10-Q 1 0001.txt THIRD 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 September 29, 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 November 2, 2000. Class Outstanding at November 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 26 Part II. Other Information Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27 AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) Company ------------------------------ September 29, December 31, 2000 1999 ------------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 4,121 $ 12,500 Accounts receivable, net 48,016 46,252 Inventories 62,126 54,404 Deferred income taxes 5,136 6,814 Prepaid expenses 2,217 1,882 --------- ---------- Total current assets 121,616 121,852 Property and equipment 109,547 98,398 Less accumulated depreciation (18,193) (8,407) --------- ---------- 91,354 89,991 Intangible assets, net: Goodwill, trademarks and patents 156,590 159,675 Other 5,611 6,826 --------- ---------- 162,201 166,501 Prepaid pension cost and other 27,201 24,527 --------- --------- Total assets $402,372 $402,871 ======== ======== See accompanying notes. -1- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
Company -------------------------------------- September 29, December 31, 2000 1999 ------------- ------------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 16,576 $ 13,711 Accrued expenses and other 20,260 23,131 Current maturities of long-term obligations 10,945 10,508 -------- ------- Total current liabilities 47,781 47,350 Long-term obligations 180,234 175,108 Retiree benefits and other 27,847 27,333 Deferred income taxes 24,734 24,078 -------- -------- Total liabilities 280,596 273,869 -------- --------- Stockholders' equity: Common stock, $.01 par value, 25,000,000 shares authorized; 12,110,349 shares issued and outstanding at September 29, 2000 and December 31, 1999 121 121 Additional paid-in capital 172,843 172,843 Advances to RSA Holdings Corporation, net (52,372) (42,714) Retained earnings (accumulated deficit) 2,222 (1,258) Accumulated other comprehensive (loss) income (1,038) 10 -------- -------- 121,776 129,002 -------- -------- Total liabilities and stockholders' equity $402,372 $402,871 ======== ========
See accompanying notes. -2- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share data)
Company Predecessor ----------------------------------------- ----------- Period Period Three Three Nine from from Months Months Months April 24, January 1, Ended Ended Ended 1999 to 1999 to September September September September April 23, 29, 2000 30, 1999 29, 2000 30, 1999 1999 ---------- ---------- ---------- ---------- ---------- Net sales $83,434 $86,080 $240,564 $146,022 $87,591 Cost of sales: Cost of sales 54,107 54,913 159,327 93,098 58,520 Purchase accounting adjustment to inventory - - - 9,008 - ------- ------- -------- -------- ------- Gross profit 29,327 31,167 81,237 43,916 29,071 Selling, general and administrative expenses 19,284 21,283 56,292 34,413 21,429 Amortization of intangible assets 1,106 1,266 3,468 2,185 835 Transaction expenses - - - - 11,440 ------- ------- -------- -------- ------- Operating income (loss) 8,937 8,618 21,477 7,318 (4,633) Interest expense 5,153 6,514 14,706 10,486 3,907 ------- ------- -------- -------- ------- Income (loss) before income taxes and extraordinary item 3,784 2,104 6,771 (3,168) (8,540) Income taxes (benefit) 1,896 845 3,291 (702) (842) ------- ------- ------- -------- ------- Income (loss) before extraordinary item 1,888 1,259 3,480 (2,466) (7,698) Extraordinary item, net of income tax benefit - - - 611 118 ------- ------- ------- -------- ------- Net income (loss) $ 1,888 $ 1,259 $ 3,480 $ (3,077) $(7,816) ======= ======= ======== ======== ======= Basic earnings per share: Income (loss) before extraordinary item $0.16 $0.10 $0.29 $(0.20) $(0.64) Extraordinary item - - - (0.05) (0.01) ----- ----- ----- ------ ------ Net income (loss) $0.16 $0.10 $0.29 $(0.25) $(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 $0.16 $0.10 $0.29 $(0.20) $(0.64) Extraordinary item - - - (0.05) (0.01) ----- ----- ----- ------ ------ Net income (loss) $0.16 $0.10 $0.29 $(0.25) $(0.65) ===== ===== ===== ====== ====== Weighted average number of shares outstanding 12,110 12,110 12,110 12,116 12,198 ====== ====== ====== ====== ======
See accompanying notes. -3- CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands)
