UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to __________
Commission File Number 0-21952
AMERICAN SAFETY RAZOR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 54-1050207
-------- ----------
(State of incorporation) (I.R.S. Employer Identification Number)
One Razor Blade Lane, P.O. Box 979, Verona, Virginia 24482-0979
- ---------------------------------------------------------------
(Address of principal executive offices, including zip code)
(540) 248-8000
- --------------
Registrant's telephone number
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 28, 1998.
Class Outstanding at October 28, 1998
----- -------------------------------
Common Stock, $.01 Par Value 12,110,049
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
Index
-----
Page Number
-----------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997 1
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended
September 30, 1998 and September 30, 1997 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 and September 30, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
<TABLE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,822 $ 1,434
Trade receivables, net 45,492 45,277
Inventories 54,642 51,488
Income taxes receivable 1,231 896
Deferred income taxes 3,385 2,803
Prepaid expenses 2,508 1,410
-------- --------
Total current assets 110,080 103,308
Property and equipment 122,230 114,649
Less accumulated depreciation (47,744) (41,706)
-------- --------
74,486 72,943
Intangible assets, net:
Goodwill 69,167 68,978
Other 3,588 4,258
-------- --------
72,755 73,236
Prepaid pension cost and other 5,518 4,594
-------- --------
Total assets $262,839 $254,081
======== ========
</TABLE>
See accompanying notes.
-1-
<PAGE>
<TABLE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable $ 18,847 $ 15,704
Accrued expenses and other 17,958 20,761
Current maturities of long-term obligations 3,393 2,107
-------- --------
Total current liabilities 40,198 38,572
Long-term obligations 123,882 121,505
Retiree benefits and other 25,065 24,983
Deferred income taxes 7,175 9,582
-------- --------
Total liabilities 196,320 194,642
-------- --------
Stockholders' equity:
Common Stock, $.01 par value, 25,000,000
shares authorized; 12,110,049 shares
issued and outstanding at September 30, 1998
(12,098,049 at December 31, 1997) 121 121
Additional capital 65,905 65,801
Retained earnings (accumulated deficit) 940 (5,645)
Accumulated other comprehensive loss (447) (838)
-------- --------
66,519 59,439
-------- --------
Total liabilities and stockholders' equity $262,839 $254,081
======== ========
</TABLE>
See accompanying notes.
-2-
<PAGE>
<TABLE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $80,171 $79,061 $220,433 $217,847
Cost of sales 53,269 52,473 150,223 145,309
------- ------- -------- --------
Gross profit 26,902 26,588 70,210 72,538
Selling, general and administrative
expenses 17,006 15,414 47,117 44,273
Amortization of intangibles 632 617 1,896 1,855
Restructuring charge - - 1,003 -
------- ------- -------- -------
Operating income 9,264 10,557 20,194 26,410
Interest expense 3,124 3,155 9,273 9,191
------- ------- ------- -------
Income before income taxes 6,140 7,402 10,921 17,219
Income taxes 2,438 2,964 4,336 6,842
------- ------- ------- -------
Net income $3,702 $4,438 $6,585 $10,377
====== ====== ====== =======
Basic earnings per share:
Net income $0.31 $0.37 $0.54 $0.86
===== ===== ===== =====
Weighted average number of shares
outstanding 12,110 12,094 12,107 12,093
====== ====== ====== ======
Diluted earnings per share:
Net income $0.30 $0.36 $0.54 $0.85
===== ===== ===== =====
Weighted average number of shares
outstanding 12,169 12,281 12,246 12,243
====== ====== ====== ======
</TABLE>
See accompanying notes.
