UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 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 July 24, 1998.
Class Outstanding at July 24, 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
June 30, 1998 (Unaudited) and December 31, 1997 1
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended
June 30, 1998 and June 30, 1997 3
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1998 and June 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 4. Vote of Security Holders 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>
June 30, December 31,
1998 1997
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,452 $ 1,434
Trade receivables, net 42,640 45,277
Inventories 55,736 51,488
Income taxes receivable 2,393 896
Deferred income taxes 2,913 2,803
Prepaid expenses 2,391 1,410
-------- --------
Total current assets 107,525 103,308
Property and equipment 119,117 114,649
Less accumulated depreciation (45,341) (41,706)
-------- --------
73,776 72,943
Intangible assets, net:
Goodwill 67,910 68,978
Other 3,812 4,258
-------- --------
71,722 73,236
Prepaid pension cost and other 5,028 4,594
-------- --------
Total assets $258,051 $254,081
======== ========
</TABLE>
See accompanying notes.
-1-
<PAGE>
<TABLE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,888 $ 15,704
Accrued expenses and other 19,436 20,761
Current maturities of long-term obligations 2,126 2,107
-------- ---------
Total current liabilities 40,450 38,572
Long-term obligations 123,481 121,505
Retiree benefits and other 25,019 24,983
Deferred income taxes 6,726 9,582
-------- ---------
Total liabilities 195,676 194,642
-------- --------
Stockholders' equity:
Common Stock, $.01 par value, 25,000,000
shares authorized; 12,110,049 shares
issued and outstanding at June 30, 1998
(12,098,049 at December 31, 1997) 121 121
Additional capital 65,905 65,801
Accumulated deficit (2,762) (5,645)
Accumulated other comprehensive loss (889) (838)
--------- ---------
62,375 59,439
--------- ---------
Total liabilities and stockholders' equity $258,051 $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 Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net sales $73,751 $75,683 $140,262 $138,786
Cost of sales 49,951 51,411 96,954 92,836
-------- -------- --------- --------
Gross profit 23,800 24,272 43,308 45,950
Selling, general and administrative
expenses 16,590 14,915 30,111 28,859
Amortization of intangibles 633 618 1,264 1,238
Restructuring charge - - 1,003 -
-------- ------- ------- -------
Operating income 6,577 8,739 10,930 15,853
Interest expense 3,104 3,130 6,149 6,036
------- ------- -------- --------
Income before income taxes 3,473 5,609 4,781 9,817
Income taxes 1,379 2,224 1,898 3,878
------- ------- ------- -------
Net income $2,094 $3,385 $2,883 $5,939
====== ====== ====== ======
Basic earnings per share:
Net income $0.17 $0.28 $0.24 $0.49
===== ===== ===== =====
Weighted average number of shares
outstanding 12,107 12,093 12,105 12,093
====== ====== ====== ======
Diluted earnings per share:
Net income $0.17 $0.28 $0.23 $0.49
===== ===== ===== =====
Weighted average number of shares
outstanding 12,234 12,229 12,285 12,223
====== ====== ====== ======
</TABLE>
See accompanying notes.
-3-
<PAGE>
<TABLE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<CAPTION>
Six Months Ended
June 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Operating activities
Net income $2,883 $5,939
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,929 5,412
Amortization of financing costs 270 271
Retiree benefits and other (448) (629)
Deferred income taxes 1,058 289
Changes in operating assets and liabilities,
net of effects of the AWC acquisition:
Trade receivables 2,637 (8,595)
Inventories (4,248) (5,330)
Income taxes receivable (1,497) -
Prepaid expenses (981) (510)
Accounts payable 3,184 4,111
Accrued and other expenses (1,325) 763
Income taxes payable (4,024) (4,243)
------ ------
Net cash provided by (used in) operating activities 3,438 (2,522)
Investing activities
Capital expenditures (5,498) (5,509)
Acquisition of AWC, net of cash acquired - (10,352)
Other - (1)
------ --------
Net cash used in investing activities (5,498) (15,862)
Financing activities
Repayment of long-term obligations (4,655) (281)
Proceeds from borrowings 6,629 17,926
Proceeds from exercise of stock options 104 -
-------- ---------
Net cash provided from financing activities 2,078 17,645
------- -------
Net increase (decrease) in cash and cash equivalents 18 (739)
Cash and cash equivalents, beginning of period 1,434 1,979
------- -------
Cash and cash equivalents, end of period $1,452 $1,240
====== ======
</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 six month periods ended June 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>
June 30, December 31,
1998 1997
-------- ------------
(In thousands)
<S> <C> <C>
Raw materials $21,244 $20,352
Work-in-process 6,664 5,596
Finished goods 24,938 23,128
Operating supplies 3,585 3,107
------- -------
56,431 52,183
Excess of current cost over LIFO inventory value (695) (695)
------- -------
$55,736 $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 June 30, 1998, the unexpended costs, related to the restructuring,
amounted to $0.6 million and are included in accrued expenses and other in the
accompanying condensed consolidated balance sheets.
