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 incorporation or
organization)
(IRS Employer Identification No.)
5457 West 79th Street
46268
Indianapolis, Indiana
(Address of principal executive offices)
(Zip Code)
(317) 692-6666
(Registrant's telephone number, including area code)
_______________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
X
No
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 November 15, 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.
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 ............................................................................................................................... 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................................ 39
Item 4. Controls and Procedures .......................................................................................................... 41
PART II – OTHER INFORMATION ........................................................................................................ 42
Item 6. Exhibits and Reports on Form 8-K.......................................................................................... 41
SIGNATURES ........................................................................................................................................ 42
EXHIBIT INDEX .................................................................................................................................... 43
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,
See Note 12)
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable (net of allowance for doubtful accounts of
$1,439 and $1,358, respectively)
Inventories
Deferred and prepaid expenses
Total current assets
LONG TERM ASSETS:
Property, plant and equipment, net
Goodwill, net
Other intangible assets, net
Other assets
Total assets
$
$
40,947
September 30,
2004
$
56,497
40,913
6,603
144,960
54,159
40,849
4,146
126,878
53,213
111,927
183,321
15,235
508,656
54,750
133,745
185,855
15,144
516,372
$
The accompanying notes are an integral part of these condensed consolidated financial statements
4
27,724
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,
2005
(As Restated,
See Note 12)
CURRENT LIABILITIES:
Current portion of long-term debt
Accounts payable and accrued liabilities
Accrued interest
Accrued income taxes
Total current liabilities
$
1,656
47,612
6,679
2,179
58,126
September 30,
2004
$
1,639
46,730
6,996
1,648
57,013
LONG TERM LIABILITIES:
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities
304,044
36,179
14,794
413,143
302,842
59,699
14,726
434,280
STOCKHOLDER’S EQUITY:
Common stock, $.01 par value–
Authorized—100 shares
Issued and outstanding—100 shares
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Total stockholder’s equity
101,630
(7,186)
1,069
95,513
101,610
(19,415)
(103)
82,092
Total liabilities and stockholder’s equity
$
508,656
$
The accompanying notes are an integral part of these condensed consolidated financial statements
5
516,372
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
Predecessor
(As
(As
Restated,
Restated,
See Note 12) Predecessor See Note 12)
$ 104,478
$ 90,378
$ 200,239
$ 169,579
Net sales
Cost of sales
52,928
47,280
101,633
89,056
51,550
43,098
98,606
80,523
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
380
535
312
(506)
--
(1,091)
Gross profit
Selling and administrative
Other (income) charges, net
Restructuring
--
(1,091)
Operating income
14,982
12,273
26,837
21,420
Interest expense, net
5,688
5,370
10,929
10,836
9,294
6,903
15,908
10,584
2,083
1,229
3,679
2,020
Income before provision for
income taxes
Provision for income taxes
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)
Additional
Retained
Paid
Earnings/
Other
In
(Accumulated
Comprehensive
Capital
Deficit)
Income (Loss)
Common
Predecessor
Balance, October 1, 2003
Net income
Shares
Amount
100
$
-
-
$ $
32,531
-
$
-
Accumulated
7,713
$
8,564
Foreign currency translation adjustment
Net minimum pension liability adjustment
Comprehensive
(6,786)
Income
Total
$
(Loss)
33,458
-
8,564
1,688
1,688
1,688
4
4
4
Comprehensive income
Balance, March 31, 2004
100
$
-
$
32,531
$
100
$
-
$
101,610
$
16,277
$
-
$
(5,094)
$
43,714
$
101,610
$
8,564
$
10,256
$
(5,110)
Successor
Capital contribution
Net loss
-
-
-
(5,110)
-
(5,110)
Foreign currency translation adjustment
-
-
-
-
(103)
(103)
(14,305)
-
(14,305)
-
-
-
101,610
(19,415)
(103)
82,092
Dividend to parent for repayment of debt
Comprehensive loss
Balance, September 30, 2004
-
-
100
(103)
$
(5,213)
$
12,229
Net income, as restated, see note 12
-
-
-
12,229
-
12,229
Foreign currency translation adjustment
-
-
-
-
1,172
1,172
1,172
Vesting of restricted stock
Comprehensive income, as restated, see
note 12
Balance, March 31, 2005, as restated, see
note 12
-
-
20
-
20
-
-
-
-
-
-
100
$
-
$
101,630
$
(7,186)
$
1,069
$
95,513
The accompanying notes are an integral part of these condensed consolidated financial statements
7
$
13,401
AEARO COMPANY I AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
For the Six Months Ended
March 31,
2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to cash provided by operating
activities–
Depreciation
Amortization of intangible assets
Amortization of deferred financing costs
Deferred income taxes
Stock based compensation
Restructuring
Loss on disposal of assets
Changes in assets and liabilities–
Accounts receivable
Inventories
Income taxes payable
Interest payable
Accounts payable and accrued liabilities
Prepaid expenses and other assets
Other liabilities
Net cash provided by operating activities
2004
Successor
(As Restated,
See Note 12) Predecessor
$
12,229 $
8,564
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment
Proceeds provided by disposals of property, plant and equipment
Net cash used for investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility, net
Repayment of term loans
Repayment of capital lease obligations
Repayment of long-term debt
Net cash used for financing activities
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS
5,006
2,615
721
824
20
-61
5,931
2,283
(15)
-(1,091)
682
(1,556)
326
430
(317)
(2,118)
(764)
(91)
17,386
(1,113)
(3,464)
(1,453)
270
(3,491)
633
1,299
9,035
(3,189)
23
(3,166)
(5,006)
12
(4,994)
-(647)
(132)
(248)
3,950
(8,949)
(122)
(119)
(1,027)
(5,240)
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
Income taxes
$
$
10,969
2,718
$
$
8,862
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®, E-A-R®,
Peltor® and SafeWaze™. 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
9
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):
Working capital
Fixed assets
Other assets and liabilities
Deferred tax liabilities
Finite lived intangible assets
Indefinite lived intangible assets
Goodwill
Purchase price
$
$
82,247
55,139
16,073
(41,384)
74,104
114,300
108,865
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
Amount
September 30, 2004
Trademarks
Customer Relationship List
Patents
Other
Total Intangibles
$
$
114,300
73,000
719
385
188,404
11
Accumulated
Amortization
$
$
Additions
-- $
(2,433)
(122)
(76)
(2,631) $
Carrying
Amount
-- $ 114,300
-70,567
82
679
-309
82 $ 185,855
Gross
Amount
March 31, 2005
Trademarks
Customer Relationship List
Patents
Other
Total Intangibles
$
$
114,300
73,000
842
385
188,527
Accumulated
Amortization
$
$
Additions
-- $
(4,867)
(245)
(135)
(5,247) $
Carrying
Amount
-- $ 114,300
-68,133
41
638
-250
41 $ 183,321
Estimate of Aggregate Amortization Expense:
Year ending September 30, 2005
Year ending September 30, 2006
Year ending September 30, 2007
Year ending September 30, 2008
Year ending September 30, 2009
$
5,230
5,225
5,114
4,904
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
Allocation adjustment
Reversal of valuation allowance
Translation adjustment
Ending balance
$
$
133,745
(16,733)
(7,549)
2,464
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):
Net income as reported
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
Proforma net income
Three Months Ended
Six Months Ended
March 31,
March 31,
2005
2004
2005
2004
Successor Predecessor Successor Predecessor
$ 7,211
$ 5,674 $ 12,229
$ 8,564
--
(20)
$ 7,191
--
$
--
(34)
(51)
5,640 $ 12,178
--
$
(67)
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 foreigncurrency-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
13
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.
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
$
Less: reclassification adjustment for
gains (losses) included in the statement
of operations
Total other comprehensive income
$
14
--
$
(390) $
--
$
(522)
---
$
(390)
-- $
--
$
(522)
--
5) Inventories
Inventories consisted of the following (dollars in thousands):
March 31,
2005
Raw materials
Work in process
Finished goods
$
$
10,105
9,130
21,678
40,913
September 30,
2004
$
$
9,302
12,087
19,460
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
16
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.
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 silicarelated 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®, E-A-R®,
Peltor® and SafeWaze™. 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
17
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.
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
Safety Prescription Eyewear
Specialty Composites
Total
$
78,612
10,239
15,627
$ 104,478
$ 68,184 $ 149,765
10,873
19,213
11,321
31,261
$ 90,378 $ 200,239
$ 127,964
20,337
21,278
$ 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
Safety Prescription Eyewear
Specialty Composites
Segment profit
Depreciation
Amortization of intangibles
Restructuring
Interest
Income before income taxes
$
$
15,634 $
(16)
3,090
18,708
12,474 $
157
1,687
14,318
27,848 $
(341)
6,951
34,458
23,704
(57)
2,855
26,502
2,429
1,297
-5,688
9,294 $
3,002
134
(1,091)
5,370
6,903 $
5,006
2,615
-10,929
15,908 $
5,931
242
(1,091)
10,836
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
March 31,
2005
2004
Successor Predecessor
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Total
$
$
364 $
206
(184)
-386 $
335 $
186
(166)
2
357 $
Six Months Ended
March 31,
2005
2004
Successor Predecessor
725
412
(368)
-769
$
$
670
371
(332)
5
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
NonAearo
Guarantor
Guarantor
Company I
Subsidiaries
Subsidiaries
$
$
Net sales ......................................................................................
$ 148,332
Cost of sales .................................................................................
83,479
Gross profit ................................................................................
64,853
Selling and administrative............................................................
46,215
Research and technical services ...................................................2,785
Amortization ................................................................................1,851
Other charges (income), net .........................................................8,552
Operating income (loss) ............................................................5,450
----
73,602
39,797
33,805
2,527
-124
(13,364)
10,713
15,669
1,646
640
5,124
10,726
Interest expense (income) ............................................................