-3-
<PAGE>
<TABLE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
------- -------
<S> <C> <C>
Operating activities
Net income $6,585 $10,377
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,000 8,265
Amortization of financing costs 406 408
Retiree benefits and other (451) (1,391)
Deferred income taxes 1,035 445
Changes in operating assets and liabilities,
net of effects of acquisitions:
Trade receivables 206 (8,447)
Inventories (2,799) (5,508)
Income taxes receivable (335) -
Prepaid expenses (1,098) 77
Accounts payable 2,907 3,234
Accrued and other expenses (2,860) (1,421)
Income taxes payable (4,024) (4,792)
------ -------
Net cash provided by operating activities 8,572 1,247
Investing activities
Capital expenditures (8,635) (9,305)
Acquisitions, net of cash acquired (571) (10,352)
Other (34) (4)
------ -------
Net cash used in investing activities (9,240) (19,661)
Financing activities
Repayment of long-term obligations (9,866) (4,115)
Proceeds from borrowings 11,818 21,940
Proceeds from exercise of stock options 104 42
------ -------
Net cash provided from financing activities 2,056 17,867
------ -------
Net increase (decrease) in cash and cash equivalents 1,388 (547)
Cash and cash equivalents, beginning of period 1,434 1,979
------ -------
Cash and cash equivalents, end of period $2,822 $1,432
====== ======
</TABLE>
See accompanying notes.
-4-
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for the
three and nine month periods ended September 30, 1998, are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1997.
NOTE B - INVENTORIES
Classifications of inventories are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
<S> <C> <C>
Raw materials $20,796 $20,352
Work-in-process 6,548 5,596
Finished goods 24,364 23,128
Operating supplies 3,604 3,107
------- -------
55,312 52,183
Excess of current cost over LIFO inventory value (670) (695)
------- -------
$54,642 $51,488
======= =======
</TABLE>
NOTE C - OTHER INFORMATION
The Company's federal income tax returns for 1989 through 1994 have been
examined by the IRS and the federal income tax return for 1996 is currently
under examination by the IRS. 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 relating to 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.
In March 1998, the Company recorded a restructuring charge of approximately $1.0
million which includes estimated costs of approximately $0.2 million to close
the Sparks, Nevada cotton operations and approximately $0.8 million in severance
and employee benefit costs relating to consolidation of the Company's domestic
shaving razor and blade and cotton products sales forces and other personnel
changes. At September 30, 1998, the unexpended costs, related to the
restructuring, amounted to $0.5 million and are included in accrued expenses and
other in the accompanying condensed consolidated balance sheets.
-5-
<PAGE>
NOTE D - PURCHASE OF WOLCO HOLLAND B.V.
On September 18, 1998, the Company purchased all of the capital stock of Wolco
Holland B.V. ("Wolco") for an aggregate purchase price of approximately $2.6
million, including assumed liabilities of $0.8 million and estimated acquisition
related expenses. The acquisition was financed by borrowings under the Company's
revolving credit facility, internally generated funds and seller financing of
$1.2 million and has been accounted for under the purchase method of accounting.
Estimated goodwill resulting from the acquisition of $1.8 million is being
amortized on a straight-line basis over a forty-year period. The Company does
not believe that the final purchase price allocation will differ significantly
from the preliminary purchase price allocation recorded at September 30, 1998.
Wolco is a packager and distributor of razor products to private label accounts
in certain European markets.
Proforma combined results of operations of the Company and Wolco are not
presented as the effects are not material.
Supplemental non-cash investing and financing activities related to the Wolco
acquisition consist of (in millions):
Fair value of assets acquired $ 2.6
Liabilities assumed (0.8)
Seller financing (1.2)
-----
Cash paid $(0.6)
=====
NOTE E - LONG TERM OBLIGATIONS
At September 30 1998, the Company had utilized $20.4 million of its revolving
credit facility and had approximately $29.6 million available for future
borrowings under this facility.
NOTE F - EARNINGS PER SHARE
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.
NOTE G - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). 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.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C>
Net income $3,702 $4,438 $6,585 $10,377
Other comprehensive income
Change in translation
adjustment account 442 (289) 391 (529)
------ ------ ------ ------
Total comprehensive income $4,144 $4,149 $6,976 $9,848
====== ====== ====== ======
</TABLE>
-6-
<PAGE>
NOTE H - NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 establishes a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. FAS 133 requires all derivatives to be recorded on the
balance sheet at fair value and also requires the recognition of offsetting
changes in value or cash flows of both the hedge and the hedged item in earnings
in the same period. This new standard is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The implementation of this new
standard is not expected to have a material effect on the Company's consolidated
results of operations or financial position.
NOTE I - SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's $100.0 million 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 September 30, 1998
and December 31, 1997, and for the nine months ended September 30, 1998 and
1997, 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 is 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.
