Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 01-07698
ACME UNITED CORPORATION
-----------------------
Exact name of registrant as specified in its charter
Connecticut 06-0236700
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1931 Black Rock Turnpike
Fairfield, Connecticut 06825
------------------------ -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 332-7330
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
$2.50 par value Common Stock American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the last business day of the registrant's most recently
completed second fiscal quarter was $20,843,160. Registrant had 3,577,671 shares
outstanding as of March 14, 2005 of its $2.50 par value Common Stock.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [ X ]
Documents Incorporated By Reference
(1) Proxy Statement for the annual meeting scheduled for April 25, 2005 is
incorporated into 2004 10-K, Part III.
1
PART I
Item 1. Business
General
- -------
Acme United Corporation (together with its subsidiaries the "Company") was
organized as a partnership in l867 and incorporated in l882 under the laws of
the State of Connecticut. The Company's operations are in the United States,
Canada, Europe (sited in Germany) and Asia (sited in Hong Kong). The operations
in the United States, Canada and Europe are primarily involved in product
development, manufacturing, marketing, sales, administrative and distribution
activities. The operation in Hong Kong is involved in sourcing, quality control
and sales activities. Net sales in 2004 were the following: United States -
$32.5 million, Canada - $6.0 million, Europe - $3.7 million and Hong Kong -
$1.2 million.
During the year ended December 31, 2002, the Company restructured its European
operations, closing its facility in England and moving those operations to
Germany.
Financial information concerning net sales and long-lived assets by geographic
area appears in Note 10 of the notes to consolidated financial statements.
The operations of the Company consist of a single reportable segment. The
Company sells cutting devices, measuring instruments and safety products for
school, office, home and industrial use in the United States, Canada, Europe and
Asia. The company competes with many companies in each market and geographic
area.
Principal products within the cutting device category are scissors, shears,
guillotine paper trimmers, rotary paper trimmers, rotary cutters, hobby knives
and blades, utility knives and medical cutting instruments. Products introduced
in 2003 and 2004 included proprietary titanium bonded scissors and trimmers.
Principal products within the measuring instrument category are rulers, math
tools and tape measures. Products introduced in 2004 included a new line of
Westcott math tools and professional grade aluminum rulers. Principal products
within the safety product category are first aid kits, personal protection
products and over-the-counter medication refills. Products introduced in 2004
included the Physicians Care(TM) branded line of over-the-counter medications.
Independent manufacturer representatives and direct sales are primarily used to
sell the Company's line of consumer products to wholesale, contract and retail
stationery distributors, office supply super stores, school supply distributors,
industrial distributors, wholesale florists and mass market retailers. The
Company had three customers with sales of 10% or more of total sales in 2004.
Net sales to the Company's three major customers, Staples, Inc., Office Max, and
United Stationers, Inc., represented approximately 43% in 2004, 46% in 2003 and
46% in 2002.
Traditionally, the Company's sales are stronger in the second and third quarters
and weaker in the first and fourth quarters of the fiscal year due to the
seasonal nature of the back-to-school business.
On May 28, 2004, the Company purchased the scissor and cutting business of
Clauss Cutlery, a division of Alco Industries, Inc. The purchase price was the
aggregate value of inventory, trademarks and brand names totaling $446,754.
Sales of Clauss products for seven months in 2004 were $1.7 million. Clauss
Cutlery was founded in 1877 in Fremont, Ohio and at one time was the largest
manufacturer of scissors in the world. Clauss products have a strong presence in
the industrial and floral markets. Its scissors and cutting tools are
distributed by most major industrial distributors and are sold to the auto,
textile, food processing, and electronic industries. The Clauss business has
been integrated into the Company's existing operations.
Other
- -----
Environmental Rules and Regulations - The Company believes that it is in
compliance with applicable environmental laws. The Company believes no major
financial impact is expected to result from current and future compliance with
these rules and regulations.
Employment - As of year-end 2004, the Company employed 103 people, all of whom
are full time and none of whom are covered by union contracts. Employee
relations are considered good and no foreseeable problems with the work force
are evident.
2
Item 2. Properties
Acme United Corporation is headquartered at 1931 Black Rock Turnpike, Fairfield,
Connecticut in 5,700 square feet of leased space. The Company owns and leases
manufacturing and warehousing facilities in the United States totaling 80,000
square feet and leases 44,000 square feet of warehousing space in Canada.
Distribution for Europe is presently being conducted at a 48,000 square foot
owned facility in Solingen, Germany.
Management believes that the Company's facilities, whether leased or owned, are
adequate to meet its current needs and should continue to be adequate for the
foreseeable future.
Item 3. Legal Proceedings
The Company is involved from time to time in disputes and other litigations in
the ordinary course of business including certain environmental and other
matters. The Company presently believes that there will not be a material
adverse impact on financial position, results of operations, or liquidity from
these matters.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders of the Company
through the solicitation of proxies or otherwise during the fourth quarter of
the year ended December 31, 2004.
3
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's Common Stock is traded on the American Stock Exchange under the
symbol "ACU". The following table sets forth the high and low sale prices on the
American Stock Exchange for the Common Stock for the periods indicated:
Dividends
Year Ended December 31, 2004 High Low Declared
--------------------------------- -------------- -------------- --------------
Fourth Quarter $16.50 $ 8.58 $ .02
--------------------------------- -------------- -------------- --------------
Third Quarter 9.28 6.66 .02
--------------------------------- -------------- -------------- --------------
Second Quarter 7.74 5.31 .02
--------------------------------- -------------- -------------- --------------
First Quarter 6.39 5.22
--------------------------------- -------------- -------------- --------------
--------------------------------- -------------- -------------- --------------
Year Ended December 31, 2003
--------------------------------- -------------- -------------- --------------
Fourth Quarter $ 5.51 $ 5.09
--------------------------------- -------------- -------------- --------------
Third Quarter 5.59 4.60
--------------------------------- -------------- -------------- --------------
Second Quarter 4.03 3.50
--------------------------------- -------------- -------------- --------------
First Quarter 3.40 3.03
--------------------------------- -------------- -------------- --------------
As of March 14, 2005 there were approximately 1,300 holders of record of the
Company's Common Stock.
Issuer Purchases of Equity Securities
On July 23, 2003, the Company announced a stock repurchase program of 150,000
shares. The program does not have an expiration date. The following table
discloses the shares repurchased under the program for the quarter ended
December 31, 2004:
Total Number of shares Maximum Number of
Purchased as Part of Shares that may yet be
Total Number of Average Price Publicly Announced Purchased Under the
Period Shares Purchased Paid per Share Program Program
- ----------------------------------------------------------------------------------------------------
October 2,000 $8.60 82,330 67,670
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(All figures in thousands except per share data)
2004 2003 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net Sales $ 43,381 $ 34,975 $ 30,884 $ 33,082 $ 31,921
- -------------------------------------------------------------------------------------------------------------------
Net Income $ 3,238 $ 1,222 $ 660 $ 1,280 $ 1,061
- -------------------------------------------------------------------------------------------------------------------
Total Assets $ 23,009 $ 19,743 $ 17,614 $ 20,173 $ 21,118
- -------------------------------------------------------------------------------------------------------------------
Long Term Debt, Less Current Portion $ 55 $ 2,752 $ 2,032 $ 2,875 $ 4,925
- -------------------------------------------------------------------------------------------------------------------
Net Income
Per Share (Basic) $ 0.96 $ 0.37 $ 0.19 $ 0.37 $ 0.30
Per Share (Diluted) $ 0.85 $ 0.34 $ 0.19 $ 0.36 $ 0.30
4
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Information
- ---------------------------
Forward-looking statements in this report, including without limitation,
statements related to the Company's plans, strategies, objectives, expectations,
intentions and adequacy of resources, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's plans and
results of operations will be affected by the Company's ability to manage its
growth and inventory; and (iii) other risks and uncertainties indicated from
time to time in the Company's filings with the Securities and Exchange
Commission.
Critical Accounting Policies
- ----------------------------
The following discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States of America. The Company's significant accounting policies
are more fully described in Note 2 of Notes to Consolidated Financial
Statements. However, certain accounting estimates are particularly important to
the understanding of the Company's financial position and results of operations
and require the application of significant judgment by the Company's management
or can be materially affected by changes from period to period in economic
factors or conditions that are outside the control of management. The Company's
management uses their judgment to determine the appropriate assumptions to be
used in the determination of certain estimates. Those estimates are based on
historical operations, future business plans and projected financial results,
the terms of existing contracts, the observance of trends in the industry,
information provided by customers and information available from other outside
sources, as appropriate. The following discusses the Company's critical
accounting policies and estimates.
Estimates. Operating results may be effected by certain accounting estimates.
The most sensitive and significant accounting estimates in the financial
statements relate to customer rebates, asset valuation allowances for deferred
income tax assets, obsolete inventories, potentially uncollectible accounts
receivable, and accruals for income taxes. Accruals for customer rebates are
based on executed contracts and anticipated sales levels, which are monitored
monthly. Management critically evaluates the potential realization of deferred
income tax benefits as well as the likely usefulness of inventories and the
collectability of accounts receivable. Accruals for income taxes or benefits
often require interpretations of complex tax rules and regulations, which may be
subsequently challenged. There have been no significant changes in estimates for
any period presented by the accompanying financial statements nor have there
been any changes in accounting principles or practices.
Revenue Recognition. The Company recognizes revenue from sales of its products
when ownership transfers to the customers. Ownership transfers from the Company
to its customer upon shipment of the Company's products. When right of return
exists, the Company recognizes revenue in accordance with SFAS 48, Revenue
Recognition When Right of Return Exists.
Intangible Assets. Intangible assets with a finite useful life are recorded at
cost upon acquisition and amortized over the term of the related contract.