10,687
(1,641)
Income (loss) before taxes ...........................................................(5,237)
12,354
Income tax provision (benefit) .....................................................(4,781)
5,092
3,368
Equity in subsidiaries’ earnings ...................................................
12,737
Net income................................................................................
$ 12,281
5,475
12,737
20
$
$
Eliminations Consolidated
$
(21,695)
(21,643)
(52)
$
200,239
101,633
98,606
----(52)
64,411
4,431
2,615
312
26,837
1,883
--
10,929
8,843
(52)
15,908
--
3,679
5,475
$
(18,212)
(18,264)
$
-12,229
Consolidating Statement of Operations Information
Six Months Ended March 31, 2004
Predecessor
NonAearo
Guarantor
Guarantor
Company I
Subsidiaries
Subsidiaries
$
$
Net sales ......................................................................................
$ 122,913
Cost of sales .................................................................................
71,142
Gross profit ................................................................................
51,771
Selling and administrative............................................................
42,612
Research and technical services ...................................................2,351
Amortization ................................................................................ 168
Other charges (income), net .........................................................6,815
Restructuring charges (income) ...................................................(1,091)
Operating income...................................................................... 916
----
65,030
36,348
28,682
$
(18,364)
(18,434)
70
$
169,579
89,056
80,523
674
-74
(12,283)
-11,535
13,549
1,272
-4,962
-8,899
-----70
56,835
3,623
242
(506)
(1,091)
21,420
(983)
1,702
--
10,836
70
10,584
--
2,020
Interest expense (income), net......................................................
10,117
Income (loss) before taxes ...........................................................(9,201)
12,518
7,197
Income tax provision (benefit) .....................................................(4,642)
5,022
1,640
Equity in subsidiaries’ earnings ...................................................
13,053
Net income................................................................................
$
8,494
5,557
13,053
$
Eliminations Consolidated
$
5,557
$
(18,610)
(18,540)
$
-8,564
Consolidating Statement of Operations Information
Three Months Ended March 31, 2005
(As Restated, See Note 12)
Successor
NonAearo
Guarantor
Guarantor
Company I
Subsidiaries
Subsidiaries
$
$
Net sales ......................................................................................
$ 76,633
Cost of Sales ................................................................................
43,045
Gross profit............................................................................
33,588
----
38,558
20,552
18,006
Eliminations Consolidated
$
(10,713)
(10,669)
(44)
$
104,478
52,928
51,550
Selling and administrative............................................................
24,437
Research and technical services ...................................................1,442
Amortization ................................................................................ 917
Other charges (income), net .........................................................4,573
Operating income ..................................................................2,219
127
-60
(6,905)
6,718
8,116
769
320
2,712
6,089
----(44)
32,680
2,211
1,297
380
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
Net income ............................................................................
$
7,255
21
$
2,639
7,602
$
2,639
$
(10,241)
(10,285)
$
-7,211
Consolidating Statement of Operations Information
Three Months Ended March 31, 2004
Predecessor
NonAearo
Guarantor
Guarantor
Company I
Subsidiaries
Subsidiaries
$
$
Net sales ......................................................................................
$ 64,726
Cost of sales .................................................................................
37,627
Gross profit ................................................................................
27,099
Selling and administrative............................................................
22,075
Research and technical services ...................................................1,195
Amortization ................................................................................ 84
Other charges (income), net .........................................................3,728
Restructuring charges (income) ...................................................(1,091)
Operating income......................................................................1,108
---445
-50
(5,718)
-5,223
Interest expense (income), net......................................................4,988
34,388
18,507
15,881
Eliminations Consolidated
$
6,844
688
-2,525
-5,824
$
-----118
90,378
47,280
43,098
29,364
1,883
134
535
(1,091)
12,273
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
Net income................................................................................
$
5,556
22
(448)
(8,736)
(8,854)
118
$
3,950
7,543
$
3,950
$
(11,493)
(11,375)
$
-5,674
Consolidating Balance Sheet Information
March 31, 2005
(As Restated, See Note 12)
NonAearo
Guarantor
Guarantor
Company I
Subsidiaries
Subsidiaries
$
$
Current Assets:
Cash and cash equivalents .....................................................
$ 32,803
Receivables, net .....................................................................
36,942
Inventories .............................................................................
29,778
Deferred and prepaid expenses ..............................................5,330
Total current assets ......................................................................
104,853
Long Term Assets:
Property plant and equipment ................................................
38,214
Goodwill and other intangibles, net .......................................
82,358
Inter-company receivables (payables)....................................
(52,476)
Investment in subsidiaries .....................................................
247,066
Other assets ...........................................................................
15,224
Total assets ..................................................................................
$ 435,239
191
---191
7,953
19,555
11,496
1,273
40,277
Eliminations Consolidated
$
--(361)
-(361)
$
40,947
56,497
40,913
6,603
144,960
-122,273
95,877
67,292
-$ 285,633
14,999
90,617
(43,401)
(734)
11
$ 101,769
---(313,624)
-$ (313,985)
$
53,213
295,248
--15,235
508,656
$
$
$
$
1,656
Current Liabilities:
Current portion of long-term debt ..........................................
$
1,656
Accounts payable and accrued liabilities ...............................
33,347
Accrued interest .....................................................................6,679
-333
--
--
--
13,932
--
47,612
--
--
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
--
--
--
304,044
23,860
13,238
--
36,179
Long Term Liabilities:
Long-term debt ......................................................................
304,044
Deferred income taxes ........................................................... (919)
Other liabilities ......................................................................
14,794
--
--
--
14,794
Total liabilities .............................................................................
362,052
21,711
29,380
--
413,143
--
--
4,222
(4,222)
--
Additional paid in capital.......................................................
101,630
267,796
41,765
(309,561)
101,630
Stockholder’s Equity:
Common stock.......................................................................
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
Total liabilities and stockholder’s equity......................................
$ 435,239
23
263,922
$ 285,633
72,389
$ 101,769
(313,985)
$ (313,985)
$
95,513
508,656
Consolidating Balance Sheet Information
September 30, 2004
NonAearo
Guarantor
Guarantor
Company I
Subsidiaries
Subsidiaries
$
$
Current Assets:
Cash and cash equivalents .....................................................
$ 18,309
Receivables, net .....................................................................
34,823
Inventories .............................................................................
29,956
Deferred and prepaid expenses ..............................................3,014
Total current assets ......................................................................
86,102
Long Term Assets:
Property plant and equipment ................................................
40,040
Goodwill and other intangibles, net .......................................
134,567
Inter-company receivables (payables)....................................
64,478
Investment in subsidiaries .....................................................
154,350
Other assets ...........................................................................
15,133
Total Assets .................................................................................
$ 494,670
140
---140
9,275
19,336
11,202
1,132
40,945
Eliminations Consolidated
$
--(309)
-(309)
$
27,724
54,159
40,849
4,146
126,878
-131,786
(12,147)
40,981
-$ 160,760
14,710
53,247
(52,331)
(713)
11
$ 55,869
---(194,618)
-$ (194,927)
$
54,750
319,600
--15,144
516,372
$
$
$
$
1,639
Current Liabilities:
Current portion of long-term debt ..........................................
$
1,618
Accounts payable and accrued liabilities ...............................
32,623
Accrued interest .....................................................................6,996
-577
--
21
--
13,530
--
46,730
--
--
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
--
--
14,726
16,998
--
434,280
Other liabilities ......................................................................
14,726
Total liabilities .............................................................................
419,022
-(1,740)
Stockholder’s Equity:
Common stock.......................................................................
--
--
7,396
(7,396)
--
Additional paid in capital.......................................................
101,610
167,519
12,280
(179,799)
101,610
(19,415)
Accumulated deficit...............................................................
(24,824)
(8,664)
26,168
(12,095)
Accumulated other comprehensive income (loss) ..................(1,138)
3,645
(6,973)
4,363
Total stockholder’s equity............................................................
75,648
Total liabilities and stockholder’s equity......................................
$ 494,670
24
162,500
$ 160,760
$
38,871
55,869
(194,927)
$ (194,927)
(103)
$
82,092
516,372
Consolidating Statement of Cash Flows Information
Six Months Ended March 31, 2005
Successor
NonAearo
Guarantor
Guarantor
Company I
Subsidiaries
Subsidiaries
$
$
Net cash provided by operating activities.....................................
$
9,516
6,169
Net cash used for investing activities ...........................................(1,978)
--
Net cash provided by (used for) financing activities ....................6,734
(7,560)
Effect of exchange rate on cash and cash equivalents .................. 222
Increase (decrease) in cash and cash equivalents .........................
14,494
1,442
51
Cash and cash equivalents at the beginning of the period ............
18,309
140
Cash and cash equivalents at the end of the period ......................
$ 32,803
$
191
1,701
Consolidated
$
17,386
(1,188)
(3,166)
(201)
(1,027)
(1,634)
(1,322)
30
13,223
9,275
27,724
$
7,953
$
40,947
Consolidating Statement of Cash Flows Information
Six Months Ended March 31, 2004
Predecessor
NonAearo
Guarantor
Guarantor
Company I
Subsidiaries
Subsidiaries
$
$
Net cash provided by (used for) operating activities ....................
$ (1,359)
Net cash used for investing activities ...........................................(3,326)
6,407
--
Net cash provided by (used for) financing activities ....................3,255
(6,840)
3,987
Consolidated
$
9,035
(1,668)
(4,994)
(1,655)
(5,240)
Effect of exchange rate on cash and cash equivalents .................. 779
Increase (decrease) in cash and cash equivalents ......................... (651)
978
545
(2,546)
(1,882)
(789)
(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
25
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:
For the period ended:
Provision (benefit) for
income taxes
Net Income
As of March 31, 2005:
Goodwill, net
Total assets
Deferred income taxes
Total liabilities
Accumulated deficit
Total stockholder’s
equity
Three Months Ended
March 31, 2005
As
Previously
Reported
As Restated
$(2,807)
$2,083
12,101
7,211
120,691
517,420
40,053
417,017
(2,296)
111,927
508,656
36,179
413,143
(7,186)
100,403
95,513
26
Six Months Ended
March 31, 2005
As
Previously
As
Reported
Restated
$
(1,211)
$3,679
17,119
12,229
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.
