Aearo Pegs Asbestos, Other Liabilities at $4.8 Million ------------------------------------------------------ Published December 27, 2002 Aearo Corporation may be contingently liable with respect to numerous lawsuits involving respirators sold by its predecessors, American Optical Corporation and Cabot Corporation, arising out of agreements entered into when the AOSafety(R) Division was sold by American Optical Corporation to Cabot in April 1990 and when later sold by Cabot to the Company in 1995. These lawsuits typically involve plaintiffs alleging that they suffer from asbestosis or silicosis, and that such condition results in part from respirators which were negligently designed or manufactured. The defendants in these lawsuits are often numerous, and include, in addition to respirator manufacturers, employers of the plaintiffs and manufacturers of sand (used in sand blasting) and asbestos. At September 30, 2002, the Company has recorded liabilities of approximately $4.8 million, 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 accrual does not include estimates for insurance recoveries. This reserve is re- evaluated periodically and additional charges or credits to operations may result as additional information becomes available. Responsibility for legal costs, as well as for settlements and judgments, is shared contractually by the Aearo, Cabot, American Optical Corporation and a prior owner of American Optical Corporation. Liability is allocated among the parties based on the number of years each Company owned the AOSafety Division and the alleged years of exposure of the individual plaintiff. The Company's share of the contingent liability is further limited by an agreement entered into between the Company and Cabot on July 11, 1995, as amended in 2002. This agreement provides that, so long as the Company pays to Cabot an annual fee of $400,000, Cabot will retain responsibility and liability for, and indemnify the Company against, asbestos and silica-related legal claims asserted after July 11, 1995 and alleged to have arisen out of the use of respirators while exposed to asbestos or silica prior to January 1, 1997. To date, the Company has elected to pay the annual fee. The Company could potentially be liable for these exposures if the Company elects to discontinue its participation in this arrangement, or if Cabot is no longer able to meet its obligations in these matters. With these arrangements in place, however, the Company's potential liability is limited to exposures alleged to have arisen from the use of respirators while exposed to asbestos or silica on or after January 1, 1997. The Company also may be responsible for certain claims relating to acquired companies other than the AOSafety(R) Division that are not covered by, and are unrelated to, the agreement with Cabot. The Company retains responsibility and liability for all other product liability claims and accordingly maintains insurance protection for claims other than asbestosis and silicosis. Consistent with the current environment being experienced by companies involved in asbestos and silica-related litigation, there has been an increase in the number of asserted claims that could potentially involve the Company. Various factors increase the difficulty in determining the Company's potential liability, if any, in such claims, including the fact that the defendants in these lawsuits are often numerous and the claims generally do not specify the amount of damages sought. Additionally, the bankruptcy filings of other companies with asbestos and silica-related litigation could increase the Company's cost over time. In light of these and other uncertainties inherent in making long-term projections, the Company has determined that the five-year period through fiscal 2007 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 Cabot 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. COMPANY PROFILE Aearo Corporation 5457 W. 79th St. Indianapolis, IN 46268 Phone: 317-692-6666 Fax: 317-692-3088 http://www.aearo.com Employees : 1,510 Revenue :$ 286,900,000 Net Income :$ 9,300,000 Assets :$ 270,200,000 Liabilities :$ 248,600,000 (As of September 30, 2002) Description: Through subsidiary Aearo Company, Aearo Corporation makes and sells personal protection equipment in about 85 countries under the brand names AOSafety, E-A-R, and Peltor. Products include earplugs, goggles, face shields, respirators, hard hats, safety clothing, first- aid kits, and communication headsets. The firm also sells safety prescription eyewear and makes energy-absorbing foams that control noise, vibration, and shock for use in its own and other manufacturers' products. Aearo's former parent, specialty chemicals maker Cabot Corporation, owns about 40% of the company; Vestar Capital Partners and Aearo executives own the rest. ----------------------------------------------------------- LitigationDataSource.com