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Acme United Corporation
TO MY FELLOW SHAREHOLDERS:
Increased shareholder value has been your management's primary goal over the
past three years. The list of actions taken has been extensive and each action
has been supportive of the primary goal. Three of the most significant things
accomplished have been (1) the strategic sale of the Medical business, (2) new
consumer products being sold to new major customers, and (3) implementation of
initiatives for substantial product cost reductions. In addition, the
international operations have also undergone extensive restructuring and are
anticipated to be profitable in 1999. It is time for management to deliver
consistent profit growth and we are dedicated to do that in 1999.
In 1998 Acme had revenues of $46.5 million compared to $46.3 million in 1997.
The Company reported a loss of $1.7 million for the year versus a gain of $.2
million in 1997. During the year, headcount was reduced from 433 to 312.
On March 22, 1999, Acme United sold the Medical Division for approximately $8.15
million. This is a major step for the Company. It focuses our sales efforts on
scissors, rulers, and first aid kits in the consumer market, and provides a
stronger foundation for growth. Medical revenues declined from $13.5 million in
1997 to $10.1 million in 1998 primarily due to the sale of the wound care
product line and weak orders from Asia.
Revenues from continuing operations in 1998 were $36.5 million compared to $32.8
million in 1997. Our U.S. and international consumer divisions reported growth
and had improved operating performance.
In the United States, revenues were $24.1 million in 1998 compared to $21.9
million in 1997, an increase of 10 percent. The patented Tagit! children's
scissors had good market reception and broadened our mass market distribution.
The traditional scissor and ruler product lines experienced growth. Our first
aid category increased 30 percent.
In Canada, revenues were $5.9 million in 1998 compared to $4.2 million in 1997,
an increase of 39 percent. Although the acquisition of the Rotex Division of
Esselte Canada contributed strongly to the increase in revenues, all major
product categories experienced sales growth. However, the subsidiary had foreign
exchange losses of $220,000, sold excess inventory below cost, and incurred
certain costs related to fully integrating the Rotex product lines.
The United Kingdom operation had revenues of $3.3 million in 1998 versus $4.1
million in 1997, with the majority of the decline due to the shift of its
manicure scissors to our German business. In 1998, the U.K. subsidiary sold its
manufacturing operation and moved to a modern warehouse and office. Headcount
declined from 20 to 9 during the year.
The German subsidiary had revenues of $3.2 million in 1998 compared to $2.7
million in 1997. Most of the sales increase was due to the shift of the United
Kingdom manicure scissor sales to Germany as referred to above.
We look forward to improved performance in 1999. New Tagit! scissors and rulers
have been introduced and have gained distribution. Margins are improving in
Canada and Germany. The transition in the United Kingdom to exit from
manufacturing is complete. We anticipate reducing our scissor business
manufacturing in the U.S. in 1999, and benefiting from lower costs from our
international suppliers.
The Company is saddened to report that Henry C. Wheeler passed away on March 2,
1999. He was Acme's Chief Executive Officer from 1941 to 1990, served as
Chairman and Chief Executive Officer from 1990 to 1994, was Chairman Emeritus
since 1994, and a member of our Board until his death. Mr. Wheeler was the
driving force for Acme United's growth from a small scissor manufacturer to its
present size. He was an inspiration to our customers, suppliers, and employees.
We will miss his guidance, support and presence.
Thank you for your support.
Sincerely,
/s/ Walter C. Johnsen
- - -----------------------------
Walter C. Johnsen
President and Chief Executive Officer
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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-4823
ACME UNITED CORPORATION
-----------------------
Exact name of registrant as specified in its charter
Connecticut 06-0236700
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 Kings Highway Cutoff
Fairfield, Connecticut 06430
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(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)
Registrant had 3,377,488 shares outstanding as of March 22, 1999 of its $2.50
par value Common Stock. The aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 22, 1999 was approximately
$7,599,348.
Documents Incorporated By Reference
(1) Proxy Statement for the annual meeting scheduled for April 26, 1999
incorporated into 1998 10-K, Part III
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 operated two business segments, consumer
and medical through 1998. On March 22, 1999 the Company sold its medical
segment. The Company's continuing operations are in the United States, Canada,
England and Germany. Financial information concerning net sales, and long-lived
assets by geographic area appears in note 11 of the notes to consolidated
financial statements.
Consumer
The Company manufactures and distributes scissors, shears, rulers and first aid
kits for school, office and home use. Acquisitions of Emil Schlemper GmbH and
Co. KG of Solingen, Germany in January l990, Homeric, Ltd. of Sheffield, England
in July l990 and Peter Altenbach and Sohne GmbH of Solingen, Germany in l99l
extended the Company's presence in Europe as a scissor and shear manufacturer.
On May 1, 1996, the Company sold the assets (excluding accounts receivable) of
Peter Altenbach and Sohne GmbH. The Company continues to be a major manufacturer
of scissors and shears in the United States and Germany, and rulers in the
United States; a distributor of scissors, shears, rulers and other office
products in Canada; and a distributor of scissors, shears and other office
products in England. In addition to local competitors in each country, the
Company competes with imported products from China, Taiwan and Korea. The
Company also imports scissors, shears, rulers and other products to supplement
its manufactured products.
Independent manufacturer representatives are primarily used to sell its line of
consumer products with wholesale, contract and retail stationery distributors,
office supply super stores, school supply distributors, and mass market
retailers in the United States. Foreign operations use a combination of
independent commission agents and an internal sales force.
A seasonal surge in revenues arises from March through July which is attributed
to sales in the educational field, primarily through school supply distributors
and mass market retailers. Unfilled order backlog at year end 1998 was
$1,400,498 as compared to $2,455,306 in l997.
Medical
The Company entered the medical products field in l965, producing disposable
medical scissors and instruments in bulk for hospital distributors. In l972, the
Company's Medical Products Division began marketing its own line of products.
New products have been added to the procedure tray line every year to meet the
specialized needs of hospitals, clinics and convalescent homes. In l978, wound
dressings were introduced by the Company. Bandage products were added in January
l992, when the Company acquired the major portion of the United States medical
products business of SePro Healthcare, Inc., the United States subsidiary of
Seton Healthcare Group, plc of Oldham, England. The Company entered into
distribution agreements with Seton Healthcare International Limited for
exclusive United States rights to an extensive line of state-of-the-art pressure
therapy bandages and specialized wound dressings. Subsequently, in March 1997,
the Company sold its distribution rights of certain wound care products to Seton
Healthcare International Limited. Under the agreement, Acme continued to
distribute the products for a portion of 1997.
In February, 1999, the Company announced its decision to discontinue the Medical
products business. On March 22, 1999, the Company sold the medical business to
Medical Action Industries, Inc.
The Company has historically sold its products through a network of medical
dealers who distribute its line of medical products with hospitals, nursing
facilities, other alternate care providers, and certain major buying groups. The
Company's field sales force historically provided technical assistance in
addition to overseeing a network of manufacturer representatives.
Unfilled order backlog at year end 1998 was $107,044, compared to $313,178 in
l997.
Other
Environmental Rules and Regulations - Environmental rules and regulations
regarding hazardous waste control and electroplating effluent have been complied
with and 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, the Company employed 312 persons, most of whom are
full time and none are covered by union contracts. Employee relations are
considered good and no foreseeable problems with the work force are evident.