Separate financial statements and other disclosures concerning the guarantor
subsidiaries are not presented because management has determined that such
information would not be material to the holders of the Series B Senior Notes.
-7-
<PAGE>
<TABLE>
Condensed Consolidating Balance Sheets
September 30, 1998
(In thousands)
<CAPTION>
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5 $ 221 $ 2,596 $ - $ 2,822
Trade receivables, net 19,664 11,446 14,382 - 45,492
Advances receivable--subsidiaries 35,957 - 4,153 (40,110) -
Inventories 29,981 13,980 11,530 (849) 54,642
Income taxes and prepaid expenses 6,270 (210) 1,064 - 7,124
-------- ------- ------- -------- --------
Total current assets 91,877 25,437 33,725 (40,959) 110,080
Property and equipment, net 41,373 23,946 9,167 - 74,486
Intangible assets, net 49,724 20,845 2,186 - 72,755
Prepaid pension cost and other 838 4,659 21 - 5,518
Investment in subsidiaries 40,606 - 900 (41,506) -
-------- ------- ------- -------- -------
Total assets $224,418 $74,887 $45,999 $(82,465) $262,839
======== ======= ======= ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, accrued expenses
and other $ 20,796 $10,927 $ 5,084 $ (2) $ 36,805
Advances payable--subsidiaries - 40,070 - (40,070) -
Current maturities of long-term
obligations 1,030 124 2,239 - 3,393
-------- ------- ------- -------- --------
Total current liabilities 21,826 51,121 7,323 (40,072) 40,198
Long-term obligations 120,817 2,667 398 - 123,882
Retiree health and insurance benefits
and other 15,100 9,965 - - 25,065
Deferred income taxes 4,025 3,061 89 - 7,175
-------- ------- ------- -------- --------
Total liabilities 161,768 66,814 7,810 (40,072) 196,320
-------- ------- ------- -------- --------
Stockholders' equity
Common Stock 121 485 87 (572) 121
Additional capital 65,905 15,662 25,272 (40,934) 65,905
Retained earnings (accumulated deficit) (5,866) (8,074) 15,765 (885) 940
Dividends 2,452 - (2,452) - -
Accumulated other comprehensive loss 38 - (483) (2) (447)
-------- ------- ------- -------- --------
62,650 8,073 38,189 (42,393) 66,519
-------- ------- ------- -------- --------
Total liabilities and
stockholders' equity $224,418 $74,887 $45,999 $(82,465) $262,839
======== ======= ======= ======== ========
</TABLE>
-8-
<PAGE>
<TABLE>
Condensed Consolidating Balance Sheets
December 31, 1997
(In thousands)
<CAPTION>
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3 $ 433 $ 637 $ 8 $ 1,434
Trade receivables, net 20,172 13,283 11,822 - 45,277
Advances receivable--subsidiarie 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 (572) 121
Additional capital 65,801 15,662 23,694 (39,356) 65,801
Accumulated deficit (10,407) (8,392) 14,147 (993) (5,645)
Dividends 2,452 - (2,452) - -
Accumulated other comprehensive loss 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>
-9-
<PAGE>
<TABLE>
Condensed Consolidating Statements of Income (Unaudited)
Nine months Ended September 30, 1998
(In thousands)
<CAPTION>
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $111,528 $85,134 $40,083 $(16,312) $220,433
Cost of sales 63,637 71,673 31,333 (16,420) 150,223
-------- ------- ------- -------- --------
Gross profit 47,891 13,461 8,750 108 70,210
Selling, general and
administrative expenses 30,286 8,882 7,949 - 47,117
Amortization of intangible assets 1,115 739 42 - 1,896
Restructuring charge 731 184 88 - 1,003
-------- ------- ------- -------- --------
Operating income 15,759 3,656 671 108 20,194
Interest expense 7,259 3,138 (1,124) - 9,273
-------- ------- ------- -------- --------
Income before income taxes 8,500 518 1,795 108 10,921
Income taxes 3,535 200 601 - 4,336
-------- ------- ------- -------- --------
Net income $ 4,965 $ 318 $ 1,194 $ 108 $ 6,585
======= ======= ======= ======== ========
</TABLE>
<TABLE>
Condensed Consolidating Statements of Income (Unaudited)
