10-Q 1 secqtr01-10q.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, 2001 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 3, 2001. Class Outstanding at August 3, 2001 ----- ----------------------------- 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 June 30, 2001 (Unaudited) and December 29, 2000 1 Condensed Consolidated Statements of Income (Unaudited) Three and Six Months Ended June 30, 2001 and June 30, 2000 3 Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2001 and June 30, 2000 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2001 and June 30, 2000 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Part II. Other Information Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, December 29, 2001 2000 ---------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,580 $ 2,142 Accounts receivable, net 54,245 51,697 Inventories 61,632 61,628 Deferred income taxes 4,157 5,394 Prepaid expenses 3,226 970 -------- -------- Total current assets 124,840 121,831 Property and equipment, net 92,465 91,814 Intangible assets, net: Goodwill, trademarks and patents 154,758 156,814 Other 5,035 5,292 -------- -------- 159,793 162,106 Prepaid pension cost and other 14,618 13,835 -------- -------- Total assets $391,716 $389,586 ======== ========
See accompanying notes. AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
June 30, December 29, 2001 2000 ----------- ------------ (Unaudited) LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable $ 18,999 $ 15,217 Accrued expenses and other 10,653 12,281 Payroll and related liabilities 4,176 4,673 Accrued interest 3,347 3,342 Income taxes payable 2,404 2,931 Current maturities of long-term obligations 14,202 11,925 -------- -------- Total current liabilities 53,781 50,369 Long-term obligations 178,210 179,098 Retiree benefits and other 27,379 26,916 Pension and other liabilities 1,097 1,188 Deferred income taxes 17,707 18,155 -------- -------- Total liabilities 278,174 275,726 -------- -------- Stockholder's equity: Common stock, $.01 par value, 25,000,000 shares authorized; 12,110,349 shares issued and outstanding at June 31, 2001 and December 29, 2000 121 121 Additional paid-in capital 172,843 172,843 Advances to RSA Holdings Corporation, net (52,141) (52,061) Accumulated deficit (6,035) (6,466) Accumulated other comprehensive loss (1,246) (577) -------- -------- 113,542 113,860 -------- -------- Total liabilities and stockholder's equity $391,716 $389,586 ======== ========
See accompanying notes. AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (In thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, --------------------- ---------------------- 2001 2000 2001 2000 ---------- -------- --------- --------- Net sales $80,953 $79,141 $158,616 $155,681 Cost of sales 58,348 53,535 113,582 105,638 ------- -------- -------- -------- Gross profit 22,605 25,606 45,034 50,043 Selling, general and administrative expenses 15,408 16,412 31,392 35,141 Amortization of intangible assets 1,098 1,174 2,197 2,362 ------- ------- -------- -------- Operating income 6,099 8,020 11,445 12,540 Interest expense 5,128 4,839 10,297 9,553 ------- ------- -------- -------- Income before income taxes 971 3,181 1,148 2,987 Income taxes 623 1,486 717 1,395 ------- ------- -------- -------- Net income $ 348 $ 1,695 $ 431 $ 1,592 ======= ======= ======== ======== Basic earnings per share: Net income $0.03 $0.14 $0.04 $0.13 ===== ===== ===== ===== Weighted average number of shares outstanding 12,110 12,110 12,110 12,110 ====== ====== ====== ====== Diluted earnings per share: Net income $0.03 $0.14 $0.04 $0.13 ===== ===== ===== ===== Weighted average number of shares outstanding 12,110 12,110 12,110 12,110 ====== ====== ====== ====== See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (In thousands)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- ---------- -------- ---------- Net income $348 $1,695 $ 431 $1,592 Other comprehensive income (loss): Foreign currency translation adjustments 188 (559) (669) (867) ---- ------ ----- ------ Comprehensive income (loss) $536 $1,136 $(238) $ 725 ==== ====== ===== ======
See accompanying notes. AMERICAN SAFETY RAZOR COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
Six Months Ended June 30, ------------------------- 2001 2000 -------- ---------- Operating activities Net income $ 431 $1,592 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,687 8,917 Interest and financing costs 750 726 Retiree benefits and other (1,080) (1,897) Deferred income taxes 789 392 Changes in operating assets and liabilities: Accounts receivable (2,548) (1,028) Inventories (4) (6,415) Prepaid expenses (2,256) (463) Accounts payable 3,782 2,623 Accrued and other expenses (2,647) (1,666) ------ ------ Net cash provided by operating activities 6,904 2,781 Investing activities Capital expenditures (6,488) (6,347) Other, net (125) - ------ ------ Net cash used in investing activities (6,613) (6,347) Financing activities Repayment of long-term obligations (27,794) (5,450) Proceeds from borrowings 27,500 10,000 Deferred loan fees (479) (39) Advances to parent, net (80) (9,669) ------- ------ Net cash used in financing activities (853) (5,158) ------ ------ Net decrease in cash and cash equivalents (562) (8,724) Cash and cash equivalents, beginning of period 2,142 12,500 ------ ------ Cash and cash equivalents, end of period $1,580 $3,776 ====== ======
