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, 2000
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)
240 Cedar Knolls Road, Suite 401, Cedar Knolls, New Jersey 07927
-----------------------------------------------------------------
(Address of principal executive offices, including zip code)
(973) 753-3000
--------------
(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 August 2, 2000.
Class Outstanding at August 2, 2000
----- -----------------------------
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 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Part II. Other Information
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
Company
----------------------------
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,776 $ 12,500
Accounts receivable, net 47,280 46,252
Inventories 60,819 54,404
Deferred income taxes 6,795 6,814
Prepaid expenses 2,345 1,882
-------- --------
Total current assets 121,015 121,852
Property and equipment 104,661 98,398
Less accumulated depreciation (14,878) (8,407)
-------- --------
89,783 89,991
Intangible assets, net:
Goodwill, trademarks and patents 157,506 159,675
Other 5,976 6,826
-------- --------
163,482 166,501
Prepaid pension cost and other 25,886 24,527
-------- --------
Total assets $400,166 $402,871
======== ========
See accompanying notes.
-1-
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
Company
-------------------------------
June 30, December 31,
2000 1999
----------- ----------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,334 $ 13,711
Accrued expenses and other 21,465 23,131
Current maturities of long-term obligations 10,070 10,508
-------- --------
Total current liabilities 47,869 47,350
Long-term obligations 180,126 175,108
Retiree benefits and other 27,662 27,333
Deferred income taxes 24,451 24,078
-------- --------
Total liabilities 280,108 273,869
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 25,000,000
shares authorized; 12,110,349 shares issued and
outstanding at June 30, 2000 and December 31, 1999 121 121
Additional paid-in capital 172,843 172,843
Advances to RSA Holdings Corporation, net (52,383) (42,714)
Retained earnings (accumulated deficit) 334 (1,258)
Accumulated other comprehensive (loss) income (857) 10
-------- --------
120,058 129,002
-------- --------
Total liabilities and stockholders' equity $400,166 $402,871
======== ========
</TABLE>
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 Period
Three from from Six from
Months April 24, April 1, Months January 1,
Ended 1999 to 1999 to Ended 1999 to
June 30, June 30, April 23, June 30, April 23,
2000 1999 1999 2000 1999
-------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $79,921 $59,942 $17,304 $157,130 $87,591
Cost of sales:
Cost of sales 53,419 38,185 11,691 105,220 58,520
Purchase accounting adjustment to inventory - 9,008 - - -
------- ------- ------- -------- -------
Gross profit 26,502 12,749 5,613 51,910 29,071
Selling, general and administrative expenses 17,308 13,130 4,922 37,008 21,429
Amortization of intangible assets 1,174 919 188 2,362 835
Transaction expenses - - 11,440 - 11,440
------- ------- ------- -------- -------
Operating income (loss) 8,020 (1,300) (10,937) 12,540 (4,633)
Interest expense 4,839 3,972 877 9,553 3,907
------- ------- ------- -------- -------
Income (loss) before income taxes
and extraordinary item 3,181 (5,272) (11,814) 2,987 (8,540)
Income taxes (benefit) 1,486 (1,547) (2,142) 1,395 (842)
------- ------- ------- -------- -------
Income (loss) before extraordinary item 1,695 (3,725) (9,672) 1,592 (7,698)
Extraordinary item, net of income tax benefit - 611 118 - 118
------- ------- ------- ------- -------
Net income (loss) $ 1,695 $(4,336) $(9,790) $ 1,592 $(7,816)
======= ======= ======= ======= =======
Basic earnings per share:
Income (loss) before extraordinary item $0.14 $(0.31) $(0.80) $0.13 $(0.64)
Extraordinary item - (0.05) (0.01) - (0.01)
----- ------ ------ ----- ------
Net income (loss) $0.14 $(0.36) $(0.81) $0.13 $(0.65)
===== ====== ====== ===== ======
Weighted average number of shares outstanding 12,110 12,110 12,110 12,110 12,110
------- ------- ------- -------- -------
Diluted earnings per share:
Income (loss) before extraordinary item $0.14 $(0.31) $(0.80) $0.13 $(0.64)
Extraordinary item - (0.05) (0.01) - (0.01)
----- ------ ------ ----- ------
Net income (loss) $0.14 $(0.36) $(0.81) $0.13 $(0.65)
===== ====== ====== ===== ======
Weighted average number of shares outstanding 12,110 12,122 12,207 12,110 12,198
====== ====== ====== ====== ======
</TABLE>
See accompanying notes.
-3-
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Company Predecessor Company Predecessor
------------------- ----------- ------- -----------
Period Period Period
Three from from Six from
Months April 24, April 1, Months January 1,
Ended 1999 to 1999 to Ended 1999 to
June 30, June 30, April 23, June 30, April 23,
2000 1999 1999 2000 1999
-------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Net income (loss) $1,695 $(4,336) $(9,790) $1,592 $(7,816)
Other comprehensive income (loss):
Foreign currency translation adjustments (559) (310) 317 (867) (116)
------ ------- -------- ------ -------
Comprehensive income (loss) $1,136 $(4,646) $(9,473) $ 725 $(7,932)
====== ======= ======= ====== =======
</TABLE>
See accompanying notes.
