SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number Q4823
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.)
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
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Registrant had 3,377,488 shares outstanding as of November 11,
1998 of its $2.50 par value Common Stock.
<PAGE 2>
ACME UNITED CORPORATION
Page
----
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.................. 3
Condensed Consolidated Statements of Operations
and Comprehensive Income............................. 5
Condensed Consolidated Statements of Cash Flows........ 6
Notes to Condensed Consolidated Financial Statements... 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 9
Part II - OTHER INFORMATION
Item 1. Legal Proceedings................................... 12
Item 2. Changes in Securities............................... 12
Item 3. Defaults Upon Senior Securities..................... 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
Item 5. Other Information................................... 12
Item 6. Exhibits and Reports on Form 8-K.................... 12
Signatures.................................................. 12
<PAGE 3>
PART I. FINANACIAL INFORMATION
ACME UNITED CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(all amounts in thousands)
September 30 December 31
1998 1997
------------ -----------
<CAPTION>
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 331 $ 25
Accounts receivable, net 11,955 7,446
Inventories:
Finished goods 5,338 7,658
Work in process 2,118 1,229
Raw materials and supplies 4,885 5,194
-------- --------
12,341 14,081
Prepaid expenses and other current assets 901 176
-------- --------
Total current assets 25,528 21,728
-------- --------
Property, plant and equipment:
Land 219 205
Buildings 2,178 2,126
Machinery and equipment 16,343 15,528
-------- --------
18,740 17,859
Less accumulated depreciation 12,022 11,624
-------- --------
6,718 6,235
Other assets 825 837
Goodwill 513 527
-------- --------
Total assets $ 33,584 $ 29,327
======== ========
See notes to condensed consolidated financial statements.
<PAGE 4>
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
(UNAUDITED)
(all amounts in thousands)
September 30 December 31
1998 1997
------------ -----------
LIABILITIES
Current Liabilities:
Cash overdraft $ 813 $ 2,538
Accounts payable 3,863 3,525
Current portion of long term debt 14,542 1,189
Restructuring liability --- 27
Other accrued liabilities 4,662 3,902
-------- --------
Total current liabilities 23,880 11,181
Long term debt, less current portion 3,276 11,852
-------- --------
Total liabilities 27,156 23,033
-------- --------
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 8,706 8,685
Additional paid-in capital 2,251 2,238
Retained-earnings deficit (2,617) (2,714)
Accumulated other comprehensive loss -
translation adjustment (1,223) (1,226)
Treasury stock-111,620 shares (689) (689)
-------- --------
Total stockholders' equity 6,428 6,294
-------- --------
Total liabilities and stockholders' equity $ 33,584 $ 29,327
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE 5>
<TABLE>
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
(all amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 13,382 $ 12,715 $ 37,145 $ 36,449
Other income 125 104 257 1,046
-------- -------- -------- --------
Total revenues 13,507 12,819 37,402 37,495
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 10,289 9,316 28,036 26,499
Selling, general and
administrative expenses 2,737 2,925 8,133 8,742
Interest expense 412 354 1,113 960
Restructuring and other charges 1 --- 8 530
-------- -------- -------- --------
Total expenses 13,439 12,595 37,290 36,731
-------- -------- -------- --------
Income before income taxes 68 224 112 764
Provision for income taxes (2) 38 15 75
-------- -------- -------- --------
Net income 70 186 97 689
Other comprehensive income (expense) -
foreign currency translation 34 (29) 3 (185)
-------- -------- -------- --------
Comprehensive income $ 104 $ 157 $ 100 $ 504
======== ======== ======== ========
Basic earnings per share $ 0.02 $ 0.06 $ 0.03 $ 0.21
======== ======== ======== ========
Diluted earnings per share $ 0.02 $ 0.05 $ 0.03 $ 0.19
======== ======== ======== ========
Weighted average number of common
shares outstanding- denominator
for basic per share computation 3,371 3,354 3,370 3,351
Weighted average number of
dilutive stock options
outstanding 365 317 348 315
-------- -------- -------- --------
Denominator for diluted per
share computation 3,736 3,671 3,718 3,666
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE 6>
<TABLE>
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(all amounts in thousands)
Nine Months Ended
September 30
-----------------
1998 1997
-----------------
<CAPTION>
<S> <C> <C>
Operating activities:
Net income $ 97 $ 689
Adjustments to reconcile net income to
net cash used by operating activities:
Gain on sale of marketing rights --- (846)
Depreciation 782 772
Amortization 17 81
Increase in deferred income taxes 56 22
Gain on disposal of property, plant, and equipment (90) ---
