-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, My14Ct3wZ3GN1l7YsD/OZiKXlW+YDeMCe1wr0Jg+wFDX1/QtC2PfGNtsXHdkImoL mGk7a8WhHr+lqTP4x6AjrQ== 0000750339-99-000003.txt : 19990426 0000750339-99-000003.hdr.sgml : 19990426 ACCESSION NUMBER: 0000750339-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990423 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SAFETY RAZOR CO CENTRAL INDEX KEY: 0000750339 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 541050207 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21952 FILM NUMBER: 99599443 BUSINESS ADDRESS: STREET 1: PO BOX 500 CITY: STAUNTON STATE: VA ZIP: 24402-0500 BUSINESS PHONE: 5042488000 MAIL ADDRESS: STREET 1: PO BOX 500 CITY: STAUNTON STATE: VA ZIP: 24402-0500 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1999 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 000-21952 AMERICAN SAFETY RAZOR COMPANY (Exact name of registrant as specified in its charter) Delaware 54-1050207 - ----------------------- --------------------------------------- (State of incorporation) (I.R.S. Employer Identification Number) One Razor Blade Lane, P.O. Box 979, Verona, Virginia 24482-0979 - ---------------------------------------------------------------- (Address of principal executive offices, including zip code) (540)248-8000 - ----------------------------- Registrant's telephone number 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 the number of shares outstanding of each of the issuer's classes of common stock, as of April 20, 1999. Class Outstanding at April 20, 1999 ----- ----------------------------- Common Stock, $.01 Par Value 12,110,349 AMERICAN SAFETY RAZOR COMPANY Index Page Number Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 1999 (Unaudited) and December 31, 1998 1 Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 1999 and March 31, 1998 3 Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three months ended March 31, 1999 and March 31, 1998 3 Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 1999 and March 31, 1998 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosure of Market Risk 20 Part II. Other Information Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, December 31, 1999 1998 --------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,588 $ 3,453 Trade receivables, net 40,152 44,498 Inventories 59,305 54,029 Income taxes receivable - 989 Deferred income taxes 5,365 5,108 Prepaid expenses 2,542 2,340 --------- --------- Total current assets 108,952 110,417 Property and equipment 126,985 124,814 Less accumulated depreciation (52,229) (50,149) --------- -------- 74,756 74,665 Intangible assets, net: Goodwill 67,928 68,446 Other 3,140 3,365 --------- --------- 71,068 71,811 Prepaid pension cost and other 6,594 6,004 --------- --------- Total assets $261,370 $262,897 ======== ========
See accompanying notes. -1- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
March 31, December 31, 1999 1998 --------- ------------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,153 $ 14,269 Accrued expenses and other 17,887 19,968 Income taxes payable 316 - Current maturities of long-term obligations 3,917 3,852 --------- --------- Total current liabilities 38,273 38,089 Long-term obligations 119,795 123,481 Retiree benefits and other 25,250 25,163 Deferred income taxes 6,955 6,610 --------- --------- Total liabilities 190,273 193,343 -------- -------- Stockholders' equity: Common Stock, $.01 par value, 25,000,000 shares authorized; 12,110,349 shares issued and outstanding at March 31, 1999 (12,110,049 at December 31, 1998) 121 121 Additional paid-in capital 65,907 65,905 Retained earnings 6,431 4,457 Accumulated other comprehensive loss (1,362) (929) ---------- ---------- 71,097 69,554 Total liabilities and stockholders' equity $261,370 $262,897 ======== ========
See accompanying notes. -2- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data)
Three Months Ended March 31, ------------------- 1999 1998 ------- ------- Net sales $70,287 $66,511 Cost of sales 46,829 47,003 ------- ------- Gross profit 23,458 19,508 Selling, general and administrative expenses 16,507 13,521 Amortization of intangibles 647 631 Special charge - 1,003 --------- ------- Operating income 6,304 4,353 Interest expense 3,030 3,045 ------- ------ Income before income taxes 3,274 1,308 Income taxes 1,300 519 ------- ------ Net income $1,974 $789 ====== ==== Basic earnings per share: Net income $0.16 $.07 ===== ==== Weighted average number of shares outstanding 12,110 12,103 ====== ====== Diluted earnings per share: Net income $0.16 $.06 ===== ==== Weighted average number of shares outstanding 12,189 12,337 ====== ====== See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands)
Three Months Ended March 31, ------------------ 1999 1998 ------- ------ Net income $1,974 $789 Other comprehensive income (loss): Foreign currency translation adjustments (433) 88 ------- ----- $1,541 $877 ====== ==== See accompanying notes.
-3- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Three Months Ended March 31, ------------------ 1999 1998 ------- ------- Operating activities Net income $1,974 $ 789 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,206 2,977 Amortization of interest and financing costs 138 136 Retiree benefits and other (936) (167) Deferred income taxes 88 881 Changes in operating assets and liabilities: Trade receivables 4,346 7,177 Inventories (5,276) (4,734) Income taxes receivable 989 (567) Prepaid expenses (202) (966) Accounts payable 1,884 79 Accrued expenses and other (2,081) (4,180) Income taxes payable 316 (483) ------- ------- Net cash provided by operating activities 4,446 942 Investing activities Capital expenditures (2,650) (2,956) Other, net (28) - ------- ------ Net cash used in investing activities (2,678) (2,956) Financing activities Repayment of long-term obligations (7,072) (3,102) Proceeds from borrowings 3,437 5,409 Proceeds from exercise of stock options 2 73 -------- ------- Net cash (used in) provided from financing activities (3,633) 2,380 Net increase (decrease) in cash and cash equivalents (1,865) 366 Cash and cash equivalents, beginning of period 3,453 1,434 ------- ------- Cash and cash equivalents, end of period $1,588 $1,800 ====== ====== See accompanying notes.