-4-
<PAGE>
AMERICAN SAFETY RAZOR COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Company Predecessor
--------------------- -----------
Period Period
Six from from
Months April 24, January 1,
Ended 1999 to 1999 to
June 30, June 30, April 23,
2000 1999 1999
-------- ---------- -----------
<S> <C> <C> <C>
Operating activities
Net income (loss) $1,592 $(4,336) $(7,816)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Extraordinary item - 611 118
Depreciation and amortization 8,917 2,960 4,105
Amortization of financing costs 726 346 180
Retiree benefits and other (1,897) (872) (719)
Deferred income taxes 392 (3,326) 232
Changes in operating assets and liabilities:
Accounts receivable (1,028) (6,062) 7,710
Inventories (6,415) 9,623 (7,748)
Income taxes receivable - 1,518 (2,252)
Prepaid expenses (463) (18) 205
Accounts payable 2,623 216 1,723
Accrued and other expenses (1,666) 1,768 (1,072)
------ ------ ------
Net cash provided by (used in) operating activities 2,781 2,428 (5,334)
Investing activities
Capital expenditures (6,347) (1,354) (3,638)
Other - 2 49
------ ------- -------
Net cash used in investing activities (6,347) (1,352) (3,589)
Financing activities
Repayment of long-term obligations (5,450) (33,793) (25,846)
Proceeds from borrowings 10,000 32,801 65,337
Deferred loan fees (39) - (7,606)
Proceeds from exercise of stock options - - 2
Advances to parent, net (9,669) - (24,155)
------ ------- -------
Net cash (used in) provided by financing activities (5,158) (992) 7,732
------ ------- -------
Net (decrease) increase in cash and cash equivalents (8,724) 84 (1,191)
Cash and cash equivalents, beginning of period 12,500 2,262 3,453
------ ------ -------
Cash and cash equivalents, end of period $3,776 $2,346 $2,262
====== ====== ======
</TABLE>
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 (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 2000, are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000.
The balance sheet at December 31, 1999 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, 1999.
As a result of the acquisition of the Company, effective April 23, 1999, 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.
NOTE B - INVENTORIES
Inventories consisted of:
Company
-------------------------------------
June 30, 2000 December 31, 1999
------------- -----------------
(In thousands)
Raw materials $29,008 $27,928
Work-in-process 6,260 4,521
Finished goods 21,319 18,098
Operating supplies 4,232 3,857
------- -------
$60,819 $54,404
======= =======
NOTE C - LONG TERM OBLIGATIONS
In May 2000, the Company amended its $190.0 million credit agreement to provide
for the Company to make a $10.0 million advance to its parent company, RSA
Holdings Corporation, for the partial prepayment of its outstanding note
payable. In May 2000, the Company borrowed $10.0 million under its revolving
credit facility and advanced the $10.0 million to RSA Holdings Corporation to
prepay a portion of its outstanding note payable.
At June 30, 2000, the Company had approximately $15.0 million available for
future borrowings under its revolving credit facility.
-6-
<PAGE>
NOTE D - 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.
NOTE E - SEGMENT INFORMATION
<TABLE>
<CAPTION>
Company Company Predecessor
--------------------- --------------------- ----------------------
Three Months Period from Period from
Ended April 24, 1999 to April 1, 1999 to
June 30, 2000 June 30, 1999 April 23, 1999
--------------------- ---------------------- ----------------------
Operating Operating Operating
Net Income Net Income Net Income
Sales (Loss) Sales (Loss) Sales (Loss)
--------- ---------- --------- ---------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Razors and Blades $52,840 $7,867 $40,332 $(1,861) $10,907 $(10,639)
Cotton and Foot Care 19,420 (364) 13,566 (151) 4,998 (169)
Custom Bar Soap 7,661 517 6,044 712 1,399 (129)
------- ------- ------- -------- ------- --------
$79,921 8,020 $59,942 (1,300) $17,304 (10,937)
======= ======= =======
Interest expense 4,839 3,972 877
------- -------- --------
Income (loss) before income taxes
and extraordinary item $3,181 $(5,272) $(11,814)
====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Company Predecessor
----------------------- ---------------------
Six Months Period from
Ended January 1, 1999 to
June 30, 2000 April 23, 1999
----------------------- ---------------------
Operating Operating
Net Income Net Income
Sales (Loss) Sales (Loss)
--------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Razors and Blades $103,308 $12,451 $55,189 $(4,673)
Cotton and Foot Care 39,646 (309) 25,551 258
Custom Bar Soap 14,176 398 6,851 (218)
--------- -------- -------- -------
$157,130 12,540 $87,591 (4,633)
======== =======
Interest expense 9,553 3,907
-------- -------
Income (loss) before income taxes
and extraordinary item $ 2,987 $(8,540)
======= =======
</TABLE>
Total Assets
------------
June 30, 2000
-------------
Razors and Blades $312,809
Cotton and Foot Care 56,646
Custom Bar Soap 30,711
--------
$400,166
========
-7-
<PAGE>
NOTE F - CONTINGENCIES
Cotton Matter:
--------------
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. No lawsuits have been filed by any of these
customers. The Company has received written notice of claims for damages in the
aggregate amount of approximately $117.0 million. In addition, $113.0 million of
this amount is for alleged lost profits from two customers, which lost profits
have not been substantiated. It is possible that additional damage claims might
be forthcoming. 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 the Company's 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 is advised by
outside counsel that it has strong legal arguments that the aggregate amount of
insurance available for these claims would be sufficient to cover the magnitude
of the claims currently expressed.
The Company also has been advised by its outside counsel that it has a number of
valid defenses to potential customer claims as well as a third party claim
against its suppliers for damages, if any, incurred by the Company. However,
management cannot at this time 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 the Company's exposure
from this matter might not potentially exceed the combination of its insurance
coverages and recourse to its 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 or adversely
affected by an ultimate unfavorable outcome of this matter.
Other Matter:
-------------
In June 1999, the Company received notice of the filing of a lawsuit by The
Gillette Company ("Gillette") asserting claims for damages and injunctive relief
for alleged patent infringement, misappropriation of trade dress, false
advertising and breach of contract in connection with the marketing of the
Company's two-bladed and three- bladed shaving cartridge systems (the MBC(TM)
introduced in 1994 and the Tri-Flexxx(TM) introduced in 1999). In August 1999,
the Company filed an answer and counterclaims in which it denied Gillette's
allegations, sought a declaration that Gillette's patents are not infringed, are
invalid and unenforceable, and asserted counterclaims against Gillette for
damages and injunctive relief for, among other things, alleged antitrust
violations and false advertising. Gillette's time to respond to the Company's
answer and counterclaims has been postponed pending ongoing settlement
discussions. The Company believes that Gillette's claims are without merit and
intends to defend against them vigorously, as well as to vigorously pursue the
Company's counterclaims against Gillette. The Company does not believe it has
any material liability with respect to Gillette's claims described above.