Company Predecessor ------------------------------------------- ----------- Period Period Three Three Nine from from Months Months Months April 24, January 1, Ended Ended Ended 1999 to 1999 to September September September September April 23, 29, 2000 30, 1999 29, 2000 30, 1999 1999 ---------- ---------- ---------- ---------- ----------- Net income (loss) $1,888 $1,259 $3,480 $(3,077) $(7,816) Other comprehensive income (loss): Foreign currency translation adjustments (181) 594 (1,048) 284 (116) ------ ------ ------ ------- ------- Comprehensive income (loss) $1,707 $1,853 $2,432 $(2,793) $(7,932) ====== ====== ====== ======= =======
See accompanying notes. -4- AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Company Predecessor --------------------- ----------- Period Period Nine from from Months April 24, January 1, Ended 1999 to 1999 to September September April 23, 29, 2000 30, 1999 1999 --------- --------- ---------- Operating activities Net income (loss) $ 3,480 $(3,077) $(7,816) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Extraordinary item - 611 118 Depreciation and amortization 13,356 7,324 4,105 Amortization of financing costs 1,090 2,867 180 Retiree benefits and other (3,208) (642) (719) Deferred income taxes 2,334 (3,438) 232 Changes in operating assets and liabilities: Accounts receivable (1,764) (9,878) 7,710 Inventories (7,722) 12,653 (7,748) Income taxes receivable - 2,268 (2,252) Prepaid expenses (335) 90 205 Accounts payable 2,865 (3,215) 1,723 Accrued and other expenses (2,871) 4,022 (1,072) ------- ------ ------- Net cash provided by (used in) operating activities 7,225 9,585 (5,334) Investing activities Capital expenditures (11,251) (3,609) (3,638) Other (175) (74) 49 ------- ------- ------- Net cash used in investing activities (11,426) (3,683) (3,589) Financing activities Repayment of long-term obligations (17,482) (39,217) (25,846) Proceeds from borrowings 23,000 57,797 65,337 Deferred loan fees (38) (395) (7,606) Proceeds from exercise of stock options - - 2 Advances to parent, net (9,658) (18,783) (24,155) ------- ------- ------- Net cash (used in) provided by financing activities (4,178) (598) 7,732 ------- ------- ------- Net (decrease) increase in cash and cash equivalents (8,379) 5,304 (1,191) Cash and cash equivalents, beginning of period 12,500 2,262 3,453 ------- ------ ------- Cash and cash equivalents, end of period $ 4,121 $7,566 $ 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 nine month periods ended September 29, 2000, are not necessarily indicative of the results that may be expected for the year ended December 29, 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. Effective January 1, 2000, the Company changed its calendar year ending on December 31 to a 52-53 week fiscal year ending on the Friday closest to December 31. The change in fiscal year did not have a material effect on financial position, results of operations or cash flows for the nine months ended September 29, 2000. NOTE B - INVENTORIES Inventories consisted of: Company ------------------------------------- September 29, December 31, 2000 1999 ------------- ------------ (In thousands) Raw materials $29,513 $27,928 Work-in-process 6,979 4,521 Finished goods 21,446 18,098 Operating supplies 4,188 3,857 ------- ------- $62,126 $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 September 29, 2000, the Company had approximately $11.4 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 ----------------------- ---------------------- Three Months Three Months Ended Ended September 29, 2000 September 30, 1999 ---------------------- ---------------------- Net Operating Net Operating Sales Income Sales Income --------- --------- --------- ---------- (In Thousands) Razors and Blades $55,100 $8,107 $54,727 $7,081 Cotton and Foot Care 21,223 402 23,468 650 Custom Bar Soap 7,111 428 7,885 887 ------- ------ ------- ------ $83,434 8,937 $86,080 8,618 ======= ======= Interest expense 5,153 6,514 ------ ------ Income before income taxes and extraordinary item $3,784 $2,104 ====== ======
Company Company Predecessor ------------------------ ---------------------- -------------------- Nine Months Period from Period from Ended April 24, 1999 to January 1, 1999 to September 29, 2000 September 30, 1999 April 23, 1999 ----------------------- -------------------- --------------------- Operating Operating Net Operating Net Income Net Income Sales Income Sales (Loss) Sales (Loss) -------- --------- -------- - --------- ------- --------- Razors and Blades $158,408 $20,558 $ 95,059 $ 5,220 $55,189 $(4,673) Cotton and Foot Care 60,869 93 37,034 499 25,551 258 Custom Bar Soap 21,287 826 13,929 1,599 6,851 (218) -------- ------- -------- ------- ------- ------- $240,564 21,477 $146,022 7,318 $87,591 (4,633) ======== ======== ======= Interest expense 14,706 10,486 3,907 ------- ------- ------- Income (loss) before income taxes and extraordinary item $ 6,771 $(3,168) $(8,540) ======= ======= =======
