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, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 01-07698
ACME UNITED CORPORATION
Exact name of registrant as specified in its charter
Connecticut 06-0236700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 Round Hill Road
Fairfield, Connecticut 06824
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 254-6060
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 is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
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.
Yes |X| No |_|
(1)
Indicate by check mark whether the registrant is a shell company as defined in
Rule 12b-2 of the Exchange Act. Yes |_| No |X|
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one).
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the last business day of the registrant's most recently
completed second fiscal quarter was $52,239,371. Registrant had 3,484,833 shares
outstanding as of March 7, 2006 of its $2.50 par value Common Stock.
Documents Incorporated By Reference
(1) Proxy Statement for the annual meeting scheduled for April 24, 2006 is
incorporated into the Company's 2005 10-K, Part III.
(2)
Page
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Part I
Item 1. Business 4
Item 1A. Risk Factors 5
Item 1B. Unresolved Staff Comments 6
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matter to a Vote of Security Holders 7
Part II
Item 5. Market for the Company's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 14
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
Item 9A. Controls and Procedures 37
Item 9B. Other Information 37
Part III
Item 10. Directors and Executive Officers of the Company 37
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 38
Item 13. Related Party Transactions 39
Item 14. Principal Accountant Fees and Services 39
Part IV
Item 15. Exhibits and Financial Statement Schedules 40
Schedule II - Valuation and Qualifying Accounts 42
Signatures 43
(3)
PART I
Item 1. Business
General
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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. Acme United is a leading worldwide supplier of
innovative cutting, measuring and safety products to the school, home, office
and industrial markets. The Company's operations are in the United States,
Canada, Europe (sited in Germany) and Asia (sited in Hong Kong and China). The
operations in the United States, Canada and Europe are primarily involved in
product development, manufacturing, marketing, sales, administrative and
distribution activities. The operation in Asia is involved in sourcing, quality
control and sales activities. Net sales in 2005 were the following: United
States - $37.5 million, Canada - $6.8 million, Europe - $4.0 million and Hong
Kong - $1.6 million.
The Company has grouped it operations into three reportable segments based on
the Company's geographical organization and structure, (1) United States; (2)
Canada and (3) Europe. The Company sells cutting devices, measuring instruments
and safety products for school, office, home and industrial use in the United
States, Canada and Europe. The company competes with many companies in each
market and geographic area. The major competitor in the cutting category is
Fiskars Corporation. The major competitor in the measuring category is Helix
International Ltd. The major competitor in the safety category is Johnson and
Johnson. Refer to Note 10 of the Notes to Consolidated Financial Statements for
additional segment information.
Our business strategy includes the following key elements:
o a commitment to technological innovation achieved through consumer insight,
creativity and speed to market;
o a broad selection of products in both brand and private label;
o prompt response and same-day shipping;
o superior customer service; and
o value pricing.
Principal products within the cutting device category are scissors, shears,
guillotine paper trimmers, rotary paper trimmers, rotary cutters, hobby knives
and blades, utility knives and medical cutting instruments. Products introduced
in 2004 and 2005 included proprietary titanium bonded scissors and trimmers, a
new line of Clauss hot forged scissors, and electric and manual pencil
sharpeners. Principal products within the measuring instrument category are
rulers, math tools and tape measures. Products introduced in 2005 included a new
line of Westcott tearing rulers and professional grade aluminum rulers.
Principal products within the safety product category are first aid kits,
personal protection products and over-the-counter medication refills. Products
introduced in 2005 included new Physicians Care(TM) branded over-the-counter
medications.
Independent manufacturer representatives and direct sales are primarily used to
sell the Company's line of consumer products to wholesale, contract and retail
stationery distributors, office supply super stores, school supply distributors,
industrial distributors, wholesale florists and mass market retailers. The
Company had three customers with sales of 10% or more of total sales in 2005.
Net sales to the Company's three major customers represented approximately 41%
of total net sales in 2005, 43% in 2004 and 46% in 2003.
Traditionally, the Company's sales are stronger in the second and third quarters
of the fiscal year due to the seasonal nature of the back-to-school business.
On May 28, 2004, the Company purchased the scissor and cutting business of
Clauss Cutlery, a division of Alco Industries, Inc. The purchase price was the
aggregate value of inventory, trademarks and brand names totaling $446,754.
Sales of Clauss products for seven months in 2004 were $1.7 million and sales
for the year ended December 31, 2005 were $3.3 million. Clauss Cutlery was
founded in 1877 in Fremont, Ohio and at one time was the largest manufacturer of
scissors in the world. Clauss products have a strong presence in the industrial
and floral markets. Its scissors and cutting tools are distributed by most major
industrial distributors and are sold to the auto, textile, food processing, and
electronic industries. The Clauss business has been integrated into the
Company's existing operations.