See accompanying notes. 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, 2001, are not necessarily indicative of the results that may be expected for the year ended December 29, 2001. The balance sheet at December 29, 2000 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 29, 2000. Effective December 30, 2000, the Company changed its fiscal year from a 52-53 week fiscal year ending on the Friday closest to December 31 to a 52-53 week fiscal year ending on the Saturday closest to December 31. The change in fiscal year did not have a material effect on the Company's financial position, results of operations or cash flows for the six months ended June 30, 2001. Certain prior period amounts have been reclassified to conform with the 2001 presentation. NOTE B - INVENTORIES Inventories consisted of: June 30, 2001 December 29, 2000 ------------- ----------------- (In thousands) Raw materials $27,186 $29,240 Work-in-process 6,645 5,110 Finished goods 23,363 22,810 Operating supplies 4,438 4,468 -------- -------- $61,632 $61,628 ======= ======= NOTE C - LONG-TERM OBLIGATIONS On March 28, 2001, the Company amended its Credit Agreement which, among other things, modified the financial ratio requirements relating to the leverage, fixed charges and interest coverage ratios. These financial ratio requirements were modified to allow the Company to meet certain of the financial ratio requirements. In addition, the Company's principal stockholder has guaranteed $5.0 million of borrowings under the Company's existing revolving credit facility. On March 28, 2001, the Company entered into an additional revolving credit facility of $5.0 million which has been guaranteed by the principal stockholder. At June 30, 2001, the Company had approximately $9.3 million available for future borrowings under its revolving credit facilities. NOTE D - 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 and requires the Company to recognize all derivatives on the balance sheet at fair value. This new standard, as amended by FAS 137 and FAS 138 was adopted by the Company on December 30, 2000. The Company's use of derivative instruments is limited to interest rate cap and swap agreements and foreign currency option and forward contracts. The Company has entered into an interest rate cap agreement and an interest rate swap agreement with a bank, which expire in October 2001, covering $56.3 million of its variable rate debt outstanding to manage its interest rate risk. The Company has also entered into foreign currency option and forward contracts, which expire in monthly amounts through November 2001, to manage its risk of foreign currency fluctuations. These derivatives are not designated as hedges. At December 30, 2000, the fair market value of the interest rate cap and swap agreements was an asset of approximately $6,000 and the fair market value of the foreign currency option contracts was a liability of approximately $302,000. At December 30, 2000, there were no foreign currency forward contracts outstanding. For the three and six months ended June 30, 2001, the Company recognized a net loss of approximately $113,000 and $258,000, respectively, related to the interest rate swap agreement which is included in interest expense in the consolidated statement of income. For the three and six months ended June 30, 2001, the Company recognized a net gain of approximately $289,000 and $544,000, respectively, related to the foreign currency option and forward contracts which is included in selling, general and administrative expenses in the consolidated statement of income. 