-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SbCTu0jSc52+SoeOfECFd9YgS6x3AAN8LHCSEiOHic/rGpci4XStzAISl08cdzCK 7IQcVL4dnthY8w57LncJ/w== 0000902561-98-000094.txt : 19980319 0000902561-98-000094.hdr.sgml : 19980319 ACCESSION NUMBER: 0000902561-98-000094 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980318 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SAFETY RAZOR CO CENTRAL INDEX KEY: 0000750339 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 541050207 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21952 FILM NUMBER: 98568564 BUSINESS ADDRESS: STREET 1: PO BOX 500 CITY: STAUNTON STATE: VA ZIP: 24402-0500 BUSINESS PHONE: 5042488000 MAIL ADDRESS: STREET 1: PO BOX 500 CITY: STAUNTON STATE: VA ZIP: 24402-0500 10-K 1 FORM 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K ---------- [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the fiscal year ended December 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act Of 1934 Commission File Number 0-21952 ---------- AMERICAN SAFETY RAZOR COMPANY (Exact name of registrant as specified in its charter) Delaware 54-1050207 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) P.O. Box 500 Strauton, Virginia 24402-0500 (Address of principal executive offices, including zip code) ---------- Registrant's telephone number, including area code: (540) 248-8000 ---------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share ---------- 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 9, 1998, 12,106,449 shares of the Registrant's Common Stock were outstanding. The aggregate market value of the Registrant's Common Stock, which is the only class of voting stock of the Registrant, held by non-affiliates was approximately $212,192,139 based on the closing sales price of March 9, 1998. Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose. DOCUMENT INCORPORATED BY REFERENCE Portions of the Registrant's definitive proxy statement for the Annual Meeting of Shareholders to be held on May 19, 1998, are incorporated by reference into Part III of this Report on Form 10-K. Table of Contents Part I Page Item 1. Business.................................................... 1 General..................................................... 1 Products.................................................... 3 Sales and Marketing......................................... 4 Manufacturing............................................... 5 Raw Materials............................................... 5 Competition................................................. 6 Other Factors Affecting the Business of the Company......... 6 Item 2. Properties.................................................. 9 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 10 Executive Officers of the Registrant........................ 10 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 11 Item 6. Selected Financial Data..................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 13 Item 8. Financial Statements and Supplementary Data................. 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................... 17 Part III Item 10. Directors and Executive Officers of the Registrant.......... 18 Item 11. Executive Compensation...................................... 18 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................. 18 Item 13. Certain Relationships and Related Transactions.............. 18 Part IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K................................................. 18 - ----------------------- Market share and product distribution data shown throughout were obtained through Information Resources Incorporated, a nationally recognized market research firm based in Chicago, Illinois, which provides the Company with scanner based product movement data from U.S. grocery stores with annual all commodity volume of at least $2 million and data from drug stores and mass merchandisers in major U.S. markets. PART I ITEM 1 - Business General American Safety Razor Company (together with its subsidiaries, the "Company"), established in 1875, is a leading designer, manufacturer and marketer of high quality store, value and premium-brand consumer products. The Company's principal products consist of razors and blades, sales of which are broken into three broad categories, shaving razors and blades, bladed hand tools and blades, and specialty industrial and medical blades. The Company also manufactures cotton and foot care products and custom bar soaps. The Company distributes its products to the retail and professional trades in the United States and in selected international markets. The Company is the largest manufacturer in terms of units of store-brand and value-brand shaving razors and blades in the United States, and has the fourth largest domestic unit volume share of the overall domestic shaving razor and blade market (based on market research data for 1997 prepared by an independent market research firm). Total shaving razor and blade products which generated 1997 net sales of $120.8 million provide consumers with a value-priced alternative to more heavily advertised premium national brands. The Company's shaving razor and blade products are sold both under a retailer's own store label and under the Company's value-brand names such as Personna(R), GEM(R), Flicker(R), PFB(R), Treet(R), Blue Star(R), Pal(R), MBC(TM), Royal(TM), and premium-brand names such as Revlon Perfect Finish(TM), Bump Fighter(R), and Burma Shave(R). The Company provides both total shaving systems and components which can be used alone or with most other nationally recognized premium priced brands. These products are sold to major national mass-merchandise, drug and supermarket chains. The Company believes that its products have achieved product quality equivalency by using substantially the same materials and processes as those used by manufacturers of competing premium brand-name products. The Company attributes its leadership in the store-brand and value-brand markets to its long history of dedication to quality, customer service, low-cost manufacturing and competitive pricing. The Company is also the largest manufacturer in terms of units of both premium and value-priced bladed hand tools and blades (based on publicly available information and Company estimates) which are sold primarily under its Personna(R), American Line(TM) and Ardell(TM) brand names. These products which generated 1997 net sales of $45.4 million, capitalize on the Company's precision shaving blade technology and include such items as single edge blades, utility blades and knives, carpet blades and knives and paint scrapers. The Company's bladed hand tools and blades are sold to consumers and professionals through home-improvement centers, retail paint chains and hardware stores and to professionals through wholesalers, distributors and specialty supply jobbers. The Company has developed a line of specialty industrial and medical blades. The specialty industrial blades perform many of the cutting, slicing and chopping functions involved in manufacturing processes employed by a variety of industries including food-processing, fiber cutting, automotive and printing. In addition, the Company manufactures and markets carbon and stainless steel surgical blades, disposable scalpels and surgical prep blades for the U.S. health care markets under the Personna(R) brand name to customers including Allegiance Health Care, General Medical and Owens & Minor. In 1997, these products generated net sales of $16.4 million. The Company intends to strengthen its relationships with retailers who carry store-brand and value-brand consumer products by expanding its offerings of personal care consumer products. Consistent with this strategy, the Company acquired Megas Beauty Care, Inc. on June 10, 1994, and Sterile Products Corporation, d.b.a. Absorbent Cotton Company ("ACCO") on March 3, 1995. During March 1996, Megas Beauty Care, Inc. was merged into ACCO and ACCO changed its name to Megas Beauty Care, Inc. ("Megas"). In addition, on April 22, 1997, Megas purchased certain assets of the American White Cross Cotton Business ("AWC") for net consideration of approximately $10.3 million including acquisition related expenses. Since the date of acquisition through December 31, 1997, AWC's cotton products generated net sales of $21.1 million. Megas manufactures cotton swabs, cotton balls, puffs, cosmetic pads, pharmaceutical and beauty coils, pocket tissue, and foot care products. As a result, the Company believes it is currently one of the largest store-brand manufacturers of cotton and foot care products in the United States. For 1997, Megas had combined net sales of $80.4 million. The products of Megas are sold both under retailers' store-brand names as well as the Company's own value-priced Megas(R), ACCO(R), Cottonette(R) and Crystal(R) brands. The Company believes it is a leading domestic manufacturer of cosmetic/skin care, bath, pharmaceutical and specialty custom bar soaps. These products, which generated 1997 net sales of $33.6 million, are marketed primarily under customers' store 1 brands and also under the Company's brand names such as Omnibus(R), Centurion(R), Kensington(R), Lavender & Old Lace(R), Satinet Rosewater & Glycerine(R), Sandalwood(R) and Fashion IV(R). Operating Strategy The Company's operating strategy is founded in four key areas: o Expand offerings of store-brand and value-brand personal care consumer products through strategic acquisitions. The Company believes that store-brand and value-brand products generally offer higher margins to retailers and significant savings to consumers over premium-brand products. Consistent with this strategy, the Company acquired Megas Beauty Care, Inc. on June 10, 1994, and expanded its product offerings to include cotton balls, swabs, cosmetic squares and rounds as well as foot care products. Follow on acquisitions of ACCO on March 3, 1995, and AWC on April 22, 1997, further solidified the Company's position as one of the largest store-brand and value-brand cotton personal care products supplier. In addition, these acquisitions expanded the Company's cotton product selection to include cotton beauty coil and pharmaceutical coil. To continue to increase its sales of store-brand and value-brand products, the Company is focusing on developing its partnerships with major retailers, developing product line extensions that build on the Company's reputation for high quality products, expanding its package design capabilities and marketing support, and expanding its existing distribution channels. The Company intends to leverage its existing distribution strengths and relationships with retailers who carry store-brand products to obtain incremental distribution for an expanded array of personal care consumer products. This strategy has led in part to the growth in sales of the Company's store-brand and value-brand shaving razor and blade products to $120.8 million in 1997 and sales of the Company's store-brand and value-brand cotton and foot care products to $80.4 million in 1997. o Increase penetration of markets currently served and enter new markets. The Company's efforts to increase market penetration are focused on international markets for shaving razors and blades which are estimated to be over three times the size of the United States market. The Company intends to continue to increase the international sales of its shaving razor and blade products through its existing strategy of developing distributors in selected target markets, expanding its sales base in established markets through local sales offices and improving its cost-competitiveness in more mature markets through local manufacturing activities and increased local promotion. Consistent with this strategy, the Company acquired Bond on March 29, 1996, which has a manufacturing facility located in Nazareth Illit, Israel. The Company's international net sales (including export sales and sales within Puerto Rico) were $54.0 million in 1997. o Develop new products and product line extensions. The Company is focusing its product development efforts on designing new products and product line extensions that build on the Company's reputation for high quality products, packaging and service, and which utilize the Company's existing distribution channels. Recent examples are the Company's introduction of a long handle twin blade disposable razor designed to compete with Gillette's Custom Plus(TM), the Revlon Perfect Finish(TM)shaving system for women which combines innovation and functionality with the Revlon(R)brand name to revolutionize the way women shave, the Company's patented moving blade cartridge, a shaving system sold under the MBC(TM)trade name which has its own handle and fits the Sensor(R)handle manufactured by The Gillette Company ("Gillette"), the introduction of the Lady MBC(TM)shaving system, the addition of Burma Shave(R)line extensions including a shaving mug and soap set, a shaving system with refill cartridges, shaving cream and aftershave skin conditioner, and the Bump Fighter(R)shaving system, with an accessory line, including a shaving gel, cleanser, beard relaxer, skin conditioner, treatment mask and aftershave skin conditioner, designed to meet the shaving needs of African-American men. The Company sells its shaving razors and blades under a number of nationally recognized names. The Company believes that it can increase sales of its shaving razors and blades by introducing additional niche premium brands which can be sold through its existing sales and distribution channels. By concentrating on niche markets, the Company believes it will be able to compete more effectively with its larger competitors. The Company is also expanding sales of its consumer bladed hand tools and blades to home-improvement centers and hardware chains by introducing new products. Several large, national home-improvement centers and hardware 2 chains offer the Company's bladed hand tools and blades as one of their featured lines in this class of merchandise. o Reduce operating costs and improve productivity. The Company has implemented several programs to reduce operating costs and increase productivity and efficiency. The Company operates efficient, low cost manufacturing and packaging operations for shaving razors and blades in Obregon, Mexico, and Knoxville, Tennessee, which has resulted in significant savings to the Company, primarily as a result of lower payroll costs. In addition, the Company is continuing to invest capital resources to improve productivity, efficiency and operating capabilities as evidenced by (i) the late 1996 expansion of manufacturing capacity in Obregon, Mexico, (ii) the completion in 1996 of the expansion of synthetic soap manufacturing capabilities in a new manufacturing facility in Columbus, Indiana, (iii) the expansion of manufacturing capacity in the Knoxville, Tennessee, facility and moving the shaving blade grinders into this facility from the Verona, Virginia, facility, (iv) the integration in 1997 of the industrial blade business into a single facility in Verona, Virginia, closing manufacturing facilities in Union and Maplewood, New Jersey, and (v) the opening of a new cotton facility in Nogales, Mexico, and the current expansion program of doubling the size of the Cleveland, Ohio, cotton and foot care manufacturing facility. In addition, the Company continues to institute a total quality management program and invest a significant portion of its capital resources in labor-saving equipment and employee training. Through the implementation of its operating strategy, the Company has maintained strong cash flow growth and increased net sales. For 1997, the Company's net sales grew to $296.6 million and EBITDA grew to $48.0 million. EBITDA for any relevant period represents operating income plus depreciation and amortization of goodwill and other intangibles. Products The following table sets forth net sales and percentage of total net sales by class of products for the years ended December 31, 1997, 1996 and 1995. Information with respect to industry segments is presented on page 35 of this Report.
