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, 1999
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 000-21952
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 (540) 248-8000
--------------------------- --------------
(Address of principal executive Registrant's telephone number
offices, including zip code)
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 November 2, 1999.
Class Outstanding at November 2, 1999
----- -------------------------------
Common Stock, $.01 Par Value 12,110,349
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
Index
Page Number
-----------
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of
Operations (Unaudited) 3
Condensed Consolidated Statements of
Comprehensive Income (Unaudited) 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) 5
Notes to Condensed Consolidated
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosure of
Market Risk 30
Part II. Other Information
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Company Predecessor
------------ -----------
September 30, December 31,
1999 1998
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,566 $ 3,453
Accounts receivable, net 46,666 44,498
Inventories 56,862 54,029
Income taxes receivable 1,399 989
Deferred income taxes 6,808 5,108
Prepaid expenses 1,876 2,340
------------ -----------
Total current assets 121,177 110,417
Property and equipment 97,654 124,814
Less accumulated depreciation (5,211) (50,149)
------------ -----------
92,443 74,665
Intangible assets, net:
Goodwill, trademarks and patents 165,534 68,446
Other 7,213 3,365
------------ -----------
172,747 71,811
Prepaid pension cost and other 23,812 6,004
------------ -----------
Total assets $410,179 $262,897
============ ===========
See accompanying notes.
-1-
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Company Predecessor
------------ -----------
September 30, December 31,
1999 1998
------------ -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,777 $ 14,269
Accrued expenses and other 24,778 19,968
Current maturities of long-term obligations 8,205 3,852
------------ -----------
Total current liabilities 45,760 38,089
Long-term obligations 177,549 123,481
Retiree benefits and other 26,144 25,163
Deferred income taxes 33,493 6,610
------------ -----------
Total liabilities 282,946 193,343
------------ -----------
Stockholders' equity:
Common Stock, $.01 par value, 25,000,000
shares authorized; 12,110,349
shares issued and outstanding at
September 30, 1999 (12,110,049 at
December 31, 1998) 121 121
Additional paid-in capital 172,843 65,905
Advances to parent, net (42,938) -
Retained earnings (accumulated deficit) (3,077) 4,457
Accumulated other comprehensive income (loss) 284 (929)
------------ -----------
127,233 69,554
------------ -----------
Total liabilities and stockholders' equity $410,179 $262,897
============ ===========
See accompanying notes.
-2-
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Company Predecessor Company Predecessor
-------- -------- -------- -------------------
Period Period
Three Three from from Nine
Months Months April 24, January 1, Months
Ended Ended 1999 to 1999 to Ended
September September September April 23, September
30, 1999 30, 1998 30, 1999 1999 30, 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $86,080 $80,171 $146,022 $87,591 $220,433
Cost of sales:
Other costs 54,913 53,269 93,098 58,520 150,223
Purchase accounting adjustment to inventory - - 9,008 - -
-------- -------- -------- -------- --------
Gross profit 31,167 26,902 43,916 29,071 70,210
Selling, general and administrative expenses 21,283 17,006 34,413 21,429 47,117
Amortization of intangibles 1,266 632 2,185 835 1,896
Special charge - - - - 1,003
Transaction expenses - - - 11,440 -
-------- -------- -------- -------- --------
Operating income (loss) 8,618 9,264 7,318 (4,633) 20,194
Interest expense 6,514 3,124 10,486 3,907 9,273
-------- -------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item 2,104 6,140 (3,168) (8,540) 10,921
Income taxes (benefit) 845 2,438 (702) (842) 4,336
-------- -------- -------- -------- --------
Income (loss) before extraordinary item 1,259 3,702 (2,466) (7,698) 6,585
Extraordinary item, net of income tax benefit - - 611 118 -
-------- -------- -------- -------- --------
Net income (loss) $1,259 $3,702 $(3,077) $(7,816) $6,585
======== ======== ======== ======== ========
Basic earnings per share:
Income (loss) before extraordinary item $0.10 $0.31 $(0.20) $(0.64) $0.54
Extraordinary item - - (0.05) (0.01) -
-------- -------- -------- -------- --------
Net income (loss) $0.10 $0.31 $(0.25) $(0.65) $0.54
======== ======== ======== ======== ========
Weighted average number of shares outstanding 12,110 12,110 12,110 12,110 12,107
======== ======== ======== ======== ========
Diluted earnings per share:
Income (loss) before extraordinary item $0.10 $0.30 $(0.20) $(0.63) $0.54
Extraordinary item - - (0.05) (0.01) -
-------- -------- -------- -------- --------
Net income (loss) $0.10 $0.30 $(0.25) $(0.64) $0.54
======== ======== ======== ======== ========
Weighted average number of shares outstanding 12,110 12,169 12,116 12,198 12,246
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
-3-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Company Predecessor Company Predecessor
-------- -------- -------- -------------------
Period Period
Three Three from from Nine
Months Months April 24, January 1, Months
Ended Ended 1999 to 1999 to Ended
September September September April 23, September
30, 1999 30, 1998 30, 1999 1999 30, 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income (loss) $1,259 $3,702 $(3,077) $(7,816) $6,585
Other comprehensive income (loss):
Foreign currency translation adjustments 594 442 284 (116) 391
-------- -------- -------- -------- --------
Comprehensive income (loss) $1,853 $4,144 $(2,793) $(7,932) $6,976
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Company Predecessor
------- ----------------------
Period Period
from from Nine
April 24, January 1, Months
1999 to 1999 to Ended
September April 23, September
30, 1999 1999 30, 1998
-------- -------- --------
Operating activities
Net income (loss) $(3,077) $(7,816) $6,585
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Extraordinary item 611 118 -
Depreciation and amortization 7,324 4,105 9,000
Amortization of financing costs 2,867 180 406
Retiree benefits and other (642) (719) (451)
Deferred income taxes (3,438) 232 1,035
Changes in operating assets
and liabilities:
Accounts receivables (9,878) 7,710 206
Inventories 12,653 (7,748) (2,799)
Income taxes receivable 2,268 (2,252) (335)
Prepaid expenses 90 205 (1,098)
Accounts payable (3,215) 1,723 2,907
Accrued and other expenses 4,022 (1,072) (2,860)
Income taxes payable - - (4,024)
-------- -------- --------
Net cash provided by (used in)
operating activities 9,585 (5,334) 8,572
Investing activities
Capital expenditures (3,609) (3,638) (8,635)
Acquisitions, net of cash acquired - - (571)
Other (74) 49 (34)
-------- -------- --------
Net cash used in investing activities (3,683) (3,589) (9,240)
Financing activities
Repayment of long-term obligations (39,217) (25,846) (9,866)
Proceeds from borrowings 57,797 65,337 11,818
Deferred loan fees (395) (7,606) -
Proceeds from exercise of stock options - 2 104
Advances to parent, net (18,783) (24,155) -
-------- -------- --------
Net cash (used in) provided
from financing activities (598) 7,732 2,056
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 5,304 (1,191) 1,388
Cash and cash equivalents,
beginning of period 2,262 3,453 1,434
-------- -------- --------
Cash and cash equivalents, end of period $7,566 $2,262 $2,822
======== ======== ========
See accompanying notes.
-5-
<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
period January 1, 1999 to April 23, 1999 for American Safety Razor Company prior
to its acquisition by RSA Acquisition Corporation (the "Predecessor"), an
affiliate of J.W. Childs Equity Partners II, L.P. ("J.W. Childs") and the period
April 24, 1999 to September 30, 1999 for the American Safety Razor Company (the
"Company") subsequent to the acquisition, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1999. The balance
sheet at December 31, 1998 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998.
As a result of the acquisition and new basis of accounting described in Note G,
the Company's financial statements for the period subsequent to the acquisition
are not comparable to the Predecessor's financial statements for the period
prior to the acquisition. With respect to inventories see Note B.
