in the projection of
any future events, it is management's opinion that these suits or claims
should not result in final judgments or settlements in excess of the
Company's reserve that, in the aggregate, would have a material effect on
the Company's financial condition, liquidity or results of operations.
CONTRACTUAL OBLIGATIONS
The Company has the following minimum commitments under contractual
obligations including purchase obligations by fiscal year, as defined by
the U.S. Securities and Exchange Commission as of March 31, 2005:
(1) 2010 AND
2005 2006-2007 2008-2009 AFTER TOTAL
---------- ---------- ---------- ---------- ----------
Capital lease obligations $ 176 $ 705 $ 368 $ 32 $ 1,281
Operating lease obligations 1,702 5,794 5,043 5,573 18,113
Mortgage obligations 179 2,048 -- -- 2,227
Purchase obligations 720 6,680 6,402 -- 13,802
Respiratory commitment 200 800 800 800 2,600
Long term debt 10,786 43,403 43,173 320,028 417,390
---------- ---------- ---------- ---------- ----------
Total $ 13,764 $ 59,430 $ 55,786 $ 326,433 $ 455,414
========== ========== ========== ========== ==========
(1) Amounts presented in the current fiscal year represent remaining payments
for the fiscal year.
The amounts for long term debt above include both interest and principal
payments. The Company paid approximately $4.7 million for taxes worldwide
in fiscal 2004 and does not anticipate significant changes to its tax
obligations in the future. The Company has approximately $1.4 million of
letters of credit outstanding as of March 31, 2005 and does not anticipate
significant changes to its outstanding letters of credit in the future.
36
The Company plans to fund approximately $1.5-$2.2 million per year for
pension obligations over the next 5 years. The above contribution level was
determined after consideration of many factors such as the funded status of
the plan, the long term rate of return on plan assets of 8%, the duration
of plan liabilities, workforce characteristics and changes to plan
features. The goal of the funding strategy is to achieve full funding while
minimizing the year to year volatility of contribution payments.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements or financing arrangements
involving variable interest entities.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB enacted Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" ("SFAS No. 123R") which replaces
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires the
measurement of all employee share-based payments to employees, including
grants of employee stock options, using a fair-value-based method and the
recording of such expense in results of operations. The accounting
provisions of SFAS No. 123R will be adopted by the Company on October 1,
2005. The pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. The
Company is in the process of evaluating the impact of SFAS 123R on its
financial position and results of operations.
37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to changes in foreign
currencies, interest rates and commodity pricing. The Company uses
derivatives to mitigate the impact of changes in foreign currencies and
interest rates. All derivatives from time to time are for purposes other
than trading. The Company accounts for derivatives pursuant to SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as
amended. The Company has formally documented its hedging relationships,
including identification of hedging instruments and the hedge items, as
well as its risk management objectives.
FOREIGN CURRENCY RISK
The Company's results of operations are subject to risks associated with
operating in foreign countries, including fluctuations in currency exchange
rates. While many of the Company's selling and distribution costs are
denominated in Canadian and European currencies, a large portion of product
costs are U.S. Dollar denominated. As a result, a decline in the value of
the U.S. Dollar relative to other currencies can have a favorable impact on
the profitability of the Company and an increase in the value of the U.S.
Dollar relative to these other currencies can have a negative effect on the
profitability of the Company. The Company's Swedish 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.
To mitigate the effects of changes in foreign currency rates on Results of
Operations and cash flows, the Company executes two hedging programs, one
for transaction exposures, and the other for cash flow exposures in foreign
operations. In order to implement the transaction hedging program, the
Company utilizes forward foreign currency contracts for up to 30-day terms
to protect against the adverse effects that exchange rate fluctuations may
have on the foreign-currency-denominated trade activities (receivables,
payables and cash) of foreign subsidiaries. These contracts have not been
designated as hedges under SFAS No. 133 and, accordingly, the gains and
losses on both the derivative and foreign-currency-denominated trade
activities are recorded as transaction adjustments in results of
operations. The impact on results of operations was a loss of approximately
$0.1 million and $0.2 million for the three and six months period ending
March 31, 2005, respectively, compared to net loss of $0.2 million and $0.4
million, respectively for the three and six months ended March 31, 2004. In
regard to its cash flow hedging program, the Company complies with SFAS No.