Intangible assets held by the Company with a finite useful life include deferred
financing costs, patents, and trademarks. Deferred financing costs are amortized
over the term of the related debt. Patents and trademarks are amortized over
their estimated useful life. The weighted average amortization period of
intangible assets at December 31, 2004 is 13 years. The Company reviews the
value recorded for intangibles to assess recoverability from future operations
using undiscounted cash flows. Impairments are recognized in operating results
to the extent the carrying value exceeds fair value determined based on the net
present value of estimated future cash flows. The projection of future cash
flows requires the Company to make estimates about the amount of future
revenues. The actual future results could differ significantly from these
estimates, and resulting changes in the estimates of future cash flows could be
significant and could affect the recoverability of intangible assets. During
2004, the Company's net book value of intangible assets increased from $252,960
to $559,646. This increase was primarily due to the acquisition of certain
trademarks as part of the Company's acquisition of Clauss Cutlery.
Accounting for Stock-Based Compensation. At December 31, 2004, the Company has
one stock-based employee compensation plan. The Company has elected to adopt the
disclosure only provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, and continues to measure costs for
its employee stock compensation plans by using the accounting methods prescribed
by APB Opinion No. 25, Accounting for Stock Issued to Employees, which allows
that no compensation cost be recognized unless the exercise price of the options
granted is less than the fair market value of the Company's stock at date of
grant.
5
Results of Operations 2004 Compared with 2003
- ---------------------------------------------
Net sales increased $8,405,988 or 24% in 2004 to $43,380,648 compared to
$34,974,660 in 2003. Excluding the favorable effect of currency gains in Canada
and Europe net sales increased 22%. The sales increase was mainly driven by a
23% growth in the U.S. due to the success of new products, market share gains
and the newly acquired Clauss Cutlery business. Clauss contributed approximately
$1,700,000 to 2004 net sales. Combined sales in Europe and Canada increased by
14% (5% in constant currency). The new business in Hong Kong generated
$1,230,000 in 2004. These were primarily shipments to global customers.
Gross profit was 45% of net sales in 2004 compared to 38% of net sales in 2003.
The increased percentage of new products coupled with positive impacts from
product rationalization efforts in Europe were the main reasons for the improved
gross margins. The Company also improved productivity due to higher volumes and
cost cutting measures.
Selling, general and administrative expenses were $14,162,082 in 2004 compared
with $10,646,395 in 2003, an increase of $3,515,687. SG&A expenses were 33% of
net sales in 2004 compared to 30% in 2003. Direct selling related expenses
increased by $516,000. Other major contributors to the increase in SG&A expenses
were market research, new product development, the new sourcing and quality
control office in Hong Kong and the addition of sales and marketing personnel in
North America and Europe.
Interest expense for 2004 was $157,335 compared with $235,265 for 2003, a
$77,930 decrease. This is attributable to the decline in average debt.
Net other income was $7,203 in 2004 compared to net other income of $91,172 in
2003. The change primarily relates to foreign currency transaction losses of
$110,519 the Company incurred in 2004, as opposed to a foreign currency gain of
$105,984 in 2003. The 2003 results were partially offset by the settlement of a
$175,000 lawsuit in Germany in March of 2003.
Income before income taxes was $5,340,316 in 2004 compared with $2,342,271 in
2003, an increase of $2,998,045. Pretax income for North America and Asia
increased by approximately $2.4 million. The European operations lost $470,000
in 2004 compared to a loss of $1,100,000 in 2003. The 2003 loss included one
time expenses of approximately $400,000.
The effective tax rate in 2004 was 39% compared to 48% in 2003. The improvement
is principally due to the lower losses in Europe, for which the benefit cannot
be utilized to offset taxable earnings in North America.
Results of Operations 2003 Compared with 2002
- ---------------------------------------------
Net sales increased $4,091,090, or 13% in 2003 to $34,974,660 compared to
$30,883,570 in 2002. Excluding the favorable effect of currency gains in Canada
and Europe net sales increased 10%. The sales increase was mainly driven by
growth in the U.S. due to the success of new products, market share gains and
new customers. International sales were down 9% in local currency principally
due to discontinuing certain product lines in the UK business and a generally
weak economy in Germany.
Gross profit was 38% of net sales in 2003 compared to 34% of net sales in 2002.
The introduction of new products coupled with improved product mix in the U.S.,
positive impacts from product rationalization efforts in Europe and overall
productivity gains were the main reasons for the improved gross margins.
Selling, general and administrative expenses were $10,646,395 in 2003 compared
with $9,528,080 in 2002, an increase of $1,118,315 or 12%. SG&A expenses were
30% of net sales in 2003 compared to 31% in 2002. Major contributors to the
increase were market research, new product development and the addition of sales
executives in Canada and Europe.
Interest expense for 2003 was $235,265 compared with $605,344 for 2002, a
$370,079 decrease. This is attributable to the decline in average debt and lower
interest rates.
Net other income was $91,172 in 2003 compared to net other income of $146,614 in
2002. The change from 2002 primarily relates to the settlement of a $175,000
lawsuit in Germany in March of 2003 partially offset by gains on the sale of
fixed assets.
Income before income taxes was $2,342,271 in 2003 compared with $97,276 in 2002,
an increase of $2,244,995. Pretax income for the U.S. business was $3,142,489
compared to $942,776 in 2002. Pretax income for the Canadian business increased
from $50,000 in 2002 to $298,000 in 2003. The European operations lost
$1,100,000 in 2003 compared to a loss of $500,000, excluding restructuring
charges (see Note 15) in 2002. The higher loss was principally due to lower
sales, a one-time expense of $175,000 for settlement of a lawsuit in Germany and
the adverse effect of a weaker dollar on translated results.
6
Income tax expense for 2003 was $1,120,440 compared to an income tax benefit of
$562,218 in 2002. In 2002, the Company recognized a significant one-time income
tax benefit associated with liquidating its UK business. The benefit recognized
was substantially in excess of income taxes computed at the statutory rate. In
2003, consolidated income before income taxes includes losses of foreign
subsidiaries with no income tax benefit, resulting in a high effective income
tax rate.
Contractual Obligations
- -----------------------
The following table summarizes the amounts of payments due during the periods
specified under the Company's contractual obligations as of December 31, 2004:
Payments Due by Period
dollars in thousands ------------------------------------------
Contractual Less than 1--3 4--5 More than
Obligations 1 Year Years Years 5 Years
- ------------- --------- --------- --------- ---------
Long-Term Debt Obligations........................................ $1,379 $ 10 $ 10 $ 35
Operating Lease Obligations....................................... 221 187 98 -
--------- --------- --------- ---------
Total............................................................. $1,600 $ 197 $ 108 $ 35
========= ========= ========= =========
Off-Balance Sheet Transactions
- ------------------------------
The Company did not engage in any off-balance sheet transactions during
2004.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital, current ratio and long-term debt to equity ratio
follow:
2004 2003
- -------------------------------------------------------------------------------
Working Capital $11,548,809 $10,777,397
Current Ratio 2.37 2.76
Long-Term Debt to Equity Ratio 0.4% 27.0%
The increase in working capital in 2004 is attributable to a 31% increase in
accounts receivables due to fourth quarter sales growth of 35%. Inventory
increased by only 3% due to improved inventory management. Days Sales
Outstanding (DSO) decreased from 64 in 2003 to 61 in 2004 due to improved
collection efforts. Operating activities generated net cash of approximately
$4.31 million in 2004 compared with $1.75 million in 2003.
During September 2004, the Company renewed its revolving loan agreement, which
originally allowed for borrowings up to a maximum of $10,000,000 based on a
borrowing base formula, which applied specific percentages to balances of
accounts receivable and inventory. The renewal modified several characteristics
of the original agreement, the most significant of which are reducing the
interest rate to LIBOR plus 1.50 percent from LIBOR plus 1.75%, eliminating the
borrowing base formula, allowing the Company to borrow up to $10,000,000,
regardless of its inventory and receivable levels, and extending the maturity of
the loan to June 30, 2007. As of December 31, 2004, $1,249,384 was outstanding
and $8,750,616 was available for borrowing under this agreement. It is estimated
that all long-term debt under this loan agreement will be paid off in 2005.
However, the Company may draw down additional funds under this loan agreement in
the future.
Due to the provisions of the revolving loan agreement, the Company, among other
things, is restricted with respect to additional borrowings, investments,
mergers and property and equipment purchases. Further, the Company is required
to maintain specific amounts of tangible net worth, and a specified debt service
coverage ratio, and a fixed charge coverage ratio, all as defined by the
agreement. The Company was in compliance with all covenants as of and through
December 31, 2004 and believes these financial covenants will continue to be met
for the remainder of the term of the debt.
7
Capital expenditures during 2004 were $443,330, which were, in part, financed
with debt. Capital expenditures in 2005 are not expected to differ materially
from recent years.
The Company believes that cash generated from operating activities together with
funds available under the revolving loan agreement, is expected, under current
conditions, to be sufficient to finance the Company's planned operations in
2005.
Recently Issued Accounting Standards
- ------------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004) (Statement
123 (R)"), "Share-Based Payment", which revised SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement supercedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". The revised statement addresses the
accounting for share-based payment transactions with employees and other third
parties, eliminates the ability to account for share-based compensation
transactions using APB 25 and requires that the compensation costs relating to
such transactions be recognized in the consolidated statement of operations. The
revised statement is effective as of the first interim period beginning after
June 15, 2005. Acme will adopt the statement on July 1, 2005 as required. The
impact of adoption of Statement 123 (R) cannot be predicted at this time because
it will depend on levels of share-based payments granted in the future. However,
had Acme adopted Statement 123 in prior periods, the impact of that standard
would have approximated the impact of Statement 123 as described in the
disclosure of pro forma net income (loss) and net income (loss) per share in the
stock-based compensation accounting policy note included in Note 2 to the
consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage) should be
recognized as current period charges, and that fixed production overheads should
be allocated to inventory based on normal capacity of production facilities.
This statement is effective for Acme's fiscal year 2006. Acme is in the process
of evaluating whether the adoption of SFAS 151 will have a significant impact on
our overall results of operations or financial position.