NOTE B - INVENTORIES
Classifications of inventories under LIFO as of December 31, 1998 are as
follows:
December 31, 1998
-----------------
(In thousands)
Raw materials $18,797
Work-in-process 6,612
Finished goods 25,070
Operating supplies 3,475
--------
53,954
Excess of LIFO inventory value over current cost 75
--------
$54,029
========
In connection with the acquisition the Company's new owners adopted the
first-in, first-out ("FIFO") method of valuation of inventories and the
classification of these inventories as of September 30, 1999, are as follows:
September 30, 1999
------------------
(In thousands)
Raw materials $22,587
Work-in-process 5,363
Finished goods 25,302
Operating supplies 3,610
-------
$56,862
=======
-6-
<PAGE>
NOTE C - SPECIAL CHARGES
In March 1998, the Company recorded a special charge of approximately $1,003,000
related to the shutdown of the Company's cotton operations in Sparks, Nevada and
employee terminations.
The following table provides information about the changes in the Company's
accrued special charges, including the special charges discussed above, for the
nine months ended September 30, 1999:
<TABLE>
<CAPTION>
Remaining Accruals Remaining
Balance at (Reversals) Charges in Balance at
January 1, 1999 in 1999 1999 September 30, 1999
--------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Discontinuation of product line:
Contract termination $ 500,000 $ - $ 517,000 $ (17,000)
Excess inventory and deferred charges 500,000 200,000 - 700,000
Severance and employee benefits 603,000 (200,000) 337,000 66,000
----------- ---------- --------- ---------
$ 1,603,000 $ - $ 854,000 $ 749,000
=========== ========== ========= =========
</TABLE>
Amounts remaining at September 30, 1999 are included in accrued expenses in the
accompanying condensed consolidated balance sheets. Substantially all of the
remaining payments and asset write-offs are expected to occur during the
remainder of 1999.
NOTE D - LONG TERM OBLIGATIONS
On April 23, 1999 and concurrent with the Acquisition described in Note G, the
Company entered into a $190,000,000 credit agreement (the "Credit Agreement"),
which provided for term loan commitments in the aggregate amount of $165,000,000
(the "Term Loan Facility") and a revolving credit facility commitment of
$25,000,000, and terminated its existing revolving credit facility (the
"Terminated Credit Facility"). The Term Loan Facility expires on January 31,
2005 and principal payments under this facility begin on January 31, 2000 and
continue quarterly until the expiration date. Principal payments are based on a
percentage of principal balance outstanding on the respective payment date as
defined in the Credit Agreement. The revolving credit facility also expires on
January 31, 2005 and borrowings under this facility are required to be repaid by
the expiration date.
At June 30, 1999, the Company had outstanding borrowings under the Term Loan
Facility of $88,000,000 and outstanding borrowings under the revolving credit
facility of $5,000,000. The proceeds from these borrowings and internally
generated funds of $1,986,000 were used to purchase $30,700,000 face value of
the Company's 9 7/8 Series B Senior Notes (the "Senior Note") which were validly
tendered (see Note G), pay expenses and accrued interest of $1,402,000 incurred
in connection with the purchase of the Senior Notes, pay the outstanding
balances of $18,811,000 including accrued interest on the Terminated Credit
Facility and other short-term debt, pay fees and expenses of $19,918,000 related
to the acquisition and financing and advance funds totaling $24,155,000 to RSA
Acquisition Corporation to fund a portion of the acquisition described in Note
G.
The Credit Agreement limits the ability of the Company, among other limitations,
to incur certain additional indebtedness, places certain restrictions on the
payment of dividends and limits the amount of annual capital expenditures. The
Credit Agreement also contains certain financial covenants which require the
Company, among other requirements, to meet certain financial ratios relating to
leverage, fixed charges and interest coverage.
In connection with the purchase of the Senior Notes, the Company paid a premium
over par and wrote-off deferred financing costs in the aggregate gross amount of
$969,000. These expenses, net of the related tax benefit of $358,000, are
reflected in the Company's consolidated statement of operations in the caption
"Extraordinary item" for the period from April 24, 1999 to September 30, 1999.
In addition, the Company wrote-off deferred financing costs, in the aggregate
gross amount of $186,000 in connection with the termination of the Terminated
Credit Facility. These expenses, net of the related tax benefit of $68,000, are
also reflected in the Company's consolidated statement of operations in the
caption "Extraordinary item" for the period from April 1, 1999 to April 23,
1999.
At September 30, 1999, the Company had outstanding borrowings under the Term
Loan Facility of $112,500,000 and no borrowings were outstanding under the
revolving credit facility. At September 30 1999, the Company had
-7-
<PAGE>
approximately $25 million available for future borrowings under its revolving
credit facility. Effective July 5, 1999, the Company permanently reduced the
amount available for future borrowings under its Term Loan Facility by $52.5
million to $112.5 million which represents the amount of borrowings outstanding
under the Term Loan Facility at September 30, 1999. In connection with the
reduction in the Term Loan Facility, the Company wrote off deferred financing
costs in the aggregate amount of $2.2 million. These expenses are reflected in
the Company's consolidated statement of operations in the caption, "Interest
expense" for the three months ended September 30, 1999.
In October 1999, the Company entered into an interest rate cap agreement and an
interest rate swap agreement with the bank. The interest rate cap agreement
covers $28,125,000 of variable rate debt, has an interest rate cap of 6.5% over
a 3 month LIBOR period and expires in October 2001. The interest rate swap
agreement also covers $28,125,000 of variable rate debt and expires in October
2001. Under the terms of this agreement, the interest rate is fixed at 5.98%
over a 3 month LIBOR period as long as the 3 month LIBOR remains below 6.5%. If
the 3 month LIBOR is greater than or equal to 6.5%, but less than or equal to
7.00% then no payment is required by the Company or the bank. If the 3 month
LIBOR is greater than 7.00%, the swap becomes a cap at an interest rate of
7.00%.
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 related to the
Predecessor's employee stock options outstanding which were assumed to be
converted for the diluted earnings per share calculation when the average market
price of the Predecessor's common stock for the period exceeded the exercise
price of the employee stock options which were outstanding.
In connection with the acquisition described in Note G, the Company, on April
30, 1999, redeemed all of its then outstanding stock options for aggregate
consideration of $1.2 million.
NOTE F - SEGMENT INFORMATION
Company Predecessor
--------------- ----------------
Three Months Three Months
Ended September Ended September
30, 1999 30, 1998
--------------- ----------------
Net Operating Net Operating
Sales Income Sales Income
----- ------ ----- ------
(In Thousands)
Razors and Blades $54,727 $7,081 $51,361 $7,871
Cotton and Foot Care 23,468 650 22,357 1,140
Custom Bar Soap 7,885 887 6,453 253
------- ------ ------- ------
$86,080 8,618 $80,171 9,264
======= =======
Interest expense 6,514 3,124
------ ------
Income before income taxes
and extraordinary item $2,104 $6,140
====== ======
-8-
<PAGE>
<TABLE>
<CAPTION>
Company Predecessor
--------------------- ----------------------------------------------
Period from Period from Nine months
April 24, 1999 to January 1, 1999 to Ended September
September 30, 1999 April 23, 1999 30, 1998
--------------------- -------------------- ----------------------
Net Operating Net Operating Net Operating
Sales Income Sales Income Sales Income
----- ------ ----- ------ ----- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Razors and Blades $ 95,059 $ 5,220 $55,189 $(4,673) $135,765 $15,883
Cotton and Foot Care 37,034 499 25,551 258 65,841 3,384
Custom Bar Soap 13,929 1,599 6,851 (218) 18,827 927
-------- -------- ------- -------- -------- -------
$146,022 7,318 $87,591 (4,633) $220,433 20,194
======== ======= ========
Interest expense 10,486 3,907 9,273
-------- -------- -------
Income (loss) before income taxes
and extraordinary item $(3,168) $(8,540) $10,921
======== ======= ========
</TABLE>
Total Assets
------------
September
30, 1999
--------
Razors and Blades $308,480
Cotton and Foot Care 61,726
Custom Bar Soap 39,973
--------
$410,179
========
NOTE G - MERGER
Effective April 23, 1999, RSA Acquisition Corporation ("Acquisition"), an
affiliate of "J.W. Childs", completed its $14.20 per share cash tender offer for
all outstanding shares of the Predecessor in accordance with a February 12, 1999
merger agreement upon the terms and subject to the conditions set forth in the
offer to purchase ("the Stock Tender Offer"). Following completion of the offer,
there remained approximately 266,601 American Safety Razor shares outstanding.