-4- AMERICAN SAFETY RAZOR COMPANY Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1999, are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. NOTE B - INVENTORIES Classification of inventories is as follows:
March 31, December 31, 1999 1998 --------- ------------ (In thousands) Raw materials $22,070 $18,797 Work-in-process 6,285 6,612 Finished goods 27,398 25,070 Operating supplies 3,477 3,475 -------- -------- 59,230 53,954 Excess of LIFO inventory value over current cost 75 75 --------- --------- $59,305 $54,029 ======= =======
NOTE C - SPECIAL CHARGES In March 1998, the Company recorded a special charge of approximately $1,003,000 related to the shutdown of the Company's cotton operations in Sparks, Nevada and employee terminations. The following table provides information about the changes in the Company's accrued special charges, including the special charge discussed above, for the first quarter of 1999:
Remaining Remaining Balance at Charges in Balance at January 1, 1999 1999 March 31, 1999 --------------- ----------- -------------- Discontinuation of product line: Contract termination $ 500,000 $ 500,000 $ - Excess inventory and deferred charges 500,000 17,000 483,000 Severance and employee benefits 603,000 129,000 474,000 ----------- --------- --------- $1,603,000 $646,000 $957,000 ========== ======== ========
Amounts remaining at March 31, 1999 are included in accrued expenses in the accompanying condensed consolidated balance sheets. Substantially all of the remaining payments and asset impairments are expected to -5- occur during the remainder of 1999. NOTE D - LONG TERM OBLIGATIONS At March 31, 1999, the Company had utilized $18.2 million of its revolving credit facility and had approximately $31.8 million available for future borrowings under this facility. NOTE E - EARNINGS PER SHARE The difference between the weighted average number of shares outstanding for computing basic earnings per share and diluted earnings per share relates to the Company's employee stock options outstanding which are assumed to be converted for the diluted earnings per share calculation when the average market price of the Company's common stock for the period exceeds the exercise price of the employee stock options which are outstanding. NOTE F - SEGMENT INFORMATION
Three Months Three Months Ended March 31, 1999 Ended March 31, 1998 ------------------------ ------------------------ Razors Cotton Custom Razors Cotton Custom and and Bar and and Bar Blades Foot Care Soap Blades Foot Care Soap ------ --------- ------ ------ --------- ------ Net sales $ 44,282 $20,553$ 5,452 $38,674 $22,647 $5,190 Operating income 5,966 427 (89) 3,187 1,163 3
A reconciliation of combined operating income of the Company's segments to consolidated income before income taxes is as follows:
Three Months Ended March 31, ------------------ 1999 1998 -------- ------- Total operating income for segments $6,304 $4,353 Interest expense 3,030 3,045 ------- ------- Income before income taxes $3,274 $1,308 ====== ======
NOTE G - MERGER On February 12, 1999, RSA Holdings Corporation and RSA Acquisition Corporation, which are affiliates of J.W. Childs Equity Partners II, L.P. ("J.W. Childs"), entered into a merger agreement with the Company. Pursuant to the merger agreement, as amended on April 8, 1999, RSA Acquisition has made an offer to purchase all of the outstanding shares of common stock of the Company at a purchase price of $14.20 per share, upon the terms and subject to the conditions set forth in the offer to purchase ("the Stock Tender Offer"). The aggregate purchase price, excluding transaction costs, to be paid for the common stock purchased in the Stock Tender Offer, assuming all of the common stock (on a fully diluted basis) is tendered, including the redemption of stock options, is approximately $173.6 million. The Stock Tender Offer is conditioned upon, among other conditions, there being validly tendered and not withdrawn, prior to the expiration date of the Stock Tender Offer, a number of shares of common stock which constitutes more than 50% of the voting power (determined on a fully diluted basis) of all the equity securities of the Company. The Stock Tender Offer expires on April 23, 1999. The merger agreement provides that, following the completion of the Stock Tender Offer, RSA Acquisition will be merged with and into the Company (the "Merger"). Following the Merger, the Company will continue as the surviving corporation and will become a direct, wholly owned subsidiary of RSA Holdings, which will be wholly owned by J.W. Childs, its affiliates and Company management. Closing for the Merger is expected to occur in -6- late April 1999. In connection with the Merger, the Company has made an offer to purchase (the "Note Tender Offer") all $100.0 million aggregate principal amount of its 9 7/8% Series B Senior Notes due August 1, 2005 (the "Existing Notes"). In conjunction with the Note Tender Offer, the Company has also solicited consents to eliminate substantially all of the covenants contained in the indenture relating to the Existing Notes. Any tender of Existing Notes pursuant to the Note Tender Offer will also be a grant of consent with respect to such Existing Notes. The Note Tender Offer expires on April 26, 1999. Upon completion of the above transactions, as currently contemplated, the Company expects it would have had approximately $227.9 million of indebtedness outstanding as of March 31, 1999 as compared to historical indebtedness outstanding as of March 31, 1999 of $123.7 million. The Company also expects that as a result of the application of purchase accounting the Company's depreciation expense and amortization of intangible assets will increase. In addition, certain fees and expenses to be incurred relating to the above transactions will be reflected either as components of the cost of the transactions or as an expense (including the net cost to redeem stock options) in the period in which the transactions are completed. The expenses to be incurred in connection with the above transactions are expected to have a material impact on results