-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOBEVyV/gXkPGPL0on/RjHe8WqhvTHumi223OI3HSjlI6/1BcAswlBbxP2ygQhKT nGenrHaw95DyG7TecsYFwQ== 0000949957-02-000003.txt : 20020414 0000949957-02-000003.hdr.sgml : 20020414 ACCESSION NUMBER: 0000949957-02-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEARO CORP CENTRAL INDEX KEY: 0000949957 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 133840356 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26940 FILM NUMBER: 02522076 BUSINESS ADDRESS: STREET 1: 5457 W 79TH ST STREET 2: 8TH FL CITY: INDIANAPOLIS STATE: IN ZIP: 46268 BUSINESS PHONE: 3176926666 MAIL ADDRESS: STREET 1: 5457 W 79TH ST CITY: INDIANAPOLIS STATE: IN ZIP: 46268 FORMER COMPANY: FORMER CONFORMED NAME: CABOT SAFETY HOLDINGS CORP DATE OF NAME CHANGE: 19950828 10-Q 1 form_10q-0102.txt Q1-02 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 Commission file number 33-96190 AEARO CORPORATION (Exact name of registrant as specified in its charter) ------------------------ Delaware 13-3840450 (State or other jurisdiction (IRS Employer Identification No.) of 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__ The number of shares of the registrant's common stock, par value $.01 per share, outstanding as of January 30, 2001 was 102,087.5. Aearo Corporation TABLE OF CONTENTS Form 10-Q for the Quarterly Period Ended December 31, 2001 PART I-FINANCIAL INFORMATION...................................................3 Item 1. Financial Statements................................................3 Condensed Consolidated Balance Sheets--Assets.......................3 Condensed Consolidated Balance Sheets - Liabilities and Stockholders' Equity............................................4 Condensed Consolidated Statements of Operations.....................5 Condensed Consolidated Statements of Cash Flows.....................6 Notes To Consolidated Condensed Financial Statements................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................15 Results of Operations..............................................15 Item 3. Quantitative and Qualitative Disclosures About Market Risk.........20 PART II - OTHER INFORMATION..................................................22 Item 1. Legal Proceedings..................................................22 Item 2. Changes in Securities and Use of Proceeds..........................22 Item 3. Defaults Upon Senior Securities....................................22 Item 4. Submission of Matters to a Vote of Security Holders................22 Item 5. Other Information..................................................22 Item 6. Exhibits and Reports on Form 8-K...................................23 SIGNATURES....................................................................24 EXHIBIT INDEX.................................................................25 PART I-FINANCIAL INFORMATION Item 1...Financial Statements AEARO CORPORATION Condensed Consolidated Balance Sheets--Assets (Dollars in Thousands)
December 31, September 30, 2001 2001 ----------- ------------ Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 20,016 $ 18,233 Accounts receivable (net of reserve for doubtful accounts of $1,022 and $831 respectively) 35,164 42,428 Inventories 30,752 29,564 Deferred and prepaid expenses 3,126 2,325 -------- -------- Total current assets 89,058 92,550 -------- -------- PROPERTY, PLANT AND EQUIPMENT, NET 48,100 47,003 INTANGIBLE ASSETS, NET 116,667 118,200 OTHER ASSETS 3,267 3,549 -------- -------- Total assets $257,092 $261,302 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. - 3 - AEARO CORPORATION Condensed Consolidated Balance Sheets - Liabilities and Stockholders' Equity (Dollars in Thousands)
December 31, September 30, 2001 2001 ------------ ------------ (Unaudited) CURRENT LIABILITIES: Current portion of long-term debt $ 9,338 $ 8,393 Accounts payable and accrued liabilities 34,226 37,896 Accrued interest 5,636 2,691 U.S. and foreign income taxes 1,873 2,265 --------- --------- Total current liabilities 51,073 51,245 --------- --------- LONG-TERM DEBT 189,477 193,836 DEFERRED INCOME TAXES 486 383 OTHER LIABILITIES 6,159 5,982 --------- --------- Total liabilities $ 247,195 $ 251,446 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value- (Redemption value of $99,826 and $96,801, respectively) Authorized--200,000 shares Issued and outstanding--45,000 shares -- -- Common stock, $.01 par value- Authorized--200,000 shares Issued and outstanding--102,088 shares 1 1 Additional paid-in capital 32,357 32,374 Accumulated deficit (3,205) (2,494) Accumulated other comprehensive loss (19,256) (20,025) --------- --------- Total stockholders' equity 9,897 9,856 --------- --------- Total liabilities and stockholders' equity $ 257,092 $ 261,302 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. - 4 - Condensed Consolidated Statements of Operations (DOLLARS IN THOUSANDS) (Unaudited) For the Three Months Ended December 31, ------------------------------- 2001 2000 ------------ ----------- NET SALES $ 61,643 $ 68,365 COST OF SALES 32,928 37,553 ------------ ---------- Gross profit 28,715 30,812 SELLING AND ADMINISTRATIVE 20,856 24,183 RESEARCH AND TECHNICAL SERVICES 1,369 1,484 AMORTIZATION OF INTANGIBLES 1,559 1,655 OTHER CHARGES 9 9 ------------ ---------- Operating income 4,922 3,481 INTEREST EXPENSE, NET 5,110 5,801 ------------ ---------- Loss before provision for income taxes (188) (2,320) PROVISION FOR INCOME TAXES 523 67 ------------ ---------- Net loss $ (711) $ (2,387) ============ ========== The accompanying notes are an integral part of these condensed consolidated financial statements. - 5 - Condensed Consolidated Statements of Cash Flows (DOLLARS IN THOUSANDS) (Unaudited)
For the Three Months Ended December 31, ------------------------------- -------------- ------------- 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (711) $ (2,387) Adjustments to reconcile net loss to cash provided by operating activities- Depreciation 2,375 2,529 Amortization of intangible assets and deferred financing costs 1,866 1,988 Deferred income taxes 96 (75) Other, net 15 16 Changes in assets and liabilities-(net of effects of Iron Age Vision purchase) Accounts receivable 7,443 3,131 Inventories (1,073) (1,454) Accounts payable and accrued liabilities (1,017) 367 Other, net (890) (680) -------- -------- Net cash provided by operating activities 8,104 3,435 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (1,811) (1,595) Cash paid for Iron Age Vision (730) -- Proceeds provided by disposals of property, plant and equipment -- 33 -------- -------- Net cash used by investing activities (2,541) (1,562) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facility, net -- 3,700 Repayment of bonds (2,000) Repayment of term loans (2,017) (4,409) Repayment of capital lease obligations (13) -- Proceeds (repayment) of long-term debt (35) 30 Other (16) (20) -------- -------- Net cash used by financing activities (4,081) (699) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 301 (752) -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 1,783 422 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,233 3,495 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,016 $ 3,917 ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations $ 1,285 $ -- ======== ======== CASH PAID FOR: Interest $ 1,698 $ 2,423 ======== ======== Income taxes $ 433 $ 433 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. - 6 - AEARO CORPORATION NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 2001 (Unaudited) 1) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America, the Company's 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-K405. 2) COMPANY BACKGROUND Aearo Corporation, a Delaware corporation, and its direct wholly owned subsidiary, Aearo Company, a Delaware corporation (collectively referred to herein as "the Company") manufactures and sells products under the brand names: AOSafety(R), E-A-R(R), and Peltor(R). These products are sold through three reportable segments, which are Safety Products, Safety Prescription Eyewear and Specialty Composites. 