Changes in operating assets and liabilities:
Accounts receivable (5,007) (3,872)
Inventories 1,720 (2,481)
Prepaid expenses and other current assets (259) (158)
Other assets (15) (10)
Accounts payable 311 836
Other accrued liabilities 780 663
------- -------
Net cash used by operating activities (1,608) (4,304)
------- -------
Investing activities:
Capital expenditures (1,474) (1,439)
Proceeds from sales of property, plant, and equipment 446 258
Proceeds from sale of marketing rights --- 1,915
------- -------
Net cash (used) provided by investing activities (1,028) 734
------- -------
Financing activities:
Proceeds from long term debt and credit arrangements 3,488 3,788
Payments on long term debt and credit arrangements (578) (705)
Stock options exercised 34 139
------- -------
Net cash provided by financing activities 2,944 3,222
------- -------
Effect of exchange rate changes on cash (2) 3
------- -------
Net change in cash and cash equivalents 306 (345)
Cash and cash equivalents at beginning of period 25 427
------- -------
Cash and cash equivalents at end of period $ 331 $ 82
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE 7>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 -
In the opinion of management, the accompanying condensed
consolidated financial statements contain all adjustments
necessary to present fairly the financial position, results of
operations and cash flows. However, the financial statements
do not include all of the disclosures normally required by
generally accepted accounting principles or those normally made
in the Company's annual report on Form 10-K. Please refer to
the Company's annual report on Form 10-K for the year ended
December 31, 1997 for such disclosures. The condensed balance
sheet as of December 31, 1997 was derived from the audited
financial statements as of that date. However, certain
reclassifications have been made thereto to conform to the 1998
presentation. The results of operations for the nine months
ended September 30, 1998 are not necessarily indicative of the
results to be expected for the full year.
Note 2 -
The Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128") as of its December 31, 1997 year-end.
As such, per share amounts for 1997 as presented herein reflect
the adoption of SFAS 128.
Note 3 -
As of January 1, 1998, the Company adopted SFAS 130,
"Reporting Comprehensive Income". The adoption of this
Statement had no impact on the Company's net income or
shareholders' equity. Under SFAS 130 the Company's foreign
currency translation adjustments, which are reported separately
in shareholders' equity, are also required to be included in
the determination of other comprehensive income or loss. The
prior year financial statements have been reclassified to
conform to the requirements of SFAS 130.
Note 4 -
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 four 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 it is not reasonably possible that a material adverse
impact on financial position, results of operations, or
liquidity, may result from environmental and product
liabilities, either individually or in aggregate.
The Company's Year 2000 Task Force is completing its
assessment of the impact of the Year 2000. The Task Force is in
the process of determining an action plan for testing and
validating all systems. In the U.S., the Company implemented a
new information system in 1997, which it believes addresses any
computer system issues related to the Year 2000. Management
believes that the Year 2000 issue will not materially affect
future financial results.
<PAGE 8>
Note 5 -
Long term debt consisted of the following:
(all amounts in thousands)
September 30 December31
1998 1997
------------ ----------
Revolving Line of Credit $ 11,780 $ 10,915
Revolving Loan 2,758 ---
Term Loan 1,385 600
Mortgage and Other Notes Payable 1,895 1,526
--------- ---------
17,818 13,041
--------- ---------
Less, Current Portion 14,542 1,189
--------- ---------
$ 3,276 $ 11,852
========= =========
The Company's Revolving Line of Credit and Term Loan are due
in May of 1999. The Company is currently in negotiations with
its lender to extend the maturity date and fully expects to
complete such arrangement prior to December of 1998.
On May 19, 1998, the Company negotiated a $3,500,000
Revolving Loan with its current lender. Under this agreement,
the amount available is determined using an asset based
formula. The loan matures May 19, 2001 and bears interest at
the prime rate.
<PAGE 9>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1998
Results of Operations
Net Sales
Consolidated net sales for the quarter ended September 30,
1998 were $13,382,000 compared with $12,715,000, or 5% higher,
for the same period last year. In 1997, Acme sold the
marketing rights of certain wound care products to Seton
Healthcare International Limited. In 1998, Acme acquired the
Rotex Division of Esselte Canada. Excluding the impact of
Seton, net sales increased by $1,033,000, or 8%, compared with
the third quarter of 1997 with Rotex contributing $367,000, or
36%, of the increase in net sales.