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.
-8-
<PAGE>
NOTE G - ADOPTION OF STOCK INCENTIVE PLAN
In June 2000, RSA Holdings Corporation, the Company's parent, adopted a stock
incentive plan, whereby stock options may be granted to directors, officers and
other key employees of RSA Holdings Corporation and its subsidiaries to purchase
a specified number of shares of common stock for a term not to exceed 10 years.
The plan provides for the granting of options to purchase up to 110,000 shares
of common stock of RSA Holdings Corporation. Grants of options to be issued to
directors, officers and other key employees vest and become exercisable upon the
attainment of certain performance goals at the end of certain performance
periods, as defined in the plan or after nine years.
At June 30, 2000, there were 95,500 stock options outstanding under the RSA
Holdings Corporation stock plan.
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," the Company has accounted for the provisions of the RSA Holdings
Corporation stock plan in its consolidated financial statements. Accordingly,
because the exercise price of the stock options equaled the fair market value of
the underlying stock on the measurement date, no compensation expense was
recognized.
NOTE H - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") 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 and FAS 138, is effective for fiscal quarters of fiscal years
beginning after June 15, 2000. The Company is required to adopt FAS 133 on
January 1, 2001. The implementation of this new standard is not expected to have
a material effect on the Company's results of operations or financial position.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Interpretation
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25. The Company is required to adopt the Interpretation on July 1,
2000. The implementation of this new standard is not expected to have a material
effect on the Company's results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB No.
101 provides additional guidance relating to revenue recognition. The Company is
required to adopt SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, in
the fourth quarter of 2000 and is currently assessing the impact, if any, that
SAB No. 101 may have on the Company's results of operations or financial
position.
-9-
<PAGE>
NOTE I - SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's $69.3 million of 9 7/8% 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 June 30, 2000 and December 31, 1999
(the Company), for the six months ended June 30, 2000 (the Company), for the
period from April 24, 1999 to June 30, 1999 (the Company), and for the period
from January 1, 1999 to April 23, 1999 (Predecessor) of American Safety Razor
Company - the parent company, the guarantor subsidiaries (on a combined basis),
the non-guarantor subsidiaries (on a combined basis), 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 9 7/8% Series B Senior Notes.
-10-
<PAGE>
Condensed Consolidating Balance Sheets (Unaudited)
June 30, 2000
<TABLE>
<CAPTION>
Company
-----------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 124 $ 1,612 $ 2,040 $ - $ 3,776
Accounts receivable, net 21,305 10,265 16,042 (332) 47,280
Advances receivable--subsidiaries 72,490 - - (72,490) -
Inventories 32,146 15,796 13,486 (609) 60,819
Income taxes and prepaid expenses 6,180 2,513 447 - 9,140
-------- ------- ------- --------- --------
Total current assets 132,245 30,186 32,015 (73,431) 121,015
Property and equipment, net 58,491 24,399 6,893 - 89,783
Intangible assets, net 135,951 22,496 5,035 - 163,482
Prepaid pension cost and other 17,110 8,756 20 - 25,886
Investment in subsidiaries 32,588 - 7,171 (39,759) -
-------- ------- ------- --------- --------
Total assets $376,385 $85,837 $51,134 $(113,190) $400,166
======== ======= ======= ========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, accrued expenses
and other $ 22,064 $ 9,892 $ 5,847 $ (4) $ 37,799
Advances payable--subsidiaries 7,633 48,339 17,455 (73,427) -
Current maturities of long-term obligations 9,946 99 25 - 10,070
-------- ------- ------- --------- --------
Total current liabilities 39,643 58,330 23,327 (73,431) 47,869
Long-term obligations 179,992 134 - - 180,126
Retiree benefits and other 17,007 10,655 - - 27,662
Deferred income taxes 19,679 4,448 324 - 24,451
-------- ------- ------- --------- --------
Total liabilities 256,321 73,567 23,651 (73,431) 280,108
-------- ------- ------- --------- --------
Stockholders' equity
Common stock 121 - - - 121
Additional paid-in capital 172,843 12,948 23,736 (36,684) 172,843
Advances to RSA Holdings Corporation, net (52,383) - - - (52,383)
Retained earnings (accumulated deficit) 334 (678) 4,604 (3,926) 334
Accumulated other comprehensive loss (851) - (857) 851 (857)
-------- ------- ------- --------- --------
120,064 12,270 27,483 (39,759) 120,058
-------- ------- ------- --------- --------
Total liabilities and stockholders' equity $376,385 $85,837 $51,134 $(113,190) $400,166
======== ======= ======= ========= ========
</TABLE>
-11-
<PAGE>
Condensed Consolidating Balance Sheets
December 31, 1999
<TABLE>
<CAPTION>
Company
----------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,221 $ 1,180 $ 5,081 $ 18 $ 12,500
Accounts receivable, net 19,927 12,906 13,751 (332) 46,252
Advances receivable--subsidiaries 59,790 - - (59,790) -
Inventories 29,825 13,322 11,947 (690) 54,404
Income taxes and prepaid expenses 6,511 1,912 273 - 8,696
-------- ------- ------- --------- --------
Total current assets 122,274 29,320 31,052 (60,794) 121,852
Property and equipment, net 58,005 24,731 7,255 - 89,991
Intangible assets, net 138,404 22,994 5,103 - 166,501
Prepaid pension cost and other 16,133 8,373 21 - 24,527
Investment in subsidiaries 32,506 - 8,587 (41,093) -
-------- ------- ------- --------- --------
Total assets $367,322 $85,418 $52,018 $(101,887) $402,871
======== ======= ======= ========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, accrued expenses
and other $ 19,299 $10,830 $ 6,714 $ (1) $ 36,842
Advances payable--subsidiaries - 44,289 16,504 (60,793) -
Current maturities of long-term obligations 7,964 1,417 1,127 - 10,508
-------- ------- ------- --------- --------
Total current liabilities 27,263 56,536 24,345 (60,794) 47,350
Long-term obligations 174,954 154 - - 175,108
Retiree benefits and other 16,750 10,583 - - 27,333
Deferred income taxes 19,353 4,392 333 - 24,078
-------- ------- ------- --------- --------
Total liabilities 238,320 71,665 24,678 (60,794) 273,869
-------- ------- ------- --------- --------
Stockholders' equity
Common stock 121 485 87 (572) 121
Additional paid-in capital 172,843 12,463 23,391 (35,854) 172,843
Advances to RSA Holdings Corporation, net (42,714) - - - (42,714)
Retained earnings (accumulated deficit) (1,258) 805 3,852 (4,657) (1,258)
Accumulated other comprehensive
income 10 - 10 (10) 10
-------- ------- ------- --------- --------