of operations in the period in which the transactions are completed. Upon consummation of the Merger, The Jordan Company, as advisor to the transaction, will receive a fee of $2.5 million. NOTE H - CONTINGENCIES During 1998 the Company purchased bleached cotton from an outside supplier for use in its pharmaceutical coil business. The Company converted this cotton from incoming bales into a coil, which was shipped to its pharmaceutical customers to be used as filler in bottles of oral dosage forms of pharmaceutical products to prevent breakage. During the period from March through November of 1998, the process by which the Company's supplier bleached this cotton was changed by introducing an expanded hydrogen peroxide treatment. Subsequent testing indicated varying levels of residual hydrogen peroxide in the cotton processed during this time period and the supplier in November 1998 reduced the levels of residual hydrogen peroxide in its bleaching process. The Company, to date, has received complaints from approximately 10 customers alleging defects in the cotton supplied them during the period and asserting these defects may have led to changes in their products pharmaceutical appearance, and with respect to a limited number of products, potency. The Company has received notice of 2 claims for damages in the aggregate amount of approximately $1.7 million which the Company believes primarily relates to alleged lost sales and merchandise damage, and it is possible that additional damage claims might be forthcoming. On March 2, 1999, at the request of the Food and Drug Administration, the Company notified all (numbering approximately 85) of its pharmaceutical cotton coil customers that it was withdrawing from the market those lots of cotton coil which may contain elevated levels of hydrogen peroxide. The Company has notified its supplier that, in the Company's view, the supplier is primarily responsible for damages, if any, that may arise out of this matter. At this time, the Company's supplier has agreed to be responsible for the cost of fiber, bleaching and freight of returned product, but has not agreed to be responsible for any other damages and has expressed an intention to assert defenses to our claims. The Company's insurance carriers have been timely notified of the existence of the claim and have agreed to provide defense in a reservation of rights letter, but are continuing to evaluate whether coverage would apply to all aspects of the claims. The Company has been advised by its general counsel that it has a number of valid defenses to potential customer claims as well as a third party claim against the supplier for damages, if any, incurred by the Company. However, management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome relating to this overall issue, and accordingly, there can be no assurance that our exposure from this matter might not exceed the combination of our insurance coverage, if any, and our recourse to suppliers. It is therefore possible that the Company's results of operations or cash flows in a particular quarterly or annual period or its financial position could be significantly and adversely affected by an ultimate unfavorable outcome -7- of this matter. Weston Properties Investments III, Ltd. has filed a claim against the Company for damages relating to delays in cost overruns attendant to the Company's facility expansion in Cleveland, Ohio in the amount of $649,000. Management believes that the outcome of this matter will not have a material adverse effect on the Company's consolidated financial position or results of operations. NOTE I - SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION The Company's $100.0 million 9 7/8% Series B Senior Notes due 2005 have been guaranteed, on a joint and several basis by certain domestic subsidiaries of the Company, which guarantees are senior unsecured obligations of each guarantor and will rank pari passu in right of payment with all other indebtedness of each guarantor. However, the guarantee of one of the guarantor subsidiaries ranks junior to its outstanding subordinated note. The following condensed consolidating financial information presents condensed consolidating financial statements as of March 31, 1999 and December 31, 1998, and for the three months ended March 31, 1999 and 1998, of American Safety Razor Company - the parent company, the guarantor subsidiaries (on a combined basis), the non-guarantor subsidiaries (on a combined basis), and elimination entries necessary to present such entities on a consolidated basis. Separate financial statements and other disclosures concerning the guarantor subsidiaries are not presented because management has determined that such information would not be material to the holders of the 9 7/8% Series B Senior Notes. -8- Condensed Consolidating Balance Sheets (Unaudited) March 31, 1999 (In thousands)
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ Assets Current assets: Cash and cash equivalents $ 6 $ 121 $ 1,461 $ - $ 1,588 Trade receivables, net 17,169 11,015 12,206 (238) 40,152 Advances receivable--subsidiaries 46,064 - - (46,064) - Inventories 31,903 15,611 13,341 (1,550) 59,305 Income taxes and prepaid expenses 5,954 1,272 681 - 7,907 --------- -------- ------- --------- -------- Total current assets 101,096 28,019 27,689 (47,852) 108,952 Property and equipment, net 42,097 23,907 8,752 - 74,756 Intangible assets, net 48,617 20,355 2,096 - 71,068 Prepaid pension cost and other 1,545 5,028 21 - 6,594 Investment in subsidiaries 40,039 - 4,088 (44,127) - --------- -------- -------- --------- -------- Total assets $233,394 $77,309 $42,646 $(91,979) $261,370 ======== ======= ======= ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable, accrued expenses and other $ 19,529 $10,877 $ 3,953 $ (3) $ 34,356 Advances payable--subsidiaries - 42,739 3,285 (46,024) - Current maturities of long-term obligations 1,034 1,379 1,504 - 3,917 -------- ------- ------- ---------- -------- Total current liabilities 20,563 54,995 8,742 (46,027) 38,273 Long-term obligations 118,450 1,345 - - 119,795 Retiree benefits and other 15,277 9,973 - - 25,250 Deferred income taxes 3,732 3,124 99 - 6,955 -------- ------- ------- ---------- -------- Total liabilities 158,022 69,437 8,841 (46,027) 190,273 Stockholders' equity Common Stock 121 485 87 (572) 121 Additional paid-in capital 65,907 15,662 27,173 (42,835) 65,907 Retained earnings (accumulated deficit) 6,431 (8,275) 10,819 (2,544) 6,431 Dividends 2,877 - (2,877) - - Accumulated other comprehensive loss 36 - (1,397) (1) (1,362) -------- ------- ------- -------- -------- 75,372 7,872 33,805 (45,952) 71,097 -------- ------- ------- -------- -------- Total liabilities and stockholders' equity $233,394 $77,309 $42,646 $(91,979) $261,370 ======== ======= ======= ======== ========