Nine months Ended September 30, 1997
(In thousands)
<CAPTION>
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $113,871 $83,442 $35,839 $(15,305) $217,847
Cost of sales 65,998 66,538 27,985 (15,212) 145,309
-------- ------- ------- -------- --------
Gross profit 47,873 16,904 7,854 (93) 72,538
Selling, general and
administrative expenses 27,672 9,232 7,369 - 44,273
Amortization of intangible assets 1,100 713 42 - 1,855
------- ------- ------- ------- --------
Operating income 19,101 6,959 443 (93) 26,410
Interest expense 6,964 2,900 (673) - 9,191
-------- ------- ------- -------- --------
Income (loss) before income taxes 12,137 4,059 1,116 (93) 17,219
Income taxes 4,703 1,712 427 - 6,842
-------- ------- ------- -------- --------
Net income (loss) $ 7,434 $ 2,347 $ 689 $ (93) $ 10,377
======== ======= ======= ======== ========
</TABLE>
-10-
<PAGE>
<TABLE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
Nine months Ended September 30, 1998
(In thousands)
<CAPTION>
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net cash provided by operating activities $7,326 $ 744 $ 495 $ 7 $8,572
Investing activities
Capital expenditures (5,498) (3,040) (97) - (8,635)
Purchase of Wolco - - (571) - (571)
Other (9) 1 (26) - (34)
Investment in subsidiaries (1,578) - 1,578 - -
Advances from (to) subsidiaries (2,777) - 571 2,206 -
------ ------ ------ ------ ------
Net cash (used in) provided from
investing activities (9,862) (3,039) 1,455 2,206 (9,240)
Financing activities
Repayment of long-term obligations (9,244) (136) (486) - (9,866)
Proceeds from borrowings 11,323 - 495 - 11,818
Proceeds for exercise of stock options 104 - - - 104
Advances from (to) subsidiaries 2 2,219 - (2,221) -
------ ------ ------ ------ ------
Net cash provided from (used in)
financing activities 2,185 2,083 9 (2,221) 2,056
------ ------ ------ ------ ------
Net (decrease) increase in cash and cash
equivalents (351) (212) 1,959 (8) 1,388
Cash and cash equivalents, beginning of
period 356 433 637 8 1,434
------ ------ ------ ------ ------
Cash and cash equivalents, end of
period $ 5 $ 221 $2,596 $ - $2,822
====== ====== ====== ====== ======
</TABLE>
-11-
<PAGE>
<TABLE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
Nine months Ended September 30, 1997
(In thousands)
<CAPTION>
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net cash (used in) provided by
operating activities $(3,496) $ 4,552 $ 131 $ 60 $ 1,247
Investing activities
Capital expenditures (6,793) (1,344) (1,168) - (9,305)
Purchase of AWC - (10,352) - - (10,352)
Other (401) 397 - - (4)
Investment in subsidiaries (9,440) - 9,437 3 -
Advances from (to) subsidiaries 3,040 - - (3,040) -
------- ------- ------- ------ -------
Net cash (used in) provided from
investing activities (13,594) (11,299) 8,269 (3,037) (19,661)
Financing activities
Repayment of long-term obligations (3,927) (188) - - (4,115)
Proceeds from borrowings 20,916 - 1,024 - 21,940
Proceeds from exercise of stock options 42 - - - 42
Advances from (to) subsidiaries - 6,992 (10,014) 3,022 -
------- ------- ------- ------ -------
Net cash provided from (used in)
financing activities 17,031 6,804 (8,990) 3,022 17,867
------- ------- ------- ------ -------
Net (decrease) increase in cash and cash
equivalents (59) 57 (590) 45 (547)
Cash and cash equivalents, beginning of
period 201 12 1,766 - 1,979
------- ------- ------- ------ -------
Cash and cash equivalents, end of
period $ 142 $ 69 $ 1,176 $ 45 $ 1,432
======= ======= ======= ====== =======
</TABLE>
-12-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included in this report and
the Registrant's Annual Report on Form 10-K for the year ended December 31,
1997. On September 18, 1998, the Company purchased all of the capital stock of
Wolco Holland B.V. ("Wolco"), a packager and distributor of razor products in
certain European markets.