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. Reclassifications. Certain amounts included in the prior period financial statements may have been reclassified to conform to the current period presentation. The reclassifications have no impact on net income previously reported. Revenue Recognition. The Company recognizes revenue upon shipment of its products to customers. Foreign Currency Translation. Assets and liabilities of the Company's foreign operations are translated at period-end exchange rates. Income and expenses are translated at the approximate average rate during the period. Foreign currency translation adjustments are recorded as a separate component of stockholders' equity. Foreign currency gains and losses arising from transactions by any of the Company's subsidiaries are reflected in net income. - 7 - Shipping and Handling Fees and Costs. Shipping and handling costs include payments to third parties for the delivery of products to customers, as well as internal salaries and overhead costs incurred to store, move and prepare finished products for shipment. Shipping and handling costs are included with selling and administrative expenses in the accompanying condensed consolidated statement of operations and totaled $4.0 million in the period ended December 31, 2001 and 2000, respectively. The Company recovers a portion of its shipping and handling costs from its customers and records this recovery in net sales. Income Taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates. Intangible Assets. Intangible assets consist primarily of the goodwill, patents, and trademarks purchased in business acquisitions. Intangible assets are amortized over their estimated useful lives. Impairment or Disposal of Long-Lived Assets. In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and Accounting Principles Board ("APB") No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No 144 is effective in fiscal years beginning after December 15, 2001, with early adoption permitted. The Company is currently assessing the impact of adopting this standard and has not yet determined the effect of adoption on its financial position and results of operations. Asset Retirement Obligations. In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, and establishes accounting standards requiring the recording of the fair value of liabilities associated with the retirement of long-lived assets in the period in which they are incurred. The Company is currently assessing the impact of adopting this standard and has not yet determined the effect of adoption on its financial position and results of operations. Business Combinations, Goodwill and Other Intangibles. In June 2001, the FASB issued two new pronouncements: SFAS No. 141, "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangibles." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that the use of the pooling-of-interest method is no longer allowed. SFAS No. 142 requires that upon adoption, amortization of goodwill will cease and instead, the carrying value of goodwill be evaluated for impairment on an annual basis. Identifiable intangible assets will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The Company is evaluating the impact of the adoption of these standards and has not yet determined the effect of adoption on its financial position and results of operations. - 8 - Accounting for Derivative Instruments and Hedging Activities. The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" on October 1, 2000. SFAS No. 133 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 forward contracts and interest rate swap and collar agreements, which are derivatives as defined by SFAS No. 133. The Company enters into foreign currency forward contracts to mitigate the effects of changes in foreign currency rates on profitability and enters into interest rate swap and collar 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 foreign currency forward contracts or when related interest payments affect earnings for interest rate swaps and collar agreements. As a result of the foreign currency forward contracts, the Company has recorded a derivative receivable of $0.2 million at December 31, 2001. All foreign currency forward contracts will expire over the next 9 months. There were no interest rate swap agreements at December 31, 2001. During the period ending December 31, 2001 the Company reclassified into earnings a net gain of approximately $0.1 million resulting from the exercise of foreign currency forward contracts. All foreign currency forward contracts were determined to be highly effective, therefore no ineffectiveness was recorded in earnings. The Company also executes foreign currency forward 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 current earnings. The impact on earnings was a loss of approximately $0.1 million for the period ended December 31, 2001. The Company also entered into an interest rate collar arrangement during October 2001 to protect $25.0 million of adjustable Term Loan debt (as defined below in Note 6). The collar was not designated as a hedge under SFAS No. 133. The fair value of the interest rate collar remained unchanged and accordingly there was no charge to earnings in the period ended December 31, 2001. - 9 - 4) COMPREHENSIVE INCOME Comprehensive income (loss) consisted of the following (Dollars in thousands): Three months ended December 31, --------------------------------- 2001 2000 (Unaudited) (Unaudited) -------------- --------------- Net loss $ (711) $ (2,387) Foreign currency translation adjustment 560 1,694 Unrealized gain (loss) on derivative Instruments 209 (1,701) -------------- --------------- Comprehensive income(loss) $ 58 $ (2,394) ============== =============== 5) INVENTORIES Inventories consisted of the following (Dollars in thousands): December 31, September 30, 2001 2001 -------------- -------------- (Unaudited) Raw materials $ 7,556 $ 7,259 Work in process 8,296 8,364 Finished goods 14,900 13,941 -------------- -------------- $ 30,752 $ 29,564 ============== ============== 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) $98 million of Senior Subordinated Notes (Notes) due 2005, which are publicly held and are redeemable at the option of the Company, in whole or in part, at various redemption prices, and (b) up to an aggregate of $135 million under a Credit Agreement with various banks to provide Senior Bank Facilities comprised of (i) a secured term loan facility consisting of loans providing for up to $100 million of term loans (collectively the Term Loans) with a portion of the Term Loans denominated in foreign currencies, (ii) a secured revolving credit facility (Revolving Credit Facility) providing for up to $30 million of revolving loans for general corporate purposes and (iii) a U.K. overdraft facility of up to an equivalent of $5 million in Great Britain Pounds for working capital requirements as needed. The amount outstanding on the Term Loans at December 31, 2001, was approximately $97 million. No amounts were outstanding under the Revolving Credit Facility or the U.K. overdraft facility. - 10 - Under the terms of both the Senior Bank Facilities and the Notes indenture, Aearo Company is required to comply with certain financial covenants and restrictions. Aearo Company was in compliance with all financial covenants and restrictions at December 31, 2001. On October 17, 2001 the Company executed a First Amendment to the Credit Agreement, which allowed the Company the option to purchase, on or before December 21, 2001, up to $10 million of the Notes at or below par. Prior to December 21, 2001, the Company purchased and retired $2 million of the Notes. 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. Contingencies. Various lawsuits and claims arise against the Company in the ordinary course of its business. Most of these lawsuits and claims relate to the Company's safety eyewear and respiratory product lines and primarily involve accidents and/or exposures occurring after the Company's Predecessor acquired the AOSafety(R) Division from American Optical Corporation in April 1990. The Company is contingently liable with respect to numerous lawsuits involving respirators sold by American Optical Corporation prior to the acquisition of the AOSafety(R) Division in April 1990. These lawsuits typically involve plaintiffs alleging that they suffer from asbestosis or silicosis, and that such condition results in part from respirators, which were negligently designed or manufactured. The defendants in these lawsuits are often numerous, and include, in addition to respirator manufacturers, employers of the plaintiffs and manufacturers of sand (used in sand blasting) and asbestos. Responsibility for legal costs, as well as for settlements and judgments, is shared contractually by the Company, American Optical Corporation and a prior owner of American Optical Corporation. The Company and Cabot have entered into an arrangement whereby, so long as the Company pays to Cabot an annual fee of $400,000, which the Company has elected to pay, Cabot will retain responsibility and liability for, and indemnify the Company against, certain legal claims asserted after July 11, 1995 (the date of the Company's formation) alleged to arise out of the use of respirators manufactured prior to July 1995. In addition, the Company may be responsible for claims alleged to arise out of the use of respirators manufactured by the Company as well as products purchased for resale. The Company may also be responsible for certain claims of acquired companies other than the AOSafety(R) Division that are not covered by the management agreement with Cabot. At December 31, 2001, the Company has reserved approximately $5.0 million for product liabilities including those arising from asbestosis or silicosis litigation. The reserve is reevaluated periodically and may result in additional charges to operations if additional information becomes available. Consistent with the general environment experienced by other companies involved in asbestos-related litigation, there has been an increase in the number of asserted legal claims that could potentially involve the Company. 