-9- Condensed Consolidating Balance Sheets December 31, 1998 (In thousands)
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Assets Current assets: Cash and cash equivalents $ (17) $ 106 $ 3,364 $ - $ 3,453 Trade receivables, net 18,717 12,315 13,704 (238) 44,498 Advances receivable--subsidiaries 48,543 - - (48,543) - Inventories 30,108 13,349 11,604 (1,032) 54,029 Income taxes and prepaid expenses 6,216 1,578 643 - 8,437 -------- ------- ------- ---------- --------- Total current assets 103,567 27,348 29,315 (49,813) 110,417 Property and equipment, net 41,656 24,068 8,941 - 74,665 Intangible assets, net 49,027 20,601 2,183 - 71,811 Prepaid pension cost and other 1,133 4,850 21 - 6,004 Investment in subsidiaries 39,458 - 4,218 (43,676) - -------- ------- ------ -------- -------- Total assets $234,841 $76,867 $44,678 $(93,489) $262,897 ======== ======= ======= ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable, accrued expenses and other $ 20,058 $ 9,611 $ 4,568 $ - $ 34,237 Advances payable--subsidiaries - 43,283 4,703 (47,986) - Current maturities of long-term obligations 1,030 1,380 1,442 - 3,852 -------- ------- ------- -------- -------- Total current liabilities 21,088 54,274 10,713 (47,986) 38,089 Long-term obligations 121,718 1,377 386 - 123,481 Retiree health and insurance benefits and other 15,169 9,994 - - 25,163 Deferred income taxes 3,468 3,040 102 - 6,610 -------- ------- ------- ------ -------- Total liabilities 161,443 68,685 11,201 (47,986) 193,343 -------- ------- ------- -------- -------- Stockholders' equity Common Stock 121 485 87 (572) 121 Additional paid-in capital 65,905 15,662 27,173 (42,835) 65,905 Retained earnings (accumulated deficit) 4,457 (7,965) 10,058 (2,093) 4,457 Dividends 2,877 - (2,877) - - Accumulated other comprehensive loss 38 - (964) (3) (929) -------- ------- ------- -------- ------- 73,398 8,182 33,477 (45,503) 69,554 -------- ------- ------- -------- -------- Total liabilities and stockholders' equity $234,841 $76,867 $44,678 $(93,489) $262,897 ======== ======= ======= ======== ========
-10- Condensed Consolidating Statements of Income (Unaudited) Three Months Ended March 31, 1999 (In thousands)
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ Net sales $37,918 $26,228 $14,005 $(7,864) $70,287 Cost of sales 21,581 22,633 10,479 (7,864) 46,829 ------- ------- ------- ------- ------- Gross profit 16,337 3,595 3,526 - 23,458 Selling, general and administrative expenses 10,836 3,013 2,658 - 16,507 Amortization of intangible assets 365 246 36 - 647 ------- ------ ------- ------- ------- Operating income 5,136 336 832 - 6,304 Other income (expense): Equity in earnings (losses) of affiliates 581 - (130) (451) - Interest expense (2,483) (1,002) 455 - (3,030) ------- ------- ------- ------- ------- Income (loss) before income taxes 3,234 (666) 1,157 (451) 3,274 Income taxes 1,260 (356) 396 - 1,300 ------- ------- ------- ------- ------- Net income (loss) $ 1,974 $ (310) $ 761 $ (451) $ 1,974 ======= ======= ======= ======= =======
Condensed Consolidating Statements of Income (Unaudited) Three Months Ended March 31, 1998 (In thousands)
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ Net sales $32,177 $28,019 $11,317 $(5,002) $66,511 Cost of sales 19,665 23,665 8,675 (5,002) 47,003 ------- ------- ------- ------- ------- Gross profit 12,512 4,354 2,642 - 19,508 Selling, general and administrative expenses 8,183 2,977 2,361 - 13,521 Amortization of intangible assets 372 245 14 - 631 Special charge 731 184 88 - 1,003 ------- ------- ------- ------ ------- Operating income 3,226 948 179 - 4,353 Other income (expense): Equity in earnings of affiliates 325 - 154 (479) - Interest expense (2,405) (1,008) 368 - (3,045) ------- ------- ------- ------ ------- Income (loss) before income taxes 1,146 (60) 701 (479) 1,308 Income taxes 357 (40) 202 - 519 ------- -------- ------- ------ ------- Net income (loss) $ 789 $ (20) $ 499 $ (479) $ 789 ======= ======== ======= ====== =======
-11- Condensed Consolidating Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 1999 (In thousands)
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ (In thousands) Net income (loss) $1,974 $(310) $761 $(451) $1,974 Other comprehensive loss: Foreign currency translation adjustments (2) - (433) 2 (433) ------ ----- ---- ----- ------ Comprehensive income $1,972 $(310) $328 $(449) $1,541 ====== ===== ==== ===== ======
Condensed Consolidating Statements of Comprehensive Income (Unaudited) Three Months Ended March 31, 1998 (In thousands)
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Net income (loss) $789 $(20) $499 $(479) $789 Other comprehensive income: Foreign currency translation adjustments - - 88 - 88 ---- ---- ---- ----- ---- Comprehensive income $789 $(20) $587 $(479) $877 ==== ==== ==== ===== ====
-12- Condensed Consolidating Statements of Cash Flows (Unaudited) Three Months Ended March 31, 1999 (In thousands)