(4)
Other
-----
Environmental Rules and Regulations - The Company believes that it is in
compliance with applicable environmental laws. As discussed in Note 19 of the
Notes to the Consolidated Financial Statement, the Company has accrued a $1.5
million charge related to the requirement by the City of Bridgeport, CT that the
Company demolish its former manufacturing facility. Included in the loss accrual
are estimates for removal of asbestos, lead and two abandoned oil tanks. This is
the only environmental liability recorded by the Company. The Company believes
that there are no other environmental matters that could have a significant
financial impact. The Company believes no major financial impact is expected to
result from current and future compliance with environmental rules and
regulations.
Employment - As of year-end 2005, the Company employed 116 people, all of whom
are full time and none of whom are covered by union contracts. Employee
relations are considered good and no foreseeable problems with the work force
are evident.
Item 1A. Risk Factors
The Company is subject to a number of significant risks that might cause the
Company's actual results to vary materially from its forecasts, targets or
projections, including:
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o achieving planned revenue and profit growth in each of the Company's
business segments;
o changes in customer requirements and in the volume of sales to principal
customers;
o the timing of orders and shipments;
o emergence of new competitors or consolidation of existing competitors;
o industry demand fluctuations.
Our expectations for both short- and long-term future net revenues are based on
our own estimates of future demand. Orders from our principal customers are
ultimately based on demand from end-users and such prospective end-user demand
can be difficult to measure. Low end-user demand, would negatively affect orders
we receive from distributors and other principal customers and this would mean
that our revenues in any fiscal period could be adversely impacted. If our
estimates of sales are not accurate and we experience unforeseen variability in
our revenues and operating results, we may be unable to adjust our expense
levels accordingly and our profit margins will be adversely affected.
A number of our products are sold through distributors and large retailers. No
assurances can be given that any or all such distributors or retailers will
continue their relationship with us. Distributors and other significant retail
customers cannot easily be replaced and the loss of revenues and our inability
to reduce expenses to compensate for the loss of revenues could adversely affect
our net revenues and profit margins.
Loss of a Major Customer could result in a decrease in our future sales and
earnings.
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Sales to our top three customers have accounted for approximately 41%, 43%, and
46% of total net revenues for the years ended December 31, 2005, 2004 and 2003,
respectively. We anticipate that a limited number of customers may account for a
substantial portion of our total net revenues for the foreseeable future. The
loss of a major customer or a disruption in sales to such a customer could
result in a decrease of our future sales and earnings.
Reliance on foreign suppliers could negatively impact our business.
-------------------------------------------------------------------
We purchase the majority of our products from foreign manufacturing partners
and, as a result, our business is exposed to increased risks due to:
o Increases in transportation costs;
o New or increased import duties;
o Transportation delays;
o Work stoppages;
o Exchange rate fluctuations that could increase the cost of foreign
manufactured goods.
(5)
The loss of key management could affect our ability to run our business.
------------------------------------------------------------------------
Our success depends to a large extent on the continued service of our executive
management team, operating officers and other key personnel. The Company must
therefore continue to recruit, retain and motivate management and operating
personnel sufficient to maintain its current business and support it projected
growth.
Our inability to meet our staffing requirements in the future could negatively
impact our results of operations.
Failure to protect our proprietary rights, or the costs of protecting these
rights could negatively impact our business.
---------------------------------------------------------------------------
The Company's success depends in part on its ability to obtain patents and
licenses and to preserve other intellectual property rights covering its
products and processes. The Company obtained certain domestic and foreign
patents and intends to continue to seek patents on its inventions when
appropriate. The process of seeking patent protection can be time consuming and
expensive. There can be no assurance that pending patents related to any of the
Company's products will be issued, in which case the Company may not be able to
legally prevent others from producing compatible competing products. If other
companies were to sell compatible products, the Company's results of operations
could be adversely affected. Furthermore, there can be no assurance that the
Company's efforts to protect its intellectual property will be successful. Any
infringement of the Company's intellectual property or legal defense of such
action could have a material adverse effect on the Company.
The Company may need to raise additional capital to fund its operations.
------------------------------------------------------------------------
The Company's management currently believes, under current conditions, that the
Company's current cash and cash equivalents, cash generated by operations,
together with the borrowing availability under the Revolving Loan agreement,
will be sufficient to fund planned operations for the next twelve months.
However, if we are unable to generate sufficient cash from operations, we may be
required to find additional funding sources. If adequate financing is
unavailable or is unavailable on acceptable terms, we may be unable to maintain,
develop or enhance our operations, products and services, take advantage of
future opportunities or respond to competitive pressures.
We may not be able to maintain or to raise prices in response to inflation and
increasing costs.
------------------------------------------------------------------------------
Future market and competitive pressures may prohibit the Company from raising
prices to offset increased product costs, freight costs and other inflationary
items. The inability to pass these costs through to our customers could have a
negative impact on our results of operations.
Item 1B. Unresolved Staff Comments
The Company had no unresolved Securities and Exchange Commission staff comments
at December 31, 2005.