Item 2. Properties
Acme United Corporation is headquartered at 75 Kings Highway Cutoff, Fairfield,
Connecticut in 15,403 square feet of leased space. The Company owns and leases
manufacturing and warehousing facilities in the United States, owns a facility
in Germany, and leases 52,000 square feet of warehousing space in Canada and
6,000 square feet of warehousing space in England. All facilities are part of
the consumer segment except for the 60,000 square foot plant leased in
Goldsboro, North Carolina which serves as the packaging, warehouse and shipping
operation for both the U.S. medical and consumer segments.
In 1996 all United States manufacturing was consolidated into the 58,000 square
foot owned Fremont, North Carolina plant. The Seneca Falls, New York ruler
manufacturing plant was sold in 1996. The Bridgeport, Connecticut plant was
closed in 1996; that facility is being leased.
Manufacturing for Europe is presently being conducted at a 48,000 square foot
owned plant 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.
Properties owned by the Company in Fremont, North Carolina and Solingen, Germany
are collateralized by notes and mortgages. The leased facilities are occupied
under leases for terms ranging from less than one year to four years.
Item 3. Legal Proceedings
The Company has been involved in certain environmental matters. Additionally,
the Company has been involved in numerous legal actions relating to the use of
certain latex products, which the Company distributes, but does not manufacture.
The Company is one of many defendants. The Company has been released from the
majority of the lawsuits. While two lawsuits remain, they are still in
preliminary stages and there is no indication the Company's products were
involved. Based on information available, the Company believes there will not be
a material adverse impact on financial position, results of operations, or
liquidity, from environmental and product liabilities, either individually or in
the aggregate.
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 fiscal year ended December 31, 1998.
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:
High Low
Year Ended December 31, 1998
First Quarter 6 4 7/8
Second Quarter 6 1/2 4
Third Quarter 4 1/8 2 1/4
Fourth Quarter 3 1 7/8
Year Ended December 31, 1997
First Quarter 6 4 9/16
Second Quarter 6 3/8 5 1/4
Third Quarter 8 1/8 6
Fourth Quarter 7 7/16 5 11/16
As of March 22, 1999 there were approximately 1,300 holders of record of the
Company's Common Stock.
The Company did not pay cash dividends on its Common Stock in 1998 and 1997. The
Company presently intends to retain earnings to finance business improvements.
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(All figures in thousands except per share data)
1998 1997 (A) 1996 (A)(B) 1995 (A) 1994 (A)
- - ----------------------------------------------------------------------------------------------------------------------
Net Sales $ 36,457 $ 32,843 $ 33,125 $ 35,882 $ 36,015
- - ----------------------------------------------------------------------------------------------------------------------
Loss from Continuing Operations (2,364) (2,847) (4,744) (9,110) (1,873)
- - ----------------------------------------------------------------------------------------------------------------------
Total Assets 28,896 29,327 (C) 27,251 37,021 42,888
- - ----------------------------------------------------------------------------------------------------------------------
Long Term Debt, less Current Portion 6,382 11,852 8,444 14,880 14,388
- - ----------------------------------------------------------------------------------------------------------------------
Loss Per Share from Continuing Operations (D) $ (.70) $ (.85) $ (1.42) $ (2.73) $ (.56)
(A) Restated to reflect the sale of the medical business on March 22, 1999
which is reported as discontinued operations.
(B) Reflects the divestiture of Altenbach as of May 1, 1996.
(C) Restated to reclassify an accrual for a loss on the write-down of abandoned
property and plant of $530,000 as a reduction in assets to conform to the
1998 presentation.
(D) The effects of the weighted average number of stock options outstanding are
antidilutive for all years presented and have been excluded from the per
share calculations.
QUARTERLY FINANCIAL INFORMATION
(All figures in thousands except per share data)
Quarters
------------------------------------------------
1998 1st 2nd 3rd 4th Total
- - ------------------------------------------------------------------------------------------------------
Net Sales $ 8,471 $ 10,273 $ 10,651 $ 7,062 $ 36,457
- - ------------------------------------------------------------------------------------------------------
Costs of Goods Sold 6,531 7,874 8,291 6,096 28,792
- - ------------------------------------------------------------------------------------------------------
Loss from Continuing Operations (376) (129) (153) (1,706) (2,364)
- - ------------------------------------------------------------------------------------------------------
Income (Loss) from Discontinued Operations 284 248 223 (57) 698
- - ------------------------------------------------------------------------------------------------------
Net (Loss) Income (92) 119 70 (1,763) (1,666)
- - ------------------------------------------------------------------------------------------------------
Loss Per Share - Continuing Operations $ (.11) $ (.03) $ (.05) $ (.51) $ (.70)
- - ------------------------------------------------------------------------------------------------------
Earnings (Loss) Per Share - Discontinued Operations $ .08 $ .07 $ .07 $ (.01) $ .21
- - ------------------------------------------------------------------------------------------------------
Net (Loss) Earnings Per Share $ (.03) $ .04 $ .02 $ (.52) $ (.49)
- - ------------------------------------------------------------------------------------------------------
1997
- - ------------------------------------------------------------------------------------------------------
Net Sales 7,037 9,312 9,431 7,063 32,843
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Costs of Goods Sold 5,376 7,240 7,257 5,699 25,572
- - ------------------------------------------------------------------------------------------------------
Loss from Continuing Operations (787) (692) (592) (776) (2,847)
- - ------------------------------------------------------------------------------------------------------
Income from Discontinued Operations 1,068 914 778 290 3,050
- - ------------------------------------------------------------------------------------------------------
Net Income (Loss) 281 222 186 (486) 203
- - ------------------------------------------------------------------------------------------------------
Loss Per Share - Continuing Operations $ (.23) $ (.21) $ (.17) $ (.24) $ (.85)
- - ------------------------------------------------------------------------------------------------------
Earnings Per Share - Discontinued Operations $ .31 $ .28 $ .23 $ .09 $ .91
- - ------------------------------------------------------------------------------------------------------
Net Earnings (Loss) Per Share $ .08 $ .07 $ .06 $ (.15) $ .06
- - ------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Acme United Corporation (the "Company") operated two principal business
segments, consumer and medical, in 1998, 1997 and 1996. The Company sold the
medical segment in March 1999, and has classified the operating results of this
segment as discontinued operations in the accompanying financial statements. The
Company's continuing operations consist of a single reportable consumer segment
which operates in the United States, Canada, England and Germany.
On March 22, 1999, the Company sold its medical business, including customer
lists, inventory, and certain equipment for approximately $8.15 million
resulting in a gain of approximately $2.0 million. Net sales of that business
had declined from $14,356,000 in 1996 to $13,435,000 in 1997 to $10,090,000 in
1998. The Company used a portion of the net proceeds from the sale to reduce
debt. The sale of the medical business enables management to focus its sales
efforts on scissors, rulers, and first aid kits in the consumer market. The
Company believes the consumer market provides a strong foundation for growth.
The loss from continuing operations was $2,364,242 in 1998; $2,847,263 in 1997
and $4,743,606 in 1996.
The following comments on the results of operations relate exclusively to the
continuing operations of the Company's consumer business.
Results of Operations 1998 Compared with 1997
Net sales from continuing operations increased $3,614,173 or 11% in 1998 to
$36,456,687 compared to $32,842,514 in 1997. Net sales in the United States
increased $2,233,000 or 10% driven mainly by increased volume in the first aid
line and the new Tagit! scissors. Foreign net sales increased $1,381,173 or 13%
primarily on increased volume in Canada, including Rotex products. The Company
purchased the majority of the inventory of the Rotex division of Esselte Canada
on December 8, 1997.