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-related litigation could affect the Company's cost over - 11 - time. However, it is management's opinion, taking into account currently available information, historical experience, uncertainties, the Cabot agreement and the Company's reserve, that these suits and claims should not result in final judgments or settlements that, in the aggregate, would have a material effect on the Company's financial condition or results of operation. 8) SEGMENT REPORTING The Company manufactures and sells products under the brand names: AOSafety(R), E-A-R(R), and Peltor(R). These products are sold through three reportable segments, which are Safety Products, Safety Prescription Eyewear and Specialty Composites. The Safety Products segment manufactures and sells hearing protection devices, non-prescription safety eyewear, face shields, reusable and disposable respirators, hard hats and first aid kits. The Safety Prescription Eyewear segment manufactures and sells prescription eyewear products that are designed to protect the eyes from the typical hazards encountered in the industrial work environment. The Company's Safety Prescription Eyewear segment purchases component parts (lenses and the majority of its frames) from various suppliers, grinds, shapes and applies coatings to the lenses in accordance with the customer's prescription, and then assembles the glasses using the customer's choice of frame. The Specialty Composites segment manufactures a wide array of energy-absorbing materials that are incorporated into other manufacturers' products to control noise, vibration and shock. Net Sales by Business Segment (Dollars in thousands): Three Months Ended December 31, ------------------------------------------- 2001 2000 ------------------- ------------------ (Unaudited) (Unaudited) Safety Products $ 45,006 $ 49,178 Safety Prescription Eyewear 8,994 8,941 Specialty Composites 7,643 10,246 ------------------- ------------------ Total $ 61,643 $ 68,365 =================== ================== Inter-segment sales of the Specialty Composites segment to the Safety Products segment totaled $0.7 million and $1.1 million for the three months ended December 31, 2001 and 2000, respectively. The inter-segment sales value is determined at fully absorbed inventory cost at standard rates plus 25%. - 12 - EBITDA by Business Segment and reconciliation to loss before provision for income taxes (Dollars in thousands): Three Months Ended December 31 ---------------------------------------- 2001 2000 ----------------- ----------------- (Unaudited) (Unaudited) Safety Products $ 7,982 $ 6,559 Safety Prescription Eyewear 254 -- Specialty Composites 31 598 Reconciling Items 597 502 ---------------- ----------------- Total EBITDA 8,864 7,659 Depreciation 2,375 2,529 Amortization 1,559 1,655 Non-operating Costs 8 (6) Interest 5,110 5,801 ---------------- ----------------- Loss before provision for income taxes $ (188) $ (2,320) ================ ================= EBITDA is defined by the Company as earnings before interest, taxes, depreciation, amortization, and non-operating income or expense. Non-operating income or expense is further defined as extraordinary gains or losses, or gains or losses from sales of assets other than in the ordinary course of business. While the Company believes EBITDA is a useful indicator of its ability to service debt, EBITDA should not be considered as a substitute for net income (loss) determined in accordance with accounting principles generally accepted in the United States of America as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity. Investors should be aware that EBITDA as presented above may not be comparable to similarly titled measures presented by other companies and comparisons could be misleading unless all companies and analysts calculate this measure in the same fashion. 9) RESTRUCTURING CHARGE During fiscal 2001, the Company recorded an unusual charge of $11.4 million relating to a restructuring plan announced by the Company to improve its competitive position and long-term profitability. The plan includes the closure of its Ettlingen, Germany plant, significantly reorganizing operations at the Company's Varnamo, Sweden plant, rationalizing the manufacturing assets and product mix of its Specialty Composites business unit and a reduction of products and product lines. The unusual charge includes cash charges of $2.3 million, which includes $1.8 million for severance and other separation costs to cover the reduction of 5% of the Company's work force and $0.5 million for other costs associated with this plan. The unusual charge also includes non-cash charges of $9.1 million, which includes $3.2 million for non-cancelable long-term lease obligations, $2.9 million for asset impairments, $2.4 million for inventory disposals and $0.6 million related to the sale of the Company's Ettlingen, Germany location. - 13 - As of December 31, 2001, there is approximately $7.9 million accrued related to the restructuring. 10) ACQUISITIONS On December 14, 2001, the Company acquired Iron Age Vision from Iron Age Corporation of Pittsburgh, Pennsylvania for approximately $0.7 million. Iron Age Vision was the safety prescription eyewear division of Iron Age Corporation. The transaction was accounted for using the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations", and accordingly, the operating results of Iron Age Vision have been included with those of the Company subsequent to December 14, 2001. 11) SUBSEQUENT EVENTS On January 21, 2002 the Company acquired the industrial safety business of Montreal, Canada based Leader Industries, Inc. for approximately $3.3 million. The transaction was accounted for using the purchase method of accounting in accordance with SFAS No. 141, "Business Combinations", and accordingly, the operating results of Leader Industries, Inc. will be included with those of the Company subsequent to January 22, 2002. - 14 - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements of the Company, including notes thereto. This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in such forward-looking statements. The factors that might cause such a difference include, among others, the following: risks associated with indebtedness; risks related to acquisitions; risks associated with the conversion to a new management information system; high level of competition in the Company's markets; importance and costs of product innovation; risks associated with international operations; product liability exposure; unpredictability of patent protection and other intellectual property issues; dependence on key personnel; the risk of adverse effect of economic and regulatory conditions on sales; and risks associated with environmental matters Results of Operations (Dollars in Thousands) (Unaudited)
Three Months Ended December 31, ------------------------------------------------------------- 2001 % 2000 % ----------- ------------ ----------- ------------ Net Sales Safety Products $ 45,006 73.0 $ 49,178 71.9 Safety Prescription Eyewear 8,994 14.6 8,941 13.1 Specialty Composites 7,643 12.4 10,246 15.0 ----------- ----------- ----------- ----------- Total net sales 61,643 100.0 68,365 100.0 Cost of Sales 32,928 53.4 37,553 54.9 Gross profit 28,715 46.6 30,812 45.1 Operating Expenses- Selling and administrative 20,856 33.8 24,183 35.4 Research and technical services 1,369 2.2 1,484 2.2 Amortization of intangibles 1,559 2.5 1,655 2.4 Other charges, net 9 -- 9 -- ----------- ----------- ----------- ----------- Total operating expenses 23,793 38.6 27,331 40.0 Operating income 4,922 8.0 3,481 5.1 Interest expense, net 5,110 8.3 5,801 8.5 ----------- ----------- ----------- ----------- Loss before provision for income taxes (188) (0.3) (2,320) (3.4) Provision for income taxes 523 0.8 67 0.1 ----------- ----------- ----------- ----------- Net loss (711) (1.2) (2,387) (3.5) EBITDA $ 8,864 14.4 $ 7,659 $ 11.2 =========== =========== =========== ===========