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
%
Net sales:
Safety Products
Safety Prescription Eyewear
Specialty Composites
Total net sales
Cost of sales
Gross profit
Operating expenses:
Selling and administrative
Research and technical services
Amortization
Other charges, net
Restructuring
Total operating expense
Operating income
Interest expense, net
Income before income taxes
Provision for income taxes
Net income
$
$
Successor
78,612
75.2
10,239
9.8
15,627
15.0
104,478
100.0
52,928
50.7
51,550
49.3
32,680
2,211
1,297
380
-36,568
14,982
5,688
9,294
2,083
7,211
31.3
2.1
1.2
0.4
-35.0
14.3
5.4
8.9
2.0
6.9
$
$
Predecessor
68,184
75.5
10,873
12.0
11,321
12.5
90,378
100.0
47,280
52.3
43,098
47.7
29,364
1,883
134
535
(1,091)
30,825
12,273
5,370
6,903
1,229
5,674
32.5
2.1
0.1
0.6
(1.2)
34.1
13.6
5.9
7.6
1.3
6.3
(1) Reflects a new basis of accounting subsequent to April 7, 2004 due to the Merger.
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
-28-
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
-29-
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.
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
Net sales:
Safety Products
Safety Prescription Eyewear
Specialty Composites
Total net sales
Cost of sales
Gross profit
Operating expenses:
Selling and administrative
Research and technical services
Amortization
Other charges (income), net
Restructuring
Total operating expense
Operating income
Interest expense, net
Income before income taxes
Provision for income taxes
Net income
$
$
Successor
149,765
74.8
19,213
9.6
31,261
15.6
200,239
100.0
101,633
50.8
98,606
49.2
64,411
4,431
2,615
312
-71,769
26,837
10,929
15,908
3,679
12,229
32.2
2.2
1.3
0.2
-35.8
13.4
5.5
7.9
1.8
6.1
$
$
%
Predecessor
127,964
75.5
20,337
12.0
21,278
12.5
169,579
100.0
89,056
52.5
80,523
47.5
56,835
3,623
242
(506)
(1,091)
59,103
21,420
10,836
10,584
2,020
8,564
33.5
2.1
0.1
(0.2)
(0.6)
34.9
12.6
6.4
6.2
1.1
5.1
(1) Reflects a new basis of accounting subsequent to April 7, 2004 due to the Merger.
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
-30-
$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
-31-
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.
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
-32-
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.
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
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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.
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
Fiscal year 2006
Fiscal year 2007
Fiscal year 2008
Fiscal year 2009
Fiscal year 2010 – 2014
$
1,121
466
618
830
1,214
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,
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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 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.
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
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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 silicarelated 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 fiveyear period through fiscal 2009 is the most reasonable time period for projecting asbestos and silicarelated 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)
2005
Capital lease obligations
Operating lease obligations
Mortgage obligations
Purchase obligations
Respiratory commitment
Long term debt
Total
2006-2007 2008-2009
$
2010 and
after
176 $
705 $
368 $
32
1,702
5,794
5,043
5,573
179
2,048
--720
6,680
6,402
-200
800
800
800
10,786
43,403
43,173
320,028
$ 13,764 $ 59,430 $ 55,786 $ 326,433
Total
$
1,281
18,113
2,227
13,802
2,600
417,390
$ 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.
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
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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.
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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
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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.
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.
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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.
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Part II – Other Information
Item 6.
Exhibits
(a) Exhibits
See Index of Exhibits on page 41 hereof.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 15, 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)
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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.
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Exhibit 3.2
AEARO COMPANY I
BYLAWS
AS AMENDED THROUGH SEPTEMBER 1, 2004
ARTICLE I
MEETING OF STOCKHOLDERS
Section 1. Place of Meeting and Notice. Meetings of the stockholders of the
Corporation shall be held at such place either within or without the State of Delaware as the
Board of Directors may determine.
Section 2. Annual and Special Meetings. Annual meetings of stockholders shall
be held, at a date, time and place fixed by the Board of Directors and stated in the notice of
meeting, to elect a Board of Directors and to transact such other business as may properly come
before the meeting. Special meetings of the stockholders may be called by the President for any
purpose and shall be called by the President or Secretary if directed by the Board of Directors or
requested in writing by the holders of not less than 25% of the capital stock of the Corporation.
Each such stockholder request shall state the purpose of the proposed meeting.
Section 3. Notice. Except as otherwise provided by law, at least 10 and not more
than 60 days before each meeting of stockholders, written notice of the time, date and place of
the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting
is called, shall be given to each stockholder.
Section 4. Quorum. At any meeting of stockholders, the holders of record,
present in person or by proxy, of a majority of the Corporation's issued and outstanding capital
stock shall constitute a quorum for the transaction of business, except as otherwise provided by
law. In the absence of a quorum, any officer entitled to preside at or to act as secretary of the
meeting shall have power to adjourn the meeting from time to time until a quorum is present.
Section 5. Voting. Except as otherwise provided by law, all matters submitted to
a meeting of stockholders shall be decided by vote of the holders of record, present in person or
by proxy, of a majority of the Corporation's issued and outstanding capital stock.
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ARTICLE II
DIRECTORS
Section 1. Number, Election and Removal of Directors. The number of
Directors that shall constitute the Board of Directors shall be not less than one nor more than
fifteen. The first Board of Directors shall consist of nine Directors. Thereafter, within the limits
specified above, the number of Directors shall be determined by the Board of Directors or by the
stockholders, except as otherwise provided in agreements among stockholders of the Corporation
to which the Corporation is party. The Directors shall be elected by the stockholders at their
annual meeting. Except as otherwise provided in agreements among stockholders of the
Corporation to which the Corporation is party, vacancies and newly created directorships
resulting from any increase in the number of Directors may be filled by a majority of the
Directors then in office, although less than a quorum, or by the sole remaining Director or by the
stockholders. A Director may be removed with or without cause by the stockholders, except as
otherwise provided in agreements among stockholders of the Corporation to which the
Corporation is party.
Section 2. Meetings. Regular meetings of the Board of Directors shall be held at
such times and places as may from time to time be fixed by the Board of Directors or as may be
specified in a notice of meeting. Special meetings of the Board of Directors may be held at any
time upon the call of the President and shall be called by the President or Secretary if directed by
the Board of Directors. Notice of each special meeting of the Board of Directors stating the
place, date and time of the meeting shall be sent to each Director either by mail not less than four
days before the date of such meeting or by telephone, facsimile or electronic mail not less than
48 hours before such meeting. A meeting of the Board of Directors may be held without notice
immediately after the annual meeting of the stockholders. Notice need not be given of regular
meetings of the Board of Directors.
Section 3. Quorum. A majority of the total number of Directors shall constitute a
quorum for the transaction of business. If a quorum is not present at any meeting of the Board of
Directors, the Directors present may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until such a quorum is present. Unless a number greater than
a simple majority is required by law, the Certificate of Incorporation of the Corporation, these
Bylaws or any contract or agreement to which the Corporation is a party, the act of a majority of
the Directors present at any meeting at which there is a quorum shall be the act of the Board of
Directors.
Section 4. Committees of Directors. The Board of Directors may, by resolution
adopted by a majority of the whole Board, designate one or more committees, including without
limitation an Executive Committee, to have and exercise such power and authority as the Board
of Directors shall specify, except as otherwise provided in agreements among stockholders of the
Corporation to which the Corporation is party. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint another Director
to act at the meeting in place of any such absent or disqualified member, except as otherwise
provided in agreements among stockholders of the Corporation to which the Corporation is party.
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ARTICLE III
OFFICERS
The officers of the Corporation shall consist of a President, a Secretary, a Treasurer and
such other additional officers with such titles as the Board of Directors shall determine, all of whom shall
be chosen by and shall serve at the pleasure of the Board of Directors. Such officers shall have the usual
powers and shall perform all the usual duties incident to their respective offices. All officers shall be
subject to the supervision and direction of the Board of Directors. The authority, duties or responsibilities
of any officer of the Corporation may be suspended by the President with or without cause. Any officer
elected or appointed by the Board of Directors may be removed by the Board of Directors with or without
cause.
ARTICLE IV
INDEMNIFICATION
Section 1. Power to Indemnify in Actions. Suits or Proceedings Other than Those
by or in the Right of the Corporation. Subject to Section 4 of this Article IV, the Corporation
shall indemnify any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he or she is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action, suit or proceeding
if he or she acted in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contender or its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his or her conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings bv or in the Right
of the Corporation. Subject to Section 4 of this Article IV, the Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he or she is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by him or her in
connection with the defense or settlement of such action or suit if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any claim, issue or
-46-
matter as to which such person shall have been adjudged to be liable for gross negligence or
willful misconduct to the Corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 3. Entitlement to Indemnification. Notwithstanding the other provisions
of this Article IV, to the extent that a director, officer, employee or agent of the Corporation has
been successful on the merits or otherwise, including without limitation the dismissal of an
action without prejudice, in the defense of any action, suit or proceeding referred to in Sections 1
and 2 above, or in the defense of any claim, issue or matter therein, that person shall be
indemnified against all costs, charges and expenses (including attorneys’ fees) actually and
reasonably incurred by that person or on that person's behalf in connection therewith.
Section 4. Authorization of Indemnification. Any indemnification under this
Article IV (unless ordered by a court) shall be made by the Corporation unless a determination is
made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or,
even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by the stockholders, that indemnification of the director, officer,
employee or agent is not proper because that person has not met the applicable standards of
conduct set forth in Sections 1 and 2 above.