-5-
<PAGE>
NOTE D - LONG TERM OBLIGATIONS
At June 30 1998, the Company had utilized $20.3 million of its revolving credit
facility and had approximately $29.7 million available for future borrowings
under this facility.
NOTE E - 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 F - 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 Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- ---------
In thousands)
<S> <C> <C> <C> <C>
Net income $2,094 $3,385 $2,883 $5,939
Other comprehensive income
Change in translation
adjustment account (139) 198 (51) (240)
------ ------ ------ ------
Total comprehensive income $1,955 $3,583 $2,832 $5,699
====== ====== ====== ======
</TABLE>
NOTE G - 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 H - 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 June 30, 1998 and
December 31, 1997, and for the
-6-
<PAGE>
six months ended June 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
June 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 $ (136) $ 69 $ 1,519 $ - $ 1,452
Trade receivables, net 19,088 11,803 11,749 - 42,640
Advances receivable--subsidiaries 36,079 - 4,346 (40,425) -
Inventories 30,470 14,413 11,743 (890) 55,736
Income taxes and prepaid expenses 7,037 (331) 991 - 7,697
------- -------- -------- --------- ---------
Total current assets 92,538 25,954 30,348 (41,315) 107,525
Property and equipment, net 40,386 23,842 9,548 - 73,776
Intangible assets, net 50,212 21,092 418 - 71,722
Prepaid pension cost and other 511 4,496 21 - 5,028
Investment in subsidiaries 39,706 - 900 (40,606) -
------- ------- -------- --------- ---------
Total assets $223,353 $75,384 $41,235 $(81,921) $258,051
======== ======= ======= ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, accrued
expenses and other $ 22,917 $11,287 $ 4,119 $ 1 $ 38,324
Advances payable--subsidiaries - 40,332 - (40,332) -
Current maturities of long-term
obligations 1,025 128 973 - 2,126
--------- -------- ------- -------- --------
Total current liabilities 23,942 51,747 5,092 (40,331) 40,450
Long-term obligations 120,784 2,697 - - 123,481
Retiree health and insurance benefits
and other 15,069 9,950 - - 25,019
Deferred income taxes 3,683 2,956 87 - 6,726
-------- -------- ------- -------- --------
Total liabilities 163,478 67,350 5,179 (40,331) 195,676
-------- -------- ------- -------- --------
Stockholders' equity
Common Stock 121 485 87 (572) 121
Additional capital 65,905 15,662 24,372 (40,034) 65,905
Accumulated deficit (8,641) (8,113) 14,973 (981) (2,762)
Dividends 2,452 - (2,452) - -
Accumulated other
comprehensive loss 38 - (924) (3) (889)
-------- ------- ------- -------- --------
59,875 8,034 36,056 (41,590) 62,375
-------- ------- ------- -------- --------
Total liabilities and
stockholders' equity $223,353 $75,384 $41,235 $(81,921) $258,051
======== ======= ======= ======== ========
</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 $ 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 (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)
Six Months Ended June 30, 1998
(In thousands)
<CAPTION>
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $69,474 $56,231 $24,527 $(9,970) $140,262
Cost of sales 40,934 47,212 18,790 (9,982) 96,954
------- ------- ------- ------- -------
Gross profit 28,540 9,019 5,737 12 43,308
Selling, general and
administrative expenses 19,188 5,859 5,064 - 30,111
Amortization of intangible assets 743 493 28 - 1,264
Restructuring charge 731 184 88 - 1,003
------- ------ ------ ------- -------
Operating income 7,878 2,483 557 12 10,930
Interest expense 4,824 2,059 (734) - 6,149
------- ------- ------ ------- -------
Income before income taxes 3,054 424 1,291 12 4,781
Income taxes 1,288 145 465 - 1,898
------- ------- ------ ------- -------
Net income $ 1,766 $ 279 $ 826 $ 12 $ 2,883
======= ======= ====== ======= =======
</TABLE>
<TABLE>
Condensed Consolidating Statements of Income (Unaudited)
Six Months Ended June 30, 1997
(In thousands)
<CAPTION>
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $72,547 $52,440 $23,690 $(9,891) $138,786
Cost of sales 43,015 41,512 18,150 (9,841) 92,836
------- ------- ------- ------- --------
Gross profit 29,532 10,928 5,540 (50) 45,950
Selling, general and
administrative expenses 17,777 6,107 4,975 - 28,859
Amortization of intangible assets 736 474 28 - 1,238
------- ------ ------- ------- --------
Operating income 11,019 4,347 537 (50) 15,853
Interest expense 4,541 1,829 (334) - 6,036
------- ------- ------ ------- --------
Income (loss) before income taxes 6,478 2,518 871 (50) 9,817
Income taxes 2,487 1,058 333 - 3,878
------- ------- ------- ------- --------
Net income (loss) $ 3,991 $ 1,460 $ 538 $ (50) $ 5,939
======= ======= ======= ======= ========
</TABLE>
-10-
<PAGE>
<TABLE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
Six Months Ended June 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 (used in)
operating activities $3,619 $ (538) $ 402 $ (45) $3,438
Investing activities
Capital expenditures (3,106) (2,216) (176) - (5,498)
Investment in subsidiaries (680) - 680 - -
Advances from (to) subsidiaries (2,470) - (48) 2,518 -