Item 2. Properties
Acme United Corporation is headquartered at 60 Round Hill Road, Fairfield,
Connecticut in 7,500 square feet of leased space. The Company owns and leases,
manufacturing and warehousing facilities in the United States totaling 130,000
square feet and leases 44,000 square feet of warehousing space in Canada. The
Company also leases approximately 2,000 square feet of office space in Canada.
Distribution for Europe is presently being conducted at a 35,000 square foot
owned facility in Solingen, Germany. The Company also leases 2,100 square feet
of office space in Hong Kong and 1,500 square feet in Guangzhou, China.
Management believes that the Company's facilities, whether leased or owned, are
adequate to meet its current needs and should continue to be adequate for the
foreseeable future.
Item 3. Legal Proceedings
The Company is involved from time to time in disputes and other litigation in
the ordinary course of business, including certain environmental and other
matters. The Company presently believes that none of these matters, individually
or in the aggregate, would be likely to have a material adverse impact on its
financial position, results of operations, or liquidity from these matters.
(6)
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of the security holders of the Company
through the solicitation of proxies or otherwise during the fourth quarter of
the year ended December 31, 2005.
(7)
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's Common Stock is traded on the American Stock Exchange under the
symbol "ACU". The following table sets forth the high and low sale prices on the
American Stock Exchange for the Common Stock for the periods indicated:
Dividends
Year Ended December 31, 2005 High Low Declared
--------------------------------- -------------- -------------- --------------
Fourth Quarter $16.15 $13.01 $ .03
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Third Quarter 20.90 12.75 .03
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Second Quarter 21.00 13.30 .03
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First Quarter 19.75 12.27 .02
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--------------------------------- -------------- -------------- --------------
Year Ended December 31, 2004
--------------------------------- -------------- -------------- --------------
Fourth Quarter $16.50 $ 8.58 $ .02
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Third Quarter 9.28 6.66 .02
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Second Quarter 7.74 5.31 .02
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First Quarter 6.39 5.22
--------------------------------- -------------- -------------- --------------
As of March 7, 2006 there were approximately 2,300 holders of record of the
Company's Common Stock.
Issuer Purchases of Equity Securities
On October 4, 2005, the Company announced a stock repurchase program of 150,000
shares. The program does not have an expiration date. The following table
discloses the shares repurchased under the program for the quarter ended
December 31, 2005:
Total Number of shares Maximum Number of
Purchased as Part of Shares that may yet be
Total Number of Average Price Publicly Announced Purchased Under the
Period Shares Purchased Paid per Share Program Program
----------------------------------------------------------------------------------------------------
2005 25,000 $14.49 25,000 125,000
Item 6. Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(All figures in thousands except per share data)
2005 2004 2003 2002 2001
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N
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Net sales $ 49,947 $ 43,381 $ 34,975 $ 30,884 $ 33,082
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Net income $ 2,937 $ 3,238 $ 1,222 $ 660 $ 1,280
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Total assets $ 28,194 $ 22,967 $ 19,743 $ 17,614 $ 20,173
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Long-term debt, less current portion $ 5,577 $ 1,434 $ 2,752 $ 2,032 $ 2,875
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Net income
Per share (Basic) $ 0.84 $ 0.96 $ 0.37 $ 0.19 $ 0.37
Per share (Diluted) $ 0.78 $ 0.85 $ 0.34 $ 0.19 $ 0.36
Dividends per share $ 0.11 $ 0.06 $ - $ - $ -
(8)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Information
---------------------------
Forward-looking statements in this report, including without limitation,
statements related to the Company's plans, strategies, objectives, expectations,
intentions and adequacy of resources, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's plans and
results of operations will be affected by the Company's ability to manage its
growth and inventory; and (iii) other risks and uncertainties indicated from
time to time in the Company's filings with the Securities and Exchange
Commission.
Critical Accounting Policies
----------------------------
The following discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in conformity with accounting principles generally accepted
in the United States of America. The Company's significant accounting policies
are more fully described in Note 2 of Notes to Consolidated Financial
Statements. However, certain accounting estimates are particularly important to
the understanding of the Company's financial position and results of operations
and require the application of significant judgment by the Company's management
or can be materially affected by changes from period to period in economic
factors or conditions that are outside the control of management. The Company's
management uses their judgment to determine the appropriate assumptions to be
used in the determination of certain estimates. Those estimates are based on
historical operations, future business plans and projected financial results,
the terms of existing contracts, the observance of trends in the industry,
information provided by customers and information available from other outside
sources, as appropriate. The following discusses the Company's critical
accounting policies and estimates.
Estimates. Operating results may be affected by certain accounting estimates.
The most sensitive and significant accounting estimates in the financial
statements relate to customer rebates, valuation allowances for deferred income
tax assets, obsolete and slow moving inventories, potentially uncollectible
accounts receivable, and accruals for income taxes. Accruals for customer
rebates are based on executed contracts and anticipated sales levels, which are
monitored monthly. Management critically evaluates the potential realization of
deferred income tax benefits as well as the likely usefulness of inventories and
the collectability of accounts receivable. Accruals for income taxes or benefits
often require interpretations of complex tax rules and regulations, which may be
subsequently challenged. Although the Company's management has used available
information to make judgments on the appropriate estimates to record for the
above matters, there can be no assurance that future events will not
significantly affect the estimated amounts related to these areas where
estimates are required.