On July 1, 1999, RSA Acquisition Corp. and American Safety Razor completed a
merger transaction pursuant to which RSA Acquisition Corp. acquired these
remaining shares of American Safety Razor for $14.20 per share. The aggregate
purchase price, including transaction costs of $1.0 million, paid for the common
stock purchased in the Stock Tender Offer excluding the cost to redeem stock
options, including all of the common stock tendered, was approximately $173.0
million.
Following the merger, the Company became the surviving corporation and is a
direct, wholly- owned subsidiary of RSA Holdings, which is wholly-owned by J.W.
Childs, its affiliates and Company management.
Subsequent to the acquisition and pursuant to the terms of its Indenture, the
Company made an offer to purchase all of its $100 million 9 7/8% Series B Senior
Notes due August 1, 2005 (the "Existing Notes"). In response thereto, $30.7
million of the Existing Notes were properly tendered and retired by the Company.
The Company has accounted for the acquisition as a purchase. The allocation of
the purchase price resulted in purchase adjustments being applied to the assets
acquired and liabilities assumed. The total purchase price of approximately
$172,964,000 was allocated to the acquired assets and assumed liabilities based
on preliminary estimates of their respective fair values at April 23, 1999 as
follows:
Working capital $ 77,054,000
Property, plant and equipment 93,973,000
Intangible assets, including goodwill 177,967,000
Prepaid pension and other assets 46,861,000
Long-term debt (163,685,000)
Other liabilities (59,206,000)
------------
$172,964,000
============
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<PAGE>
These preliminary estimates are subject to change as they are based on
preliminary appraisals and as certain of the Company's business plans become
finalized.
As a result of the acquisition and new basis of accounting, the Company's
financial statements for the period subsequent to the acquisition are not
comparable to the Predecessor's financial statements for the period prior to the
acquisition. As a result of the application of purchase accounting the Company's
depreciation expense and amortization of intangible assets increased and the
Company adjusted the carrying value of acquired inventories to reflect their
fair market value, which adjustment was written off in the April 24, 1999 to
September 30, 1999 reporting period. In addition, certain fees and expenses
incurred relating to the above transactions were expensed in the period in which
the transactions were completed and are included in the Predecessor's
consolidated statement of operations in the caption "Transaction expenses".
The primary components of this caption are (i) amounts paid to redeem all of the
outstanding options to purchase common stock of the Predecessor, (ii) costs
incurred by or on behalf of the Predecessor in connection with the acquisition,
including legal and other advisory fees, and (iii) costs incurred by or on
behalf of the Predecessor related to payments made to certain employees of the
Predecessor in connection with the change of control.
NOTE H - CONTINGENCIES
During 1998 the Company purchased bleached cotton from an outside supplier for
use in its pharmaceutical coil business. The Company converted this cotton from
incoming bales into a coil, which was shipped to its pharmaceutical customers to
be used as filler in bottles of oral dosage forms of pharmaceutical products to
prevent breakage. During the period from March through November of 1998, the
process by which the Company's supplier bleached this cotton was changed by
introducing an expanded hydrogen peroxide treatment. Subsequent testing
indicated varying levels of residual hydrogen peroxide in the cotton processed
during this time period and the supplier in November 1998 reduced the levels of
residual hydrogen peroxide in its bleaching process. The Company, to date, has
received complaints from a number of customers alleging defects in the cotton
supplied them during the period and asserting these defects may have led to
changes in their products pharmaceutical appearance, and with respect to a
limited number of products, potency. The Company has received written notice of
claims for damages in the aggregate amount of approximately $2.5 million which
the Company believes primarily relates to alleged lost sales and merchandise
damage, and has been advised by one customer that it intends to make claims for
damages that "will run into the millions of dollars." It is possible that
additional damage claims might be forthcoming. To date, none of these claims
have been substantiated. On March 2, 1999, at the request of the Food and Drug
Administration, the Company notified all (numbering approximately 85) of its
pharmaceutical cotton coil customers that it was withdrawing from the market
those lots of cotton coil which may contain elevated levels of hydrogen
peroxide.
The Company has notified its supplier that, in the Company's view, the supplier
is primarily responsible for damages, if any, that may arise out of this matter.
At this time, the Company's supplier has agreed to be responsible for the cost
of fiber, bleaching and freight of returned product, but has not agreed to be
responsible for any other damages and has expressed an intention to assert
defenses to our claims. The Company's insurance carriers have been timely
notified of the existence of the claim and have agreed to provide defense in a
reservation of rights letter, but are continuing to evaluate whether coverage
would apply to all aspects of the claims.
The Company has been advised by its general counsel that it has a number of
valid defenses to potential customer claims as well as a third party claim
against the supplier for damages, if any, incurred by the Company. However,
management is unable to make a meaningful estimate of the amount or range of
loss that could result from an unfavorable outcome relating to this overall
issue, and accordingly, there can be no assurance that our exposure from this
matter might not exceed the combination of our insurance coverage, if any, and
our recourse to suppliers. It is therefore possible that the Company's results
of operations or cash flows in a particular quarterly or annual period or its
financial position could be significantly and adversely affected by an ultimate
unfavorable outcome of this matter.
Weston Properties Investments III, Ltd. has filed a claim against the Company
for damages relating to delays in cost overruns attendant to the Company's
facility expansion in Cleveland, Ohio in the amount of $649,000.
-10-
<PAGE>
Management believes that the outcome of this matter will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
In June 1999, the Company received notice of the filing of a lawsuit by The
Gillette Company ("Gillette") seeking injunction and damages for (i) alleged
infringement by the Company's MBC(TM) moving blade shaving cartridge system,
introduced by the Company during the fourth quarter of 1994, and by the
Company's Tri-Flexxx(TM) three bladed shaving system, introduced by the Company
during the second quarter of 1999, of certain patents held by Gillette, and (ii)
alleged unfair advertising and packaging practices as well as alleged breach of
contract related to MBC(TM) and Tri-Flexxx(TM) packaging. The Company believes
the claims are without merit and does not believe it has any material liability
with respect to the patent, unfair advertising or contract claims and intends to
vigorously contest these claims. However, management and counsel at this time
are unable to make a meaningful estimate of the amount or range of loss that
could result from an unfavorable outcome relating to this matter. The Company
will reassess this matter as new facts become available.
NOTE I - SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's $69.3 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 condensed
consolidating financial statements as of September 30, 1999 (the Company) and
December 31, 1998 (Predecessor), for the period from April 24, 1999 to September
30, 1999 (the Company), for the period from January 1, 1999 to April 23, 1999
(Predecessor), and for the nine months ended September 30, 1998 (Predecessor),
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. 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.
