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 June 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 August 14, 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........................................ 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.................................................................. 13
<PAGE 3>
PART I. FINANCIAL INFORMATION
<TABLE>
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(all amounts in thousands, except per share data)
June 30 December 31
1999 1998
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<CAPTION>
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................ $ 33 $ 40
Accounts receivable, less allowance...................................... 9,453 7,722
Inventories:
Finished goods........................................................ 5,187 7,122
Work in process....................................................... 903 1,240
Raw materials and supplies............................................ 3,574 4,907
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9,664 13,269
Prepaid expenses and other current assets................................ 415 424
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Total current assets............................................. 19,565 21,455
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Property, plant and equipment:
Land .................................................................... 196 219
Buildings................................................................ 2,023 2,179
Machinery and equipment.................................................. 13,404 16,216
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15,623 18,614
Less accumulated depreciation............................................ 10,260 12,573
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5,363 6,041
Other assets............................................................... 903 895
Goodwill, less accumulated amortization.................................... 388 505
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Total assets................................................... $ 26,219 $ 28,896
========== ==========
See notes to condensed consolidated financial statements.
<PAGE 4>
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
(UNAUDITED)
(all amounts in thousands, except per share data)
June 30 December 31
1999 1998
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LIABILITIES
Current Liabilities:
Notes payable ........................................................... $ 753 $ 882
Accounts payable......................................................... 4,722 4,422
Other accrued liabilities................................................ 4,071 3,590
Current portion of long term debt........................................ 9,735 8,944
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Total current liabilities............................................ 19,281 17,838
Long term debt, less current portion..................................... 458 6,382
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Total liabilities................................................... 19,739 24,220
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STOCKHOLDERS' EQUITY
Common stock, par value $2.50 :
Authorized-4,000,000 shares;
issued-3,482,495 shares in 1999
and 1998, including treasury stock .................................... 8,706 8,706
Additional paid-in capital .............................................. 2,233 2,233
Retained-earnings deficit................................................ (2,499) (4,380)
Accumulated other comprehensive loss - translation adjustment............ (1,312) (1,235)
Treasury stock, at cost -105,007 shares.................................. (648) (648)
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Total stockholders' equity........................................... 6,480 4,676
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Total liabilities and stockholders' equity......................... $ 26,219 $ 28,896
========== ==========
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 data)
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 9,813 $ 10,273 $ 17,383 $ 18,744
Other income 87 72 264 125
-------- -------- -------- --------
Total revenues 9,900 10,345 17,647 18,869
-------- -------- -------- --------
Costs and expenses:
Cost of goods sold 7,419 7,874 13,496 14,405
Selling, general and administrative expenses 2,069 2,215 3,937 4,251
Interest expense 248 363 606 701
-------- -------- -------- --------
Total expenses 9,736 10,452 18,039 19,357
-------- -------- -------- --------
Income (loss) from continuing operations before income taxes 164 (107) (392) (488)
Income taxes 39 22 25 18
-------- -------- -------- --------
Income (loss) from continuing operations 125 (129) (417) (506)
Discontinued operations:
Gain on sale of discontinued operations --- --- 2,101 ---
Income from discontinued operations --- 248 198 532
-------- -------- -------- --------
--- 248 2,299 532
-------- -------- -------- --------
Net income 125 119 1,882 26
Other comprehensive expense -
foreign currency translation (7) (19) (78) (31)
-------- -------- -------- --------
Comprehensive income $ 118 $ 100 $ 1,804 $ 553
======== ======== ======== ========
Earnings (loss) per share:
Continuing operations $ 0.04 $ (0.03) $ (0.12) $ (0.14)
Discontinued operations --- 0.07 0.68 0.15
-------- -------- -------- --------
Net income $ 0.04 $ 0.04 $ 0.56 $ 0.01
======== ======== ======== ========
Weighted average number of common shares outstanding-
denominator used for per share computations 3,377 3,370 3,377 3,369
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE 6>
<TABLE>
ACME UNITED CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(all amounts in thousands)
Six Months Ended
June 30
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1999 1998
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<CAPTION>
<S> <C> <C>
Operating activities:
Net income............................................................... $ 1,882 $ 27
Adjustments to reconcile net income to net cash used by
operating activities:
Gain on sale of discontinued operations................................ (2,101) ---
Depreciation........................................................... 346 524
Amortization........................................................... 15 11
Gain on disposal of property, plant, and equipment..................... --- 51
Changes in operating assets and liabilities:
Accounts receivable.................................................. (1,881) (3,366)
Inventories.......................................................... 313 1,225
Prepaid expenses and other current assets............................ 9 (506)
Other assets......................................................... (2) (18)
Accounts payable..................................................... 300 427
Other accrued liabilities............................................ (1,442) 169
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Net cash used by operating activities.............................. (2,561) (1,456)
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Investing activities:
Capital expenditures..................................................... (342) (1,284)
Proceeds from sales of property, plant, and equipment.................... --- 300
Proceeds from sale of medical division................................... 8,156 ---
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Net cash provided (used) by investing activities..................... 7,814 (984)
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Financing activities:
Net proceeds (payments) on short term borrowing arrangements............. (5,999) 1,710
Proceeds on long term debt............................................... 2,500 736
Payments on long term debt............................................... (1,763) ---
Stock options exercised.................................................. --- 33
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Net cash (used) provided by financing activities..................... (5,262) 2,479
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Effect of exchange rate changes on cash.................................... 2 (2)
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Net change in cash and cash equivalents ................................... (7) 37
Cash and cash equivalents at beginning of period........................... 40 25
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Cash and cash equivalents at end of period................................. $ 33 $ 62
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<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
six months ended June 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:
Six Months Ended
June 30
---------------------------
1999 1998
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Net sales........................ $ 3,049,000 $ 5,020,000
Costs and expenses............... 2,851,000 4,488,000
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Income from operations........... $ 198,000 $ 532,000
========== ==========
Earnings per share............... $ .06 $ .15
========== ==========
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 $753,000 is
outstanding at June 30, 1999.