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Net Sales. Net sales for the three months ended September 30, 1998 and 1997,
were $80.2 million and $79.1 million, respectively, a increase of $1.1 million,
or 1%.
Net sales of the Company's shaving razors and blades for the three months ended
September 30, 1998, totaled $33.9 million, a 7% increase compared to net sales
for the three months ended September 30, 1997, of $31.7 million. Net sales of
domestic branded shaving products increased 2% and were negatively impacted by
the third quarter 1997 sales relating to a new product launch, sales of which
significantly exceeded 1998 third quarter sales. Excluding sales of this
product, branded sales were up 10% reflecting sales gains relating to an
increase in promotional activity and increased distribution of the Company's
MBC(TM) products. Net sales of private brand shaving products decreased 6% due
primarily to heavy promotional activity by competitors and reduced promotional
support of several of the Company's products by certain customers. Net sales of
international shaving products increased 25% (excluding the 3% decrease due to
the impact of unfavorable exchange rates) reflecting stronger sales, primarily
in Latin America, Mexico, Europe and Africa.
Net sales of bladed hand tools and blades for the three months ended September
30, 1998 and 1997, were $13.4 million and $12.2 million, respectively, an
increase of $1.2 million, or 10%. This growth primarily reflects increased sales
of the Company's Ardell(TM) and American Line(TM) brands of products as a result
of new distribution gains.
Net sales of industrial and specialty and medical blades for the three months
ended September 30, 1998 and 1997, were $4.0 million and $4.3 million,
respectively, a decrease of $0.3 million, or 8%. Sales of industrial and
specialty products decreased 18% due primarily to inventory adjustments by
certain customers and mix shifts to lower priced blade products. Sales of
medical products increased 2% due primarily to increased distribution of
products.
Net sales of cotton and foot care products for the three months ended September
30, 1998 and 1997, were $22.4 million and $23.2 million, respectively, a
decrease of $0.8 million or 4%. This decrease results primarily from issues
related to the start-up of two new manufacturing facilities which have led to
delays in shipping products to customers.
Net sales of the Company's custom bar soap products for the three months ended
September 30, 1998 and 1997, were $6.5 million and $7.7 million, respectively, a
decrease of $1.2 million or 16%. This decrease results primarily from lower
sales to certain of the Company's pharmaceutical/skin care customers whose sales
have been impacted by weakness in Asian markets, the redesign of certain
products by customers and customer inventory adjustments.
Gross Profit. Gross profit increased $0.3 million to $26.9 million during the
three months ended September 30, 1998, from $26.6 million for the three months
ended September 30, 1997. As a percentage of net sales, gross profit was
unchanged at 33.6% for the three months ended September 30, 1998, and 1997.
Blade margins improved due to favorable product mix and lower manufacturing
costs reflecting the Company's continuing efforts to reduce manufacturing costs.
This improvement in blade margins was offset by (i) increased shipping costs and
higher manufacturing overheads related primarily to the start up of two
manufacturing facilities in the Company's
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<PAGE>
cotton operations, and (ii) the effect of absorbing manufacturing overheads and
depreciation over a lower sales base in the Company's soap operations.
Operating and Other Expenses. Selling, general and administrative expenses were
21.2% of net sales for the three months ended September 30, 1998, compared to
19.5% for the three months ended September 30, 1997. This increase primarily
reflects an increase in promotional support for the Company's shaving blade
products. Amortization of goodwill and other intangible assets was substantially
unchanged at $0.6 million for the three months ended September 30, 1998 and
1997. Interest expense was substantially unchanged at $3.1 million for the three
months ended September 30, 1998, compared to $3.2 million for the three months
ended September 30, 1997.
The Company's effective income tax rate was 39.7% for the three months ended
September 30, 1998, compared to 40.0% for the three months ended September 31,
1997, and varies from the United States statutory rate due primarily to
nondeductible goodwill amortization and state income taxes, net of the federal
tax benefit.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Net Sales. Net sales for the nine months ended September 30, 1998 and 1997, were
$220.4 million and $217.8 million, respectively, an increase of $2.6 million, or
1%.