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Operating activities Net cash (used in) provided by operating activities $2,752 $1,258 $ (79) $ 515 $4,446 Investing activities Capital expenditures (1,865) (652) (133) - (2,650) Other (79) - 51 - (28) Advances from (to) subsidiaries 2,477 - (1,418) (1,059) - ------ ------ ------ ------ ----- Net cash (used in) provided from investing activities 533 (652) (1,500) (1,059) (2,678) Financing activities Repayment of long-term obligations (6,564) (47) (461) - (7,072) Proceeds from borrowings 3,300 - 137 - 3,437 Proceeds from exercise of stock options 2 - - - 2 Advances from (to) subsidiaries - (544) - 544 - ------ ----- ------ ---- ------ Net cash used in financing activities (3,262) (591) (324) 544 (3,633) Net increase (decrease) in cash and cash equivalents 23 15 (1,903) - (1,865) Cash and cash equivalents, beginning of period (17) 106 3,364 - 3,453 ------ ----- ------ ---- ------ Cash and cash equivalents, end of period $ 6 $ 121 $1,461 $ - $1,588 ====== ====== ====== ==== ======
-13- Condensed Consolidating Statements of Cash Flows (Unaudited) Three Months Ended March 31, 1998 (In thousands)
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ Operating activities Net cash (used in) provided by operating activities $ (274) $1,057 $ 178 $(19) $ 942 Investing activities Capital expenditures (1,616) (1,105) (235) - (2,956) Advances from (to) subsidiaries (662) - - 662 - ------ ------ ------ ---- ------ Net cash used in investing activities (2,278) (1,105) (235) 662 (2,956) Financing activities Repayment of long-term obligations (3,047) (55) - - (3,102) Proceeds from borrowings 5,288 - 121 - 5,409 Proceeds from exercise of stock options 73 - - - 73 Advances from (to) subsidiaries - (239) 890 (651) - ------ ------ ------ ---- ------ Net cash provided from (used in) financing activities 2,314 (294) 1,011 (651) 2,380 Net increase (decrease) in cash and cash equivalents (238) (342) 954 (8) 366 Cash and cash equivalents, beginning of period 356 433 637 8 1,434 ------ ------- ------- ---- ------ Cash and cash equivalents, end of period $ 118 $ 91 $1,591 $ - $1,800 ====== ======= ====== ===== ======
-14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion of results of operations and financial condition is based upon and should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in this report and the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. Forward-Looking Statements This report contains forward-looking statements relating to future results of the Company. Such forward-looking statements are identified by use of forward-looking words such as "anticipates," "believes," "plans," "estimates," "expects," and "intends" or words or phrases of similar expression. These forward-looking statements are subject to various assumptions, risks and uncertainties, including but not limited to, changes in political and economic conditions, demand for the Company's products, acceptance of new products, technology developments affecting the Company's products and to those discussed in the Company's filings with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those contemplated by the forward-looking statements. Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Net Sales. Net sales for the three months ended March 31, 1999 and 1998, were $70.3 million and $66.5 million, respectively, an increase of $3.8 million, or 6%. Razors and Blades. Net sales of our razors and blades segment for the three months ended March 31, 1999 and 1998, were $44.3 million and $38.7 million, respectively, an increase of $5.6 million, or 14%. Net sales of shaving razors and blades for the three months ended March 31, 1999 and 1998, were $29.1 million and $23.5 million, respectively, an increase of $5.6 million, or 24%. Net sales of domestic value branded shaving products increased 108%, rebounding from weak sales in the first quarter of 1998, reflecting sales gains relating to an increase in promotional programs with several customers and overall increased distribution of the Company's shaving products. Net sales of domestic private label shaving products decreased 7% due primarily to reduced promotional support by certain customers. Net sales of shaving products in international markets increased 9% (net of a 3% negative impact of unfavorable exchange rates) reflecting stronger sales in certain markets. Net sales of blades and bladed hand tools for the three months ended March 31, 1999 and 1998, were $11.6 million and $11.0 million, respectively, an increase of $0.6 million, or 5%. This growth primarily reflects increased sales of the Company's Personna(R) brand of products as a result of new distribution gains. Net sales of specialty industrial and medical blades for the three months ended March 31, 1999 and 1998, were $3.6 million and $4.2 million, respectively, a decrease of $0.6 million, or 14%. Sales of specialty industrial products decreased 33% due primarily to inventory adjustments by certain customers and mix shifts to lower priced blade products. Additionally, certain of the Company's distributors experienced increased competition in their serviced niche markets. Sales of medical products increased 10% due primarily to increased distribution of products. Cotton and Foot Care. Net sales of cotton and foot care products for the three months ended March 31, 1999 and 1998, were $20.6 million and $22.6 million, respectively, a decrease of $2.0 million or 9%. This decrease results primarily from issues related to the continuing integration and reorganization of the Company's cotton operations which have led to delays in shipping products to customers and in turn reduced promotional activity. -15- Custom Bar Soap. Net sales of the Company's custom bar soap products for the three months ended March 31, 1999 and 1998, were $5.5 million and $5.2 million, respectively, an increase of $0.3 million or 6%. This increase results primarily from increased sales to certain of the Company's pharmaceutical/skin care customers. Gross Profit. Gross profit increased $4.0 million to $23.5 million during the three months ended March 31, 1999, from $19.5 million for the three months ended March 31, 1998. As a percentage of net sales, gross profit was 33.4% for the three months ended March 31, 1999, and 29.3% for the three months ended March 31, 1998. Blade margins improved due to favorable product mix, lower material costs and lower manufacturing costs reflecting the Company's continuing efforts to reduce manufacturing costs. This improvement in blade margins was somewhat offset by increased distribution costs and higher