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. EITF No. 00-14 requires a vendor to recognize discounts, coupons and rebate obligations as a reduction of revenue. In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." This consensus requires that certain activities such as the payment of "slotting fees", cooperative advertising arrangements and "buy downs" be classified as a reduction of revenue. The Company has historically followed the practice of recording such items as a selling expense. The Company is required to adopt EITF No. 00-14 and EITF No. 00-25 in the first quarter of 2002. At the time of adoption, the Company will reclassify prior quarters and prior year financial statements to conform to the new income statement classification. As the Company believes its current accounting practices relative to the timing and method of recognizing such costs is consistent with the consensus it is not expected that the adoption of the consensus will have any impact on the Company's financial position or results of operations. The Company is in the process of determining the amounts to be reclassified. In January 2001, the EITF reached a consensus on one of the issues currently under consideration within EITF Issue No. 00-22, "Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future". This consensus requires a vendor to recognize a rebate or refund obligation as a reduction of revenue based on a systematic and rational allocation of the costs of honoring rebates or refunds earned. The Company has historically followed the practice of recording the cost of such items as a selling expense. The Company adopted the consensus in the first quarter of 2001 relating to volume rebates and recorded approximately $608,000 in the first quarter of 2001 and approximately $668,000 in the second quarter of 2001 of volume rebates as a reduction of revenue. The consolidated statement of income for the six months ended June 30, 2000 was reclassified to conform to the new classification which resulted in volume rebates of approximately $1,449,000 being reflected as a reduction of revenue. As the Company's current accounting practices relative to the timing and method of recognizing such costs is consistent with the consensus, the adoption of the consensus did not have any impact on the Company's financial position or results of operations. NOTE E - SEGMENT INFORMATION
Three Months Ended Three Months Ended June 30, 2001 June 30, 2000 ------------------------- -------------------------- Operating Operating Net Income Net Income Sales (Loss) Sales (Loss) --------- ------------ ----------- ----------- (In Thousands) Razors and Blades $52,224 $5,824 $52,312 $7,867 Cotton and Foot Care 21,072 (227) 19,213 (364) Custom Bar Soap 7,657 502 7,616 517 ------- ------ ------- ------ $80,953 6,099 $79,141 8,020 ======= ======= Interest expense 5,128 4,839 ------ ------ Income before income taxes $ 971 $3,181 ====== ====== Six Months Ended Six Months Ended June 30, 2001 June 30, 2000 ------------------------- ------------------------ Operating Operating Net Income Net Income Sales (Loss) Sales (Loss) ---------- ---------- --------- --------- (In Thousands) Razors and Blades $102,593 $11,124 $102,469 $12,451 Cotton and Foot Care 42,157 (157) 39,108 (309) Custom Bar Soap 13,866 478 14,104 398 -------- ------- -------- ------- $158,616 11,445 $155,681 12,540 ======== ======== Interest expense 10,297 9,553 ------- ------- Income before income taxes $ 1,148 $ 2,987 ======= ======= Total Assets June 30, 2001 ------------- Razors and Blades $306,469 Cotton and Foot Care 52,746 Custom Bar Soap 32,501 -------- $391,716 ========
NOTE F - CONTINGENCIES During 1998, the Company purchased bleached cotton from an outside supplier for use in its pharmaceutical coil business. The Company converted this cotton from incoming bales into a coil, which was shipped to its pharmaceutical customers to be used as filler in bottles of oral dosage forms of pharmaceutical products to prevent breakage. During the period from March through November of 1998, the process by which the Company's supplier bleached this cotton was changed by introducing an expanded hydrogen peroxide treatment. Subsequent testing indicated varying levels of residual hydrogen peroxide in the cotton processed during this time period and the supplier in November 1998 reduced the levels of residual hydrogen peroxide in its bleaching process. The Company, to date, has received complaints from 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 supplier 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 supplier. 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. NOTE G - 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 June 30, 2001 and December 31, 2000, and for the six months ended June 30, 2001 and 2000, 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. Condensed Consolidating Balance Sheets (Unaudited) June 30, 2001
