10-Q 1 0001.txt SECOND QUARTER FORM 10-Q FOR AMERICAN SAFETY RAZOR 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 June 30, 2000 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 0-21952 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) 240 Cedar Knolls Road, Suite 401, Cedar Knolls, New Jersey 07927 ----------------------------------------------------------------- (Address of principal executive offices, including zip code) (973) 753-3000 -------------- (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 August 2, 2000. Class Outstanding at August 2, 2000 ----- ----------------------------- 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 1 Condensed Consolidated Statements of Operations (Unaudited) 3 Condensed Consolidated Statements of Comprehensive Income (Unaudited) 4 Condensed Consolidated Statements of Cash Flows (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 28 Part II. Other Information Item 1. Legal Proceedings 28 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 29 AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) Company ---------------------------- June 30, December 31, 2000 1999 ----------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 3,776 $ 12,500 Accounts receivable, net 47,280 46,252 Inventories 60,819 54,404 Deferred income taxes 6,795 6,814 Prepaid expenses 2,345 1,882 -------- -------- Total current assets 121,015 121,852 Property and equipment 104,661 98,398 Less accumulated depreciation (14,878) (8,407) -------- -------- 89,783 89,991 Intangible assets, net: Goodwill, trademarks and patents 157,506 159,675 Other 5,976 6,826 -------- -------- 163,482 166,501 Prepaid pension cost and other 25,886 24,527 -------- -------- Total assets $400,166 $402,871 ======== ======== See accompanying notes. -1- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
Company ------------------------------- June 30, December 31, 2000 1999 ----------- ---------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,334 $ 13,711 Accrued expenses and other 21,465 23,131 Current maturities of long-term obligations 10,070 10,508 -------- -------- Total current liabilities 47,869 47,350 Long-term obligations 180,126 175,108 Retiree benefits and other 27,662 27,333 Deferred income taxes 24,451 24,078 -------- -------- Total liabilities 280,108 273,869 -------- -------- Stockholders' equity: Common stock, $.01 par value, 25,000,000 shares authorized; 12,110,349 shares issued and outstanding at June 30, 2000 and December 31, 1999 121 121 Additional paid-in capital 172,843 172,843 Advances to RSA Holdings Corporation, net (52,383) (42,714) Retained earnings (accumulated deficit) 334 (1,258) Accumulated other comprehensive (loss) income (857) 10 -------- -------- 120,058 129,002 -------- -------- Total liabilities and stockholders' equity $400,166 $402,871 ======== ========
See accompanying notes. -2- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share data)
Company Predecessor Company Predecessor ----------------- ----------- ------- ----------- Period Period Period Three from from Six from Months April 24, April 1, Months January 1, Ended 1999 to 1999 to Ended 1999 to June 30, June 30, April 23, June 30, April 23, 2000 1999 1999 2000 1999 -------- --------- --------- -------- ---------- Net sales $79,921 $59,942 $17,304 $157,130 $87,591 Cost of sales: Cost of sales 53,419 38,185 11,691 105,220 58,520 Purchase accounting adjustment to inventory - 9,008 - - - ------- ------- ------- -------- ------- Gross profit 26,502 12,749 5,613 51,910 29,071 Selling, general and administrative expenses 17,308 13,130 4,922 37,008 21,429 Amortization of intangible assets 1,174 919 188 2,362 835 Transaction expenses - - 11,440 - 11,440 ------- ------- ------- -------- ------- Operating income (loss) 8,020 (1,300) (10,937) 12,540 (4,633) Interest expense 4,839 3,972 877 9,553 3,907 ------- ------- ------- -------- ------- Income (loss) before income taxes and extraordinary item 3,181 (5,272) (11,814) 2,987 (8,540) Income taxes (benefit) 1,486 (1,547) (2,142) 1,395 (842) ------- ------- ------- -------- ------- Income (loss) before extraordinary item 1,695 (3,725) (9,672) 1,592 (7,698) Extraordinary item, net of income tax benefit - 611 118 - 118 ------- ------- ------- ------- ------- Net income (loss) $ 1,695 $(4,336) $(9,790) $ 1,592 $(7,816) ======= ======= ======= ======= ======= Basic earnings per share: Income (loss) before extraordinary item $0.14 $(0.31) $(0.80) $0.13 $(0.64) Extraordinary item - (0.05) (0.01) - (0.01) ----- ------ ------ ----- ------ Net income (loss) $0.14 $(0.36) $(0.81) $0.13 $(0.65) ===== ====== ====== ===== ====== Weighted average number of shares outstanding 12,110 12,110 12,110 12,110 12,110 ------- ------- ------- -------- ------- Diluted earnings per share: Income (loss) before extraordinary item $0.14 $(0.31) $(0.80) $0.13 $(0.64) Extraordinary item - (0.05) (0.01) - (0.01) ----- ------ ------ ----- ------ Net income (loss) $0.14 $(0.36) $(0.81) $0.13 $(0.65) ===== ====== ====== ===== ====== Weighted average number of shares outstanding 12,110 12,122 12,207 12,110 12,198 ====== ====== ====== ====== ======
See accompanying notes. -3- CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands)
Company Predecessor Company Predecessor ------------------- ----------- ------- ----------- Period Period Period Three from from Six from Months April 24, April 1, Months January 1, Ended 1999 to 1999 to Ended 1999 to June 30, June 30, April 23, June 30, April 23, 2000 1999 1999 2000 1999 -------- --------- --------- -------- ---------- Net income (loss) $1,695 $(4,336) $(9,790) $1,592 $(7,816) Other comprehensive income (loss): Foreign currency translation adjustments (559) (310) 317 (867) (116) ------ ------- -------- ------ ------- Comprehensive income (loss) $1,136 $(4,646) $(9,473) $ 725 $(7,932) ====== ======= ======= ====== =======
See accompanying notes. -4- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Company Predecessor --------------------- ----------- Period Period Six from from Months April 24, January 1, Ended 1999 to 1999 to June 30, June 30, April 23, 2000 1999 1999 -------- ---------- ----------- Operating activities Net income (loss) $1,592 $(4,336) $(7,816) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary item - 611 118 Depreciation and amortization 8,917 2,960 4,105 Amortization of financing costs 726 346 180 Retiree benefits and other (1,897) (872) (719) Deferred income taxes 392 (3,326) 232 Changes in operating assets and liabilities: Accounts receivable (1,028) (6,062) 7,710 Inventories (6,415) 9,623 (7,748) Income taxes receivable - 1,518 (2,252) Prepaid expenses (463) (18) 205 Accounts payable 2,623 216 1,723 Accrued and other expenses (1,666) 1,768 (1,072) ------ ------ ------ Net cash provided by (used in) operating activities 2,781 2,428 (5,334) Investing activities Capital expenditures (6,347) (1,354) (3,638) Other - 2 49 ------ ------- ------- Net cash used in investing activities (6,347) (1,352) (3,589) Financing activities Repayment of long-term obligations (5,450) (33,793) (25,846) Proceeds from borrowings 10,000 32,801 65,337 Deferred loan fees (39) - (7,606) Proceeds from exercise of stock options - - 2 Advances to parent, net (9,669) - (24,155) ------ ------- ------- Net cash (used in) provided by financing activities (5,158) (992) 7,732 ------ ------- ------- Net (decrease) increase in cash and cash equivalents (8,724) 84 (1,191) Cash and cash equivalents, beginning of period 12,500 2,262 3,453 ------ ------ ------- Cash and cash equivalents, end of period $3,776 $2,346 $2,262 ====== ====== ======