129,002 13,753 27,340 (41,093) 129,002
-------- ------- ------- ---------- --------
Total liabilities and stockholders' equity $367,322 $85,418 $52,018 $(101,887) $402,871
======== ======= ======= ========= ========
</TABLE>
-12-
<PAGE>
Condensed Consolidating Statements of Operations (Unaudited)
Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Company
---------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net sales $82,276 $54,284 $33,506 $(12,936) $157,130
Cost of sales 46,888 46,253 25,015 (12,936) 105,220
------- ------- ------- -------- --------
Gross profit 35,388 8,031 8,491 - 51,910
Selling, general and
administrative expenses 23,625 7,442 5,941 - 37,008
Amortization of intangible assets 1,796 498 68 - 2,362
------- ------- ------- -------- --------
Operating income 9,967 91 2,482 - 12,540
Other income (expense):
Equity in earnings (losses) of affiliates 685 - (1,416) 731 -
Interest expense (8,333) (2,297) 1,077 - (9,553)
------- ------- ------- -------- --------
Income (loss) before income taxes 2,319 (2,206) 2,143 731 2,987
Income taxes (benefit) 727 (723) 1,391 - 1,395
------- ------- ------- -------- --------
Net income (loss) $ 1,592 $(1,483) $ 752 $ 731 $ 1,592
======= ======= ======= -======= ========
</TABLE>
-13-
<PAGE>
Condensed Consolidating Statements of Income (Unaudited)
For the Period from April 24, 1999 to June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Company
--------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $32,902 $19,729 $11,751 $(4,440) $59,942
Cost of sales:
Other costs 17,452 16,358 8,815 (4,440) 38,185
Purchase accounting adjustment
to inventory 7,910 215 883 - 9,008
------- ------- ------- ------- -------
Gross profit 7,540 3,156 2,053 - 12,749
Selling, general and
administrative expenses 8,898 2,287 1,945 - 13,130
Amortization of intangible assets 676 236 7 - 919
------- ------- ------- ------- -------
Operating income (loss) (2,034) 633 101 - (1,300)
Operating income (expense):
Equity in earnings (losses) of affiliates 286 - (484) 198 -
Interest expense (3,561) (764) 353 - (3,972)
------- ------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item (5,309) (131) (30) 198 (5,272)
Income taxes (benefit) (1,584) (16) 53 - (1,547)
------- ------- ------- ------- -------
Income (loss) before extraordinary item (3,725) (115) (83) 198 (3,725)
Extraordinary item 611 - - - 611
------- ------- ------- ------- -------
Net income (loss) $(4,336) $ (115) $ (83) $ 198 $(4,336)
======= ======= ======= ======= =======
</TABLE>
-14-
<PAGE>
Condensed Consolidating Statements of 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
------- ------------ ------------ ------------ ------------
<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 Comprehensive Income (Unaudited)
Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Company
--------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income (loss) $1,592 $(1,483) $ 752 $ 731 $1,592
Other comprehensive loss:
Foreign currency translation adjustments (861) - (867) 861 (867)
------ ------- ------ ------ ------
Comprehensive income (loss) $ 731 $(1,483) $(115) $1,592 $ 725
====== ======= ===== ====== ======
</TABLE>
Condensed Consolidating Statements of Comprehensive Income (Unaudited)
For the Period from April 24, 1999 to June 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) $(4,336) $(115) $ (83) $198 $(4,336)
Other comprehensive loss:
Foreign currency translation adjustments - - (313) 3 (310)
------- ----- ----- ---- -------
Comprehensive income (loss) $(4,336) $(115) $(396) $201 $(4,646)
======= ===== ===== ==== =======
</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>
-16-
<PAGE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Company
--------------------------------------------------------------
Non-
Guarantor guarantor
ASR Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Operating activities
Net cash provided by (used in)
operating activities $6,434 $(1,064) $(2,571) $ (18) $2,781
Investing activities
Capital expenditures (4,776) (1,186) (385) - (6,347)
Advances from (to) subsidiaries (5,067) - - 5,067 -
------ ------- ------- ------ ------
Net cash used in investing activities (9,843) (1,186) (385) 5,067 (6,347)
Financing activities
Repayment of long-term obligations (2,980) (1,368) (1,102) - (5,450)
Proceeds from borrowings 10,000 - - - 10,000
Deferred loan fees (39) - - - (39)
Advances to parent (9,669) - - - (9,669)
Advances from (to) subsidiaries - 4,050 1,017 (5,067) -
------ ------ ------ ------ ------
Net cash (used in) provided by
financing activities (2,688) 2,682 (85) (5,067) (5,158)
Net (decrease) increase in cash and cash
equivalents (6,097) 432 (3,041) (18) (8,724)
Cash and cash equivalents, beginning of
period 6,221 1,180 5,081 18 12,500
------ ------ ------ ------ ------
Cash and cash equivalents, end of
period` $ 124 $1,612 $2,040 $ - $3,776
====== ====== ====== ====== ======
</TABLE>
-17-
<PAGE>
Condensed Consolidating Statements of Cash Flows (Unaudited)
For the Period from April 24, 1999 to June 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 (used in)
operating activities $2,341 $(892) $ 941 $ 38 $2,428
Investing activities
Capital expenditures (1,132) (206) (16) - (1,354)
Other (34) - 36 - 2
Advances from (to) subsidiaries (1,587) - (641) 2,228 -
------ ------- ------ ----- -------
Net cash used in investing activities (2,753) (206) (621) 2,228 (1,352)
Financing activities
Repayment of long-term obligations (32,209) (1,280) (304) - (33,793)
Proceeds from borrowings 32,801 - - - 32,801
Advances from (to) subsidiaries - 2,266 - (2,266) -
------- ----- ----- ------ -------
Net cash provided by (used in)
financing activities 592 986 (304) (2,266) (992)
Net increase (decrease) in cash and cash
equivalents 180 (112) 16 - 84
Cash and cash equivalents, beginning of
period (173) 297 2,138 - 2,262
------ ----- ------ ------ ------
Cash and cash equivalents, end of
period $ 7 $ 185 $2,154 $ - $2,346
====== ===== ====== ====== ======
</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 by (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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The following discussion and analysis of financial condition and results of
operations 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,
1999. Additionally, management has prepared pro forma results of operations for
the three and six months ended June 30, 1999 to enable a meaningful comparison
between 2000 and 1999 results of operations. Accordingly, see "Three Months
Ended June 30, 2000 Compared to Pro Forma Three Months Ended June 30, 1999 and
Six Months Ended June 30, 2000 Compared to Pro Forma Six Months Ended June 30,
1999" discussions below, which compare the three and six months ended June, 30,
1999 on a pro forma basis assuming the acquisition and related financing
transactions had occurred on April 1, 1999 and January 1, 1999, respectively,
with 2000 actual results for a more meaningful comparison of operations.