Net other expense was $51,758 in 1998 compared to net other income of $367,406
in 1997. Net other expense in 1998 includes foreign currency transaction losses
of $194,000 in 1998 compared to currency gains of $182,000 in 1997. A currency
loss of $220,000 was incurred in 1998 related to the Company's Canadian
operations.
Gross profit was 21% of net sales in 1998 compared to 22% of net sales in 1997.
Temporary manufacturing inefficiencies negatively impacted manufacturing costs
for 1998. In addition, customer rebates which are netted against sales, were
higher in 1998 than 1997 as a percentage of gross sales.
Selling, general and administrative expenses were $8,519,808 in 1998 compared
with $8,678,687 in 1997, a decrease of $158,879 or 2%. Decreased compensation
expense applicable to fewer employees was offset in part by increased
advertising expense.
Interest expense increased $175,289 in 1998 to $1,501,575 compared to $1,326,286
in 1997 on higher borrowings to fund the purchase of the Rotex inventory and, in
part, to fund a portion of the net operating loss for the current year.
An income tax benefit of $44,002 was recognized in 1998 compared to an expense
of $94,317 in 1997. The Company has significant net operating loss carryovers
for United States federal and state, and foreign tax reporting purposes. The
benefits from such loss carryovers will only be recognized when realized.
Results of Operations 1997 Compared with 1996
Net sales from continuing operations in 1997 were $32,842,514, a decrease of
$282,073 or 1% compared to $33,124,587 in 1996. Net sales for 1996 included
$1,568,000 for the Company's former Peter Altenbach & Sohne GmbH subsidiary
("Altenbach") which was sold May 1, 1996. Net sales in the United States
increased $2,038,000 or 10% in 1997 over 1996. Excluding Altenbach, net sales
from foreign operations declined $752,000 in 1997 from 1996. Foreign currency
translations in 1997 resulted in $375,000 of the net sales decline.
The gross profit was 22% in both 1997 and 1996.
Selling, general and administrative (SG&A) expenses were $8,678,687 in 1997
compared to $9,071,207 in 1996, a decrease of $392,520 or 4%. SG&A expense for
1996 included $363,000 from the divested Altenbach subsidiary.
Interest expense decreased $211,113 or 14% in 1997 from 1996 due to lower
average borrowings and a slight reduction in interest rates. The reduction in
average borrowings resulted from the divestiture of Altenbach in 1996, the
extinguishment of certain debt in 1997 with a portion of the proceeds from the
sale of marketing rights referred to in Note 2 to the accompanying financial
statements, and improved cash management.
The provision for income taxes in 1997 was $94,317 compared to $83,963 in 1996.
Liquidity and Capital Resources
The Company's working capital, current ratio and long - term debt to equity
ratio follow:
1998 1997
- - ---------------------------------------------------------------------
Working Capital $ 3,616,421 $ 10,017,000
Current Ratio 1.20 to 1 1.86 to 1
Long - Term Debt to Equity Ratio 1.37 1.88
The decease in working capital and current ratio in 1998 is primarily a result
of a decrease of inventories, a decrease in current notes payable, an increase
in accounts payable and an increase in current portion of long-term debt.
Inventories decreased $812,362 or 5.8% in 1998 due to the Company adjusting
purchasing levels to support sales levels. Accounts payable increased $897,731
or 25% in 1998 primarily as a result of the Company increasing payment terms
with certain key vendors. Current notes payable decreased $1,656,758 as a result
of a 1998 refinancing. The current portion of long-term debt includes debt
repaid with proceeds from the sale of the medical business. On March 22, 1999,
the Company sold its medical business for approximately $8,150,000. At the
closing the Company used a portion of the cash proceeds to repay approximately
$6,000,000 of bank debt.
Long-term debt increased $2,285,538 to $15,326,209 as of December 31, 1998 due
to a refinancing of short-term lines of credit to a long-term borrowing
arrangement and increased borrowing related to the purchase of equipment.
Net cash provided by operating activities was $607,885 for 1998 compared to net
cash used by operating activities of $3,356,965 in 1997. The change resulted
primarily from a decrease in the level of inventories which was offset by the
net loss of $1,666,242.
On March 25, 1999, the Company entered into an irrevocable financing agreement
(the Commitment) with a bank to refinance debt. The closing is scheduled for
April 5, 1999. Under the Commitment the Company may borrow up to $10,500,000
through November 15, 1999 and from January 1, 2000 to April 30, 2000; between
November 16, 1999 and December 31, 1999 the Company may borrow up to $7,250,000.
The amounts the Company may borrow are based on a formula which applies specific
percentages to balances of accounts receivable and inventories. Upon closing,
the Company expects to have approximately $1,000,000 available for additional
borrowings.
Under the Commitment the Company, among other things, is restricted with respect
to dividends, additional borrowings, investments, mergers, distributions, and
property and equipment acquisitions. Further, the Company is required to
maintain specific amounts of tangible net worth, as defined, commencing June 30,
1999, and specified debt service coverage ratio, as defined, commencing
September 30, 1999. The Company believes these financial covenants will be met.
Capital expenditures during 1998 were approximately $1,600,000 which were, in
part, financed with long-term debt. Capital expenditures in 1999 are not
expected to be material.
Cash generated from operations, together with funds available under the
Commitment, is expected, under current conditions, to be sufficient to finance
the Company's planned operations in 1999.
Market Risk Disclosures
Foreign Currency Risk:
The Company manufactures products in the United States, Germany and Canada.
Further, the Company engages in intracompany sales which are denominated in
currencies other then those of the operating entity making the sale. As such,
these transaction give rise to foreign currency risk. The Company's currency
exposures vary, but are concentrated in the Canadian dollar, British pound, and
German mark.
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
under 90 days. 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. The Company does not hedge intracompany
sales nor does it 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.
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.
The Company's debt portfolio and associated interest rates after giving
retroactive effect to the debt refinancing referred to above follows:
1999 2000 2001 Total Fair Value
- - --------------------------------------------------------------------------------------------------------
Current Liabilities -Notes payable $ 881,538 $ 881,538 $ 881,538
Average interest rate 8.3% 8.3% 8.3%
- - --------------------------------------------------------------------------------------------------------
Long-term Debt:
Fixed rate $ 1,139,547 $ 148,922 $ 1,288,469 $ 1,288,469
Average interest rate 6.7% 8.0% 6.9% 6.9%
- - --------------------------------------------------------------------------------------------------------
Variable rate:
To be refinanced $ 582,492 $ 6,031,138 $ 6,613,630 $ 6,613,630
Average interest rate 9.3% 9.3% 9.3% 9.3%
Other $ 7,221,739 $ 188,768 $ 13,603 $ 7,424,110 $ 7,424,110
Average interest rate 7.8% 11.0% 11.0% 7.9% 7.9%
Compliance with Year 2000
The Company has completed the assessment phase of its Year 2000 compliance
program and is currently completing modifications and testing of its information
technology and other internal systems with the exception of Germany. In Germany,
the Company is presently in the selection phase of a new financial system to
mitigate the Year 2000 problem. The Company's goal is to complete implementation
of this new system by the end of the second quarter 1999. Financial systems at
the Company's other locations are substantially Year 2000 compliant.