See accompanying notes. -5- 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 (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2000, are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. The balance sheet at December 31, 1999 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, 1999. As a result of the acquisition of the Company, effective April 23, 1999, and new basis of accounting, the Company's financial statements for the period subsequent to the acquisition are not comparable to the Predecessor's financial statements for the period prior to the acquisition. NOTE B - INVENTORIES Inventories consisted of: Company ------------------------------------- June 30, 2000 December 31, 1999 ------------- ----------------- (In thousands) Raw materials $29,008 $27,928 Work-in-process 6,260 4,521 Finished goods 21,319 18,098 Operating supplies 4,232 3,857 ------- ------- $60,819 $54,404 ======= ======= NOTE C - LONG TERM OBLIGATIONS In May 2000, the Company amended its $190.0 million credit agreement to provide for the Company to make a $10.0 million advance to its parent company, RSA Holdings Corporation, for the partial prepayment of its outstanding note payable. In May 2000, the Company borrowed $10.0 million under its revolving credit facility and advanced the $10.0 million to RSA Holdings Corporation to prepay a portion of its outstanding note payable. At June 30, 2000, the Company had approximately $15.0 million available for future borrowings under its revolving credit facility. -6- NOTE D - EARNINGS PER SHARE The difference between the weighted average number of shares outstanding for computing basic earnings per share and diluted earnings per share related to the Predecessor's employee stock options outstanding which were assumed to be converted for the diluted earnings per share calculation when the average market price of the Predecessor's common stock for the period exceeded the exercise price of the employee stock options which were outstanding. NOTE E - SEGMENT INFORMATION
Company Company Predecessor --------------------- --------------------- ---------------------- Three Months Period from Period from Ended April 24, 1999 to April 1, 1999 to June 30, 2000 June 30, 1999 April 23, 1999 --------------------- ---------------------- ---------------------- Operating Operating Operating Net Income Net Income Net Income Sales (Loss) Sales (Loss) Sales (Loss) --------- ---------- --------- ---------- --------- ---------- (In Thousands) Razors and Blades $52,840 $7,867 $40,332 $(1,861) $10,907 $(10,639) Cotton and Foot Care 19,420 (364) 13,566 (151) 4,998 (169) Custom Bar Soap 7,661 517 6,044 712 1,399 (129) ------- ------- ------- -------- ------- -------- $79,921 8,020 $59,942 (1,300) $17,304 (10,937) ======= ======= ======= Interest expense 4,839 3,972 877 ------- -------- -------- Income (loss) before income taxes and extraordinary item $3,181 $(5,272) $(11,814) ====== ======= ========
Company Predecessor ----------------------- --------------------- Six Months Period from Ended January 1, 1999 to June 30, 2000 April 23, 1999 ----------------------- --------------------- Operating Operating Net Income Net Income Sales (Loss) Sales (Loss) --------- ---------- ------- ---------- Razors and Blades $103,308 $12,451 $55,189 $(4,673) Cotton and Foot Care 39,646 (309) 25,551 258 Custom Bar Soap 14,176 398 6,851 (218) --------- -------- -------- ------- $157,130 12,540 $87,591 (4,633) ======== ======= Interest expense 9,553 3,907 -------- ------- Income (loss) before income taxes and extraordinary item $ 2,987 $(8,540) ======= =======
Total Assets ------------ June 30, 2000 ------------- Razors and Blades $312,809 Cotton and Foot Care 56,646 Custom Bar Soap 30,711 -------- $400,166 ======== -7- NOTE F - CONTINGENCIES Cotton Matter: -------------- 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 a number of 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. No lawsuits have been filed by any of these customers. The Company has received written notice of claims for damages in the aggregate amount of approximately $117.0 million. In addition, $113.0 million of this amount is for alleged lost profits from two customers, which lost profits have not been substantiated. 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 the Company's 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 is advised by outside counsel that it has strong legal arguments that the aggregate amount of insurance available for these claims would be sufficient to cover the magnitude of the claims currently expressed. The Company also has been advised by its outside counsel that it has a number of valid defenses to potential customer claims as well as a third party claim against its suppliers for damages, if any, incurred by the Company. However, management cannot at this time 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 the Company's exposure from this matter might not potentially exceed the combination of its insurance coverages and recourse to its 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 or adversely affected by an ultimate unfavorable outcome of this matter. Other Matter: ------------- In June 1999, the Company received notice of the filing of a lawsuit by The Gillette Company ("Gillette") asserting claims for damages and injunctive relief for alleged patent infringement, misappropriation of trade dress, false advertising and breach of contract in connection with the marketing of the Company's two-bladed and three- bladed shaving cartridge systems (the MBC(TM) introduced in 1994 and the Tri-Flexxx(TM) introduced in 1999). In August 1999, the Company filed an answer and counterclaims in which it denied Gillette's allegations, sought a declaration that Gillette's patents are not infringed, are invalid and unenforceable, and asserted counterclaims against Gillette for damages and injunctive relief for, among other things, alleged antitrust violations and false advertising. Gillette's time to respond to the Company's answer and counterclaims has been postponed pending ongoing settlement discussions. The Company believes that Gillette's claims are without merit and intends to defend against them vigorously, as well as to vigorously pursue the Company's counterclaims against Gillette. The Company does not believe it has any material liability with respect to Gillette's claims described above. However, management and counsel at this time are unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome relating to this matter. The Company will reassess this matter as new facts become available. -8- NOTE G - ADOPTION OF STOCK INCENTIVE PLAN In June 2000, RSA Holdings Corporation, the Company's parent, adopted a stock incentive plan, whereby stock options may be granted to directors, officers and other key employees of RSA Holdings Corporation and its subsidiaries to purchase a specified number of shares of common stock for a term not to exceed 10 years. The plan provides for the granting of options to purchase up to 110,000 shares of common stock of RSA Holdings Corporation. Grants of options to be issued to directors, officers and other key employees vest and become exercisable upon the attainment of certain performance goals at the end of certain performance periods, as defined in the plan or after nine years. At June 30, 2000, there were 95,500 stock options outstanding under the RSA Holdings Corporation stock plan. In accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," the Company has accounted for the provisions of the RSA Holdings Corporation stock plan in its consolidated financial statements. Accordingly, because the exercise price of the stock options equaled the fair market value of the underlying stock on the measurement date, no compensation expense was recognized. NOTE H - NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (the "FASB") 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, as amended by FAS 137 and FAS 138, is effective for fiscal quarters of fiscal years beginning after June 15, 2000. The Company is required to adopt FAS 133 on January 1, 2001. The implementation of this new standard is not expected to have a material effect on the Company's results of operations or financial position. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Interpretation clarifies guidance for certain issues that arose in the application of APB Opinion No. 25. The Company is required to adopt the Interpretation on July 1, 2000. The implementation of this new standard is not expected to have a material effect on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 provides additional guidance relating to revenue recognition. The Company is required to adopt SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, in the fourth quarter of 2000 and is currently assessing the impact, if any, that SAB No. 101 may have on the Company's results of operations or financial position. -9- NOTE I - SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION The Company's $69.3 million of 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 June 30, 2000 and December 31, 1999 (the Company), for the six months ended June 30, 2000 (the Company), for the period from April 24, 1999 to June 30, 1999 (the Company), and for the period from January 1, 1999 to April 23, 1999 (Predecessor) 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 combine 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. -10- Condensed Consolidating Balance Sheets (Unaudited) June 30, 2000
Company ----------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Assets Current assets: Cash and cash equivalents $ 124 $ 1,612 $ 2,040 $ - $ 3,776 Accounts receivable, net 21,305 10,265 16,042 (332) 47,280 Advances receivable--subsidiaries 72,490 - - (72,490) - Inventories 32,146 15,796 13,486 (609) 60,819 Income taxes and prepaid expenses 6,180 2,513 447 - 9,140 -------- ------- ------- --------- -------- Total current assets 132,245 30,186 32,015 (73,431) 121,015 Property and equipment, net 58,491 24,399 6,893 - 89,783 Intangible assets, net 135,951 22,496 5,035 - 163,482 Prepaid pension cost and other 17,110 8,756 20 - 25,886 Investment in subsidiaries 32,588 - 7,171 (39,759) - -------- ------- ------- --------- -------- Total assets $376,385 $85,837 $51,134 $(113,190) $400,166 ======== ======= ======= ========= ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable, accrued expenses and other $ 22,064 $ 9,892 $ 5,847 $ (4) $ 37,799 Advances payable--subsidiaries 7,633 48,339 17,455 (73,427) - Current maturities of long-term obligations 9,946 99 25 - 10,070 -------- ------- ------- --------- -------- Total current liabilities 39,643 58,330 23,327 (73,431) 47,869 Long-term obligations 179,992 134 - - 180,126 Retiree benefits and other 17,007 10,655 - - 27,662 Deferred income taxes 19,679 4,448 324 - 24,451 -------- ------- ------- --------- -------- Total liabilities 256,321 73,567 23,651 (73,431) 280,108 -------- ------- ------- --------- -------- Stockholders' equity Common stock 121 - - - 121 Additional paid-in capital 172,843 12,948 23,736 (36,684) 172,843 Advances to RSA Holdings Corporation, net (52,383) - - - (52,383) Retained earnings (accumulated deficit) 334 (678) 4,604 (3,926) 334 Accumulated other comprehensive loss (851) - (857) 851 (857) -------- ------- ------- --------- -------- 120,064 12,270 27,483 (39,759) 120,058 -------- ------- ------- --------- -------- Total liabilities and stockholders' equity $376,385 $85,837 $51,134 $(113,190) $400,166 ======== ======= ======= ========= ========
-11- Condensed Consolidating Balance Sheets December 31, 1999
Company ---------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Assets Current assets: Cash and cash equivalents $ 6,221 $ 1,180 $ 5,081 $ 18 $ 12,500 Accounts receivable, net 19,927 12,906 13,751 (332) 46,252 Advances receivable--subsidiaries 59,790 - - (59,790) - Inventories 29,825 13,322 11,947 (690) 54,404 Income taxes and prepaid expenses 6,511 1,912 273 - 8,696 -------- ------- ------- --------- -------- Total current assets 122,274 29,320 31,052 (60,794) 121,852 Property and equipment, net 58,005 24,731 7,255 - 89,991 Intangible assets, net 138,404 22,994 5,103 - 166,501 Prepaid pension cost and other 16,133 8,373 21 - 24,527 Investment in subsidiaries 32,506 - 8,587 (41,093) - -------- ------- ------- --------- -------- Total assets $367,322 $85,418 $52,018 $(101,887) $402,871 ======== ======= ======= ========= ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable, accrued expenses and other $ 19,299 $10,830 $ 6,714 $ (1) $ 36,842 Advances payable--subsidiaries - 44,289 16,504 (60,793) - Current maturities of long-term obligations 7,964 1,417 1,127 - 10,508 -------- ------- ------- --------- -------- Total current liabilities 27,263 56,536 24,345 (60,794) 47,350 Long-term obligations 174,954 154 - - 175,108 Retiree benefits and other 16,750 10,583 - - 27,333 Deferred income taxes 19,353 4,392 333 - 24,078 -------- ------- ------- --------- -------- Total liabilities 238,320 71,665 24,678 (60,794) 273,869 -------- ------- ------- --------- -------- Stockholders' equity Common stock 121 485 87 (572) 121 Additional paid-in capital 172,843 12,463 23,391 (35,854) 172,843 Advances to RSA Holdings Corporation, net (42,714) - - - (42,714) Retained earnings (accumulated deficit) (1,258) 805 3,852 (4,657) (1,258) Accumulated other comprehensive income 10 - 10 (10) 10 -------- ------- ------- --------- -------- 129,002 13,753 27,340 (41,093) 129,002 -------- ------- ------- ---------- -------- Total liabilities and stockholders' equity $367,322 $85,418 $52,018 $(101,887) $402,871 ======== ======= ======= ========= ========
-12- Condensed Consolidating Statements of Operations (Unaudited) Six Months Ended June 30, 2000
Company --------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net sales $82,276 $54,284 $33,506 $(12,936) $157,130 Cost of sales 46,888 46,253 25,015 (12,936) 105,220 ------- ------- ------- -------- -------- Gross profit 35,388 8,031 8,491 - 51,910 Selling, general and administrative expenses 23,625 7,442 5,941 - 37,008 Amortization of intangible assets 1,796 498 68 - 2,362 ------- ------- ------- -------- -------- Operating income 9,967 91 2,482 - 12,540 Other income (expense): Equity in earnings (losses) of affiliates 685 - (1,416) 731 - Interest expense (8,333) (2,297) 1,077 - (9,553) ------- ------- ------- -------- -------- Income (loss) before income taxes 2,319 (2,206) 2,143 731 2,987 Income taxes (benefit) 727 (723) 1,391 - 1,395 ------- ------- ------- -------- -------- Net income (loss) $ 1,592 $(1,483) $ 752 $ 731 $ 1,592 ======= ======= ======= -======= ========
-13- Condensed Consolidating Statements of Income (Unaudited) For the Period from April 24, 1999 to June 30, 1999 (In thousands)
Company -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ Net sales $32,902 $19,729 $11,751 $(4,440) $59,942 Cost of sales: Other costs 17,452 16,358 8,815 (4,440) 38,185 Purchase accounting adjustment to inventory 7,910 215 883 - 9,008 ------- ------- ------- ------- ------- Gross profit 7,540 3,156 2,053 - 12,749 Selling, general and administrative expenses 8,898 2,287 1,945 - 13,130 Amortization of intangible assets 676 236 7 - 919 ------- ------- ------- ------- ------- Operating income (loss) (2,034) 633 101 - (1,300) Operating income (expense): Equity in earnings (losses) of affiliates 286 - (484) 198 - Interest expense (3,561) (764) 353 - (3,972) ------- ------- ------- ------- ------- Income (loss) before income taxes and extraordinary item (5,309) (131) (30) 198 (5,272) Income taxes (benefit) (1,584) (16) 53 - (1,547) ------- ------- ------- ------- ------- Income (loss) before extraordinary item (3,725) (115) (83) 198 (3,725) Extraordinary item 611 - - - 611 ------- ------- ------- ------- ------- Net income (loss) $(4,336) $ (115) $ (83) $ 198 $(4,336) ======= ======= ======= ======= =======