Total Assets ------------- September 29, 2000 ------------- Razors and Blades $313,787 Cotton and Foot Care 59,197 Custom Bar Soap 29,388 -------- $402,372 ======== -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 September 29, 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 December 30, 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 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 adopted the Interpretation on July 1, 2000, which did not have any 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. In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting for Certain Sales Incentives". EITF No. 00-14 addresses the recognition, measurement, and income statement classification of various sales incentives including discounts, coupons, rebates, and free products or services. The Company is required to adopt EITF No. 00-14 in the fourth quarter of 2000. The Company has determined that the adoption of EITF No. 00-14 will have no effect on its financial position or previously reported results of operations and is in the process of determining the potential effect on its statement of operations presentation and upon adoption, previously issued financial statements may need to be revised to conform to the new presentation. NOTE I - RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS In the third quarter of 2000, the Company's Board of Directors approved an early retirement program which covers certain hourly employees at the Verona, Virginia plant. Employees' eligibility for the early retirement program is based on age and years of service. Participants will be provided enhanced retirement benefits including additional years of credited service, a social security bridge and postretirement benefits. The early retirement program was offered to eligible employees on November 1, 2000 and the offer is expected to expire on December 15, 2000. The termination benefits and related curtailment gain and loss related to the early retirement program will be recorded in the fourth quarter of 2000. -9- NOTE J - 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. The following condensed consolidating financial information presents condensed consolidating financial statements as of September 29, 2000 and December 31, 1999 (the Company), for the nine months ended September 29, 2000 (the Company), for the period from April 24, 1999 to September 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) September 29, 2000
Company --------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------ ------------ ------------ (In thousands) Assets Current assets: Cash and cash equivalents $ (8) $ 1,781 $ 2,348 $ - $ 4,121 Accounts receivable, net 21,704 11,350 15,294 (332) 48,016 Advances receivable--subsidiaries 65,358 - - (65,358) - Inventories 32,858 16,199 13,907 (838) 62,126 Income taxes and prepaid expenses 4,488 2,102 763 - 7,353 -------- ------- ------- --------- ------- Total current assets 124,400 31,432 32,312 (66,528) 121,616 Property and equipment, net 59,831 24,251 7,272 - 91,354 Intangible assets, net 134,877 22,328 4,996 - 162,201 Prepaid pension cost and other 18,126 9,054 21 - 27,201 Investment in subsidiaries 33,103 - 6,725 (39,828) - -------- ------- ------- --------- -------- Total assets $370,337 $87,065 $51,326 $(106,356) $402,372 ======== ======= ======= ========= ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable, accrued expenses and other $ 20,491 $10,891 $ 5,458 $ (4) $ 36,836 Advances payable--subsidiaries - 48,967 17,557 (66,524) - Current maturities of long-term obligations 10,900 45 - - 10,945 -------- ------- ------- --------- -------- Total current liabilities 31,391 59,903 23,015 (66,528) 47,781 Long-term obligations 180,098 136 - - 180,234 Retiree benefits and other 17,270 10,577 - - 27,847 Deferred income taxes 19,802 4,606 326 - 24,734 -------- ------- ------- --------- -------- Total liabilities 248,561 75,222 23,341 (66,528) 280,596 -------- ------- ------- --------- -------- 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 (52,372) - - - (52,372) Retained earnings (accumulated deficit) 2,222 (1,105) 5,287 (4,182) 2,222 Accumulated other comprehensive loss (1,038) - (1,038) 1,038 (1,038) -------- ------- ------- --------- -------- 121,776 11,843 27,985 (39,828) 121,776 -------- ------- ------- --------- --------- Total liabilities and stockholders' equity $370,337 $87,065 $51,326 $(106,356) $402,372 ======== ======= ======= ========= ========