Revenue Recognition. The Company recognizes revenue from sales of its products
when ownership transfers to the customers. Ownership generally transfers from
the Company to its customer upon shipment of the Company's products. When right
of return exists, the Company recognizes revenue in accordance with SFAS 48,
Revenue Recognition When Right of Return Exists.
Intangible Assets. Intangible assets with a finite useful life are recorded at
cost upon acquisition and amortized over the term of the related contract.
Intangible assets held by the Company with a finite useful life include deferred
financing costs, patents, and trademarks. Deferred financing costs are amortized
over the term of the related debt. Patents and trademarks are amortized over
their estimated useful life. The weighted average amortization period of
intangible assets at December 31, 2005 is 14 years. The Company reviews the
value recorded for intangibles to assess recoverability from future operations
using undiscounted cash flows. Impairments are recognized in operating results
to the extent the carrying value exceeds fair value determined based on the net
present value of estimated future cash flows. The projection of future cash
flows requires the Company to make estimates about the amount of future
revenues. The actual future results could differ significantly from these
estimates, and resulting changes in the estimates of future cash flows could be
significant and could affect the recoverability of intangible assets. During
2005, the Company's net book value of intangible assets increased from $559,646
to $769,852.
Accounting for Stock-Based Compensation. At December 31, 2005, the Company has
one stock-based employee compensation plan. The Company has elected to adopt the
disclosure only provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, and continues to measure costs for
its employee stock compensation plans by using the accounting methods prescribed
by APB Opinion No. 25, Accounting for Stock Issued to Employees, which allows
that no compensation cost be recognized unless the exercise price of the options
granted is less than the fair market value of the Company's stock at date of
grant.
(9)
Results of Operations 2005 Compared with 2004
Net Sales
---------
Net sales increased $6,565,726 or 15% (14% in constant currency) in 2005 to
$49,946,374 compared to $43,380,648 in 2004. U.S. and Hong Kong sales increased
by $5,319,117 or 16%. Hong Kong sales were to global customers, primarily direct
imports to U.S. customers. Sales increased in Canada by $852,313 or 14% and 6%
in local currency. European sales increased by $394,296 or 11% both in US
dollars and local currency.
The 16% sales increase in the United States was mainly due to the success of new
products and a full year effect of the Clauss Cutlery business acquired in June
of 2004. Clauss sales approximated $3,300,000 in 2005 and $1,700,000 for seven
months in 2004. The major driver in new product sales was the expansion of the
Company's patented titanium bonded scissors. The ability for the Company to
expand its customer base with titanium products attributed to sales growth. The
expansion into titanium sewing scissors also contributed to the growth. Other
new product sales included hot forged sewing scissors, Critters scissors, Kids
scissors, Craft scissors and the launch of several innovative rulers.
The 6% sales increase in local currency in Canada was mainly the result of
additional placement in one of the major superstores and a new major retailer.
The 11% sales increase in Europe was due to the additional placement of manicure
scissors into a major retailer in Germany and new sales of paper trimmers into a
multinational superstore across Europe.
Gross Profit
------------
Gross profit was 45% of net sales in both 2005 and 2004. Excluding the
unfavorable impact of an unusually high amount of airfreight expense to meet new
product and new customer requirements, the comparison would have been 47% in
2005 versus 46% in 2004. The increased percentage of new products with higher
gross margins and sales of a more profitable product mix in Europe were
partially offset by an unfavorable product mix, higher raw material costs and
price pressure in the U.S. business.
Selling, General and Administrative
-----------------------------------
Selling, general and administrative expenses were $15,512,488 in 2005 compared
with $14,162,082 in 2004, an increase of $1,350,406. SG&A expenses were 31% of
net sales in 2005 compared to 33% in 2004. Higher sales commission and freight
costs associated with higher sales amounted to $682,000. Other major
contributors to the increase in SG&A expenses were market research, new product
development, an expansion of the sourcing and quality control office in Hong
Kong and the addition of sales and marketing personnel in North America and
Europe.
Non -Recurring Charge
---------------------
The Company is the owner of certain commercial property located in Bridgeport,
Connecticut. Buildings, totaling approximately 150,000 square feet, are located
on this property. The Company ceased using the Bridgeport property as a
manufacturing facility in September 1996 and operations were consolidated into
Acme's North Carolina facility. For approximately the next two years, the
Company continued to pay property taxes, insurance, maintenance and other
operating costs which totaled approximately $107,000 annually and the Company
leased a small part of the property for $32,000 resulting in a net cost of
$75,000 annually. In October 1998, the Company leased the entire property to an
unrelated commercial real estate company for a term of 24 years. The lease had
provided for the payment of one dollar ($1.00) per year as base rent and
required that the tenant pay all taxes, insurance and other expenses in
connection with the property. At the time, Acme considered the cost savings from
leasing the property, for which Acme had no specific use, an appropriate basis
for the arrangement.