Item 7A. Qualitative and Quantitative Disclosure about Market Risk
The Company's debt portfolio and associated interest rates follow:
(dollars in thousands)
2005 2006 2007 2008 2009 Thereafter Total Fair Value
- ----------------------------------------------------------------------------------------------------------------
Current Liabilities:
Notes payable $42 $0 $0 $0 $0 $0 $42 $42
Average interest rate 3.9% 0.0% 0.0% 0.0% 0.0% 0.0% 3.9% 3.9%
Long-term Debt (including current portion):
Amount at fixed rate $171 $5 $5 $5 $5 $35 $226 $226
Average interest rate 7.4% 7.0% 7.0% 7.0% 7.0% 7.0% 7.3%
Amount at variable rate $1,208 $0 $0 $0 $0 $0 $1,208 $1,208
Average interest rate 3.9% 0.0% 0.0% 0.0% 0.0% 0.0% 3.9%
Interest Rate Risk:
- -------------------
The Company's interest expense on debt is most sensitive to changes in the level
of United States interest rates. To mitigate the impact of these fluctuations,
the Company periodically evaluates alternative interest rate arrangements. In
2000, the Company entered into an interest rate swap agreement with a bank to
minimize exposure to interest rate changes for $3.5 million of debt. The swap
agreement expired on January 19, 2003.
Foreign Currency Risk:
- ----------------------
The Company's currency exposures vary, but are concentrated in the Canadian
dollar, British pound, and Euro. Purchases by the Hong Kong office are in U.S.
dollars.
8
At times, the Company utilizes forward foreign exchange contracts to hedge
specific transactions with third parties denominated in foreign currencies. The
terms of these forward foreign exchange contracts are typically 90 days to a
year. Because the contracts are acquired for specific transactions, they are an
effective hedge against fluctuations in the value of the foreign currency
underlying the transaction. At December 31, 2004, the Company's Canadian
subsidiary had entered into a forward foreign exchange contract to reduce the
risk of the Company's Canadian subsidiary's purchases of inventory in a currency
other than the Canadian subsidiary's functional currency, the Canadian dollar.
The Company has hedged the risk of foreign currency fluctuations for
approximately $1.5 million of inventory purchases in 2005 by the Canadian
subsidiary. The fair value of the foreign exchange contract totaled
approximately $82,000 at December 31, 2004 and is reported as a liability and a
component of accumulated other comprehensive loss in the statement of
stockholders' equity.
The Company does not enter into financial instruments for speculation or trading
purposes.
The Company and its foreign subsidiaries utilize bank loans to finance their
operations. To mitigate foreign currency risk, foreign loans are denominated in
the local currency of the foreign subsidiary wherever possible.
Inflation
- ---------
Inflation had a negligible effect on the Company's operations during 2004 and
2003. The Company estimates that inflationary effects, in the aggregate, were
generally recovered or offset through increased pricing or cost reductions in
both years.
9
Item 8. Financial Statements and Supplementary Data
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2004, 2003 and 2002
2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Net Sales $ 43,380,648 $ 34,974,660 $ 30,883,570
Costs and Expenses:
Cost of Goods Sold:
Before inventory write-off related to restructuring 23,728,118 21,841,901 20,244,139
Inventory write-off related to restructuring - - 206,133
- ------------------------------------------------------------------------------------------------------------------
23,728,118 21,841,901 20,450,272
Selling, General and Administrative Expenses 14,162,082 10,646,395 9,528,080
Restructuring charges - - 349,212
- ------------------------------------------------------------------------------------------------------------------
Income before Non Operating Items 5,490,448 2,486,364 556,006
Non Operating Items:
Interest Expense 157,335 235,265 605,344
Other Income (Expense)-Net 7,203 91,172 146,614
- ------------------------------------------------------------------------------------------------------------------
Income before Income Taxes 5,340,316 2,342,271 97,276
Income Taxes (Benefit) 2,101,911 1,120,440 (562,218)
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 3,238,405 $ 1,221,831 $ 659,494
==================================================================================================================
Earnings Per Share:
Basic $ 0.96 $ 0.37 $ 0.19
Diluted $ 0.85 $ 0.34 $ 0.19
See accompanying notes.
10
Acme United Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
- ----------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,930,394 $ 1,390,641
Accounts receivable, less allowance 8,884,807 6,795,212
Inventories 8,389,228 8,179,081
Deferred income taxes 279,201 286,213
Prepaid expenses and other current assets 484,532 259,972
- ----------------------------------------------------------------------------------------------
Total current assets 19,968,162 16,911,119
Plant, Property and Equipment:
Land 250,692 234,866
Buildings 2,796,286 2,643,608
Machinery and equipment 6,101,802 5,772,432
- ----------------------------------------------------------------------------------------------
Total plant, property and equipment 9,148,780 8,650,906
Less accumulated depreciation 6,853,349 6,266,115
- ----------------------------------------------------------------------------------------------
Net plant, property and equipment 2,295,431 2,384,791
Goodwill 88,828 88,828
Intangible assets, less accumulated amortization 559,646 252,960
Intangible pension asset 96,536 105,312
- ----------------------------------------------------------------------------------------------
Total Assets $ 23,008,603 $ 19,743,010
==============================================================================================
LIABILITIES
Current Liabilities:
Notes payable $ 41,884 $ 141,113
Accounts payable 2,316,480 1,742,655
Other accrued liabilities 4,682,360 2,214,605
Current portion of long-term debt 1,378,629 2,035,349
- ----------------------------------------------------------------------------------------------
Total current liabilities 8,419,353 6,133,722
Deferred income taxes 131,228 155,829
Long-term debt, less current portion 55,307 2,751,960
Other 420,251 522,875
- ----------------------------------------------------------------------------------------------
Total Liabilities 9,026,139 9,564,386
STOCKHOLDERS' EQUITY
Common Stock, par value $2.50: authorized 8,000,000
shares; issued - 3,849,512 shares in 2004 and 3,652,812
shares in 2003, including treasury stock 9,623,780 9,132,030
Treasury Stock, at cost, 436,091 shares in 2004 and
387,261 shares in 2003 (1,874,611) (1,621,813)
Additional paid-in capital 2,231,003 2,028,574
Accumulated other comprehensive loss (1,031,587) (1,370,441)
Retained earnings 5,033,879 2,010,274
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity 13,982,464 10,178,624
- ----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 23,008,603 $ 19,743,010
==============================================================================================
See accompanying notes.
11
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
Accumulated
Outstanding Additional Other
Shares of Common Treasury Paid-In Comprehensive Retained
Common Stock Stock Stock Capital Income (Loss) Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2001 3,410,051 $ 9,033,280 $ (936,996) $ 2,037,823 $ (1,591,157) $ 128,949 $ 8,671,899
Net Income 659,494 659,494
Translation Adjustment 119,864 119,864
Change in Fair Value of
Derivative Financial
Instruments 163,735 163,735
Income Taxes Relating
to Derivative Financial
Instruments (60,500) (60,500)
Change in
Minimum Pension
Liability (1,509,574) (1,509,574)
Income Taxes Relating
to Minimum Pension
Liability 560,818 560,818
-----------
Comprehensive Loss (66,163)
Issuance of Common Stock 39,000 97,500 (8,718) 88,782
Purchase of Treasury Stock (65,800) (214,713) (214,713)
- ------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2002 3,383,251 $ 9,130,780 $(1,151,709) $ 2,029,105 $ (2,316,814) $ 788,443 $ 8,479,805
Net Income 1,221,831 1,221,831
Translation Adjustment 670,941 670,941
Change in Fair Value of
Derivative Financial
Instruments 26,974 26,974
Income Taxes Relating
to Derivative Financial
Instruments (9,401) (9,401)
Change in
Minimum Pension
Liability 412,912 412,912
Income Taxes Relating
to Minimum Pension
Liability (155,053) (155,053)
-----------
Comprehensive Income 2,168,204
Issuance of Common Stock 500 1,250 (531) 719
Purchase of Treasury Stock (118,200) (470,104) (470,104)
- ------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2003 3,265,551 $ 9,132,030 $(1,621,813) $ 2,028,574 $ (1,370,441) $2,010,274 $10,178,624
Net Income 3,238,405 3,238,405
Translation Adjustment 328,028 328,028
Change in Fair Value of
Derivative Financial
Instruments (82,268) (82,268)
Change in
Minimum Pension
Liability 132,463 132,463
Income Taxes Relating
to Minimum Pension
Liability (39,369) (39,369)
-----------
Comprehensive Income 3,577,259
Distribution to Shareholders (214,800) (214,800)
Issuance of Common Stock 196,700 491,750 202,429 694,179
Purchase of Treasury Stock (48,830) (252,798) (252,798)
- ------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2004 3,413,421 $ 9,623,780 $(1,874,611) $ 2,231,003 $ (1,031,587) $5,033,879 $13,982,464
See accompanying notes.
12
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Operating activities:
Net income $ 3,238,405 $ 1,221,831 $ 659,494
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 492,361 433,645 482,880
Amortization 29,986 24,406 79,607
Deferred income taxes (56,958) 540,600 (548,467)
(Gain) Loss on disposal of plant, property and equipment 59,156 (174,528) 25,464
Non-cash restructuring charges - - 293,153
Changes in operating assets and liabilities
Accounts receivable (1,974,964) (342,197) 133,698
Inventories (64,949) (1,017,075) 2,103,118
Prepaid expenses and other current assets (213,326) 286,147 75,120
Other assets - - (33,738)
Accounts payable 540,792 311,798 (786,147)
Other accrued liabilities 2,260,338 468,000 (841,939)
- -----------------------------------------------------------------------------------------------------------------
Total adjustments 1,072,436 530,796 982,748
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,310,841 1,752,627 1,642,242
- -----------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of plant, property and equipment (443,330) (424,537) (484,088)
Purchase of patents and trademarks (336,673) (115,615) (114,216)
Proceeds from sales of plant, property and equipment 51,583 250,196 58,597
- -----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (728,420) (289,956) (539,707)
- -----------------------------------------------------------------------------------------------------------------
Financing activities:
Net (repayments) borrowings on notes payable and
revolving credit facilities (855,458) 108,297 (554,495)
Payments of long term debt (2,612,137) (305,548) (13,254)
Debt issuance costs - - 11,209
Distributions to shareholders (143,007) - -
Purchase of treasury stock (252,798) (470,247) (214,713)
Issuance of Common Stock 694,179 862 88,782
- -----------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (3,169,221) (666,636) (682,471)
Effect of exchange rate changes 126,553 (3,064) 6,069
- -----------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 539,753 792,971 426,134
Cash and cash equivalents at beginning of year 1,390,641 597,670 171,536
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,930,394 $ 1,390,641 $ 597,670
=================================================================================================================
See accompanying notes.