The Company is in the process of gathering information about the Year 2000
compliance status of its significant suppliers and is developing a contingency
plan for alternative sourcing. The Company's goal is to complete its Year 2000
compliance program by the end of the third quarter 1999.
Estimated future costs for the Year 2000 compliance program range from $225,000
to $275,000 of which approximately $150,000 relates to Germany. Of these costs,
the Company expects that $75,000 will be charged to operations as expenses. The
costs of this project and its completion date are based on management's best
estimates, which were derived from numerous assumptions about future events,
including the availability of certain resources, third party remediation plans,
and other factors.
The Company continuously monitors its action plans addressing the Year 2000
issue, and is developing contingency plans to address unforeseen problems and
"worst case" scenarios. This is potentially a significant issue for most, if not
all, companies, with implications which can not be anticipated or predicted with
any degree of certainty.
Inflation
Inflation had a negligible effect on the Company's operations during 1998 and
1997. The Company estimates that inflationary effects, in the aggregate, were
generally recovered or offset through increased pricing or cost reductions in
both years.
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.
Item 8. Financial Statements and Supplementary Data
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
- - --------------------------------------------------------------------------------------------------
Net Sales $ 36,456,687 $ 32,842,514 $ 33,124,587
Other (Expense)/Income - Net (51,758) 367,406 449,275
- - --------------------------------------------------------------------------------------------------
36,404,929 33,209,920 33,573,862
Costs and Expenses:
Cost of Goods Sold 28,791,790 25,572,257 25,845,868
Selling, General and Administrative Expenses 8,519,808 8,678,687 9,071,207
Interest Expense 1,501,575 1,326,286 1,537,399
Restructuring and Other Charges -- 385,636 1,779,031
- - --------------------------------------------------------------------------------------------------
38,813,173 35,962,866 38,233,505
- - --------------------------------------------------------------------------------------------------
Loss from Continuing Operations before Income Taxes (2,408,244) (2,752,946) (4,659,643)
Income Taxes (Benefit) (44,002) 94,317 83,963
- - --------------------------------------------------------------------------------------------------
Loss from Continuing Operations (2,364,242) (2,847,263) (4,743,606)
Income from Discontinued Operations 698,000 3,050,000 1,569,000
- - --------------------------------------------------------------------------------------------------
Net (Loss) Income (1,666,242) 202,737 (3,174,606)
Other Comprehensive (Expense) Income -
Foreign Currency Translation (8,675) (250,436) 25,708
- - --------------------------------------------------------------------------------------------------
Comprehensive Loss $ (1,674,917) $ (47,699) $ (3,148,898)
==================================================================================================
(Loss) Earnings Per Share:
Continuing Operations $ (.70) $ (.85) $ (1.42)
Discontinued Operations .21 .91 .47
- - --------------------------------------------------------------------------------------------------
Net (Loss) Income $ (.49) $ .06 $ (.95)
==================================================================================================
See accompanying notes.
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
Accumulated
Other
Outstanding Comprehensive
Shares of Additional Loss- Retained
Common Common Treasury Paid-In Translation Earnings
Stock Stock Stock Capital Adjustment (Deficit)
- - ---------------------------------------------------------------------------------------------------------------------------
Balances, December 31,1995 3,337,620 $ 8,461,550 $ (357,631) $ 2,145,119 $(1,001,812) $ 257,627
Net Loss (3,174,606)
Exercise of Stock Options 50,000 125,000 34,375
Translation Adjustment 25,708
- - ---------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 3,387,620 8,586,550 (357,631) 2,179,494 (976,104) (2,916,979)
Net Income 202,737
Exercise of Stock Options 39,375 98,438 58,734
Purchase of Treasury Stock (64,620) (331,178)
Translation Adjustment (250,436)
- - ---------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 3,362,375 8,684,988 (688,809) 2,238,228 (1,226,540) (2,714,242)
Net Loss (1,666,242)
Exercise of Stock Options 8,500 21,250 12,375
Issuance of Treasury Stock 6,613 40,809 (17,898)
Translation Adjustment (8,675)
- - ---------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 3,377,488 $ 8,706,238 $ (648,000) $ 2,232,705 $(1,235,215) $(4,380,484)
===========================================================================================================================
See accompanying notes.
Acme United Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS 1998 1997
- - --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 39,805 $ 24,706
Accounts receivable, less allowance 7,721,699 7,445,839
Inventories 13,268,989 14,081,351
Prepaid expenses and other current assets 423,772 176,223
- - --------------------------------------------------------------------------
Total current assets 21,454,265 21,728,119
Plant, Property and Equipment:
Land 219,249 204,928
Buildings 2,178,805 2,120,427
Machinery and equipment 16,216,082 15,527,753
- - --------------------------------------------------------------------------
Total plant, property and equipment 18,614,136 17,853,108
Less accumulated depreciation 12,572,886 11,618,129
- - --------------------------------------------------------------------------
Net plant, property and equipment 6,041,250 6,234,979
Goodwill, less accumulated amortization 504,848 526,513
Other assets 895,156 837,116
- - --------------------------------------------------------------------------
Total Assets $ 28,895,519 $ 29,326,727
==========================================================================
LIABILITIES 1998 1997
Current Liabilities:
Notes payable $ 881,538 $ 2,538,296
Accounts payable 4,422,315 3,524,584
Restructuring liability - 27,688
Other accrued liabilities 3,590,213 3,901,863
Current portion of long-term debt 8,943,778 1,188,665
- - --------------------------------------------------------------------------
Total current liabilities 17,837,844 11,181,096
Long-term debt, less current portion 6,382,431 11,852,006
- - --------------------------------------------------------------------------
Total Liabilities 24,220,275 23,033,102
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $2.50: authorized
4,000,000 shares; issued - 3,482,495
shares in 1998 and 3,473,995 shares
in 1997, including Treasury Stock 8,706,238 8,684,988
Treasury Stock, at cost, 105,007
shares in 1998 and 111,620 shares in 1997 (648,000) (688,809)
Additional paid-in capital 2,232,705 2,238,228
Retained - earnings deficit (4,380,484) (2,714,242)
Accumulated other comprehensive loss -
translation adjustment (1,235,215) (1,226,540)
- - --------------------------------------------------------------------------
Total Stockholders' Equity 4,675,244 6,293,625
- - --------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 28,895,519 $ 29,326,727
==========================================================================
See accompanying notes.
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (1,666,242) $ 202,737 $ (3,174,606)
Adjustments to reconcile net (loss) income to net cash
provided (used) by operating activities
Gain on sale of marketing rights -- (846,178) --
Depreciation 1,242,605 979,196 923,031
Amortization 33,421 92,480 443,977
(Gain) loss on disposal of plant, property and equipment (98,264) -- 120,259
Changes in operating assets and liabilities
Accounts receivable (275,860) (709,695) 684,562
Inventories 812,362 (4,030,034) 5,352,588
Prepaid expenses and other current assets (247,549) (114,580) 2,157,901
Other assets (69,796) (196,518) (835,892)
Accounts payable 897,731 1,034,140 (324,665)
Other accrued liabilities (20,523) 231,487 898,103
- - --------------------------------------------------------------------------------------------------------------
Total adjustments 2,274,127 (3,559,702) 9,419,864
- - --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 607,885 (3,356,965) 6,245,258
- - --------------------------------------------------------------------------------------------------------------
Investing activities:
Capital expenditures (1,572,516) (1,824,394) (1,068,550)
Proceeds from sales of plant, property and equipment 326,000 345,106 484,340
Proceeds from sale of marketing rights -- 1,915,178 --
Proceeds from divestiture of Altenbach -- -- 962,290
Divestiture of Altenbach -- -- (3,253,873)
- - --------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (1,246,516) 435,890 (2,875,793)
- - --------------------------------------------------------------------------------------------------------------
Financing activities:
Net (repayments) borrowings on notes payable and
revolving credit facilities (400,375) 3,661,074 (2,103,352)
Borrowings of long-term debt 1,266,557 600,000 --
Repayment of long-term debt (237,402) (1,903,896) (1,518,670)
Exercise of stock options 33,625 157,172 159,375
- - --------------------------------------------------------------------------------------------------------------
Net cash provided (used) for financing activities 662,405 2,514,350 (3,462,647)
- - --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (8,675) 4,229 (11,389)
- - --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 15,099 (402,496) (104,571)
Cash and cash equivalents at beginning of year 24,706 427,202 531,773
- - --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 39,805 $ 24,706 $ 427,202
==============================================================================================================
See accompanying notes.