-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) Nine Months Ended September 29, 2000
Company --------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net sales $125,510 $82,727 $52,328 $(20,001) $240,564 Cost of sales 69,696 70,101 39,531 (20,001) 159,327 -------- ------- ------- --------- -------- Gross profit 55,814 12,626 12,797 - 81,237 Selling, general and administrative expenses 36,228 11,100 8,964 - 56,292 Amortization of intangible assets 2,695 666 107 - 3,468 -------- ------- ------- --------- -------- Operating income 16,891 860 3,726 - 21,477 Other income (expense): Equity in earnings (losses) of affiliates 1,388 - (1,863) 475 - Interest expense (12,800) (3,578) 1,672 - (14,706) -------- ------- ------- --------- --------- Income (loss) before income taxes 5,479 (2,718) 3,535 475 6,771 Income taxes (benefit) 1,999 (808) 2,100 - 3,291 -------- ------- ------- --------- -------- Net income (loss) $ 3,480 $(1,910) $ 1,435 $ 475 $ 3,480 ======== ======= ======= ========= ========
-13- Condensed Consolidating Statements of Operations (Unaudited) For the Period from April 24, 1999 to September 30, 1999
Company -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net sales $77,406 $51,280 $27,890 $(10,554) $146,022 Cost of sales: Cost of sales 40,310 42,103 21,239 (10,554) 93,098 Purchase accounting adjustment to inventory 7,910 215 883 - 9,008 ------- ------- ------- --------- -------- Gross profit 29,186 8,962 5,768 - 43,916 Selling, general and administrative expenses 23,413 6,299 4,701 - 34,413 Amortization of intangible assets 1,606 565 14 - 2,185 ------- ------- ------- -------- -------- Operating income 4,167 2,098 1,053 - 7,318 Operating income (expense): Equity in earnings (losses) of affiliates 1,635 - (602) (1,033) - Interest expense (9,477) (1,874) 865 - (10,486) ------- ------- ------- -------- -------- Income (loss) before income taxes and extraordinary item (3,675) 224 1,316 (1,033) (3,168) Income taxes (benefit) (1,209) 109 398 - (702) ------- ------ ------- -------- -------- Income (loss) before extraordinary item (2,466) 115 918 (1,033) (2,466) Extraordinary item 611 - - - 611 ------- ------ ------- -------- -------- Net income (loss) $(3,077) $ 115 $ 918 $ (1,033) $ (3,077) ======= ====== ======= ======== ========
-14- Condensed Consolidating Statements of Operations (Unaudited) For the Period from January 1, 1999 to April 23, 1999
Predecessor -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ (In thousands) 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 (losses) 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) Nine Months Ended September 29, 2000
Company ------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ (In thousands) Net income (loss) $3,480 $(1,910) $1,435 $ 475 $3,480 Other comprehensive loss: Foreign currency translation adjustments (1,048) - (1,048) 1,048 (1,048) ------ ------- ------ ------ ------ Comprehensive income (loss) $2,432 $(1,910) $ 387 $1,523 $2,432 ====== ======= ====== ====== ======
Condensed Consolidating Statements of Comprehensive Income (Unaudited) For the Period from April 24, 1999 to September 30, 1999
Company -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net income (loss) $(3,077) $115 $ 918 $(1,033) $(3,077) Other comprehensive loss: Foreign currency translation adjustments - - 281 3 284 ------- ---- ------ ------- ------- Comprehensive income (loss) $(3,077) $115 $1,199 $(1,030) $(2,793) ======= ==== ====== ======= =======
Condensed Consolidating Statements of Comprehensive Income (Unaudited) For the Period from January 1, 1999 to April 23, 1999
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) Nine Months Ended September 29, 2000