Forward-Looking Statements
Management's discussion and analysis of financial condition and results of
operations and other sections of this Report contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We intend for the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding the
Company's expected financial position, business and financing plans are
forward-looking statements. 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.
Pro Forma Condensed Consolidated Statement of Operations for the Three Months
Ended June 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 April 1, 1999 to April 23, 1999, and the
historical financial statements of the Company for the period from April 24,
1999 to June 30, 1999. The acquisition, and the related financing transactions,
are assumed to have occurred on April 1, 1999. The pro forma condensed
consolidated statement of operations for the three months ended June 30, 1999,
is not necessarily indicative of the results of operations that would have
occurred for the three months ended June 30, 1999, had the acquisition and
relating financing transactions occurred on April 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 three
months ended June 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, 1999.
-20-
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Three Months Ended June 30, 1999
(In Thousands)
<TABLE>
<CAPTION>
Predecessor Predecessor Company
Historical Pro Forma Historical Company
Period from Period From Period From Pro Forma
April 1, 1999 April 1, 1999 April 24, 1999 Three Months
to April 23, Pro Forma to April 23, to June 30, Pro Forma Ended
1999 Adjustments 1999 1999 Adjustments June 30, 1999
------------- ----------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $17,304 $ 17,304 $59,942 $ - $ 77,246
Cost of sales:
Cost of sales 11,691 $ 94 (a) 11,785 38,185 - 49,970
Purchase accounting adjustment
to inventory - 3,453 (b) 3,453 9,008 (3,453)(b) 9,008
------- ------- -------- ------- ------ --------
Gross profit 5,613 (3,547) 2,066 12,749 3,453 18,268
Selling, general and administrative
expenses 4,922 14 (c) 4,936 13,130 - 18,066
Amortization of intangible assets 188 118 (d) 306 919 - 1,225
Transaction expenses 11,440 - 11,440 - - 11,440
------- ------- -------- ------- ------ --------
Operating loss (10,937) (3,679) (14,616) (1,300) 3,453 (12,463)
Interest expense 877 406 (e) 1,283 3,972 (138)(g) 5,117
------- ------- -------- ------- ------ --------
Loss before income taxes
and extraordinary item (11,814) (4,085) (15,899) (5,272) 3,591 (17,580)
Income taxes (benefit) (2,142) (1,653)(f) (3,795) (1,547) 1,426 (f) (3,916)
------- ------- -------- ------- ------ --------
Loss before
extraordinary item $(9,672) $(2,432) $(12,104) $(3,725) $2,165 $(13,664)
======= ======= ======== ======= ====== ========
</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.
(b) Adjustment to reflect the impact on cost of sales of additional inventory
costs resulting from adjusting the carrying value of acquired inventories to
reflect their estimated fair market value assuming the acquisition occurred
on April 1, 1999.
(c) Adjustment to reflect the elimination of amortization of unrecognized prior
service cost and unrecognized gains related to the Predecessor's pension and
postretirement benefit plans.
(d) Adjustment to reflect the elimination of $159 of amortization related to
historical goodwill and record pro forma amortization of $277 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
$108 related to the Predecessor's credit facilities, loan commitment fees,
and the amortization of deferred financing costs, (ii) pro forma
amortization of $72 for the $8,001 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 $442 on
the Company's credit facilities related to the balances assumed to be
outstanding on April 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 April 1,
1999, include $5,000 under the revolving credit facility and $88,000 under
the Term Loan Facility. In addition, the purchase of
-21-
<PAGE>
$30,700 in Senior Notes on June 10, 1999, was assumed to occur on April 1,
1999.
(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 $80 which is not tax deductible.
(g) Adjustment to reflect 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. Adjustment to reflect 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.
Three Months Ended June 30, 2000 Compared to Pro Forma Three Months Ended June
30, 1999
Net Sales. Net sales for the three months ended June 30, 2000, and for the pro
forma three months ended June 30, 1999, were $79.9 million and $77.2 million,
respectively, an increase of $2.7 million, or 3.5%.
Razors and Blades. Net sales of our razors and blades segment for the three
months ended June 30, 2000, and for the pro forma three months ended June 30,
1999, were $52.8 million and $51.2 million, respectively, an increase of $1.6
million or 3.1%.
