SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[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
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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)
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Registrant's telephone number, including area code:
(540) 248-8000
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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
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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.
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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
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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.
<PAGE>
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
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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
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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.
<TABLE>
<CAPTION>
1997 1996 1995
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(In millions)
<S> <C> <C> <C> <C> <C> <C>
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%
====== ===== ====== ===== ====== =====
</TABLE>
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-
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(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.
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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.
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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
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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
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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
<PAGE>
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
<PAGE>
ITEM 2 - Properties
As of March 9, 1998, the Company owned or leased the following
facilities:
<TABLE>
<CAPTION>
Lease
Approximate Owned or Termination
Products Location Type of Facility Square Feet Leased Date
- -------- -------- ---------------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
Name Age Position with Company
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Year ended December 31,
Statement of Income Data: 1997 (1) 1996 (2) 1995 (3) 1994 (4) 1993
--------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE>
(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:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See accompanying notes.
23
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
See accompanying notes.
24
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in the components of stockholders' equity are as follows:
<TABLE>
<CAPTION>
Common Stock
---------------------------------- Foreign
Par Additional Currency
Shares Value Capital Deficit Translation Total
------------- ------ ---------- --------- ----------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
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
============== ====== ========== ======= ======= ========
</TABLE>
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.
<TABLE>
<CAPTION>
Industry Segments
-----------------
Net Sales Operating Income Year-End Assets
--------- ---------------- ---------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- ------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= ======
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheets
December 31, 1997
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
38
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Consolidating Balance Sheets
December 31, 1996
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
39
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Income
Year Ended December 31, 1997
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Income
Year Ended December 31, 1996
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
40
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Income
Year Ended December 31, 1995
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
41
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 1997
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>
42
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 1996
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Condensed Consolidating Statements of Cash Flows
Year Ended December 31, 1995
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= =========
</TABLE>
44
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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
- ----------- --------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= =======
</TABLE>
(1) Allowance balance of subsidiary at acquisition date
(2) Accounts written off, net of recoveries
(3) Discounts taken by customer
46
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
</TABLE>
50
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CIK> 0000750339
<NAME> AMERICAN SAFETY RAZOR COMPANY
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<RECEIVABLES> 48738
<ALLOWANCES> 3461
<INVENTORY> 51488
<CURRENT-ASSETS> 103308
<PP&E> 114649
<DEPRECIATION> 41706
<TOTAL-ASSETS> 254081
<CURRENT-LIABILITIES> 38572
<BONDS> 121505
0
0
<COMMON> 121
<OTHER-SE> 59318
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15069
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.23
</TABLE>