Section 5. Good Faith Defined. For purposes of any determination under this
Article IV, a person shall be deemed to have acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the Corporation, or, with
respect to any criminal action or proceeding, to have had no reasonable cause to believe his or
her conduct was unlawful, if his or her action is based on the records or books of account of this
Corporation or another enterprise, or on information supplied to him or her by the officers of the
Corporation or another enterprise in the course of their duties, or on the advise of legal counsel
for the Corporation or another enterprise or on information or record given or reports made to the
Corporation or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or another enterprise.
The term "another enterprise" as used in this Section 5 shall mean any other corporation or any
partnership, joint venture, trust or other enterprise of which such person is or was serving at the
request of Corporation as a director, officer, employee or agent. The provisions of this Section 5
shall not be deemed to be exclusive or to limit in any way the circumstances in which a person
may be deemed to have met the applicable standard of conduct set forth in Sections 1 and 2 of
this Article IV, as the case may be.
Section 6. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 4 of this Article IV, and notwithstanding the
absence of any determination thereunder, any director, officer, employee or agent may apply to
any court of competent jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 1 and 2 of this Article IV. The basis of such
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indemnification by a court shall be a determination by such court that indemnification of the
director, officer, employee or agent is proper in the circumstances because he or she has met the
applicable standards of conduct set forth in Sections 1 and 2 of this Article IV, as the case may
be. Notice of any application for indemnification pursuant to this Section 6 shall be given to the
Corporation promptly upon the filing of such application.
Section 7. Advance of Costs, Charges and Expenses. Costs, charges and
expenses (including attorneys' fees) incurred by a person referred to in Sections 1 and 2 above in
defending a civil or criminal action, suit or proceeding (including investigations by any
government agency and all costs, charges and expenses incurred in preparing for any threatened
action, suit or proceeding) shall be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding: provided however, that the payment of such costs, charges and
expenses incurred by a director or officer in that person's capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such person while a director or
officer) in advance of the final disposition of such action, suit or proceeding shall be made only
upon receipt of an undertaking by or on behalf of the director or officer to repay all amounts so
advanced in the event that it shall ultimately be determined that such director or officer is not
entitled to be indemnified by the Corporation as authorized in this Article IV; provided however,
that nothing herein shall require the Corporation to indemnify or advance expenses to any person
in connection with any action, suit, proceeding, claim or counterclaim initiated by or on behalf of
such person. No security shall be required for such undertaking and such undertaking shall be
accepted without reference to the recipient's financial ability to make repayment. The repayment
of such charges and expenses incurred by other employees and agents of the Corporation which
are paid by the Corporation in advance of the final disposition of such action, suit or proceeding
as permitted by this Section 7 may be required upon such terms and conditions, if any, as the
Board of Directors deems appropriate. The Board of Directors may, in the manner set forth
above, and subject to the approval of such director, officer, employee or agent of the
Corporation, authorize the Corporation's counsel to represent such person, in any action, suit or
proceeding, whether or not the Corporation is party to such action, suit or proceeding.
Section 8. Procedure for Indemnification. Any indemnification under Sections 1,
2 or 3 or advance of costs, charges and expenses under Section 7 of this Article IV shall be made
promptly, and in any event, within sixty (60) days, upon the written request of the director,
officer, employer or agent directed to the Secretary of the Corporation. The right to
indemnification or advances granted in this Article IV shall be enforceable by the director,
officer, employer, or agent in any court of competent jurisdiction if the Corporation denies such
request, in whole or part, or if no disposition thereof is made within sixty (60) days. Such
person’s costs and expenses incurred in connection with successfully establishing that person’s
right to indemnification or advances, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other than an action
brought to enforce a claim for advance costs, charges and expenses under Section 7 of this
Article IV where the required undertaking, if any, has been received by the Corporation) that the
claimant has not met the standard of conduct set forth in Sections 1 or 2 of this Article IV, but
the burden of proving such standard of conduct has not been met shall be on the Corporation.
Neither the failure of the Corporation (including its Board of Directors, its independent legal
counsel and its stockholders) to have made such a determination prior to the commencement of
such action that indemnification of the claimant is proper in the circumstances because he or she
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has met the applicable standard of conduct set forth in Sections 1 and 2 of this Article IV, nor the
fact that there has been an actual determination by the Corporation (including its Board of
Directors, its independent legal counsel and its stockholders) that the claimant has not met such
applicable standard, shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 9. Non-Exclusivity of Indemnification and Advancement of Expenses.
The indemnification and advancement of expenses provided by or granted pursuant to this
Article IV shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any Bylaw, agreement,
contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever
embodied) of any court of competent jurisdiction or otherwise, both as to action in his or her
official capacity and as to action in another capacity while holding such office, it being the
policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this
Article IV shall be made to the fullest extent permitted by law. The provisions of this Article IV
shall not be deemed to preclude the indemnification of any person who is not specified in
Sections 1 or 2 of this Article IV but whom the Corporation has the power or obligation to
indemnify under the provisions of the General Corporation Law of the State of
Delaware, or otherwise.
Section 10. Insurance. The Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity, or arising out of his
or her status as such, whether or not the Corporation would have the power or the obligation to
indemnify him or her against such liability under the provisions of this Article IV.
Section 11. Meaning of “Corporation” for Purposes of Article IV. For purposes
of this Article IV, references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued, would have had
power and authority to indemnify its directors, officers and employees or agents, so that any
person who is or was a director, officer, employee or agent of such constituent corporation, or is
or was serving at the request for such constituent corporation as director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in
the same position under the provisions of this Article IV with respect to the resulting or surviving
corporation as he she would have with respect to such constituent corporation if its separate
existence had continued.
Section 12. Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by, or granted pursuant to, this section
shall, unless otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
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ARTICLE V
GENERAL PROVISIONS
Section 1. Notices. Whenever any statute, the Certificate of Incorporation or
these Bylaws require notice to be given to any Director or stockholder, such notice may be given
in writing by mail, addressed to such Director or stockholder at his address as it appears on the
records of the Corporation, with postage thereon prepaid. Such notice shall be deemed to have
been given when it is deposited in the United States mail. Notice to Directors may also be given
by telephone, facsimile or electronic mail.
Section 2. Fiscal Year. The fiscal year of the Corporation shall be fixed by the
Board of Directors.
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Exhibit 10.12
FIRST AMENDMENT TO CREDIT AGREEMENT
FIRST AMENDMENT TO CREDIT AGREEMENT (this “Amendment”), dated as of
April 28, 2005, among AC SAFETY HOLDING CORP. (the “Parent”), AEARO
CORPORATION (“Holdings”), AEARO COMPANY I (the “Borrower” and, together with the
Parent and Holdings, the “Credit Agreement Parties”), the undersigned lenders party to the
Credit Agreement referred to below (the “Consenting Lenders”), BEAR STEARNS
CORPORATE LENDING INC., as Syndication Agent (in such capacity, the “Syndication
Agent”), NATIONAL CITY BANK OF INDIANA and WELLS FARGO BANK, N.A., as CoDocumentation Agents (in such capacity, the “Co-Documentation Agents”), and DEUTSCHE
BANK AG, NEW YORK BRANCH, as Administrative Agent (in such capacity, the
“Administrative Agent”). Unless otherwise defined herein, capitalized terms used herein and
defined in the Credit Agreement referred to below are used herein as so defined.
WITNESSETH:
WHEREAS, the Parent, Holdings, the Borrower, the Lenders from time to time party
thereto, the Syndication Agent, the Co-Documentation Agents and the Administrative Agent, are
party to a Credit Agreement, dated as of April 7, 2004 (as the same has been amended, restated,
modified and/or supplemented to, but not including, the date hereof, the “Credit Agreement”);
WHEREAS, subject to the terms and conditions set forth below, the parties hereto wish
to amend the Credit Agreement as provided herein;
NOW, THEREFORE, it is agreed;
A.
Amendments
Section 1.01(c) of the Credit Agreement is hereby amended by (a) deleting the text “and shall in
no event be incurred later than the Incremental Commitment Termination Date” appearing in
said Section, (b) inserting the text “or Euros” immediately after the text “Dollars” appearing in
clause (ii) of said Section, (c) deleting the text “, provided that no Incremental Term Loans may
be made part of the Tranche of Euro Term Loans” appearing in clause (iii) of said Section and
inserting the text “, provided that Incremental Term Loans may only be added to another
Tranche of Term Loans denominated in the same currency as such Incremental Term Loans”
in lieu thereof and (d) inserting the text “in the case of Incremental Term Loans denominated in
Dollars,” immediately before the text “except as hereafter provided” appearing clause (iv) of
said Section.
Section 1.09 of the Credit Agreement is hereby amended by inserting the text “or Euro
Incremental Term Loans” after each instance of the text “Euro Term Loans” appearing in said
Section.
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Section 1.10 of the Credit Agreement is hereby amended by (a) inserting the text “or Euro
Incremental Term Loans” after each instance of the text “Euro Term Loans” appearing in said
Section and (b) inserting the text “or Euro Incremental Term Loan” after each instance of the
text “Euro Term Loan” appearing in said Section.
Section 1.15(a) of the Credit Agreement is hereby amended by (a) deleting the text “ but
excluding the Tranche of Euro Term Loans” appearing in the lead-in of said Section and
inserting the text “provided that Incremental Term Loans may only be added to another
Tranche of Term Loans denominated in the same currency as such Incremental Term Loans”
in lieu thereof, (b) deleting the text “and prior to the Incremental Term Loan Commitment
Termination Date”, (c) deleting the amount “$60,000,000” and inserting the amount
“$75,000,000 (or the Dollar Equivalent thereof with respect to Euro Incremental Term Loans)”
in lieu thereof and (d) deleting each instance of the text “, provided that no Tranche of
Incremental Term Loans may be added to the Tranche of Euro Term Loans” appearing in
clause (v) and (vi) of said Section and inserting the text “provided that Incremental Term
Loans may only be added to another Tranche of Term Loans denominated in the same
currency as such Incremental Term Loans” in lieu thereof.