-14- Condensed Consolidating Statements of Income (Unaudited) For the Period from January 1, 1999 to April 23, 1999 (In thousands)
Predecessor ---------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ Net sales $46,889 $32,731 $17,136 $(9,165) $87,591 Cost of sales 26,237 28,514 12,934 (9,165) 58,520 ------- ------- ------- ------- ------- Gross profit 20,652 4,217 4,202 - 29,071 Selling, general and administrative expenses 13,665 3,860 3,904 - 21,429 Amortization of intangible assets 470 318 47 - 835 Transaction expenses 11,440 - - - 11,440 ------- ------- ------- ------- ------- Operating income (loss) (4,923) 39 251 - (4,633) Operating income (expense): Equity in earnings of affiliates (135) - (394) 529 - Interest expense (3,193) (1,300) 586 - (3,907) ------- ------- ------- ------- ------- Income (loss) before income taxes and extraordinary item (8,251) (1,261) 443 529 (8,540) Income taxes (benefit) (553) (570) 281 - (842) ------- ------- ------- ------- ------- Income (loss) before extraordinary item (7,698) (691) 162 529 (7,698) Extraordinary item 118 - - - 118 ------- ------- ------- ------- ------- Net income (loss) $(7,816) $ (691) $ 162 $ 529 $(7,816) ======= ======== ======== ======= =======
-15- Condensed Consolidating Statements of Comprehensive Income (Unaudited) Six Months Ended June 30, 2000
Company -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ (In thousands) Net income (loss) $1,592 $(1,483) $ 752 $ 731 $1,592 Other comprehensive loss: Foreign currency translation adjustments (861) - (867) 861 (867) ------ ------- ------ ------ ------ Comprehensive income (loss) $ 731 $(1,483) $(115) $1,592 $ 725 ====== ======= ===== ====== ======
Condensed Consolidating Statements of Comprehensive Income (Unaudited) For the Period from April 24, 1999 to June 30, 1999 (In thousands)
Company --------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Net income (loss) $(4,336) $(115) $ (83) $198 $(4,336) Other comprehensive loss: Foreign currency translation adjustments - - (313) 3 (310) ------- ----- ----- ---- ------- Comprehensive income (loss) $(4,336) $(115) $(396) $201 $(4,646) ======= ===== ===== ==== =======
Condensed Consolidating Statements of Comprehensive Income (Unaudited) For the Period from January 1, 1999 to April 23, 1999 (In thousands)
Predecessor --------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Net income (loss) $(7,816) $(691) $162 $529 $(7,816) Other comprehensive loss: Foreign currency translation adjustments - - (116) - (116) ------- ----- ---- ---- ------- Comprehensive income (loss) $(7,816) $(691) $ 46 $529 $(7,932) ======= ===== ==== ==== =======
-16- Condensed Consolidating Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2000
Company -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ (In thousands) Operating activities Net cash provided by (used in) operating activities $6,434 $(1,064) $(2,571) $ (18) $2,781 Investing activities Capital expenditures (4,776) (1,186) (385) - (6,347) Advances from (to) subsidiaries (5,067) - - 5,067 - ------ ------- ------- ------ ------ Net cash used in investing activities (9,843) (1,186) (385) 5,067 (6,347) Financing activities Repayment of long-term obligations (2,980) (1,368) (1,102) - (5,450) Proceeds from borrowings 10,000 - - - 10,000 Deferred loan fees (39) - - - (39) Advances to parent (9,669) - - - (9,669) Advances from (to) subsidiaries - 4,050 1,017 (5,067) - ------ ------ ------ ------ ------ Net cash (used in) provided by financing activities (2,688) 2,682 (85) (5,067) (5,158) Net (decrease) increase in cash and cash equivalents (6,097) 432 (3,041) (18) (8,724) Cash and cash equivalents, beginning of period 6,221 1,180 5,081 18 12,500 ------ ------ ------ ------ ------ Cash and cash equivalents, end of period` $ 124 $1,612 $2,040 $ - $3,776 ====== ====== ====== ====== ======
-17- Condensed Consolidating Statements of Cash Flows (Unaudited) For the Period from April 24, 1999 to June 30, 1999 (In thousands)
Company -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ Operating activities Net cash provided by (used in) operating activities $2,341 $(892) $ 941 $ 38 $2,428 Investing activities Capital expenditures (1,132) (206) (16) - (1,354) Other (34) - 36 - 2 Advances from (to) subsidiaries (1,587) - (641) 2,228 - ------ ------- ------ ----- ------- Net cash used in investing activities (2,753) (206) (621) 2,228 (1,352) Financing activities Repayment of long-term obligations (32,209) (1,280) (304) - (33,793) Proceeds from borrowings 32,801 - - - 32,801 Advances from (to) subsidiaries - 2,266 - (2,266) - ------- ----- ----- ------ ------- Net cash provided by (used in) financing activities 592 986 (304) (2,266) (992) Net increase (decrease) in cash and cash equivalents 180 (112) 16 - 84 Cash and cash equivalents, beginning of period (173) 297 2,138 - 2,262 ------ ----- ------ ------ ------ Cash and cash equivalents, end of period $ 7 $ 185 $2,154 $ - $2,346 ====== ===== ====== ====== ======
-18- Condensed Consolidating Statements of Cash Flows (Unaudited) For the Period from January 1, 1999 to April 23, 1999 (In thousands)
Predecessor -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ Operating activities Net cash (used in) provided by operating activities $(7,976) $1,545 $ 124 $ 973 $(5,334) Investing activities Capital expenditures (2,538) (824) (276) - (3,638) Other 49 - - - 49 Advances from (to) subsidiaries 2,132 - (691) (1,441) - ------ ------ ------ ------ ------- Net cash used in investing activities (357) (824) (967) (1,441) (3,589) Financing activities Repayment of long-term obligations (25,401) (62) (383) - (25,846) Proceeds from borrowings 65,337 - - - 65,337 Deferred loan fees (7,606) - - - (7,606) Proceeds from exercise of stock options 2 - - - 2 Advances to parent, net (24,155) - - - (24,155) Advances from (to) subsidiaries - (468) - 468 - ------ ------ ------ ------ ------- Net cash provided by (used in) financing activities 8,177 (530) (383) 468 7,732 Net (decrease) increase in cash and cash equivalents (156) 191 (1,226) - (1,191) Cash and cash equivalents, beginning of period (17) 106 3,364 - 3,453 ------ ------ ------ ------ ------ Cash and cash equivalents, end of period $ (173) $ 297 $2,138 $ - $2,262 ====== ====== ====== ====== ======
-19- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following discussion and analysis of financial condition and results of operations 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, 1999. Additionally, management has prepared pro forma results of operations for the three and six months ended June 30, 1999 to enable a meaningful comparison between 2000 and 1999 results of operations. Accordingly, see "Three Months Ended June 30, 2000 Compared to Pro Forma Three Months Ended June 30, 1999 and Six Months Ended June 30, 2000 Compared to Pro Forma Six Months Ended June 30, 1999" discussions below, which compare the three and six months ended June, 30, 1999 on a pro forma basis assuming the acquisition and related financing transactions had occurred on April 1, 1999 and January 1, 1999, respectively, with 2000 actual results for a more meaningful comparison of operations. Forward-Looking Statements Management's discussion and analysis of financial condition and results of operations and other sections of this Report contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend for the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Company's expected financial position, business and financing plans are forward-looking statements. 