manufacturing overheads resulting primarily from issues related to the continuing integration and reorganization of the Company's cotton operations, and increased manufacturing overheads and depreciation expense in the Company's soap operations. Operating and Other Expenses. Selling, general and administrative expenses were 23.5% of net sales for the three months ended March 31, 1999, compared to 20.3% for the three months ended March 31, 1998. This increase primarily reflects an increase in promotional support for the Company's shaving blade products and increased spending on new product development activities, primarily related to our three-blade shaving system, Tri-Flexxx(TM) which will be introduced during the second quarter of 1999. Amortization of goodwill and other intangible assets was substantially unchanged at $0.6 million for the three months ended March 31, 1999 and 1998. Interest expense was substantially unchanged at $3.0 million for the three months ended March 31, 1999 and 1998. In March 1998, the Company recorded a special charge of approximately $1,003,000 related to the shutdown of the Company's cotton operations in Sparks, Nevada and employee terminations. As of March 31, 1999, approximately $1.0 million remained as an accrued expense on our balance sheet related to the Company's special charges, including the special charge discussed above, which is expected to be substantially paid or utilized for asset impairment during the remainder of 1999. The Company's effective income tax rate was 39.7% for the three months ended March 31, 1999 and 1998, and varies from the United States statutory rate due primarily to nondeductible goodwill amortization and state income taxes, net of the federal tax benefit. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flow from operations and borrowings under its revolving credit facility. Net cash provided by operating activities for the three months ended March 31, 1999, amounted to $4.4 million. Net cash used in investing activities for the three months ended March 31, 1999, related primarily to capital expenditures of $2.7 million. Net cash used in financing activities for the three months ended March 31, 1999, resulted primarily from net repayments of $3.6 million. At March 31, 1999, the Company had utilized $18.2 million of its revolving credit facility and had approximately $31.8 million available for future borrowings under this facility. Management believes that the Company's cash on hand, anticipated funds from operations, and the amounts available to the Company under its revolving credit facility will be sufficient to cover its working capital, capital expenditures, debt service requirements and tax obligations as well as support the Company's growth-oriented strategy for its existing business for at least the next 12 months. Market Risk The Company is exposed to various market risk factors such as fluctuating interest rates and changes in foreign currency rates. These risk factors can impact our results of operations, cash flows and financial position. We manage these risks through regular operating and financing activities and periodically use derivative financial instruments such as foreign exchange option and forward contracts. These derivative instruments are placed with major financial institutions and are not for speculative or trading purposes. -16- The following analysis presents the effect on the Company's earnings, cash flows and financial position as if the hypothetical changes in market risk factors occurred on March 31, 1999 and March 31, 1998. Only the potential impacts of our hypothetical assumptions are analyzed. The analysis does not consider other possible effects that could impact our business. Interest Rate Risk At March 31, 1999, the Company carried $123.7 million of outstanding debt on its books, with $17.5 million of that total held at variable interest rates. Holding all other variables constant, if interest rates hypothetically increased or decreased by 10%, for the three months ended March 31, 1999 and 1998, the impact on earnings, cash flow and financial position would not be material. In addition, if interest rates hypothetically increased or decreased by 10% on March 31, 1999, with all other variables held constant, the fair market value of our $100.0 million 9 7/8% Series B Senior Notes would increase or decrease by approximately $5.0 million. Foreign Currency Risk The Company sells to customers in foreign markets through our foreign operations and through export sales from our plants in the U.S. These transactions are often denominated in currencies other than the U.S. dollar. Our primary currency exposures are the Euro, British Pound Sterling, Canadian Dollar and Mexican Peso. The Company limits its foreign currency risk by operational means, mostly by locating its manufacturing operations in those locations where it has significant exposures in major currencies. The Company has entered into currency option contracts to minimize the risk of foreign currency fluctuations. The value of these contracts at March 31, 1999 was not material to the Company's earnings, cash flow and financial position. Merger On February 12, 1999, RSA Holdings Corporation and RSA Acquisition Corporation, which are affiliates of J.W. Childs Equity Partners II, L.P. ("J.W. Childs"), entered into a merger agreement with the Company. Pursuant to the merger agreement, as amended on April 8, 1999, RSA Acquisition has made an offer to purchase all of the outstanding shares of common stock of the Company at a purchase price of $14.20 per share, upon the terms and subject to the conditions set forth in the offer to purchase ("the Stock Tender Offer"). The aggregate purchase price, excluding transaction costs, to be paid for the common stock purchased in the Stock Tender Offer, assuming all of the common stock (on a fully diluted basis) is tendered, including the redemption of stock options, is approximately $173.6 million. The Stock Tender Offer is conditioned upon, among other conditions, there being validly tendered and not withdrawn, prior to the expiration date of the Stock