Acme United Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Continuing Operations
The continuing operations of Acme United Corporation (the Company) consist of a
single reportable "consumer" segment. The consumer segment operates in the
United States, Canada, England and Germany. Principal consumer segment 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. Revenues related to sales of such products are recognized at
the time of shipment. Continuous credit evaluations are made of customers;
collateral is not required. Allowances for credit losses are provided and have
been within management's expectations. Net sales for 1998 and 1997 include two
customers which aggregate approximately 20% for each year.
2. Discontinued Operations
On March 22, 1999 the Company sold its medical business, including customer
lists, inventory, and certain equipment for approximately $8,150,000 realizing a
gain of approximately $2,000,000. The consolidated statements of operations for
1998, 1997 and 1996 have been reclassified to reflect the discontinuance of the
medical business segment. The consolidated balance sheets include the assets of
the discontinued medical business. A summary of those assets follows:
1998 1997
- - --------------------------------------------------
Current assets:
Accounts receivable $1,121,000 $1,210,000
Inventories 3,464,000 3,339,000
Other 150,000 107,000
- - --------------------------------------------------
4,735,000 4,656,000
Equipment, net and other 1,215,000 1,213,000
- - --------------------------------------------------
$5,950,000 $5,869,000
==================================================
The condensed statements of operations relating to the medical business follow:
1998 1997 1996
- - ------------------------------------------------------------------------------
Net sales $10,090,000 $13,435,000 $14,356,000
Costs and expenses 9,392,000 11,231,000 12,787,000
- - ------------------------------------------------------------------------------
698,000 2,204,000 1,569,000
Gain on sale of marketing rights (A) -- 846,000 --
- - ------------------------------------------------------------------------------
Income from operations (B) $ 698,000 $ 3,050,000 $ 1,569,000
==============================================================================
(A) On March 3, 1997, the Company sold marketing rights of certain wound care
products applicable to the medical business for approximately $2.0 million
which resulted in a gain of $846,000.
(B) Income taxes related to the medical business are not material.
3. Accounting Policies
(a) Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
(b) 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 are eliminated in
consolidation.
(c) 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. Translation adjustments are shown as a separate component of
stockholders' equity. Foreign currency transaction gains and losses are
recognized at the time of settlement of the underlying purchase
transactions and treated as purchasing variances. Resulting translation
adjustments are made directly to a separate component of shareholders'
equity--"Accumulated other comprehensive loss - translation adjustment".
Foreign currency transaction (losses) gains which are included in other
(expense) income were $(194,000) in 1998, $182,000 in 1997, and $104,000 in
1996.
(d) Hedging Activity - Foreign currency contracts are occasionally purchased as
hedges against foreign currency fluctuation risk related to specific
purchase commitments. The Company does not engage in foreign currency
exchange contracts for speculative purposes and accordingly, the contracts
are accounted for as hedges. There were no significant foreign currency
contracts outstanding as of December 31, 1998 and 1997.
(e) Cash Equivalents - Investments with an original maturity of three months or
less at the date of purchase are considered cash equivalents.
(f) Accounts Receivable - Accounts receivable are shown less an allowance for
doubtful accounts of $195,325 in 1998 and $252,079 in 1997.
(g) Inventories - Inventories are stated at the lower of average cost
determined by the first in, first out method or market.
(h) 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.
(i) Goodwill - Goodwill represents the excess of the cost of investments in
businesses acquired over the net asset values at acquisition. Goodwill is
being amortized by the straight line method over periods ranging from 3 to
40 years. Accumulated amortization thereon aggregated $325,546 and $292,125
at December 31, 1998 and 1997, respectively.
(j) Asset Impairment -The Company evaluates the propriety of the carrying
amounts of its long-lived assets, including goodwill, as well as their
estimated useful lives, 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.
(k) 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.
(l) Research and Development - Research and development costs ($90,651 in 1998,
$385,000 in 1997 and $47,277 in 1996) are charged to operations as
incurred.
(m) Advertising - Advertising costs ($2,353,188 in 1998, $2,044,179 in 1997,
and $1,990,086 in 1996) are expensed as incurred.
(n) Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year presentation.
4. Inventories
Inventories consists of:
1998 1997
- - --------------------------------------------------
Finished goods $ 7,122,146 $ 7,658,012
Work in process 1,240,055 1,229,079
Materials and supplies 4,906,788 5,194,260
- - --------------------------------------------------
$13,268,989 $14,081,351
==================================================
5. Other Assets
Other assets consist of:
1998 1997
- - -------------------------------------------
Prepaid pension costs $867,540 $768,876
Other 27,616 68,240
- - -------------------------------------------
$895,156 $837,116
===========================================
6. Other Accrued Liabilities
Other accrued liabilities consist of:
1998 1997
- - ----------------------------------------
Vendor rebates $1,278,226 $1,078,692
Other 2,311,987 2,823,171
- - ----------------------------------------
$3,590,213 $3,901,863
========================================
7. 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.
Other disclosures related to the pension plan follow:
1998 1997
- - ----------------------------------------------------------------------
Changes in benefit obligation
Benefit obligation at beginning of year $(5,306,010) $(5,270,640)
Interest cost (381,457) (376,622)
Plan participants' contributions (7,833)
Actuarial loss (350,647) (210,618)
Benefits paid 726,575 559,703
- - ----------------------------------------------------------------------
Benefit obligation at end of year $(5,311,539) $(5,306,010)
- - ----------------------------------------------------------------------
Changes in plan assets
Fair value of plan assets at
beginning of year $ 5,911,452 $ 5,509,300
Actual return on plan assets 685,461 954,022
Employer contributions 7,833
Benefits paid (726,575) (559,703)
- - ----------------------------------------------------------------------
Fair value of plan assets at end of year $ 5,870,338 $ 5,911,452
- - ----------------------------------------------------------------------
Funded status $ 558,799 $ 605,442
Unrecognized loss 308,741 163,434
- - ----------------------------------------------------------------------
Prepaid benefit costs $ 867,540 $ 768,876
======================================================================
At December 31, 1998 and 1997, plan assets include 30,000 shares of the
Company's Common Stock having a market value of $67,500 and $180,000 at those
dates, respectively.