The Company had written off the book value of the property by the end of 1998.
Since October 1998, the tenant leased portions of buildings to subtenants,
primarily for use as commercial warehouses. Approximately 30% of the total
square footage is subject to subleases. The remainder has been empty since 1996.
On July 28, 2005, the Building Department of Bridgeport informed Acme United
that pursuant to a call from the Bridgeport Fire Department, an inspection of
the premises was made on July 21, 2005. The roof of a portion of a building had
collapsed that day. The Company received notice that it must either repair
certain portions of the damaged building and two others or demolish them because
of unsafe conditions. The Company was ordered to begin the necessary work to
make the buildings safe within 30 days from receipt of the letter.
(10)
The lessee filed an insurance claim on August 24, 2005. The insurance company
investigated the facts and circumstances surrounding the claim and determined
that the roof had collapsed due to wear, tear, deterioration, wet rot, dry rot
and lack of maintenance of the premises. They stated in a letter dated October
18, 2005 that the causes of the loss were not insured perils under the tenant's
policy and denied coverage.
On July 29, 2005, the Company notified the tenant of the action by the building
inspector and that under the terms of the lease the tenant had the entire
responsibility for compliance with the order. The lessee subsequently refused to
assume responsibility for the repair or demolition. Acme considered legal action
under the terms of the lease to force the lessee to pay for the repair or
demolition. However, the Company believed that the city would require action
over a time period shorter than the time required to file a lawsuit and to bring
the action to a conclusion.
As a result of discussions between the Company and the tenant regarding the
required repair or demolition, the Company and the tenant agreed to terminate
the lease. Pursuant to a Termination of Lease agreement entered into by the
Company and the tenant on September 16, 2005, the parties terminated this lease,
effective September 1, 2005. As part of the lease termination, the Company paid
$400,000 to the tenant in exchange for rights to the rental income from the
leases with current sub-tenants.
The Company also decided to demolish all unoccupied structures on the property.
The unoccupied structures are abandoned manufacturing buildings that had been
constructed over one hundred years ago.
Several subtenants continue to occupy portions of the property and are paying
rent presently totaling approximately $190,000 per year to the Company. In
addition, the principal subtenant pays a portion of the taxes and insurance
expenses related to the property it leases.
In the quarter ended September 30, 2005, the Company accrued a charge of
approximately $1.5 million related to the estimated cost to demolish the
structures and remove certain environmentally hazardous material included in the
buildings to be demolished. After the demolition is complete, the Company will
explore options to sell the property.
The estimated costs are based on a third party contractor's estimate.
Adjustments to the cost will be recorded when better estimates or actual costs
are known.
Operating Income
----------------
Operating income was $5,342,201 in 2005 compared with $5,490,448 in 2004, a
decrease of $148,247. The decrease is due to the $1,500,000 charge on the
Bridgeport property. Operating income for the United States excluding the
$1,500,000 charge increased by approximately $973,000 or 18%. Operating income
increased in Canada by $21,000 or 5%. The European operating loss decreased by
$505,000 or 76%. The results of the European operations are improving due to
higher sales and a more profitable product mix. The higher sales are primarily
due to increases in the sales force and increases in advertising.
Interest Expense, Net
---------------------
Interest expense for 2005 was $234,868 compared with $157,335 for 2004, a
$77,533 increase. The increase in interest expense was primarily the result of
higher borrowings on the Company's bank revolving credit agreement.
Other (Expense) Income, Net
---------------------------
Net other expense was $341,267 in 2005 compared to net other income of $7,203 in
2004. The change from 2004 is primarily due to higher foreign exchange
transaction losses in 2005.
Income Tax
----------
The effective tax rate in 2005 was 38% compared to 39% in 2004. The lower
effective tax rate is principally due to lower losses in Europe for which there
is no recorded tax benefit because the losses in Europe cannot be utilized to
offset earnings in other countries.
(11)
Results of Operations 2004 Compared with 2003
Net Sales
---------
Net sales increased $8,405,988 or 24% in 2004 to $43,380,648 compared to
$34,974,660 in 2003. Excluding the favorable effect of currency gains in Canada
and Europe net sales increased 22%. The sales increase was mainly driven by a
27% growth in the U.S. due to the success of new products, market share gains
and the newly acquired Clauss Cutlery business. Clauss contributed approximately
$1,700,000 to 2004 net sales. Combined sales in Europe and Canada increased by
14% (5% in constant currency). The new business in Hong Kong generated
$1,230,000 in 2004. These were primarily shipments to global customers.
Gross Profit
------------
Gross profit was 45% of net sales in 2004 compared to 38% of net sales in 2003.