Section 4.02(e) of the Credit Agreement is hereby amended by (a) deleting the word “and”
appearing immediately before clause (vii) of said Section and inserting a comma (“,”) in lieu
thereof and (b) inserting the text “, (viii) so long as no Default or Event of Default shall have
occurred and be continuing, proceeds from any capital contribution or issuance of Designated
Preferred Stock or Qualified Capital Stock, in each case, to the extent such proceeds are used
by Holdings to repay, redeem or repurchase, in a like amount, Designated Holdings Notes or
any Designated Refinancing Notes within 90 days of the receipt thereof), (ix) so long as no
Default or Event of Default shall have occurred and be continuing, proceeds from the issuance
by the Parent of Designated Preferred Stock to the extent the proceeds thereof are used to pay
Dividends permitted under Section 9.03(xiv) within 90 days of the receipt thereof and (x)
proceeds from the issuance of Qualified Capital Stock by the Parent, so long as such proceeds
are used in accordance with Section 9.03(iv)(c)” immediately after clause (vii) of said Section.
Section 4.02(f) of the Credit Agreement is hereby amended by inserting the text “or (xviii)”
immediately after the text “Section 9.04(xiv)” appearing in said Section.
Section 4.03 of the Credit Agreement is hereby amended by inserting the text “or Euro
Incremental Term Loans” immediately after the text “on Euro Term Loans” appearing in said
Section.
Section 8.01(h) is hereby amended by (a) inserting the text “or Designated Preferred Stock”
immediately after the text “holders of its Indebtedness” appearing in said Section and (b)
inserting the text “or aggregate liquidation preference, as the case may be” immediately before
the text “in excess of $10,000,000” appearing in said Section.
Section 8.08 of the Credit Agreement is hereby amended by inserting the text “, provided that
such fiscal year may be changed to end on December 31 (together with corresponding changes
to such fiscal quarters to end on dates consistent with a December 31 fiscal year end) so long as
(i) the Parent shall have given the Administrative Agent at least 30 days’ prior written notice
thereof and (ii) on or prior to such change in fiscal year and fiscal quarters, the relevant Credit
Parties and the Required Lenders shall have entered into certain technical amendments and
modifications to this Agreement to preserve the intent of the parties with respect to the
covenants and agreements set forth in Sections 8.01, 9.07 and any other provisions of this
Agreement reasonably deemed appropriate by the Administrative Agent” immediately after the
text “September 30” appearing in clause (ii) of said Section.
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Section 8 of the Credit Agreement is hereby further amended by inserting the following new
Section 8.16 immediately after Section 8.15 of said Section:
“8.16
Designated Holdings Notes; Designated Refinancing Notes and
Designated Preferred Stock. (a) Holdings shall pay interest owing on any
outstanding Designated Holdings Notes or Designated Refinancing Notes, in each
case only through the issuance of additional Designated Holdings Notes or
Designated Refinancing Notes (or, in the case of discount notes, increased as a
result of accretion) (as applicable), rather than in cash, to the maximum extent
permitted by the Designated Holdings Note Documents or the Designated
Refinancing Note Documents (as applicable).
(b)
Holdings shall pay all Dividends on Designated Preferred Stock
through the issuance of additional shares of Designated Preferred Stock or an
increase in the aggregate liquidation preference of the shares of Designated
Preferred Stock in respect of which Dividends have accrued (but not in cash) to
the maximum extent permitted by the Designated Preferred Stock Documents.”
Section 9.02(xvi) of the Credit Agreement is hereby amended by (a) inserting the text “and/or
Safety Prescription Eyewear Division” immediately after the text “Specialty Composites
Division” appearing in said Section and (b) inserting the text “, in each case, ” immediately
after the text “; provided that” appearing in said Section.
Section 9.02 of the Credit Agreement is hereby further amended by (a) deleting the word “and”
appearing at the end of clause (xv) of said Section, (b) deleting the period (‘.”) appearing at the
end of clause (xvi) of said Section and inserting the text “; and” in lieu thereof and (c) inserting
the following new clause (xvii) immediately following clause (xvi) of said Section:
“(xvii) (A) transfers of assets among Credit Parties constituting investments
permitted pursuant to Section 9.05 shall be permitted and (B) transfers of assets
constituting Dividends permitted pursuant to Section 9.03 shall be permitted.”
Section 9.03 of the Credit Agreement is hereby amended by (a) deleting the word “and”
appearing at the end of clause (x) of said Section, (b) deleting the period (‘.”) appearing at the
end of clause (xi) of said Section and (c) inserting the following new clauses (xii), (xiii), (xiv),
(xv) and (xvi), immediately following clause (xi) of said Section:
“(xii) the Borrower may pay up to two cash Dividends to Holdings, and in
turn, Holdings may pay cash Dividends to the Parent in an aggregate amount not to
exceed $35,000,000; provided that (x) the Dividends paid by the Borrower to
Holdings pursuant to this Section 9.03(xii) shall be paid solely from the Borrower’s
available cash on hand on or prior to September 30, 2005, (y) immediately after
giving effect to the payment of all Dividends pursuant to this Section 9.03(xii), the
Borrower shall have at least $45,000,000 of available cash on hand and/or unutilized
Revolving Loan Commitments and (z) the Parent shall promptly utilize all of the
proceeds of the Dividends paid to it pursuant to this Section 9.03(xii) to pay a
portion of the Designated Dividends;
(xiii) Holdings may pay cash Dividends to the Parent in an aggregate
amount not to exceed $100,000,000; provided that (x) such Dividends shall be paid
solely from the net cash proceeds received by Holdings from one or more issuances
of the Designated Holdings Notes issued pursuant to Sections 9.04(xvii)(A) and (y)
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the Parent shall utilize all of the proceeds of the Dividends paid to it pursuant to this
Section 9.03(xiii) to pay a portion of the Designated Dividends;
(xiv) the Parent may pay cash Dividends in an aggregate amount not to
exceed $135,000,000 to the holders of record of its outstanding capital stock (the
“Designated Dividends”); provided that the Designated Dividends are paid solely
from the cash Dividends paid to the Parent by Holdings pursuant to Section
9.03(xii) and Section 9.03(xiii) and/or from the proceeds of one or more issuances of
Designated Preferred Stock pursuant to Section 9.13(c)(ii);
(xv)
the Borrower may pay cash Dividends to Holdings, which in turn
shall promptly utilize the full amount of such cash Dividends for the purpose of
paying cash interest, to the extent, and when due on Designated Holdings Notes or
any Designated Refinancing Notes, in each case, then outstanding, provided that (x)
the amount of cash Dividends payable by the Borrower pursuant to this Section
9.03(xv) shall not exceed the amounts necessary to pay the cash interest owing with
respect to such outstanding Designated Holdings Notes or any Designated
Refinancing Notes, as the case may be, (y) no such Dividend shall be paid at any
time following the occurrence and during the continuance of any Default or Event of
Default or if a Default or Event of Default would exist immediately after giving
effect to the payment of such Dividend and (z) the Borrower would be permitted to
pay any such Dividend under Section 4.03 of the Senior Subordinated Note
Indenture (as in effect on the First Amendment Effective Date including, without
limitation, with respect to all definitions used therein or in connection therewith, in
each case, without giving effect to any (i) waiver, amendment and/or modification
thereof or (ii) the redemption, repurchase or repayment of any or all Senior
Subordinated Notes or the defeasance of any covenants therein); and
(xvi) the Borrower may pay cash Dividends to Holdings, which in turn,
shall promptly pay such cash as Dividends to the Parent, which in turn, shall
promptly utilize the full amount of such cash Dividends for the purpose of paying
cash Dividends, to the extent, and when due on Designated Preferred Stock, in each
case, then outstanding, provided that (x) the amount of cash Dividends payable by
the Borrower pursuant to this Section 9.03(xvi) shall not exceed the amounts
necessary to pay the cash Dividends owing with respect to such outstanding
Designated Preferred Stock, (y) no Dividends shall be paid pursuant to this Section
9.03(xvi) at any time following the occurrence and during the continuance of any
Default or Event of Default or if a Default or Event of Default would exist
immediately after giving effect to the payment of such Dividend and (z) the
Borrower would be permitted to pay any such Dividend under Section 4.03 of the
Senior Subordinated Note Indenture (as in effect on the First Amendment Effective
Date including, without limitation, with respect to all definitions used therein or in
connection therewith, in each case, without giving effect to any (i) waiver,
amendment and/or modification thereof or (ii) the redemption, repurchase or
repayment of any or all Senior Subordinated Notes or the defeasance of any
covenants therein).”
Section 9.04 of the Credit Agreement is hereby amended by (a) deleting the word “and”
appearing at the end of clause (xvi) of said Section, (b) deleting the period (“.”) appearing at the
end of clause (xvii) of said Section and inserting text “; and” in lieu thereof and (c) inserting the
following new clause (xviii) immediately following clause (xvii) of said Section:
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“(xviii) (A) Indebtedness of Holdings under the Designated Holdings Notes
in an aggregate initial principal amount (or, in the case of discount notes, the initial
accreted value) not to exceed, when added to the initial aggregate liquidation
preference of all Designated Preferred Stock (but for the avoidance of doubt,
excluding the liquidation preference of Designated Preferred Stock issued as
Dividends on Designated Preferred Stock in accordance with Section 8.16(b)) issued
pursuant to Section 9.13(c)(ii), $100,000,000, as such amount of Indebtedness may
be (1) increased as a result of the issuance of any additional Designated Holdings
Notes (or, in the case of discount notes, increased as a result of accretion) to pay in
kind any regularly accruing interest on then outstanding Designated Holdings Notes
in accordance with the terms of the Designated Holdings Notes Documents and (2)
reduced by any repayment of principal thereof; provided that (x) 100% of the gross
cash proceeds thereof shall be applied to pay fees and expenses incurred in
connection therewith and to promptly pay the cash Dividend permitted to be paid to
the Parent pursuant to Section 9.03(xiii) and (y) in the event that that Designated
Dividends are not paid by the Parent within 90 days of the receipt thereof, the Net
Cash Proceeds of the Designated Holdings Notes shall be applied to repay
outstanding Term Loans in accordance with Section 4.02(f) and (B) Indebtedness
under the Designated Refinancing Notes shall be permitted in accordance with the
definition thereof, provided that the aggregate principal amount Indebtedness (or,
in the case of discount notes, the initial accreted value) thereunder does not exceed
the aggregate outstanding principal amount Indebtedness of the Designated
Holdings Notes being refinanced thereby or the aggregate liquidation preference of
the Designated Preferred Stock being redeemed or repurchased with the proceeds
thereof, in each case, plus any reasonable costs and expenses incurred in connection
therewith and any applicable premiums thereon.”