13
Acme United Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
The operations of Acme United Corporation (the Company) consist of a single
reportable segment, which operates in the United States, Canada, Germany and
Hong Kong. Principal products are scissors, shears, rulers, first aid kits, and
related products which are sold primarily to wholesale, contract and retail
stationery distributors, office supply super stores, school supply distributors,
drug store retailers and mass market retailers.
2. Accounting Policies
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Translation of Foreign Currency - For foreign operations, assets and liabilities
are translated at rates in effect at the end of the year; revenues and expenses
are translated at average rates in effect during the year. Resulting translation
adjustments are made directly to accumulated other comprehensive loss. Foreign
currency transaction gains and losses are recognized in operations. Foreign
currency transaction gains (losses), which are included in other income
(expense), were ($110,519) in 2004, $105,984 in 2003, and $57,000 in 2002.
Cash Equivalents - Investments with an original maturity of three months or less
at the date of purchase are considered cash equivalents.
Accounts Receivable - Accounts receivable are shown less an allowance for
doubtful accounts of $210,914 in 2004 and $199,102 in 2003.
Inventories - Inventories are stated at the lower of cost, determined by the
first in, first out method, or market.
Plant, Property and Equipment and Depreciation - Plant, property and equipment
is recorded at cost. Depreciation is computed by the straight-line method over
the estimated useful lives of the assets which range from 3 to 30 years.
Asset Impairments - The Company evaluates the propriety of the carrying amounts
of its long-lived assets, including goodwill, at least annually, or when current
events and circumstances indicate a potential impairment. The Company believes
that there are no significant impairments of the carrying amounts of such assets
and no reduction in their estimated useful lives is warranted.
Intangible Assets - Intangible assets with a finite useful life are recorded at
cost upon acquisition and amortized over the term of the related contract.
Intangible assets held by the Company with a finite useful life include deferred
financing costs, patents, and trademarks. Deferred financing costs are amortized
over the term of the related debt. Patents and trademarks are amortized over
their estimated useful life. The weighted average amortization period of
intangible assets at December 31, 2004 is 13 years.
Goodwill - As of January 1, 2002, the Company adopted Financial Accounting
Standards Board Statement No. 142, Goodwill and Other Intangible Assets (FAS
142) and as such no longer amortizes goodwill but rather tests it annually for
impairment. There was no impairment of goodwill at December 31, 2004 and
December 31, 2003.
Deferred Income Taxes - Deferred income taxes are provided on the differences
between the financial statement and tax bases of assets and liabilities, and on
operating loss carryovers, using enacted tax rates in effect in years in which
the differences are expected to reverse.
14
Accounting for Stock-Based Compensation - At December 31, 2004, the Company has
one stock-based employee compensation plan, which is described more fully in
Note 11. The Company has elected to adopt the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, and continues to measure costs for its employee stock compensation
plans by using the accounting methods prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, which allows that no compensation cost
be recognized unless the exercise price of the options granted is less than the
fair market value of the Company's stock at date of grant. Accordingly, no
stock-based employee compensation cost is reflected in net income, as all
options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share as if the Company had applied
the fair value method under SFAS No. 123, Accounting for Stock Based
Compensation, to stock based employee compensation.
2004 2003 2002
==============================================================================================
Net income, as reported $ 3,238,405 $ 1,221,831 $ 659,494
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (76,929) (84,985) (88,646)
- -----------------------------------------------------------------------------------------------
Pro forma net income $ 3,161,476 $ 1,136,846 $ 570,848
===============================================================================================
Basic-as reported $ 0.96 $ 0.37 $ 0.19
Basic-pro forma $ 0.94 $ 0.34 $ 0.17
Diluted-as reported $ 0.85 $ 0.34 $ 0.19
Diluted-pro forma $ 0.83 $ 0.32 $ 0.16
Revenue Recognition - The Company recognizes revenue from sales of its products
when ownership transfers to the customers. Ownership transfers from the Company
to its customer upon shipment of the Company's products. When right of return
exists, the Company recognizes revenue in accordance with SFAS 48, Revenue
Recognition When Right of Return Exists.
Research and Development - Research and development costs ($456,905 in 2004,
$347,130 in 2003 and $385,066 in 2002) are charged to operations as incurred.
Shipping Costs - Shipping costs ($1,684,448 in 2004, $1,439,615 in 2003 and
$1,272,115 in 2002) are included in selling, general and administrative
expenses.
Advertising Costs - The Company expenses the production costs of advertising the
first time the advertising takes place. Advertising costs ($1,109,217 in 2004,
$669,065 in 2003 and $766,058 in 2002) are included in selling, general and
administrative expenses.
Concentrations - The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Allowances for credit
losses are provided and have been within management's expectations. Net sales to
the Company's three major customers, Staples, Inc., Office Max, and United
Stationers, Inc., represented approximately 43% in 2004, 46% in 2003 and 46% in
2002.
Consideration paid to a reseller - As of January 1, 2002, the Company adopted
the Emerging Issues Task Force consensus No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of a Vendor's Products
(EITF 00-25). As such, the Company recognizes consideration paid to a reseller
of its product as a reduction of the selling price of its products and,
therefore, reduces revenue in the Company's statement of operations.
15
Derivatives - The Company accounts for derivative financial instruments
consistent with the requirements of Financial Accounting Standards Board (FASB)
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement 133) and its amendments Statements 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133, and Statement No. 138, Accounting for Derivative Instruments
and Certain Hedging Activities. The Company recognizes all derivative financial
instruments, such as interest rate swap contracts, forward foreign exchange
contracts, and foreign currency option contracts, in the consolidated financial
statements at fair value regardless of the purpose or intent for holding the
instrument. Changes in the fair value of derivative financial instruments are
either recognized periodically in operations or in stockholders' equity as a
component of accumulated other comprehensive income (loss) depending on whether
the derivative financial instrument qualifies for hedge accounting, and if so,
whether it qualifies as a fair value hedge or cash flow hedge. Generally,
changes in fair values of derivatives accounted for as fair value hedges are
recorded in operations along with the portions of the changes in the fair values
of the hedged items that relate to the hedged risk(s). Changes in fair values of
derivatives accounted for as cash flow hedges, to the extent they are effective
as hedges, are recorded in other comprehensive (loss) income net of deferred
income taxes. Changes in fair value of derivatives used as hedges of the net
investment in foreign operations are reported in other comprehensive income
(loss) as part of the cumulative translation adjustment. Changes in fair values
of derivatives not qualifying as hedges are reported in operations.
Reclassifications - Certain prior year amounts have been reclassified to conform
to the current year presentation.
3. Inventories
Inventories consist of: 2004 2003
- ------------------------------------------------------------------------
Finished goods $ 7,739,109 $ 7,252,114
Work in process 91,697 119,796
Materials and supplies 558,422 807,171
- ------------------------------------------------------------------------
$ 8,389,228 $ 8,179,081
========================================================================
Inventories are stated net of valuation allowances for obsolescence of $620,538
in 2004 and $374,665 in 2003.
4. Intangible Assets
Intangible assets consist of: 2004 2003
- --------------------------------------------------------------
Deferred financing costs $ 70,577 $ 70,577
Patents 283,866 216,869
Trademarks 282,637 12,962
- --------------------------------------------------------------
637,080 300,408
Accumulated amortization 77,434 47,448
- --------------------------------------------------------------
$ 559,646 $ 252,960
==============================================================
During the year ended December 31, 2002, the Company refinanced its revolving
loan and wrote-off unamortized deferred financing costs of $53,380. The Company
capitalized additional financing costs of $48,773 on the new loan. Amortization
expense for deferred financing costs for the years ended December 31, 2004,
2003, and 2002, was $13,615, $21,262 and $139,589, respectively. Amortization
expense for patents and trademarks for the years ended December 31, 2004 and
2003 was $16,371 and $3,144, respectively. There was no amortization expense in
2002 on patents and trademarks. The estimated aggregate amortization expense for
each of the next five succeeding years are as follows: 2005 - $52,994; 2006
- -$43,315; 2007 - $43,315; 2008 - $43,315 and 2009 - $43,315.
5. Other Accrued Liabilities
Other accrued liabilities consist of: 2004 2003
- --------------------------------------------------------------------------
Vendor rebates $ 2,517,666 $ 1,756,973
Other 2,584,945 980,507
- --------------------------------------------------------------------------
$ 5,102,611 $ 2,737,480
==========================================================================
The increase in the other portion of Other Accrued liabilities primarily relates
to a higher tax liability in the U.S.A. as the Company utilized all outstanding
tax loss carry forwards in 2003.
16
6. Pension and Profit Sharing
United States employees, hired prior to July 1, 1993, are covered by a funded,
defined benefit pension plan. The benefits are based on years of service and the
average compensation of the highest three consecutive years during the last ten
years of employment. In December 1995, the Company's Board of Directors approved
an amendment to the United States pension plan ceasing all future benefit
accruals as of February 1, 1996, without terminating the pension plan. The
Company uses a December 31 measurement date for the pension plan.
The plan asset weighted average allocation at December 31, by asset category,
are as follows:
Asset Category 2004 2003
- --------------------------------------------------------------------------------
Equity 71% 67%
Fixed Income 25% 28%
Other 4% 5%
- --------------------------------------------------------------------------------
Total 100% 100%
================================================================================
The Company's investment policy is to minimize risk by balancing investments
between equity and fixed income, utilizing a weighted average approach of 65%
equity securities, 30% fixed income funds, and 5% cash investments. Plan funds
are invested in long term obligations with a history of moderate to low risk.
At December 31, 2004 and 2003, equity securities include 30,000 shares of the
Company's Common Stock having a market value of $471,000 and $162,000 at those
dates, respectively.
