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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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Commission file number Q4823
ACME UNITED CORPORATION
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(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0236700
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
75 Kings Highway Cutoff, Fairfield, Connecticut 06430
- ----------------------------------------------- -----
(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 15, 1999 of its $2.50
par value Common Stock.
<PAGE 2>
ACME UNITED CORPORATION
Page
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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.................. 10
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........................................................ 13
<PAGE 3>
PART I. FINANCIAL INFORMATION
ACME UNITED CORPORATION
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(all amounts in thousands, except per share data)
September 30 December 31
1999 1998
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<CAPTION>
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 40
Accounts receivable, less allowance 9,144 7,722
Inventories:
Finished goods 6,111 7,122
Work in process 732 1,240
Raw materials and supplies 1,297 4,907
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8,140 13,269
Prepaid expenses and other current assets 154 424
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Total current assets 17,438 21,455
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Property, plant and equipment:
Land 202 219
Buildings 2,062 2,179
Machinery and equipment 10,206 16,216
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12,470 18,614
Less accumulated depreciation 7,914 12,573
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4,556 6,041
Other assets 996 895
Goodwill, less accumulated amortization 389 505
---------- ----------
Total assets $ 23,379 $ 28,896
========== ==========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE 4>
<TABLE>
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
(UNAUDITED)
(all amounts in thousands, except per share data)
September 30 December 31
1999 1998
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<CAPTION>
<S> <C> <C>
LIABILITIES
Current Liabilities:
Notes payable $ 928 $ 882
Accounts payable 2,882 4,422
Other accrued liabilities 3,577 3,590
Current portion of long term debt 8,976 8,944
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Total current liabilities 16,363 17,838
Long term debt, less current portion 355 6,382
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Total liabilities 16,718 24,220
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STOCKHOLDERS' EQUITY Common stock, par value $2.50:
Authorized-4,000,000 shares
issued-3,482,495 shares, including treasury stock 8,706 8,706
Additional paid-in capital 2,233 2,233
Retained-earnings deficit (2,363) (4,380)
Accumulated other comprehensive loss-translation adjustment (1,267) (1,235)
Treasury stock, at cost-105,007 shares (648) (648)
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Total stockholders' equity 6,661 4,676
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Total liabilities and stockholders' equity $ 23,379 $ 28,896
========== ==========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(UNAUDITED)
(all amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 9,327 $10,651 $26,710 $29,395
Other income 31 124 295 248
------- ------- ------- -------
Total revenues 9,358 10,775 27,005 29,643
------- ------- ------- -------
Costs and expenses:
Cost of goods sold 7,091 8,291 20,587 22,696
Selling, general and administrative expenses 1,963 2,227 5,900 6,477
Interest expense 239 412 845 1,113
------- ------- ------- -------
Total expenses 9,293 10,930 27,332 30,286
------- ------- ------- -------
Income (loss) from continuing operations before income taxes 65 (155) (327) (643)
Income taxes (71) (2) (46) 15
------- ------- ------- -------
Income (loss) from continuing operations 136 (153) (281) (658)
Discontinued operations:
Gain on sale of discontinued operations --- --- 2,101 ---
Income from discontinued operations --- 223 198 755
------- ------- ------- -------
--- 223 2,299 755
------- ------- ------- -------
Net income 136 70 2,018 97
Other comprehensive income (expense) -
foreign currency translation 47 34 (31) 3
------- ------- ------- -------
Comprehensive income $ 183 $ 104 $ 1,987 $ 100
======= ======= ======= =======
Earnings (loss) per share:
Continuing operations $ 0.04 $ (0.05) $ (0.08) $ (0.19)
Discontinued operations --- 0.07 0.68 0.22
------- ------- ------- -------
Net income $ 0.04 $ 0.02 $ 0.60 $ 0.03
======= ======= ======= =======
Weighted average number of common shares outstanding-
denominator used for per share computations 3,377 3,370 3,377 3,369
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
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1999 1998
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<CAPTION>
<S> <C> <C>
Operating Activities:
Net income $ 2,018 $ 97
Adjustments to reconcile net income
to net cash used by operating activities:
Gain on sale of discontinued operations (2,101) ---
Depreciation 504 782
Amortization 20 17
Gain on disposal of property, plant, and equipment (24) (90)
Changes in operating assets and liabilities:
Accounts receivable (1,603) (5,007)
Inventories 1,741 1,720
Prepaid expenses and other current assets 270 (259)
Other assets (101) (15)
Accounts payable (1,540) 311
Other accrued liabilities (1,936) 836
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Net cash used by operating activities (2,752) (1,608)
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Investing Activities:
Capital expenditures (412) (1,474)
Proceeds from sale of property, plant, and equipment 141 446
Proceeds from sale of medical division 8,156 ---
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Net cash provided (used) by investing activities 7,885 (1,028)
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Financing Activities:
Net proceeds (payments) on short term borrowing arrangements (5,235) 2,125
Proceeds on long term debt 2,500 785
Payments on long term debt (2,440) ---
Stock options exercised --- 34
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Net cash (used) provided by financing activities (5,175) 2,944
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Effect of exchange rate changes on cash 2 (2)
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Net change in cash and cash equivalents (40) 306
Cash and cash equivalents at beginning of period 40 25
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Cash and cash equivalents at end of period $ (0) $ 331
========== =========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE 7>
Notes to CONDENSED CONSOLIDATED Financial Statements
(Unaudited)
Note 1 -- Basis of Presentation
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, 1998 for such disclosures. The condensed
consolidated balance sheet as of December 31, 1998 was derived from the audited
consolidated balance sheet as of that date. The results of operations for the
nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
Note 2 -- Discontinued Operations
On March 22, 1999 the Company sold its medical business including customer
lists, inventory, and certain equipment for approximately $8,156,000 realizing a
gain of $2,101,000. The condensed consolidated statements of operations for 1998
have been reclassified to reflect the discontinuance of the medical business
segment.