1997 1996 1995 -------------- -------------- ------------- (In millions) Shaving razors and blades(1) $120.8 40.8% $114.4 43.9% $ 97.1 42.2% Bladed hand tools and blades 45.4 15.3 40.7 15.6 39.2 17.0 Specialty industrial and medical blades 16.4 5.5 16.5 6.4 15.8 6.8 ------ ----- ------ ----- ------ ----- Total 182.6 61.6 171.6 65.9 152.1 66.0 Cotton and foot care(2) 80.4 27.1 55.8 21.4 48.7 21.1 Custom bar soap 33.6 11.3 33.2 12.7 29.7 12.9 ------ ----- ------ ----- ------ ----- Total $296.6 100.0% $260.6 100.0% $230.5 100.0% ====== ===== ====== ===== ====== =====
Shaving Razors and Blades. The Company designs, manufactures and markets a full line of shaving razors and blades, including single-edge, double-edge and injector blades, twin-blade fixed and pivoting head cartridges, moving blade cartridges, disposables, single-edge razors, women's shaving razors and special purpose shaving blades. The Company provides both total shaving systems and components which can be used alone or with most other nationally-recognized premium brands. These shaving products are marketed under the Company's own brands (i.e., Personna(R), GEM(R), Flicker(R), PFB(R), Treet(R), Blue Star(R), Pal(R), MBC(TM) Royal(TM), Revlon Perfect Finish(TM), Bump Fighter(R), and Burma Shave(R)) or under the store brands of the Company's private-brand shaving razor and blade customers. Bladed Hand Tools and Blades. The Company designs, manufactures and markets bladed hand tools and blades, such as single edge blades, utility blades and knives, carpet blades and knives and paint scrapers primarily under its Personna(R), American Line(TM) and Ardell(TM) brand names. The majority of the Company's bladed hand tools and blades are sold to retail customers through home- - -------- (1) The year ended December 31, 1996, includes net sales of Bond of $11.2 million since its March 29, 1996, acquisition date. (2) The year ended December 31, 1997, includes net sales of AWC of $21.1 million since its April 22, 1997, acquisition date, the year ended December 31, 1995, includes net sales of ACCO of $16.6 million since its March 3, 1995, acquisition date and the year ended December 31, 1994, includes net sales of Megas of $18.7 million since its June 10, 1994, acquisition date. 3 improvement centers, retail paint chains and hardware stores and to professionals through wholesalers, distributors and specialty supply jobbers. Specialty Industrial and Medical Blades. The Company designs, manufactures and markets disposable blades for both the industrial and medical markets. Although the specialty industrial blade market is large and diverse, the Company's products are specially designed for niche industrial applications. These specialty industrial blades perform many of the cutting, slicing or chopping functions involved in manufacturing processes employed by a variety of industries including food processing, fiber cutting, automotive and printing. The Company manufactures and markets carbon and stainless steel surgical blades, disposable scalpels and surgical prep blades for the U.S. health care markets under the Personna(R) brand name. Cotton and Foot Care. The Company believes it is one of the largest store-brand manufacturers and distributors of cotton swabs, cotton balls and puffs and cotton cosmetic pads. In addition, the Company also manufactures pharmaceutical and beauty coils and foot care products. All of the foregoing products are sold under retailers' store-brand names as well as the Company's own value-priced brands Megas(R), ACCO(R), Cottonette(R) and Crystal(R). The Company believes that it is one of the few large cotton and foot care products manufacturers and distributors which can bleach its own cotton--a process integral to the production of cotton products. Custom Bar Soap. The Company manufactures custom designed and formulated bar soap for sale to a broad variety of pharmaceutical, cosmetic/skin-care and department store customers, primarily under such customers' own brand names. The Company's flexible manufacturing equipment, product design and development capabilities and reputation for high quality allow it to compete successfully in all major custom bar soap market segments. The Company also develops and markets seasonal gift soap products. Sales and Marketing The Company's products are sold through all major distribution channels through internal sales and marketing resources, as well as third party distributors and manufacturer's representatives. The Company's sales personnel receive a fixed salary plus a bonus based on sales performance or Company earnings. The Company's store-brand and value-brand shaving razors and blades and cotton and foot care products are sold through mass-merchandise, drug and supermarket chains. The Company's sales of consumer and personal care products is managed by a senior vice president who oversees a number of division vice presidents of sales and related personnel. Marketing support for the value-brand shaving razors and blades and cotton and foot care products focuses on direct mail advertisements, temporary price reductions and point of sale promotions. To assist stores in promoting their store-brand shaving razors and blades and cotton and foot care products, the Company helps customers develop customized marketing programs, including managing product introductions and promotional planning support. In addition, such merchandising vehicles as trial size programs, floor displays, point of purchase advertising, bonus sizes, coupons, rebates, store signs and promotional packs are available and incorporated into individual customers' programs. The Company also provides customers with market research to assist the customer in determining the effectiveness of various marketing programs. The Company's international shaving razors and blades sales effort is headed by a vice president who reports to the senior vice president of consumer and personal products. The vice president of international sales directs daily activities through group managers responsible for specific geographic regions. The Company uses a variety of sales strategies and organizations, depending upon the specific country to sell its products. The Company has a manufacturing and packaging facility in Mexico, a manufacturing, warehousing and packaging facility in Nazareth Illit, Israel, warehousing and packaging operations in Puerto Rico and the United Kingdom, and warehousing facilities in Canada to further its penetration in those markets. The Company sells bladed hand tools and blades to national and regional chains of home improvement centers and paint/decorating retailers as well as hardware co-op, wholesale buying groups, and industrial distributors. Specialty industrial blades are sold to direct users, original equipment manufacturers and to a wide variety of distributors who service professionals and niche segments. Overall management of the industrial division is headed by a vice president with specific responsibilities assigned to a director of field sales, director of market development and a general manager in Europe. Marketing needs for the entire division are overseen by a marketing manager who also reports to the vice president. 4 The Company distributes medical blades to hospitals, nursing homes, doctors' offices and other health care practitioners. The Company's medical blade sales efforts are headed by a vice president who oversees a number of regional managers. The Company focuses its medical blade marketing efforts through targeted trade journal advertising, direct mail promotions, medical trade shows and a volume rebate program. The Company's soap sales effort is headed by the vice president - general manager who oversees a number of sales people and national account representatives who work with customers to custom design soap products and programs. The Company also utilizes manufacturers' representatives to sell its products to customers in the hospitality industry, such as hotels, and to market its line of industrial and corporate promotional products. Manufacturing The Company is a fully integrated manufacturer performing all aspects of the manufacture of shaving razors and blades, blades for use with bladed hand tools and specialty industrial and medical blades from metal forming and plastic injection molding to assembly and packaging. Blades are manufactured at the Company's facilities in Verona, Virginia, Knoxville, Tennessee, and Nazareth Illit, Israel. The Company operates a low-cost, highly efficient injection molding, packaging and assembly facility in Obregon, Mexico. In July 1995, the Company purchased a new facility in Knoxville, Tennessee, to develop a fully integrated shaving razors and blades manufacturing operation. During 1997, the Company completed the second full year of a three-year manufacturing plan to develop a fully integrated facility to perform all operations attendant to manufacture, mold, assemble and package shaving razors and blades. In addition, the Company has restructured its industrial blade business moving substantially all of its operations into a single facility in Verona, Virginia, closing its manufacturing facilities in Union and Maplewood, New Jersey. Proprietary manufacturing processes allow the Company to produce a wide variety of products of different quantities, sizes and packaging while maintaining a high level of quality. The Company is continually working to improve its blade making productivity by adding new technologies and/or manufacturing processes, i.e., improved grinding, slitting or automatic package loading. Most of the processes which the Company uses to manufacture products are unique and proprietary. The production of the Company's cotton and foot care products starts with the receipt of cotton fibers in bales. The cotton is bleached, either internally or through the use of contract bleachers. Once the cotton has been bleached, the cotton is processed into yarn which is then used either in the production of (i) cotton balls, (ii) cotton swabs, (iii) cotton pads, or (iv) other cotton products. The Company's cotton and foot care products are manufactured at its facilities in Cleveland, Ohio, Valley Park, Missouri, Sparks, Nevada, Dayville, Connecticut, Canavanas, Puerto Rico, and Nogales, Mexico. The manufacture of soap is a specialized process which involves the reaction between tallow (animal fat), vegetable oil or a fatty acid with a caustic substance (called an alkaline) and water. The resulting soap mixture is then treated with additives to decrease the harshness of the substance and to give the soap functional or cosmetic applications. The Company has the ability to produce soap through four different manufacturing processes, producing a variety of soap products with different characteristics. The Company manufactures soap in its Dayton, Ohio and Columbus, Indiana facilities. Raw Materials The principal raw materials used by the Company in the manufacture of blade products are stainless and carbon steel, plastics and packaging supplies, all of which are normally readily available in the marketplace. While all raw materials are purchased from outside sources, the Company is not dependent upon any single supplier in its operations for any materials essential to its business or not otherwise commercially available to the Company. The Company has been able to obtain an adequate supply of raw materials, and no shortage of raw materials is currently anticipated. The principal raw materials used by the Company in the manufacture of its fiber and foot care products include cotton fiber, plastic and paper sticks for cotton swabs, foam insoles and packaging supplies. The Company has developed several different qualified sources for its key material requirements. The Company bleaches cotton for the majority of its production requirements. The Company also maintains a relationship with several qualified sources for additional contract bleaching. The prices of certain of the raw materials purchased by Megas are subject to commodity price volatility, particularly with respect to cotton fiber and 5 paper sticks, which may affect profitability of the Company's cotton and foot care products. The Company has been able to obtain an adequate supply of high quality raw materials, and no shortage of raw materials is currently anticipated. The principal raw materials used by the Company in the manufacture of its custom bar soap products are tallow, various chemicals, coconut oil, fatty acids, fragrances and packaging supplies. The prices of certain of the raw materials used by the Company, such as coconut oil and fatty acids, are volatile, which may affect the profitability of the Company's soap products. The Company has been able to obtain an adequate supply of high quality raw materials, and no shortage of raw materials is currently anticipated. Competition The shaving razor and blade market is competitive and sensitive to changing consumer preferences and demands. The Company's principal competitors in the shaving razor and blade market are Gillette, the Schick Division of Warner-Lambert and Societe Bic, S.A. These competitors are substantially larger and have substantially greater resources than the Company. The Company is the leading producer of store-brand and value-brand shaving razors and blades in the United States where the Company's primary competitors are smaller, privately held companies. Periodically, one of the premium-brand shaving razor and blade manufacturers mentioned above attempts to compete with the Company by lowering prices or entering the store-brand market. The Company believes that it is unlikely that a new shaving razor and blade manufacturer will appear in the near future given the proprietary nature of the manufacturing processes used by the Company and each of its competitors. In the bladed hand tools and blades and specialty industrial blades markets, competition is based on quality, price and customer service. The Company believes that it competes favorably on these bases and is a leading producer of bladed hand tools and blades and specialty industrial blades in the United States. The Company has a number of smaller competitors in bladed hand tools and blades such as I.B.U. and U.S. Blades. The medical blade market is dominated by a division of Becton Dickinson and Company. Megas competes in store-brand cotton swabs, cotton balls, puffs, cotton cosmetic pads, pharmaceutical and beauty coils and foot care products, on the basis of producing equal or better quality products than the national brand equivalents and offering a complete program of products in both store-brand and value-brand products. The market for these products is highly competitive, often attracting large national brand manufacturers seeking to add incremental store-brand business. Kimberly-Clark, in particular, has become very active in the store-brand pocket tissue category. In addition, companies such as Chesebrough-Pond's, Johnson & Johnson and Dr. Scholl's are continually re-investing in their premium brands, partly in an attempt to reclaim market share lost to store-brand and value-brand products. The custom bar soap market is very fragmented with numerous participants, some of which have greater resources than the Company. Competition in the custom bar soap market is based primarily on quality, price and customer service. Other Factors Affecting the Business of the Company Trademarks and Patents The Company owns all of the rights to the large number of trademarks used in its blade, cotton and foot care and soap businesses. Such trademarks include, among others, "Personna", "MBC", "GEM", "Flicker", "PFB", "Bump Fighter", "Burma Shave", "Megas", "ACCO", "Cottonette", "Crystal", "Omnibus", "Centurion", "Kensington", "Lavender & Old Lace", "Satinet Rosewater & Glycerine", "Sandalwood" and "Fashion IV". Trademarks are registered in the United States and in many other countries, and the Company considers such trademarks, in the aggregate, to be material to its business. In addition, the Company owns various patents and licenses related to the design and manufacture of certain of its products. The Company considers such patents to be important to its business, and the "MBC" patent is considered material to the conduct of the Company's business. There are no trademarks, patents or licenses expiring in 1998 which the Company expects would have a material effect on its business. The Company considers many of the processes which it uses to manufacture its products unique and proprietary. The 6 Company has not, however, applied for patent or copyright protection for any of these processes. The Company relies on non-disclosure and non-compete agreements with many of its employees and with the former owners of the Company's predecessor to protect its proprietary rights in these patents, licenses and processes. Employees and Labor Relations As of December 31, 1997, the Company employed 2,257 people worldwide, including 1,796 hourly employees and 461 salaried employees. Four collective bargaining agreements cover certain of the Company's employees: the first, at the Verona, Virginia plant, covers 425 employees and expires on September 25, 2000; the second, at the Company's Dayton, Ohio plant, covers 157 employees and expires on March 24, 1999; the third, at the Company's St. Louis plant, covers 213 employees and expires on September 1, 1999, and the fourth at the Company's Nazareth Illit, Israel plant, covers 148 employees and expires on April 1, 1999. In addition to the foregoing employees, the Company employs an aggregate of 853 hourly employees at its Knoxville, Tennessee; Cleveland, Ohio; Sparks, Nevada; Dayville, Connecticut; Nogales, Mexico; Canavanas, Puerto Rico; Nottingham, England; Obregon, Mexico; and San Juan, Puerto Rico facilities, none of whose employees are covered by a collective bargaining agreement. The Company considers its relations with its employees to be satisfactory. Environmental Matters The Company is subject to various federal, state and local environmental laws and regulations and the environmental laws and regulations of the various foreign jurisdictions in which the Company does business. The Company anticipates that such laws and regulations will become increasingly stringent in the future. In December 1986, the Company entered into a Special Order with the predecessor agency of the Virginia Department of Environmental Quality ("VDEQ") pursuant to which the Company agreed to investigate and cleanup groundwater contamination at the Company's Verona, Virginia, razor blade manufacturing facility. Pursuant to a plan of remediation approved by the VDEQ's executive director on February 18, 1988, and fully implemented in 1989, the Company built and currently operates a groundwater treatment facility to treat the contaminated groundwater. The Company regularly monitors the level of contamination in the groundwater. The Company is not presently aware of any additional contamination that is required to be remediated at this time at the Verona site. In October 1996, the Company's review of safety and environmental compliance at its razor blade manufacturing facility in Verona, Virginia, revealed that modifications to the facility in 1994 may have violated federal and state air regulations. The Verona facility uses a halogenated solvent, trichloroethylene ("TCE") in the blade cleaning machines attached to its blade grinders. In December 1994, pursuant to the federal Clean Air Act ("CAA"), the United States Environmental Protection Agency ("EPA") adopted a rule which regulates the emissions from halogenated solvent cleaning machines (the "HSC Rule"). The HSC Rule includes reporting requirements, emission controls and compliance deadlines. Existing machines were to comply with the emission controls by December 2, 1997, and new machines (those installed after November 29, 1993) were to be constructed to comply with the emission controls. Owners or operators of the machines were to submit an initial notification report to the EPA for new machines by January 31, 1995, and for existing machines by August 29, 1995. The initial notification reports were to identify each machine used by a facility, its date of installation and the emission controls used in new machines or to be retrofitted onto existing machines. The Company's blade cleaning machines are halogenated solvent cleaning machines covered by the HSC Rule and its October 1996, compliance review discovered that two of the Verona facility's twenty-four blade cleaning machines had been installed in 1994 without the requisite new machine air emission controls. The review also revealed that, although the Company had submitted notice of the new and existing blade cleaning machines as sources of TCE to the VDEQ in 1994, it had not submitted the initial notification to the EPA required by the HSC Rule. The Company promptly reported the findings of the compliance review to the EPA and to the VDEQ. The Company's report to the agencies enclosed the initial notification report for the blade cleaning machines, proposed to shut down the two "new" blade cleaning machines and proposed to install a facility-wide solvent vapor recovery system designed to reduce TCE emissions to well below that required by the HSC Rule. By the end of May 1997, the Company had taken both new machines off line and, by November 1997, had installed the solvent vapor recovery system. 7 In June 1997, the EPA Region III filed an administrative complaint seeking $147,000 in penalties. The Company contested the penalty and has reached an agreement in principle with the EPA for a penalty payment of $6,250. Negotiations of the consent order to finalize the settlement are underway. In June 1997, the VDEQ issued the Company a notice of violation of state air permitting requirements for the construction of a number of its blade cleaning machines without a permit to construct at the Verona facility. The Company and the VDEQ resolved the notice of violation by agreeing to enter into a consent order and having the Company file a facility-wide state air operating permit application. The Company submitted the application in September 1997, and anticipates receiving the permit in March 1998. The Company expects to file a major source air operating permit application in May 1998, to comply with the new air operating permit program adopted by Virginia pursuant to Title V of the CAA. Once issued, the major source air operating permit will supersede the state operating permit. When the Company purchased the Maplewood, New Jersey, facility as part of the Ardell acquisition, the Company and the previous owners of Ardell entered into an Administrative Consent Order on March 31, 1989, with the New Jersey Department of Environmental Protection and Energy ("NJDEPE") pursuant to which the previous owners of Ardell agreed to perform soil and groundwater remediation under the New Jersey Environmental Cleanup and Responsibility Act. Through September 1996, the previous owners had assumed full financial and oversight responsibility for remediation of the site. At that time, in settlement of claims by Ardell under its insurance policies with Federal Insurance Company covering the periods March 6, 1979 to March 6, 1987, Federal Insurance Company assumed primary financial and oversight responsibility for the remediation. The costs to complete the remediation are being borne by Federal Insurance Company and the previous owners of Ardell. The previous owners have posted the requisite financial assurance bond with NJDEPE securing such remediation obligations and have provided the Company with evidence of having obtained the bond. They also agreed to the delay of payments totaling approximately $1 million due them by the Company under the acquisition agreement for Ardell until such time as the remediation achieves certain defined benchmarks. The first partial principal payment of $0.3 million has been paid leaving $0.7 million still owed them by the Company. The Company has the right to offset these amounts against any costs incurred to ensure remediation. Additionally, as security, a letter of credit was obtained by the sellers in favor of NJDEPE in the amount of $0.6 million which remains intact. The Company has incurred only limited costs to date regarding this matter and does not expect to incur any material future costs. The Valley Park, Missouri, plant facility of the Company's Megas subsidiary, which was acquired on March 3, 1995, is located on a parcel of land which is the subject of a CERCLA investigation. This investigation is being undertaken in response to a release of "hazardous substances" from upgradient industries. The affected area, which includes the groundwater beneath a segment of the plant site, has been found to be contaminated by various chlorinated solvents including trichloroethylene (TCE) and trichloromethane (TCA). The contaminated aquifer had been the source of municipal water supply wells. The results of a limited remedial investigation completed for EPA and the State of Missouri in January 1988, indicate that the source of the TCE contamination was located to the northwest of the Megas facility. The EPA and the State subsequently developed a remediation plan to address the TCE contamination and have executed a Consent Order with a potentially responsible party to implement the plan. The focus of their investigation has now turned to the remediation of the TCA contamination which the limited remedial investigation concluded was originating west southwest of the Megas facility between Marshall Road and the Merrimac River. Megas does not use or have records of having used the identified "hazardous substances" in its facility and has not been found to be a potentially responsible party. The Company has reviewed the EPA limited remediation investigation report and performed limited soil gas analysis on site. The results of the testing did not indicate soil contamination that could have contributed to the underlying plume. Based on the Company's investigation to date, results of the soil gas analyses performed on site, and discussions held with the Missouri Attorney General's office, the Company believes that it is unlikely that Megas will be identified as a potentially responsible party in connection with the EPA Superfund site. In the unlikely event that the Company is identified as a potentially responsible party, the sellers of Megas have agreed to indemnify the Company, until March 3, 2000, for certain environmental matters, including costs incurred in connection with the Valley Park site, in an amount not to exceed $300,000. The Company, after consultation with its advisors, does not believe that any of these matters will have a material effect on the Company's consolidated financial position or results of operations, regardless of any claims to indemnification. 8 ITEM 2 - Properties As of March 9, 1998, the Company owned or leased the following facilities:
Lease Approximate Owned or Termination Products Location Type of Facility Square Feet Leased Date - -------- -------- ---------------- ----------- ------ ---------- Shaving razors and Verona, Virginia Industrial/medical 307,000 Owned blades, bladed hand manufacturing, packaging, tools and blades and distribution, sales, specialty industrial shaving manufacturing and and medical blades corporate offices Knoxville, Tennessee Manufacturing, packaging 125,000 Owned and distribution Obregon, Mexico Manufacturing and packaging 94,000 Leased April 2006 Nazareth Illit, Israel Manufacturing, packaging 65,000 Leased July 2002 distribution and sales Nottinghamshire, Packaging, distribution 36,000 Leased July 2012 United Kingdom and sales Rio Grande, Manufacturing, packaging, 26,000 Leased June 2000 Puerto Rico distribution and sales Cotton and foot care Cleveland, Ohio Manufacturing, packaging, 123,000(1) Leased February 1999 distribution and sales Valley Park, Missouri Manufacturing and packaging 107,000 Owned Nogales, Mexico Manufacturing, packaging 84,000 Leased March 2000 and distribution Dayville, Connecticut Manufacturing and packaging 43,000 Leased September 2002 Sparks, Nevada Manufacturing and packaging 36,000 Leased November 1998 Canavanas, Puerto Rico Manufacturing, packaging 22,000 Leased November 1998 and distribution Soap Dayton, Ohio Manufacturing, packaging, 270,000 Owned distribution and sales Columbus, Indiana Manufacturing, packaging, 20,000 Leased September 2005 distribution and sales
(1) Currently expanding facility to 250,000 square feet. New lease term begins in May 1998, with a lease termination date of April 2013. The Company supplements its distribution capabilities through public warehouse facilities. In addition, the Company uses contract packagers in selected domestic and international markets. The Company believes that the variety of domestic and international locations give the Company operating flexibility. The Company considers all of its facilities to be in good operating condition and adequate for their present purposes. The Company's production facilities are capable of being utilized at a higher capacity to support increased demand, if necessary. 9 ITEM 3 - Legal Proceedings The Company is party to routine litigation incidental to the conduct of its business, the disposition of which is not expected to have a material effect on the Company's consolidated financial position or results of operations. ITEM 4 - Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of stockholders of the Company during the fourth quarter of the fiscal year ended December 31, 1997. Executive Officers of the Registrant Set forth below are the executive officers of the Company as of March 13, 1998, their ages, positions, and a description of their business experiences for the last five years. Except for Mr. Heim, Mr. Casner, Mr. Paterson and Mr. Piron, all of the below named executive officers have been employees of the Company for more than the last five years.