- 15 - Results of Operations -- Three Months Ended December 31, 2001 Compared to Three Months Ended December 31, 2000 Net Sales. Net sales in the three months ended December 31, 2001 decreased 9.8% to $61.6 million from $68.4 million in the three months ended December 31, 2000. The change in sales was primarily driven by the significant slowdown in the manufacturing sector of the economy in which the Company markets its products, exacerbated by the impact of the terrorist events of September 11, 2001. The Safety Products segment net sales in the three months ended December 31, 2001 decreased 8.5% to $45.0 million from $49.2 million in the three months ended December 31, 2000. This decrease was primarily driven by the continued effects of a weak economy as mentioned above. The Safety Prescription Eyewear segment net sales in the three months ended December 31, 2001 increased 1.0% to $9.0 million from $8.9 million in the three months ended December 31, 2000. This increase was the result of increased share in the safety prescription eyewear market despite the weak economy and events of September 11, 2001. Specialty Composites' net sales in the three months ended December 31, 2001 decreased 25.4% to $7.6 million from $10.2 million in the three months ended December 31, 2000. The decrease was primarily driven by volume declines in the truck market and the electronics segment of the precision equipment market, which includes computers and personal communications system (PCS) applications. Gross Profit. Gross Profit in the three months ended December 31, 2001 decreased 6.8% to $28.7 million from $30.8 million in the three months ended December 31, 2000. Gross Profit as a percentage of net sales in the three months ended December 31, 2001 improved to 46.6% as compared to 45.1% in the three months ended December 31, 2000. The decline in Gross Profit is primarily due to lower sales volumes caused by the events of September 11, 2001 and the continued recession. The increase in the Gross Profit percentage of net sales is primarily due to continued productivity improvements in manufacturing operations and the positive impact of the restructuring plan announced on September 30, 2001 partially offset by unfavorable product mix and lower capacity utilization. Operating Expenses. Operating expenses in the three months ended December 31, 2001 decreased 12.9% to $23.8 million from $27.3 million in the three months ended December 31, 2000. The decrease in operating expenses was primarily driven by lower selling and administrative expenses. Selling and administrative expenses as a percentage of net sales decreased to 33.8% in the three months ended December 31, 2001 as compared to 35.4% in the three months ended December 31, 2000. The decrease in selling and administrative expenses was primarily due to discretionary spending controls to keep expenses in line with revenues. Operating Income. Primarily as a result of the factors mentioned above, operating income increased 41.4% to $4.9 million in the three months ended December 31, 2001 from $3.5 million in the three months ended December 31, 2000. Operating income as a percentage of net sales in the three months ended December 31, 2001 increased to 8.0% as compared to 5.1% in the three months ended December 31, 2000. Interest Expense, Net. Interest expense, net in the three months ended December 31, 2001 decreased 11.9% to $5.1 million from $5.8 million in the three months ended December 31, 2000. The decrease is attributed to lower weighted average interest rates in effect for the three months ended December 31, 2001 as compared to the three months ended December 31, 2000. - 16 - Provision For Income Taxes. The provision for income taxes increased to $0.5 million in the three months ended December 31, 2001 from $0.1 million in the three months ended December 31, 2000. The Company's foreign subsidiaries had taxable income in their foreign jurisdictions while the Company's domestic subsidiaries generated a net operating loss. The domestic subsidiaries have net operating loss carry-forwards for income tax purposes. Due to the uncertainty of realizing these tax benefits, the tax benefits generated by the net operating losses have been fully offset by a valuation allowance. Net Income (Loss). For the three months ended December 31, 2001 the Company had a net loss of $0.7 million as compared to net loss of $2.4 million for the three months ended December 31, 2000. EBITDA. EBITDA is defined by the Company as earnings before interest, taxes, depreciation, amortization, and non-operating income or expense. Non-operating income or expense is further defined as extraordinary gains or losses, or gains or losses from sales of assets other than in the ordinary course of business. While the Company believes EBITDA is a useful indicator of its ability to service debt, EBITDA should not be considered as a substitute for net income determined in accordance with accounting principles generally accepted in the United States of America as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity. Investors should be aware that EBITDA as presented below may not be comparable to similarly titled measures presented by other companies and comparisons could be misleading unless all companies and analysts calculate this measure in the same fashion. EBITDA Calculation Three Months Ended December 31 (Dollars in Thousands) (Unaudited) Three Months Ended Change December 31, Favorable (Unfavorable) ------------ ----------------------- 2001 2000 Amount Percent ---- ---- ------ ------- Operating Income $ 4,922 $ 3,481 $ 1,441 41.4% Add Backs: Depreciation 2,375 2,529 (154) (6.1%) Amortization of intangibles 1,559 1,655 (96) (5.8%) Non-operating costs, net 8 (6) 14 -- -------- -------- --------- EBITDA $ 8,864 $ 7,659 $ 1,205 15.7% ======== ======== ========= EBITDA for the three months ended December 31, 2001 increased 15.7% to $8.9 million from $7.7 million for the three months ended December 31, 2000. EBITDA as a percentage of net sales in the three months ended December 31, 2001 was 14.4% as compared to 11.2% in the three months ended December 31, 2000. The increase in EBITDA is primarily attributed to the improvement in gross margin percentage and the reduction in selling and administrative expenses, which were partially offset by lower sales volume and unfavorable product mix. 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 - 17 - in these currencies, a large portion of product costs are U.S. Dollar denominated. As a result, a decline in the value of the U.S. Dollar relative to other currencies can have a favorable impact on the profitability of the Company and an increase in the value of the U.S. Dollar relative to these other currencies can have a negative effect on the profitability of the Company. As a result of the acquisition of Peltor, the Company's operations are also affected by changes in exchange rates relative to the Swedish Krona. 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 utilizes foreign currency forward 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. Effects of Economic Conditions Softening of the North American economy began during the first fiscal quarter of 2001. Since that time the overall economic downturn has resulted in many companies announcing layoffs which has also had an impact on overall consumer confidence. The announced layoffs have had a significant impact on the number of employed industrial workers. As a result of this it is expected that sales, on a comparable quarterly basis, will remain soft for at least the next two fiscal quarters. Liquidity and Capital Resources The Company's sources of funds have consisted primarily of operating cash flow and debt financing. The Company's uses of those funds consist principally of debt service, capital expenditures and acquisitions. The Company's debt structure includes: (a) $98 million of Senior Subordinated Notes (Notes) due 2005, which are publicly held and are redeemable at the option of the Company, in whole or in part, at various redemption prices, and (b) up to an aggregate of $135.0 million under a Credit Agreement with various banks to provide Senior Bank Facilities comprised of (i) a secured term loan facility consisting of loans providing for up to $100 million of term loans (collectively