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. Pro Forma Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 1999 The following unaudited pro forma condensed consolidated statement of operations has been prepared by management from the historical financial statements of the Predecessor for the period from April 1, 1999 to April 23, 1999, and the historical financial statements of the Company for the period from April 24, 1999 to June 30, 1999. The acquisition, and the related financing transactions, are assumed to have occurred on April 1, 1999. The pro forma condensed consolidated statement of operations for the three months ended June 30, 1999, is not necessarily indicative of the results of operations that would have occurred for the three months ended June 30, 1999, had the acquisition and relating financing transactions occurred on April 1, 1999. In preparation of the pro forma condensed consolidated statement of operations, management has made certain estimates and assumptions that affect the amounts reported in the unaudited pro forma condensed consolidated statement of operations. The unaudited pro forma condensed consolidated statement of operations for the three months ended June 30, 1999, should be read in conjunction with the historical financial statements and related notes thereto of the Company which are included in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. -20- Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Three Months Ended June 30, 1999 (In Thousands)
Predecessor Predecessor Company Historical Pro Forma Historical Company Period from Period From Period From Pro Forma April 1, 1999 April 1, 1999 April 24, 1999 Three Months to April 23, Pro Forma to April 23, to June 30, Pro Forma Ended 1999 Adjustments 1999 1999 Adjustments June 30, 1999 ------------- ----------- --------------- -------------- ------------ ------------ Net sales $17,304 $ 17,304 $59,942 $ - $ 77,246 Cost of sales: Cost of sales 11,691 $ 94 (a) 11,785 38,185 - 49,970 Purchase accounting adjustment to inventory - 3,453 (b) 3,453 9,008 (3,453)(b) 9,008 ------- ------- -------- ------- ------ -------- Gross profit 5,613 (3,547) 2,066 12,749 3,453 18,268 Selling, general and administrative expenses 4,922 14 (c) 4,936 13,130 - 18,066 Amortization of intangible assets 188 118 (d) 306 919 - 1,225 Transaction expenses 11,440 - 11,440 - - 11,440 ------- ------- -------- ------- ------ -------- Operating loss (10,937) (3,679) (14,616) (1,300) 3,453 (12,463) Interest expense 877 406 (e) 1,283 3,972 (138)(g) 5,117 ------- ------- -------- ------- ------ -------- Loss before income taxes and extraordinary item (11,814) (4,085) (15,899) (5,272) 3,591 (17,580) Income taxes (benefit) (2,142) (1,653)(f) (3,795) (1,547) 1,426 (f) (3,916) ------- ------- -------- ------- ------ -------- Loss before extraordinary item $(9,672) $(2,432) $(12,104) $(3,725) $2,165 $(13,664) ======= ======= ======== ======= ====== ========
(a) Adjustment to provide pro forma depreciation expense resulting from the application of purchase accounting adjustments computed based on the remaining useful lives of plant and equipment. (b) Adjustment to reflect the impact on cost of sales of additional inventory costs resulting from adjusting the carrying value of acquired inventories to reflect their estimated fair market value assuming the acquisition occurred on April 1, 1999. (c) Adjustment to reflect the elimination of amortization of unrecognized prior service cost and unrecognized gains related to the Predecessor's pension and postretirement benefit plans. (d) Adjustment to reflect the elimination of $159 of amortization related to historical goodwill and record pro forma amortization of $277 related to intangible assets including goodwill, trademarks and patents recorded in connection with the acquisition. Goodwill and trademarks are being amortized over a 40-year useful life and patents are being amortized over a 15-year useful life. These periods are believed by management to be reasonable based on the expected lives of the underlying processes, products, and equipment assumed to be acquired. (e) Adjustment to reflect (i) the elimination of historical interest expense of $108 related to the Predecessor's credit facilities, loan commitment fees, and the amortization of deferred financing costs, (ii) pro forma amortization of $72 for the $8,001 in deferred financing costs incurred in connection with the financing, amortized over the respective lives of the Company's credit facilities, and (iii) pro forma interest expense of $442 on the Company's credit facilities related to the balances assumed to be outstanding on April 1, 1999. Interest expense has been computed assuming that the LIBOR-based interest rate (plus the applicable margin) option is selected by the Company. Balances assumed to be outstanding on April 1, 1999, include $5,000 under the revolving credit facility and $88,000 under the Term Loan Facility. In addition, the purchase of -21- $30,700 in Senior Notes on June 10, 1999, was assumed to occur on April 1, 1999. (f) Adjustment to reflect the income tax consequences of the pro forma adjustments computed at the statutory rate of 39.7% excluding the net adjustment for goodwill of $80 which is not tax deductible. (g) Adjustment to reflect pro forma interest expense of $261 on the Company's credit facilities related to the balances assumed to be outstanding on April 24, 1999. Interest expense has been computed assuming that the LIBOR-based interest rate (plus the applicable margin) option is selected by the Company. Balances assumed to be outstanding on April 24, 1999, are the same as described in (e) above. Adjustment to reflect pro forma interest expense reduction of $399 related to the $30,700,000 in Senior Notes which were assumed to be purchased on April 24, 1999. Three Months Ended June 30, 2000 Compared to Pro Forma Three Months Ended June 30, 1999 Net Sales. Net sales for the three months ended June 30, 2000, and for the pro forma three months ended June 30, 1999, were $79.9 million and $77.2 million, respectively, an increase of $2.7 million, or 3.5%. Razors and Blades. Net sales of our razors and blades segment for the three months ended June 30, 2000, and for the pro forma three months ended June 30, 1999, were $52.8 million and $51.2 million, respectively, an increase of $1.6 million or 3.1%. Net sales of shaving razors and blades for the three months ended June 30, 2000, and for the pro forma three months ended June 30, 1999, were $35.3 million and $32.8 million, respectively, an increase of $2.5 million, or 7.4%. Net sales of domestic value branded shaving products decreased 13.3%. Net sales for the three months ended June 30, 1999, were favorably affected by the launch of the Tri-Flexxx shaving product and by sales of the Revlon Perfect Finish(TM) shaving system which was discontinued in September 1999. The decrease in domestic value branded shaving products net sales also reflects a decline in promotional programs and inventory reductions by a key customer. Net sales of domestic private label shaving products increased 5.0% primarily reflecting sales gains relating to the Tri-Flexxx and Premier Comfort shaving products. Net sales of shaving products in international markets increased 28.0% (net of a 6% negative impact of unfavorable exchange rates) reflecting stronger sales in most of the Company's markets. Net sales of blades and bladed hand tools for the three months ended June 30, 2000, and for the pro forma three months ended June 30, 1999, were $13.3 million and $14.2 million, respectively, a decrease of $0.9 million, or 5.8%. The decrease primarily reflects the timing of seasonal promotional volume. Net sales of specialty industrial and medical blades for the three months ended June 30, 2000, and for the pro forma three months ended June 30, 1999, were unchanged at $4.2 million. Cotton and Foot Care. Net sales of cotton and foot care products for the three months ended June 30, 2000, and for the pro forma three months ended June 30, 1999, were $19.4 million and $18.6 