Other disclosures related to the pension plan follow:
2004 2003
---------------------------------
Assumptions used to determine benefit obligation:
Discount rate 5.75% 6.00%
Changes in benefit obligation:
Benefit obligation at beginning of year $ (3,527,592) $ (3,710,070)
Interest cost (206,327) (221,265)
Service cost (35,000) (35,000)
Actuarial loss (173,813) 22,957
Benefits and plan expenses paid 461,299 415,786
- ----------------------------------------------------------------------------------------------
Benefit obligation at end of year (3,481,433) (3,527,592)
- ----------------------------------------------------------------------------------------------
Changes in plan assets:
Fair value of plan assets at beginning of year 3,418,066 3,278,460
Actual return on plan assets 495,728 555,392
Benefits and plan expenses paid (461,299) (415,786)
- ----------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 3,452,495 3,418,066
- ----------------------------------------------------------------------------------------------
Funded status (28,938) (109,525)
Unrecognized actuarial loss 964,199 1,096,662
Unrecognized prior service costs 96,536 105,312
Minimum pension liability, including intangible
pension asset of $96,536 in 2004 and $105,312 in 2003 (1,060,735) (1,201,974)
- ----------------------------------------------------------------------------------------------
Accrued benefit costs $ (28,938) $ (109,525)
==============================================================================================
Accrued benefits costs are included in other accrued liabilities.
17
2004 2003 2002
==============================================================================================================
Assumptions used to determine net periodic benefit cost:
Discount rate 6.00% 6.50% 6.50%
Expected return on plan assets 8.00% 8.00% 8.50%
- --------------------------------------------------------------------------------------------------------------
Components of net benefit (expense) income:
Interest cost $ 206,327 $ 221,265 $ 253,046
Service cost 35,000 35,000 35,000
Expected return on plan assets (257,424) (246,124) (339,765)
Amortization of prior service costs 8,776 8,776 8,776
Amortization of actuarial gain 67,972 80,687 9,205
- --------------------------------------------------------------------------------------------------------------
$ 60,651 $ 99,604 $ (33,738)
==============================================================================================================
Acme United Corporation employs a building block approach in determining the
long-term rate of return for plan assets. Historical markets are studied and
long-term historical relationships between equities and fixed income are
preserved congruent with the widely-accepted capital market principle that
assets with higher volatility generate return over the long run. Current market
factors such as inflation and interest rates are evaluated before long-term
capital market assumptions are determined.
The following table discloses the change in other comprehensive income:
2004 2003 2002
-------------------------------------------------
Decrease (increase) in minimum liability included in
other comprehensive income, excluding
income tax effect $ 132,463 $ 412,912 $ (1,509,514)
The following benefits, which reflect expected future service, as appropriate,
are expected to be paid:
2005 $ 386,763
2006 373,162
2007 359,629
2008 362,522
2009 351,383
Years 2010 - 2014 1,471,356
The Company also has a qualified, non-contributory profit sharing plan covering
substantially all United States employees. Annual Company contributions are
determined by the Compensation Committee. For the years ended December 31, 2004,
2003 and 2002, contributions amounted to a 50% match up to the first 6% of
employee contributions. Total contribution expense under this plan approximated
$63,000, $61,000, $57,000 for 2004, 2003 and 2002, respectively.
18
7. Income Taxes
The amounts of income taxes (benefit) reflected in operations follow:
2004 2003 2002
- -------------------------------------------------------------------------------
Current:
Federal $ 1,714,456 $ 513,057 $ (31,751)
State 211,927 66,783 18,000
Foreign 232,486 - -
- -------------------------------------------------------------------------------
2,158,869 579,840 (13,751)
- -------------------------------------------------------------------------------
Deferred:
Federal (70,436) 557,886 (437,330)
State 4,397 2,813 (116,519)
Foreign 9,081 (20,099) 5,382
- -------------------------------------------------------------------------------
(56,958) 540,600 (548,467)
- -------------------------------------------------------------------------------
$ 2,101,911 $ 1,120,440 $ (562,218)
===============================================================================
The current state tax provision is comprised of taxes on income, the minimum
capital tax and other franchise taxes related to the jurisdictions in which the
Company's facilities are located.
A summary of United States and foreign income (loss) before income taxes
follows:
2004 2003 2002
- -------------------------------------------------------------------------------
United States $ 4,927,741 $ 3,142,489 $ 942,776
Foreign 412,575 (800,218) (845,500)
- -------------------------------------------------------------------------------
$ 5,340,316 $ 2,342,271 $ 97,276
===============================================================================
The following schedule reconciles the amounts of income taxes (benefit) computed
at the United States statutory rate to the actual amounts reported in
operations.
2004 2003 2002
- -------------------------------------------------------------------------------
Federal income
taxes at
34% statutory rate $ 1,815,707 $ 796,372 $ 33,074
State and local
taxes, net of
federal income
tax effect 147,373 80,199 (29,123)
Permanent items (31,907) (25,710) (2,709)
Write-off
intercompany
investment - - (567,438)
Non-recognition
of foreign tax loss
carryforwards 170,738 269,579 3,978
- -------------------------------------------------------------------------------
Provision (benefit)
for income taxes $ 2,101,911 $ 1,120,440 $ (562,218)
===============================================================================
Income taxes paid, net of refunds received, were $1,390,967 in 2004, $850,600 in
2003, and $24,501 in 2002.
19
2004 2003
- ---------------------------------------------------------------
Deferred income tax liabilities:
Plant, property
and equipment $ 156,227 $ 174,939
Other 26,440
- ---------------------------------------------------------------
156,227 201,379
Deferred income tax assets:
Asset valuations 195,048 188,979
Operating loss
carryforwards and credits 1,418,433 1,278,341
Pension 24,999 1,545
Other 1,627 2,773
- ---------------------------------------------------------------
1,640,107 1,471,638
- ---------------------------------------------------------------
Net deferred
income tax asset before
valuation allowance 1,483,880 1,270,259
Valuation allowance (1,335,907) (1,139,875)
- ---------------------------------------------------------------
Net deferred
income tax asset $ 147,973 $ 130,384
===============================================================
The Company provides deferred income taxes on foreign subsidiary earnings, which
are not considered permanently reinvested. Earnings permanently reinvested would
become taxable upon the sale or liquidation of a foreign subsidiary or upon the
remittance of dividends. Foreign subsidiary earnings of $2,189,000 and
$1,666,000 are considered permanently reinvested as of December 31, 2004 and
2003, respectively, and the amount of deferred income taxes thereon cannot be
reasonably determined.
In December 2004, the FASB issued FSP No. FAS 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation provision within the American
Jobs Creation Act of 2004 ("AJCA"). The AJCA provides a one-time 85% dividends
received deduction for certain foreign earnings that are repatriated under a
plan for reinvestment in the United States, provided certain criteria are met.
FSP No. 109-2 is effective immediately and provides accounting and disclosure
guidance for the repatriation provision. FSP No. 109-2 allows companies
additional time to evaluate the effects of the law on its unremitted earnings
for the purpose of applying the "indefinite reversal criteria" under APB Opinion
No. 23, Accounting for Income Taxes - Special Areas, and requires explanatory
disclosures from companies that have not yet completed the evaluation. The
Company is currently evaluating the effects of the provision and its impact on
the consolidated financial statements. The Company is currently analyzing this
evaluation for 2005. The range of possible amounts of unremitted earnings that
is being considered for repatriation under this provision is between zero and
$2,189,000. The related potential range of income tax is between zero and
$745,000.
Due to the uncertain nature of the realization of the Company's deferred income
tax assets based on past performance and carry forward expiration dates, the
Company has recorded a valuation allowance for the amount of deferred income tax
assets which are not expected to be realized. This valuation allowance is
subject to periodic review, and if the allowance is reduced, the tax benefit
will be recorded in future operations as a reduction of the Company's tax
expense.
At December 31, 2004, the Company has tax operating loss carry forwards
aggregating $4,453,024, all of which are applicable to Germany, and can be
carried forward indefinitely.
20
8. Debt
Long term debt consists of:
2004 2003
- -----------------------------------------------------------------------------
Notes payable:
North American arrangements $ 1,207,500 $ 4,493,729
Other 226,436 293,580
- -----------------------------------------------------------------------------
1,433,936 4,787,309
Less current portion 1,378,629 2,035,349
- -----------------------------------------------------------------------------
$ 55,307 $ 2,751,960
=============================================================================
During September 2004, the Company renewed its revolving loan agreement, which
originally allowed for borrowings up to a maximum of $10,000,000 based on a
borrowing base formula, which applied specific percentages to balances of
accounts receivable and inventory. The renewal modified several characteristics
of the original agreement, the most significant of which are reducing the
interest rate to LIBOR plus 1.50% from LIBOR plus 1.75%, eliminating the
borrowing base formula, allowing the Company to borrow up to $10,000,000,
regardless of its inventory and receivable levels, and extending the maturity of
the loan to June 30, 2007. As of December 31, 2004, $1,249,384 was outstanding
and $8,750,616 was available for borrowing under this agreement. It is estimated
that all long-term debt will be paid off in 2005. Amounts outstanding under the
Agreement bear interest at the LIBOR rate plus 1.50% (3.90% at December 31,
2004).
The Company had maintained an interest rate swap agreement, which fixed the
effective interest rate at 7.18% for $3,500,000 of debt under the previous
revolving loan agreement. The swap agreement expired January 19, 2003.
On August 22, 2000 the Company borrowed $700,000 under a loan agreement with a
bank to refinance a mortgage. The loan was payable in monthly installments of
$6,928, including interest at the Federal Home Loan Bank of Seattle fixed
advanced rate, plus 3.0%, adjusting every five years, through August 1, 2020 and
a final installment of $500,800, plus interest, due on August 1, 2020. During
the year ended December 31, 2003, the Company made prepayments on the loan
amounting to $279,999. During the year ended December 31, 2004, the Company paid
the final balance on the loan amounting to $364,117.
The Company, among other things, is restricted with respect to additional
borrowings, investments, mergers, and property and equipment acquisitions.
Further, the Company is required to maintain specific amounts of tangible net
worth, a specified debt service coverage ratio, and a fixed charge coverage
ratio, all as defined in the revolving loan agreement. The Company is in
compliance with these financial covenants at December 31, 2004.
Maturities of long-term debt for the next five years follow: 2005 - $1,378,629;
2006- $4,837; 2007 - $4,837; 2008 - $4,837; and 2009 - $4,837.