the Term Loans) with a portion of the Term Loans denominated in foreign currencies, (ii) a secured revolving credit facility (Revolving Credit Facility) providing for up to $30million of revolving loans for general corporate purposes and (iii) a U.K. overdraft facility of up to an equivalent of $5.0 million in Great Britain Pounds for working capital requirements as needed. The amount outstanding on the Term Loans at December 31, 2001, was approximately $97.0 million. No amounts were outstanding under the Revolving Credit Facility or the U.K. overdraft facility. Under the terms of both the Senior Bank Facilities and the Notes indenture, Aearo Company is required to comply with certain financial covenants and restrictions. Aearo Company was in compliance with all financial covenants and restrictions at December 31, 2001. On October 17, 2001 the Company executed a First Amendment to the Credit Agreement, which allowed the Company the option to purchase, on or before December 21, 2001, - 18 - up to $10 million of the Notes at or below par. Prior to December 21, 2001, the Company purchased and retired $2.0 million of the Notes. Maturities under the Company's Term Loans are: $6.0 million for the remainder of fiscal 2002, $12.0 million in fiscal 2003, and $78.0 million thereafter. Other than upon a change of control or as a result of certain asset sales, or in the event that certain excess funds exist at the end of a fiscal year, the Company will not be required to make any principal payments in respect of the Notes until maturity. The Company is required to make interest payments with respect to both the Senior Bank Facilities and the Notes. The Company's Revolving Credit Facility and Term Loans mature in March 2005. The Company's net cash provided by operating activities for the three months ended December 31, 2001 totaled $8.1 million as compared to $3.4 million for the three months ended December 31, 2000. The increase of $4.7 million was due primarily to a $1.7 million improvement in net loss and a $3.1 million increase in the Company's net changes in assets and liabilities. The Company's net changes in assets and liabilities was primarily driven by a larger reduction in receivables of $4.3 million, an improvement in the change in inventories of $0.4 million, offset by a decrease in the change in accounts payable and other liabilities of $1.4 million, as well as a $0.2 million decrease in the net change in other assets and liabilities. The decrease in the change in accounts payable and other liabilities included $0.5 million in payments related to the Company's restructuring plan. Net cash used by investing activities was $2.5 million for the three months ended December 31, 2001 as compared to $1.6 million for the three months ended December 31, 2000. The increase of $0.9 million in net cash used by investing activities is primarily attributed to the acquisition of Iron Age Vision for $0.7 million in December 2001 and an increase of $0.2 million in capital expenditures for the three months ended December 31, 2001, as compared to the three months ended December 31, 2000. Net cash used by financing activities for the three months ended December 31, 2001 was $4.1 million compared with net cash used by financing activities for the three months ended December 31, 2000 of $0.7 million. The change of $3.4 million is primarily due to no draw of proceeds from the Revolving Credit Facility during the three months ended December 31, 2001, as compared to a net draw of $3.7 million during the three months ended December 31, 2000. The Company paid off the Revolving Credit Facility upon the execution of the July 13, 2001 amendment and restatement of its Credit Agreement. The Company has a substantial amount of indebtedness. The Company relies on internally generated funds, and to the extent necessary, on borrowings under the Revolving Credit Facility (subject to certain customary drawing conditions) to meet its liquidity needs. The Company anticipates that operating cash flow will be adequate to meet its operating and capital expenditure requirements for the next several years, although there can be no assurances that existing levels of sales and normalized profitability, and therefore cash flow, will be maintained in the future. In particular, during fiscal 2001 and the three months ended December 31, 2001, the Company was affected by the significant slowdown in the manufacturing sector of the economies in which the Company markets its products that began in earnest during the first fiscal quarter of fiscal 2001, exacerbated by the impact of the terrorist events of September 11, 2001. It is expected that sales, on a comparable quarterly basis, will remain soft for at least the next two fiscal quarters. - 19 - 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 are for purposes other than trading. The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" on October 1, 2000. 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. As a result of the acquisition of Peltor, the Company's operations are also affected by changes in exchange rates relative to the Swedish Krona. In contrast with 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 executes two hedging programs, one for transaction exposures, and the other for cash flow exposures in European operations. The Company has utilized foreign currency forward contracts for transaction and cash flow exposures. During the period ended December 31, 2001, net transaction losses were $0.1 million and cash flow hedge gains were $0.1 million. In addition, the Company limits foreign exchange impact on the balance sheet with foreign denominated debt in Great Britain Pound Sterling and Euros. The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" on October 1, 2000. SFAS No. 133 requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measures at its fair value. As a result of foreign currency forward contracts, the Company has recorded a derivative receivable of $0.2 million as of December 31, 2001. The foreign currency forward contracts will expire over the next 9 months. Interest Rates The Company is exposed to market risk changes in interest rates through its debt. The Company utilizes interest rate instruments to reduce the impact of either increases or decreases in interest rates on its floating rate debt. As a result of the current economic slowdown and corresponding interest rate reductions, the Company entered into an interest rate collar arrangement in October 2001 to protect $25.0 million of the outstanding variable rate term loan debt from future interest rate volatility. The collar floor is set at 2% LIBOR (London Interbank Offering Rate) and cap at 6.25% LIBOR. The collar was not designated as a hedge under SFAS No. 133 and accordingly, the fair value of gains or losses was charged to earnings. - 20 - The Company is of the opinion that it is well positioned to manage interest 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 impact 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 risk. - 21 - PART II - OTHER INFORMATION Item 1. Legal Proceedings Various lawsuits and claims arise against the Company in the ordinary course of its business. Most of these lawsuits and claims relate to the Company's safety eyewear and respiratory product lines and primarily involve accidents and/or exposures occurring after the Company's Predecessor acquired the AOSafety(R) Division from American Optical Corporation in April 1990. The Company is contingently liable with respect to numerous lawsuits involving respirators sold by American Optical Corporation prior to the acquisition of the AOSafety(R) Division in April 1990. These lawsuits typically involve plaintiffs alleging that they suffer from asbestosis or silicosis, and that such condition results in part from respirators which were negligently designed or manufactured. The defendants in these lawsuits are often numerous, and include, in addition to respirator manufacturers, employers of the plaintiffs and manufacturers of sand (used in sand blasting) and asbestos. Responsibility for legal costs, as well as for settlements and judgments, is shared contractually by the Company, American Optical Corporation and a prior owner of American Optical Corporation. The Company and Cabot have entered into an arrangement whereby, so long as the Company pays to Cabot an annual fee of $400,000, which the Company has elected to pay, Cabot will retain responsibility and liability for, and indemnify the Company against, certain legal claims asserted after July 11, 1995 (the date of the Company's formation) alleged to arise out of the use of respirators manufactured prior to July 1995. In addition, the Company may be responsible for claims alleged to arise out of the use of respirators manufactured by the Company as well as products purchased for resale. The Company may also be responsible for certain claims of acquired companies other than the AOSafety(R) Division that are not covered by the management agreement with Cabot. At December 31, 2001 the Company has reserved approximately $5.0 million for liabilities including those arising from asbestosis or silicosis litigation. The reserve is re-evaluated periodically and may result in additional charges to operations if additional information becomes available. Consistent with the general environment experienced by other companies involved in asbestos-related litigation, there has been an increase in the number of asserted legal claims that could potentially involve the Company. 