million, respectively, an increase of $0.8 million or 4.6%. The increase results primarily from an increase in promotional programs with several customers which was somewhat offset by reduced sales resulting from issues related to the cotton coil matter (see Note F to the condensed consolidated financial statements). Custom Bar Soap. Net sales of the Company's custom bar soap products for the three months ended June 30, 2000, and for the pro forma three months ended June 30, 1999, were $7.7 million and $7.4 million, respectively, an increase of $0.3 million or 2.9%. The increase results primarily from increased sales volume to several of the Company's skin care and specialty customers. Gross Profit. Gross profit increased $8.2 million to $26.5 million during the three months ended June 30, 2000, from $18.3 million for the pro forma three months ended June 30, 1999 due primarily to the purchase accounting adjustment to inventory of $9.0 million for the pro forma three months ended June 30, 1999. As a percentage of net sales, gross profit was 33.2% for the three months ended June 30, 2000, and 23.6% for the pro forma three months ended June 30, 1999. Excluding the 1999 purchase accounting adjustment to inventory of $9.0 million, gross profit decreased $0.8 million to $26.5 million for the three months ended June 30, 2000, from $27.3 million -22- for the pro forma three months ended June 30, 1999, and as a percentage of net sales, gross profit was 33.2% for the three months ended June 30, 2000, and 35.3% for the pro forma three months ended June 30, 1999. Blade margins declined due primarily to product mix, higher material costs, higher depreciation expense related to capacity expansion projects and from the negative impact of unfavorable exchange rates, primarily the Euro. Cotton margins declined due primarily to product mix and higher manufacturing overheads. Operating and Other Expenses. Selling, general and administrative expenses were 21.7% of net sales for the three months ended June 30, 2000, compared to 23.4% for the pro forma three months ended June 30, 1999. The decrease primarily reflects a decrease in promotional spending for our shaving blade products which was somewhat offset by an increase in product development costs and an increase in marketing and administrative overhead associated with the new management team and the new corporate headquarters. Amortization of intangible assets was substantially unchanged at $1.2 million for the three months ended June 30, 2000, and the pro forma three months ended June 30, 1999. Interest expense decreased $0.3 million to $4.8 million for the three months ended June 30, 2000, from $5.1 million for the pro forma three months ended June 30, 1999, due primarily to lower commitment fee expense relating to the permanent reduction in the amount of available borrowings under the Company's term loan facility of $52.5 million in July 1999. The decrease was substantially offset by increased interest expense resulting from additional debt and amortization of deferred loan fees incurred in connection with the acquisition, additional borrowings under the Company's revolving credit facility and an increase in interest rates. In connection with the 1999 acquisition the Predecessor incurred approximately $11.4 million in transaction expenses related primarily to (i) amounts paid to redeem all of the outstanding options to purchase common stock of the Predecessor, (ii) costs incurred by or on behalf of the Predecessor in connection with the acquisition, including legal and other advisory fees, and (iii) costs incurred by or on behalf of the Predecessor related to payments made to certain employees of the Predecessor in connection with the change of control. Costs of $0.7 million (net of tax benefit) associated with the 1999 purchase of the Senior Notes and repayment of the terminated credit facility are reflected in the consolidated statement of operations as an extraordinary item. The Company's effective income tax rate was 46.7% for the three months ended June 30, 2000, versus (22.3)% for the pro forma three months ended June 30, 1999, and varies from the United States statutory rate due primarily to nondeductible goodwill amortization, certain nondeductible transaction expenses in 1999 and state income taxes, net of the federal tax benefit. Pro Forma Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 1999 The following unaudited pro forma condensed consolidated statement of operations has been prepared by management from the historical financial statements of the Predecessor for the period from January 1, 1999 to April 23, 1999, and the historical financial statements of the Company for the period from April 24, 1999 to June 30, 1999. The acquisition, and the related financing transactions, are assumed to have occurred on January 1, 1999. The pro forma condensed consolidated statement of operations for the six months ended June 30, 1999, is not necessarily indicative of the results of operations that would have occurred for the six months ended June 30, 1999, had the acquisition and relating financing transactions occurred on January 1, 1999. In preparation of the pro forma condensed consolidated statement of operations, management has made certain estimates and assumptions that affect the amounts reported in the unaudited pro forma condensed consolidated statement of operations. The unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 1999, should be read in conjunction with the historical financial statements and related notes thereto of the Company which are included in this Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. -23- Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six Months Ended June 30, 1999 (In Thousands)
Predecessor Predecessor Company Historical Pro Forma Historical Company Period from Period From Period From Pro Forma January 1, 1999 January 1,1999 April 24,1999 Six Months to April 23, Pro Forma April 23, to June 30, Pro Forma Ended 1999 Adjustments 1999 1999 Adjustments June 30, 1999 --------------- ----------- --------------- -------------- ----------- ------------- Net sales $87,591 $87,591 $59,942 $ - $147,533 Cost of sales: Cost of sales 58,520 $ 460 (a) 58,980 38,185 - 97,165 Purchase accounting adjustment to inventory - 9,008 (b) 9,008 9,008 (9,008)(b) 9,008 --------- ------- -------- ------- ------ --------- Gross profit 29,071 (9,468) 19,603 12,749 9,008 41,360 Selling, general and administrative expenses 21,429 68 (c) 21,497 13,130 - 34,627 Amortization of intangible assets 835 638 (d) 1,473 919 - 2,392 Transaction expenses 11,440 - 11,440 - - 11,440 ------- ------ -------- --------- -------- -------- Operating loss (4,633) (10,174) (14,807) (1,300) 9,008 (7,099) Interest expense 3,907 2,030 (e) 5,937 3,972 (138)(g) 9,771 -------- ------ -------- ------- ------- --------- Loss before income taxes and extraordinary item (8,540) (12,204) (20,744) (5,272) 9,146 (16,870) Income taxes (benefit) (842) (4,666)(f) (5,508) (1,547) 3,631 (f) (3,424) -------- ------- ------- ------- ------ --------- Loss before extraordinary item $(7,698) $(7,538) $(15,236) $(3,725) $5,515 $(13,446) ======= ======= ======== ======= ====== ========