Net sales were $37,145,000 for the first nine months of
1998, compared with net sales of $36,449,000, or 2% higher, for
the first nine months of 1997. Net sales in 1997 included
$1,973,000 for Seton products. Excluding Seton, net sales
increased by $2,669,000, or 8%, compared with the first nine
months of 1997 with Rotex contributing $1,285,000, or 48%, of
the increase in net sales.
Consumer products net sales in the U.S. of $7,287,000 in the
third quarter of 1998 increased 13% compared with $6,463,000 in
the third quarter 1997. Sales of Tagit!, the patented
children's scissor line, began during the second quarter with
shipments to Kmart, Staples, Office Depot and others in time
for the back-to-school season. Tagit! accounted for about half
of the increase in net sales in the scissor category. Sales
growth in the first aid product line resulted from sourcing and
repackaging products to leverage distribution channels in
combination with increased sales to existing customers and new
customers. The company expects to exploit the innovative
concept of Tagit! by expanding existing product lines including
adult scissors and rulers.
Medical products net sales of $2,730,000 in the third
quarter of 1998 decreased $554,000, or 17%, compared with
$3,284,000 in the third quarter 1997. Excluding Seton, net
sales decreased $188,000, or 6%. The decline resulted from the
lack of orders from a single Asian customer with core sales
remaining steady. In June, the division won a supply contract
with a national alternative care distributor to consolidate
minor procedure kits around its product line. Revenues from
this contract are expected to exceed $4 million over the next
three years with shipments beginning during the quarter.
International sales increased by 13% for the third quarter
primarily due to Canada. Excluding currency fluctuations,
international sales for the third quarter of 1998 were 18%
higher than the third quarter of 1997. Canada sales increased
32% primarily due to the purchase of the Rotex Division of
Esselte Canada. Excluding the acquisition, third quarter sales
of the ongoing business improved 18% over prior year levels as
the acquisition of Rotex has lead to strong growth in the
existing Acme product lines. European sales were flat with
1997 levels.
Gross Profit
Consolidated gross profit for the third quarter of 1998 was
$3,093,000 (23.1% of net sales) compared with $3,399,000 (26.7%
of net sales) for the third quarter of 1997. The U.S. consumer
gross margin declined from 25.4% in 1997 to 24.2% in 1998. The
decline resulted from cost increases in higher volume product
lines and lower manufacturing efficiencies. The medical gross
margin declined $493,000 from 37.3% in 1997 to 26.8% in 1998.
One third of this decline resulted from a loss of the high
margin Seton products with the balance split between the loss
of sales associated with a single Asian customer and lower
manufacturing efficiencies. The international gross margin
declined from 17.9% in 1997 to 14.9% in 1998, primarily due to
Canada where lower margin products were sold from the Rotex
acquisition.
Consolidated gross profit for the first nine months of 1998
was $9,109,000 (24.5% of net sales) compared with $9,950,000
(27.3% of net sales) for the first nine months of 1997. The
consumer gross margin declined from 24.9% in 1997 to 25.1% in
1998. The medical gross margin declined from 38.1% in 1997 to
31.1% in 1998. The international gross margin declined from
18.8% in 1997 to 16.1% in 1998. Management expects to
consolidate sourcing product from Asia to leverage its buying
power to improve margins.
<PAGE 10>
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for
the third quarter of 1998 were $2,737,000 (20.5% of net sales)
compared with $2,925,000 (23.0% of net sales) for the same
period of 1997, a decrease of $188,000, or 6%. The primary
reason for the decrease was headcount reductions in all
locations except Canada, partially offset by an increase in
advertising expense that contributed to an increase in sales
and higher commission costs that resulted from increased sales.
SG&A expenses for the first nine months of 1998 of $8,133,000
(21.9% of net sales) compared with $8,742,000 (24.0% of net
sales), a decrease of $609,000, or 7%. The first nine months
of 1997 included $162,000 of non-recurring charges. Excluding
the non-recurring charges, SG&A expense in the first nine
months of 1998 declined by $528,000, or 6%, due to headcount
reductions, and the elimination of certain expenses incurred in
1997 associated with the product lines sold to Seton offset by
higher commissions and advertising in the consumer business
associated with increased sales.