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-related litigation could affect the Company's cost over time. However, it is management's opinion, taking into account currently available information, historical experience, uncertainties, the Cabot agreement and the Company's reserve, that these suits and claims should not result in final judgments or settlements that, in the aggregate, would have a material effect on the Company's financial condition or results of operation. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. - 22 - Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.30 - First Amendment to the Amended and Restated Credit Agreement, as of July 13, 2001, dated October 17, 2001 (b) Reports on Form 8-K On October 1, 2001, the Company filed a Current Report on Form 8-K regarding the announcement of its restructuring. On October 19, 2001, the Company filed a Current Report on Form 8-K regarding a slowdown in the market for its products and other matters. - 23 - 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: January 30, 2002 AEARO CORPORATION /s/ Jeffrey S. Kulka ------------------------------------------ Jeffrey S. Kulka Vice President, Chief Financial Officer, Treasurer,and Secretary (Principal Financial and Accounting Officer) - 24 - EXHIBIT INDEX EXHIBITS DESCRIPTION - --------- ------------ 10.30* First Amendment to the Amended and Restated Credit Agreement as of July 13, 2001, dated October 17, 2001 *Filed herewith. EX-10 3 exh-edu.txt EXHIBIT 10.30 FIRST AMENDMENT TO THE CREDIT AGREEMENT FIRST AMENDMENT TO THE CREDIT AGREEMENT (the "Amendment"), dated as of October 11, 2001, among AEARO CORPORATION, a Delaware corporation ("Holdings"), AEARO COMPANY I, a Delaware corporation (the "US Borrower"), AEARO CANADA LIMITED, an Ontario corporation (the "Canadian Borrower"), AEARO LIMITED, a limited liability company formed under the laws of England (the "UK Borrower"), the Banks party hereto and BANKERS TRUST COMPANY, as Administrative Agent. Unless otherwise defined herein, capitalized terms used herein and defined in the Credit Agreement referred below are used are herein defined. W I T N E S S E T H : - - - - - - - - - - WHEREAS, Holdings, the US Borrower, the Canadian Borrower, the UK Borrower, the Banks and the Administrative Agent are parties to a Credit Agreement, dated as of July 11, 1995 and amended and restated as of July 13, 2001 (as amended, modified or supplemented to, but not including, the date hereof, the "Credit Agreement"); WHEREAS, the parties hereto wish to provide for certain amendments, waivers and consents to the Credit Agreement as herein provided; and WHEREAS, subject to the terms and conditions of this Amendment, the parties hereto wish to agree as follows: A. Amendments 1. Section 1.01(a) of the Credit Agreement is hereby amended by inserting the following new clause (F) at the end thereof. "(F) Subject to and upon the terms and conditions set forth herein, each Bank with an Additional A-1 Term Loan Commitment severally agrees to make at any time and from time to time from the First Amendment Effective Date to, and including, the Additional A-1 Term Loan Commitment Termination Date an additional A-1 Term Loan or A-1 Term Loans to the US Borrower, which such A-1 Term Loans shall (i) be made and maintained in Dollars, (ii) at the option of the US Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or one or more Borrowings of Eurodollar Loans having such Interest Periods as are selected by the US Borrower pursuant to Section 1.09 and Section 1.17(b), and (iii) not exceed for any Bank, in initial aggregate principal amount, that amount which equals the Additional A-1 Term Loan Commitment of such Bank at the time of incurrence thereof (before giving effect to any reductions thereto on such date pursuant to Section 3.03(b)). Once repaid, A-1 Term Loans incurred hereunder may not be reborrowed." 2. Section 1 of the Credit Agreement is hereby amended by inserting the following new Section 1.17 at the end thereof: "1.17 Additional Term Loan Commitments. (a) So long as no Default or Event of Default then exists or would result therefrom, the US Borrower shall have the right to request on one or more occasions from the period on and after the First Amendment Effective Date to, and including, the Additional A-1 Term Loan Commitment Termination Date that one or more Banks (and/or one or more other Persons which will become Banks as provided below) provide Additional A-1 Term Loan Commitments and, subject to the terms and conditions contained in this Agreement and the relevant Additional A-1 Term Loan Commitment Agreement, make A-1 Term Loans on any Additional A-1 Term Loan Borrowing Date pursuant to Section 1.01(a)(F), it being understood and agreed, however, that (i) no Bank shall be obligated to provide an Additional A-1 Term Loan Commitment as a result of any request by the US Borrower, and until such time, if any, as (x) such Bank has agreed in its sole discretion to provide an Additional A-1 Term Loan Commitment and executed and delivered to the Administrative Agent an Additional A-1 Term Loan Commitment Agreement as provided in clause (b) of this Section 1.17 and (y) the other conditions set forth in Section 1.17(b) shall have been satisfied, such Bank shall not be obligated to fund any A-1 Term Loans pursuant to an Additional A-1 Term Loan Commitment, (ii) any Bank (or, in the circumstances contemplated by clause (vi) below, any other Person which will qualify as an Eligible Transferee) may so provide an Additional A-1 Term Loan Commitment without the consent of any other Bank, (iii) each provision of Additional A-1 Term Loan Commitments pursuant to this Section 1.17 on a given date shall be in a minimum aggregate amount (for all Banks (including in the circumstances contemplated by clause (vi) below, Eligible Transferees who will become Banks)) of at least $1,000,000, (iv) the aggregate amount of all Additional A-1 Term Loan Commitments permitted to be provided pursuant to this Section 1.17 shall not exceed $5,000,000, (v) other than the Additional A-1 Term Loan Scheduled Repayments in respect of the Additional A-1 Term Loan Commitments which shall be as set forth in Section 4.02(b)(F) of this Agreement, the A-1 Term Loans made pursuant to the Additional A-1 Term Loan Commitment shall be on the same terms and conditions set forth in this Credit Agreement and the other Credit Documents pertaining to A-1 Term Loans, (vi) if, after the US Borrower has requested the then existing Banks (other than Defaulting Banks) to provide Additional A-1 Term Loan Commitments pursuant to this Section 1.17 the US Borrower has not received Additional A-1 Term Loan Commitments in an aggregate amount equal to that amount of Additional A-1 Term Loan Commitments which the US Borrower desires to obtain pursuant to such request (as set forth in the notice provided by the US Borrower as provided below), then the US Borrower may, with the consent of the Administrative Agent (which consent shall not be unreasonably withheld or delayed), request Additional A-1 Term Loan Commitments from Persons which would qualify as Eligible Transferees hereunder in an aggregate amount equal to such deficiency on terms (including Fees to be paid to such Eligible Transferee) which are no more favorable to such Eligible Transferee in any respect than the terms offered to the then existing Lenders and (vii) the proceeds of all A-1 Term Loans made pursuant to Additional A-1 Term Loan Commitments shall be used to repurchase, redeem or otherwise retire outstanding Senior Subordinated Notes in accordance with Section 8.11(i)(z) and to pay the fees and expenses incurred in connection therewith. (b) At the time of any provision of Additional A-1 Term Loan Commitments pursuant