(a) Adjustment to provide pro forma depreciation expense resulting from the application of purchase accounting adjustments computed based on the remaining useful lives of plant and equipment. (b) Adjustment to reflect the impact on cost of sales of additional inventory costs resulting from adjusting the carrying value of acquired inventories to reflect their estimated fair market value assuming the acquisition occurred on January 1, 1999. (c) Adjustment to reflect the elimination of amortization of unrecognized prior service cost and unrecognized gains related to the Predecessor's pension and postretirement benefit plans. (d) Adjustment to reflect the elimination of $705 of amortization related to historical goodwill and record pro forma amortization of $1,343 related to intangible assets including goodwill, trademarks and patents recorded in connection with the acquisition. Goodwill and trademarks are being amortized over a 40-year useful life and patents are being amortized over a 15-year useful life. These periods are believed by management to be reasonable based on the expected lives of the underlying processes, products, and equipment assumed to be acquired. (e) Adjustment to reflect (i) the elimination of historical interest expense of $494 related to the Predecessor's credit facilities, loan commitment fees, and the amortization of deferred financing costs, (ii) pro forma amortization of $353 for the $8,001 in deferred financing costs incurred in connection with the financing, amortized over the respective lives of the Company's credit facilities, and (iii) pro forma interest expense of $2,171 on the Company's credit facilities related to the balances assumed to be outstanding on January 1, 1999. Interest expense has been computed assuming that the LIBOR-based interest rate (plus the applicable margin) option is selected by the Company. Balances assumed to be outstanding on January 1, 1999, include $5,000 under the revolving credit facility and $88,000 under the Term Loan Facility. In addition, the purchase -24- of $30,700 in Senior Notes on June 10, 1999, was assumed to occur on January 1, 1999. (f) Adjustment to reflect the income tax consequences of the pro forma adjustments computed at the statutory rate of 39.7% excluding the net adjustment for goodwill of $451 which is not tax deductible. (g) Adjustment to reflect pro forma interest expense of $261 on the Company's credit facilities related to the balances assumed to be outstanding on April 24, 1999. Interest expense has been computed assuming that the LIBOR-based interest rate (plus the applicable margin) option is selected by the Company. Balances assumed to be outstanding on April 24, 1999, are the same as described in (e) above. Adjustment to reflect pro forma interest expense reduction of $399 related to the $30,700,000 in Senior Notes which were assumed to be purchased on April 24, 1999. Six Months Ended June 30, 2000 Compared to Pro Forma Six Months Ended June 30, 1999 Net Sales. Net sales for the six months ended June 30, 2000, and for the pro forma six months ended June 30, 1999, were $157.1 million and $147.5 million, respectively, an increase of $9.6 million, or 6.5%. Razors and Blades. Net sales of our razors and blades segment for the six months ended June 30, 2000, and for the pro forma six months ended June 30, 1999, were $103.3 million and $95.5 million, respectively, an increase of $7.8 million, or 8.2%. Net sales of shaving razors and blades for the six months ended June 30, 2000, and for the pro forma six months ended June 30, 1999, were $69.7 million and $61.9 million, respectively, an increase of $7.8 million, or 12.6%. Net sales of domestic value branded shaving products decreased 4.5%. Net sales for the six months ended June 30, 1999, were favorably affected by sales of the Revlon Perfect Finish(TM) shaving system which was discontinued in September 1999. The decrease in domestic value branded shaving products net sales also reflects a decline in promotional programs and inventory reductions by a key customer. Net sales of domestic private label shaving products increased 12.0% primarily reflecting sales gains relating to the Tri-Flexxx and Premier Comfort shaving products. Net sales of shaving products in international markets increased 28.2% (net of a 5% negative impact of unfavorable exchange rates) reflecting stronger sales in most of the Company's markets. Net sales of blades and bladed hand tools for the six months ended June 30, 2000, and for the pro forma six months ended June 30, 1999, were $25.5 million and $25.7 million, respectively, a decrease of $0.2 million, or 1.0%. The decrease primarily reflects the timing of seasonal promotional volume. Excluding this impact, core volume increased 3.2%. Net sales of specialty industrial and medical blades for the six months ended June 30, 2000, and for the pro forma six months ended June 30, 1999, were $8.1 million and $7.9 million, respectively, an increase of $0.2 million, or 3.3%. Sales of specialty industrial products increased 9.0% reflecting distribution gains. Sales of medical products were substantially unchanged. Cotton and Foot Care. Net sales of cotton and foot care products for the six months ended June 30, 2000, and for the pro forma six months ended June 30, 1999, were $39.6 million and $39.1 million, respectively, an increase of $0.5 million or 1.4%. The increase results primarily from an increase in promotional programs with several customers which was somewhat offset by reduced sales resulting from issues related to the cotton coil matter (see Note F to the condensed consolidated financial statements). Custom Bar Soap. Net sales of the Company's custom bar soap products for the six months ended June 30, 2000, and for the pro forma six months ended June 30, 1999, were $14.2 million and $12.9 million, respectively, an increase of $1.3 million or 9.9%. The increase results primarily from increased sales volume to several of the Company's skin care and specialty customers. Gross Profit. Gross profit increased $10.5 million to $51.9 million for the six months ended June 30, 2000, from $41.4 million for the pro forma six months ended June 30, 1999 due primarily to the purchase accounting adjustment to inventory of $9.0 million for the pro forma six months ended June 30, 1999, and to higher sales volume. As a percentage of net sales, gross profit was 33.0% for the six months ended June 30, 2000, and 28.0% -25- for the pro forma six months ended June 30, 1999. Excluding the 1999 purchase accounting adjustment to inventory of $9.0 million, gross profit increased $1.5 million to $51.9 million for the six months ended June 30, 2000, from $50.4 million for the pro forma six months ended June 30, 1999, and as a percentage of net sales, gross profit was 33.0% for the six months ended June 30, 2000, and 34.1% for the pro forma six months ended June 30, 1999. Blade margins declined due primarily to product mix, higher material costs, higher depreciation expense related to capacity expansion projects and from the negative impact of unfavorable exchange rates, primarily the Euro. Operating and Other Expenses. Selling, general and administrative expenses were 23.6% of net sales for the six months ended June 30, 2000, compared to 23.5% for the pro forma six months ended June 30, 1999. The increase primarily reflects an increase in legal fees arising from the Gillette lawsuit and an increase in marketing and administrative overhead associated with the new management team and the new corporate headquarters. The increase was substantially offset by a decrease in promotional spending for our shaving blade products. Amortization of intangible assets was substantially unchanged at $2.4 million for the six months ended June 30, 2000, and for the pro forma six months ended June 30, 1999. Interest expense decreased $0.2 million to $9.6 million for the six months ended June 30, 2000, from $9.8 million for the pro forma six months ended June 30, 1999, due primarily to lower commitment fee expense relating to the permanent reduction in the amount of available borrowings under the Company's term loan facility of $52.5 million in July 1999. The decrease was substantially offset by increased interest expense resulting from additional debt and amortization of deferred loan fees incurred in connection with the acquisition, additional borrowings under the Company's revolving credit facility and an