-11-
<PAGE>
Condensed Consolidating Balance Sheets (Unaudited)
September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Company
---------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,402 $ 182 $ 1,982 $ - $ 7,566
Accounts receivables, net 21,161 12,167 13,576 (238) 46,666
Advances receivable--subsidiaries 36,731 - 5,459 (42,190) -
Inventories 31,903 14,182 11,956 (1,179) 56,862
Income taxes and prepaid expenses 7,150 2,362 571 - 10,083
--------- --------- --------- ---------- ---------
Total current assets 102,347 28,893 33,544 (43,607) 121,177
Property and equipment, net 56,479 26,524 9,440 - 92,443
Intangible assets, net 135,200 36,541 1,006 - 172,747
Prepaid pension cost and other 15,571 8,220 21 - 23,812
Investment in subsidiaries 62,898 - 3,222 (66,120) -
--------- --------- --------- ---------- ---------
Total assets $ 372,495 $ 100,178 $ 47,233 $ (109,727) $ 410,179
========= ========= ========= ========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, accrued expenses
and other $ 21,571 $ 11,365 $ 4,620 $ (1) $ 37,555
Advances payable--subsidiaries - 43,349 - (43,349) -
Current maturities of long-term obligations 5,571 1,419 1,215 - 8,205
--------- --------- --------- ---------- ---------
Total current liabilities 27,142 56,133 5,835 (43,350) 45,760
Long-term obligations 177,347 202 - - 177,549
Retiree benefits and other 16,095 10,049 - - 26,144
Deferred income taxes 24,962 8,254 277 - 33,493
--------- --------- --------- ---------- ---------
Total liabilities 245,546 74,638 6,112 (43,350) 282,946
--------- --------- --------- ---------- ---------
Stockholders' equity
Common Stock 121 485 88 (573) 121
Additional paid-in capital 172,843 24,940 39,834 (64,774) 172,843
Advances to parent, net (42,938) - - - (42,938)
Retained earnings (accumulated deficit) (3,077) 115 918 (1,033) (3,077)
Accumulated other comprehensive
income - - 281 3 284
--------- --------- --------- ---------- ---------
126,949 25,540 41,121 (66,377) 127,233
--------- --------- --------- ---------- ---------
Total liabilities and stockholders' equity $ 372,495 $ 100,178 $ 47,233 $ (109,727) $ 410,179
========= ========= ========= ========== =========
</TABLE>
-12-
<PAGE>
Condensed Consolidating Balance Sheets
December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Predecessor
------------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ (17) $ 106 $ 3,364 $ - $ 3,453
Accounts receivables, net 18,717 12,315 13,704 (238) 44,498
Advances receivable--subsidiaries 48,543 - - (48,543) -
Inventories 30,108 13,349 11,604 (1,032) 54,029
Income taxes and prepaid expenses 6,216 1,578 643 - 8,437
--------- -------- -------- --------- ---------
Total current assets 103,567 27,348 29,315 (49,813) 110,417
Property and equipment, net 41,656 24,068 8,941 - 74,665
Intangible assets, net 49,027 20,601 2,183 - 71,811
Prepaid pension cost and other 1,133 4,850 21 - 6,004
Investment in subsidiaries 39,458 - 4,218 (43,676) -
--------- -------- -------- --------- ---------
Total assets $ 234,841 $ 76,867 $ 44,678 $ (93,489) $ 262,897
========= ======== ======== ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, accrued expenses
and other $ 20,058 $ 9,611 $ 4,568 $ - $ 34,237
Advances payable--subsidiaries - 43,283 4,703 (47,986) -
Current maturities of long-term obligations 1,030 1,380 1,442 - 3,852
--------- -------- -------- --------- ---------
Total current liabilities 21,088 54,274 10,713 (47,986) 38,089
Long-term obligations 121,718 1,377 386 - 123,481
Retiree benefits and other 15,169 9,994 - - 25,163
Deferred income taxes 3,468 3,040 102 - 6,610
--------- -------- -------- --------- ---------
Total liabilities 161,443 68,685 11,201 (47,986) 193,343
--------- -------- -------- --------- ---------
Stockholders' equity
Common Stock 121 485 87 (572) 121
Additional paid-in capital 65,905 15,662 27,173 (42,835) 65,905
Retained earnings (accumulated deficit) 4,457 (7,965) 10,058 (2,093) 4,457
Dividends 2,877 - (2,877) - -
Accumulated other comprehensive loss 38 - (964) (3) (929)
--------- -------- -------- --------- ---------
73,398 8,182 33,477 (45,503) 69,554
--------- -------- -------- --------- ---------
Total liabilities and stockholders' equity $ 234,841 $ 76,867 $ 44,678 $ (93,489) $ 262,897
========= ======== ======== ========= =========
</TABLE>
-13-
<PAGE>
Condensed Consolidating Statements of Operations (Unaudited)
For the Period from April 24, 1999 to September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Company
--------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $77,406 $51,280 $27,890 $(10,554) $146,022
Cost of sales:
Other costs 40,310 42,103 21,239 (10,554) 93,098
Purchase accounting adjustment
to inventory 7,910 215 883 - 9,008
-------- -------- -------- -------- -------
Gross profit 29,186 8,962 5,768 - 43,916
Selling, general and
administrative expenses 23,413 6,299 4,701 - 34,413
Amortization of intangible assets 1,606 565 14 - 2,185
-------- -------- -------- -------- -------
Operating income 4,167 2,098 1,053 - 7,318
Operating income (expense):
Equity in earnings (losses) of affiliates 1,635 - (602) (1,033) -
Interest expense (9,477) (1,874) 865 - (10,486)
-------- -------- -------- -------- -------
Income (loss) before income taxes
and extraordinary item (3,675) 224 1,316 (1,033) (3,168)
Income taxes (benefit) (1,209) 109 398 - (702)
-------- -------- -------- -------- -------
Income (loss) before extraordinary item (2,466) 115 918 (1,033) (2,466)
Extraordinary item 611 - - - 611
-------- -------- -------- -------- -------
Net income (loss) $(3,077) $115 $918 $(1,033) $(3,077)
======== ======== ======== ======== =======
</TABLE>
-14-
<PAGE>
Condensed Consolidating Statements of Operations (Unaudited)
For the Period from January 1, 1999 to April 23, 1999
(In thousands)
<TABLE>
<CAPTION>
Predecessor
--------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $46,889 $32,731 $17,136 $(9,165) $87,591
Cost of sales 26,237 28,514 12,934 (9,165) 58,520
-------- -------- -------- -------- -------
Gross profit 20,652 4,217 4,202 - 29,071
Selling, general and
administrative expenses 13,665 3,860 3,904 - 21,429
Amortization of intangible assets 470 318 47 - 835
Transaction expenses 11,440 - - - 11,440
-------- -------- -------- -------- -------
Operating income (loss) (4,923) 39 251 - (4,633)
Operating income (expense):
Equity in earnings of affiliates (135) - (394) 529 -
Interest expense (3,193) (1,300) 586 - (3,907)
-------- -------- -------- -------- -------
Income (loss) before income taxes
and extraordinary item (8,251) (1,261) 443 529 (8,540)
Income taxes (benefit) (553) (570) 281 - (842)
-------- -------- -------- -------- -------
Income (loss) before extraordinary item (7,698) (691) 162 529 (7,698)
Extraordinary item 118 - - - 118
-------- -------- -------- -------- -------
Net income (loss) $(7,816) $ (691) $ 162 $ 529 $(7,816)
======== ======== ======== ======== =======
</TABLE>
-15-
<PAGE>
Condensed Consolidating Statements of Income (Unaudited)
Nine months Ended September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Predecessor
--------------------------------------------------------------
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 63,529 71,673 31,333 (16,312) 150,223
-------- ------- ------- --------- --------
Gross profit 47,999 13,461 8,750 - 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
Special charge 731 184 88 - 1,003
-------- ------- ------- --------- --------
Operating income 15,867 3,656 671 - 20,194
Operating income (expense):
Equity in earnings of affiliates 1,512 - 272 (1,784) -
Interest expense (7,259) (3,138) 1,124 - (9,273)
-------- ------- ------- --------- --------
Income before income taxes 10,120 518 2,067 (1,784) 10,921
Income taxes 3,535 200 601 - 4,336
-------- ------- ------- --------- --------
Net income $6,585 $ 318 $1,466 $(1,784) $ 6,585
======== ======= ======= ========= ========
</TABLE>
-16-
<PAGE>
Condensed Consolidating Statements of Comprehensive Income (Unaudited)
For the Period from April 24, 1999 to September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Company
-------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss) $(3,077) $115 $ 918 $(1,033) $(3,077)
Other comprehensive income:
Foreign currency translation adjustments - - 281 3 284
------- ------- ------- ------- -------
Comprehensive income (loss) $(3,077) $115 $1,199 $(1,030) $(2,793)
======= ======= ======= ======= =======
</TABLE>
Condensed Consolidating Statements of Comprehensive Income (Unaudited)
For the Period from January 1, 1999 to April 23, 1999
(In thousands)
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss) $(7,816) $(691) $162 $529 $(7,816)
Other comprehensive loss:
Foreign currency translation adjustments - - (116) - (116)
------- ------- ------- ------- -------
Comprehensive income (loss) $(7,816) $(691) $ 46 $529 $(7,932)
======= ======= ======= ======= =======
</TABLE>
Condensed Consolidating Statements of Comprehensive Income (Unaudited)
Nine Months Ended September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income $6,585 $318 $1,466 $(1,784) $6,585
Other comprehensive income:
Foreign currency translation adjustments - - 390 1 391
------- ------- ------- ------- -------
Comprehensive income $6,585 $318 $1,856 $(1,783) $6,976
======= ======= ======= ======= =======
</TABLE>
-17-
<PAGE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