to this Section 1.17, (i) the US Borrower, the Administrative Agent and each such Bank or other Eligible Transferee (each an "Additional A-1 Term Loan Bank") which agrees to provide an Additional A-1 Term Loan Commitment shall execute and deliver to the Administrative Agent an Additional A-1 Term Loan Commitment Agreement substantially in the form of Exhibit O (appropriately completed), with the effectiveness of such Additional A-1 Term Loan Bank's Additional A-1 Term Loan Commitment (the "Additional A-1 Term Loan Commitment Date") to occur upon delivery of such Additional A-1 Term Loan Commitment Agreement to the Administrative Agent and the satisfaction of the other conditions in this Section 1.17(b) to the reasonable satisfaction of the Administrative Agent, (ii) the Administrative Agent shall receive from the US Borrower (or, to the extent agreed to by the US Borrower and the respective Additional A-1 Term Loan Bank, from such respective Additional A-1 Term Loan Bank) the payment of a non-refundable fee of $3,500 for each Eligible Transferee which becomes a Bank pursuant to this Section 1.17, (iii) the US Borrower, in coordination with the Administrative Agent, shall ensure that each Bank participate in each Borrowing of A-1 Term Loans pro rata (after giving effect to any increase in A-1 Term Loans pursuant to this Section 1.17) and with the US Borrower being obligated to pay the respective Banks the costs of the type referenced to in Section 1.11 in connection with any such Borrowing; provided that notwithstanding the above, the Borrowing of A-1 Term Loans pursuant to any Additional A-1 Term Loan Commitment on each Additional A-1 Term Loan Borrowing Date may have an initial Interest Period commencing on such date (or on the date that is three Business Days thereafter in the event such A-1 Term Loan is initially made as a Base Rate Loan) and ending on December 31, 2001, and any Bank that has made such A-1 Term Loans as Eurodollar Loans shall be entitled to receive an effective interest rate on such A-1 Term Loans as is equal to the Euro Rate as in effect three Business Days prior to the incurrence (or conversion) of such A-1 Term Loans plus the then Applicable Margin for such A-1 Term Loans, (iv) the US Borrower shall deliver to the Administrative Agent a certificate of its chief financial officer demonstrating in reasonable detail that the A-1 Term Loans to be incurred pursuant to an Additional A-1 Term Loan Commitment may be incurred in accordance with, and not violate any provisions of, the Senior Subordinated Note Indenture, and (v) the US Borrower shall deliver to the Administrative Agent an opinion or opinions, in form and substance reasonably satisfactory to the Administrative Agent, from counsel to the US Borrower reasonably satisfactory to the Administrative Agent and dated such date, covering such of the matters set forth in the opinions of counsel delivered to the Administrative Agent on the Restatement Effective Date pursuant to Section 5.04 as may be reasonably requested by the Administrative Agent, including, without limitation, that any A-1 Term Loans incurred pursuant to an Additional A-1 Term Loan Commitment will not violate any provisions of the Senior Subordinated Note Indenture and will constitute "Senior Debt" as defined in the Senior Subordinated Note Indenture, and such other matters as the Administrative Agent may reasonably request. The Administrative Agent shall promptly notify each Bank as to the effectiveness of each Additional A-1 Term Loan Commitment Agreement, and (i) at such time Schedule I shall be deemed modified to reflect the Additional A-1 Term Loan Commitments of such Additional A-1 Term Loan Bank and (ii) upon surrender of any old A-1 Term Loans by the respective Additional A-1 Term Loan Bank (or, if lost, a standard lost note indemnity in form and substance reasonably satisfactory to the US Borrower), to the extent requested by any Additional A-1 Term Loan Bank, a new A-1 Term Note will be issued, at the US Borrower's expense, to such Additional A-1 Term Loan Bank, to be in conformity with the requirements of Section 1.05 (with appropriate modifications) to the extent needed to reflect the revised A-1 Term Loan of such Bank. 3. Section 3.03(b) of the Credit Agreement is hereby amended by (i) inserting the reference "(A)" immediately after the reference "(b)" appearing therein and inserting the following new paragraph immediately after subclause (b): "(B) Notwithstanding anything to the contrary in Section 3.03(a) or in the foregoing clause (A), Additional A-1 Term Loan Commitments (i) shall be permanently reduced on each Additional A-1 Term Loan Borrowing Date (after giving effect to the incurrence of A-1 Term Loans pursuant to Additional A-1 Term Loan Commitments on each such date) in an amount equal to the aggregate principal amount of A-1 Term Loans incurred on each such date and (ii) shall terminate in its entirety (to the extent not theretofore terminated) on the Additional A-1 Term Loan Commitment Termination Date. 4. Section 4.02(b)(A) of the Credit Agreement is hereby amended by inserting the phrase "on the Restatement Effective Date" immediately prior to the phrase "multiplied by the percentage set forth below" appearing therein. 5. Section 4.02 of the Credit Agreement is hereby further amended by inserting the following new Section 4.02(b)(F) immediately following Section 4.02(b)(E): "(b) (F) In addition to any other mandatory repayments pursuant to this Section 4.02, the US Borrower shall be required to repay on each date set forth below a portion of the principal amount of A-1 Term Loans made pursuant to any Additional A-1 Term Loan Commitments, to the extent then outstanding, equal to the aggregate principal amount of such A-1 Term Loans outstanding on the Additional A-1 Term Loan Commitment Termination Date multiplied by the percentage set forth below opposite such date (each such repayment, as the same may be reduced as provided in Sections 4.01 and 4.02, an "Additional A-1 Term Loan Scheduled Repayment"): A-1 Term Loan Scheduled Repayment Date Percentage -------------------------------------- ---------- December 31, 2001 4.16% March 31, 2002 2.08% June 30, 2002 2.08% September 30, 2002 2.08% December 31, 2002 3.12% March 31, 2003 3.12% June 30, 2003 3.12% September 30, 2003 3.12% December 31, 2003 4.16% March 31, 2004 4.16% June 30, 2004 4.16% September 30, 2004 4.16% December 31, 2004 4.70% Term Loan Maturity Date 55.78%" 6. Section 6.08(a) of the Credit Agreement is hereby amended by (i) inserting the phrase ", (ii) for permitted repurchases, either directly or indirectly, of the Senior Subordinated Notes" immediately after the parenthetical "(to the extent not continued hereunder)" and (ii) deleting the reference to "(ii)" appearing therein and inserting the reference "(iii)" in lieu thereof. 7. Section 8.05(x) of the Credit Agreement is hereby amended by inserting the Section reference " or 8.11(i)" immediately after the Section reference "8.02" appearing therein. 8. Section 8.11(i) of the Credit Agreement is hereby amended by (i) deleting the word "and" appearing immediately before the clause (y) thereof and inserting a "," in lieu thereof, and (ii) inserting the following new clause (z) immediately following subclause (B) thereof: "and (z) for the period from the First Amendment Effective Date to, and including, the date which is 45 Business Days after the First Amendment Effective Date, repurchase, redeem or otherwise retire at par value or below par value outstanding Senior Subordinated Notes in an aggregate principal amount not to exceed $10,000,000," so long as (A) the first $5,000,000 of proceeds used for such repurchase, redemption or retirement of the Senior Subordinated Notes is provided from cash and Cash Equivalents of the US Borrower and (B) the remaining proceeds are provided from either (I) cash and Cash Equivalents of the US Borrower or (II) the incurrence of the A-1 Term Loans; it being understood and agreed that (C) the proceeds from the incurrence of Revolving Loans shall not be used for the repurchase, redemption or retirement of the Senior Subordinated Notes pursuant to this clause (z) and (D) any Senior Subordinated Notes repurchased, redeemed or retired pursuant to clause (y) and (z) above may not be reissued." 9. The definition of the term "Excess Cash Flow" contained in Section 10 of the Credit Agreement is hereby amended by inserting the phrase ", A-1 Term Loans incurred pursuant to Additional A-1 Term Loan Commitments" immediately after the phrase "other than Revolving Loans" appearing in the parenthetical in clause (iii)(A) thereof. 