133 which requires that derivative instruments be recorded in the balance
sheet as either an asset or liability measured at its fair value. As of
March 31, 2005, the company did not have any hedges in place for the cash
flow hedging program and therefore the Company had recorded no derivative
asset or liability at March 31, 2005. As a result of open forward foreign
currency contracts entered into in the implementation of the Company's cash
flow hedging program, the Company had a derivative payable of $0.4 million
as of March 31, 2004. In addition, the Company limits the foreign exchange
impact on the balance sheet with debt denominated in Euros.
INTEREST RATES
The Company is exposed to market risk from changes in interest rates. The
Company, from time to time, will utilize interest rate instruments to
reduce the impact of either increases or decreases in interest rates on its
floating rate debt.
The Company had approximately $30.5 million of variable rate debt protected
under an interest rate cap arrangement, which expired December 31, 2004.
The Company had not elected hedge accounting treatment for the interest
rate cap as defined under SFAS No, 133 and, as a result, fair value
adjustments were charged directly to other charges (income), net. There was
a $0.1 million impact on earnings for the six month period ending March 31,
2004.
38
The Company is of the opinion that it is well positioned to manage interest
rate exposures in the short term. The Company continues to monitor interest
rate movements and has mitigated the risks of potential interest rate
fluctuations through the use of the aforementioned interest rate
instruments.
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. The Company
is also exposed to market risks for electricity, fuel oil and natural gas
consumed in its operations. Items with potential risk of price volatility
are paperboard, packaging films, nylons, resins, propylene, ethylene,
plasticizer and freight. 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 risks.
39
ITEM 4. CONTROLS AND PROCEDURES
Disclosure controls and procedures are defined by the Securities and Exchange
Commission as those controls and other procedures that are designed to ensure
that information required to be disclosed in the Company's filings under the
Securities Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of March 31, 2005,
and, based on the material weakness in our internal control over financial
reporting described below, have determined that such disclosure controls and
procedures were ineffective. In response to this material weakness, management
performed additional analysis and other procedures to ensure that our restated
condensed consolidated financial statements included in this Form 10-Q/A were
prepared in accordance with generally accepted accounting principles.
Accordingly, management, including our Chief Executive Officer and Chief
Financial Officer, believes that the restated condensed consolidated financial
statements included in this Form 10-Q/A fairly present in all material respects
our financial condition, results of operations and cash flows for the periods
presented. The material weakness identified had no effect on our cash provided
by operating activities or operating income.
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the Exchange
Act. Our internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
material misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies
and procedures may deteriorate.
A material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of the end of the period covered by this Form 10-Q/A, we
identified the following material weakness in our internal control over
financial reporting: there was a deficiency in the design of our internal
control for interim reporting of the tax effects of book and tax bases
differences for complex, non-routine business combinations. As more fully
explained in Note 12 to the condensed consolidated financial statements
contained in this Form 10-Q/A, goodwill, deferred income taxes, net income,
accumulated deficit and income tax provision (benefit) were misstated in the
Form 10-Q originally filed for the quarterly period ended March 31, 2005 as a
result of this deficiency.
To remediate the material weakness referred to above, the Company implemented
additional controls and procedures to ensure that interim reporting of the tax
effects of book and tax bases differences for complex, non-routine business
combinations in the future will be properly recorded.
Other than the changes referred to above, there has been no change in the
Company's internal control over financial reporting during the quarter ended
March 31, 2005, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
40
Part II - Other Information
ITEM 6. EXHIBITS
(a) Exhibits
See Index of Exhibits on page 43 hereof.
41
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: November 21, 2005 AEARO COMPANY I
/s/ Michael A. McLain
---------------------------------------
Michael A. McLain
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Jeffrey S. Kulka
---------------------------------------
Jeffrey S. Kulka
Senior Vice President, Chief Financial
Officer and Secretary
(Principal Financial and Accounting Officer)
42
Exhibit Index
EXHIBITS DESCRIPTION
-------- -----------
3.2 Bylaws of Aearo Company I(*)
10.12 First Amendment, dated as of April 28, 2005, with respect to
the Credit Agreement, dated as of April 7, 2004, among AC
Safety Holding Corp. and Aearo Corporation, as guarantors, the
other guarantors party thereto, the various lenders party
thereto, Bear Stearns Corporate Lending, as Syndication Agent,
National City Bank of Indiana and Wells Fargo Bank, N.A., as
Co-Document Agents, and Deutsche Bank AG, New York Branch as
Administrative Agent.*
31.1 Certification of Chief Executive Officer pursuant to Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
15d-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- -------------------------
(*) As previously filed.
43