increase in interest rates. In connection with the 1999 acquisition the Predecessor incurred approximately $11.4 million in transaction expenses related primarily to (i) amounts paid to redeem all of the outstanding options to purchase common stock of the Predecessor, (ii) costs incurred by or on behalf of the Predecessor in connection with the acquisition, including legal and other advisory fees, and (iii) costs incurred by or on behalf of the Predecessor related to payments made to certain employees of the Predecessor in connection with the change of control. Costs of $0.7 million (net of tax benefit) associated with the 1999 purchase of the Senior Notes and repayment of the terminated credit facility are reflected in the consolidated statement of operations as an extraordinary item. The Company's effective income tax rate was 46.7% for the six months ended June 30, 2000, and (20.3)% for the pro forma six months ended June 30, 1999, and varies from the United States statutory rate due primarily to nondeductible goodwill amortization, certain non deductible transaction expenses in 1999 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 amounted to $2.8 million for the six months ended June 30, 2000. Net cash provided by operating activities amounted to $2.4 million for the period from April 24, 1999, to June 30, 1999, and net cash used in operating activities amounted to $5.3 million for the period from January 1, 1999, to April 23, 1999. Net cash provided by operating activities for the six months ended June 30, 2000 primarily reflects an increase in net income and net changes in working capital accounts. Net cash used in investing activities related to capital expenditures of $6.3 million for the six months ended June 30, 2000. Net cash used in financing activities resulted from $9.7 million in net advances to the Company's parent which was somewhat offset by $4.6 million in net borrowings for the six months ended June 30, 2000. In May 2000, the Company amended its $190.0 million credit agreement to provide for the Company to make a $10.0 million advance to its parent company, RSA Holdings Corporation, for the partial prepayment of its outstanding note payable. In May 2000, the Company borrowed $10.0 million under its revolving credit facility and advanced the $10.0 million to RSA Holdings Corporation to prepay a portion of its outstanding note payable. At June 30, 2000, the Company had approximately $15.0 million available for future borrowings under its revolving credit facility. -26- 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 needs, capital expenditures and debt service requirements as well as support the Company's growth-oriented strategy for its existing business for at least the next 12 months. The Company's ability to fund operations, make capital expenditures and make scheduled principal and interest payments or to refinance the Company's indebtedness will depend upon future financial and operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, some of which are beyond the Company's control. 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 results of operations, cash flows and financial position. The Company manages these risks through regular operating and financing activities and periodically uses derivative financial instruments such as foreign exchange option and forward contracts and interest rate cap and swap agreements. These derivative instruments are placed with major financial institutions and are not for speculative or trading purposes. 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 June 30, 2000 and June 30, 1999. Only the potential impacts of hypothetical assumptions are analyzed. The analysis does not consider other possible effects that could impact the business. Interest Rate Risk At June 30, 2000, the Company carried $190.2 million of outstanding debt on its balance sheet, with $119.7 million of that total held at variable interest rates. The Company has entered into an interest rate cap agreement and an interest rate swap agreement with a bank covering $56.3 million of its variable rate debt outstanding to manage its interest rate risk. Holding all other variables constant, if interest rates hypothetically increased or decreased by 10%, for the six months ended June 30, 2000 and 1999, 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 June 30, 2000, with all other variables held constant, the fair market value of our $69.3 million 9 7/8% Series B Senior Notes would increase or decrease by approximately $3.5 million. Foreign Currency Risk The Company sells to customers in foreign markets through foreign operations and through export sales from plants in the U.S. These transactions are often denominated in currencies other than the U.S. dollar. The 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 to major currencies. The Company periodically enters into currency option contracts to partially offset the risk of foreign currency fluctuations. There were no currency contracts outstanding at June 30, 2000. Contingencies Refer to Note F - 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 (the "FASB") 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, as amended by FAS 137 and FAS 138, is effective for fiscal quarters of fiscal years beginning after June 15, 2000. The Company is required to adopt FAS 133 on January 1, 2001. The implementation of this new standard is not expected to -27- have a material effect on the Company's results of operations or financial position. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Interpretation clarifies guidance for certain issues that arose in the application of APB Opinion No. 25. The Company is required to adopt the Interpretation on July 1, 2000. The implementation of this new standard is not expected to have a material effect on the Company's results of operations or financial position. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 provides additional guidance relating to revenue recognition. The Company is required to adopt SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, in the fourth quarter of 2000 and is currently assessing the impact, if any, that SAB No. 101 may have on the Company's results of operations or financial position. Inflation Inflation has not been material to the Company's operations within the periods presented. Item 3. Quantitative and Qualitative Disclosures About 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 Condition and Results of Operations of this Report. PART II, OTHER INFORMATION Item 1. Legal Proceedings The information called for by this item is provided in Note F - Contingencies to Notes to Condensed Consolidated Financial Statements under Part I, Item 1. - Financial Statements of this Report. Item 6. Exhibits and Reports on Form 8-K a. Exhibits - Exhibit 4.19 - Amendment No. 1 to the Credit Agreement dated as of April 23, 1999, among RSA Acquisition Corp., ("Purchaser"), the Registrant ("Borrower"), RSA Holdings Corp. of Delaware ("Holdings"), and the Initial Lenders, the Swing Line Bank and the Initial Issuing Bank and NationsBank, N.A. ("Administrative Agent"). - Exhibit 10.10 - RSA Holdings Corp. of Delaware 1999 Stock Incentive Plan. - Exhibit 27 - Financial Data Schedule. b. Reports on Form 8-K: On April 20, 2000, the Registrant filed a report on Form 8-K reporting that it had changed its independent public accountants from PricewaterhouseCoopers LLP to Ernst & Young LLP. -28- 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 August 10, 2000 By /s/James D. Murphy ----------------- --------------------------------------- Date James D. Murphy President and Chief Executive Officer August 10, 2000 By /s/Alan R. Koss ----------------- --------------------------------------- Date Alan R. Koss Senior Vice President Chief Financial Officer -29-