For the Period from April 24, 1999 to September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Company
-------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net cash provided by
operating activities $ 7,068 $1,111 $2,731 $(1,325) $9,585
Investing activities
Capital expenditures (2,076) (990) (543) - (3,609)
Other (35) (1) (38) - (74)
Advances from (to) subsidiaries (131) - (2,076) 2,207 -
------- ------ ------ ------- ------
Net cash used in investing activities (2,242) (991) (2,657) 2,207 (3,683)
Financing activities
Repayment of long-term obligations (37,870) (1,117) (230) - (39,217)
Proceeds from borrowings 57,797 - - - 57,797
Deferred loan fees (395) - - - (395)
Advances to parent, net (18,783) - - - (18,783)
Advances from (to) subsidiaries - 882 - (882) -
------- ------ ------ ------- ------
Net cash provided from (used in)
financing activities 749 (235) (230) (882) (598)
Net increase (decrease) in cash and cash
equivalents 5,575 (115) (156) - 5,304
Cash and cash equivalents, beginning of
period (173) 297 2,138 - 2,262
------- ------ ------ ------- ------
Cash and cash equivalents, end of
period $5,402 $182 $1,982 $ - $7,566
======= ====== ====== ======= ======
</TABLE>
-18-
<PAGE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
For the Period from January 1, 1999 to April 23, 1999
(In thousands)
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net cash (used in) provided by
operating activities $(7,976) $1,545 $ 124 $ 973 $(5,334)
Investing activities
Capital expenditures (2,538) (824) (276) - (3,638)
Other 49 - - - 49
Advances from (to) subsidiaries 2,132 - (691) (1,441) -
------- ------ ------ ------- ------
Net cash used in investing activities (357) (824) (967) (1,441) (3,589)
Financing activities
Repayment of long-term obligations (25,401) (62) (383) - (25,846)
Proceeds from borrowings 65,337 - - - 65,337
Deferred loan fees (7,606) - - - (7,606)
Proceeds from exercise of stock options 2 - - - 2
Advances to parent, net (24,155) - - - (24,155)
Advances from (to) subsidiaries - (468) - 468 -
------- ------ ------ ------- ------
Net cash provided from (used in)
financing activities 8,177 (530) (383) 468 7,732
Net (decrease) increase in cash and cash
equivalents (156) 191 (1,226) - (1,191)
Cash and cash equivalents, beginning of
period (17) 106 3,364 - 3,453
------- ------ ------ ------- ------
Cash and cash equivalents, end of
period $ (173) $ 297 $2,138 $ - $2,262
======= ====== ====== ======= ======
</TABLE>
-19-
<PAGE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
Nine months Ended September 30, 1998
(In thousands)
<TABLE>
<CAPTION>
Predecessor
-------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating activities
Net cash provided by operating activities $8,946 $ 744 $ 767 $(1,885) $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 (4,397) - 299 4,098 -
------- ------ ------ ------- ------
Net cash (used in) provided from
investing activities (11,482) (3,039) 1,183 4,098 (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>
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis 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 in this report
and the Registrant's Annual Report on Form 10-K for the year ended December 31,
1998. Additionally, management has prepared pro forma results of operations for
the nine months ended September 30, 1999 to enable a meaningful comparison
between 1999 and 1998 results of operations. Accordingly, see "Pro Forma Nine
Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998" discussions below, which compare the nine months ended September, 30, 1999
on a pro forma basis assuming the acquisition and financing had occurred on
January 1, 1999, with 1998 actual results for a more meaningful comparison of
operations.
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.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Net Sales. Net sales for the three months ended September 30, 1999 and 1998,
were $86.1 million and $80.2 million, respectively, an increase of $5.9 million,
or 7%.
Razors and Blades. Net sales of our razors and blades segment for the three
months ended September 30, 1999 and 1998, were $54.7 million and $51.3 million,
respectively, an increase of $3.4 million or 7%.
Net sales of shaving razors and blades for the three months ended September 30,
1999 and 1998, were $37.4 million and $33.9 million, respectively, an increase
of $3.5 million, or 10%. Net sales of domestic value branded shaving products
increased 24%, rebounding from weak sales in the third quarter of 1998,
reflecting sales gains relating to an increase in promotional programs with
several customers, the launch of the new Tri-Flexxx shaving product and overall
increased distribution of the Company's shaving products. Net sales of domestic
private label shaving products increased 1%. Net sales of shaving products in
international markets increased 8% (net of a 1% negative impact of unfavorable
exchange rates) reflecting stronger sales, primarily in the United Kingdom,
Europe, Puerto Rico and Latin America which were somewhat offset by weaker sales
in Canada, Africa, the Middle East and Asia Pacific.
Net sales of blades and bladed hand tools for the three months ended September
30, 1999 and 1998, were $13.1 million and $13.4 million, respectively, a
decrease of $0.3 million, or 2%. This decrease primarily reflects decreased
sales of the Company's Ardell(TM) brands of products due to the timing of
promotional programs.
Net sales of specialty industrial and medical blades for the three months ended
September 30, 1999 and 1998, were $4.2 million and $4.0 million, respectively,
an increase of $0.2 million, or 7%. Sales of specialty industrial products
increased 6% due primarily to the timing of purchases by certain customers.
Sales of medical products increased 7% due primarily to increased distribution
of certain products.
Cotton and Foot Care. Net sales of cotton and foot care products for the three
months ended September 30, 1999 and 1998, were $23.5 million and $22.4 million,
respectively, an increase of $1.1 million or 5%. This increase
-21-
<PAGE>
primarily reflects increased sales in the puffs, pads and swabs product lines
due to increased distribution of products.
Custom Bar Soap. Net sales of the Company's custom bar soap products for the
three months ended September 30, 1999 and 1998, were $7.9 million and $6.5
million, respectively, an increase of $1.4 million or 22%. This increase results
primarily from increased sales volume to certain of the Company's
pharmaceutical/skin care customers.
Gross Profit. Gross profit increased $4.3 million to $31.2 million during the
three months ended September 30, 1999, from $26.9 million for the three months
ended September 30, 1998. As a percentage of net sales, gross profit was 36.2%
for the three months ended September 30, 1999, and 33.6% for the three months
ended September 30, 1998. Blade margins improved due to favorable product mix,
lower material costs and lower manufacturing costs reflecting the Company's
continuing efforts to reduce manufacturing costs. Soap margins improved due to
favorable product mix. This improvement in blade and soap margins was somewhat
offset by increased depreciation expense resulting from the acquisition and
lower margins in the Company's cotton business due to higher manufacturing
overheads resulting primarily from issues related to the continuing integration
and reorganization of the cotton operations.
Operating and Other Expenses. Selling, general and administrative expenses were
24.7% of net sales for the three months ended September 30, 1999, compared to
21.2% for the three months ended September 30, 1998. This increase primarily
reflects an increase in promotional support for the Company's shaving blade
products and an increase in legal fees resulting from the Gillette lawsuit.
Amortization of goodwill and other intangible assets increased $0.6 million to
$1.3 million for the three months ended September 30, 1999, over the three
months ended September 30, 1998, reflecting increased amortization of intangible
assets related to the acquisition. Interest expense increased $3.4 million for
the three months ended September 30, 1999, to $6.5 million over the three months
ended September 30, 1998, due primarily to the write-off of deferred financing
costs of approximately $2.2 million in connection with the reduction in the Term
Loan Facility and increased interest expense, commitment fees and amortization
of deferred loans fees associated with debt incurred in connection with the
acquisition. This increase was somewhat offset by lower interest expense
relating to the Company's $30.7 million purchase of its 9 7/8% Series Senior B
Notes in June 1999.
As of September 30, 1999, approximately $0.7 million remained as an accrued
expense on our balance sheet related to the Company's special charges which is
expected to be substantially paid or utilized for asset write-offs during the
remainder of 1999.
The Company's effective income tax rate was 40.2% for the three months ended
September 30, 1999, versus 39.7% for the three months ended September 30, 1998,
and varies from the United States statutory rate due primarily to nondeductible
goodwill amortization, certain nondeductible transaction expenses and state
income taxes, net of the federal tax benefit.