1998 1997
- - ---------------------------------------------------------
Assumptions
Discount rate 6.5% 7.0%
Expected return on plan assets 8.5% 8.5%
1998 1997 1996
- - ----------------------------------------------------------------------
Components of net benefit income
Interest cost $ 381,457 $ 376,622 $ 329,189
Expected return on plan assets (480,121) (446,996) (345,539)
- - ----------------------------------------------------------------------
Net benefit income $ (98,664) $ (70,374) $ (16,350)
======================================================================
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 and have amounted to 2% of eligible
employee earnings. Total contribution expense under this plan approximated
$102,000, $104,000, and $108,000 for 1998, 1997, and 1996, respectively.
8. Income Taxes
The amounts of income taxes (benefit) reflected in operations follow:
1998 1997 1996
- - -------------------------------------------------------
Current:
State $ 29,808 $ 49,800 $ 49,800
Foreign (73,810) 44,517 34,163
- - -------------------------------------------------------
$ (44,002) $ 94,317 $ 83,963
=======================================================
The current state tax provision is comprised of the minimum capital tax and
other franchise taxes related to the jurisdictions in which the Company's
manufacturing plants are located.
A summary of United States and foreign losses before income taxes from
continuing operations follows:
1998 1997 1996
- - ---------------------------------------------------------
United States $(1,443,434) $(2,280,601) $(3,785,565)
Foreign (964,810) (472,345) (874,078)
- - ---------------------------------------------------------
$(2,408,244) $(2,752,946) $(4,659,643)
=========================================================
The following schedule reconciles the amounts of income taxes (benefit) computed
at the United States statutory rate to the actual amounts reported in
operations.
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------
Federal income taxes (benefit) at 34% statutory rate $ (581,483) $ 100,999 $(1,050,819)
State and local taxes, net of federal income tax effect 19,673 32,868 32,415
Foreign income taxes (benefit) (22,345) (19,473) (123,355)
Deferred income tax asset valuation allowance 578,601 117,666 716,177
Repatriated earnings of foreign subsidiary -- -- 353,136
Other (38,448) (137,743) 156,409
- - ------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (44,002) $ 94,317 $ 83,963
======================================================================================================
Income taxes paid, net of refunds received, were $66,363 in 1998, $13,267 in
1997 and $20,676 in 1996.
Deferred income taxes relate to:
1998 1997
- - -------------------------------------------------------------------------------------
Deferred income tax liabilities:
Plant, property and equipment $ 373,115 $ 275,719
Pension 301,170 305,244
Other -- 55,762
- - -------------------------------------------------------------------------------------
674,285 636,725
Deferred income tax assets:
Asset valuations allowances 381,595 844,402
Operating loss carryforwards 4,279,050 3,084,142
Intangible assets 126,962 (9,344)
Other 88,022 340,268
- - -------------------------------------------------------------------------------------
4,875,629 4,259,468
- - -------------------------------------------------------------------------------------
Net deferred income tax asset before valuation allowance (4,201,344) (3,622,743)
Valuation allowance 4,201,344 3,622,743
- - -------------------------------------------------------------------------------------
Net deferred income taxes $ -- $ --
=====================================================================================
The deferred income tax asset valuation allowance was $3,505,077 as of December
31, 1996.
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. $1,414,000 and $2,153,000 of foreign subsidiary
earnings are considered permanently reinvested as of December 31, 1998 and 1997,
respectively, and the amount of deferred income taxes thereon cannot be
reasonably determined.
Due to the uncertain nature of the realization of the Company's deferred income
tax assets based on past performance and carryforward 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, 1998, the Company has tax operating loss carryforwards
aggregating $13,209,000 of which $6,068,000 relate to United States federal
income taxes which expire from 2011 through 2018, $2,910,000 relate to state
income taxes which expire from 1999 through 2008 and $4,231,000 relate to
foreign operations income taxes which can be carried forward indefinitely.
9. Debt
The Company has short-term lines of credit for its foreign subsidiaries which
expire in 1999. The aggregate amount available under these lines is $1,051,061
of which $881,538 is outstanding at December 31, 1998 and bears interest at
rates ranging from local prime to local prime plus 3.25%. The weighted average
interest rate for outstanding borrowings was 8.3% at December 31, 1998 (8.0% at
December 31, 1997).
Long-term debt consists of:
1998 1997
- - --------------------------------------------------
Notes payable to bank:
To be refinanced $ 6,613,630 $ --
Other 7,120,533 11,514,800
Other notes payable 1,592,026 1,525,871
- - --------------------------------------------------
15,326,209 13,040,671
Less current portion 8,943,778 1,188,665
- - --------------------------------------------------
$ 6,382,431 $11,852,006
==================================================
On March 25, 1999 the Company entered into an irrevocable financing agreement
(the Commitment) with a bank to refinance debt. The closing is scheduled for
April 5, 1999. Under the Commitment the Company may borrow up to $10,500,000
through November 15, 1999 and from January 1, 2000 to April 30, 2000 (the
maturity date); between November 16, 1999 and December 31, 1999 the Company may
borrow up to $7,250,000. (The amounts the Company may borrow are based on a
formula which applies specific percentages to balances of accounts receivable
and inventories.) Throughout 1999 the Company expects to have a minimum of
$6,000,000 outstanding under this arrangement. In addition, the Company will
borrow $2,500,000 under a term loan arrangement payable in monthly installments
of $50,000, plus interest, commencing May 1, 1999 through April 1, 2000 and a
final installment of $1,900,000, plus interest, due April 30, 2000. All amounts
borrowed under the Commitment bear interest at the prime base rate, as defined,
plus 1.5%. A portion of the amount to be borrowed under the Commitment will
refinance $6,613,630 of debt outstanding as of December 31, 1998 and has been
applied retroactively.
Under the Commitment the Company, among other things, is restricted with respect
to dividends, aditional borrowings, investments, mergers, distributions, and
property and equipment acquisitions. Further, the Company is required to
maintain specific amounts of tangible net worth, as defined, commencing June 30,
1999 and a specified debt service coverage ratio, as defined, commencing
September 30, 1999. The Company believes these financial covenants will be met.
Current maturities of long-term debt which reflect the Commitment follow: 1999 -
$8,943,778; 2000 - $6,368,828; and 2001 - $13,603.
The interest rates of the other notes payable range from 6.25% to 11.0%.
Interest paid was $1,530,290 in 1998, $1,306,694 in 1997, and $1,537,399 in
1996.
Substantially all assets are pledged as collateral for outstanding debt,
including that portion to be refinanced.
10. Commitments and Contingencies
The Company leases certain office, manufacturing and warehouse facilities and
various equipment under non-cancelable operating leases. Total rent expense was
$684,000 in 1998, $613,000 in 1997 and $626,000 in 1996. Minimum annual rental
commitments under non-cancelable leases with initial or remaining terms of one
year or more as of December 31, 1998 follow: 1999 - $552,639; 2000 - $446,784;
2001 - $84,784; 2002 - $29,170; 2003 - $3,800; and thereafter - $950.
The Company has been involved in certain environmental matters. Additionally,
the Company has been involved in numerous legal actions relating to the use of
certain latex products, which the Company distributes, but does not manufacture.
The Company is one of many defendants. The Company has been released from the
majority of the lawsuits. While two lawsuits remain, they are still in
preliminary stages and there is no indication the Company's products were
involved. Based on information available, the Company believes that there will
not be a material adverse impact on financial position, results of operations,
or liquidity, from environmental and product liabilities, either individually or
in aggregate.