Interest paid was $157,335 in 2004, $235,265 in 2003 and $605,344 in 2002.
9. Commitments and Contingencies
The Company leases certain office, manufacturing and warehouse facilities and
various equipment under non-cancelable operating leases. Total rent expense was
$309,107 in 2004, $252,294 in 2003 and $165,854 in 2002. Minimum annual rental
commitments under non-cancelable leases with initial or remaining terms of one
year or more as of December 31, 2004 to their expiration follow: 2005 -
$221,491; 2006 - $133,511; 2007 - $53,157; 2008 - $49,542; and 2009 - $48,496.
The Company is involved from time to time in disputes and other litigation in
the ordinary course of business, including certain environmental and other
matters. The Company presently believes that there will not be a material
adverse impact on financial position, results of operations, or liquidity from
these matters.
21
10. Geographic Data
Net sales of the Company's continuing operations by geographic area follow
(000's omitted):
2004 2003 2002
- -------------------------------------------------------------------------------
United States $ 32,511 $ 26,482 $ 22,773
Canada 5,986 5,611 5,098
Europe 3,654 2,882 3,013
Hong Kong 1,230 - -
- ------------------------------------------------------------------------------
$ 43,381 $ 34,975 $ 30,884
==============================================================================
Long-lived assets by geographic area follow (000's omitted):
2004 2003 2002
- -------------------------------------------------------------------------------
United States $ 1,189 $ 1,300 $ 1,326
Canada 182 156 157
Europe 874 854 798
Hong Kong 50 75 -
- -------------------------------------------------------------------------------
$ 2,295 $ 2,385 $ 2,281
===============================================================================
11. Stock Option Plans
The Company's amended and restated stock option plan, which provides incentive
and nonqualified stock options for up to 790,000 shares of the Company's Common
Stock to officers and key employees (the Employee's Plan), terminated on
February 24, 2002. Options previously granted under the Employee's Plan continue
to vest and to be exercisable in accordance with their terms, however, no new
options may be granted under the Employee's Plan. The Employee's Plan provided
for the purchase of shares of the Company's Common Stock at a price of not less
than 100% of its fair market value at the date of grant. Generally, options
granted under the Employee's Plan prior to June 24, 1996 vested immediately or
within a year; after June 24, 1996, 25% of options granted vest immediately with
the balance vesting over the next three years. The term of options issued cannot
exceed 10 years from the date of grant.
Effective February 26, 2002, the Company adopted a new officers' and key
employee's stock option plan which provides incentive and nonqualified stock
options for up to 150,000 shares of the Company's Common Stock to officers and
key employees (the New Employee's Plan). The New Employee's Plan provided for
the purchase of shares of the Company's Common Stock at a price of not less than
100% of its fair market value at the date of grant. The term of options issued
cannot exceed 10 years from the date of grant.
The Company also has a stock option plan which provides nonqualified stock
options for up to 160,000 shares of the Company's Common Stock to non-salaried
directors (the Director's Plan). The original Director's Plan, as approved at
the 1996 Annual Meeting, granted 10,000 options to new directors elected to the
Board at the 1996 Annual Meeting, which vested one year after the grant date.
The Director's Plan was amended in 1997 to grant 10,000 options to directors
elected at the 1997 Annual Meeting, who were first elected prior to the 1996
Annual Meeting, which vested immediately. The Director's Plan was amended again
in 1998 to grant 2,500 options to each director re-elected to the Board at the
annual meeting. These options vest immediately.
During 2003 and 2002, an additional 2,500 options were granted to each director.
Also during 2003, 10,000 options were issued to one new director. The Director's
Plan provides for the purchase of shares of the Company's Common Stock at a
price of not less than 100% of its fair value at the date of grant.
A summary of changes in options issued under the Company's two stock option
plans follows:
22
2004 2003 2002
- -------------------------------------------------------------------------------
Options outstanding at the
beginning of the year 867,150 766,850 830,350
Options granted 6,500 102,500 30,500
Options forfeited (3,750) (1,700) (55,000)
Options exercised (196,700) (500) (39,000)
- -------------------------------------------------------------------------------
Options outstanding at
the end of the year 673,200 867,150 766,850
===============================================================================
Options exercisable at the
end of the year 622,263 747,940 635,000
===============================================================================
Common stock available for future
grants at the end of the year 60,500 64,500 167,000
===============================================================================
Weighted average price of options:
Granted $ 5.50 $ 3.89 $ 3.94
Forfeited 4.33 2.67 3.35
Exercised 3.53 2.53 2.28
Outstanding 3.27 3.31 3.23
Exercisable 3.19 3.26 3.29
A summary of options outstanding at December 31, 2004 follows:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------- ----------------------------
Weighted-
Average Weighted-
Remaining Weighted- Average
Number Contractual Average Number Exercise
Range of Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------------------------
$1.25 to $2.49 204,600 4 $ 2.13 204,600 $ 2.13
$2.50 to $3.65 265,850 7 3.05 257,850 3.04
$3.66 to $5.00 118,250 4 4.01 84,188 4.03
$5.01 to $7.25 84,500 3 5.65 75,625 5.68
- ---------------------------------------------------------------------------------------------- ----------------------------
673,200 622,263
================ ===============
The weighted average remaining contractual life of outstanding stock options is
5 years.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations to recognize compensation expense under its stock
option plans. As such, no expense is recognized if, at the date of grant, the
exercise price of the option is at least equal to the fair market value of the
Company's Common Stock. No compensation expense related to the Company's stock
option plans was required to be recognized for its plans in 2004, 2003 and 2002
except as discussed in Note 17.
The weighted average fair value at the date of grant for options granted during
2004, 2003, and 2002 was $2.59, $1.79, $1.82 per option, respectively.
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
2004 2003 2002
----------------------------------------------
Expected Life in Years 5 5 5
Interest Rate 3.84% 3.00% 3.00%
Volatility 0.527 0.480 0.491
Dividend Yield 1.09% 0% 0%
23
12. Earnings Per Share
The calculation of earnings per share follows:
2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Numerator:
Net income $ 3,238,405 $ 1,221,831 $ 659,494
- -----------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share
Weighted average shares outstanding 3,364,033 3,317,231 3,400,151
Effect of dilutive employee stock options 442,995 240,663 155,575
- -----------------------------------------------------------------------------------------------------------------
Denominator for dilutive earnings per share 3,807,028 3,557,894 3,555,726
- -----------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.96 $ 0.37 $ 0.19
- -----------------------------------------------------------------------------------------------------------------
Dilutive earnings per share $ 0.85 $ 0.34 $ 0.19
- -----------------------------------------------------------------------------------------------------------------
For 2003 and 2002, 87,000 and 79,000 stock options, respectively, were excluded
from diluted earnings per share calculations because they would have been
anti-dilutive.
13. Accumulated Other Comprehensive Loss
The components of the accumulated other comprehensive loss follow:
Derivative Minimum
Translation Financial Pension
Adjustment Instruments Liability Total
- -----------------------------------------------------------------------------------------------------------------
Balances, January 1, 2003 $ (1,350,485) $ (17,573) $ (948,756) $ (2,316,814)
Change in Fair Value of
Derivative Financial
Instruments 26,974 26,974
Income Taxes Relating
to Derivative Financial
Instruments (9,401) (9,401)
Change in Fair Value of
Minimum Pension
Liability 412,912 412,912
Income Taxes Relating
to Minimum Pension
Liability (155,053) (155,053)
Translation Adjustment 670,941 670,941
- -----------------------------------------------------------------------------------------------------------------
Balances, December 31, 2003 (679,544) 0 (690,897) (1,370,441)
Change in Fair Value of
Derivative Financial
Instruments (82,268) (82,268)
Change in Fair Value of
Minimum Pension
Liability 132,463 132,463
Income Taxes Relating
to Minimum Pension
Liability (39,369) (39,369)
Translation Adjustment 328,028 328,028
- -----------------------------------------------------------------------------------------------------------------
Balances, December 31, 2004 $ (351,516) $ (82,268) $ (597,803) $ (1,031,587)
=================================================================================================================
24
14. Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for
cash and cash equivalents approximates fair value.
Accounts receivable and accounts payable: The carrying amounts reported in the
balance sheet for accounts receivable and accounts payable approximate fair
value.
Long-and short-term debt: The carrying amounts of the Company's borrowings under
its short-term notes payable and revolving credit arrangements approximate their
fair value. The fair values of the Company's long-term debt are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Forward foreign exchange contracts and interest rate swaps: The fair values of
the Company's forward foreign currency contracts and interest rate swaps are
estimated based on dealer quotes.
The carrying amounts and fair values of the Company's financial instruments
follow (000's omitted):
2004 2003
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalent $ 1,930 $ 1,930 $ 1,391 $ 1,391
Accounts receivable 8,885 8,885 6,795 6,795
Accounts payable (2,316) (2,316) (1,743) (1,743)
Short term notes payable (42) (42) (141) (141)
Long term debt (1,434) (1,434) (4,787) (4,787)
Forward foreign exchange contract (82) (82)
Derivative Financial Instruments
- --------------------------------
The Company uses derivatives for cash flow hedging purposes as part of its risk
management strategy. Following is a summary of the Company's risk management
strategies and derivatives and the effect of them on the Company's consolidated
financial statements.
The Company and its foreign subsidiaries utilize bank loans to finance their
operations. To mitigate foreign currency risk, foreign loans are denominated in
the local currency of the foreign subsidiary wherever possible.
In September 2004, the Company entered into a forward foreign currency contract
to hedge forecasted 2005 inventory purchases by the Company's Canadian
subsidiary in a foreign currency other than the Canadian subsidiary's functional
currency, the Canadian dollar. The fair value of the forward foreign
currency contract totaled $82,268 and is reflected as a liability and component
of accumulated other comprehensive loss in the accompanying consolidated balance
sheet.
In 2000, the Company entered into an interest-rate swap agreement that
effectively converted a portion of its floating-rate debt to a fixed-rate basis
through January 19, 2003, the agreement maturity date, thus reducing the impact
of interest-rate changes on future income. During 2003 and 2002, the Company
recognized expense of $26,874 and $174,122 respectively, related to the net
amounts paid and accrued on interest rate swaps, which are included in interest
expense in each year's respective consolidated statements of income.