Tender Offer, a number of shares of common stock which constitutes more than 50% of the voting power (determined on a fully diluted basis) of all the equity securities of the Company. The Stock Tender Offer expires on April 23, 1999. The merger agreement provides that, following the completion of the Stock Tender Offer, RSA Acquisition will be merged with and into the Company (the "Merger"). Following the Merger, the Company will continue as the surviving corporation and will become a direct, wholly owned subsidiary of RSA Holdings, which will be wholly owned by J.W. Childs, its affiliates and Company management. Closing for the Merger is expected to occur in late April 1999. In connection with the Merger, the Company has made an offer to purchase (the "Note Tender Offer") all $100.0 million aggregate principal amount of its 9 7/8% Series B Senior Notes due August 1, 2005 (the "Existing Notes"). In conjunction with the Note Tender Offer, the Company has also solicited consents to eliminate substantially all of the covenants contained in the indenture relating to the Existing Notes. Any tender of Existing Notes pursuant to the Note Tender Offer will also be a grant of consent with respect to such Existing Notes. The Note Tender Offer expires on April 26, 1999. Upon completion of the above transactions, as currently contemplated, the Company expects it would have had approximately $227.2 million of indebtedness outstanding as of March 31, 1999 as compared to historical indebtedness outstanding as of March 31, 1999 of $123.7 million. The Company also expects that as a result of -17- the application of purchase accounting the Company's depreciation expense and amortization of intangible assets will increase. In addition, certain fees and expenses to be incurred relating to the above transactions will be reflected either as components of the cost of the transactions or as an expense (including the net cost to redeem stock options) in the period in which the transactions are completed. The expenses to be incurred in connection with the above transactions are expected to have a material impact on results of operations in the period in which the transactions are completed. Upon consummation of the Merger, The Jordan Company, as advisor to the transaction, will receive a fee of $2.5 million. Contingencies Refer to Note H - Contingencies to the Notes to Condensed Consolidated Financial Statements for a discussion of legal contingencies. New Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes standards for accounting and disclosure of derivative instruments. This new standard is effective for fiscal quarters of fiscal years beginning after June 15, 1999. The implementation of this new standard is not expected to have a material effect on our consolidated results of operations or financial position. Year 2000 Computer Issues The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year, as well as hardware designed with similar constraints. Some of our computer programs and hardware that have date sensitive functions may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions in operations including, among other things, a temporary inability to process transactions, receive invoices, make payments or engage in normal business transactions. We are taking action to resolve those Year 2000 issues that are under our control. The overall effort encompasses our razors and blades, cotton and foot care and custom bar soap business segments and covers international as well as domestic sites. We are centrally monitoring and controlling the effort; however, there are designated representatives at each affiliate and subsidiary location with responsibility for resolving site-specific Year 2000 issues. Following is a description of the six-phase approach we are using: (1) Assessment - Identify and inventory all information technology and non-information technology system components that are possible sources of Year 2000 issues and assess the criticality of non-compliant systems in order to establish priorities for replacement or repair. (2) Strategy - Determine the nature and extent of Year 2000 issues and select a remediation strategy (i.e., renovate by modifying existing system, upgrade to a later version of the system, replace with a new system, or retire the affected component). After the strategy has been selected, develop project plans to address non-compliant systems, beginning with the most critical systems. (3) Remediation - Execute project plans to resolve issues with non-compliant systems. (4) Testing - Perform testing to evaluate effectiveness of the corrective actions taken or to confirm compliance of systems that have been certified by third parties. (5) Implementation - Implement the renovated, upgraded, and replaced system components into the production environment. -18- (6) Contingency Planning - Continue monitoring readiness and complete necessary contingency plans. We have completed the Assessment and Strategy phases for substantially all of our information technology and non-information technology system components. Our most mission-critical system is the "Corporate ERP" system, which is a widely available software package that we have moderately customized. Eleven of our fifteen manufacturing, packaging and distribution sites utilize the Corporate ERP system to process orders, control manufacturing planning/work-order processing, distribute products, manage financial activities and report financial results. The eleven sites using the Corporate ERP system include corporate headquarters, U.S. and Mexican razors and blades sites, all cotton and foot care facilities, and all custom bar soap facilities. The third party vendor has responded that all of its software modules in use at American Safety Razor and our subsidiaries are Year 2000 ready. In addition, the most frequently utilized system functions have been tested by our users, including the internally developed system customizations. We are currently linked with 152 customers for exchange of documents using the Corporate EDI (electronic data interchange) system. Our EDI software has been