The condensed consolidated statements of operations relating to the medical
business follow:
<TABLE>
Nine Months Ended Three Months Ended
September 30 September 30
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1999 1998 1998
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<CAPTION>
<S> <C> <C> <C>
Net sales........................... $5,630,000 $7,752,000 $2,732,000
Costs and expenses.................. 5,432,000 6,997,000 2,509,000
---------- ---------- ----------
Income from operations.............. $ 198,000 $ 755,000 $ 223,000
========== ========== ==========
Earnings per share.................. $ .06 $ .22 $ .07
========== ========== ==========
</TABLE>
Income taxes related to the medical business are not material.
Note 3 -- Contingencies
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 a limited number of 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.
<PAGE 8>
Notes to CONDENSED CONSOLIDATED Financial Statements- continued
(Unaudited)
Note 4 -- Debt and Liquidity
The Company has short-term lines of credit for its foreign subsidiaries
which are renewable at various times throughout the remainder of 1999. The
aggregate amount available under these lines is $1,029,000 of which $928,000 is
outstanding at September 30, 1999.
Long term debt consisted of the following:
(all amounts in thousands)
September 30 December 31
1999 1998
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Notes payable:
U.S. and Canada arrangements...... $ 7,905 $ 6,614
Other............................. 1,426 8,712
-------- --------
9,331 15,326
Less current portion 8,976 8,944
-------- --------
$ 355 $ 6,382
======== ========
On March 22, 1999, the Company used the proceeds from the sale of the
medical business to pay down $6,800,000 of outstanding debt.
On April 28, 1999 the Company refinanced its debt arrangements in the U.S.
and Canada. Under the new arrangement, 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.) In addition, the Company converted $2,500,000 of debt into a
term loan 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 these arrangements bear
interest at the prime base rate, as defined, plus 1.5%. At September 30, 1999,
outstanding debt under the Company's arrangements in the U.S. and Canada was
$7,905,000 which has been classified as current and $438,000 was available for
additional borrowing. The Company is currently negotiating with lenders to
refinance these arrangements to extend the maturity date beyond December 31,
2000. Without such adequate debt financing the Company would be unable to fund
its obligations as they become due in the ordinary course of business. The
Company believes it will be successful in refinancing these arrangements.
Under the aforementioned debt arrangements, 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, and a specified debt service coverage ratio, as defined. The
Company is in compliance with the covenants and believes that they will be met
for the remainder of the arrangement's term. Substantially all assets are
pledged as collateral for debt.
<PAGE 9>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1999
Results of Operations
Net Sales
Traditionally, the Company's sales are stronger in the second and third
quarters, and weaker in the first and fourth quarters of the fiscal year due to
the seasonal nature of the business specific to the back-to-school season.
Consolidated net sales for the quarter ended September 30, 1999 were $9,327,000
compared with $10,651,000 for 1998, or 12% lower. In March 1999, the Company
sold its medical business to Medical Action Industries, Inc. Efforts were
focused on building inventory to comply with contractual obligations arising
from this sale in addition to shipping medical inventory to Medical Action
Industries, Inc., which slowed shipments of consumer product thereby negatively
impacting results from continuing operations.
Domestic consumer sales were $6,826,000 for the third quarter of 1999
compared to $7,287,000, a 6% decrease. Domestic consumer sales backorder for the
third quarter of 1999 was $708,000 compared with $352,000 for the third quarter
of 1998, or 2 times higher. Had backorder levels been equal to prior year, sales
would have been 1.5% lower.
International sales decreased by 26% for the third quarter. European sales
decreased mainly due to weak sales in the United Kingdom, as a slowing economy
and competitive pressures negatively impacted results in the third quarter. In
addition, a rationalization program of lower margin products reduced sales in
Canada when compared to the previous year.