Section 9.05 of the Credit Agreement is hereby amended by (a) deleting the word “and”
appearing at the end of clause (xx) of said Section, (b) deleting the period (“.”) appearing at the
end of clause (xxi) of said Section and inserting text “; and” in lieu thereof and (c) inserting the
following new clause (xxii) immediately following clause (xxi) of said Section:
“(xxii) the Parent and Holdings may own and acquire the capital stock of, and
make capital contributions to, the Borrower and Subsidiary Guarantors.”
Section 9.11(i) of the Credit Agreement is hereby amended by (a) deleting the word “or”
appearing at the end of clause (3) of said Section and inserting a comma (“,”) in lieu thereof, (b)
inserting the text “, (5) any Designated Holdings Notes, and after the issuance thereof any
Designated Refinancing Notes and (6) any Designated Preferred Stock” immediately after
clause (4) of said Section, (c) inserting the text “(i)” immediately after the text “, provided that,
” appearing in said Section and (d) inserting the text “and (ii) Holdings may repurchase,
redeem or otherwise retire outstanding Designated Holdings Notes or Designated Preferred
Stock with (x) the proceeds of Designated Refinancing Notes and (y) the cash proceeds received
from the issuance of Designated Preferred Stock or Qualified Capital Stock of the Parent”
immediately after the text “not to exceed $5,000,000” appearing in said Section.
Section 9.11(ii) of the Credit Agreement is hereby amended by (a) inserting the text “, any
Designated Holdings Note Documents or any Designated Preferred Stock Documents”
immediately after the text “Senior Subordinated Note Documents” appearing in said Section
and (b) inserting the text “, any Designated Holdings Notes or any Designated Preferred Stock
(as applicable)” immediately after the text “Senior Subordinated Notes” appearing in said
Section.
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Section 9.11(iii) of the Credit Agreement is hereby amended by (a) inserting the text “and any
Designated Holdings Notes” immediately following the text “Senior Subordinated Notes”
appearing in said Section and (b) inserting the text “, any Designated Refinancing Notes”
immediately after the text “any Shareholder Subordinated Notes” appearing in said Section.
Section 9.12 is hereby amended by (a) deleting the word “and” appearing immediately before
clause (xiv) of said Section and inserting a comma (“,”) in lieu thereof and (b) inserting the text
“, (xv) any restrictions, after the issuance of any Designated Holdings Notes, in the Designated
Holdings Note Documents or, after the issuance of any Designated Refinancing Notes, the
Designated Refinancing Note Documents, so long as the provisions thereof are no more
restrictive than the provisions in the Designated Holdings Note Documents and (xvi) after the
issuance of any Designated Preferred Stock, the Designated Preferred Stock Documents”
immediately before the period (“.”) appearing at the end of said Section.
Section 9.13(c) is hereby amended by (a) inserting the text “(i)” immediately after the text
“Notwithstanding the foregoing,” and (b) adding the following text immediately before the
period (“.”) appearing at the end of said Section:
“and (ii) the Parent may issue Designated Preferred Stock so long as (I) no Default
or Event of Default then exists or would exist immediately after giving effect to the
respective issuance thereof and (II) the initial aggregate liquidation preference for
all Designated Preferred Stock issued pursuant to this Section 9.13(d) (but for the
avoidance of doubt, excluding the liquidation preference of Designated Preferred
Stock issued as Dividends on Designated Preferred Stock in accordance with Section
8.16(b)) shall not to exceed, when added to the aggregate initial principal amount
(or, in the case of discount notes, the initial accreted value) of all Indebtedness
incurred pursuant to Section 9.04(xviii), $100,000,000”
Section 9.14(b) of the Credit Agreement is hereby amended by inserting the text “, Designated
Preferred Stock” immediately after the text “Permitted Earn-Out Debt” appearing in said
Section.
Section 9.14(c) of the Credit Agreement is hereby amended by inserting the text “, its
obligations with respect to the Designated Holdings Note Documents, and after the issuance
thereof any Designated Refinancing Note Documents” immediately after the text “its
obligations with respect to this Agreement” appearing in said Section.
Section 10 of the Credit Agreement is hereby amended by (a) inserting the word “or”
immediately after the semicolon (“;”) appearing at the end of Section 10.10 and (b) inserting the
following new Section 10.11 immediately after Section 10.10:
“10.11 Default Under Designated Preferred Stock. (i) The Parent or any
of its Subsidiaries shall (x) default in the observance or performance of any
agreement or condition relating to any Designated Preferred Stock or contained in
any instrument or agreement evidencing, securing or relating thereto, or any other
event shall occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Designated
Preferred Stock (or a trustee or agent on behalf of such holder or holders) to cause
(determined without regard to whether any notice is required or grace period has
elapsed), any such Designated Preferred Stock to become mandatorily redeemable
or repurchased prior to the stated redemption or repurchase thereof, or (ii) any
such Designated Preferred Stock shall be required to be mandatorily redeemed, or
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required to be mandatorily repurchased (unless such required redemption or
repurchase results from a default thereunder or an event of the type that
constitutes an Event of Default), prior to the stated redemption or repurchase
thereof, provided that it shall not be a Default or an Event of Default under this
Section 10.11 unless the aggregate liquidation preference of all Designated
Preferred Stock as described in preceding clauses (i) and (ii) is at least
$5,000,000;”
The definition of “Applicable Currency” contained in Section 11 of the Credit Agreement is
hereby amended by inserting the text “or Euro Incremental Term Loans” immediately after the
text “Euro Term Loans” appearing in said definition.
The definition of “Change of Control” contained in Section 11 of the Credit Agreement is
hereby amended by deleting the text “under the Senior Subordinated Note Indenture or, after
the issuance thereof, any document evidencing or relating to the Permitted Refinancing
Subordinated Indebtedness” appearing in clause (vi) of said definition and inserting the text
“under (i) the Senior Subordinated Note Indenture or, after the issuance thereof, any document
evidencing or relating to the Permitted Refinancing Subordinated Indebtedness, (ii) after the
issuance of the Designated Holdings Notes, any Designated Holdings Note Document or, after
the issuance of any Designated Refinancing Notes, any Designated Refinancing Note Document
and (iii) after the issuance of any Designated Preferred Stock, any Designated Preferred Stock
Document” in lieu thereof.
The definition of the term “Consolidated Debt” contained in Section 11 of the Credit
Agreement is hereby amended by (a) deleting the word “and” appearing immediately before
clause (ii)(y) of said definition and (b) inserting the text “and (z) after the issuance thereof,
Indebtedness under the Designated Holdings Notes and the Designated Refinancing Notes”
immediately after the text “at such time” appearing in clause (ii)(y) of said definition.
The definition of the term “Consolidated Cash Interest Expense” contained in Section 11 of the
Credit Agreement is hereby amended by (a) the text deleting the text “Consolidated Interest
Expense (net of cash interest income)” appearing in said definition and (b) inserting the text
“the sum of (i) Consolidated Interest Expense and (ii) the amount of all cash Dividends paid on
Designated Preferred Stock (which amounts described in this clause (ii) shall be treated as cash
interest expense of the Parent for purposes of this definition regardless of the treatment of such
amounts under GAAP), in each case, net of cash interest income” in lieu thereof.
The definition of “EURIBOR” contained in Section 11 of the Credit Agreement is hereby
amended by (a) inserting the text “or Euro Incremental Term Loan” immediately after each
instance of the text “Euro Term Loan” appearing in said definition and (b) inserting the text
“or Euro Incremental Term Loans” immediately after the text “Euro Term Loans” appearing
in said definition.
The definition of “Euro Rate” contained in Section 11 of the Credit Agreement is hereby
amended by inserting the text “or Euro Incremental Term Loans” immediately after the text
“Euro Term Loans” appearing in said definition.
The definition of “Euro Rate Loan” contained in Section 11 of the Credit Agreement is hereby
amended by inserting the text “, Euro Incremental Term Loan” immediately after the text
“Eurodollar Loan” appearing in said definition.
The definition of the term “Excess Cash Flow” contained in Section 11 of the Credit Agreement
is hereby amended by deleting the text “Section 9.03(iv), (vi) and (vii)” appearing in said
definition and inserting the text “Section 9.03(iv), (vi), (vii), (viii), (xii) and (xvi)” in lieu thereof.
-57-
The definition of “Incremental Term Loan Borrowing Date” contained in Section 11 of the
Credit Agreement is hereby amended by deleting the text “; provided that no such date shall
occur after the applicable Incremental Term Loan Commitment Termination Date” appearing
in said definition.
The definition of “Required Lenders” contained in Section 11 of the Credit Agreement is
hereby amended by inserting the text “or Euro Incremental Term Loan” immediately after
each instance of the text “Euro Term Loan” appearing in said definition.
The definition of “Tranche Percentage” contained in Section 11 of the Credit Agreement is
hereby amended by inserting the text “or Euro Incremental Term Loans” immediately after
each instance of the text “Euro Term Loans” appearing in said definition.