11.Geographic Data
Net sales of the Company's continuing operations by geographic area follow
(000's omitted):
1998 1997 1996
- - ---------------------------------------------------------------------
Net Sales:
United States $ 24,108 $ 21,875 $ 19,837
Canada 5,880 4,235 4,103
England 3,296 4,067 3,942
Germany and other European countries 3,173 2,666 5,243
- - ---------------------------------------------------------------------
$ 36,457 $ 32,843 $ 33,125
=====================================================================
Long-lived assets by geographic area follow (000's omitted):
1998 1997 1996
- - ---------------------------------------------------------------------
Long-Lived Assets:
United States $ 5,648 $ 4,950 $ 5,485
Canada 83 66 48
England 184 661 1,117
Germany 1,526 1,922 2,356
- - ---------------------------------------------------------------------
$ 7,441 $ 7,599 $ 9,006
=====================================================================
12. Stock Option Plans
The Company has a stock option plan which provides incentive and nonqualified
stock options for up to 520,000 shares of the Company's Common Stock to officers
and key employees (the Employee's Plan). The Employee'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 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.
The Company also has a stock option plan which provides nonqualified stock
options for up to 120,000 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 and for subsequent Annual Meetings 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. 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 option plans follows:
1998 1997 1996
- - ------------------------------------------------------------------------------
Options outstanding at the beginning of the year 318,750 301,500 250,000
Options granted 67,950 66,000 159,500
Options canceled (1,650) (9,375) (58,000)
Options exercised (8,500) (39,375) (50,000)
- - ------------------------------------------------------------------------------
Options outstanding at the end of year 376,550 318,750 301,500
==============================================================================
Options exercisable at the year end 292,563 245,000 245,625
==============================================================================
Options available for future grants at
the end of the year 165,575 51,875 108,500
==============================================================================
Average price of options granted $4.62 $5.81 $3.92
Average price of options canceled $4.17 $4.52 $4.35
Average price of options exercised $3.96 $3.99 $3.19
Average price of options outstanding $4.31 $4.23 $3.87
Average price of options exercisable $4.14 $3.93 $3.81
A summary of options outstanding at December 31, 1998 follows:
Options Outstanding Options Exercisable
--------------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- - ---------------------------------------------------------- ---------------------
$ 2.50 to $ 3.65 113,200 6 $ 3.51 102,550 $ 3.59
$ 3.66 to $ 5.00 144,600 7 $ 3.91 123,700 $ 3.85
$ 5.01 to $ 7.25 118,750 8 $ 5.57 66,313 $ 5.54
------- -------
376,550 292,563
======= =======
The weighted average remaining contractual life of outstanding stock options is
7 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
1998, 1997 and 1996.
If compensation expense for the Company's stock option plans had been determined
using the fair value method under SFAS No. 123, Accounting for Stock Based
Compensation, the Company would have reported a net loss of $1,814,064 ($.54 a
share) for 1998 and net income of $89,541 ($.03 a share) for 1997. Because the
SFAS No. 123 method of accounting has not been applied to options granted prior
to January 1, 1995, the resulting compensation cost may not be representative of
that to be expected in future years.
The weighted average fair value at date of grant for options granted during 1998
and 1997 is $1.83 and $2.52 per option, respectively.
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
1998 1997
- - -----------------------------------------------
Expected Life (years) 5 5
Interest Rate 5.69% 6.65%
Volatility 37.2% 36.4%
Dividend Yield 0% 0%
13. Earnings Per Share
The denominators used in the (loss) earnings per share computations consist of
the weighted average shares of Common Stock outstanding of 3,371,099 in 1998,
3,353,581 in 1997, and 3,342,278 in 1996. The effects of the weighted average
number of stock options outstanding were antidilutive in 1998 and 1996 and have
been excluded from the per share calculations. Further, because the Company had
a loss from continuing operations in 1997 the weighted average number of stock
options outstanding were also excluded from the per share calculations.
14. Restructuring and Other Charges
In 1996 the Company completed a consolidation of its Connecticut and North
Carolina manufacturing facilities. Additional severance charges were incurred as
the Company reorganized its senior and middle management organization. These
steps resulted in a reduction of 95 positions in 1996 and a charge to operations
of $1,779,000.
A summary of restructuring and other charges included in operations follows:
1997 1996
- - ----------------------------------------------------------------------------
Severance costs $ 948,000
Write down of abandoned property and plant $ 530,000
Adjustment of prior year exit costs (144,000)
Exit costs 274,000
Relocation 328,000
Other 229,000
- - ----------------------------------------------------------------------------
$ 386,000 $1,779,000
============================================================================
A summary of the changes in the components of the Company's restructuring
liability follows:
Balance at Balance at Balance at
December 31, 1997 Charges December 31, 1998 Charges December 31,
1996 1997 1998
- - --------------------------------------------------------------------------------------------------------------
Severance costs $ 368,000 $ 340,000 $ 28,000 $ 28,000 $ -
Exit costs 274,000 274,000 (A) - - -
Relocation and other 113,000 113,000 - - -
- - --------------------------------------------------------------------------------------------------------------
$ 755,000 $ 727,000 $ 28,000 $ 28,000 $ -
==============================================================================================================
(A) Net of an adjustment of $144,000 to reduce exit costs accrued in a prior
year.
15. Financial Instruments
The carrying values of financial instruments (cash and cash equivalents,
accounts receivable, accounts payable, and debt) as of December 31, 1998 and
1997 approximate fair value. Fair value was based on expected cash flows and
current market conditions.
16. Purchase of Inventory from Rotex Division of Esselte Canada
On December 8, 1997, the Company purchased the majority of the inventory of the
Rotex Division of Esselte Canada. This inventory was purchased for $967,000 with
a debt financing of $564,800, and assumed liabilities of $402,200. This
represents an expansion of the Company's office products business in Canada
where the Company distributes a broad range of office products to most of the
major distributors and retail chains.
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Stockholders of Acme United Corporation
We have audited the accompanying consolidated balance sheet of Acme United
Corporation and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations and comprehensive loss, changes in
stockholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at Item 14(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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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, 1998, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with 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
March 25, 1999
Report of PricewaterhouseCoopers LLP, Independent Accountants
To the Board of Directors and Stockholders of Acme United Corporation
We have audited the accompanying consolidated balance sheet of Acme United
Corporation and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations and comprehensive loss, changes in
stockholders' equity, and cash flows for the years December 31, 1997 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as 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 as of December 31, 1997, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997 and 1996, in conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
- - ------------------------------
Hartford, Connecticut
March 19, 1998, except as to the information presented in note 2, for which the
date is March 26, 1999
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 1998.
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 to the Board of
Directors to hold office until their successors are elected and qualified.
Name Age Position Held with Company
- - ------------------------ --- ----------------------------------------------
Walter C. Johnsen 48 President and Chief Executive Officer and
Director
Gary D. Penisten 67 Chairman of the Board and Director
Brian S. Olschan 42 Executive Vice President and Chief Operating
Officer
Ronald P. Davanzo 36 Vice President and Chief Financial Officer,
Secretary and Treasurer
David W. Clark, Jr. 61 Director
George R. Dunbar 75 Director
Richmond Y. Holden, Jr. 45 Director
Wayne R. Moore 68 Director
James L.L. Tullis 51 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. He is a Director of D. E. Foster & Partners L.P., an
executive search firm. 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.
Brian S. Olschan served as Senior Vice President-Sales and Marketing from
September 10, 1996 until February 22, 1999. From 1991 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
1994-1996. Effective January 23, 1999, he was promoted to Executive Vice
President and Chief Operating Officer.