Net sales of shaving razors and blades for the three months ended June 30, 2000,
and for the pro forma three months ended June 30, 1999, were $35.3 million and
$32.8 million, respectively, an increase of $2.5 million, or 7.4%. Net sales of
domestic value branded shaving products decreased 13.3%. Net sales for the three
months ended June 30, 1999, were favorably affected by the launch of the
Tri-Flexxx shaving product and by sales of the Revlon Perfect Finish(TM) shaving
system which was discontinued in September 1999. The decrease in domestic value
branded shaving products net sales also reflects a decline in promotional
programs and inventory reductions by a key customer. Net sales of domestic
private label shaving products increased 5.0% primarily reflecting sales gains
relating to the Tri-Flexxx and Premier Comfort shaving products. Net sales of
shaving products in international markets increased 28.0% (net of a 6% negative
impact of unfavorable exchange rates) reflecting stronger sales in most of the
Company's markets.
Net sales of blades and bladed hand tools for the three months ended June 30,
2000, and for the pro forma three months ended June 30, 1999, were $13.3 million
and $14.2 million, respectively, a decrease of $0.9 million, or 5.8%. The
decrease primarily reflects the timing of seasonal promotional volume.
Net sales of specialty industrial and medical blades for the three months ended
June 30, 2000, and for the pro forma three months ended June 30, 1999, were
unchanged at $4.2 million.
Cotton and Foot Care. Net sales of cotton and foot care products for the three
months ended June 30, 2000, and for the pro forma three months ended June 30,
1999, were $19.4 million and $18.6 million, respectively, an increase of $0.8
million or 4.6%. The increase results primarily from an increase in promotional
programs with several customers which was somewhat offset by reduced sales
resulting from issues related to the cotton coil matter (see Note F to the
condensed consolidated financial statements).
Custom Bar Soap. Net sales of the Company's custom bar soap products for the
three months ended June 30, 2000, and for the pro forma three months ended June
30, 1999, were $7.7 million and $7.4 million, respectively, an increase of $0.3
million or 2.9%. The increase results primarily from increased sales volume to
several of the Company's skin care and specialty customers.
Gross Profit. Gross profit increased $8.2 million to $26.5 million during the
three months ended June 30, 2000, from $18.3 million for the pro forma three
months ended June 30, 1999 due primarily to the purchase accounting adjustment
to inventory of $9.0 million for the pro forma three months ended June 30, 1999.
As a percentage of net sales, gross profit was 33.2% for the three months ended
June 30, 2000, and 23.6% for the pro forma three months ended June 30, 1999.
Excluding the 1999 purchase accounting adjustment to inventory of $9.0 million,
gross profit decreased $0.8 million to $26.5 million for the three months ended
June 30, 2000, from $27.3 million
-22-
<PAGE>
for the pro forma three months ended June 30, 1999, and as a percentage of net
sales, gross profit was 33.2% for the three months ended June 30, 2000, and
35.3% for the pro forma three months ended June 30, 1999. Blade margins declined
due primarily to product mix, higher material costs, higher depreciation expense
related to capacity expansion projects and from the negative impact of
unfavorable exchange rates, primarily the Euro. Cotton margins declined due
primarily to product mix and higher manufacturing overheads.
Operating and Other Expenses. Selling, general and administrative expenses were
21.7% of net sales for the three months ended June 30, 2000, compared to 23.4%
for the pro forma three months ended June 30, 1999. The decrease primarily
reflects a decrease in promotional spending for our shaving blade products which
was somewhat offset by an increase in product development costs and an increase
in marketing and administrative overhead associated with the new management team
and the new corporate headquarters. Amortization of intangible assets was
substantially unchanged at $1.2 million for the three months ended June 30,
2000, and the pro forma three months ended June 30, 1999. Interest expense
decreased $0.3 million to $4.8 million for the three months ended June 30, 2000,
from $5.1 million for the pro forma three months ended June 30, 1999, due
primarily to lower commitment fee expense relating to the permanent reduction in
the amount of available borrowings under the Company's term loan facility of
$52.5 million in July 1999. The decrease was substantially offset by increased
interest expense resulting from additional debt and amortization of deferred
loan fees incurred in connection with the acquisition, additional borrowings
under the Company's revolving credit facility and an increase in interest rates.
In connection with the 1999 acquisition 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 1999 purchase of
the Senior Notes and repayment of the terminated credit facility are reflected
in the consolidated statement of operations as an extraordinary item.
The Company's effective income tax rate was 46.7% for the three months ended
June 30, 2000, versus (22.3)% for the pro forma three months ended June 30,
1999, and varies from the United States statutory rate due primarily to
nondeductible goodwill amortization, certain nondeductible transaction expenses
in 1999 and state income taxes, net of the federal tax benefit.
Pro Forma Condensed Consolidated Statement of Operations for the Six Months
Ended June 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 June 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 six months ended June 30, 1999, is
not necessarily indicative of the results of operations that would have occurred
for the six months ended June 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 six
months ended June 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, 1999.
-23-
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
Six Months Ended June 30, 1999
(In Thousands)
<TABLE>
<CAPTION>
Predecessor Predecessor Company
Historical Pro Forma Historical Company
Period from Period From Period From Pro Forma
January 1, 1999 January 1,1999 April 24,1999 Six Months
to April 23, Pro Forma April 23, to June 30, Pro Forma Ended
1999 Adjustments 1999 1999 Adjustments June 30, 1999
--------------- ----------- --------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $87,591 $87,591 $59,942 $ - $147,533
Cost of sales:
Cost of sales 58,520 $ 460 (a) 58,980 38,185 - 97,165
Purchase accounting adjustment
to inventory - 9,008 (b) 9,008 9,008 (9,008)(b) 9,008
--------- ------- -------- ------- ------ ---------
Gross profit 29,071 (9,468) 19,603 12,749 9,008 41,360
Selling, general and administrative
expenses 21,429 68 (c) 21,497 13,130 - 34,627
Amortization of intangible assets 835 638 (d) 1,473 919 - 2,392
Transaction expenses 11,440 - 11,440 - - 11,440
------- ------ -------- --------- -------- --------
Operating loss (4,633) (10,174) (14,807) (1,300) 9,008 (7,099)
Interest expense 3,907 2,030 (e) 5,937 3,972 (138)(g) 9,771
-------- ------ -------- ------- ------- ---------
Loss before income taxes
and extraordinary item (8,540) (12,204) (20,744) (5,272) 9,146 (16,870)
Income taxes (benefit) (842) (4,666)(f) (5,508) (1,547) 3,631 (f) (3,424)
-------- ------- ------- ------- ------ ---------
Loss before
extraordinary item $(7,698) $(7,538) $(15,236) $(3,725) $5,515 $(13,446)
======= ======= ======== ======= ====== ========
</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.