Name Age Position with Company Thomas H. Quinn 50 Chairman and Chief Executive Officer William C. Weathersby 56 President, Chief Operating Officer James V. Heim 44 Senior Vice President - Consumer and Personal Products Thomas G. Kasvin 50 Senior Vice President - Chief Financial Officer Michael M. Casner 53 Vice President - International John R. Lupton 56 Vice President - Operations, Cotton and Foot Care John W. Paterson 55 Vice President - Medical Michael J. Piron 57 Vice President - Technical and Logistics Operations Gary R. Moorhead 49 Vice President - General Manager, Custom Bar Soap William L. Robbins 57 Vice President - Consumer Products Sales Gary S. Wade 49 Vice President - Industrial
Mr. Quinn became Chairman of the Board of Directors of the Company in April 1989, in connection with the acquisition of the Company. Since 1988, Mr. Quinn has been President, Chief Operating Officer and a director of Jordan Industries, Inc., a diversified industrial holding company, and Chairman of the Board and Chief Executive Officer of Welcome Home, Inc., and a director of Ameriking, Inc., and Motors and Gears, Inc. Mr. Weathersby joined the Company in January 1990, and has served as President and a director since that time. Prior to joining the Company, Mr. Weathersby held senior executive positions with Revlon Health Care and Squibb Corporation. From 1985 through 1989, Mr. Weathersby was Group President, Squibb Corporation, and a member of its Executive Committee. Mr. Heim joined the Company in June 1996, and has served as Senior Vice President - Consumer and Personal Products since that time. From November 1985 through May 1996, Mr. Heim held various executive positions with Maybelline Corporation. From September 1994 through May 1996, Mr. Heim was General Manager of Maybelline Canada, Inc./The Yardley Company, and from January 1992 through August 1994, he was Senior Vice President, Maybelline Sales. Mr. Kasvin joined the Company in August 1991, and has served as Vice President - Chief Financial Officer since that time until August 1996, when he became Senior Vice President - Chief Financial Officer. From May 1982 through July 1991, Mr. Kasvin was corporate controller for the Marmon Group, a privately held, diversified manufacturing company. Mr. Casner joined the Company in June 1997, and has served as Vice President - International since that time. Prior to joining the Company, Mr. Casner held various international marketing positions with Helene Curtis, Gillette and Johnson & Johnson. 10 Mr. Lupton has been employed in various positions with the Company since 1982. Currently, Mr. Lupton serves as Vice President - Operations, Cotton and Foot Care. Prior to joining the Company, Mr. Lupton spent eighteen years in various production and engineering positions with General Electric. Mr. Paterson joined the Company in July 1993, and has served as Vice President - Medical since that time. From 1990 through 1992, Mr. Paterson served as Vice President, Marketing and Sales of Cryomedical Sciences. Prior to that time, Mr. Paterson held various sales and marketing positions where he was responsible for the marketing of medical devices with Johnson & Johnson and Abbott Laboratories. Mr. Piron has been Vice President - Technical and Logistics Operations of the Company since January 1994. Prior to joining the Company, Mr. Piron was Vice President of Operations for the Consumer Products Group at Bristol Myers Squibb. From 1963 through 1987, Mr. Piron held various manufacturing and logistics positions in consumer products with Johnson & Johnson, Warner-Lambert and Hoechst Celanese. Mr. Moorhead joined the Company in 1980, in connection with the acquisition of the Hewitt Soap Company and held various sales and marketing positions until April 1997, when he became Vice President - General Manager. Mr. Robbins has been Vice President - Store-Brands of the Company since 1983 and has been employed by the Company since 1973. Prior to joining the Company, Mr. Robbins held various positions with Chesebrough-Pond's and Johnson & Johnson. Mr. Wade has been employed in various sales positions in the Company's industrial blade division since 1978. In 1990, Mr. Wade was appointed Vice President - Industrial. Prior to joining the Company, Mr. Wade was employed in various sales positions by Philip Morris U.S.A. PART II ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock, par value $.01 per share (the "Common Stock") is traded in the over-the-counter market and has been included in the NASDAQ National Market under the symbol "RAZR" since the Company's Form S-1 registration statement relating to the initial public offering of its Common Stock became effective on June 8, 1993. Information with respect to market prices of the Common Stock for each of the quarters in 1996 and 1997 is presented under Item 8 of this Report. As of March 9, 1998, the Company's shares of Common Stock were held by approximately 3,100 shareholders of record (including brokers, dealers, banks and other nominees participating in The Depository Trust Company). The Company has not paid and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. From time to time, the Board of Directors intends to review the Company's dividend policy. Any payment of dividends will be at the discretion of the Board of Directors and will be dependent on the earnings and financial requirements of the Company and other factors, including the restrictions imposed by the General Corporation Law of the State of Delaware on the payment of dividends and covenants in the Company's revolving credit facility and the indenture related to the 9 7/8% Series B Senior Notes described in Note 5 of Notes to Consolidated Financial Statements under Item 8 of this Report. 11 ITEM 6 - Selected Financial Data The following data (in thousands, except per share data) should be read in conjunction with the consolidated financial statements of the Company included under Item 8 of this Report and management's discussion and analysis of financial condition and results of operations included under Item 7 of this Report.
Year ended December 31, Statement of Income Data: 1997 (1) 1996 (2) 1995 (3) 1994 (4) 1993 --------- ----------- ---------- ---------- --------- Net sales $296,607 $260,636 $230,453 $192,573 $158,141 Costs and expenses Cost of sales 196,991 169,949 149,994 119,192 95,884 Selling, general and administrative expenses 60,206 54,867 48,487 43,366 35,593 Amortization of intangible assets 2,501 2,503 2,341 3,219 7,110 Termination of consulting agreement - - - - 1,969 Litigation settlement expense - - 947 - - ---------- ---------- --------- ---------- ---------- Operating income 36,909 33,317 28,684 26,796 17,585 Interest expense 12,270 11,719 10,582 7,580 12,056 ---------- ---------- --------- ---------- ---------- Income before income taxes and extraordinary items 24,639 21,598 18,102 19,216 5,529 Income taxes 9,570 8,425 7,241 7,895 1,961 ---------- ---------- --------- ---------- ---------- Income before extraordinary items 15,069 13,173 10,861 11,321 3,568 Extraordinary items, net of income tax benefit (5) - - (980) - (3,197) ---------- ---------- --------- ---------- --------- Net income $15,069 $ 13,173 $ 9,881 $ 11,321 $ 371 ========== ========== ========= ========== ========= Basic earnings per share: Income before extraordinary items $1.25 $1.09 $0.90 $0.94 $0.34 Extraordinary items - - (0.08) - (0.34) ---------- ---------- --------- ---------- ---------- Net income $1.25 $1.09 $0.82 $0.94 $ - ========== ========== ========= ========== ========== Weighted average number of shares outstanding 12,094 12,093 12,093 12,093 9,550 ========== ========== ========= ========== ========== Diluted earnings per share: Income before extraordinary items $1.23 $1.09 $0.90 $0.93 $0.34 Extraordinary items - - (0.08) - (0.34) ---------- ---------- --------- ---------- ---------- Net income $1.23 $1.09 $0.82 $0.93 $ - ========== ========== ========= ========== ========== Weighted average number of shares outstanding 12,255 12,139 12,135 12,125 9,554 ========== ========== ========= ========== ========== December 31, Balance Sheet Data: 1997 1996 1995 1994 1993 ---------- ---------- --------- ---------- ---------- Total assets $254,081 $229,997 $208,263 $180,000 $146,643 Long-term obligations, including current portion 123,612 112,181 109,789 99,577 94,297 Stockholders' equity 59,439 44,523 30,898 21,139 9,592
(1) The Company's results of operations include results for the Cotton Division of American White Cross, Inc. ("AWC") since its April 22, 1997, acquisition date. Results for the period ended December 31, 1997, include net sales of AWC of $21.1 million. 12 (2) The Company's results of operations include results for Bond-America Israel Blades, Ltd., and its wholly-owned subsidiary, A.I. Blades, Inc. (collectively, "Bond") since its March 29, 1996, acquisition date. Results for the period ended December 31, 1996, include net sales of Bond of $11.2 million. (3) The Company's results of operations include results for Absorbent Cotton Company ("ACCO") since its March 3, 1995, acquisition date. Results for the period ended December 31, 1995, include net sales of ACCO of $16.6 million. (4) The Company's results of operations include results for Megas Beauty Care, Inc., ("Megas") since its June 10, 1994, acquisition date. Results for the period ended December 31, 1994, include net sales of Megas of $18.7 million. (5) Extraordinary items relate to the early extinguishment of debt (see Note 5 to the Consolidated Financial Statements). ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations The following table sets forth information with respect to the Company's business segments:
Year ended December 31, ---------------------------------------------------- 1997 1996 1995 --------------- --------------- --------------- (Dollars in millions) Net Sales: Razors and blades Shaving razors and blades (1) $120.8 40.8% $114.4 43.9% $ 97.1 42.2% Bladed hand tools and blades 45.4 15.3 40.7 15.6 39.2 17.0 Specialty industrial and medical blades 16.4 5.5 16.5 6.4 15.8 6.8 ------ ------ ------ ----- ------ ------ Total 182.6 61.6 171.6 65.9 152.1 66.0 Cotton and foot care (2) 80.4 27.1 55.8 21.4 48.7 21.1 Custom bar soap 33.6 11. 33.2 12.7 29.7 12.9 ------ ------ ------ ----- ------ ------ Total $296.6 100.0% $260.6 100.0% $230.5 100.0% Operating Income: Razors and blades $ 26.5 14.5% $ 26.4 15.4% $ 24.1 15.9% Cotton and foot care 6.3 7.8 4.1 7.3 3.0 6.2 Custom bar soap 4.1 12.3 2.8 8.4 1.6 5.3 ------ ------ ------ Total $ 36.9 12.4% $ 33.3 12.8% $ 28.7 12.4%
(1) The year ended December 31, 1996, includes net sales of Bond of $11.2 million since its March 29, 1996, acquisition date. (2) The year ended December 31, 1997, includes net sales of AWC of $21.1 million since its April 22, 1997, acquisition date, the year ended December 31, 1995, includes net sales of ACCO of $16.6 million since its March 3, 1995, acquisition date and the year ended December 31, 1994, includes net sales of Megas of $18.7 million since its June 10, 1994, acquisition date. GENERAL The following discussion of results of operations and financial condition is based upon and should be read in conjunction with the Consolidated Financial Statements of the Company and notes thereto included under Item 8 of this Report. Forward-Looking Statements Management's discussion and analysis of financial condition and results of operations and other sections of this annual report contain forward-looking statements relating to future results of the Company. Such forward-looking statements are identified by use of forward-looking words such as "anticipates", "believes", "plans", "estimates", "expects", and "intends" or words or phrases of similar expression. These forward-looking statements are subject to various assumptions, risks and uncertainties, including but not limited to, changes in political and economic conditions, demand for the Company's products, acceptance of new products, technology developments affecting the Company's products and to those discussed in the Company's filings with the Securities and Exchange Commission. Accordingly, actual results could differ materially from those contemplated by the forward-looking statements. In 1997, the Company posted record net sales of $296.6 million. Net sales benefited from the Company's purchase on April 22, 1997, of certain assets of the Cotton Division of American White Cross, Inc. ("AWC"), a manufacturer and distributor of store-brand and value-brand cotton swabs, cotton rounds and squares, cotton balls and puffs, pharmaceutical coil and cotton rolls. Sales by AWC since its acquisition date were $21.1 million. The Company's operating income of $36.9 million or 12.4% of net sales was also a record. Net income for 1997 of $15.1 million set another record, rising 14.4%, or $1.25 for basic earnings per share compared to net income of $13.2 million, or $1.09 for basic earnings per share for 1996. Diluted earnings per share for 1997 was $1.23 compared to diluted earnings per share for 1996 of $1.09. 13 The Company is a leading designer, manufacturer and marketer of high quality store, value and premium-brand consumer products. The Company's principal products consist of razors and blades, sales of which are broken into three broad categories, shaving razors and blades, bladed hand tools and blades, and specialty industrial and medical blades. The Company also manufactures cotton and foot care products and custom bar soaps. The Company distributes its products to the retail and professional trades in the United States and in selected international markets. The Company's operating strategy consists of four key elements: (i) expand offerings of store-brand and value-brand personal care consumer products through strategic acquisitions; (ii) increase penetration of markets currently served by the Company and enter new markets; (iii) develop new products and product line extensions; and (iv) reduce operating costs and improve productivity. This strategy contemplates that the Company will acquire or dispose of businesses that assist the Company in attaining its strategic goals. YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net Sales. Net sales for 1997 and 1996 were $296.6 million and $260.6 million, respectively, an increase of $36.0 million, or 13.8%. Sales by AWC, since its April 22, 1997, acquisition date, contributed $21.1 million to the net sales increase and sales by Bond, since its March 29, 1996, acquisition date, contributed $1.9 million to the net sales increase. The impact of increases in unit volume and new product offerings within the Company's other operating units accounted for substantially all of the remaining $13.0 million increase in net sales. Net sales of the Company's shaving razors and blades for 1997 and 1996 were $120.8 million and $114.4 million, respectively, an increase of $6.4 million or 5.6%. Net sales of domestic private-brand shaving products increased 8.2% primarily benefiting from continued growth in sales of the Company's MBC(TM) products and increased promotional support of products by major customers. Net sales of international shaving products increased 5.1% reflecting stronger sales, primarily in Canada, Latin America, Mexico, the United Kingdom, Russia, and Asia. International net sales were negatively impacted approximately 4% by unfavorable exchange rates. Net sales of domestic branded shaving products were up marginally for the year. Net sales of bladed hand tools and blades for 1997 and 1996 were $45.4 million and $40.7 million, respectively, an increase of $4.7 million or 11.6%. This strong growth primarily reflects increased sales of the Company's American Line(TM) and Personna(R) brands of products as a result of new distribution gains and product line extensions. Net sales of specialty industrial and medical blades for 1997 and 1996 were $16.4 million and $16.5 million, respectively, a decrease of $0.1 million, or 0.8%. Sales of specialty industrial products decreased 5.6% due primarily to cyclical usage and purchasing patterns by certain customers and mix shifts to lower priced blade products. Sales of medical products increased 4.6% due to an expanding customer base and new product offerings. Net sales of cotton and foot care products, excluding AWC, for 1997 and 1996 were $59.3 million and $55.8 million, respectively, an increase of $3.5 million, or 6.1%. Cotton and foot care experienced sales growth across most of its product lines due primarily to increased distribution of products. Net sales of the Company's custom bar soap products for 1997 and 