Section 11 of the Credit Agreement is hereby further amended by (a) deleting the definition
“Incremental Term Loan Commitment Termination Date” in its entirety and (b) adding the
following new defined terms in the correct alphabetical order to said Section:
“Designated Dividends” shall have the meaning provided in Section
9.03(xiv).
“Designated Holdings Notes” shall mean unsecured debt securities of
Holdings issued pursuant to an effective registration statement under the
Securities Act or Rule 144A thereunder in the form of pay-in-kind or
discount notes which debt securities (i) shall provide that the interest rate
applicable thereto does not exceed market interest rates existing at such time
for transactions of a similar nature with issuers that are similarly situated
with Holdings, of which no amount shall be paid in cash, prior to the date
occurring four years after the First Amendment Effective Date, (ii) shall not
mature prior to the date occurring eight years after the First Amendment
Effective Date, (iii) shall not require any amortization (or similar
arrangement), or any other scheduled maturity of the principal amount
thereof on any date which is earlier than the date occurring eight years after
the First Amendment Effective Date, (iv) do not provide for any guarantees
and (v) have no covenants, mandatory prepayment provisions (other than a
“change of control” put), defaults or remedies materially less favorable taken
as a whole to the Borrower and its Subsidiaries (or to Holdings, if the
provisions applicable to the Borrower in the Senior Subordinated Note
Documents were deemed applicable to Holdings) than those than those
contained in the Senior Subordinated Note Documents (as in effect on the
First Amendment Effective Date). It being understood that the lack of
subordination provisions and provisions related thereto are not materially
less favorable taken as a whole to the Borrower and its Subsidiaries (or to
Holdings, if the provisions applicable to the Borrower in the Senior
Subordinated Note Documents were deemed applicable to Holdings).
“Designated Note Documents” shall mean the Designated Note
Holdings Indenture, the Designated Holdings Notes and each other
agreement, document or instrument relating to the issuance of the Designated
Holdings Notes, in each case as the same may be amended, modified or
-58-
supplemented from time to time in accordance with the terms hereof and
thereof.
“Designated Holdings Note Indenture” shall mean any indenture or
similar agreement entered into in connection with the issuance of Designated
Holdings Notes, as the same may be amended, modified or supplemented
from time to time in accordance with the terms hereof and thereof.
“Designated Preferred Stock” shall mean preferred capital stock of
the Parent which (i) provides by its terms that Dividends thereon shall not be
required to be paid in cash at any time (and to the extent) that such payment
would be prohibited by the terms of this Agreement or any other agreement of
the Parent or any of its Subsidiaries relating to outstanding Indebtedness and
(ii) by its terms does not mature and does not contain any mandatory
redemption, put, repurchase, repayment, sinking fund or other similar
provision (including, without limitation, upon the occurrence of a Change of
Control Event or a sale of all or substantially all of the assets of Holdings and
its Subsidiaries) or any right on the part of the holder thereof to require the
repurchase or redemption thereof, in whole or in part, in any such case prior to
the date occurring eight years after the First Amendment Effective Date, (iii)
has a dividend rate (after taking into account any compounding thereof) that
does not exceed market dividend rates existing at such time for transactions of
a similar nature with issuers that are similarly situated with Parent, (iii) shall
not be guaranteed by, or receive other credit support from, any Subsidiary of
the Parent, (iv) shall not be subject to any requirement that Dividends thereon
be paid in cash prior to the date occurring four years after the First
Amendment Effective Date and (v) has no covenants, mandatory prepayment
provisions (other than a “change of control” put), defaults or remedies
materially less favorable taken as a whole to the Borrower and its Subsidiaries
(or to the Parent or Holdings, if the provisions applicable to the Borrower in
the Senior Subordinated Note Documents were deemed applicable to
Holdings or the Parent, as applicable) than those contained in the Senior
Subordinated Note Documents (as in effect on the First Amendment Effective
Date).
“Designated Preferred Stock Documents” shall mean the Designated
Preferred Stock, the organizational documents of the Parent governing the
same and the other documents executed and delivered in connection with any
issuance of Designated Preferred Stock, in each case as the same may be
amended, modified and/or supplemented from time to time in accordance with
the terms hereof and thereof.
“Designated Refinancing Notes” shall mean unsecured debt securities
of Holdings issued pursuant to an effective registration statement under the
Securities Act or Rule 144A thereunder solely to refinance outstanding
Designated Holdings Notes or to repurchase or redeem outstanding
Designated Preferred Stock which debt securities (i) require no amortization
-59-
(or similar arrangement), or any other scheduled maturity of the principal
amount thereof on any date which is earlier than that applicable to the
Designated Holdings Notes being refinanced, (ii) have an interest rate that
shall not be in excess of the interest rate applicable to the Designated
Holdings Notes being refinanced, (iii) do not provide for any guarantees, (iv)
do not require interest on such Indebtedness to be paid in cash prior to the date
upon which interest in respect of the Designated Holdings Notes are required
to be paid in cash and (v) have no covenants, mandatory prepayment
provisions (other than a “change of control” put), defaults or remedies
materially less favorable taken as a whole to the Borrower and its Subsidiaries
(or to Holdings, if the provisions applicable to the Borrower in the Senior
Subordinated Note Documents were deemed applicable to Holdings) than
those contained in the Senior Subordinated Note Documents (as in effect on
the First Amendment Effective Date). It being understood that the lack of
subordination provisions and provisions related thereto are not materially less
favorable taken as a whole to the Borrower and its Subsidiaries (or to
Holdings, if the provisions applicable to the Borrower in the Senior
Subordinated Note Documents were deemed applicable to Holdings).
“Designated Refinancing Note Documents” shall mean all
documentation (including, without limitation, any indenture or purchase
agreement) entered into in connection with any issuance of Designated
Refinancing Notes.
“Euro Incremental Term Loan” shall mean each Incremental Term
Loan denominated in Euros.
“First Amendment” shall mean the First Amendment to Credit
Agreement, dated as of April 28, 2005, among the Parent, Holdings, the
Borrowers, the lenders party thereto and the Administrative Agent.
“First Amendment Effective Date” shall have the meaning provided
in the First Amendment.
Miscellaneous Provisions
In order to induce the Lenders to enter into this Amendment, each Credit Agreement Party
hereby represents and warrants that (i) the representations and warranties 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 date), and (ii) there exists no Default or Event of Default under the
Credit Agreement on the First Amendment Effective Date, in the case of each of clauses (i) and
(ii) above, before and after giving effect to this Amendment and the transactions contemplated
hereby.
This Amendment is limited as expressly specified and shall not constitute an amendment,
modification, acceptance or waiver of any other provision of the Credit Agreement, any other
Credit Document.
-60-
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.
This Amendment shall become effective on the date (the “First Amendment Effective Date”)
when (i) each Credit Agreement Party and Consenting Lenders constituting the Required
Lenders 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
and (ii) Holdings shall have, or shall have caused to be, paid in full to the Administrative Agent
all costs, fees and expenses (including, without limitation, all reasonable legal fees and expenses)
payable to the Administrative Agent to the extent then due and (iv) the Credit Agreement
Parties shall have, or shall have caused to be, paid to each Consenting Lender which executes
and delivers (including by way of telecopier) to the Administrative Agent a counterpart of this
Amendment on or before 5:00 P.M. (New York time) on April 28, 2005, an amendment fee
equal to 0.10% of the aggregate principal amount of such Consenting Lender’s outstanding
Term Loans and/or such Lender’s Revolving Loan Commitments, in each case, as of the First
Amendment Effective Date.
From and after the First Amendment Effective Date, all references to the “Agreement” in the
Credit Agreement and to the “Credit Agreement” in the other Credit Documents shall be
deemed to be references to the Credit Agreement as modified hereby.
***
-61-
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be duly
executed and delivered as of the date first above written.
AC SAFETY HOLDING CORP.
By: /s/ Noel Marsden
Title: Treasurer
AEARO CORPORATION
By: /s/ Noel Marsden
Title: Treasurer
AEARO COMPANY I
By: /s/ Noel Marsden
Title: Treasurer
NEWYORK 4862038 (2K)
DEUTSCHE BANK AG, NEW YORK BRANCH,
Individually and as Administrative Agent
By: /s/ Diane F. Rolphe
Title: Vice President
By: /s/ Omayra Laucella
Title: Vice President
BEAR STEARNS CORPORATE LENDING INC.,
Individually and as Syndication Agent
By: /s/ Victor Bulzacchelli
Title: Vice President
NEWYORK 4862038 (2K)
AIB DEBT MANAGEMENT LIMITED
By: /s/ Margaret Brennan
Title: Vice President
Investment Advisor to AIB Debt
Management, Limited
By: /s/ Rima Terradista
Title: Senior Vice President
Investment Advisor to AIB Debt
Management, Limited
Europe,
Manager
COPERNICUS EURO CDO-I B.V.
By: Highland Capital Management
Limited as Collateral
By: /s/ David W. Lancelot
Title: Proxy Holder
Europe,
Manager
COPERNICUS EURO CDO-II B.V.
By: Highland Capital Management
Limited as Collateral
By: /s/ David W. Lancelot
Title: Proxy Holder
CREDIT INDUSTRIEL ET
COMMERCIAL
By: /s/ Sean Mounier
Title: First Vice President
By: /s/ Marcus Edward
Title: Vice President
FIFTH THIRD BANK (Central Indiana)
By: /s/ David O’Neal
Title: Vice President
GERMAN AMERICAN CAPITAL
CORPORATION
By: DB Services New Jersey, Inc.
64
By: /s/ Dierdre Whorton
Title: Assistant Vice President
By: /s/ Edward Schaffer
Title: Vice President
HARBOUR TOWN FUNDING LLC
By: /s/ Meredith J. Koslick
Title: Assistant Vice President
HARBOURMASTER LOAN
CORPORATION B.V.
By: TMF Management B.V.