Long term debt consisted of the following:
(all amounts in thousands)
June 30 December 31
1999 1998
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Notes payable:
U.S. and Canada arrangements....... $ 8,629 $ 6,614
Other.............................. 1,564 8,712
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10,193 15,326
Less current portion 9,735 8,944
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$ 458 $ 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 June 30, 1999,
outstanding debt under the Company's arrangements in the U.S. and Canada was
$8,629,000 which has been classified as current and $223,000 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, commencing June 30, 1999 and a specified debt service
coverage ratio, as defined, commencing September 30, 1999. As of June 30, 1999
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 Six Months Ended June 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 June 30, 1999 were $9,813,000
compared with $10,273,000 for 1998, or 4% 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 impacting continuing operations.
Domestic consumer sales backorder for the second quarter of 1999 was $1,472,000
compared with $631,000 for the second quarter of 1998, or 2.3 times higher. Had
backorder levels been equal to prior year, sales would have been 4% higher.
International sales decreased by 18% for the second quarter. Three percent
of the decline was due to currency fluctuations. European sales decreased mainly
due to weak sales in the United Kingdom, as a slowing economy and competitive
pressures negatively impacted results in the second quarter.
Gross Profit
The gross profit from continuing operations for the second quarter of 1999
was $2,394,000 (24.4% of net sales) compared with $2,399,000 (23.3% of net
sales) for the second quarter of 1998. Product sourcing alternatives positively
impacted costs in the U.S. consumer business which lead to an increase in gross
margin from 25.0% in 1998 to 26.8% in the second quarter of 1999. The
international gross margin rose to 17.0% in the second quarter of 1999 from
15.1% 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.
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 second
quarter of 1999 were $2,069,000 (21% of net sales) compared with $2,215,000 (22%
of net sales) for the same period of 1998, a decrease of $146,000, or 7%. The
primary reason for the decrease is staff reductions. Management is continuing to
investigate other potential SG&A cost saving programs.
Income (Loss)
Net income for the first half of 1999 is $1,882,000, or 56 cents per share.
Net income for the first half of 1999 includes a realized gain on the sale of
the medical business of $2,101,000. Income from continuing operations for the
second quarter of 1999 is $125,000, or 4 cents per share, compared with a loss
of $129,000, or 3 cents per share, for the second quarter of 1998. For the first
six months of 1999, the loss from continuing operations was $417,000, or 12
cents per share compared with a loss of $505,000, or 15 cents per share in the
first six 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:
June 30, 1999 December 31, 1998
------------------ ------------------
Working capital................... $284,000 $3,616,000
Current ratio..................... 1.01 to 1 1.20 to 1
Long-term debt to equity ratio.... .07 1.37
During the first six months of 1999, the total debt decreased by $5,133,000
compared to total debt at December 31, 1998.
Debt of $6,726,000 as of June 30, 1999 was classified during the second
quarter of 1999 to the current portion of long term debt 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 is currently completing modifications and testing of its information
technology and other internal systems with the exception of Germany. In Germany,
the Company has selected a new financial system to mitigate a Year 2000 problem.
The Company's goal is to complete implementation of this new system by the end
of the third 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
$100,000 to $125,000 of which approximately $75,000 relates to Germany. Of these
costs, the Company expects that $35,000 to $50,000 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.
<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
Form 8-K was filed by the Company on April 6, 1999.
<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: August 14, 1999
By /s/ RONALD P. DAVANZO
------------------------------
Ronald P. Davanzo
Vice President and
Chief Financial Officer
Dated: August 14, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 33
<SECURITIES> 0
<RECEIVABLES> 9,605
<ALLOWANCES> 152
<INVENTORY> 9,664
<CURRENT-ASSETS> 19,565
<PP&E> 15,623
<DEPRECIATION> 10,260
<TOTAL-ASSETS> 26,219
<CURRENT-LIABILITIES> 19,281
<BONDS> 0
0
0
<COMMON> 8,706
<OTHER-SE> (2,226)
<TOTAL-LIABILITY-AND-EQUITY> 26,219
<SALES> 17,383
<TOTAL-REVENUES> 17,647
<CGS> 13,496
<TOTAL-COSTS> 17,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 606
<INCOME-PRETAX> (392)
<INCOME-TAX> 25
<INCOME-CONTINUING> (417)
<DISCONTINUED> 2,299
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,882
<EPS-BASIC> .56
<EPS-DILUTED> .56
</TABLE>