1996 were $33.6 million and $33.2 million, respectively, an increase of $0.4 million, or 1.4%. This increase primarily reflects the continued growth in sales of the Company's pharmaceutical/skin care products. Gross Profit. Gross profit increased $8.9 million to $99.6 million for 1997 from $90.7 million for 1996. As a percentage of net sales, gross profit was 33.6% for 1997 and 34.8% for 1996. This decrease was primarily due to the lower margins earned in the newly acquired AWC cotton operations and the negative impact of unfavorable exchange rates. This decrease was somewhat offset by lower production costs in the shaving blades and synthetic soap operations and lower material costs in the cotton operations. Operating and Other Expenses. Selling, general and administrative expenses were 20.3% of net sales for 1997, compared to 21.1% for 1996. This decrease 14 primarily reflects spreading these costs over an increased sales base due to the AWC acquisition. Amortization of goodwill and other intangible assets was unchanged at $2.5 million for 1997 and 1996. Interest expense increased in 1997 to $12.3 million from $11.7 million in 1996 primarily reflecting increased borrowings to finance the AWC acquisition. The Company's effective income tax rate for 1997 and 1996 was 38.8% and 39.0%, respectively. (See Note 9 to the Consolidated Financial Statements.) YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net Sales. Net sales for 1996 and 1995 were $260.6 million and $230.5 million, respectively, an increase of $30.1 million, or 13.1%. Sales by Bond, since its March 29, 1996, acquisition date, contributed $11.2 million to the net sales increase. The impact of increases in unit volume and new product introductions within the Company's other operating units accounted for substantially all of the remaining $18.9 million increase in net sales. Net sales of the Company's shaving razors and blades for 1996 (excluding Bond) and 1995 were $103.2 million and $97.1 million, respectively, an increase of $6.1 million or 6.3%. Net sales of domestic branded shaving products increased 10.7%, primarily benefiting from increased promotional programs and continued strength in the MBC(TM), Lady MBC(TM) and Burma Shave(R) shaving system line of products. Net sales of international shaving products (excluding Bond) increased 6.6%, primarily benefiting from increased distribution of the MBC(TM) and Lady MBC(TM) line of products and from increased sales primarily in Canada, Mexico, Europe and the Far East. In addition, international net sales during 1996 were negatively impacted by exchange rate fluctuations. Net sales of domestic private-brand shaving products increased 1.5% and also benefitted from sales of the Company's MBC(TM) and Lady MBC(TM) products. Net sales of bladed hand tools and blades for 1996 and 1995 were $40.7 million and $39.2 million, respectively, an increase of $1.5 million or 3.8%. This increase primarily reflects increased sales of the Company's American Line(TM) and Personna(R) line of products and increased product promotions. Net sales of specialty industrial and medical blades for 1996 and 1995 were $16.5 million and $15.8 million, respectively, an increase of $0.7 million, or 5.0%. Sales of specialty industrial products decreased 5.2% due primarily to inventory adjustments at major original equipment manufacturers and other user customers. Sales of medical products increased 19.7% due to new product introductions and an expanding customer base. Net sales of cotton and foot care products for 1996 and 1995 were $55.8 million and $48.7 million, respectively, an increase of $7.1 million, or 14.7%. On a fully comparable basis (including 1995 net sales of ACCO of $3.1 million prior to its acquisition date), net sales increased $4.1 million, or 7.9%. Cotton and foot care experienced sales growth across all of its product lines, particularly in cotton pads, swabs, and tissues primarily resulting from increased product promotions and increased sales to certain customers. Net sales of the Company's custom bar soap products for 1996 and 1995 were $33.2 million and $29.7 million, respectively, an increase of $3.5 million, or 11.6%. This increase primarily reflects the strong growth in sales of the Company's pharmaceutical/skin care products. Gross Profit. Gross profit increased $10.2 million to $90.7 million for 1996 from $80.5 million for 1995. As a percentage of net sales, gross profit was 34.8% for 1996 and 34.9% for 1995. This decrease was primarily due to the lower margins earned on sales of Bond products and higher depreciation expense, related to the Company's capacity expansion projects. This decrease was substantially offset by lower production costs resulting from increased output from the Company's Mexico operations and the Columbus, Indiana, synthetic soap operations and from cotton and foot care's efforts to control manufacturing costs while increasing sales volume, lower material costs and lower shipping costs primarily resulting from negotiating lower shipping rates with carriers. Operating and Other Expenses. Selling, general and administrative expenses were substantially unchanged at 21.1% of net sales for 1996 compared to 21.0% for 15 1995. Amortization of goodwill and other intangible assets increased for 1996 to $2.5 million from $2.3 million for 1995, primarily reflecting an increase in amortization of goodwill relating to the ACCO and Bond acquisitions. Litigation settlement expense of $0.9 million, including legal fees, relates to the American Medical Manufacturing, Inc. suit which was settled in June 1995. Interest expense increased in 1996 to $11.7 million from $10.6 million in 1995 primarily reflecting the higher interest rate resulting from the Company's debt offering in August 1995, and from increased borrowings to finance the ACCO and Bond acquisitions. The Company's effective income tax rate for 1996 and 1995 was 39.0% and 40.0%, respectively. (See Note 9 to the Consolidated Financial Statements.) LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are cash generated from operating activities and borrowings under its revolving credit facility. Net cash provided by operating activities amounted to $12.0 million and $25.5 million for 1997 and 1996, respectively. The decrease of $13.5 million in net cash provided by operating activities for 1997 as compared to 1996 was due primarily to (i) an increase in trade accounts receivable for the Company's newly acquired AWC operations, (ii) the timing of customer payments, (iii) strong year end sales which increased trade accounts receivable, (iv) an increase in inventories to improve customer service, and (v) the payment of certain tax liabilities. In connection with the April 22, 1997, acquisition of AWC, the Company borrowed $9.8 million under its revolving credit facility. At December 31, 1997, long-term indebtedness amounted to $123.6 million (including the current portion of $2.1 million), and the Company had approximately $32.0 million available for future borrowings and letters of credit under its revolving credit facility. The weighted-average interest rate incurred by the Company with respect to its debt obligations in 1997 was approximately 9.5%. The Company's liquidity requirements are primarily the funding of working capital needs, which consist of inventory and trade receivables, capital expenditures and scheduled principal and interest payments on indebtedness. Capital expenditures in 1997 totaled $13.8 million, as compared to $11.3 million in 1996 and $12.4 million in 1995. The Company anticipates spending approximately $13.1 million in 1998 for capital expenditures. Management believes that the Company's cash on hand, anticipated funds from operations and the amounts available to the Company under its revolving credit facility will be sufficient to cover its working capital, capital expenditures, debt service requirements and tax obligations as well as the Company's growth-oriented strategy for its existing business for at least the next 12 months. The Company anticipates that funding of any additional acquisitions will require additional borrowings under its revolving credit facility. The Company intends to maintain and further strengthen its financial condition and, in connection therewith, may from time to time consider other possible transactions, including other capital markets transactions or dispositions of businesses that no longer meet strategic objectives. The Company has engaged Paine Webber, Inc. to explore strategic alternatives which could involve a recapitalization, merger or sale of the Company. Currently, the Company has not entered into any agreement or commitments concerning any such alternatives. New Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income." FAS 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. FAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In June 1997, the FASB issued FAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." FAS 131 establishes standards for reporting information about operating segments. It also establishes standards for disclosures about products and services, geographic areas, and major customers. 16 In February 1998, the FASB issued FAS No. 132, "Employers' Disclosures About Pension and Other Postretirement Benefits." FAS 132 establishes standards for disclosure of pension and postretirement benefit information. These new standards are effective for periods beginning after December 15, 1997, and require comparative information for earlier years to be restated. The implementation of these new standards will not affect the Company's results of operations or financial position, but may impact future financial statement disclosures. ITEM 8 - Financial Statements and Supplementary Data The consolidated financial statements of the registrant are submitted as a separate section of this Report starting on page 20. Information related to "Quarterly Data (Unaudited)" is summarized below: 1997 ----------------------------------------------------- First Second Third Fourth ----- ------ ----- ------ (In thousands, except per share and market price data) Net sales $63,103 $75,683 $79,061 $78,760 Gross profit 21,678 24,272 26,588 27,078 Net income 2,554 3,385 4,438 4,692 Earnings per share Basic .21 .28 .37 .39 Diluted .21 .28 .36 .38 Market price High 15.75 18.13 19.38 20.75 Low 12.88 13.38 16.00 16.25 1996 ------------------------------------------------------ First Second Third Fourth ----- ------ ----- ------ (In thousands, except per share and market price data) Net sales $57,460 $64,862 $71,052 $67,262 Gross profit 19,917 22,377 24,638 23,755 Net income 2,267 2,850 4,092 3,964 Earnings per share Basic .19 .24 .34 .33 Diluted .19 .23 .34 .33 Market price High 9.75 12.25 12.25 14.00 Low 7.50 9.00 9.88 11.50 ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 17 PART III ITEMS 10, 11, 12, AND 13. The information required by these Items, other than the information set forth in Part I under the Section entitled "Executive Officers of the Registrant", is hereby incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A for its Annual Meeting of Stockholders to be held on May 19, 1998. PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K. (a) (1), (2) and (3)--The response to this portion of Item 14 is submitted as a separate section of this Report starting on page 20. (b) Reports on Form 8-K filed in the fourth quarter of 1997. None (c) Exhibits--The response to this portion of Item 14 is submitted as a separate section of this Report starting on page 47. (d) Financial Statement Schedule--The response to this portion of Item 14 is submitted as a separate section of this Report on page 46. 18 Signatures Pursuant to the requirements of Section 13 or 15(d) 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, as of the 17th day of March 1998. AMERICAN SAFETY RAZOR COMPANY /s/Thomas H. Quinn ----------------------------- Thomas H. Quinn Chairman of the Board and Chief Executive Officer Power of Attorney Each person whose signature appears below hereby constitutes and appoints William C. Weathersby and Jonathan F. Boucher, and each of them, the true and lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned and to file the same, with all exhibits thereto, in any and all capabilities, to sign any and all amendments (including post-effective exhibits thereto, and other documents in connection therewith) with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities as of the 17th day of March 1998. Signature Title /s/ Thomas H. Quinn Chairman of the Board and -------------------------- Chief Executive Officer Thomas H. Quinn (Principal Executive Officer) /s/ William C. Weathersby Director, President and -------------------------- Chief Operating Officer William C. Weathersby /s/ Thomas G. Kasvin Senior Vice President -------------------------- Chief Financial Officer Thomas G. Kasvin (Principal Financial Officer and Principal Accounting Officer) /s/ Jonathan F. Boucher Director, Vice President and -------------------------- Assistant Secretary Jonathan F. Boucher /s/ John W. Jordan II Director -------------------------- John W. Jordan II /s/ David W. Zalaznick Director -------------------------- David W. Zalaznick /s/ John R. Lowden Director -------------------------- John R. Lowden /s/ Paul D. Rhines Director -------------------------- Paul D. Rhines /s/ D. Patrick Curran Director -------------------------- D. Patrick Curran /s/ William C. Ballard, Jr. Director -------------------------- William C. Ballard, Jr. 19 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) and (2), (c) and (d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULE YEAR ENDED DECEMBER 31, 1997 AMERICAN SAFETY RAZOR COMPANY STAUNTON, VIRGINIA 20 FORM 10-K--ITEM 14(a)(1) AND (2) American Safety Razor Company List of Financial Statements and Financial Statement Schedule The following consolidated financial statements of American Safety Razor Company are included in Item 8: Consolidated Balance Sheets--December 31, 1997 and 1996 Consolidated Statements of Income--Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows--Years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements--December 31, 1997 The following consolidated financial statement schedule of American Safety Razor Company is included in Item 14(d): Schedule II Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 21 AMERICAN SAFETY RAZOR COMPANY CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 1997 1996 ---------- --------- Assets Current assets: Cash and cash equivalents ..................... $ 1,434 $ 1,979 Trade receivables, less allowances of ......... 45,277 37,904 $3,461 in 1997, and $2,558 in 1996 Inventories ................................... 51,488 43,866 Income taxes receivable ....................... 896 -- Deferred income taxes ......................... 2,803 3,760 Prepaid expenses .............................. 1,410 1,833 --------- --------- Total current assets .............................. 103,308 89,342 Property and equipment, net ....................... 72,943 61,022 Intangible assets, net: Goodwill ...................................... 68,978 70,678 Other ......................................... 4,258 5,055 --------- --------- 73,236 75,733 Prepaid pension cost and other .................... 4,594 3,900 --------- --------- Total assets ...................................... $ 254,081 $ 229,997 ========= ========= Liabilities and stockholders' equity Current liabilities: Accounts payable .............................. $ 15,704 $ 14,212 Accrued expenses .............................. 10,772 10,195 Payroll and related liabilities ............... 5,720 5,220 Accrued interest .............................. 4,269 4,234 Income taxes payable .......................... -- 370 Current maturities of long-term obligations ... 2,107 1,419 --------- --------- Total current liabilities ......................... 38,572 35,650 Long-term obligations ............................. 121,505 110,762 Retiree health and insurance benefits ............. 22,966 22,292 Pension and other liabilities ..................... 2,017 3,383 Deferred income taxes ............................. 9,582 13,387 --------- --------- Total liabilities ................................. 194,642 185,474 --------- --------- Contingent liabilities and commitments Stockholders' equity: Common Stock, $.01 par value, 25,000,000 shares authorized; 12,098,049 shares issued and outstanding in 1997, 12,092,849 in 1996 121 121 Additional capital ................................ 65,801 65,756 Deficit ........................................... (5,645) (20,714) Foreign currency translation ...................... (838) (640) --------- --------- 59,439 44,523 Total liabilities and stockholders' equity ........ $ 254,081 $ 229,997 ========= ========= See accompanying notes. 22 AMERICAN SAFETY RAZOR COMPANY CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Year ended December 31, 1997 1996 1995 --------- --------- --------- Net sales ....................................... $ 296,607 $ 260,636 $ 230,453 Cost of sales ................................... 196,991 169,949 149,994 --------- --------- --------- Gross profit .................................... 99,616 90,687 80,459 Selling, general and administrative expenses .... 60,206 54,867 48,487 Amortization of intangible assets ............... 2,501 2,503 2,341 Litigation settlement expense ................... -- -- 947 --------- --------- --------- Operating income ................................ 36,909 33,317 28,684 Interest expense ................................ 12,270 11,719 10,582 --------- --------- --------- Income before income taxes and extraordinary item 24,639 21,598 18,102 Income taxes .................................... 9,570 8,425 7,241 --------- --------- --------- Income before extraordinary item ................ 15,069 13,173 10,861 Extraordinary item, net of income tax benefit of $654 in 1995 .................... -- -- (980) Net income ...................................... $ 15,069 $ 13,173 $ 9,881 ========= ========= ========= Basic earnings per share: Income before extraordinary item ............ $ 1.25 $ 1.09 $ .90 Extraordinary item .......................... -- -- (.08) --------- --------- --------- Net income .................................. $ 1.25 $ 1.09 $ .82 ========= ========= ========= Weighted average number of shares outstanding 12,094 12,093 12,093 ========= ========= ========= Diluted earnings per share: Income before extraordinary item ............ $ 1.23 $ 1.09 $ .90 Extraordinary item .......................... -- -- (.08) --------- --------- --------- Net income .................................. $ 1.23 $ 1.09 $ .82 ========= ========= ========= Weighted average number of shares outstanding 12,255 12,139 12,135 ========= ========= =========