10. The definition of the term "Minimum Borrowing Amount" contained in Section 10 of the Credit Agreement is hereby amended by deleting clause (i) appearing therein and inserting the following in lieu thereof: "(i)(A) prior to December 31, 2001, with respect to A-1 Term Loans incurred pursuant to any Additional A-1 Term Loan Commitments that are Dollar denominated, $1,000,000 and (B) with respect to all other A-1 Term Loans that are Dollar denominated, $5,000,000," 11. The definitions of the terms A-1 Term Loan Commitment," "Required Banks," and "Scheduled Repayments" in Section 10 of the Credit Agreement are hereby amended to read in their entirety as follows: "A-1 Term Loan Commitment" shall mean the sum of, (i) with respect to each Bank, the amount set forth opposite such Bank's name on Schedule I directly below the column entitled "A-1 Term Loan Commitment", and (ii) the Additional A-1 Term Loan Commitment, in each case as the same may be reduced or terminated pursuant to Section 3.03 and/or 9. "Required Banks" shall mean Non-Defaulting Banks the sum of whose outstanding Term Loans (or, with respect to A-1 Term Loans made pursuant to an Additional A-1 Term Loan Commitment prior to the Additional A-1 Term Loan Commitment Termination Date, the Additional A-1 Term Loan Commitments) and Revolving Loan Commitments (or after the Total Revolving Loan Commitment has been terminated, outstanding Revolving Loans and Revolving Percentages of outstanding Letter of Credit Outstandings) constitute greater than 50% of the sum of (i) the total outstanding Term Loans (or, with respect to A-1 Term Loans made pursuant to an Additional A-1 Term Loan Commitment prior to the Additional A-1 Term Loan Commitment Termination Date, the Additional A-1 Term Loan Commitments) of Non-Defaulting Banks and (ii) the Total Revolving Loan Commitment less the aggregate Revolving Loan Commitments of Defaulting Banks (or, after the Total Revolving Loan Commitment has been terminated, the total outstanding Revolving Loans of Non-Defaulting Banks and the aggregate Revolving Percentages of all Non-Defaulting Banks of the Letter of Credit Outstandings at such time). For purposes of determining the Required Banks at any time, the principal amount of each Term Loan denominated in a Alternate Currency shall be deemed to be the Dollar Equivalent of the principal amount of such Term Loan at such time. "Scheduled Repayments" shall mean each A-1 Term Loan Scheduled Repayment, each Additional A-1 Term Loan Scheduled Repayment, each A-2 Term Loan Scheduled Repayment, each A-3 Term Loan Scheduled Repayment, each A-4 Term Loan Scheduled Repayment and each A-5 Term Loan Scheduled Repayment. 12. Section 10 of the Credit Agreement is hereby amended by inserting therein the following new defined terms in the appropriate alphabetical order: "Additional A-1 Term Loan Bank" shall have the meaning provided in Section 1.17(b). "Additional A-1 Term Loan Borrowing Date" shall mean the date the US Borrower incurs A-1 Term Loans pursuant to Additional A-1 Term Loan Commitments. "Additional A-1 Term Loan Commitment" shall mean, for each Bank, any commitment to A-1 Term Loans provided by such Bank pursuant to Section 1.17, in such amount as agreed to by such Bank in the respective Additional A-1 Term Loan Commitment Agreement. "Additional A-1 Term Loan Commitment Agreement" shall mean and include each Additional Term Loan Commitment Agreement substantially in the form of Exhibit O attached hereto executed in accordance with Section 1.17 hereof. "Additional A-1 Term Loan Commitment Date" shall have the meaning provided in Section 1.17(b). "Additional A-1 Term Loan Commitment Termination Date" shall mean December 31, 2001. "Additional A-1 Term Loan Scheduled Repayment" shall have the meaning provided in Section 4.02(b)(F). "Additional A-1 Term Loan Scheduled Repayment Date" shall have the meaning provided in Section 4.02(b)(F). "First Amendment to the Credit Agreement" shall mean the First Amendment to this Agreement, dated as of October 11, 2001. "First Amendment Effective Date" shall mean the First Amendment Effective Date as defined in the First Amendment to this Agreement. 13. The Credit Agreement is hereby further amended by inserting a new Exhibit O thereto in the form of Exhibit O attached hereto. B. Miscellaneous Provisions 1. In order to induce the Banks to enter into this Amendment, each of Holdings and each Borrower hereby represents and warrants that (i) the representations and warranties made by it contained in the Credit Agreement are true and correct in all material respects on and as of the First Amendment Effective Date (as defined below) (except with respect to any representations and warranties limited by their terms to a specific date, which shall be true and correct in all material respects as of such specific date), and (ii) there exists no Default or Event of Default under the Credit Agreement on the First Amendment Effective Date, in each case after giving effect to this Amendment. 2. The US Borrower hereby covenants and agrees to deliver to the Collateral Agent within 30 days following the incurrence of A-1 Term Loans pursuant to an Additional A-1 Term Loan Commitment, (x) fully executed counterparts of amendments (the "Mortgage Amendments"), in form and substance satisfactory to the Collateral Agent, to each of the Mortgages, together with evidence that counterparts of each of the Mortgage Amendments have been delivered to the title company insuring the Lien on the Mortgages for recording in all places to the extent necessary or desirable, in the judgment of the Collateral Agent, effectively to maintain a valid and enforceable first priority mortgage lien on the Mortgaged Properties in favor of the Collateral Agent for the benefit of the Secured Creditors and (y) either endorsements to the existing mortgage policies or new mortgage policies assuring the Collateral Agent that each Mortgage is a valid and enforceable first priority mortgage lien on the respective Mortgaged Properties, free and clear of all defects and encumbrances except Permitted Encumbrances. 3. All parties hereto hereby acknowledge and agree that all extensions of credit (including, without limitation, all A-1 Term Loans incurred pursuant to Additional A-1 Term Loan Commitments and all amounts owing with respect thereto) pursuant to the Credit Agreement, as amended by this Amendment and as same may be amended, modified or supplemented from time to time in the future, shall be entitled to the benefits of all Guaranties and Security Documents executed and delivered pursuant to the Credit Agreement, and to the benefit of all Credit Documents. 4. The US Borrower hereby agrees to pay each Bank which delivers an executed copy of this Amendment (by hard copy or facsimile) to the Administrative Agent by no later than 12:00 (Noon) (New York time) on October 17, 2001, a fee (the "Work Fee") in an amount equal to $2,000, which Work Fee shall be due and payable on the third Business Day following the date on which the Required Banks shall have executed and delivered this First Amendment. 5. This Amendment is limited as specified and shall not constitute an amendment, modification, acceptance or waiver of any other Credit Agreement or any other Credit Document. 6. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 7. This Amendment shall become effective on the date (the "First Amendment Effective Date") when Holdings, each Borrower and the Required Banks shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered (including by way of telecopier) the same to the Administrative Agent. 8. From and after the First Amendment Effective Date, all references in the Credit Agreement and in the other Credit Documents shall be deemed to be referenced to the Credit Agreement as modified hereby. * * * IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly executed and delivered as of the date first above written. AEARO CORPORATION By --------------------------------------------------- Title: AEARO COMPANY I By --------------------------------------------------- Title: AEARO CANADA LIMITED By --------------------------------------------------- Title: AEARO LIMITED By --------------------------------------------------- Title: CABOT SAFETY INTERMEDIATE CORPORATION By --------------------------------------------------- Title: CSC FSC, INC. By --------------------------------------------------- Title: BANKERS TRUST COMPANY, Individually and as Administrative Agent By --------------------------------------------------- Title: NAME OF LENDER: By --------------------------------------------------- Title: -----END PRIVACY-ENHANCED MESSAGE-----