25
15. Restructuring Charges
In 2002, restructuring charges of approximately $555,000 were recorded as a
result of certain strategic and operating changes initiated by the Company's
management related to liquidating Acme United Limited (AUL), a United Kingdom
subsidiary. The restructuring charges consisted of a write-down of inventories
of $206,000, accounting and legal costs of $95,000, lease cancellation costs of
$90,000, a write-off of goodwill of $69,000, severance costs of $55,000, other
closing costs of $22,000, a write-off of uncollectible accounts receivable of
$9,000 and write-offs of equipment of $9,000. As of December 31, 2002, the
restructuring was substantially complete and approximately $36,000 remained in
accrued restructuring charges, primarily related to accounting and legal costs.
The Company terminated five employees as part of the restructuring.
16. Quarterly Data (unaudited)
Quarters (000's omitted, except per share data)
2004 First Second Third Fourth Total
- ---------------------------------------------------------------------------------------------------------------------------
Net Sales $ 8,567 $ 12,298 $ 11,595 $ 10,921 $ 43,381
- ---------------------------------------------------------------------------------------------------------------------------
Cost of Goods Sold 4,848 6,779 6,142 5,959 23,728
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 392 1,075 1,017 754 3,238
- ---------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.12 $ 0.32 $ 0.30 $ 0.22 $ 0.96
Diluted Earnings Per Share $ 0.11 $ 0.29 $ 0.26 $ 0.19 $ 0.85
2003 First Second Third Fourth Total
- ---------------------------------------------------------------------------------------------------------------------------
Net Sales $ 7,189 $ 10,142 $ 9,538 $ 8,106 $ 34,975
- ---------------------------------------------------------------------------------------------------------------------------
Cost of Goods Sold 4,307 6,221 6,367 4,946 21,842
- ---------------------------------------------------------------------------------------------------------------------------
Net Income 78 615 302 227 1,222
- ---------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 0.02 $ 0.18 $ 0.09 $ 0.07 $ 0.37
Diluted Earnings Per Share $ 0.02 $ 0.17 $ 0.08 $ 0.06 $ 0.34
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
necessarily equal the total for the year.
17. Capital Structure
In 2004, the Company issued 196,700 shares of common stock with proceeds of
$694,179 upon the exercise of outstanding stock options. The Company also
repurchased 48,830 shares of common stock for treasury. The shares were
purchased at fair market value, with a total cost to the Company of $252,798.
During the first quarter, an additional $31,225 of compensation expense was
charged to operating results as a result of the Company's repurchase of 16,000
shares within six months of exercise of certain options by a terminated
employee.
18. Business Combination
On May 28, 2004, the Company purchased Clauss Cutlery, a division of Alco
Industries, Inc. The purchase price was the aggregate value of inventory,
trademarks and brand names totaling $446,754. Included in the purchase price was
a stand-by letter of credit the Company issued in the amount of $230,000 for a
trademark from Alco Industries, Inc. that was renewed by the U.S. Patent and
Trademark Office on July 13, 2004. The letter of credit was set-up to expire on
May 28, 2005, if the trademark was not renewed. Since the trademark was renewed
prior to the expiration date, Alco Industries, Inc. enforced the letter of
credit and drew down the funds. Included in the accompanying Statement of
Operations are the operations of the acquired business since the date of
acquisition. Proforma operating information for the periods prior to the
acquisition is not provided because of the immateriality of the transaction on a
proforma basis.
19. Impairment of Equipment
During the second quarter of 2004, the Company abandoned its ruler manufacturing
equipment. In accordance with FASB 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company recorded an impairment loss of
$84,820, or $0.02 a share, for the full amount of the assets at the time of
abandonment.
26
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Acme United Corporation
We have audited the accompanying consolidated balance sheets of Acme United
Corporation and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Acme United
Corporation and subsidiaries at December 31, 2004 and 2003, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Hartford, Connecticut
February 14, 2005
27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements with accountants related to accounting and
financial disclosures in 2004.
Item 9A. Controls and Procedures
(a) Evaluation of Internal Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures, which
included inquiries made to certain other of our employees. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have each
concluded that, as of December 31, 2004, our disclosure controls and procedures
were effective and sufficient to ensure that we record, process, summarize and
report information required to be disclosed by us in our periodic reports filed
under the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2004, there were no changes in our
internal control over financial reporting that materially affected, or was
reasonably likely to materially affect, this control.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the directors
and executive officers of the Company. All directors of the Company hold office
until the next annual meeting of the shareholders or until their successors have
been elected and qualified. Executive officers are elected by the Board of
Directors to hold office until their successors are elected and qualified.
Name Age Position Held with Company
- --------------------------------------------------------------------------------
Walter C. Johnsen 54 President, Chief Executive Officer and
Director
Gary D. Penisten 73 Chairman of the Board and Director
Brian S. Olschan 48 Executive Vice President, Chief Operating
Officer and Director
Paul G. Driscoll 44 Vice President, Chief Financial Officer,
Secretary and Treasurer
George R. Dunbar 81 Director
Richmond Y. Holden, Jr. 51 Director
Wayne R. Moore 73 Director
Stevenson E. Ward III 59 Director
Susan H. Murphy 53 Director
Walter C. Johnsen has served as director since 1995 and as President and Chief
Executive Officer since November 30, 1995. Prior to that he was Executive Vice
President since January 24, 1995. He also was Chief Financial Officer from March
26, 1996 until June 30, 1996. Before joining the Company he was Vice Chairman
and a principal of Marshall Products, Inc., a medical supply distributor.
Gary D. Penisten has served as director since 1994 and Chairman of the Board
since February 27, 1996. From 1977 to 1988, he was Senior Vice President of
Finance, Chief Financial Officer and a Director of Sterling Drug Inc. in New
York City. From 1974 to 1977 he served as Assistant Secretary of the United
States Navy. Prior to that he was employed by General Electric for twenty-one
years.
Brian S. Olschan served as Senior Vice President-Sales and Marketing from
September 10, 1996 until February 22, 1999. Effective January 23, 1999, he was
promoted to Executive Vice President and Chief Operating Officer. From 1984 to
1996, he was employed by General Cable Corporation in various executive
positions including Vice President and General Manager of the Cordset and
Assembly Business from 1994 to 1996.
28
Paul G. Driscoll has served as Vice President and Chief Financial Officer,
Secretary and Treasurer since October 2, 2002. Mr. Driscoll joined Acme as
Director International Finance on March 19, 2001. From 1997 to 2001 he was
employed by Ernest and Julio Gallo Winery including two years in Japan as
Director of Finance and Operations. Prior to Gallo he served in several
increasingly responsible positions in Sterling Winthrop Inc. in New York City
and Sanofi S.A. in France.
George R. Dunbar has served as director since 1977. He is currently President of
The U.S. Baird Corporation and Dunbar Associates, a municipal management
consulting firm. He is a former Chief Administrative Officer for the City of
Bridgeport and served as President (1972-1987) of the Bryant Electric Division
of Westinghouse Electric Corporation, manufacturer of electrical distribution
and utilization products, Bridgeport, Connecticut.
Richmond Y. Holden, Jr. has served as director since 1998. He has served as
President and Chief Executive Officer of J.L. Hammett Co. since 1992; Executive
Vice President from 1989 to 1992. J.L. Hammett Co. is a distributor and online
retailer of educational products throughout the United States, and is one of the
largest distributors to the K-12 educational marketplace.
Wayne R. Moore has served as director since 1976. He is presently Chairman
Emeritus of The Producto Machine Company, manufacturer of machine tools, special
machines, and tool die and mold components. He was Chairman of the Board of The
Producto Machine Company and the Moore Special Tool Company, manufacturer of
machine tools, measuring machines and metrology products. Mr. Moore was Chairman
of the U.S. Machine Tool Builders/ Association for Manufacturing Technology
(1985-1986) and Committee Member of U.S. Eximbank (1984). He is a Trustee of the
American Precision Museum and on the Board of advisors of the Fairfield
University School of Engineering.
Stevenson E. Ward III has served as director since 2001. He is presently Vice
President and Chief Financial Officer of Triton Thalassic Technologies, Inc.
From 1999 through 2000, Mr. Ward served as Senior Vice President -
Administration of Sanofi-Synthelabo, Inc. He also served as Executive Vice
President (1996 - 1999) and Chief Financial Officer (1994 - 1995) of Sanofi,
Inc. and Vice President, Pharmaceutical Group, Sterling Winthrop, Inc. (1992 -
1994). Prior to joining Sterling he was employed by General Electric.
Susan H. Murphy has served as director since 2003. She is presently Vice
President for Student and Academic Services at Cornell University. From 1985
through 1994, Ms. Murphy served as Dean of Admissions and Financial Aid. Ms.
Murphy has been employed at Cornell since 1978.
The Company has adopted a Code of Conduct that is applicable to our employees,
including the Chief Executive Officer, Chief Financial Officer and Controller.
The Code of Conduct is available in the investor relations section on our
website at www.acmeunited.com
If we make any substantive amendments to the Code of Conduct which apply to our
Chief Executive Officer, Chief Financial Officer or Controller or grant any
waiver, including any implicit waiver, from a provision of the Code of Conduct
to our executive officers, we will disclose the nature of the amendment or
waiver on our website or in a report on Form 8-K.
Item 11. Executive Compensation
The information contained in Acme United Corporations
Proxy Statement Dated March 28, 2005, with respect to executive
compensation, is incorporated here in by reference in response to this
item.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information contained in Acme United Corporations
Proxy Statement Dated March 28, 2005, with respect to security
ownership of certain beneficial owners and management, is incorporated
here in by reference in response to this item.
Item 13. Certain Relationships and Related Transactions
(None)
29
Item 14. Principal Accountant Fees and Services
The information contained in Acme United Corporations
Proxy Statement Dated March 28, 2005, with respect to principal
accountant fees and services, is incorporated here in by reference in
response to this item.