Pro Forma Condensed Consolidated Statement of Operations for the Nine Months
Ended September 30, 1999
The following unaudited pro forma condensed consolidated statement of operations
has been prepared by management from the historical financial statements of the
Predecessor for the period from January 1, 1999 to April 23, 1999, and the
historical financial statements of the Company for the period from April 24,
1999 to September 30, 1999. The acquisition, and the related financing
transactions, are assumed to have occurred on January 1, 1999. The pro forma
condensed consolidated statement of operations for the nine months ended
September 30, 1999, is not necessarily indicative of the results of operations
that would have occurred for the nine months ended September 30, 1999, had the
acquisition and relating financing transactions occurred on January 1, 1999. In
preparation of the pro forma condensed consolidated statement of operations,
management has made certain estimates and assumptions that affect the amounts
reported in the unaudited pro forma condensed consolidated statement of
operations. The unaudited pro forma condensed consolidated statement of
operations for the nine months ended September 30, 1999, should be read in
conjunction with the historical financial statements and related notes thereto
of the Company which are included in this Form 10-Q and in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
-22-
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Nine Months Ended September 30, 1999
(In Thousands)
<TABLE>
<CAPTION>
Predecessor Predecessor Company Company
Historical Pro Forma Historical Pro Forma
Period from Period From Period From Nine Months
January 1, 1999 January 1, 1999 April 24, 1999 Ended
to April 23, Pro Forma to April 23, to September Pro Forma September
1999 Adjustments 1999 30, 1999 Adjustments 30, 1999
--------------- ----------- --------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $87,591 $87,591 $146,022 $ - $233,613
Cost of sales:
Other costs 58,520 $ 431 (a) 58,951 93,098 - 152,049
Purchase accounting adjustment
to inventory - 9,008 (b) 9,008 9,008 (9,008)(b) 9,008
------ ------ ------ ------ ----- ------
Gross profit 29,071 (9,439) 19,632 43,916 9,008 72,556
Selling, general and administrative
expenses 21,429 68 (c) 21,497 34,413 - 55,910
Amortization of intangibles 835 774 (d) 1,609 2,185 - 3,794
Transaction expenses 11,440 - 11,440 - - 11,440
------ ------ ------ ------ ----- ------
Operating income (loss) (4,633) (10,281) (14,914) 7,318 9,008 1,412
Interest expense 3,907 2,006 (e) 5,913 10,486 (138)(g) 16,261
------ ------ ------ ------ ----- ------
Income (loss) before income taxes
and extraordinary item (8,540) (12,287) (20,827) (3,168) 9,146 (14,849)
Income taxes (benefit) (842) (4,757)(f) (5,599) (702) 3,631 (f) (2,670)
------ ------ ------ ------ ----- ------
Income (loss) before
extraordinary item $(7,698) $(7,530) $(15,228) $(2,466) $5,515 $(12,179)
====== ====== ====== ====== ===== ======
</TABLE>
(a) Adjustment to provide pro forma depreciation expense resulting from the
application of purchase accounting adjustments computed based on the
remaining useful lives of plant and equipment ranging from 3 to 26 years.
(b) Adjustment to reflect the impact on cost of sales of the purchase accounting
adjustment to inventory assuming the acquisition occurred on January 1,
1999.
(c) Adjustment to reflect the elimination of amortization of unrecognized prior
service cost and unrecognized gains related to the Company's pension and
postretirement benefit plans.
(d) Adjustment to reflect the elimination of $705 of amortization related to
historical goodwill and record pro forma amortization of $1,479 related to
intangible assets including goodwill, trademarks and patents recorded in
connection with the acquisition. Goodwill and trademarks are being amortized
over a 40-year useful life and patents are being amortized over a 15-year
useful life. These periods are believed by management to be reasonable based
on the expected lives of the underlying processes, products, and equipment
assumed to be acquired.
(e) Adjustment to reflect (i) the elimination of historical interest expense of
$494 related to the Predecessor's credit facilities, loan commitment fees,
and the amortization of deferred financing costs, (ii) pro forma
amortization of $329 for the $7,606 in deferred financing costs incurred in
connection with the financing, amortized over the respective lives of the
Company's credit facilities, and (iii) pro forma interest expense of $2,171
on the Company's credit facilities related to the balances assumed to be
outstanding on January 1, 1999. Interest expense has been computed assuming
that the LIBOR-based interest rate (plus the applicable margin) option is
selected by the Company. Balances assumed to be outstanding on January 1,
1999, includes $5,000 under the revolving credit facility and $88,000 under
the Term Loan Facility. In addition, the purchase of $30,700 in Senior Notes
on June 10, 1999, was assumed to occur on January 1, 1999.
-23-
<PAGE>
(f) Adjustment to reflect the income tax consequences of the pro forma
adjustments computed at the statutory rate of 39.7% excluding the net
adjustment for goodwill of $305 which is not tax deductible.
(g) Adjustment to reflect (i) pro forma interest expense of $261 on the
Company's credit facilities related to the balances assumed to be
outstanding on April 24, 1999. Interest expense has been computed assuming
that the LIBOR-based interest rate (plus the applicable margin) option is
selected by the Company. Balances assumed to be outstanding on April 24,
1999, are the same as described in (e) above, and (ii) the pro forma
interest expense reduction of $399 related to the $30,700,000 in Senior
Notes which were assumed to be purchased on April 24, 1999.
Pro Forma Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Net Sales. Net sales for the pro forma nine months ended September 30, 1999, and
for the nine months ended September 30, 1998, were $233.6 million and $220.4
million, respectively, an increase of $13.2 million, or 6%.
Razors and Blades. Net sales of our razors and blades segment for the pro forma
nine months ended September 30, 1999, and for the nine months ended September
30, 1998, were $150.2 million and $135.8 million, respectively, an increase of
$14.4 million, or 11%.
Net sales of shaving razors and blades for the pro forma nine months ended
September 30, 1999, and for the nine months ended September 30, 1998, were $99.3
million and $87.7 million, respectively, an increase of $11.6 million, or 13%.
Net sales of domestic value branded shaving products increased 41% rebounding
from weak sales during the first nine months of 1998, reflecting sales gains
relating to an increase in promotional programs with several customers, the
launch of the new Tri-Flexxx shaving product and overall increased distribution
of the Company's shaving products. Net sales of domestic private label shaving
products decreased 1% due primarily to reduced promotional support by certain
customers. Net sales of shaving products in international markets increased 8%
(net of a 2% negative impact of unfavorable exchange rates) reflecting stronger
sales, primarily in the United Kingdom, Europe, Puerto Rico, the Caribbean,
Latin America and Mexico which were somewhat offset by weaker sales in Canada,
Africa, and the Middle East and Asia Pacific.
Net sales of blades and bladed hand tools for the pro forma nine months ended
September 30, 1999, and for the nine months ended September 30, 1998, were $38.9
million and $36.1 million, respectively, an increase of $2.8 million, or 8%.
This growth primarily reflects increased sales of the Company's Personna(R) and
American Line(TM) brands of products as a result of new distribution gains.
Net sales of specialty industrial and medical blades for the pro forma nine
months ended September 30, 1999, and for the nine months ended September 30,
1998, were $12.0 million. Sales of specialty industrial products decreased 6%
due primarily to inventory adjustments by certain customers and mix shifts to
lower priced blade products. Additionally, certain of the Company's distributors
experienced increased competition in their serviced niche markets. Sales of
medical products increased 6% due primarily to increased distribution of certain
products.
Cotton and Foot Care. Net sales of cotton and foot care products for the pro
forma nine months ended September 30, 1999, and for the nine months ended
September 30, 1998, were $62.6 million and $65.8 million, respectively, a
decrease of $3.2 million or 5%. This decrease results primarily from issues
related to the continuing integration and reorganization of the Company's cotton
operations which have led to delays in shipping products to customers and in
turn reduced promotional activity and volume with certain customers.
Custom Bar Soap. Net sales of the Company's custom bar soap products for the pro
forma nine months ended September 30, 1999, and for the nine months ended
September 30, 1998, were $20.8 million and $18.8 million, respectively, an
increase of $2.0 million or 11%. This increase results primarily from increased
sales volume to certain of the Company's pharmaceutical/skin care customers.