The increased percentage of new products coupled with positive impacts from
product rationalization efforts in Europe were the main reasons for the improved
gross margins. The Company also improved productivity due to higher volumes and
cost cutting measures.
Selling, General and Administrative
-----------------------------------
Selling, general and administrative expenses were $14,162,082 in 2004 compared
with $10,646,395 in 2003, an increase of $3,515,687. SG&A expenses were 33% of
net sales in 2004 compared to 30% in 2003. Direct selling related expenses
increased by $516,000. Other major contributors to the increase in SG&A expenses
were market research, new product development, the new sourcing and quality
control office in Hong Kong and the addition of sales and marketing personnel in
North America and Europe.
Operating Income
----------------
Operating income was $5,490,448 in 2004 compared with $2,486,364 in 2003, an
increase of $3,004,084. Operating income for the United States increased by
approximately $2.4 million. Canada's operating income was $463,000 in 2004
compared to $249,000 in 2003. The European operating loss was $664,000 in 2004
compared to an operating loss of $859,000 in 2003.
Interest Expense, Net
---------------------
Interest expense for 2004 was $157,335 compared with $235,265 for 2003, a
$77,930 decrease. This is attributable to the decline in average debt.
Other (Expense) Income, Net
---------------------------
Net other income was $7,203 in 2004 compared to net other income of $91,172 in
2003. The change primarily relates to foreign currency transaction losses of
$110,519 the Company incurred in 2004, as opposed to a foreign currency gain of
$105,984 in 2003. The 2003 results were partially offset by the settlement of a
$175,000 lawsuit in Germany in March of 2003.
The effective tax rate in 2004 was 39% compared to 48% in 2003. The improvement
is principally due to the lower losses in Europe, for which the benefit cannot
be utilized to offset taxable earnings in North America.
Contractual Obligations
-----------------------
The following table summarizes the amounts of payments due during the periods
specified under the Company's contractual obligations as of December 31, 2005:
Payments Due by Period
(dollars in thousands) ------------------------------------------
Contractual Less than 2--3 4--5 More than
Obligations 1 Year Years Years 5 Years
------------- --------- --------- --------- ---------
Long-Term Debt Obligations........................................ $ 10 $5,561 $ 16 -
Operating Lease Obligations....................................... 493 659 550 -
--------- --------- --------- ---------
Total............................................................. $ 503 $6,220 $ 566 -
========= ========= ========= =========
(12)
Off-Balance Sheet Transactions
------------------------------
The Company did not engage in any off-balance sheet transactions during 2005.
Liquidity and Capital Resources
-------------------------------
The Company's working capital, current ratio and long-term debt to equity ratio
follow:
2005 2004
--------------------------------------------------------------------------------
Working Capital $16,325,098 $12,927,438
Current Ratio 3.17 2.85
Long-Term Debt to Equity Ratio 39.7% 10.3%
The increase in working capital in 2005 is attributable to a 49% increase in
inventory. Inventory turnover decreased from 2.9 in 2004 to 2.6 in 2005,
calculated using a twelve month average inventory balance. The inventory buildup
was mainly in response to anticipated product demand and increased customer
specific inventory. Additionally, given the lengthy lead times associated with
product availability and our customer's requirements for complete and on-time
deliveries, the Company's management decided to increase inventory levels. Also,
the Company increased safety stock during supply chain system upgrades in 2005.
The majority of the increase is attributed to the operations in the United
States.
The average number of days sales outstanding in accounts receivable was 59 days
in 2005 and 61 days in 2004.
Total debt in 2005 increased by $4,153,446 compared to total debt at December
31, 2004, principally as a result of $3,564,165 of repurchases of Company stock
and the buildup of inventory.
During September 2004, the Company renewed its revolving loan agreement, which
originally allowed for borrowings up to a maximum of $10,000,000 based on a
borrowing base formula, which applied specific percentages to balances of
accounts receivable and inventory. The renewal modified several characteristics
of the original agreement, the most significant of which are reducing the
interest rate to LIBOR plus 1.50 percent from LIBOR plus 1.75%, eliminating the
borrowing base formula, allowing the Company to borrow up to $10,000,000,
regardless of its inventory and receivable levels, and extending the maturity of
the loan to June 30, 2007. As of December 31, 2005, $5,544,500 was outstanding
and $4,455,500 was available for borrowing under this agreement. Prior year
outstanding balances under this loan agreement have been reclassified to
long-term debt to conform to current year classification.
Due to the provisions of the revolving loan agreement, the Company, among other
things, is restricted with respect to additional borrowings, investments,
mergers and property and equipment purchases. Further, the Company is required
to maintain specific amounts of tangible net worth, and a specified debt service
coverage ratio, and a fixed charge coverage ratio, all as defined by the
agreement. The Company was in compliance with all covenants as of and through
December 31, 2005 and believes these financial covenants will continue to be met
for the remainder of the term of the debt.