upgraded to a Year 2000 compliant version that is now capable of supporting ANSI standard version 4010, which provides for a 4 digit year and is the version which many of our EDI customers are adopting prior to the Year 2000. EDI transactions with a 2 digit year have also been tested and will continue to be supported for those customers who elect not to convert to a 4 digit year. Approximately 45% of the 152 EDI customers have now been implemented on 4010. Testing with EDI customers will continue through the remainder of 1999. All personal computers are being analyzed and tested to determine whether any remediation is required. We expect that the analysis and testing process will be complete by June 1999 and that all personal computers will be Year 2000 ready by December 31, 1999. Our U.S., Canada and U.K. payroll systems are Year 2000 compliant and we expect all of our remaining international payroll systems will be compliant by the end of 1999. We are also assessing the Year 2000 readiness of non-information technology systems and equipment which may include embedded technology such as micro-controllers. Our manufacturing, assembly, and packaging machines, operating in each of our razors and blades, cotton and foot care and custom bar soap segments, are scheduled to be Year 2000 compliant by the end of the second quarter of 1999. Our "worst-case" scenario at the present time is the disruption of business operations as the result of supplier Year 2000 related failures, which would impair their ability to adequately provide us with products or services. Our business processes depend on our material suppliers as well as our infrastructure suppliers in areas such as electricity, water, gas, communications and transportation. Year 2000 related failures by suppliers could adversely affect business operations including payroll, manufacturing processes, product distribution, material ordering, customer-order processing and other support functions dependent on the affected supplier. While we have a limited ability to test and control our suppliers' and other third parties' Year 2000 readiness, we are contacting major suppliers and other critical third parties to obtain information as to their Year 2000 readiness. Razors and blades and cotton and foot care suppliers were surveyed regarding Year 2000 issues and all key suppliers have indicated they plan to be compliant during 1999. The custom bar soap business is scheduling a meeting with its top twenty suppliers during the first half of 1999 for a Year 2000 readiness review. Considering the number of internal and external systems which we directly or indirectly use, it is likely that there will be instances of failure that could cause disruptions in business processes. The likelihood of failures in infrastructure systems and in the supply chain cannot be estimated and therefore the impact of these failures on business operations is uncertain. If we or any critical third party supplier does not complete necessary upgrades as planned, the Year 2000 issue may have a material impact on us. Necessary contingency plans are scheduled to be developed, beginning in July 1999, for any internal systems that are not compliant by the end of June 1999. Also, contingency plans will be developed by December 1999, as needed, to address the risk of business disruption due to supplier Year 2000 issues. As part of contingency planning, we will consider a number of options to mitigate risk, including building additional inventory prior to year 2000, establishing manual backup processes and arranging for alternate suppliers. -19- Since most of our Year 2000 issues are being addressed through normal planned upgrades, incremental external Year 2000 costs are expected to be minimal, approximating $115,000. To date, the Company has spent approximately $70,000, of which approximately $35,000 was spent during the first quarter of 1999. The remaining balance of $45,000 is planned to be spent during the second quarter of 1999. Readers are cautioned that forward-looking statements contained in this discussion of Year 2000 issues should be read in conjunction with our disclosures under the heading "Forward-Looking Statements" above. Inflation Inflation has not been material to our operations within the periods presented. Item 3. Quantitative and Qualitative Disclosure of Market Risk The information called for by this item is provided under the captions "Market Risk", "Interest Rate Risk" and "Foreign Currency Risk" under Part I, Item 2 - Management's Discussion and Analysis of Financial Position and Results of Operations. PART II, OTHER INFORMATION Item 1. Legal Proceedings The information called for by this item is provided in Note H - Contingencies to Notes to Condensed Consolidated Financial Statements under Part I, Item 1. - Financial Statements Item 6. Exhibits and Reports on Form 8-K a. Exhibits - Exhibit 27 - Financial Data Schedule b. Reports on Form 8-K: On February 24, 1999, the Registrant filed a report on Form 8-K reporting that the Registrant entered into an Agreement and Plan of Merger with RSA Holdings Corp. and RSA Acquisition Corp., each an indirect, wholly-owned subsidiary of the private investment firm J. W. Childs Associates, Inc. -20- 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. AMERICAN SAFETY RAZOR COMPANY April 22, 1999 By /s/William C. Weathersby - -------------- --------------------------- Date William C. Weathersby President April 22, 1999 By /s/Thomas G. Kasvin - -------------- ---------------------------- Date Thomas G. Kasvin -21- EX-27 2
5 This schedule contains summary financial information extracted from the financial statements included in the Form 10-Q of American Safety Razor Company for the quarter ended March 31, 1999, and is qualified in its entirety by reference to such financial statements. 0000750339 AMERICAN SAFETY RAZOR COMPANY 1000 US DOLLARS 3-MOS DEC-31-1999 MAR-31-1999 1 1588 0 40152 0 59305 108952 126985 52229 261370 38273 119795 0 0 121 70976 261370 70287 70287 46829 46829 0 0 3030 3274 1300 1974 0 0 0 1974 .16 .16
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