Ronald P. Davanzo has served as Vice President and Chief Financial Officer,
Secretary and Treasurer since March 18, 1999. Prior to that he was Vice
President-International since April 27, 1998, and continues to serve in that
capacity. Mr. Davanzo joined Acme on May 19, 1997. From 1985 to 1997 he served
in several increasingly responsible positions in Sterling Drug, Inc., Eastman
Kodak, and Sanofi S.A. In his final position before joining Acme he was Director
of Finance for Sanofi's Oscar de la Renta fragrance business.
David W. Clark, Jr. has served as director since 1980. He is Managing Director
of Pryor & Clark Company, an investment company. From July 1988 to June 1992,
Mr. Clark was President of Corcap, Inc. which was spun out of Lydall, Inc. in
July 1988. Mr. Clark joined Lydall in 1972 as Vice President-Treasurer and
Director. He became Executive Vice President in 1977 and President in 1986.
Until July of 1992, Mr. Clark was also Chairman of the Board of CompuDyne
Corporation of which he remains a Director. He is also a Director of Checkpoint
Systems, Inc., Thorofare, NJ and SSC Technologies, Bloomfield, Connecticut.
George R. Dunbar has served as director since 1977. He is President of 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 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 a Director and
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 of Moore Tool Company,
manufacturer of machine tools, measuring machines and metrology products. Mr.
Moore was Chairman of the Association for Manufacturing Technology/U.S. Machine
Tool Builders (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.
James L.L. Tullis has served as director since 1996. He is Chairman and Chief
Executive Officer of Tullis-Dickerson & Company, Inc., Greenwich, Connecticut, a
venture capital firm. He has been a securities analyst researching the health
care industry at Putnam Funds and Morgan Stanley and Company, Inc. He also was a
Senior Vice President at E.F. Hutton and Company. He is a Director of Physician
Sales & Service, Inc. and American Consolidated Laboratories, Inc. He is not
standing for reelection.
Henry C. Wheeler served as director since 1941. The Company is saddened to
report that Mr. Wheeler died on March 2, 1999. Until the time of his death, he
was Chairman Emeritus after serving as Chairman through November 29, 1995 and
President, Treasurer and Chief Executive Officer from 1941 to December 20, 1994.
Item 11. Executive Compensation
(Refer to Proxy Statement pages 8-12)
Item 12. Security Ownership of Certain Beneficial Owners and Management
(Refer to Proxy Statement pages 2-3)
Item 13. Certain Relationships and Related Transactions
(None)
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Financial Statements
Page(s)
Consolidated Balance Sheets 12
Consolidated Statements of Operations and Comprehensive Loss 11
Consolidated Statements of Changes in Stockholders' Equity 11
Consolidated Statements of Cash Flows 13
Notes to Consolidated Financial Statements 14-23
Report of Ernst & Young LLP, Independent Auditors 24
Report of PricewaterhouseCoopers LLP, Independent Accountants 24
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts 28
Report of Independent Accountants 28
Schedules other than those listed above have been omitted because the required
information is contained in the financial statements and notes thereto, or
because such schedules are not required or applicable.
3. Exhibits
Exhibit 21 - Parents and Subsidiaries 29
Exhibit 23 - Consent of Ernst & Young LLP, Independent Auditors 29
- Consent of PricewaterhouseCoopers LLP,
Independent Accountants 29
The following basic documents are contained in S-1 Registration Statement No.
230682 filed with the Commission on November 7, 1968 and amended by Substantive
Amendment No. 1 on December 31, 1968 and by No. 2 on January 31, 1969:
Certificate of Organization of Registrant
Amendment to Certificate of Incorporation of Registrant
dated September 24, 1968
Proof of Common Stock Certificates
The following basic documents were filed with Form 10-K for 1971:
Amendment to Certificate of Incorporation of Registrant dated
April 27, 1971
Amendment to Certificate of Incorporation
dated June 29, 1971
Proof of Common Stock Certificate
Proof of Preferred Stock Certificate
(b) No Form 8-K was filed by the Company during the quarter ended
December 31, 1998.
A Form 8-K was filed by the Company on March 6, 1998.
A Form 8-K was filed by the Company on April 6, 1998.
SCHEDULE II
Acme United Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997 and 1996
Balance at Charged to Deductions
Beginning of Costs and and Other Balance at
Period Expenses Adjustments End of Period
- - ------------------------------------------------------------------------------------------------------
1998
Restructuring liability $ 27,688 $ - $ 27,688 $ -
Allowance for doubtful accounts 252,079 35,889 92,643 195,325
- - ------------------------------------------------------------------------------------------------------
1997
Restructuring liability 755,440 385,636 1,113,388 (A) 27,688
Allowance for doubtful accounts 197,755 155,622 101,298 252,079
- - ------------------------------------------------------------------------------------------------------
1996
Restructuring liability 2,549,500 1,779,000 3,573,060 755,440
Allowance for doubtful accounts 132,593 134,014 68,852 197,755
(A) Reflects the write-down of abandoned property and plant of $530,000.
Report of Independent Accountants
To the Board of Directors and Stockholders of Acme United Corporation:
Our report on the consolidated financial statements of Acme United Corporation
and Subsidiaries is included on page 24 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule included on page 28 of this form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
- - ----------------------------------
PricewaterhouseCoopers LLP
Hartford, Connecticut
March 19, 1998
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 State or Country of Incorporation
- - ---- ---------------------------------
Acme United Limited Canada
Acme United, Ltd. England
Emil Schlemper GmbH Germany
Westcott Ruler Company, Inc. New York
The Acme Shear Company Connecticut
Only Acme United Limited (Canada), Acme United, Ltd. (England) and Emil
Schlemper GmbH are active and included in the consolidated financial statements.
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-98918 and 333-26737) pertaining to the Acme United Corporation
Employee Stock Option Plan and the Registration Statement (Form S-8 No.
333-26739) pertaining to the Acme United Director's Stock Option Plan of our
report dated March 25, 1999, with respect to the consolidated financial
statements and schedule of Acme United Corporation and subsidiaries included in
this Annual Report (Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
--------------------------
Hartford, Connecticut
March 25, 1999
Consent of PricewaterhouseCoopers LLP, Independent Accountants
We consent to the incorporation by reference in the registration statements of
Acme United Corporation and Subsidiaries on Forms S-8 (File No. 33-98918, File
No. 333-26737, and File No. 333-26739) of our report dated March 19, 1998,
except as to the information presented in note 2, for which the date is March
26, 1999, on our audits of the consolidated financial statements and financial
statement schedule of Acme United Corporation and Subsidiaries as of December
31, 1997, and for the two years in the period ended December 31, 1997 and 1996,
which reports are included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- - ------------------------------
Hartford, Connecticut
March 26, 1999
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 29, 1999.
ACME UNITED CORPORATION
(Registrant)
Signatures Titles
/s/ Walter C. Johnsen
- - ---------------------------
Walter C. Johnsen Chief Executive Officer and Director
/s/ Gary D. Penisten
- - ---------------------------
Gary D. Penisten Chairman of the Board and Director
/s/ Ronald P. Davanzo
- - ---------------------------
Ronald P. Davanzo Vice President and Chief Financial Officer,
Secretary and Treasurer
/s/ David W. Clark, Jr.
- - ---------------------------
David W. Clark, Jr. Director
/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/ James L.L. Tullis
- - ---------------------------
James L.L. Tullis Director