By: /s/ A.H. van Lidth De Jeude
Title: Managing Director
By: /s/ D. Timmers
Title: Managing Director
Collateral
ARCHIMEDES FUNDING III, LTD.
By: ING Capital Advisors LLC, as
Manager
By: /s/ Steven Gorski
Title: Director
ARCHIMEDES FUNDING IV
(CAYMAN), LTD.
By: ING Capital Advisors LLC, as
Manager
Collateral
By: /s/ Steven Gorski
Title: Director
Collateral
ING-ORYX CLO, LTD.
By: ING Capital Advisors LLC, as
Manager
By: /s/ Steven Gorski
65
Title: Director
Investment
NEMEAN CLO, LTD.
By: ING Capital Advisors LLC, as
Manager
By: /s/ Steven Gorski
Title: Director
Collateral
SEQUILS-ING I (HBDGM), LTD.
By: ING Capital Advisors LLC, as
Manager
By: /s/ Steven Gorski
Title: Director
Management,
AVALON CAPITAL LTD. 3
By: INVESCO Senior Secured
Inc., as Asset Manager
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
Management,
CHAMPLAIN CLO, LTD.
By: INVESCO Senior Secured
Inc., as Collateral Manager
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
Management,
CHARTER VIEW PORTFOLIO
By: INVESCO Senior Secured
Inc., as Investment Manager
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
DIVERSIFIED CREDIT PORTFOLIO
LTD.
By: INVESCO Senior Secured
Inc., as Investment Manager
Management,
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
66
Management,
AIM FLOATING RATE FUND
By: INVESCO Senior Secured
Inc., as Sub-Adviser
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
Management,
INVESCO EUROPEAN CDO I S.A.
By: INVESCO Senior Secured
Inc., as Collateral Manager
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
Management,
SEQUILS LIBERTY, LTD.
By: INVESCO Senior Secured
Inc., as Collateral Manager
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
Management,
PETRUSSE EUROPEAN CLO S.A.
By: INVESCO Senior Secured
Inc., as Collateral Manager
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
Management,
SAGAMORE CLO LTD.
By: INVESCO Senior Secured
Inc., as Collateral Manager
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
Management,
SARATOGA CLO I, LIMITED
By: INVESCO Senior Secured
Inc., as Asset Manager
By: /s/ Gregory Stoeckle
Title: Authorized Signatory
JPMORGAN CHASE BANK, NA
fka Bank One, NA
67
By: /s/ John C. Otteson
Title: First Vice President
KATONAH I, LTD.
By: Katonah Capital, L.L.C., as Manager
By: /s/ Ralph Della Rocca
Title: Authorized Officer
KATONAH III, LTD.
By: Katonah Capital, L.L.C., as Manager
By: /s/ Ralph Della Rocca
Title: Authorized Officer
KATONAH IV, LTD.
By: Katonah Capital, L.L.C., as Manager
By: /s/ Ralph Della Rocca
Title: Authorized Officer
KATONAH V, LTD.
By: Katonah Capital, L.L.C., as Manager
By: /s/ Ralph Della Rocca
Title: Authorized Officer
LASALLE BANK NATIONAL
ASSOCIATION
By: /s/ Matthew Doye
Title: Vice President
LONG LANE MASTER TRUST IV
By: /s/ Meredith J. Koslick
Title: Authorized Agent
METROPOLITAN LIFE INSURANCE
COMPANY
By: /s/ James R. Dingler
Title: Director
68
METLIFE BANK, NATIONAL
ASSOCIATION
By: /s/ James R. Dingler
Title: Director
NATEXIS BANQUES POPULAIRES
By: /s/ Frank H. Madden, Jr.
Title: Vice President & Group Manager
By: /s/ Jordan H. Levy
Title: Assistant Vice President
NATIONAL CITY BANK OF INDIANA
By: /s/ Christopher A. Susott
Title: Vice President
NEW YORK LIFE INSURANCE
COMPANY
By: /s/ F. David Melka
Title: Investment Vice President
ANNUITY
NEW YORK LIFE INSURANCE AND
CORPORATION
By: NEW YORK LIFE INVESTMENT
MANAGEMENT LLC, its
Investment Manager
By: /s/ F. David Melka
Title: Director
ELF FUNDING TRUST III
By: NEW YORK LIFE INVESTMENT
MANAGEMENT LLC, as AttorneyIn-Fact
By: /s/ F. David Melka
Title: Director
NYLIM FLATIRON CLO 2003-1 LTD.
By: NEW YORK LIFE INVESTMENT
69
MANAGEMENT LLC, As
and Attorney-In-Fact
Collateral Manager
By: /s/ F. David Melka
Title: Director
Collateral Manager
NYLIM FLATIRON CLO 2004-1 LTD.
By: NEW YORK LIFE INVESTMENT
MANAGEMENT LLC, As
and Attorney-In-Fact
By: /s/ F. David Melka
Title: Director
MAINSTAY FLOATING RATE FUND
By: NEW YORK LIFE INVESTMENT
MANAGEMENT LLC
By: /s/ F. David Melka
Title: Director
OCTAGON INVESTMENT PARTNERS
II, LLC
By: Octagon Credit Investors, LLC as
Investment manager
sub-
By: /s/ Andrew. D. Gordon
Title: Portfolio Manager
OCTAGON INVESTMENT PARTNERS
III, LTD.
By: Octagon Credit Investors, LLC as
Manager
Portfolio
By: /s/ Andrew. D. Gordon
Title: Portfolio Manager
OCTAGON INVESTMENT PARTNERS
IV, LTD.
By: Octagon Credit Investors, LLC as
collateral manager
By: /s/ Andrew. D. Gordon
Title: Portfolio Manager
OCTAGON INVESTMENT PARTNERS
V, LTD.
70
By: Octagon Credit Investors, LLC as
Manager
Portfolio
By: /s/ Andrew. D. Gordon
Title: Portfolio Manager
OCTAGON INVESTMENT PARTNERS
VI, LTD.
By: Octagon Credit Investors, LLC, as
Collateral Manager
By: /s/ Andrew. D. Gordon
Title: Portfolio Manager
OCTAGON INVESTMENT PARTNERS VII,
LTD.
By: Octagon Credit Investors, LLC as
collateral manager
By: /s/ Andrew. D. Gordon
Title: Portfolio Manager
Company
ADDISON CDO, LIMITED
By: Pacific Investment Management
LLC, as its Investment Advisor
By: /s/ Mohan V. Phansalker
Title: Managing Director
Company
CLARENVILLE CDO, SA
By: Pacific Investment Management
LLC, as its Investment Advisor
By: /s/ Mohan V. Phansalker
Title: Managing Director
Company
LOAN FUNDING III LLC
By: Pacific Investment Management
LLC, as its Investment Advisor
By: /s/ Mohan V. Phansalker
Title: Managing Director
Company
SEQUILS-MAGNUM, LTD.
By: Pacific Investment Management
LLC, as its Investment Advisor
71
By: /s/ Mohan V. Phansalker
Title: Managing Director
Company
WRIGLEY CDO, LTD.
By: Pacific Investment Management
LLC, as its Investment Advisor
By: /s/ Mohan V. Phansalker
Title: Managing Director
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Julie S. Springer
Title: Vice President
SANKATY HIGH YIELD PARTNERS II,
L.P.
By: /s/ Diane J. Exter
Title: Managing Director
Portfolio Manager
KATONAH II, LTD.
By: Sankaty Advisors LLC as SubAdvisors
By: /s/ Diane J. Exter
Title: Managing Director
Portfolio Manager
AVERY POINT CLO, LTD., as Term
Lender
By: Sankaty Advisors, LLC as Collateral
Manager
By: /s/ Diane J. Exter
Title: Managing Director
Portfolio Manager
CASTLE HILL I - INGOTS, LTD., as Term
Lender
By: Sankaty Advisors, LLC as Collateral
Manager
By: /s/ Diane J. Exter
72
Title: Managing Director
Portfolio Manager
CASTLE HILL II - INGOTS, LTD., as
Term Lender
By: Sankaty Advisors, LLC as Collateral
Manager
By: /s/ Diane J. Exter
Title: Managing Director
Portfolio Manager
CASTLE HILL III CLO, LIMITED, as
Term Lender
By: Sankaty Advisors, LLC as Collateral
Manager
By: /s/ Diane J. Exter
Title: Managing Director
Portfolio Manager
WELLS FARGO BANK, N.A.
By: /s/ Geoff Headington
Title: Vice President
73
Exhibit 31.1
CERTIFICATION 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
I, Michael A. McLain., certify that:
1.
I have reviewed this quarterly report on Form 10-Q/A of Aearo Company I;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
c) disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: November 15, 2005
/s/ Michael A. McLain
Michael A. McLain
Chairman, President and Chief
Executive Officer
74
Exhibit 31.2
CERTIFICATION 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
I, Jeffrey S. Kulka, certify that:
1.
I have reviewed this quarterly report on Form 10-Q/A of Aearo Company I;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
c) disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: November 15, 2005
/s/ Jeffrey S. Kulka
Jeffrey S. Kulka
Senior Vice President, Chief Financial
Officer and Secretary
75
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Aearo Company I (the “Company”), on Form 10-Q/A for
the period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, Michael A. McLain, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Michael A. McLain
Michael A. McLain
Chairman, President
and Chief Executive Officer
November 15, 2005
A signed written statement required by Section 906 has been provided to Aearo Company I and will be
retained by Aearo Company I and furnished to the Securities and Exchange Commission and its staff upon
request.
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Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Aearo Company I (the “Company”), on Form 10-Q/A for
the period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date
hereof (the “Report”), I, Jeffrey S. Kulka, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
/s/ Jeffrey S. Kulka
Jeffrey S. Kulka
Senior Vice President,
Chief Financial Officer
and Secretary
November 15, 2005
A signed written statement required by Section 906 has been provided to Aearo Company I and will be
retained by Aearo Company I and furnished to the Securities and Exchange Commission and its staff upon
request.
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