See accompanying notes. 23 AMERICAN SAFETY RAZOR COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year ended December 31, 1997 1996 1995 --------- --------- --------- Operating activities Net income ......................................... $ 15,069 $ 13,173 $ 9,881 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary charge ....................... -- -- 980 Depreciation ............................... 8,624 8,081 6,592 Amortization ............................... 2,501 2,503 2,341 Interest and financing costs ............... 540 727 997 Deferred income taxes ...................... 1,834 273 1,446 Retiree health and insurance benefits ...... 674 684 858 Pension and other .......................... (2,023) 254 301 Changes in operating assets and liabilities net of effects of acquisitions: Trade receivables ...................... (7,685) (1,213) (3,210) Inventories ............................ (3,619) (171) (3,445) Income taxes receivable ................ (896) -- -- Prepaid expenses ....................... 423 (119) (244) Accounts payable ....................... 1,492 666 (889) Accrued and other expenses ............. (70) 998 2,061 Income taxes payable ................... (4,827) (343) 539 --------- --------- --------- Net cash provided by operating activities .......... 12,037 25,513 18,208 Investing activities Capital expenditures (net of disposals of $84 in 1997, $74 in 1996 and $268 in 1995) .......... (13,714) (11,269) (12,109) Acquisitions, net of cash acquired ................. (10,300) (16,673) (7,704) Deferred loan costs and other ...................... (3) 62 (4,452) --------- --------- --------- Net cash used in investing activities .............. (24,017) (27,880) (24,265) Financing activities Repayment of long-term obligations ................. (553) (11,225) (118,269) Proceeds from borrowings ........................... 11,943 13,424 125,795 Proceeds from exercise of stock options ............ 45 -- -- --------- --------- --------- Net cash provided from financing activities ........ 11,435 2,199 7,526 --------- --------- --------- Net increase (decrease) in cash and cash equivalents (545) (168) 1,469 Cash and cash equivalents, beginning of period ..... 1,979 2,147 678 --------- --------- --------- Cash and cash equivalents, end of period ........... $ 1,434 $ 1,979 $ 2,147 ========= ========= =========
See accompanying notes. 24 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company American Safety Razor Company and its subsidiaries (the "Company") is a leading designer, manufacturer and marketer of high quality store, value and premium-brand consumer products. The Company's principal products consist of shaving razors and blades, bladed hand tools and blades, specialty industrial and medical blades, cotton and foot care products, and custom bar soaps principally sold to the retail and professional trades in the United States and in selected international markets. Basis of Presentation The consolidated financial statements have been prepared in accordance with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Accordingly, actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of American Safety Razor Company and its subsidiaries, all of which are wholly-owned. The consolidated financial statements also include the accounts of The Cotton Division of American White Cross, Inc., ("AWC"), Bond-America Israel Blades, Ltd., and its wholly-owned U.S. subsidiary, A.I. Blades, Inc. (collectively, "Bond") and Megas Beauty Care, Inc., ("Megas") since their acquisition dates (see Note 13). During March 1996, Megas Beauty Care, Inc., was merged into Absorbent Cotton Company ("ACCO"), which was acquired on March 3, 1995, and ACCO changed its name to Megas Beauty Care, Inc. ("Megas"). All significant intercompany accounts and transactions have been eliminated in consolidation. Inventories Inventories are stated at the lower of cost or market. Cost for approximately 61 percent and 56 percent of inventories for 1997 and 1996, respectively, is determined by the last-in, first-out ("LIFO") method. Cost of the remaining inventories, operating supplies and inventories of foreign and certain domestic subsidiaries, is determined by the first-in, first-out method. Long-Lived Assets Property and equipment are stated on the basis of cost. Expenditures for renewals and betterments are capitalized, and expenditures for repairs and maintenance are expensed as incurred. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets, which are as follows: Land improvements 5-20 years Buildings and improvements 15-40 years Machinery and equipment 3-15 years Intangible assets are stated on the basis of cost. Goodwill is being amortized on a straight-line basis over a forty-year period. The Company periodically reviews its long-lived assets to assess recoverability or impairment based on expectations of undiscounted cash flows and the assets' carrying amount. Any impairment in carrying value would be recognized in operating results if a permanent decline in value were to occur. Noncompete agreements are being amortized using the straight-line method over the terms of the related agreements. Deferred loan costs are amortized using the straight-line method over the term of the related long-term obligations. Advertising Expenses Advertising costs are expensed when incurred and approximated $2,318,000 in 1997, $732,000 in 1996, and $1,161,000 in 1995. Foreign Currency Translation The accounts of the Company's foreign subsidiaries are generally measured using local currency as the functional currency. Accordingly, assets and liabilities are translated into U.S. dollars at period-end exchange rates, and income and expense are translated at average monthly exchange rates. Net exchange gains or losses resulting from such translations are excluded from net earnings and accumulated as a separate component of stockholders' equity. Gains and losses from foreign currency transactions are included in net earnings and are not significant in amount. The effect of exchange rate changes on cash flows is not material. 25 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Financial Instruments The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable, debt obligations and foreign currency forward contracts. Because of their short maturity, the carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value. Fair value of debt obligations is based on quoted market prices for the same or similar issues. Fair value of foreign currency forward contracts is based on quoted market prices. The Company periodically hedges certain foreign currency exposures through a hedging program. Gains and losses on these contracts are deferred and offset against foreign exchange gains or losses on the underlying hedged transaction. At December 31, 1997, there were no foreign exchange forward contracts outstanding. At December 31, 1996, there were approximately $2,370,000 of foreign exchange forward contracts outstanding and the carrying values of these contracts approximated their fair values. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables. The Company restricts its cash and cash equivalents to financial institutions with high credit ratings and credit risk on trade receivables is minimized due to the diverse geographic areas covered by the Company's operations and its diverse customer base. Earnings Per Share In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Diluted earnings per share include the dilutive effects of options, warrants and convertible securities. The Company adopted FAS 128 effective December 31, 1997. Earnings per share amounts for all periods prior to December 31, 1997, have been restated as required to comply with FAS 128. The difference between the weighted average number of shares outstanding for computing basic earnings per share and diluted earnings per share relates to the Company's employee stock options outstanding which are assumed to be converted for the diluted earnings per share calculation when the average market price of the Company's common stock for the period exceeds the exercise price of the employee stock options which are outstanding. Statement of Cash Flows The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company paid income taxes of $13,516,000 in 1997, $8,750,000 in 1996, and $4,296,000 in 1995. The Company paid interest of $11,706,000 in 1997, $11,123,000 in 1996, and $5,610,000 in 1995. Stock Options The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company provides additional pro forma disclosures of the fair-value based method in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (See Note 10). New Accounting Standards In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive Income." FAS 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. FAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. In June 1997, the FASB issued FAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." FAS 131 establishes standards for reporting information about operating segments. It also establishes standards for disclosures about products and services, geographic areas, and major customers. In February 1998, the FASB issued FAS No. 132, "Employers' Disclosures About Pension and Other Postretirement Benefits." FAS 132 establishes standards for disclosure of pension and postretirement benefit information. 26 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS These new standards are effective for periods beginning after December 15, 1997, and require comparative information for earlier years to be restated. The implementation of these new standards will not affect the Company's results of operations or financial position, but may impact future financial statement disclosures. 2. INVENTORIES Inventories consisted of: December 31, 1997 1996 -------- -------- (In thousands) Raw materials $20,352 $15,463 Work in process 5,596 5,951 Finished goods 23,128 20,289 Operating supplies 3,107 2,819 -------- -------- 52,183 44,522 Excess of current cost over LIFO inventory value 695 656 -------- -------- $51,488 $43,866 ======== ======== 3. PROPERTY AND EQUIPMENT Property and equipment consisted of: December 31, 1997 1996 -------- -------- (In thousands) Land and land improvements $ 1,872 $ 1,817 Buildings and improvements 9,959 9,843 Machinery and equipment 92,965 73,158 Construction in progress 9,853 10,216 -------- -------- 114,649 95,034 Less accumulated depreciation (41,706) (34,012) -------- -------- $72,943 $61,022 ======== ======== 4. INTANGIBLE ASSETS Intangible assets consisted of: December 31, 1997 1996 -------- -------- (In thousands) Goodwill $84,396 $83,996 Noncompete agreements 2,522 2,422 Deferred loan costs and other 4,256 4,250 ------- ------- 91,174 90,668 Less accumulated amortization (17,938) (14,935) ------- ------- $73,236 $75,733 ======= ======= 27 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LONG-TERM OBLIGATIONS Long-term obligations consist of the following: December 31, 1997 1996 --------- -------- (In thousands) Revolving loans, due August 2000 $ 17,300 $ 6,100 9 7/8% Series B Senior Notes, due August 2005 100,000 100,000 9% subordinated note, due June 2000 2,500 2,500 Other: 3% Industrial Development Authority note, due March 30, 2002 1,767 2,078 Other obligations 2,045 1,503 --------- -------- 123,612 112,181 Less current maturities 2,107 1,419 --------- -------- $121,505 $110,762 ========= ======== The Company's revolving credit facility requires payment of an annual commitment fee of .31% on the average daily unborrowed amounts under the facility. Interest is based on the bank's prime rate or the London Interbank offered rate plus 1.25%. The weighted-average interest rate on the Company's outstanding revolving loans was approximately 7.3% at December 31, 1997. Borrowings under this facility mature on August 3, 2000. At December 31, 1997, the Company had approximately $32,000,000 available for future borrowings and letters of credit under its revolving credit facility. The weighted-average interest rate incurred by the Company with respect to its debt obligations, was approximately 9.5% and 9.6% during the years ended December 31, 1997 and 1996, respectively. The 9 7/8% Series B Senior Notes require semi-annual interest payments on August 1 and February 1 of each year and a principal payment of $100,000,000 on August 1, 2005. The 9 7/8% Series B Senior Notes are guaranteed by certain domestic subsidiaries of the Company. The 9% subordinated note was issued to the seller in connection with the Megas acquisition and is due in equal installments on June 10, 1999 and June 10, 2000. The industrial development authority note requires semi-annual payments of $185,000 through September 2001 with a final payment of $435,000 due March 2002. Other obligations include debt obligations of several of the Company's subsidiaries. Maturities of long-term obligations subsequent to December 31, 1997, approximate $2,107,000 in 1998, $1,710,000 in 1999, $19,016,000 in 2000, $350,000 in 2001, $429,000 in 2002 and $100,000,000 thereafter. The Company's trade receivables, inventories and property and equipment are pledged as collateral for the industrial development authority note and trade receivables and inventories are pledged as collateral for the revolving credit facility. The revolving credit facility contains certain financial covenants which require the Company, among other requirements, to meet certain financial ratios relating to interest coverage and indebtedness. The indenture related to the 9 7/8% Series B Senior Notes limits the ability of the Company, among other limitations, to pay dividends, make certain other restricted payments or incur certain additional indebtedness unless it meets a cash flow coverage ratio, as defined. In addition, the Company may be required to offer to purchase Senior Notes equal to 100% of the principal amount thereof, with the proceeds of certain asset sales, as defined. In August 1995, in connection with the repayment of its bank credit agreement and subordinated notes, the Company wrote-off deferred financing costs and paid a prepayment premium in the aggregate amount of approximately $1,634,000. These costs have been presented as an extraordinary charge for early extinguishment of debt of $980,000 (net of a tax benefit) in the results of operations during the year ended December 31, 1995. 