Provision for Income Taxes
The Company has tax operating loss carryforwards in the
United States, England and Germany in excess of $3.4 million.
The tax provision for the three and nine months periods ended
September 30, 1998 was ($2,000) and $38,000, respectively,
compared with $15,000 and $75,000 for the same periods for
1997. The tax provision includes minimum state and local tax
obligations net of the benefit of net operating losses
utilized. Management is synchronizing its manufacturing,
sourcing, and tax strategies to utilize loss carryforwards.
Net Income
The Company reported net income for the third quarter of
1998 of $70,000, or 2 cents per share (diluted), compared with
net income of $186,000, or 5 cents per share (diluted), for the
third quarter of 1997. For the first nine months of 1998, net
income was $97,000, or 3 cents per share (diluted), compared
with net income of $689,000, or 19 cents per share (diluted),
for the same period in 1997. The first nine months of 1997
included a gain of the sale of marketing rights to Seton offset
by one-time charges; an increase in net income of $157,000 was
recognized.
Financial Condition
Liquidity and Capital Resources
During the first nine months of 1998, the total debt
increased by $3,052,000 compared to total debt at December 31,
1997. Of the increase, $1,698,000 was related to the Company's
Acme United Limited subsidiary where a new loan agreement was
negotiated in May of 1998 utilizing an asset based lending
formula that provides increased working capital to support the
Rotex acquisition and sales growth. The remaining increase
supported capital expenditures and increased sales growth in
U.S. operations.
For the remainder of 1998, cash generated from operating
activities is expected to be sufficient to reduce debt and fund
capital expenditures. The Company's current credit
arrangements coupled with cash expected from operating
activities are considered adequate to meet liquidity needs for
the remainder of 1998.
The Company's working capital, current ratio and long term
debt to equity ratio follow:
September 30, 1998 December 31,1997
------------------ ----------------
Working capital $1,648,000 $10,547,000
Current ratio 1.07 to 1 1.94 to 1
Long term debt to equity ratio .51 1.88
As of September 30, 1998, $11,780,00 is outstanding under
the Company's revolving line of credit. This line matures in
May of 1999. The Company is currently in negotiations with its
lender to extend the maturity date and fully expects to
complete such an arrangement prior to December of 1998. Had
negotiations been completed during the third quarter,
$13,165,00 of related debt would have been classified as long
term and would have resulted in working capital of $14,813,000,
a current ratio of 2.38 to 1, and long term debt to equity
ratio of 2.56.
<PAGE 11>
Safe Harbor for Forward-looking Statements
Except for historical information contained herein, certain
statements in this Management's Discussion and Analysis of
financial condition and results of operations and other
sections of this document contain forward-looking statements
that are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Words such
as `expects,' `anticipates,' `intends,' `plans,' `believes,'
`seeks,' `estimates,' or variations of such words and similar
expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future
performance and involve unknown risks and uncertainties which
may cause the Company's actual results in future periods to
differ materially from forecasted results.
<PAGE 12>
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
None.
Item 2 - Changes in Securities
None.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
Form 8-K was filed by the Company on April 6, 1998, and
revised on April 17, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
ACME UNITED CORPORATION
By /s/ Cheryl L. Kendall
--------------------------------------
Cheryl L. Kendall
Vice President and
Chief Financial Officer
Dated: November 11, 1998
By /s/ Richard L. Windt
--------------------------------------
Richard L. Windt
Vice President and
Corporate Controller
Dated: November 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 331
<SECURITIES> 0
<RECEIVABLES> 12,161
<ALLOWANCES> 206
<INVENTORY> 12,341
<CURRENT-ASSETS> 25,528
<PP&E> 20,045
<DEPRECIATION> 13,327
<TOTAL-ASSETS> 33,584
<CURRENT-LIABILITIES> 23,880
<BONDS> 0
0
0
<COMMON> 8,706
<OTHER-SE> (2,278)
<TOTAL-LIABILITY-AND-EQUITY> 33,584
<SALES> 37,145
<TOTAL-REVENUES> 37,402
<CGS> 28,036
<TOTAL-COSTS> 36,177
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,113
<INCOME-PRETAX> 112
<INCOME-TAX> 15
<INCOME-CONTINUING> 97
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