Net sales of the Company's shaving razors and blades for the nine months ended
September 30, 1998, totaled $87.7 million, a 2% decrease compared to net sales
for the nine months ended September 30, 1997, of $89.3 million. Net sales of
domestic branded and private brand shaving products decreased 10% and 8%,
respectively. During the first nine months of 1997 branded shaving products
sales were favorably affected by the launch of a new product, sales of which
significantly exceeded 1998 sales. Excluding sales of this product, branded
sales were up 2% reflecting an increase in promotional activity and increased
distribution of the Company's MBC(TM) products. Net sales of private brand
shaving products were down due primarily to heavy promotional activity by
competitors and reduced promotional support of several of the Company's products
by certain customers. Net sales of international shaving products increased 12%
(excluding the 3% decrease due to the impact of unfavorable exchange rates)
reflecting stronger sales, primarily in Latin America, Mexico, the United
Kingdom and Africa.
Net sales of bladed hand tools and blades for the nine months ended September
30, 1998 and 1997, were $36.1 million and $33.1 million, respectively, an
increase of $3.0 million, or 9%. This growth primarily reflects increased sales
of the Company's Personna(R), Ardell(TM) and American Line(TM) brands of
products as a result of new distribution gains and new product introductions in
the Personna(R) line of products.
Net sales of industrial and specialty and medical blades for the nine months
ended September 30, 1998 and 1997, were $12.0 million and $12.3 million,
respectively, a decrease of $0.3 million, or 2%. Sales of industrial and
specialty products decreased 9% due primarily to inventory adjustments by
certain customers and mix shifts to lower priced blade products. Sales of
medical products increased 5% due primarily to increased distribution of
products.
Net sales of cotton and foot care products for the nine months ended September
30, 1998 and 1997, were $65.8 million and $58.1 million, respectively, an
increase of $7.7 million or 13%. This increase primarily reflects sales
resulting from the April 1997, acquisition of the Cotton Division of American
White Cross, Inc. ("AWC").
Net sales of the Company's custom bar soap products for the nine months ended
September 30, 1998 and 1997, were $18.8 million and $25.0 million, respectively,
a decrease of $6.2 million or 25%. This decrease results primarily from lower
sales to certain of the Company's pharmaceutical/skin care customers whose sales
have been impacted by weakness in Asian markets, the redesign of certain
products by customers and customer inventory adjustments.
Gross Profit. Gross profit decreased $2.3 million to $70.2 million for the nine
months ended September 30, 1998, from $72.5 million for the nine months ended
September 30, 1997. As a percentage of net sales, gross profit was 31.9% for the
nine months ended September 30, 1998, and 33.3% for the nine months ended
September 30, 1997.
-14-
<PAGE>
This decrease was due primarily to (i) lower margins in the Company's cotton
operations due to increased shipping costs and higher manufacturing overheads
related primarily to the start-up of two new manufacturing facilities and the
generally lower margins associated with the acquired AWC business, and (ii) from
the effect of absorbing manufacturing overheads and depreciation over a lower
sales base in the Company's soap operations.
Operating and Other Expenses. Selling, general and administrative expenses were
21.4% of net sales for the nine months ended September 30, 1998, compared to
20.3% for the nine months ended September 30, 1997. This increase primarily
reflects an increase in promotional support for the Company's shaving blade
products.
Amortization of goodwill and other intangible assets was substantially unchanged
at $1.9 million for the nine months ended September 30, 1998 and 1997. Interest
expense was substantially unchanged at $9.3 million for the nine months ended
September 30, 1998, compared to $9.2 million for the nine months ended September
30, 1997.
The restructuring charge of $1.0 million includes estimated costs of
approximately $0.2 million to close the Sparks, Nevada cotton operations and
approximately $0.8 million in severance and employee benefit costs relating to
consolidation of the Company's domestic shaving razor and blade and cotton
products sales forces and other personnel changes.
The Company's effective income tax rate was 39.7% for the nine months ended
September 30, 1998 and 1997, and varies from the United States statutory rate
due primarily to nondeductible goodwill amortization and state income taxes, net
of the federal tax benefit.