Company --------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ (In thousands) Operating activities Net cash provided by (used in) operating activities $ 9,419 $ (788) $(1,551) $ 145 $ 7,225 Investing activities Capital expenditures (8,289) (1,854) (1,108) - (11,251) Other (175) - - - (175) Advances from (to) subsidiaries (5,568) - - 5,568 - ------- ----- ------- ------ -------- Net cash used in investing activities (14,032) (1,854) (1,108) 5,568 (11,426) Financing activities Repayment of long-term obligations (14,920) (1,435) (1,127) - (17,482) Proceeds from borrowings 23,000 - - - 23,000 Deferred loan fees (38) - - - (38) Advances to parent (9,658) - - - (9,658) Advances from (to) subsidiaries - 4,678 1,053 (5,731) - ------- ------ ------- ------ ------- Net cash (used in) provided by financing activities (1,616) 3,243 (74) (5,731) (4,178) Net (decrease) increase in cash and cash equivalents (6,229) 601 (2,733) (18) (8,379) Cash and cash equivalents, beginning of period 6,221 1,180 5,081 18 12,500 ------- ------ ------- ------ ------- Cash and cash equivalents, end of period $ (8) $1,781 $ 2,348 $ - $ 4,121 ======= ====== ======= ====== =======
-17- Condensed Consolidating Statements of Cash Flows (Unaudited) For the Period from April 24, 1999 to September 30, 1999
Company -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Operating activities Net cash provided by operating activities $ 7,068 $1,111 $2,731 $(1,325) $ 9,585 Investing activities Capital expenditures (2,076) (990) (543) - (3,609) Other (35) (1) (38) - (74) Advances from (to) subsidiaries (131) - (2,076) 2,207 - ------- ------ ------ ------- ------- Net cash used in investing activities (2,242) (991) (2,657) 2,207 (3,683) Financing activities Repayment of long-term obligations (37,870) (1,117) (230) - (39,217) Proceeds from borrowings 57,797 - - - 57,797 Deferred loan fees (395) - - - (395) Advances to parent, net (18,783) - - - (18,783) Advances from (to) subsidiaries - 882 - (882) - ------- ------ ------ ------- ------- Net cash provided by (used in) financing activities 749 (235) (230) (882) (598) Net increase (decrease) in cash and cash equivalents 5,575 (115) (156) - 5,304 Cash and cash equivalents, beginning of period (173) 297 2,138 - 2,262 ------ ------ ------ ------- ------- Cash and cash equivalents, end of period $5,402 $ 182 $1,982 $ - $ 7,566 ====== ====== ====== ======= =======
-18- Condensed Consolidating Statements of Cash Flows (Unaudited) For the Period from January 1, 1999 to April 23, 1999
Predecessor -------------------------------------------------------------- Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) 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 nine months ended September 30, 1999 to enable a meaningful comparison between 2000 and 1999 results of operations. Accordingly, see "Nine Months Ended September 29, 2000 Compared to Pro Forma Nine Months Ended September 30, 1999" discussions below, which compare the nine months ended September 29, 2000 to the pro forma nine months ended September 30, 1999 assuming the acquisition and related financing transactions had occurred on January 1, 1999, 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. Three Months Ended September 29, 2000 Compared to Three Months Ended September 30, 1999 Net Sales. Net sales for the three months ended September 29, 2000, and for the three months ended September 30, 1999, were $83.4 million and $86.1 million, respectively, a decrease of $2.7 million, or 3.1%. Razors and Blades. Net sales of our razors and blades segment for the three months ended September 29, 2000, and for the three months ended September 30, 1999, were $55.1 million and $54.7 million, respectively, an increase of $0.4 million or 0.7%. Net sales of shaving razors and blades for the three months ended September 29, 2000, and for the three months ended September 30, 1999, were $37.3 million and $37.4 million, respectively, a decrease of $0.1 million, or 0.3%. Net sales of domestic value branded shaving products decreased 7.0% primarily reflecting a decline in promotional programs and inventory reductions by a key customer. Net sales of domestic private label shaving products decreased 3.1% primarily reflecting a decline in promotional programs by several customers which was somewhat offset by sales gains relating to the Tri-Flexxx and Premier Comfort shaving products. Net sales of shaving products in international markets increased 7.9% (net of a 7% 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 September 29, 2000, and for the three months ended September 30, 1999, were $13.5 million and $13.1 million, respectively, an increase of $0.4 million, or 2.9%. The growth primarily reflects increased sales of the Company's branded products as a result of recent distribution gains. Net sales of specialty industrial and medical blades for the three months ended September 29, 