28 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FINANCIAL INSTRUMENTS At December 31, 1997 and 1996, the carrying value of the Company's financial instruments approximate their fair values except for the 9 7/8% Series B Senior Notes which have a fair value of approximately $108,000,000 and $105,000,000 at December 31, 1997 and 1996, respectively. 7. RETIREMENT PLANS The Company and certain subsidiaries have defined benefit pension plans covering substantially all employees. Benefits are generally based on employee years of service and compensation. The Company's funding policy is to contribute such amounts as are necessary to provide assets sufficient to meet the benefits to be paid to plan members. The following table sets forth the funded status and amounts recognized in the consolidated balance sheets for the Company's defined benefit pension plans: December 31, 1997 1996 -------- -------- (In thousands) Actuarial present value of benefit obligation: Vested benefit obligation $ 79,380 $ 75,123 ======== ======== Accumulated benefit obligation $ 85,750 $ 81,261 ======== ======== Projected benefit obligation 96,685 91,863 Plan assets at fair value 117,777 102,059 ------- ------- Projected benefit obligation less than plan assets 21,092 10,196 Unrecognized net gain (18,660) (9,450) Unrecognized prior service cost 682 865 -------- -------- Net pension asset $ 3,114 $ 1,611 ======== ======== The significant assumptions used in determining the actuarial present value of the projected benefit obligation were as follows: December 31, 1997 1996 1995 ----- ----- ----- Weighted-average discount rates 7.25% 7.5% 7.5% Rates of increases in compensation levels 5.0% 5.0% 5.0% Expected long-term rates of return on assets 11.0% 11.0% 11.0% Effective December 31, 1997, the weighted-average discount rate was decreased to 7.25% which increased the projected benefit obligation by approximately $3,146,000. Effective December 31, 1995, the weighted-average discount rate was decreased to 7.5% which increased the projected benefit obligation by approximately $8,726,000. The net pension asset is comprised of a prepaid pension asset of $4,034,000 in 1997 and $3,560,000 in 1996 and an accrued pension liability of $920,000 in 1997 and $1,949,000 in 1996. Amortization of unrecognized prior service cost is based on the expected future service of active employees expected to receive benefits. The plan assets were primarily invested in listed common stocks, cash equivalents, corporate bonds and U.S. government debt securities. 29 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the components of net periodic pension cost of the defined benefit plans follows: December 31, 1997 1996 1995 ------- --------- -------- (In thousands) Service cost $ 2,238 $ 2,285 $ 1,841 Interest cost 6,662 6,309 6,017 Actual return on plan assets (20,977) (14,734) (17,677) Net amortization and deferral 10,670 6,013 10,154 -------- -------- -------- Net periodic pension (income) cost $(1,407) $ (127) $ 335 ======== ======== ======== The Company and certain subsidiaries sponsor defined contribution benefit plans for substantially all U.S. employees. The plans permit employees to contribute up to 15% of their salary to the plan. The Company also makes contributions to the plans which approximated $173,000 in 1997, $159,000 in 1996 and $121,000 in 1995. 8. RETIREE HEALTH AND INSURANCE BENEFITS The Company sponsors several defined benefit postretirement medical and life insurance plans providing benefits to certain employees who have worked a minimum of five years and attained age 55 while in service with the Company. The Company requires salaried employees retiring after April 1, 1993, to have 20 years of service after age 40 to receive full benefits and has implemented maximum payments for certain of its hourly employees. Salaried employees hired after May 1, 1991, are not eligible to participate in these postretirement benefit plans. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. The Company's policy is to fund the costs of these medical and life insurance benefit plans as they become due. The following table presents the plans' accumulated postretirement benefit obligation reconciled with amounts recognized in the Company's consolidated balance sheets: December 31, 1997 1996 ------- ------- (In thousands) Accumulated postretirement benefit obligation: Retirees $11,918 $10,133 Fully eligible active plan participants 5,096 3,320 Other active plan participants 7,801 7,936 ------- ------- 24,815 21,389 Unrecognized reduction of prior service cost 1,368 1,854 Unrecognized net loss (3,217) (951) ------- ------- Accrued postretirement benefit cost $22,966 $22,292 ======= ======= Effective December 31, 1997, the weighted-average discount rate used in determining the accumulated postretirement benefit obligation was decreased to 7.25% from 7.5% which increased the accumulated postretirement benefit obligation by approximately $594,000. Effective December 31, 1995, the weighted-average discount rate used in determining the accumulated postretirement benefit obligation was decreased to 7.5% from 8.5% in 1994 and the ultimate health care cost trend rate was changed to 5.75% in 2000 from 6.5% in 2000 which increased the accumulated postretirement benefit obligation by approximately $2,330,000. 30 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net periodic postretirement benefit cost includes the following components: Year Ended December 31, 1997 1996 1995 ------ ------ ------ (In thousands) Service cost $ 548 $ 617 $ 542 Interest cost 1,739 1,533 1,568 Net amortization and deferral (486) (419) (486) ------ ------ ------ Net periodic postretirement benefit cost $1,801 $1,731 $1,624 ====== ====== ====== The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is 7.5% for 1998, (8% for 1997) and is assumed to decline gradually to 5.75% for 2000 and thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. An increase in the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $983,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by $167,000. 9. TAXES ON INCOME The provision for taxes on income is comprised of the following: Year Ended December 31, 1997 1996 1995 ------- ------- ------ (In thousands) Current: Federal $6,869 $6,784 $4,972 State and local 493 393 476 Foreign 374 975 347 ------- ------- ------- Total current 7,736 8,152 5,795 ------- ------- ------- Deferred: Federal 1,708 277 944 State and local 233 26 530 Foreign (107) (30) (28) ------- ------- ------- Total deferred 1,834 273 1,446 ------- ------- ------- Total provision for income taxes $9,570 $8,425 $7,241 ====== ====== ====== The provision for income taxes in 1995 applicable to the extraordinary item consisted of current federal and state income tax benefits of $576,000 and $78,000, respectively. The Company has not provided taxes of approximately $868,000 on the undistributed pre-tax earnings of $10,196,000 of foreign subsidiaries as it is the intent of the Company to support these subsidiaries with such earnings. Income before income taxes and extraordinary item attributable to foreign operations for 1997, 1996 and 1995 was approximately $1,134,000, $2,818,000 and $3,120,000, respectively. 31 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's effective income tax rate varies from the United States statutory rate as follows: Year Ended December 31, 1997 1996 1995 ---- ---- ---- United States rate 35% 35% 35% Foreign taxes in excess of (less than) U.S. rate - 3 (1) State income taxes, net of federal tax benefit 2 4 4 Goodwill amortization 3 3 4 Interest on tax basis adjustments - 11 - Employee benefits and other provisions - 4 - Reduction of valuation allowance - (23) - Other--net (1) 2 (2) ----- ----- ---- Effective income tax rate 39% 39% 40% ===== ===== ==== At December 31, 1997 and 1996, the Company had deferred tax liabilities and assets which have been netted by tax jurisdiction for presentation purposes. The significant components of these amounts at December 31, 1997 and 1996 are as follows: December 31, 1997 1996 ------- ------- (In thousands) Deferred tax liabilities: Property and equipment $ 7,636 $ 7,352 Employee benefits 1,967 1,657 Other 9,720 14,183 ------- ------- Total deferred tax liabilities 19,323 23,192 Deferred tax assets: Employee benefits 10,143 10,135 Selling and promotion costs 513 1,172 Inventories 1,284 1,102 Restructuring costs 134 669 Net operating loss carryforward 216 89 Other 254 398 ------- ------- Total deferred tax assets 12,544 13,565 ------- ------- Net deferred tax liabilities $ 6,779 $ 9,627 ======= ======= The deferred tax liabilities and assets are disclosed in the consolidated balance sheets at December 31, 1997 and 1996 as follows: December 31, 1997 1996 ------- ------- (In thousands) Noncurrent deferred income tax $9,582 $13,387 liabilities Current deferred income tax assets 2,803 3,760 ------ ------- Net deferred tax liabilities $6,779 $ 9,627 ====== ======= During 1996, management determined, based on the Company's recent history of earnings and its expectations for future earnings, that operating income would more likely than not be sufficient to fully recognize the Company's deferred tax assets. Accordingly, in 1996 the Company reversed its valuation allowance of $5 million relating to its deferred tax assets. Included in the deferred tax liabilities-other are the Company's estimated tax liabilities relating to the ultimate outcome of its current Internal Revenue Service (IRS) examinations and other tax issues. Upon favorable ultimate settlement of these matters, up to approximately $5 million of such estimated tax liabilities would reduce goodwill. 32 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's federal income tax returns for 1989 through 1994 have been examined by the IRS. During 1996, the Company provided additional taxes related to its IRS examinations. The Company acquired certain intangible assets at the time of acquisition of the Company and of Ardell for $29 million, and to date the Company has claimed federal income tax deductions of $29 million for the amortization of those assets. In June 1997, the IRS issued a statutory notice of deficiency disallowing substantially all of the Company's amortization deductions relating to the intangible assets. The Company disagrees with the IRS's disallowances and in September 1997, petitioned the U.S. Tax Court to review and redetermine such disallowances. The outcome of these proceedings cannot be predicted at this time and the Company will continue to evaluate the potential impact on its tax reserves for this case. However, the Company believes that the ultimate outcome of these issues will not have a materially adverse impact on the consolidated financial position or results of operations of the Company. 10. STOCKHOLDERS' EQUITY The Company has an incentive stock option plan whereby incentive stock options may be granted to directors, officers and other key employees to purchase a specified number of shares of common stock at a price not less than the fair market value on the date of grant and for a term not to exceed 10 years. The plan provides for the granting of options to purchase up to 750,000 shares of Common Stock. Grants of options for 10,000 shares of Common Stock for each of two new directors issued in June 1993 become exercisable in five equal installments commencing one year from the date of grant. Grants of options issued to key management employees become 40% exercisable two years following the date of grant and the remainder are exercisable over the following three years in equal annual installments. The plan also provides for the granting of stock appreciation rights ("SARs") to officers and key employees with terms of ten years. The terms of the SARs are determined at the time of grant. Upon exercise, holders of SARs are paid, at the option of the Company, cash or Common Stock in an amount equal to the appreciation in market value of such stock between grant date and the exercise date. At December 31, 1997, there were no SARs granted. On February 22, 1996, the compensation committee of the Board of Directors of the Company approved the repricing of all outstanding stock options under the incentive stock option plan based on the market price of the Company's Common Stock at the close of business on February 22, 1996 of $8.63 per share. The stock option data below has been updated for each period presented to give effect to the repricing. The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, "Accounting for Stock-Based Compensation," and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model. Significant weighted-average assumptions used in the model for valuing stock options granted during 1997 and 1996 are as follows: 1997 1996 ---- ---- Risk-free interest rate 6.9% 6.6% Expected life of the option 7.9 years 8.0 years Expected volatility of stock .268 .261 Expected dividend yield 0% 0% 33 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The Company's pro forma information follows (in thousands, except for earnings per share data): 1997 1996 ---- ---- Net income As reported $15,069 $13,173 Pro forma 14,608 12,955 Earnings per share As reported Basic $1.25 $1.09 Diluted 1.23 1.09 Pro forma Basic 1.21 1.07 Diluted 1.19 1.07 Stock options granted during 1997 and 1996 (net of forfeitures and including stock options issued prior to 1996 which were repriced on February 22, 1996), aggregated 121,500 and 365,900 shares, respectively, and their weighted-average estimated fair value at the date of grant is $7.47 and $4.54 per share, respectively. Stock option plan activity is summarized below: Exercise Price Per Share Number of Weighted Shares Range Average -------- -------------- ------ Outstanding at 12-31-94 222,000 $ 8.63 $ 8.63 Cancelled in 1995 (6,000) 8.63 8.63 -------- -------------- ------ Outstanding at 12-31-95 216,000 8.63 8.63 Granted in 1996 154,000 8.63-11.00 10.84 Cancelled in 1996 (2,500) 8.63 8.63 -------- -------------- ------ Outstanding at 12-31-96 367,500 8.63-11.00 9.56 Granted in 1997 121,500 15.38 15.38 Exercised in 1997 (5,200) 8.63 8.63 Cancelled in 1997 (1,600) 8.63-11.00 10.11 -------- ------------- ------ Outstanding at 12-31-97 482,200 $8.63-$15.38 $11.03 ======= ============ ====== Stock options outstanding at December 31, 1997, aggregated 482,200 shares and have a weighted-average remaining contractual life of 7.9 years and a weighted-average exercise price of $11.03 per share. Stock options exercisable at December 31, 1997, 1996 and 1995 totaled 142,460, 103,400 and 35,800 shares, respectively. Stock options exercisable at December 31, 1997, have a weighted-average exercise price of $8.63 per share. Stock options reserved for future grant at December 31, 1997 and 1996 totaled 262,600 and 132,500 shares, respectively. 34 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in the components of stockholders' equity are as follows:
Common Stock ---------------------------------- Foreign Par Additional Currency Shares Value Capital Deficit Translation Total ------------- ------ ---------- --------- ----------- -------- (In thousands, except share data) Balance at December 31, 1994 12,092,849 $121 $65,756 $(43,768) $ (970) $21,139 Foreign currency translation - - - - (122) (122) Net income - - - 9,881 - 9,881 ------------- ------ ---------- --------- -------- -------- Balance at December 31, 1995 12,092,849 121 65,756 (33,887) (1,092) 30,898 Foreign currency translation - - - - 452 452 Net income - - - 13,173 - 13,173 ------------- ------ ---------- --------- -------- ------- Balance at December 31, 1996 12,092,849 121 65,756 (20,714) (640) 44,523 Exercise of stock options 5,200 - 45 - - 45 Foreign currency translation - - - - (198) (198) Net income - - - 15,069 - 15,069 -------------- ------ ---------- ------- ------- -------- Balance at December 31, 1997 12,098,049 $121 $65,801 $(5,645) $(838) $59,439 ============== ====== ========== ======= ======= ========
11. SEGMENT INFORMATION The Company's products are reported in three industry segments which consist of Razors and Blades, Cotton and Foot Care and Custom Bar Soap. The razors and blades segment includes store-brand and value-brand shaving razors and blades, and value-brand disposable and cartridge razors, bladed hand tools and blades, and specialty industrial and medical blades. The cotton and foot care segment includes cotton swabs, cotton balls and puffs, cosmetic pads, tissues, pharmaceutical and beauty coil, and foot care products. The custom bar soap segment includes cosmetic/skin care, bath, pharmaceutical and specialty custom bar soaps.