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Assets Current assets: Cash and cash equivalents $ 9 $ 111 $ 1,460 $ - $ 1,580 Accounts receivable, net 23,619 11,964 18,994 (332) 54,245 Advances receivable--subsidiaries 66,326 - - (66,326) - Inventories 33,045 13,640 15,273 (326) 61,632 Income taxes and prepaid expenses 3,937 1,801 1,645 - 7,383 -------- ------- ------- --------- -------- Total current assets 126,936 27,516 37,372 (66,984) 124,840 Property and equipment, net 60,667 24,818 6,980 - 92,465 Intangible assets, net 133,068 21,829 4,896 - 159,793 Prepaid pension cost and other 5,034 9,563 21 - 14,618 Investment in subsidiaries 33,332 - 3,887 (37,219) - -------- ------- ------- --------- -------- Total assets $359,037 $83,726 $53,156 $(104,203) $391,716 ======== ======= ======= ========= ======== Liabilities and Stockholder's Equity Current liabilities: Accounts payable, accrued expenses and other $ 24,280 $ 8,105 $ 7,196 $ (2) $ 39,579 Advances payable--subsidiaries - 49,239 17,743 (66,982) - Current maturities of long-term obligations 14,080 122 - - 14,202 -------- ------- ------- --------- -------- Total current liabilities 38,360 57,466 24,939 (66,984) 53,781 Long-term obligations 176,557 1,653 - - 178,210 Retiree benefits and other 17,839 10,637 - - 28,476 Deferred income taxes 12,394 4,743 570 - 17,707 -------- ------- ------- --------- -------- Total liabilities 245,150 74,499 25,509 (66,984) 278,174 -------- ------- ------- --------- -------- Stockholder's equity Common stock 121 - 2 (2) 121 Additional paid-in capital 172,843 12,948 23,931 (36,879) 172,843 Advances to RSA Holdings Corporation, net (52,141) - - - (52,141) (Accumulated deficit) retained earnings (5,992) (3,721) 5,262 (1,584) (6,035) Dividends 302 - (302) - - Accumulated other comprehensive loss (1,246) - (1,246) 1,246 (1,246) -------- ------- ------- --------- -------- 113,887 9,227 27,647 (37,219) 113,542 -------- ------- ------- --------- -------- Total liabilities and stockholder's equity $359,037 $83,726 $53,156 $(104,203) $391,716 ======== ======= ======= ========= ========
Condensed Consolidating Balance Sheets December 29, 2000
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ (In thousands) Assets Current assets: Cash and cash equivalents $ 97 $ 191 $ 1,854 $ - $ 2,142 Accounts receivable, net 22,304 11,393 18,331 (331) 51,697 Advances receivable--subsidiaries 66,995 - - (66,995) - Inventories 31,915 15,679 14,979 (945) 61,628 Income taxes and prepaid expenses 3,788 2,278 298 - 6,364 -------- ------- ------- --------- -------- Total current assets 125,099 29,541 35,462 (68,271) 121,831 Property and equipment, net 60,767 23,993 7,054 - 91,814 Intangible assets, net 134,978 22,161 4,967 - 162,106 Prepaid pension cost and other 4,533 9,281 21 - 13,835 Investment in subsidiaries 33,687 - 5,297 (38,984) - -------- ------- -------- ---------- -------- Total assets $359,064 $84,976 $52,801 $(107,255) $389,586 ======== ======= ======= ========= ======== Liabilities and stockholder's equity Current liabilities: Accounts payable, accrued expenses and other $ 23,731 $ 8,300 $ 6,413 $ - $ 38,444 Advances payable--subsidiaries - 50,472 17,799 (68,271) - Current maturities of long-term obligations 11,875 50 - - 11,925 -------- ------- ------ --------- -------- Total current liabilities 35,606 58,822 24,212 (68,271) 50,369 Long-term obligations 178,979 119 - - 179,098 Retiree benefits and other 17,495 10,609 - - 28,104 Deferred income taxes 12,820 4,792 543 - 18,155 -------- ------- ------- --------- -------- Total liabilities 244,900 74,342 24,755 (68,271) 275,726 -------- ------- ------- --------- -------- Stockholder's equity Common stock 121 - 2 (2) 121 Additional paid-in capital 172,843 12,948 23,736 (36,684) 172,843 Advances to RSA Holdings Corporation, net (52,061) - - - (52,061) (Accumulated deficit) retained earnings (6,464) (2,314) 5,187 (2,875) (6,466) Dividends 302 - (302) - - Accumulated other comprehensive loss (577) - (577) 577 (577) -------- ------- -------- --------- -------- 114,164 10,634 28,046 (38,984) 113,860 -------- ------- ------- --------- -------- Total liabilities and stockholder's equity $359,064 $84,976 $52,801 $(107,255) $389,586 ======== ======= ======= ========= ========
Condensed Consolidating Statements of Income (Unaudited) Six Months Ended June 30, 2001
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Net sales $79,656 $56,436 $39,431 $(16,907) $158,616 Cost of sales 50,136 49,292 31,061 (16,907) 113,582 ------- ------- ------- -------- -------- Gross profit 29,520 7,144 8,370 - 45,034 Selling, general and administrative expenses 18,129 6,491 6,772 - 31,392 Amortization of intangible assets 1,797 333 67 - 2,197 ------- ------- ------- -------- -------- Operating income 9,594 320 1,531 - 11,445 Other income (expense): Equity in earnings (losses) of affiliates 118 - (1,409) 1,291 - Interest expense (9,206) (2,374) 1,283 - (10,297) ------- ------- ------- -------- -------- Income (loss) before income taxes 506 (2,054) 1,405 1,291 1,148 Income taxes (benefit) 34 (647) 1,330 - 717 ------- ------- ------- -------- -------- Net income (loss) $ 472 $(1,407) $ 75 $ 1,291 $ 431 ======= ======= ======= ======== ========
Condensed Consolidating Statements of Income (Unaudited) Six Months Ended June 30, 2000