Gross Profit. Gross profit increased $2.4 million to $72.6 million for the pro
forma nine months ended September 30, 1999, from $70.2 million for the nine
months ended September 30, 1998. As a percentage of net sales, gross profit was
31.1% for the pro forma nine months ended September 30, 1999, and 31.9% for the
nine months ended September 30, 1998. Excluding the purchase accounting
adjustment to inventory of $9.0 million, gross profit
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<PAGE>
increased $11.4 million to $81.6 million for the nine months ended September 30,
1999, from $70.2 million for the nine months ended September 30, 1998, and as a
percentage of net sales, gross profit was 34.9% for the pro forma nine months
ended September 30, 1999, and 31.9% for the nine months ended September 30,
1998. Blade margins improved due to favorable product mix, lower material costs
and lower manufacturing costs reflecting the Company's continuing efforts to
reduce manufacturing costs. Soap margins improved due to favorable product mix
and lower material costs for certain raw materials. This improvement in blade
and soap margins was somewhat offset by increased depreciation expense resulting
from the acquisition and by lower margins in the Company's cotton operations due
to increased distribution costs and higher manufacturing overheads resulting
primarily from issues related to the continuing integration and reorganization
of the cotton operations.
Operating and Other Expenses. Selling, general and administrative expenses were
23.9% of net sales for the pro forma nine months ended September 30, 1999,
compared to 21.4% for the nine months ended September 30, 1998. This increase
primarily reflects an increase in promotional support for the Company's shaving
blade products and an increase in legal fees resulting from the Gillette
lawsuit. Amortization of goodwill and other intangible assets increased $1.9
million to $3.8 million for the pro forma nine months ended September 30, 1999,
from $1.9 million for the nine months ended September 30, 1998, reflecting
increased amortization of intangible assets related to the acquisition. Interest
expense increased $7.0 million to $16.3 million for the pro forma nine months
ended September 30, 1999, from $9.3 million for the nine months ended September
30, 1998, due primarily to the write-off of deferred financing costs of
approximately $2.2 million in connection with the reduction in the Term Loan
Facility and increased interest expense, commitment fees and amortization of
deferred loan fees associated with debt incurred in connection with the
acquisition. This increase was somewhat offset by lower interest expense
relating to the Company's $30.7 million purchase of its 9 7/8% Series B Senior
Notes in June 1999.
As of September 30, 1999, approximately $0.7 million remained as an accrued
expense on our balance sheet related to the Company's special charges which is
expected to be substantially paid or utilized for asset write-offs during the
remainder of 1999.
In connection with the acquisition transaction the Predecessor incurred
approximately $11.4 million in transaction expenses related primarily to (i)
amounts paid to redeem all of the outstanding options to purchase common stock
of the Predecessor, (ii) costs incurred by or on behalf of the Predecessor in
connection with the acquisition, including legal and other advisory fees, and
(iii) costs incurred by or on behalf of the Predecessor related to payments made
to certain employees of the Predecessor in connection with the change of
control.
Costs of $0.7 million (net of tax benefit) associated with the purchase of the
Senior Notes and repayment of the Terminated Credit Facility (see Note D) are
reflected in the Company's consolidated statement of operations as an
extraordinary item.
The Company's effective income tax rate was (18.0)% for the pro forma nine
months ended September 30, 1999, and 39.7% for the nine months ended September
30, 1998, and varies from the United States statutory rate due primarily to
nondeductible goodwill amortization, certain non-deductible transaction expenses
and state income taxes, net of the federal tax benefit.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash flow from operating
activities and borrowings under its revolving credit facility. Net cash provided
by operating activities amounted to $9.6 million for the period from April 24,
1999, to September 30, 1999, and net cash used in operating activities amounted
to $5.3 million for the period from January 1, 1999, to April 23, 1999,
primarily reflecting the payment of transaction expenses of $11.4 million. Net
cash used in investing activities related primarily to capital expenditures of
$3.6 million for the period from April 24, 1999 to September 30, 1999, and net
cash used in investing activities related to capital expenditures of $3.6
million for the period from January 1, 1999 to April 23, 1999. Net cash used in
financing activities resulted from $18.8 million in net advances to the
Company's parent and deferred loan fees of $0.4 million which were substantially
offset by net borrowings of $18.6 million for the period from April 24, 1999
-25-
<PAGE>
to September 30, 1999, and net cash provided by financing activities resulted
from net borrowings of $39.5 million which was reduced by deferred loan fees of
$7.6 million and $24.2 million in net advances to the Company's parent for the
period from January 1, 1999 to April 23, 1999.
At September 30, 1999, the Company had approximately $25 million available for
future borrowings under its revolving credit facility. Effective July 5, 1999,
the Company permanently reduced the amount available for future borrowings under
its Term Loan Facility by $52.5 million to $112.5 million which represents the
amount of borrowings outstanding under the Term Loan Facility on September 30,
1999.
The Credit Agreement limits the ability of the Company, among other limitations,
to incur certain additional indebtedness, places certain restrictions on the
payment of dividends and limits the amount of annual capital expenditures. The
Credit Agreement also contains certain financial covenants which require the
Company, among other requirements, to meet certain financial ratios relating to
leverage, fixed charges and interest coverage.
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.
Market Risk
The Company is exposed to various market risk factors such as fluctuating
interest rates and changes in foreign currency rates. These risk factors can
impact our results of operations, cash flows and financial position. We manage
these risks through regular operating and financing activities and periodically
use derivative financial instruments such as foreign exchange option and forward
contracts. These derivative instruments are placed with major financial
institutions and are not for speculative or trading purposes.
The following analysis presents the effect on the Company's earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on September 30, 1999 and September 30, 1998. Only the potential
impacts of our hypothetical assumptions are analyzed. The analysis does not
consider other possible effects that could impact our business.
Interest Rate Risk
At September 30, 1999, the Company carried $185.8 million of outstanding debt on
its balance sheet, with $113.3 million of that total held at variable interest
rates. In October 1999, the Company entered into an interest rate cap agreement
and an interest rate swap agreement with the bank covering $56,250,000 of its
variable rate debt outstanding to manage its interest rate risk (See Note D).
Holding all other variables constant, if interest rates hypothetically increased
or decreased by 10%, for the nine months ended September 30, 1999 and 1998, the
impact on earnings, cash flow and financial position would not be material. In
addition, if interest rates hypothetically increased or decreased by 10% on
September 30, 1999, with all other variables held constant, the fair market
value of our $69.3 million 9 7/8% Series B Senior Notes would increase or
decrease by approximately $3.5 million.
Foreign Currency Risk
The Company sells to customers in foreign markets through our foreign operations
and through export sales from our plants in the U.S. These transactions are
often denominated in currencies other than the U.S. dollar. Our primary currency
exposures are the Euro, British Pound Sterling, Canadian Dollar and Mexican
Peso.
The Company limits its foreign currency risk by operational means, mostly by
locating its manufacturing operations in those locations where it has
significant exposures in major currencies. The Company has entered into currency
option contracts to partially offset the risk of foreign currency fluctuations.
The value of these contracts at September 30, 1999 was not material to the
Company's earnings, cash flow and financial position.
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<PAGE>
Merger
Effective April 23, 1999, RSA Acquisition Corporation ("Acquisition"), an
affiliate of "J.W. Childs", completed its $14.20 per share cash tender offer for
all outstanding shares of the Predecessor in accordance with a February 12, 1999
merger agreement upon the terms and subject to the conditions set forth in the
offer to purchase ("the Stock Tender Offer"). Following completion of the offer,
there remained approximately 266,601 American Safety Razor shares outstanding.
On July 1, 1999, RSA Acquisition Corp. and American Safety Razor completed a
merger transaction pursuant to which RSA Acquisition Corp. acquired these
remaining shares of American Safety Razor for $14.20 per share. The aggregate
purchase price, including transaction costs of $1.0 million, paid for the common
stock purchased in the Stock Tender Offer excluding the cost to redeem stock
options, including all of the common stock tendered, was approximately $173.0
million.
Following the merger, the Company became the surviving corporation and is a
direct, wholly- owned subsidiary of RSA Holdings, which is wholly-owned by J.W.
Childs, its affiliates and Company management.
Subsequent to the acquisition and pursuant to the terms of its Indenture, the
Company made an offer to purchase all of its $100 million 9 7/8% Series B Senior
Notes due August 1, 2005 (the "Existing Notes"). In response thereto, $30.7
million of the Existing Notes were properly tendered and retired by the Company.