30
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
o Consolidated Balance Sheets
o Consolidated Statements of Operations
o Consolidated Statements of Changes in Stockholders' Equity
o Consolidated Statements of Cash Flows
o Notes to Consolidated Financial Statements
o Report of Independent Registered Public Accounting Firm
(a)(2) Financial Statement Schedules
o Schedule 2--Valuation and Qualifying Accounts
o Schedules other than those listed above have been omitted because of
the absence of conditions under which they are required or because the
required information is presented in the Financial Statements or Notes
thereto.
(a)(3) The exhibits listed under Item 15(b) are filed or incorporated by
reference herein.
(b) Exhibits.
The exhibits listed below are filed as part of this Annual Report on form 10-K.
Certain of the exhibits, as indicated, have been previously filed and are
incorporated herein by reference.
- ----------- --------------------------------------------------------------------
Exhibit No. Identification of Exhibit
- ----------- --------------------------------------------------------------------
3(i) Certificate of Organization of the Company (1)
- ----------- --------------------------------------------------------------------
Amendment to Certificate of Organization of Registrant dated
September 24, 1968 (1)
- ----------- --------------------------------------------------------------------
Amendment to Certificate of Incorporation of the Company dated
April 27, 1971 (2)
- ----------- --------------------------------------------------------------------
Amendment to Certificate of Incorporation of the Company dated
June 29, 1971 (2)
- ----------- --------------------------------------------------------------------
3(ii) Bylaws of the Company
- ----------- --------------------------------------------------------------------
4 Specimen of Common Stock certificate (2)
- ----------- --------------------------------------------------------------------
10.1 Non-Salaried Director Stock Option Plan dated April 22, 1996* (3)
- ----------- --------------------------------------------------------------------
31
- ----------- --------------------------------------------------------------------
10.1(a) Amendment No. 1 to the Non-Salaried Director Stock Option Plan *(4)
- ----------- --------------------------------------------------------------------
10.1(b) Amendment No. 2 to the Non-Salaried Director Stock Option Plan *(5)
- ----------- --------------------------------------------------------------------
10.2 1992 Amended and Restated Stock Option Plan* (6)
- ----------- --------------------------------------------------------------------
10.2(a) Amendment No. 1 to the Amended and Restated Stock Option Plan* (7)
- ----------- --------------------------------------------------------------------
10.2(b) Amendment No. 2 to the Amended and Restated Stock Option Plan* (8)
- ----------- --------------------------------------------------------------------
10.2(c) Amendment No. 3 to the Amended and Restated Stock Option Plan* (9)
- ----------- --------------------------------------------------------------------
10.2(d) Amendment No. 4 to the Amended and Restated Stock Option Plan* (9)
- ----------- --------------------------------------------------------------------
10.3 Acme United Employee Stock Option Plan dated February 26, 2002*
- ----------- --------------------------------------------------------------------
10.4 Severance Pay Plan dated September 28, 2004*
- ----------- --------------------------------------------------------------------
10.5 Salary Continuation Plan dated September 28, 2004*
- ----------- --------------------------------------------------------------------
21 Subsidiaries of the Registrant
- ----------- --------------------------------------------------------------------
23 Consent of Ernst & Young, Independent Auditors
- ----------- --------------------------------------------------------------------
31.1 Certification of Walter Johnsen pursuant to Rule 13a-14(a) and
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
- ----------- --------------------------------------------------------------------
31.2 Certification of Paul Driscoll pursuant to Rule 13a-14(a) and
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
- ----------- --------------------------------------------------------------------
32.1 Certification of Walter Johnsen pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------- --------------------------------------------------------------------
32.2 Certification of Paul Driscoll pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- ----------- --------------------------------------------------------------------
* Indicates a management contract or a compensatory plan or arrangement
(1) Previously filed in S-1 Registration Statement No. 230682 filed with
the Commission on November 7, 1968 and amended by Amendment No. 1 on
December 31, 1968 and by Amendment No. 2 on January 31, 1969.
(2) Previously filed as an exhibit to the Company's Form 10-K filed in
1971.
(3) Previously filed in the Company's Form S-8 Registration Statement No.
333-26739 filed with the Commission on May 9, 1997.
(4) Previously filed in the Company's Form S-8 Registration Statement No.
333-84505 filed with the Commission on August 4, 1999.
(5) Previously filed in the Company's Form S-8 Registration Statement No.
333-70348 filed with the Commission on September 21, 2000.
(6) Previously filed as an exhibit to the Company's Proxy Statement filed
on March 29, 1996.
(7) Previously filed in the Company's Form S-8 Registration Statement No.
333-26737 filed with the Commission on May 9, 1997.
(8) Previously filed in the Company's Form S-8 Registration Statement No.
333-84499 filed with the Commission on August 4, 1999.
(9) Previously filed in the Company's Form S-8 Registration Statement No.
333-70346 filed with the Commission on September 27, 2001.
32
SCHEDULE II
Acme United Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2004, 2003 and 2002
Balance at Charged to Deductions Balance at
Beginning of Costs and and Other End of
Period Expenses Adjustments Period
- --------------------------------------------------------------------------------------------------------------------
2004
Allowance for doubtful accounts $ 199,102 $ 123,809 $ 111,997 $ 210,914
Allowance for inventory obsolescence 374,665 425,127 179,253 620,538
Deferred income tax asset valuation allowance 1,139,875 196,032 - 1,335,907
- --------------------------------------------------------------------------------------------------------------------
2003
Allowance for doubtful accounts $ 205,213 $ 61,924 $ 68,035 $ 199,102
Allowance for inventory obsolescence 407,881 273,447 306,663 374,665
Deferred income tax asset valuation allowance 1,130,777 9,098 - 1,139,875
- --------------------------------------------------------------------------------------------------------------------
2002
Allowance for doubtful accounts $ 209,508 $ 71,998 $ 76,293 $ 205,213
Allowance for inventory obsolescence 273,260 216,512 81,891 407,881
Deferred income tax asset valuation allowance 1,552,666 - 421,889 1,130,777
- --------------------------------------------------------------------------------------------------------------------
33
EXHIBIT 21
PARENTS AND SUBSIDIARIES
The Company was organized as a partnership in 1867 and incorporated in 1882
under the laws of the State of Connecticut as The Acme Shear Company. The
corporate name was changed to Acme United Corporation in 1971.
There is no parent of the registrant.
Registrant has the following subsidiaries, all of which are totally held:
Name Country of Incorporation
- ---- ------------------------
Acme United Limited Canada
Acme United Europe GmbH Germany
Acme United (Asia Pacific) Limited Hong Kong
All subsidiaries are active and included in the consolidated financial
statements.
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-84499, 33-98918, 333-26737, and 333-70346) pertaining to the
Acme United Corporation Amended and Restated Stock Option Plan, the Registration
Statements (Form S-8 Nos. 333-84505, 333-26739, and 333-70348) pertaining to the
Acme United Corporation Non-Salaried Director Stock Option Plan and the
Registration Statement (Form S-8 No. 333-84509) pertaining to the Acme United
Corporation Deferred Compensation Plan for Directors and Acme United Corporation
Deferred Compensation Plan for Walter C. Johnsen of our report dated February
14, 2005, with respect to the consolidated financial statements and schedule of
Acme United Corporation and subsidiaries included in the Annual Report (Form
10-K) for the year ended December 31, 2004.
/s/ Ernst & Young LLP
Hartford, Connecticut
March 15, 2005
34
Exhibit 31.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of Acme United Corporation (the "Company") hereby
certifies to my knowledge that the Company's annual report on Form 10-K for the
annual period ended December 31, 2004 (the "Report"), as filed with the
Securities and Exchange Commission on the date hereof, fully complies with the
requirements of section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended, and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company. This certification is provided solely
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and shall not be deemed to be a part of the Report
or "filed" for any purpose whatsoever.
By /s/ WALTER C. JOHNSEN
------------------------------
Walter C. Johnsen
President and
Chief Executive Officer
Dated: March 17, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Acme United Corporation and will
be retained by Acme United Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
35
Exhibit 31.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of Acme United Corporation (the "Company") hereby
certifies to my knowledge that the Company's annual report on Form 10-K for the
annual period ended December 31, 2004 (the "Report"), as filed with the
Securities and Exchange Commission on the date hereof, fully complies with the
requirements of section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended, and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company. This certification is provided solely
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and shall not be deemed to be a part of the Report
or "filed" for any purpose whatsoever.
By /s/ PAUL G. DRISCOLL
------------------------------
Paul G. Driscoll
Vice President and
Chief Financial Officer
Dated: March 17, 2005
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Acme United Corporation and will
be retained by Acme United Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
36
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 17, 2005.
ACME UNITED CORPORATION
(Registrant)
Signatures Titles
s/ Walter C. Johnsen
- --------------------------------
Walter C. Johnsen President, Chief Executive Officer
and Director
s/ Gary D. Penisten
- --------------------------------
Gary D. Penisten Chairman of the Board and Director
s/ Brian S. Olschan
- --------------------------------
Brian S. Olschan Executive Vice President, Chief
Operating Officer and Director
s/ Paul G. Driscoll
- --------------------------------
Paul G. Driscoll Vice President, Chief Financial
Officer, Secretary and Treasurer
s/ George R. Dunbar
- --------------------------------
George R. Dunbar Director
s/ Richmond Y. Holden, Jr.
- --------------------------------
Richmond Y. Holden, Jr. Director
s/ Wayne R. Moore
- --------------------------------
Wayne R. Moore Director
s/ Susan H. Murphy
- --------------------------------
Susan H. Murphy Director
s/ Stevenson E. Ward III
- --------------------------------
Stevenson E. Ward III Director
37
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, WALTER C. JOHNSEN, certify that:
I have reviewed this annual report on Form 10-K of Acme United Corporation;
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
By /s/ WALTER C. JOHNSEN
------------------------------
Walter C. Johnsen
President and
Chief Executive Officer
Dated: March 17, 2005
38
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, PAUL G. DRISCOLL, certify that:
I have reviewed this annual report on Form 10-K of Acme United Corporation;
Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
By /s/ PAUL G. DRISCOLL
------------------------------
Paul G. Driscoll
Vice President and
Chief Financial Officer
Dated: March 17, 2005
39