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ (In thousands) Net sales $81,501 $53,674 $33,442 $(12,936) $155,681 Cost of sales 47,246 46,313 25,015 (12,936) 105,638 ------- ------- ------- -------- -------- Gross profit 34,255 7,361 8,427 - 50,043 Selling, general and administrative expenses 22,492 6,772 5,877 - 35,141 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 ======= ======= ======= ======== ========
Condensed Consolidating Statements of Comprehensive Income (Unaudited) Six Months Ended June 30, 2001
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Net income (loss) $ 472 $(1,407) $ 75 $1,291 $ 431 Other comprehensive loss: Foreign currency translation adjustments (669) - (669) 669 (669) ----- ------- ----- ------ ----- Comprehensive income (loss) $(197) $(1,407) $(594) $1,960 $(238) ===== ======= ===== ====== =====
Condensed Consolidating Statements of Comprehensive Income (Unaudited) Six Months Ended June 30, 2000
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 Cash Flows (Unaudited) Six Months Ended June 30, 2001
Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ (In thousands) Operating activities Net cash provided by operating activities $ 4,391 $2,070 $ 394 $ 49 $ 6,904 Investing activities Capital expenditures (4,717) (839) (932) - (6,488) Other (128) (1) 4 - (125) Investment in subsidiaries (196) - 196 - - Advances from (to) subsidiaries 1,338 - - (1,338) - ------- ------ ------ ------ ------- Net cash used in investing activities (3,703) (840) (732) (1,338) (6,613) Financing activities Repayment of long-term obligations (27,717) (77) - - (27,794) Proceeds from borrowings 27,500 - - - 27,500 Deferred loan fees (479) - - - (479) Advances to parent (80) - - - (80) Advances from (to) subsidiaries - (1,233) (56) 1,289 - ------- ------ ------ ------ ------- Net cash used in financing activities (776) (1,310) (56) 1,289 (853) Net decrease in cash and cash equivalents (88) (80) (394) - (562) Cash and cash equivalents, beginning of period 97 191 1,854 - 2,142 ------- ------ ------ ------ ------- Cash and cash equivalents, end of period $ 9 $ 111 $1,460 $ - $ 1,580 ======= ====== ====== ====== =======
Condensed Consolidating Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2000
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 ====== ======= ======= ====== ======
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 29, 2000. 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 June 30, 2001 Compared to Three Months Ended June 30, 2000 Net Sales. Net sales for the three months ended June 30, 2001 and 2000 were $80.9 million and $79.1 million, respectively, an increase of $1.8 million, or 2.3%. Razors and Blades. Net sales of our razors and blades segment for the three months ended June 30, 2001 and 2000 were $52.2 million and $52.3 million, respectively, a decrease of $0.1 million or 0.2%. Net sales of shaving razors and blades for the three months ended June 30, 2001 and 2000 were $35.4 million and $34.9 million, respectively, an increase of $0.5 million, or 1.5%. Net sales of domestic value branded shaving products decreased 7.9% primarily reflecting an increase in promotional programs by certain competitors and inventory reductions by certain customers which were somewhat offset by sales gains relating to the premium rubber grip and long handle disposable razors. Net sales of domestic private label shaving products decreased 2.7% primarily reflecting the timing of promotional programs and inventory reductions by certain customers somewhat offset by sales gains relating to the introduction of the premium rubber grip disposable razor and the restage of Tri-Flexxx(TM). Net sales of shaving products in international markets increased 8.9% (net of a 4.9% negative impact of unfavorable exchange rates) reflecting stronger sales in most of the Company's markets. The increase results primarily from increased sales of the Tri-Flexxx(TM), long handle and welter weight disposable shaving products and from increased sales penetration in existing and new markets. Net sales of blades and bladed hand tools for the three months ended June 30, 2001 and 2000 were $12.3 million and $13.2 million, respectively, a decrease of $0.9 million, or 7.3%. The decrease primarily reflects demand softness related to economic conditions and inventory reductions experienced in certain markets. Net sales of specialty industrial and medical blades for the three months ended June 30, 2001 and 2000 were $4.5 million and $4.2 million, respectively, an increase of $0.3 million or 8.3%. Sales of specialty industrial products decreased 3.2% as a result of reduced usage in certain markets. Sales of medical products increased 19.4% reflecting strong distribution gains. Cotton and Foot Care. Net sales of cotton and foot care products for the three months ended June 30, 2001 and 2000 were $21.1 million and $19.2 million, respectively, an increase of $1.9 