------ ------ ----- ------- ------
Net cash (used in) provided from
investing activities (6,256) (2,216) 456 2,518 (5,498)
Financing activities
Repayment of long-term obligations (4,564) (91) - - (4,655)
Proceeds from borrowings 6,605 - 24 - 6,629
Proceeds for exercise of stock options 104 - - - 104
Advances from (to) subsidiaries - 2,481 - (2,481) -
------ ------ ----- ------ ------
Net cash provided from (used in)
financing activities 2,145 2,390 24 (2,481) 2,078
------ ------ ----- ------ ------
Net (decrease) increase in cash and
cash equivalents (492) (364) 882 (8) 18
Cash and cash equivalents, beginning of
period 356 433 637 8 1,434
------ ------ ------ ------ ------
Cash and cash equivalents, end of
period $(136) $ 69 $1,519 $ - $1,452
===== ====== ====== ====== ======
</TABLE>
-11-
<PAGE>
<TABLE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
Six Months Ended June 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 $ (5,264) $ 2,382 $ 473 $ (113) $ (2,522)
Investing activities
Capital expenditures (4,438) (536) (535) - (5,509)
Purchase of AWC - (10,352) - - (10,352)
Other (399) 398 - - (1)
Investment in subsidiaries (9,300) - 9,300 - -
Advances from (to) subsidiaries 2,228 - - (2,228) -
-------- ------- ------- ------ -------
Net cash (used in) provided from
investing activities (11,909) (10,490) 8,765 (2,228) (15,862)
Financing activities
Repayment of long-term obligations (154) (127) - - (281)
Proceeds from borrowings 17,200 - 726 - 17,926
Advances from (to) subsidiaries - 8,540 (10,888) 2,348 -
------- ------- ------- ------ -------
Net cash provided from (used in)
financing activities 17,046 8,413 (10,162) 2,348 17,645
------- ------- ------- ------ -------
Net (decrease) increase in cash and
cash equivalents (127) 305 (924) 7 (739)
Cash and cash equivalents, beginning
of period 201 12 1,766 - 1,979
------- ------- ------- ------- -------
Cash and cash equivalents, end of
period $ 74 $ 317 $ 842 $ 7 $ 1,240
======= ======= ======= ======= =======
</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.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Net Sales. Net sales for the three months ended June 30, 1998 and 1997, were
$73.8 million and $75.7 million, respectively, a decrease of $1.9 million, or
3%.
Net sales of the Company's shaving razors and blades for the three months ended
June 30, 1998, totaled $30.3 million, substantially unchanged compared to net
sales for the three months ended June 30, 1997, of $30.2 million. Net sales of
domestic branded shaving products were flat as sales gains relating to an
increase in promotional activity offset the second quarter 1997 sales relating
to a new product launch, sales of which significantly exceeded 1998 sales. Net
sales of private brand shaving products decreased 10% due primarily to heavy
promotional activity by certain competitors. Net sales of international shaving
products increased 11% (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 June 30,
1998 and 1997, were $11.6 million and $11.0 million, respectively, an increase
of $0.6 million, or 5%. 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 June 30, 1998 and 1997, were $3.9 million and $4.1 million, respectively,
a decrease of $0.2 million, or 5%. Sales of industrial and specialty products
decreased 14% due primarily to inventory adjustments by certain customers. Sales
of medical products increased 4% due primarily to increased distribution of
products and from new product offerings.
Net sales of cotton and foot care products for the three months ended June 30,
1998 and 1997, were substantially unchanged at $20.8 million and $20.7 million,
respectively.
Net sales of the Company's custom bar soap products for the three months ended
June 30, 1998 and 1997, were $7.2 million and $9.7 million, respectively, a
decrease of $2.5 million or 26%. 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 $0.5 million to $23.8 million during the
three months ended June 30, 1998, from $24.3 million for the three months ended
June 30, 1997. As a percentage of net sales, gross profit was 32.3% for the
three months ended June 30, 1998, and 32.1% for the three months ended June 30,
1997. This increase was due primarily to improved blade margins due to favorable
product mix and lower manufacturing costs reflecting the Company's continuing
efforts to manufacture products in a lower cost environment. This improvement in
blade margins offset the negative impact on the Company's international
operations of exchange rate fluctuations, the increased shipping costs and
higher manufacturing overheads related primarily to the start-up of two new
manufacturing facilities in the Company's cotton operations, and 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
22.5% of net sales for the three months ended June 30, 1998, compared to 19.7%
for the three months ended June 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
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<PAGE>
June 30, 1998 and 1997. Interest expense was substantially unchanged at $3.1
million for the three months ended June 30, 1998 and 1997.