Capital expenditures during 2005 were $1,430,530, which were, in part, financed
with debt. Included in capital expenditures in 2005 was $455,000 associated with
the capitalization of the lease termination and associated costs (Refer to Note
19 Non-Recurring Charge for additional information). Capital expenditures in
2006 are not expected to differ materially from recent years.
The Company believes that cash generated from operating activities together with
funds available under the revolving loan agreement, is expected, under current
conditions, to be sufficient to finance the Company's planned operations for the
next twelve months.
The funding of the demolition and asbestos removal costs of $1,500,000 are
expected to be incurred in the first half of 2006. The costs will be paid with
funds borrowed under the Company's existing revolving credit facility and will
not have a material impact on the Company's liquidity.
(13)
Recently Issued Accounting Standards
------------------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004) ("Statement
123 (R)"), "Share-Based Payment", which revised SFAS No. 123, "Accounting for
Stock-Based Compensation". This statement supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees". The revised statement addresses the
accounting for share-based payment transactions with employees and other third
parties, eliminates the ability to account for share-based compensation
transactions using APB 25 and requires that the compensation costs relating to
such transactions be recognized in the consolidated statement of operations.
Acme will adopt the provisions of the statement effective January 1, 2006 as
required. The impact of adoption of Statement 123 (R) cannot be predicted at
this time because it will depend on levels of share-based payments granted in
the future. However, had Acme adopted Statement 123 in prior periods, the impact
of that standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income (loss) and net income (loss)
per share in the stock-based compensation accounting policy note included in
Note 2 to the consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage) should be
recognized as current period charges, and that fixed production overheads should
be allocated to inventory based on normal capacity of production facilities.
This statement is effective for Acme's fiscal year 2006. We do not expect the
adoption of this standard to have a material effect on our financial position,
results of operations or cash flows.
Item 7A. Qualitative and Quantitative Disclosure about Market Risk
The Company's debt portfolio and associated interest rates follow:
(dollars in thousands)
2006 2007 2008 2009 2010 Thereafter Total Fair Value
-----------------------------------------------------------------------------------------------------------------
Long-term Debt (including current portion):
Amount at fixed rate $10 $8 $8 $8 $8 $0 $42 $42
Average interest rate 6.5% 6.5% 6.5% 6.5% 6.5% 0.0% 6.5%
Amount at variable rate $0 $5,545 $0 $0 $0 $0 $5,545 $5,545
Average interest rate 0.0% 5.9% 0.0% 0.0% 0.0% 0.0% 0.0%
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.
Foreign Currency Risk:
----------------------
The Company's currency exposures vary, but are concentrated in the Canadian
dollar, British pound, and Euro. Purchases of inventory by the Hong Kong office
are in U.S. dollars.
At times, the Company utilizes forward foreign exchange contracts to hedge
specific transactions with third parties denominated in foreign currencies. The
terms of these forward foreign exchange contracts are typically 90 days to a
year. Because the contracts are acquired for specific transactions, they are an
effective hedge against fluctuations in the value of the foreign currency
underlying the transaction. The Company's Canadian subsidiary had entered into a
forward foreign exchange contract to reduce the risk of inventory purchases in a
currency other than its functional currency, the Canadian dollar. The Company
hedged the risk of foreign currency fluctuations for approximately $1.5 million
of inventory purchases in 2005 by the Canadian subsidiary. The foreign exchange
contract expired at December 31, 2005. Adjustments to the fair value were
reported as a component of accumulated other comprehensive loss in the statement
of changes in stockholders' equity.
The Company does not enter into financial instruments for speculation or trading
purposes.
The Company and its foreign subsidiaries utilize bank loans to finance their
operations. To mitigate foreign currency risk, foreign loans are denominated in
the local currency of the foreign subsidiary wherever possible.
(14)
Inflation
---------
Inflation had a negligible effect on the Company's operations during 2005 and
2004. The Company estimates that any inflationary effects, in the aggregate,
were generally recovered or offset through increased pricing or cost reductions
in both years.
(15)
Item 8. Financial Statements and Supplementary Data
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
-----------------------------------------------
2005 2004 2003
-----------------------------------------------
Net sales $ 49,946,374 $ 43,380,648 $ 34,974,660
Costs and expenses:
Cost of goods sold 27,591,685 23,728,118 21,841,901
Selling, general and administrative expenses 15,512,488 14,162,082 10,646,395
Provision for loss on property demolition 1,500,000 - -
-----------------------------------------------
Operating income 5,342,201 5,490,448 2,486,364
Non operating items:
Interest expense, net 234,868 157,335 235,265
Other (expense) income, net (341,267) 7,203 91,172
-----------------------------------------------
Income before income taxes 4,766,066 5,340,316 2,342,271
Income tax expense 1,828,756 2,101,911 1,120,440
-----------------------------------------------
Net income $ 2,937,310 $ 3,238,405 $ 1,221,831
===============================================
Earnings per share:
Basic $ 0.84 $ 0.96 $ 0.37
Diluted $ 0.78 $ 0.85 $ 0.34
See accompanying notes.