million or 9.7%. The increase results primarily from an increase in promotional programs with certain customers which was somewhat offset by reduced sales volume resulting from redesign of products by certain medical cotton customers. Custom Bar Soap. Net sales of the Company's custom bar soap products for the three months ended June 30, 2001 and 2000 were unchanged at $7.6 million. Gross Profit. Gross profit decreased $3.0 million to $22.6 million during the three months ended June 30, 2001, from $25.6 million for the three months ended June 30, 2000. As a percentage of net sales, gross profit was 27.9% for the three months ended June 30, 2001 and 32.4% for the three months ended June 30, 2000. Blade margins declined due primarily to changes in product mix, the negative impact of unfavorable exchange rates, higher depreciation expense related to capacity expansion projects and higher manufacturing overheads. Cotton margins were unchanged and reflect labor efficiencies and lower material costs which were offset by changes in product mix and higher shipping costs. Soap margins declined due primarily to higher manufacturing overheads and higher depreciation expense. Operating and Other Expenses. Selling, general and administrative expenses were 19.0% of net sales for the three months ended June 30, 2001, compared to 20.7% of net sales for the three months ended June 30, 2000. The decrease primarily reflects a decrease in promotional spending for our shaving blade products and management's efforts to control expenses. Amortization of intangible assets was substantially unchanged at $1.1 million for the three months ended June 30, 2001, and $1.2 million for the three months ended June 30, 2000. Interest expense increased $0.3 million to $5.1 million for the three months ended June 30, 2001, from $4.8 million for the three months ended June 30, 2000, due primarily from additional borrowings under the Company's revolving credit facilities and additional interest expense relating to the interest rate swap agreement which were somewhat offset by a decrease in interest rates and lower debt outstanding under the Company's term loans. The Company's effective income tax rate was 64.2% for the three months ended June 30, 2001, versus 46.7% for the three months ended June 30, 2000, and varies from the United States statutory rate due primarily to nondeductible goodwill amortization, foreign taxes in excess of the U.S. rate and state income taxes, net of the federal tax benefit. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Net Sales. Net sales for the six months ended June 30, 2001 and 2000 were $158.6 million and $155.7 million, respectively, an increase of $2.9 million, or 1.9%. Razors and Blades. Net sales of our razors and blades segment for the six months ended June 30, 2001 and 2000 were $102.6 million and $102.5 million, respectively, an increase of $0.1 million, or 0.1%. Net sales of shaving razors and blades for the six months ended June 30, 2001 and 2000 were $70.6 million and $69.1 million, respectively, an increase of $1.5 million, or 2.2%. Net sales of domestic value branded shaving products decreased 2.8% primarily reflecting an increase in promotional programs by certain competitors and inventory reductions by certain customers which were somewhat offset by sales gains relating to the premium rubber grip and long handle disposable razors. Net sales of domestic private label shaving products decreased 9.6% primarily reflecting the decline in and timing of promotional programs and inventory reductions by certain customers which were somewhat offset by sales gains relating to the introduction of the premium rubber grip disposable razor and the restage of Tri-Flexxx(TM). Net sales of shaving products in international markets increased 11.4% (net of a 5.5% negative impact of unfavorable exchange rates) reflecting stronger sales in most of the Company's markets. The increase results primarily from increased sales of the Tri-Flexxx(TM), long handle and welter weight disposable shaving products and from increased sales penetration in existing and new markets. Net sales of blades and bladed hand tools for the six months ended June 30, 2001 and 2000 were $23.3 million and $25.3 million, respectively, a decrease of $2.0 million, or 7.7%. The decrease primarily reflects demand softness related to economic conditions and inventory reductions experienced in certain markets. Net sales of specialty industrial and medical blades for the six months ended June 30, 2001 and 2000 were $8.7 million and $8.1 million, respectively, an increase of $0.6 million, or 7.1%. Sales of specialty industrial products decreased 4.0% as a result of reduced usage in certain markets. Sales of medical products increased 17.1% reflecting strong distribution gains. Cotton and Foot Care. Net