The Company's effective income tax rate was 39.7% for the three months ended
June 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.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net Sales. Net sales for the six months ended June 30, 1998 and 1997, were
$140.3 million and $138.8 million, respectively, an increase of $1.5 million, or
1%.
Net sales of the Company's shaving razors and blades for the six months ended
June 30, 1998, totaled $53.7 million, a 7% decrease compared to net sales for
the six months ended June 30, 1997, of $57.6 million. Net sales of domestic
branded and private brand shaving products decreased 17% and 9%, respectively.
During the 1997 first half 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 essentially
flat. Net sales of private brand shaving products were down due primarily to
heavy promotional activity by certain competitors. Net sales of international
shaving products increased 6% (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 six months ended June 30, 1998
and 1997, were $22.6 million and $20.9 million, respectively, an increase of
$1.7 million, or 8%. 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 six months
ended June 30, 1998 and 1997, were $8.1 million and $8.0 million, respectively,
an increase of $0.1 million, or 1%. Sales of industrial and specialty products
decreased 5% due primarily to inventory adjustments by certain customers. Sales
of medical products increased 7% due primarily to increased distribution of
products and from new product offerings.
Net sales of cotton and foot care products for the six months ended June 30,
1998 and 1997, were $43.5 million and $35.0 million, respectively, an increase
of $8.5 million or 24%. This increase primarily reflects sales resulting from
the April 1997, acquisition of the Cotton Division of American White Cross, Inc.
("AWC") and sales growth across most product lines due primarily to increased
distribution of products.
Net sales of the Company's custom bar soap products for the six months ended
June 30, 1998 and 1997, were $12.4 million and $17.3 million, respectively, a
decrease of $4.9 million or 28%. 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 $2.7 million to $43.3 million for the six
months ended June 30, 1998, from $46.0 million for the six months ended June 30,
1997. As a percentage of net sales, gross profit was 30.9% for the six months
ended June 30, 1998, and 33.1% for the six months ended June 30, 1997. 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
21.5% of net sales for the six months ended June 30, 1998, compared to 20.8% for
the six months ended June 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 $1.3 million
for the six months ended June 30, 1998, and $1.2 million for the six months
ended June 30, 1997. Interest expense was substantially unchanged at $6.1
million for the six months ended June 30, 1998, and $6.0 million for the six
months ended June 30, 1997.
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<PAGE>
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 six months ended June
30, 1998, and 39.5% for the six months ended June 30, 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 amounted to $3.4 million for the six months ended June
30, 1998. Net cash used in investing activities related to capital expenditures
of $5.5 million for the six months ended June 30, 1998. Net cash provided by
financing activities resulted from net borrowings of $2.0 million for the six
months ended June 30, 1998.
At June 30, 1998, the Company had utilized $20.3 million of its revolving credit
facility and had approximately $29.7 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 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.
Year 2000 Computer Issues
The Company has conducted a review of its computer systems to identify the
hardware and software applications that will be affected by Year 2000 issues and
has developed an implementation plan to resolve such issues. Substantially all
Year 2000 issues will be resolved through the upgrade of existing hardware and
software applications to current versions and releases. The Company is presently
upgrading its hardware and software applications and expects its computer
systems will be Year 2000 compliant by June 1999. Estimated Year 2000 compliance
costs to be incurred are not expected to have a material effect on the Company's
consolidated results of operations or financial position.
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,"
-15-
<PAGE>
"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 4. Vote of Security Holders
At its Annual Meeting on May 19, 1998, the stockholders of American
Safety Razor Company took the following actions:
1. Elected the following three directors for terms to expire at the 2001
Annual Meeting of Stockholders, with votes as indicated opposite each
director's name:
Voted For Withheld Authority
David W. Zalaznick 6,284,956 shares 761,362 shares
John R. Lowden 6,287,156 shares 759,162 shares
Paul D. Rhines 7,006,493 shares 39,825 shares
2. Approved the appointment of Coopers & Lybrand, L.L.P., as independent
auditors for the Company for the year ending December 31, 1998. The
vote was 7,043,518 shares for approval, 2,300 shares against
approval, and 500 shares abstaining.
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 June 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
August 4, 1998 By /s/William C. Weathersby
- -------------- ---------------------------
Date William C. Weathersby
President
August 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 June 30, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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