2000, and for the three -20- months ended September 30, 1999, were $4.3 million and $4.2 million, respectively, an increase of $0.1 million or 2.2%. Sales of specialty industrial products increased 12.7% reflecting strong distribution gains. Sales of medical products decreased 6.3% primarily reflecting inventory reductions by certain customers and consolidations within the healthcare industry. Cotton and Foot Care. Net sales of cotton and foot care products for the three months ended September 29, 2000, and for the three months ended September 30, 1999, were $21.2 million and $23.5 million, respectively, a decrease of $2.3 million or 9.6%. The decrease results primarily from a decrease in promotional programs and inventory reductions by a key customer and reduced sales volume 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 September 29, 2000, and for the three months ended September 30, 1999, were $7.1 million and $7.9 million, respectively, a decrease of $0.8 million or 9.8%. The decrease results primarily from decreased sales volume to several pharmaceutical/skin care customers which was somewhat offset by increased sales volume to one of the Company's specialty customers. Gross Profit. Gross profit decreased $1.9 million to $29.3 million during the three months ended September 29, 2000, from $31.2 million for the three months ended September 30, 1999 due to lower sales volume. As a percentage of net sales, gross profit was 35.1% for the three months ended September 29, 2000, and 36.2% for the three months ended September 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. Soap margins declined due primarily to product mix. Operating and Other Expenses. Selling, general and administrative expenses were 23.1% of net sales for the three months ended September 29, 2000, compared to 24.7% for the three months ended September 30, 1999. The decrease primarily reflects a decrease in promotional spending for our shaving blade and cotton products and an increase in pension income which was somewhat offset by an increase in administrative overhead associated with the new corporate headquarters. Amortization of intangible assets was substantially unchanged at $1.1 million for the three months ended September 29, 2000, and $1.3 million for the three months ended September 30, 1999. Interest expense decreased $1.3 million to $5.2 million for the three months ended September 29, 2000, from $6.5 million for the three months ended September 30, 1999, due primarily to the write-off in July 1999 of $2.2 million of deferred financing costs in connection with the $52.5 million reduction in the Company's term loan facility. The decrease was somewhat offset by increased interest expense resulting from additional borrowings under the Company's revolving credit facility and an increase in interest rates. The Company's effective income tax rate was 50.1% for the three months ended September 29, 2000, versus 40.2% for the three months ended September 30, 1999, and varies from the United States statutory rate due primarily to nondeductible goodwill amortization and state income taxes, net of the federal tax benefit. Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 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 September 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 nine months ended September 30, 1999, is not necessarily indicative of the results of operations that would have occurred for the nine months ended September 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 nine months ended September 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. -21- Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 1999 (In Thousands)
Predecessor Predecessor Company Company Historical Pro Forma Historical Pro Forma Period from Period From Period From Nine Months January 1, 1999 January 1, 1999 April 24, 1999 Ended to April 23, Pro Forma to April 23, to September Pro Forma September 1999 Adjustments 1999 30, 1999 Adjustments 30, 1999 --------------- ----------- -------------- -------------- ----------- ----------- Net sales $87,591 $ 87,591 $146,022 $ - $233,613 Cost of sales: Cost of sales 58,520 $ 460 (a) 58,980 93,098 - 152,078 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 43,916 9,008 72,527 Selling, general and administrative expenses 21,429 68 (c) 21,497 34,413 - 55,910 Amortization of intangible assets 835 638 (d) 1,473 2,185 - 3,658 Transaction expenses 11,440 - 11,440 - - 11,440 ------- ------- -------- -------- ------- -------- Operating (loss) income (4,633) (10,174) (14,807) 7,318 9,008 1,519 Interest expense 3,907 2,030 (e) 5,937 10,486 (138)(g) 16,285 ------- ------- -------- -------- ------ -------- Loss before income taxes and extraordinary item (8,540) (12,204) (20,744) (3,168) 9,146 (14,766) Income taxes (benefit) (842) (4,666)(f) (5,508) (702) 3,631 (f) (2,579) ------- ------- -------- -------- ------ -------- Loss before extraordinary item $(7,698) $(7,538) $(15,236) $ (2,466) $5,515 $(12,187) ======= ======= ======== ======== ====== ========