sales of cotton and foot care products for the six months ended June 30, 2001 and 2000 were $42.1 million and $39.1 million, respectively, an increase of $3.0 million or 7.8%. The increase results primarily from an increase in promotional programs with several customers which was somewhat offset by reduced sales volume resulting from redesign of products by certain medical cotton customers. Custom Bar Soap. Net sales of the Company's custom bar soap products for the six months ended June 30, 2001 and 2000 were $13.9 million and $14.1 million, respectively, a decrease of $0.2 million or 1.7%. The decrease results primarily from decreased sales volume to several pharmaceutical/skin care customers including repackaging of products for one customer, which was somewhat offset by increased sales volume to several skin care/specialty customers. Gross Profit. Gross profit decreased $5.0 million to $45.0 million for the six months ended June 30, 2001, from $50.0 million for the six months ended June 30, 2000. As a percentage of net sales, gross profit was 28.4% for the six months ended June 30, 2001, and 32.1% for the six months ended June 30, 2000. Blade margins declined due primarily to changes in product mix, the negative impact of unfavorable exchange rates, higher depreciation expense related to capacity expansion projects and higher manufacturing overheads. Cotton margins declined due primarily to changes in product mix and higher shipping costs which were somewhat offset by labor efficiencies and lower material costs. Soap margins declined due primarily to higher manufacturing overheads and higher depreciation expense. Operating and Other Expenses. Selling, general and administrative expenses were 19.8% of net sales for the six months ended June 30, 2001, compared to 22.6% for the six months ended June 30, 2000. The decrease primarily reflects a decrease in promotional spending for our shaving blade products and management's efforts to control expenses. Amortization of intangible assets was substantially unchanged at $2.2 million for the six months ended June 30, 2001, and $2.4 million for the six months ended June 30, 2000. Interest expense increased $0.7 million to $10.3 million for the six months ended June 30, 2001, from $9.6 million for the six months ended June 30, 2000, due primarily from additional borrowings under the Company's revolving credit facilities and additional interest expense relating to the interest rate swap agreement which were somewhat offset by a decrease in interest rates and lower debt outstanding under the Company's term loans. The Company's effective income tax rate was 62.5% for the six months ended June 30, 2000, and 46.7% for the six months ended June 30, 2000, and varies from the United States statutory rate due primarily to nondeductible goodwill amortization, foreign taxes in excess of the U.S. rate 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 facilities. Net cash provided by operating activities amounted to $6.9 million for the six months ended June 30, 2001 and $2.8 million for the six months ended June 30, 2000. Net cash provided by operating activities for the six months ended June 30, 2001 primarily reflects earnings from operations and an increase in accounts payable which were somewhat offset by changes in working capital accounts, primarily accounts receivable, prepaid expenses and accrued expenses and other. Net cash used in investing activities related primarily to capital expenditures of $6.5 million for the six months ended June 30, 2001. Net cash used in financing activities resulted primarily from net repayments of debt obligations and deferred loan fees for the six months ended June 30, 2001. At June 30, 2001, the Company had approximately $9.3 million available for future borrowings under its revolving credit facilities. Management believes that the Company's cash on hand, anticipated funds from operations, and the amounts available to the Company under its revolving credit facilities will be sufficient to cover its working capital needs, capital expenditures, debt service requirements and tax obligations 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, 2001 and June 30, 2000. 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, 2001, the Company carried $192.4 million of outstanding debt on its balance sheet, with $120.7 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, 2001 and 2000, 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, 2001, 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 $2.5 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 has entered into currency option and forward contracts to partially offset the risk of foreign currency fluctuations. The value of these contracts at June 30, 2001 was not material to the Company's earnings, cash flow and financial position. 