The Company has accounted for the acquisition as a purchase. The allocation of
the purchase price resulted in purchase adjustments being applied to the assets
acquired and liabilities assumed. The total purchase price of approximately
$172,964,000 was allocated to the acquired assets and assumed liabilities based
on preliminary estimates of their respective fair values at April 23, 1999 as
follows:
Working capital $ 77,054,000
Property, plant and equipment 93,973,000
Intangible assets, including goodwill 177,967,000
Prepaid pension and other assets 46,861,000
Long-term debt (163,685,000)
Other liabilities (59,206,000)
------------
$172,964,000
============
These preliminary estimates are subject to change as they are based on
preliminary appraisals and as certain of the Company's business plans become
finalized.
As a result of the acquisition and new basis of accounting, the Company's
financial statements for the period subsequent to the acquisition are not
comparable to the Predecessor's financial statements for the period prior to the
acquisition. As a result of the application of purchase accounting the Company's
depreciation expense and amortization of intangible assets increased and the
Company adjusted the carrying value of acquired inventories to reflect their
fair market value, which adjustment was written off in the April 24, 1999 to
September 30, 1999 reporting period. In addition, certain fees and expenses
incurred relating to the above transactions were expensed in the period in which
the transactions were completed and are included in the Predecessor's
consolidated statement of operations in the caption "Transaction expenses".
The primary components of this caption are (i) amounts paid to redeem all of the
outstanding options to purchase common stock of the Predecessor, (ii) costs
incurred by or on behalf of the Predecessor in connection with the acquisition,
including legal and other advisory fees, and (iii) costs incurred by or on
behalf of the Predecessor related to payments made to certain employees of the
Predecessor in connection with the change of control.
Contingencies
Refer to Note H - Contingencies to the Notes to Condensed Consolidated Financial
Statements for a discussion of legal contingencies.
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<PAGE>
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 establishes standards for
accounting and disclosure of derivative instruments. This new standard, as
amended by FAS 137, is effective for fiscal quarters of fiscal years beginning
after June 15, 2000. The implementation of this new standard is not expected to
have a material effect on our consolidated results of operations or financial
position.
Year 2000 Computer Issues
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year, as well as hardware
designed with similar constraints. Some of our computer programs and hardware
that have date sensitive functions may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions in operations including, among other things,
a temporary inability to process transactions, receive invoices, make payments
or engage in normal business transactions.
We are taking action to resolve those Year 2000 issues that are under our
control. The overall effort encompasses our razors and blades, cotton and foot
care and custom bar soap business segments and covers international as well as
domestic sites. We are centrally monitoring and controlling the effort; however,
there are designated representatives at each affiliate and subsidiary location
with responsibility for resolving site-specific Year 2000 issues. Following is a
description of the six-phase approach we are using:
(1) Assessment - Identify and inventory all information technology and
non-information technology system components that are possible sources
of Year 2000 issues and assess the criticality of non-compliant
systems in order to establish priorities for replacement or repair.
(2) Strategy - Determine the nature and extent of Year 2000 issues and
select a remediation strategy (i.e., renovate by modifying existing
system, upgrade to a later version of the system, replace with a new
system, or retire the affected component). After the strategy has been
selected, develop project plans to address non-compliant systems,
beginning with the most critical systems.
(3) Remediation - Execute project plans to resolve issues with
non-compliant systems.
(4) Testing - Perform testing to evaluate effectiveness of the corrective
actions taken or to confirm compliance of systems that have been
certified by third parties.
(5) Implementation - Implement the renovated, upgraded, and replaced
system components into the production environment.
(6) Contingency Planning - Continue monitoring readiness and complete
necessary contingency plans.
We have completed the Assessment, Strategy, Remediation, Testing and
Implementation phases for substantially all of our information technology and
non-information technology system components.
Our most mission-critical system is the "Corporate ERP" system, which is a
widely available software package that we have moderately customized. Twelve of
our fifteen manufacturing, packaging and distribution sites utilize the
Corporate ERP system to process orders, control manufacturing
planning/work-order processing, distribute products, manage financial activities
and report financial results. The twelve sites using the Corporate ERP system
include corporate headquarters, U.S., Mexican, Canadian razors and blades sites,
all cotton and foot care facilities, and all custom bar soap facilities. The
third party vendor has responded that all of its software modules in use at
American Safety Razor and our subsidiaries are Year 2000 ready. In addition, the
most frequently utilized system functions have been tested by our users,
including the internally developed system customizations.
We are currently linked with 159 customers for exchange of documents using the
Corporate EDI (electronic data interchange) system. Our EDI software has been
upgraded to a Year 2000 compliant version that is now capable of supporting ANSI
standard version 4010, which provides for a 4 digit year and is the version
which many of
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<PAGE>
our EDI customers are adopting prior to the Year 2000. EDI transactions with a 2
digit year have also been tested and will continue to be supported for those
customers who elect not to convert to a 4 digit year. Approximately 90% of the
159 EDI customers have now been implemented on 4010. Testing with EDI customers
will continue through the remainder of 1999.
All personal computers have been Year 2000 compliance tested and are now Year
2000 ready. In addition, our U.S. and international payroll systems are Year
2000 compliant.
We have assessed the Year 2000 readiness of non-information technology systems
and equipment which may include embedded technology such as micro-controllers.
Our manufacturing, assembly, and packaging machines, operating in each of our
razors and blades, cotton and foot care and custom bar soap segments were tested
and are now Year 2000 ready.
Our "worst-case" scenario at the present time is the disruption of business
operations as the result of supplier Year 2000 related failures, which would
impair their ability to adequately provide us with products or services. Our
business processes depend on our material suppliers as well as our
infrastructure suppliers in areas such as electricity, water, gas,
communications and transportation. Year 2000 related failures by suppliers could
adversely affect business operations including payroll, manufacturing processes,
product distribution, material ordering, customer-order processing and other
support functions dependent on the affected supplier. While we have a limited
ability to test and control our suppliers' and other third parties' Year 2000
readiness, we are contacting major suppliers and other critical third parties to
obtain information as to their Year 2000 readiness. Razors and blades and cotton
and foot care suppliers were surveyed regarding Year 2000 issues and all key
suppliers have indicated they plan to be compliant during 1999. The custom bar
soap business held a meeting with its top suppliers during the second quarter of
1999 for a Year 2000 readiness review.
Considering the number of internal and external systems which we directly or
indirectly use, it is likely that there will be instances of failure that could
cause disruptions in business processes. The likelihood of failures in
infrastructure systems and in the supply chain cannot be estimated and therefore
the impact of these failures on business operations is uncertain. If we or any
critical third party supplier does not complete necessary upgrades as planned,
the Year 2000 issue may have a material impact on us.
Contingency plans will be developed by December 1999, as needed, to address the
risk of business disruption due to supplier Year 2000 issues. As part of
contingency planning, we will consider a number of options to mitigate risk,
including building additional inventory prior to year 2000, establishing manual
backup processes and arranging for alternate suppliers.
Since most of our Year 2000 issues are being addressed through normal planned
upgrades, incremental external Year 2000 costs are expected to be minimal,
approximating $115,000. To date, the Company has spent $115,000, of which
approximately $20,000 was spent during the third quarter of 1999.
Readers are cautioned that forward-looking statements contained in this
discussion of Year 2000 issues should be read in conjunction with our
disclosures under the heading "Forward-Looking Statements" above.
Inflation
Inflation has not been material to our operations within the periods presented.
-29-
<PAGE>
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The information called for by this item is provided under the captions "Market
Risk", "Interest Rate Risk" and "Foreign Currency Risk" under Part I, Item 2 -
Management's Discussion and Analysis of Financial Position and Results of
Operations.
PART II, OTHER INFORMATION
Item 1. Legal Proceedings
The information called for by this item is provided in Note H -
Contingencies to Notes to Condensed Consolidated Financial Statements
under Part I, Item 1. - Financial Statements
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, 1999.
-30-
<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 5, 1999 By /s/James D. Murphy
- ---------------- ---------------------
Date James D. Murphy
President
November 5, 1999 By /s/Alan R. Koss
- ---------------- ---------------------
Date Alan R. Koss
Senior Vice President
Chief Financial Officer
-31-
<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, 1999, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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