Industry Segments ----------------- Net Sales Operating Income Year-End Assets --------- ---------------- --------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 -------- ------- -------- -------- -------- -------- -------- -------- -------- (In thousands) Razors and Blades $182,615 $171,611 $152,036 $26,506 $26,474 $24,111 $178,331 $167,468 $143,367 Cotton and Foot Care 80,350 55,856 48,708 6,278 4,074 3,007 49,366 36,126 37,714 Custom Bar Soap 33,642 33,169 29,709 4,125 2,769 1,566 26,384 26,403 27,182 --------- --------- -------- -------- -------- -------- -------- -------- -------- $296,607 $260,636 $230,453 36,909 33,317 28,684 $254,081 $229,997 $208,263 ======== ======== ======== ======== ======== ======== Interest expense 12,270 11,719 10,582 ------- ------- ------- Income before income taxes and extraordinary item $24,639 $21,598 $18,102 ======= ======= ======= Capital Expenditures Depreciation and Amortization ------------------------------ ----------------------------- 1997 1996 1995 1997 1996 1995 -------- -------- -------- -------- -------- -------- Razors and Blades $11,064 $ 9,372 $10,110 $ 7,415 $ 7,503 $6,079 Cotton and Foot Care 1,777 972 856 2,625 1,985 1,901 Custom Bar Soap 957 999 1,411 1,085 1,096 953 -------- -------- -------- -------- ------- ------- $13,798 $11,343 $12,377 $11,125 $10,584 $8,933 ======= ======= ======= ======= ======= ======
Summarized data for the Company's foreign operations (principally in Canada, the United Kingdom, Europe, Israel, Asia Pacific and the Caribbean) are as follows: 1997 1996 1995 -------- -------- --------- (In thousands) Net sales $47,169 $41,948 $32,299 Operating income 1,817 3,335 3,261 Year-end assets 34,850 32,913 16,499 35 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Export sales from the Company's United States operations aggregated $6,798,000 in 1997, $4,816,000 in 1996 and $4,705,000 in 1995. Sales to one of the Company's customers in 1997 amounted to approximately 10% of consolidated net sales. 12. COMMITMENTS, CONTINGENCIES AND OTHER The Company leases buildings, office space and equipment under operating lease agreements which expire on various dates through 2013. Certain leases contain renewal or purchase options which may be exercised by the Company. Rent for leases amounted to approximately $3,033,000 in 1997, $2,697,000 in 1996 and $2,199,000 in 1995. Future minimum rental commitments under all noncancellable operating leases at December 31, 1997 approximate $3,413,000 in 1998, $3,059,000 in 1999, $2,619,000 in 2000, $2,391,000 in 2001 and $2,159,000 in 2002. The Company is subject to litigation incidental to the conduct of its business and is also subject to government agency regulations relating to its products, environmental matters, taxes and other aspects of its business. While the ultimate outcome of proceedings against the Company cannot be predicted with certainty, management does not expect that these matters will have a significant effect on the consolidated financial position or results of operations of the Company. During May 1994, American Medical Manufacturing, Inc. ("AMMI") sued the Company based on a group of claims involving the failure by the Company to fulfill an alleged nationwide distribution agreement relating to AMMI's products. The Company denied the existence of any such agreement. In January 1995, the Company won a motion for summary judgement on certain of the claims and filed an appeal to dismiss the remaining claims which was denied. The case was settled in June 1995, for $947,000 ($568,000 after taxes), including legal fees. These litigation settlement expenses have been reflected in the statement of income for the year ended December 31, 1995. At December 31, 1997 and 1996, outstanding checks less amounts on deposit amounted to $1,690,000 and $1,051,000, respectively, which is included in accounts payable in the accompanying consolidated balance sheets. In addition, at December 31, 1997 and 1996, accrued health insurance claims amounted to $600,000, which is included in accrued expenses in the accompanying consolidated balance sheets. In connection with the Company's restructuring of Ardell, at December 31, 1997 and 1996, the unexpended costs amounted to $357,000 and $1,782,000, respectively, and are included in accrued expenses in the accompanying consolidated balance sheets. 13. ACQUISITIONS On April 22, 1997, the Company purchased certain assets of The Cotton Division of American White Cross, Inc. ("AWC") for net consideration of approximately $10,300,000, including acquisition related expenses. AWC is a manufacturer and distributor of store-brand and value-brand cotton swabs, cotton rounds and squares, cotton balls and puffs, pharmaceutical coil and cotton rolls. The acquisition was financed by borrowings of $9,800,000 under the Company's revolving credit facility and has been accounted for under the purchase method of accounting. On March 29, 1996, the Company purchased certain assets of Israel based Bond-America Israel Blades, Ltd., and its wholly-owned U.S. subsidiary, A.I. Blades, Inc. (collectively, "Bond") for net consideration of approximately $16,673,000, net of cash, including acquisition related expenses. Bond is engaged in the manufacture and distribution of store-brand and value-brand shaving razors and blades. The acquisition was financed by borrowings of $12,718,000 under the Company's revolving credit facility and internally generated funds and has been accounted for under the purchase method of accounting. Goodwill of $2,786,000 is being amortized on a straight-line basis over a forty-year period. On March 3, 1995, the Company purchased all of the capital stock of Sterile Products Corporation, d.b.a. Absorbent Cotton Company ("ACCO") for net consideration of approximately $10,400,000 including assumed debt, net of cash, and acquisition related expenses. ACCO is a manufacturer and distributor of store-brand and value-brand cotton squares, cotton balls and puffs, and pharmaceutical coil. The acquisition was financed by borrowings of $8,800,000 under the Company's revolving credit facility and has been accounted for under the purchase method of accounting. Goodwill of $2,746,000 is being amortized on a straight-line basis over a forty-year period and two noncompete agreements aggregating $422,000 with the former owners are being amortized using the straight-line method over the terms of the agreements which expire in December 2005 and August 2007. 36 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AWC's, Bond's and ACCO's results of operations have been included in the consolidated statement of income since their date of acquisition. Pro forma results of operations for the years ended December 31, 1997 and 1996, as if the AWC and Bond acquisitions occurred as of the beginning of the respective periods, are not presented as the effects are not material. 14. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION The Company's $100,000,000 of Series B Senior Notes due 2005 have been guaranteed, on a joint and several basis by certain domestic subsidiaries of the Company, which guarantees are senior unsecured obligations of each guarantor and will rank pari passu in right of payment with all other indebtedness of each guarantor. However, the guarantee of one of the guarantor subsidiaries ranks junior to its outstanding subordinated note. The following condensed consolidating financial information presents: (1) Condensed consolidating financial statements as of December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996 and 1995, of American Safety Razor Company - the parent company, the guarantor subsidiaries, the non-guarantor subsidiaries, and elimination entries necessary to combine such entities on a consolidated basis, and (2) The investment in subsidiaries carried on the cost basis for purposes of the supplemental financial information. Earnings (losses) of subsidiaries are therefore not reflected in the related investment accounts. During 1997, Ardell Industries, Inc., a non-guarantor subsidiary, was merged into American Safety Razor Company - the parent company. 37 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheets December 31, 1997 Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Assets Current assets: Cash and cash equivalents ..................... $ 356 $ 433 $ 637 $ 8 $ 1,434 Trade receivables, net ........................ 20,172 13,283 11,822 -- 45,277 Advances receivable--subsidiaries ............. 33,608 -- 4,299 (37,907) -- Inventories ................................... 29,106 12,603 10,724 (945) 51,488 Income taxes and prepaid expenses ............. 5,730 (982) 361 -- 5,109 --------- --------- --------- --------- --------- Total current assets ..................... 88,972 25,337 27,843 (38,844) 103,308 Property and equipment, net ........................ 39,836 23,135 9,972 -- 72,943 Intangible assets, net ............................. 51,205 21,585 446 -- 73,236 Prepaid pension cost and other ..................... 297 4,277 20 -- 4,594 Investment in subsidiaries ......................... 39,026 -- 900 (39,926) -- --------- --------- --------- --------- --------- Total assets ............................. $ 219,336 $ 74,334 $ 39,181 $ (78,770) $ 254,081 ========= ========= ========= ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable, accrued expenses and other ................................... $ 19,540 $ 13,346 $ 3,576 $ 3 $ 36,465 Advances payable--subsidiaries ................ -- 37,851 -- (37,851) -- Current maturities of long-term obligations ... 1,020 138 949 -- 2,107 --------- --------- --------- --------- --------- Total current liabilities ................ 20,560 51,335 4,525 (37,848) 38,572 Long-term obligations .............................. 118,748 2,757 -- -- 121,505 Retiree health and insurance benefits and other .... 14,988 9,995 -- -- 24,983 Deferred income taxes .............................. 7,035 2,492 55 -- 9,582 --------- --------- --------- --------- --------- Total liabilities ........................ 161,331 66,579 4,580 (37,848) 194,642 --------- --------- --------- --------- --------- Stockholders' equity Common Stock .................................. 121 485 85 (570) 121 Additional capital ............................ 65,801 15,662 23,694 (39,356) 65,801 Deficit ....................................... (10,407) (8,392) 14,147 (993) (5,645) Dividends ..................................... 2,452 -- (2,452) -- -- Foreign currency translation .................. 38 -- (873) (3) (838) --------- --------- --------- --------- --------- 58,005 7,755 34,601 (40,922) 59,439 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 219,336 $ 74,334 $ 39,181 $ (78,770) $ 254,081 ========= ========= ========= ========= =========
38 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheets December 31, 1996 Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Assets Current assets: Cash and cash equivalents ..................... $ 201 $ 12 $ 1,766 $ -- $ 1,979 Trade receivables, net ........................ 13,923 10,691 13,290 -- 37,904 Advances receivable--subsidiaries ............. 49,343 -- -- (49,343) -- Inventories ................................... 24,030 8,954 11,371 (489) 43,866 Deferred income taxes and prepaid expenses .... 4,224 851 518 -- 5,593 --------- --------- --------- --------- --------- Total current assets ..................... 91,721 20,508 26,945 (49,832) 89,342 Property and equipment, net ........................ 35,995 15,707 9,320 -- 61,022 Intangible assets, net ............................. 52,760 22,472 501 -- 75,733 Prepaid pension cost and other ..................... 73 3,806 21 -- 3,900 Investment in subsidiaries ......................... 29,581 -- 900 (30,481) -- --------- --------- --------- --------- --------- Total assets ............................. $ 210,130 $ 62,493 $ 37,687 $ (80,313) $ 229,997 ========= ========= ========= ========= ========= Liabilities and Stockholders' Equity Current liabilities: Accounts payable, accrued expenses and other ................................... $ 20,299 $ 8,470 $ 5,462 $ -- $ 34,231 Advances payable--subsidiaries ................ -- 34,103 15,206 (49,309) -- Current maturities of long-term obligations ... 1,011 202 206 -- 1,419 --------- --------- --------- --------- --------- Total current liabilities ................ 21,310 42,775 20,874 (49,309) 35,650 Long-term obligations .............................. 107,867 2,895 -- -- 110,762 Retiree health and insurance benefits and other .... 15,515 10,160 -- -- 25,675 Deferred income taxes .............................. 10,956 2,431 -- -- 13,387 --------- --------- --------- --------- --------- Total liabilities ........................ 155,648 58,261 20,874 (49,309) 185,474 --------- --------- --------- --------- --------- Stockholders' equity Common Stock .................................. 121 484 77 (561) 121 Additional capital ............................ 65,756 15,662 14,257 (29,919) 65,756 Deficit ....................................... (13,496) (11,914) 5,217 (521) (20,714) Dividends ..................................... 2,063 -- (2,063) -- -- Foreign currency translation .................. 38 -- (675) (3) (640) --------- --------- --------- --------- --------- 54,482 4,232 16,813 (31,004) 44,523 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 210,130 $ 62,493 $ 37,687 $ (80,313) $ 229,997 ========= ========= ========= ========= =========
39 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Income Year Ended December 31, 1997 Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Net sales .................................. $152,784 $114,365 $ 48,467 $(19,009) $296,607 Cost of sales .............................. 87,037 91,503 36,988 (18,537) 196,991 -------- -------- -------- -------- -------- Gross profit ............................... 65,747 22,862 11,479 (472) 99,616 Selling, general and administrative expenses 37,853 12,269 10,084 -- 60,206 Amortization of intangible assets .......... 1,456 990 55 -- 2,501 -------- -------- -------- -------- -------- Operating income ........................... 26,438 9,603 1,340 (472) 36,909 Interest expense ........................... 9,387 3,923 (1,040) -- 12,270 -------- -------- -------- -------- -------- Income (loss) before income taxes .......... 17,051 5,680 2,380 (472) 24,639 Income taxes ............................... 6,390 2,158 1,022 -- 9,570 -------- -------- -------- -------- -------- Net income (loss) .......................... $ 10,661 $ 3,522 $ 1,358 $ (472) $ 15,069 ======== ======== ======== ======== ========
Condensed Consolidating Statements of Income Year Ended December 31, 1996 Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Net sales .................................. $138,685 $ 89,025 $ 52,710 $(19,784) $260,636 Cost of sales .............................. 79,920 70,313 39,309 (19,593) 169,949 -------- -------- -------- -------- -------- Gross profit ............................... 58,765 18,712 13,401 (191) 90,687 Selling, general and administrative expenses 33,153 11,447 10,267 -- 54,867 Amortization of intangible assets .......... 1,481 980 42 -- 2,503 -------- -------- -------- -------- -------- Operating income ........................... 24,131 6,285 3,092 (191) 33,317 Interest expense ........................... 8,477 3,622 (380) -- 11,719 -------- -------- -------- -------- -------- Income (loss) before income taxes .......... 15,654 2,663 3,472 (191) 21,598 Income taxes ............................... 6,089 1,105 1,231 -- 8,425 -------- -------- -------- -------- -------- Net income (loss) .......................... $ 9,565 $ 1,558 $ 2,241 $ (191) $ 13,173 ======== ======== ======== ======== ========
40 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Income Year Ended December 31, 1995 Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Net sales ........................................... $ 126,275 $ 78,418 $ 40,215 $ (14,455) $ 230,453 Cost of sales ....................................... 72,425 63,229 28,816 (14,476) 149,994 --------- --------- --------- --------- --------- Gross profit ........................................ 53,850 15,189 11,399 21 80,459 Selling, general and administrative expenses ........ 30,176 9,999 8,255 57 48,487 Amortization of intangible assets ................... 1,399 942 -- -- 2,341 Litigation settlement expense ....................... 947 -- -- -- 947 --------- --------- --------- --------- --------- Operating income .................................... 21,328 4,248 3,144 (36) 28,684 Interest expense .................................... 7,166 3,981 (565) -- 10,582 --------- --------- --------- --------- --------- Income (loss) before income taxes and extraordinary item ........................... 14,162 267 3,709 (36) 18,102 Income taxes ........................................ 6,340 321 601 (21) 7,241 --------- --------- --------- --------- --------- Income (loss) before extraordinary item ............. 7,822 (54) 3,108 (15) 10,861 Extraordinary item, net of income tax benefit of $654 (980) -- -- -- (980) --------- --------- --------- --------- --------- Net income (loss) ................................... $ 6,842 $ (54) $ 3,108 $ (15) $ 9,881 ========= ========= ========= ========= =========
41 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Cash Flows Year Ended December 31, 1997 Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Operating activities Net cash (used in) provided by operating activities .................. $ (588) $ 9,941 $ 2,697 $ (13) $ 12,037 Investing activities Capital expenditures ................... (8,115) (2,724) (2,875) -- (13,714) Purchase of AWC, net of cash acquired .. -- (10,300) -- -- (10,300) Other .................................. -- (3) -- -- (3) Investment in subsidiaries ............. (9,445) -- 9,445 -- -- Advances from (to) subsidiaries ........ 6,979 -- -- (6,979) -- -------- -------- -------- -------- -------- Net cash (used in) provided from investing activities ............. (10,581) (13,027) 6,570 (6,979) (24,017) Financing activities Repayment of long-term obligations ..... (310) (243) -- -- (553) Proceeds from borrowings ............... 11,200 -- 743 -- 11,943 Proceeds for exercise of stock options . 45 -- -- -- 45 Advances from (to) subsidiaries ........ -- 3,750 (10,750) 7,000 -- Dividends .............................. 389 -- (389) -- -- -------- -------- -------- -------- -------- Net cash provided from (used in) financing activities ............. 11,324 3,507 (10,396) 7,000 11,435 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents ......................... 155 421 (1,129) 8 (545) Cash and cash equivalents, beginning of period ............................... 201 12 1,766 -- 1,979 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period ......................... $ 356 $ 433 $ 637 $ 8 $ 1,434 ======== ======== ======== ======== ========