(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 of $30,700 in Senior Notes -22- 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. Nine Months Ended September 29, 2000 Compared to Pro Forma Nine Months Ended September 30, 1999 Net Sales. Net sales for the nine months ended September 29, 2000, and for the pro forma nine months ended September 30, 1999, were $240.6 million and $233.6 million, respectively, an increase of $7.0 million, or 3.0%. Razors and Blades. Net sales of our razors and blades segment for the nine months ended September 29, 2000, and for the pro forma nine months ended September 30, 1999, were $158.4 million and $150.2 million, respectively, an increase of $8.2 million, or 5.4%. Net sales of shaving razors and blades for the nine months ended September 29, 2000, and for the pro forma nine months ended September 30, 1999, were $107.0 million and $99.3 million, respectively, an increase of $7.7 million, or 7.7%. Net sales of domestic value branded shaving products decreased 5.4% primarily reflecting a decline in promotional programs and inventory reductions by a key customer. In addition, net sales for the nine months ended September 30, 1999, were favorably affected by sales of the Revlon Perfect Finish(TM) shaving system which was discontinued in September 1999. Net sales of domestic private label shaving products increased 6.3% primarily reflecting sales gains relating to the Tri-Flexxx and Premier Comfort shaving products which was somewhat offset by a decline in promotional programs by several customers. Net sales of shaving products in international markets increased 20.5% (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 nine months ended September 29, 2000, and for the pro forma nine months ended September 30, 1999, were $39.0 million and $38.9 million, respectively, an increase of $0.1 million, or 0.3%. Net sales of specialty industrial and medical blades for the nine months ended September 29, 2000, and for the pro forma nine months ended September 30, 1999, were $12.4 million and $12.0 million, respectively, an increase of $0.4 million, or 2.9%. Sales of specialty industrial products increased 10.3% reflecting strong distribution gains. Sales of medical products decreased 3.1% primarily reflecting inventory reductions by certain customers and consolidations within the healthcare industry. Cotton and Foot Care. Net sales of cotton and foot care products for the nine months ended September 29, 2000, and for the pro forma nine months ended September 30, 1999, were $60.9 million and $62.6 million, respectively, a decrease of $1.7 million or 2.7%. The decrease results primarily from reduced sales volume 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 nine months ended September 29, 2000, and for the pro forma nine months ended September 30, 1999, were $21.3 million and $20.8 million, respectively, an increase of $0.5 million or 2.4%. The increase results primarily from increased sales volume to one of the Company's specialty customers which was somewhat offset by decreased sales volume to several pharmaceutical/skin care customers. Gross Profit. Gross profit increased $8.7 million to $81.2 million for the nine months ended September 29, 2000, from $72.5 million for the pro forma nine months ended September 30, 1999 due primarily to the purchase accounting adjustment to inventory of $9.0 million for the pro forma nine months ended September 30, 1999, and -23- to higher sales volume. As a percentage of net sales, gross profit was 33.8% for the nine months ended September 29, 2000, and 31.0% for the pro forma nine months ended September 30, 1999. Excluding the 1999 purchase accounting adjustment to inventory of $9.0 million, gross profit decreased $0.3 million to $81.2 million for the nine months ended September 29, 2000, from $81.5 million for the pro forma nine months ended September 30, 1999, and as a percentage of net