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 for the nine months ended September 30, 1998, amounted
to $8.6 million. Net cash used in investing activities for the nine months ended
September 30, 1998, related primarily to capital expenditures of $8.6 million
and the purchase of Wolco for $0.6 million. Net cash provided by financing
activities for the nine months ended September 30, 1998, resulted primarily from
net borrowings of $2.0 million.
At September 30, 1998, the Company had utilized $20.4 million of its revolving
credit facility and had approximately $29.6 million available for future
borrowings under this facility.
Management believes that the Company's cash on hand, anticipated funds from
operations, and the amounts available to the Company under its revolving credit
facility will be sufficient to cover its working capital needs, capital
expenditures, debt service requirements and tax obligations as well as support
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 market transactions or
disposition of businesses that no longer meet its strategic objectives.
Currently, the Company has not entered into any agreement or commitments
concerning any such transactions.
New Accounting Standard
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS 133 establishes a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. FAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and also requires the recognition of
offsetting changes in value or cash flows of both the hedge and the hedged item
in earnings in the same period. This new standard is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. The implementation of
this new standard is not expected to have a material effect on the Company's
consolidated results of operations or financial position.
-15-
<PAGE>
Year 2000 Computer Issues
The Company has assessed the Year 2000 readiness of both its information
technology and non-information technology systems. The system components covered
in the assessment include: application systems supporting business operations,
data warehouse systems, computer server hardware and software,
telecommunications network components (LANs and WAN), telephone systems (PBX,
call accounting, voice mail), manufacturing process control systems, engineering
and graphics design systems, bar-coding scanning hardware and software, personal
computers, and building/facilities (security, air conditioning, etc.). Based on
this assessment, an implementation plan has been developed which is expected to
resolve any known compliance issues.
The Company's most critical systems are expected to be Year 2000 compliant by
the end of 1998 and all systems are expected to be Year 2000 compliant by June
1999. All known compliance issues relating to the corporate business application
systems and server have been addressed and a Year 2000 compliant human resource
and payroll system is on schedule to be fully implemented by June 1999. Most of
the Company's telephone systems and telecommunications network components are
compliant and the remainder are planned to be compliant by the end of the first
quarter of 1999. A review of manufacturing control systems and
building/facilities systems has revealed no significant issues to date. However,
further evaluation is planned during the first half of 1999. Other issues which
are expected to be resolved by June 1999, include the upgrade of selected
international application systems (impacts less than 40 system users) and
completing required personal computer upgrades.
The Company's EDI software has been upgraded to a Year 2000 compliant version.
Testing with trading partners began during 1998 and will continue during 1999.
The Company's EDI software supports both a 2 digit year and 4 digit year to
support the varying Year 2000 compliance methods used by EDI partners. A Year
2000 survey was sent to suppliers and so far, no compliance issues which will
impact the business have been identified. The suppliers used for the Company's
voice and data networks have issued statements confirming their intentions to be
Year 2000 compliant by the end of 1999.
Development of a Year 2000 contingency plan is presently under consideration.
The Company will continue to monitor key business partners' compliance status as
well as its own internal systems status and develop contingency plans as deemed
appropriate. The Company does not expect that Year 2000 issues will have a
material effect on the Company's consolidated results of operations or financial
position. Since most of the Company's Year 2000 issues are being addressed
through normal planned upgrades, incremental external Year 2000 costs are
expected to be minimal, approximating $100,000, of which approximately one half
is planned to be spent in the fourth quarter of 1998 and the balance in 1999.
Readers are cautioned that forward-looking statements contained in the Year 2000
Computer Issues should be read in conjunction with the Company's disclosures
under the heading "Forward-Looking Statements" below.
Forward-Looking Statements
This report contains 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.
-16-
<PAGE>
PART II, OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits - Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K: No reports on Form 8-K have been filed during the
quarter ended September 30, 1998.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN SAFETY RAZOR COMPANY
November 4, 1998 By /s/William C. Weathersby
- ---------------- ------------------------
Date William C. Weathersby
President
November 4, 1998 By /s/Thomas G. Kasvin
- ---------------- -----------------------
Date Thomas G. Kasvin
Senior Vice President
Chief Financial Officer
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in the Form 10-Q of American Safety Razor Company
for the quarter ended September 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<NAME> AMERICAN SAFETY RAZOR COMPANY
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