42 AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Cash Flows Year Ended December 31, 1996 Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Operating activities Net cash provided by operating activities ..... $ 16,109 $ 7,822 $ 1,580 $ 2 $ 25,513 Investing activities Capital expenditures .......................... (8,711) (1,912) (646) -- (11,269) Purchase of Bond, net of cash acquired ........ (16,673) -- -- -- (16,673) Other ......................................... 62 -- -- -- 62 Investment in subsidiaries .................... (2,301) -- -- 2,301 -- Advances from (to) subsidiaries ............... 7,037 -- -- (7,037) -- -------- -------- -------- -------- -------- Net cash used in investing activities .... (20,586) (1,912) (646) (4,736) (27,880) Financing activities Repayment of long-term obligations ............ (10,949) (276) -- -- (11,225) Proceeds from borrowings ...................... 13,218 -- 206 -- 13,424 Advances from (to) subsidiaries ............... -- (5,672) 938 4,734 -- Dividends ..................................... 2,063 -- (2,063) -- -- -------- -------- -------- -------- -------- Net cash provided from (used in) financing activities .............................. 4,332 (5,948) (919) 4,734 2,199 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents ................................ (145) (38) 15 -- (168) Cash and cash equivalents, beginning of period ...................................... 346 50 1,751 -- 2,147 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period ................................ $ 201 $ 12 $ 1,766 $ -- $ 1,979 ======== ======== ======== ======== ======== 43
AMERICAN SAFETY RAZOR COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statements of Cash Flows Year Ended December 31, 1995 Non- Guarantor guarantor ASR Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------ ------------ ------------ (In thousands) Operating activities Net cash provided by (used in) operating activities .......................... $ 18,041 $ (1,154) $ 1,359 $ (38) $ 18,208 Investing activities Capital expenditures ................... (9,721) (2,000) (388) -- (12,109) Purchase of ACCO, net of cash acquired . (7,704) -- -- -- (7,704) Other .................................. (4,452) -- -- -- (4,452) Investment in subsidiaries ............. (11,295) -- (900) 12,195 -- Advances from (to) subsidiaries ........ 6,101 -- -- (6,101) -- --------- --------- --------- --------- --------- Net cash (used in) provided from investing activities ............. (27,071) (2,000) (1,288) 6,094 (24,265) Financing activities Repayment of long-term obligations ..... (116,837) (1,432) -- -- (118,269) Proceeds from borrowings ............... 125,795 -- -- -- 125,795 Advances from (to) subsidiaries ........ -- 4,633 1,423 (6,056) -- --------- --------- --------- --------- --------- Net cash provided from (used in) financing activities ............. 8,958 3,201 1,423 (6,056) 7,526 --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents ......................... (72) 47 1,494 -- 1,469 Cash and cash equivalents, beginning of period ............................... 418 3 257 -- 678 --------- --------- --------- --------- --------- Cash and cash equivalents, end of period ......................... $ 346 $ 50 $ 1,751 $ -- $ 2,147 ========= ========= ========= ========= =========
44 Report of Independent Accountants Stockholders and Board of Directors American Safety Razor Company We have audited the accompanying consolidated balance sheets of American Safety Razor Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income and cash flows for each of the three years in the period ended December 31, 1997. We have also audited the financial statement schedule listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Safety Razor Company and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information required to be included therein. Coopers and Lybrand L.L.P. Richmond, Virginia February 4, 1998 45
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AMERICAN SAFETY RAZOR COMPANY (IN THOUSANDS) Additions -------------------- Balance Charged to Charged Balance Beginning Costs and to Other End of Description of Period Expenses Accounts Deductions Period - ----------- --------- -------- -------- ---------- ------- Year ended 12-31-97 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ................ $ 1,252 $ 595 $ -- $ 484 (2) $ 1,363 Allowance for discounts and other deductions ... 1,306 4,820 -- 4,028 (3) 2,098 ------- ------- ------- ------- ------- $ 2,558 $ 5,415 $ -- $ 4,512 $ 3,461 ======= ======= ======= ======= ======= Year ended 12-31-96 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ................ $ 1,026 $ 593 $ 3 (1) $ 370 (2) $ 1,252 Allowance for discounts and other deductions ... 986 3,223 32 (1) 2,935 (3) 1,306 ------- ------- ------- ------- ------- $ 2,012 $ 3,816 $ 35 $ 3,305 $ 2,558 ======= ======= ======= ======= ======= Year ended 12-31-95 Reserves and allowances deducted from asset accounts: Allowance for doubtful accounts ................ $ 794 $ 594 $ 71 (1) $ 433 (2) $ 1,026 Allowance for discounts and other deductions ... 633 3,534 235 (1) 3,416 (3) 986 ------- ------- ------- ------- ------- $ 1,427 $ 4,128 $ 306 $ 3,849 $ 2,012 ======= ======= ======= ======= =======
(1) Allowance balance of subsidiary at acquisition date (2) Accounts written off, net of recoveries (3) Discounts taken by customer 46
INDEX TO EXHIBITS Sequentially Exhibit Numbered Number Description Page - ------- ----------- ------------ 2.1 Stock Sale and Purchase Agreement for the Registrant, dated April 12, 1989, by, between, and among J. Gray Ferguson, Arthur J. Gajarsa, Joseph F. Hackett and William L. Robbins, III, the Registrant and ASR Acquisition Corp. (1)............... ** 2.2 Agreement for Purchase and Sale of Stock, dated April 17, 1989, by and among Howard E. Strauss, Bert Ghavami, and Ardell Acquisition Corp.(1)........................ ** 2.3 Amendment No. 1 to Agreement for Purchase and Sale of Stock, dated April 28, 1989, by and among Howard E. Strauss, Bert Ghavami, and Ardell Acquisition Corp........................................................................ ** 2.4 Agreement for Purchase and Sale of Stock of Megas Beauty Care, Inc. dated May 16, 1994 between Megas Holdings, Inc. and Robert Bender (1)......................... *** 2.5 Stock Purchase Agreement dated February 7, 1995, by and among Sterile Products Holdings, Inc. and C. C. (Jack) Van Noy, George P. Goemans, Tamalpais Capital, and Newtek Venture (1)......................................................... **** 2.6 Asset Purchase Agreement, dated as of March 6, 1996, by and among MLO Razor Company (1996) Ltd. ("Purchaser"), and Bond-America Israel Blades Ltd. ("Seller"), Nostrum Establishment and Kaftor VePerach Ltd., the stockholders of Seller (individually each an "Owner" and collectively, the "Owners") and Robert Mandel, Daniel Mandel, Alfred Mernone, Shulamit Weiman, Noam Weiman, Efrat Gershoni and Ayin Mor Ltd. (individually each a "Beneficial Owner" and collectively the "Beneficial Owners" and together with the Owners, the "Stockholders"). (1).......................................................... ******* 2.7 Amendment No. 1 to Asset Purchase Agreement (the "Amendment"), dated as of March 25, 1996, by and among Bond Blades International Ltd. (formerly known as MLO Razor Company (1996) Ltd.), ("Purchaser"), and Bond-America Israel Blades Ltd., ("Seller"), Nostrum Establishment and Kaftor VePerach Ltd., the stockholders of Seller (individually each an "Owner" and collectively, the "Owners") and Robert Mandel, Daniel Mandel, Alfred Mernone, Shulamit Weiman, Noam Weiman, Efrat Gershoni and Ayin Mor Ltd. (individually each a "Beneficial Owner" and collectively the "Beneficial Owners" and together with the Owners, the "Stockholders")............................................................... ******* 2.8 Asset Purchase Agreement, dated as of March 6, 1996, by and among American Safety Razor Company ("Purchaser"), and A.I. Blades, Inc. ("Seller") and Bond-America Israel Blades, Ltd., the sole stockholder of Seller ("Bond"), Nostrum Establishment and Kaftor VePerach Ltd., Robert Mandel, Daniel Mandel, Alfred Mernone, Shulmait Weiman, Noam Weiman, Efrat Gershoni and Ayin Mor Ltd. (individually each a "Beneficial Owner" and collectively the "Beneficial Owners" and together with Bond, the "Stockholders"). (1)............................................. ******* 47 Sequentially Exhibit Numbered Number Description Page - ------- ----------- ------------ 2.9 Amendment No. 1 to Asset Purchase Agreement (the "Amendment"), dated as of March 25, 1996, by and among American Safety Razor Company ("Purchaser"), and A.I. Blades, Inc. ("Seller") and Bond-America Israel Blades Ltd., the sole stockholder of Seller ("Bond"), Nostrum Establishment and Kaftor VePerach Ltd., Robert Mandel, Daniel Mandel, Alfred Mernone, Shulamit Weiman, Noam Weiman, Efrat Gershoni and Ayin Mor Ltd. (individually each a "Beneficial Owner" and collectively the "Beneficial Owners" and together with Bond, the "Stockholders")................................................... ******* 3.1 Amended and Restated Certificate of Incorporation of the Registrant....................... * 3.2 Amended and Restated By-laws of the Registrant............................................ * 4.1 Specimen of Stock Certificate............................................................. ** 4.2 Recapitalization Agreement, dated May 24, 1993, among the Registrant and its Stockholders............................................................................ * 4.3 Subscription Agreement, dated April 28, 1989, by and among the Registrant, JZCC and Allsop.............................................................................. ** 4.4 Registration Rights Agreement, dated as of August 3, 1995, among the Registrant, the Guarantors and the Initial Purchasers, relating to the Senior Notes................. ****** 4.5 Indenture governing the Senior Notes, dated as of August 3, 1995, by and among the Registrant, the Guarantors and the Trustees......................................... ***** 4.6 Preferred Stock Exchange Agreement, dated June 14, 1993, among the Registrant and the holders of Preferred Stock.......................................................... * 4.7 Common Stock Conversion Agreement, dated May 24, 1993, among the Registrant and the holders of Common Stock............................................................. * 4.8 Stockholders Agreement, dated April 14, 1989, between the Registrant and its Stockholders............................................................................ ** 4.9 First Amendment to the Stockholders Agreement, dated April 28, 1989, between the Registrant and its Stockholders......................................................... ** 4.10 Second Amendment to the Stockholders Agreement, dated December 29, 1992, between the Registrant and its Stockholders .................................................... ** 4.11 Third Amendment to the Stockholders Agreement, dated June 15, 1993, among the Registrant and certain of its Stockholders.............................................. * 4.12 $2,500,000 Subordinated Secured Note, due June 10, 2000, executed by Megas Holdings, Inc. in favor of Robert Bender................................................ *** 4.13 Junior Security Agreement, dated June 10, 1994, by Megas Beauty Care, Inc. (formerly Megas Holdings, Inc.) in favor of Robert Bender......................................... **** 4.14 Multicurrency Credit Agreement, dated as of August 3, 1995, among the Registrant, the Guarantors and First National Bank of Chicago, as agent, including exhibits............. ***** 48 Sequentially Exhibit Numbered Number Description Page - ------- ----------- ------------ 4.15 Guarantees of the Guarantors pursuant to the Multicurrency Credit Agreement............... ****** 4.16 Security Agreement, dated August 3, 1995, between the Registrant and First National Bank of Chicago, as agent, including schedules.......................................... ****** 4.17 Guarantor Security Agreements, dated August 3, 1995, by and among the Guarantors and First National Bank of Chicago, as agent, including schedules....................... ****** 10.1(a) Non-Disclosure/Non-Compete Agreement, dated June 15, 1993, between the Registrant and William C. Weathersby (2)................................................ * 10.1(b) Non-Disclosure/Non-Compete Agreement, dated June 15, 1993, between the Registrant and William L. Robbins (2)................................................... * 10.1(c) Non-Disclosure/Non-Compete Agreement, dated June 15, 1993, between the Registrant and George L. Pineo (2)...................................................... * 10.1(d) Non-Disclosure/Non-Compete Agreement, dated June 15, 1993, between the Registrant and Gary S. Wade (2)......................................................... * 10.1(e) Non-Disclosure/Non-Compete Agreement, dated June 15, 1993, between the Registrant and Joseph F. Hackett (2).................................................... * 10.1(f) Non-Disclosure/Non-Compete Agreement, dated June 15, 1993, between the Registrant and Thomas G. Kasvin (2)..................................................... * 10.1(g) Non-Disclosure/Non-Compete Agreement, dated June 15, 1993, between the Registrant and Thomas B. Boyd (2)....................................................... * 10.1.(h) Non-Disclosure/Non-Compete Agreement, dated June 15, 1993, between the Registrant and Bruce L. Stichter (2).................................................... * 10.2(a) Indemnification Agreement, dated June 15, 1993, between the Registrant and Thomas H. Quinn (2)..................................................................... * 10.2(b) Indemnification Agreement, dated June 15, 1993, between the Registrant and William C. Weathersby (2)............................................................... * 10.2(c) Indemnification Agreement, dated June 15, 1993, between the Registrant and Jonathan F. Boucher (2)................................................................. * 10.2(d) Indemnification Agreement, dated June 15, 1993, between the Registrant and John W. Jordan, II (2).................................................................. * 10.2(e) Indemnification Agreement, dated June 15, 1993, between the Registrant and David W. Zalaznick (2).................................................................. * 10.2(f) Indemnification Agreement, dated June 15, 1993, between the Registrant and John R. Lowden (2)...................................................................... * 10.2(g) Indemnification Agreement, dated June 15, 1993, between the Registrant and Paul D. Rhines (2)...................................................................... * 10.2(h) Indemnification Agreement, dated June 15, 1993, between the Registrant and D. Patrick Curran (2)................................................................... * 49 Sequentially Exhibit Numbered Number Description Page - ------- ----------- ------------ 10.2(i) Indemnification Agreement, dated June 15, 1993, between the Registrant and William C. Ballard, Jr. (2)............................................................. * 10.3 Financial Advisory Agreement, dated July 12, 1995, between the Registrant and TJC Management.......................................................................... ****** 10.4 Settlement Agreement, dated June 5, 1992, by and between Warner-Lambert Company and the Registrant.............................................................. ** 10.5 Administrative Consent Order, dated March 13, 1989, between the Registrant and the New Jersey Department of Environmental Protection and Energy.................... ** 10.6 Employment Agreement, dated March 3, 1995, by and between Sterile Products Holdings, and Sterile Products Corporation and C. C. Van Noy (2).......................... **** 10.7 The American Safety Razor Company Stock Option Plan....................................... * 16 Letter re Change in Certifying Accountant................................................. **** 21 List of Subsidiaries of the Registrant.................................................... 51 23 Consent of Coopers & Lybrand L.L.P........................................................ 52 27 Financial Data Schedule................................................................... 53 - ----------------------- * Incorporated by reference to the exhibits filed with the Registrant's Form 10-K for the fiscal year ended December 31, 1993. ** Incorporated by reference to the exhibits filed with the Registrant's Form S-1 Registration Statement (No. 33-60298). *** Incorporated by reference to the exhibits filed with the Registrant's Form 8-K/A, dated June 10, 1994 relating to the acquisition of Megas Beauty Care, Inc. **** Incorporated by reference to the exhibits filed with the Registrant's Form 10-K for the fiscal year ended December 31, 1994. ***** Incorporated by reference to the exhibits filed with the Registrant's Form 8-K, dated August 15, 1995. ****** Incorporated by reference to the exhibits filed with the Registrant's Form S-4 Registration Statement (No. 33-96046). ******* Incorporated by reference to the exhibits filed with the Registrant's Form 10-Q for the quarter ended March 31, 1996. (1) Disclosure schedules relating to the representations and warranties have not been filed; such schedules will be filed supplementally upon the request of the Securities and Exchange Commission. (2) This exhibit is a management contract or compensatory plan or arrangement required to be identified in this Form 10-K pursuant to Item 14(c) of this Report.
50 Exhibit 21 LIST OF SUBSIDIARIES OF THE REGISTRANT (1): Subsidiary ACME Chaston Puerto Rico, Inc. American Safety Razor Corporation American Safety Razor of Canada Limited ASR Holdings, Inc. Bond Blades International, Ltd. The Hewitt Soap Company, Inc. Industrias Manufactureras ASR de Puerto Rico, Inc. Megas Beauty Care, Inc. Personna International de Mexico, S.A. de C.V. Personna International Limited Personna International UK Limited Personna International (Deutschland) GmbH Personna International de Puerto Rico, Inc. Valley Park Realty, Inc. (1) Each subsidiary is 100% owned by the Company or certain of its subsidiaries. 51 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of American Safety Razor Company and subsidiaries on Form S-8 (File No. 33-73982) of our report dated February 4, 1998, on our audits of the consolidated financial statements and financial statement schedule of American Safety Razor Company and subsidiaries as of December 31, 1997 and 1996, and for the years December 31, 1997, 1996, and 1995, which report is included in this Annual Report on Form 10-K. Coopers and Lybrand L.L.P. Richmond, Virginia March 13, 1998 52 EX-27 2 FDS --
5 This schedule contains summary financial information extracted from the financial statements included in the Form 10-K of American Safety Razor Company for the year ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 0000750339 AMERICAN SAFETY RAZOR COMPANY 1000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 1434 0 48738 3461 51488 103308 114649 41706 254081 38572 121505 0 0 121 59318 254081 296607 296607 196991 196991 0 595 12270 24639 9570 15069 0 0 0 15069 1.25 1.23
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