sales, gross profit was 33.8% for the nine months ended September 29, 2000, and 34.9% for the pro forma nine months ended September 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. Soap margins declined due primarily to product mix. Operating and Other Expenses. Selling, general and administrative expenses were 23.4% of net sales for the nine months ended September 29, 2000, compared to 23.9% for the pro forma nine months ended September 30, 1999. The decrease primarily reflects a decrease in promotional spending for our shaving blade products and an increase in pension income which was somewhat offset by 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. Amortization of intangible assets was substantially unchanged at $3.5 million for the nine months ended September 29, 2000, and $3.7 million for the pro forma nine months ended September 30, 1999. Interest expense decreased $1.6 million to $14.7 million for the nine months ended September 29, 2000, from $16.3 million for the pro forma nine months ended September 30, 1999, due primarily to the write-off in July 1999 of $2.2 million of deferred financing costs and lower commitment fee expense in connection with the $52.5 million permanent reduction in the Company's term loan facility. The decrease was somewhat offset by increased interest expense resulting from 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 48.6% for the nine months ended September 29, 2000, and (17.5)% for the pro forma nine months ended September 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 $7.2 million for the nine months ended September 29, 2000. Net cash provided by operating activities amounted to $9.6 million for the period from April 24, 1999, to September 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 nine months ended September 29, 2000 primarily reflects an increase in net income and net changes in working capital accounts. Net cash used in investing activities related primarily to capital expenditures of $11.3 million for the nine months ended September 29, 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 $5.5 million in net borrowings for the nine months ended September 29, 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 September 29, 2000, the Company had approximately $11.4 million available for future borrowings under its revolving credit facility. -24- 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 September 29, 2000 and September 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 September 29, 2000, the Company carried $191.2 million of outstanding debt on its balance sheet, with $120.9 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 nine months ended September 29, 2000 and the nine months ended September 30, 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 September 29, 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 September 29, 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 December 30, 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. -25- 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 adopted the Interpretation on July 1, 2000, which did not have any 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. In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-14, "Accounting for Certain Sales Incentives". EITF No. 00-14 addresses the recognition, measurement, and income statement classification of various sales incentives including discounts, coupons, rebates, and free products or services. The Company is required to adopt EITF No. 00-14 in the fourth quarter of 2000. The Company has determined that the adoption of EITF No. 00-14 will have no effect on its financial position or previously reported results of operations and is in the process of determining the potential effect on its statement of operations presentation and upon adoption, previously issued financial statements may need to be revised to conform to the new presentation. 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 27 - Financial Data Schedule. b. Reports on Form 8-K: No reports on Form 8-K have been filed during the quarter ended September 29, 2000. -26- 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 November 8, 2000 By /s/James D. Murphy ----------------- -------------------------------------- Date James D. Murphy President and Chief Executive Officer November 8, 2000 By /s/Alan R. Koss ----------------- -------------------------------------- Date Alan R. Koss Senior Vice President Chief Financial Officer -27-