(b) Adjustment to reflect the impact on cost of sales of additional inventory
costs resulting from adjusting the carrying value of acquired inventories to
reflect their estimated fair market value 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 Predecessor'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 $1,343 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 $353 for the $8,001 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, include $5,000 under the revolving credit facility and $88,000 under
the Term Loan Facility. In addition, the purchase
-24-
<PAGE>
of $30,700 in Senior Notes on June 10, 1999, was assumed to occur on January
1, 1999.
(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 $451 which is not tax deductible.
(g) Adjustment to reflect 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. Adjustment to reflect 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.
Six Months Ended June 30, 2000 Compared to Pro Forma Six Months Ended June 30,
1999
Net Sales. Net sales for the six months ended June 30, 2000, and for the pro
forma six months ended June 30, 1999, were $157.1 million and $147.5 million,
respectively, an increase of $9.6 million, or 6.5%.
Razors and Blades. Net sales of our razors and blades segment for the six months
ended June 30, 2000, and for the pro forma six months ended June 30, 1999, were
$103.3 million and $95.5 million, respectively, an increase of $7.8 million, or
8.2%.
Net sales of shaving razors and blades for the six months ended June 30, 2000,
and for the pro forma six months ended June 30, 1999, were $69.7 million and
$61.9 million, respectively, an increase of $7.8 million, or 12.6%. Net sales of
domestic value branded shaving products decreased 4.5%. Net sales for the six
months ended June 30, 1999, were favorably affected by sales of the Revlon
Perfect Finish(TM) shaving system which was discontinued in September 1999. The
decrease in domestic value branded shaving products net sales also reflects a
decline in promotional programs and inventory reductions by a key customer. Net
sales of domestic private label shaving products increased 12.0% primarily
reflecting sales gains relating to the Tri-Flexxx and Premier Comfort shaving
products. Net sales of shaving products in international markets increased 28.2%
(net of a 5% negative impact of unfavorable exchange rates) reflecting stronger
sales in most of the Company's markets.
Net sales of blades and bladed hand tools for the six months ended June 30,
2000, and for the pro forma six months ended June 30, 1999, were $25.5 million
and $25.7 million, respectively, a decrease of $0.2 million, or 1.0%. The
decrease primarily reflects the timing of seasonal promotional volume. Excluding
this impact, core volume increased 3.2%.
Net sales of specialty industrial and medical blades for the six months ended
June 30, 2000, and for the pro forma six months ended June 30, 1999, were $8.1
million and $7.9 million, respectively, an increase of $0.2 million, or 3.3%.
Sales of specialty industrial products increased 9.0% reflecting distribution
gains. Sales of medical products were substantially unchanged.
Cotton and Foot Care. Net sales of cotton and foot care products for the six
months ended June 30, 2000, and for the pro forma six months ended June 30,
1999, were $39.6 million and $39.1 million, respectively, an increase of $0.5
million or 1.4%. The increase results primarily from an increase in promotional
programs with several customers which was somewhat offset by reduced sales
resulting from issues related to the cotton coil matter (see Note F to the
condensed consolidated financial statements).
Custom Bar Soap. Net sales of the Company's custom bar soap products for the six
months ended June 30, 2000, and for the pro forma six months ended June 30,
1999, were $14.2 million and $12.9 million, respectively, an increase of $1.3
million or 9.9%. The increase results primarily from increased sales volume to
several of the Company's skin care and specialty customers.
Gross Profit. Gross profit increased $10.5 million to $51.9 million for the six
months ended June 30, 2000, from $41.4 million for the pro forma six months
ended June 30, 1999 due primarily to the purchase accounting adjustment to
inventory of $9.0 million for the pro forma six months ended June 30, 1999, and
to higher sales volume. As a percentage of net sales, gross profit was 33.0% for
the six months ended June 30, 2000, and 28.0%
-25-
<PAGE>
for the pro forma six months ended June 30, 1999. Excluding the 1999 purchase
accounting adjustment to inventory of $9.0 million, gross profit increased $1.5
million to $51.9 million for the six months ended June 30, 2000, from $50.4
million for the pro forma six months ended June 30, 1999, and as a percentage of
net sales, gross profit was 33.0% for the six months ended June 30, 2000, and
34.1% for the pro forma six months ended June 30, 1999. Blade margins declined
due primarily to product mix, higher material costs, higher depreciation expense
related to capacity expansion projects and from the negative impact of
unfavorable exchange rates, primarily the Euro.
Operating and Other Expenses. Selling, general and administrative expenses were
23.6% of net sales for the six months ended June 30, 2000, compared to 23.5% for
the pro forma six months ended June 30, 1999. The increase primarily reflects an
increase in legal fees arising from the Gillette lawsuit and an increase in
marketing and administrative overhead associated with the new management team
and the new corporate headquarters. The increase was substantially offset by a
decrease in promotional spending for our shaving blade products. Amortization of
intangible assets was substantially unchanged at $2.4 million for the six months
ended June 30, 2000, and for the pro forma six months ended June 30, 1999.