Net sales were $26,710,000 for the first nine months of 1999, compared with
net sales of $29,395,000, or 9% lower, for the first nine months of 1998. Sales
declines in Canada and England were the main reasons for the lower sales.
Gross Profit
The gross profit from continuing operations for the third quarter of 1999
was $2,236,000 (24.0% of net sales) compared with $2,360,000 (22.2% of net
sales) for the third quarter of 1998. Product sourcing alternatives positively
impacted costs in the U.S. consumer business which led to an increase in gross
margin from 24.2% in 1998 to 28.2% in the third quarter of 1999. The
international gross margin rose to 15.9% in the third quarter of 1999 from 14.9%
in the comparable quarter in 1998. The gain in gross profit was primarily due to
savings associated with re-sourcing products acquired from Esselte Canada in
1997 and the discontinuing of lower margin products in Canada. For the first
nine months of 1999, gross profit was $6,123,000, or 23.0% of net sales,
compared with $6,699,000, or 22.8%, for the first nine months of 1998.
Management expects to continue to consolidate sourcing product from Asia to
leverage its buying power to further improve margins.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the third quarter
of 1999 were $1,963,000 (21.1% of net sales) compared with $2,227,000 (20.9% of
net sales) for the same period of 1998, a decrease of $264,000, or 13.5%. The
primary reason for the decrease is staff reductions. Management is continuing to
investigate other potential SG&A cost saving programs. For the first nine months
of 1999, SG&A expenses were $5,900,000 (22.1% of net sales) compared with
$6,477,000 (22.0% of net sales) for the same period of 1998.
Income (Loss)
Net income for the first nine months of 1999 is $2,018,000, or 60 cents per
share. Net income for the first nine months of 1999 includes a realized gain on
the sale of the medical business of $2,101,000. Income from continuing
operations for the third quarter of 1999 is $136,000, or 4 cents per share,
compared with a loss of $153,000, or 5 cents per share, for the third quarter of
1998. For the first nine months of 1999, the loss from continuing operations was
$281,000, or 8 cents per share compared with a loss of $658,000, or 19 cents per
share in the first nine months of 1998.
<PAGE 10>
Financial Condition
Liquidity and Capital Resources
The Company's working capital, current ratio and long term debt to equity
ratio follow:
September 30, 1999 December 31, 1998
------------------ ------------------
Working capital................... $1,075,000 $3,616,000
Current ratio..................... 1.07 to 1 1.20 to 1
Long-term debt to equity ratio.... .05 1.37
During the first nine months of 1999, the total debt decreased by
$5,995,000 compared to total debt at December 31, 1998.
Debt of $7,905,000 as of September 30, 1999 is classified as current to
reflect its maturity date of April 30, 2000. The Company is currently in
negotiations with lenders to refinance these loans. Without such adequate debt
financing the Company would be unable to fund its obligations as they become due
in the ordinary course of business. The Company fully expects to secure new debt
financing by the end of the year.
Capital expenditures for the next 12 months are not expected to exceed
$250,000 and are expected to be financed by cash provided by investing
activities and future operating activities.
Year 2000
The Company has completed the assessment phase of its Year 2000 compliance
program and has completed modifications and testing of its information
technology and other internal systems.
The Company has gathered 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 November 1999.
Estimated costs for the Year 2000 compliance program are $125,000. Of these
costs, the Company expects that approximately $50,000 will be charged to
operations as expenses. The project was essentially complete subsequent to the
third quarter of 1999; and the majority of the costs associated with the
completion were incurred after the third quarter of 1999.
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.
<PAGE 11>
Safe Harbor for Forward-looking Statements
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; (iii) other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange Commission.
<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
None.
<PAGE 13>
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/ WALTER C. JOHNSEN
------------------------------
Walter C. Johnsen
President and
Chief Executive Officer
Dated: November 15, 1999
By /s/ RONALD P. DAVANZO
------------------------------
Ronald P. Davanzo
Vice President and
Chief Financial Officer
Dated: November 15, 1999
<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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 9,282
<ALLOWANCES> 139
<INVENTORY> 8,140
<CURRENT-ASSETS> 17,438
<PP&E> 12,470
<DEPRECIATION> 7,914
<TOTAL-ASSETS> 23,379
<CURRENT-LIABILITIES> 16,363
<BONDS> 0
0
0
<COMMON> 8,706
<OTHER-SE> (2,045)
<TOTAL-LIABILITY-AND-EQUITY> 23,379
<SALES> 26,710
<TOTAL-REVENUES> 27,005
<CGS> 20,587
<TOTAL-COSTS> 27,286
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 845
<INCOME-PRETAX> 1,972
<INCOME-TAX> (46)
<INCOME-CONTINUING> (281)
<DISCONTINUED> 2,299
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,018
<EPS-BASIC> .60
<EPS-DILUTED> .60
</TABLE>