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 and requires the Company to recognize all derivatives on the balance sheet at fair value. This new standard, as amended by FAS 137 and FAS 138 was adopted by the Company on December 30, 2000. The Company's use of derivative instruments is limited to interest rate cap and swap agreements and foreign currency option and forward contracts. The Company has entered into an interest rate cap agreement and an interest rate swap agreement with a bank, which expire in October 2001, covering $56.3 million of its variable rate debt outstanding to manage its interest rate risk. The Company has also entered into foreign currency option and forward contracts, which expire in monthly amounts through November 2001, to manage its risk of foreign currency fluctuations. These derivatives are not designated as hedges. At December 30, 2000, the fair market value of the interest rate cap and swap agreements was an asset of approximately $6,000 and the fair market value of the foreign currency option contracts was a liability of approximately $302,000. At December 30, 2000, there were no foreign currency forward contracts outstanding. For the three and six months ended June 30, 2001, the Company recognized a net loss of approximately $113,000 and $258,000, respectively, related to the interest rate swap agreement which is included in interest expense in the consolidated statement of income. For the three and six months ended June 30, 2001, the Company recognized a net gain of approximately $289,000 and $544,000, respectively, related to the foreign currency option and forward contracts which is included in selling, general and administrative expenses in the consolidated statement of income. 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. EITF No. 00-14 requires a vendor to recognize discounts, coupons and rebate obligations as a reduction of revenue. In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor's Products or Services." This consensus requires that certain activities such as the payment of "slotting fees", cooperative advertising arrangements and "buy downs" be classified as a reduction of revenue. The Company has historically followed the practice of recording such items as a selling expense. The Company is required to adopt EITF No. 00-14 and EITF No. 00-25 in the first quarter of 2002. At the time of adoption, the Company will reclassify prior quarters and prior year financial statements to conform to the new income statement classification. As the Company believes its current accounting practices relative to the timing and method of recognizing such costs is consistent with the consensus it is not expected that the adoption of the consensus will have any impact on the Company's financial position or results of operations. The Company is in the process of determining the amounts to be reclassified. In January 2001, the EITF reached a consensus on one of the issues currently under consideration within EITF Issue No. 00-22, "Accounting for Points and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future". This consensus requires a vendor to recognize a rebate or refund obligation as a reduction of revenue based on a systematic and rational allocation of the costs of honoring rebates or refunds earned. The Company has historically followed the practice of recording the cost of such items as a selling expense. The Company adopted the consensus in the first quarter of 2001 relating to volume rebates and recorded approximately $608,000 in the first quarter of 2001 and approximately $668,000 in the second quarter of 2001 of volume rebates as a reduction of revenue. The consolidated statement of income for the six months ended June 30, 2000 was reclassified to conform to the new classification which resulted in volume rebates of approximately $1,449,000 being reflected as a reduction of revenue. As the Company's current accounting practices relative to the timing and method of recognizing such costs is consistent with the consensus, the adoption of the consensus did not have any impact on the Company's financial position or results of operations. Contingencies Refer to Note F - Contingencies to the Notes to Condensed Consolidated Financial Statements for a discussion of legal contingencies. 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. Reports on Form 8-K: No reports on Form 8-K have been filed during the quarter ended June 30, 2001. 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 8, 2001 By /s/James D. Murphy ----------------------- ------------------------------------- Date James D. Murphy President and Chief Executive Officer August 8, 2001 By /s/J. Andrew Bolt ----------------------- ------------------------------------- Date J. Andrew Bolt Senior Vice President Chief Financial Officer