Interest expense decreased $0.2 million to $9.6 million for the six months ended
June 30, 2000, from $9.8 million for the pro forma six months ended June 30,
1999, due primarily to lower commitment fee expense relating to the permanent
reduction in the amount of available borrowings under the Company's term loan
facility of $52.5 million in July 1999. The decrease was substantially offset by
increased interest expense resulting from additional debt and amortization of
deferred loan fees incurred in connection with the acquisition, additional
borrowings under the Company's revolving credit facility and an increase in
interest rates.
In connection with the 1999 acquisition 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 1999 purchase of
the Senior Notes and repayment of the terminated credit facility are reflected
in the consolidated statement of operations as an extraordinary item.
The Company's effective income tax rate was 46.7% for the six months ended June
30, 2000, and (20.3)% for the pro forma six months ended June 30, 1999, and
varies from the United States statutory rate due primarily to nondeductible
goodwill amortization, certain non deductible transaction expenses in 1999 and
state income taxes, net of the federal tax benefit.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash flow from operations and
borrowings under its revolving credit facility. Net cash provided by operating
activities amounted to $2.8 million for the six months ended June 30, 2000. Net
cash provided by operating activities amounted to $2.4 million for the period
from April 24, 1999, to June 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.
Net cash provided by operating activities for the six months ended June 30, 2000
primarily reflects an increase in net income and net changes in working capital
accounts. Net cash used in investing activities related to capital expenditures
of $6.3 million for the six months ended June 30, 2000. Net cash used in
financing activities resulted from $9.7 million in net advances to the Company's
parent which was somewhat offset by $4.6 million in net borrowings for the six
months ended June 30, 2000.
In May 2000, the Company amended its $190.0 million credit agreement to provide
for the Company to make a $10.0 million advance to its parent company, RSA
Holdings Corporation, for the partial prepayment of its outstanding note
payable. In May 2000, the Company borrowed $10.0 million under its revolving
credit facility and advanced the $10.0 million to RSA Holdings Corporation to
prepay a portion of its outstanding note payable.
At June 30, 2000, the Company had approximately $15.0 million available for
future borrowings under its revolving credit facility.
-26-
<PAGE>
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 and debt service requirements as well as support the Company's
growth-oriented strategy for its existing business for at least the next 12
months.
The Company's ability to fund operations, make capital expenditures and make
scheduled principal and interest payments or to refinance the Company's
indebtedness will depend upon future financial and operating performance, which
will be affected by prevailing economic conditions and financial, business and
other factors, some of which are beyond the Company's control.
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 results of operations, cash flows and financial position. The Company
manages these risks through regular operating and financing activities and
periodically uses derivative financial instruments such as foreign exchange
option and forward contracts and interest rate cap and swap agreements. 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 June 30, 2000 and June 30, 1999. Only the potential impacts of
hypothetical assumptions are analyzed. The analysis does not consider other
possible effects that could impact the business.
Interest Rate Risk
At June 30, 2000, the Company carried $190.2 million of outstanding debt on its
balance sheet, with $119.7 million of that total held at variable interest
rates. The Company has entered into an interest rate cap agreement and an
interest rate swap agreement with a bank covering $56.3 million of its variable
rate debt outstanding to manage its interest rate risk. Holding all other
variables constant, if interest rates hypothetically increased or decreased by
10%, for the six months ended June 30, 2000 and 1999, 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 June 30, 2000, 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 foreign operations and
through export sales from plants in the U.S. These transactions are often
denominated in currencies other than the U.S. dollar. The 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 to major currencies. The Company periodically enters into
currency option contracts to partially offset the risk of foreign currency
fluctuations. There were no currency contracts outstanding at June 30, 2000.
Contingencies
Refer to Note F - Contingencies to the Notes to Condensed Consolidated Financial
Statements for a discussion of legal contingencies.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (the "FASB") 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 and FAS 138, is effective for fiscal quarters of fiscal years
beginning after June 15, 2000. The Company is required to adopt FAS 133 on
January 1, 2001. The implementation of this new standard is not expected to
-27-
<PAGE>
have a material effect on the Company's results of operations or financial
position.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", an interpretation of APB
Opinion No. 25, "Accounting for Stock Issued to Employees." The Interpretation
clarifies guidance for certain issues that arose in the application of APB
Opinion No. 25. The Company is required to adopt the Interpretation on July 1,
2000. The implementation of this new standard is not expected to have a material
effect on the Company's results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements". SAB No.
101 provides additional guidance relating to revenue recognition. The Company is
required to adopt SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, in
the fourth quarter of 2000 and is currently assessing the impact, if any, that
SAB No. 101 may have on the Company's results of operations or financial
position.
Inflation
Inflation has not been material to the Company's operations within the periods
presented.
Item 3. Quantitative and Qualitative Disclosures About 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 Condition and Results of
Operations of this Report.
PART II, OTHER INFORMATION
Item 1. Legal Proceedings
The information called for by this item is provided in Note F -
Contingencies to Notes to Condensed Consolidated Financial Statements
under Part I, Item 1. - Financial Statements of this Report.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
- Exhibit 4.19 - Amendment No. 1 to the Credit Agreement dated
as of April 23, 1999, among RSA Acquisition Corp.,
("Purchaser"), the Registrant ("Borrower"), RSA Holdings
Corp. of Delaware ("Holdings"), and the Initial Lenders, the
Swing Line Bank and the Initial Issuing Bank and
NationsBank, N.A. ("Administrative Agent").
- Exhibit 10.10 - RSA Holdings Corp. of Delaware 1999 Stock
Incentive Plan.
- Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K: On April 20, 2000, the Registrant filed a
report on Form 8-K reporting that it had changed its independent
public accountants from PricewaterhouseCoopers LLP to Ernst &
Young LLP.
-28-
<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 10, 2000 By /s/James D. Murphy
----------------- ---------------------------------------
Date James D. Murphy
President and Chief Executive Officer
August 10, 2000 By /s/Alan R. Koss
----------------- ---------------------------------------
Date Alan R. Koss
Senior Vice President
Chief Financial Officer
-29-