(16)
Acme United Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2005 2004
--------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,076,489 $ 1,888,510
Accounts receivable, less allowance 9,391,546 8,884,807
Inventories 12,530,454 8,389,228
Deferred income taxes 324,919 279,201
Prepaid expenses and other current assets 541,991 484,532
--------------------------------
Total current assets 23,865,399 19,926,278
Property, plant and equipment:
Land 152,363 250,692
Buildings 2,953,515 2,796,286
Machinery and equipment 6,525,213 6,101,802
--------------------------------
Total property, plant and equipment 9,631,091 9,148,780
Less accumulated depreciation 6,845,051 6,853,349
--------------------------------
Net plant, property and equipment 2,786,040 2,295,431
Goodwill 88,828 88,828
Intangible assets, less accumulated amortization 769,852 559,646
Intangible pension asset 87,760 96,536
Deferred income taxes non-current 596,087 -
--------------------------------
Total assets $ 28,193,966 $ 22,966,719
================================
LIABILITIES
Current liabilities:
Accounts payable $ 2,174,051 $ 2,316,480
Other accrued liabilities 3,859,100 4,682,360
Accrual for property demolition 1,497,150 -
Current portion of long-term debt 10,000 -
--------------------------------
Total current liabilities 7,540,301 6,998,840
Deferred income taxes 140,774 131,228
Long-term debt 5,577,382 1,433,936
Other 870,515 420,251
--------------------------------
Total liabilities 14,128,972 8,984,255
STOCKHOLDERS' EQUITY
Common stock, par value $2.50: authorized 8,000,000
shares; issued - 4,161,824 shares in 2005 and
3,849,512 shares in 2004, including treasury stock 10,404,560 9,623,780
Treasury stock, at cost, 678,991 shares in 2005 and
436,091 shares in 2004 (5,438,776) (1,874,611)
Additional paid-in capital 2,623,887 2,231,003
Accumulated other comprehensive loss (1,071,236) (1,031,587)
Retained earnings 7,546,559 5,033,879
--------------------------------
Total stockholders' equity 14,064,994 13,982,464
--------------------------------
Total liabilities and stockholders' equity $ 28,193,966 $ 22,966,719
================================
See accompanying notes.
(17)
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Outstanding Additional Other
Shares of Common Treasury Paid-In Comprehensive Retained
Common Stock Stock Stock Capital Income (Loss) Earnings Total
-------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2002 3,383,251 $ 9,130,780 $(1,151,709) $ 2,029,105 $ (2,316,814) $ 788,443 $ 8,479,805
Net income 1,221,831 1,221,831
Translation adjustment 670,941 670,941
Change in fair value of
derivative financial
instruments 26,974 26,974
Income taxes relating
to derivative financial
instruments (9,401) (9,401)
Change in
minimum pension
liability 412,912 412,912
Income taxes relating
to minimum pension
liability (155,053) (155,053)
------------
Comprehensive income 2,168,204
Issuance of common stock 500 1,250 (531) 719
Purchase of treasury stock (118,200) (470,104) (470,104)
-------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2003 3,265,551 $ 9,132,030 $(1,621,813) $ 2,028,574 $ (1,370,441) $2,010,274 $10,178,624
Net income 3,238,405 3,238,405
Translation Adjustment 328,028 328,028
Change in fair value of
derivative financial
instruments (82,268) (82,268)
Change in
minimum pension
liability 132,463 132,463
Income taxes relating
to minimum pension
liability (39,369) (39,369)
------------
Comprehensive income 3,577,259
Distribution to shareholders (214,800) (214,800)
Issuance of common stock 196,700 491,750 202,429 694,179
Purchase of treasury stock (48,830) (252,798) (252,798)
-------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2004 3,413,421 $ 9,623,780 $(1,874,611) $ 2,231,003 $ (1,031,587) $5,033,879 $13,982,464
Net Income 2,937,310 2,937,310
Translation adjustment 170,432 170,432
Change in fair value of
derivative financial
instruments 82,268 82,268
Change in
minimum pension
liability (471,532) (471,532)
Income taxes relating
to minimum pension
liability 179,183 179,183
------------
Comprehensive income 2,897,661
Tax benefit from exercise of
employee stock options 326,713 326,713
Distribution to shareholders (424,630) (424,630)
Issuance of common stock 312,312 780,780 66,171 846,951
Purchase of treasury stock (242,900) (3,564,165) (3,564,165)
-------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2005 3,482,833 $10,404,560 $(5,438,776) $ 2,623,887 $ (1,071,236) $7,546,559 $14,064,994
See accompanying notes.
(18)
Acme United Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended December 31,
---------------------------------------------------
2005 2004 2003
---------------------------------------------------
Operating activities:
Net income $ 2,937,310 $ 3,238,405 $ 1,221,831
Adjustments to reconcile net income to net
cash (used) provided by operating activities
Depreciation 610,509 492,361 433,645
Amortization 42,263 29,986 24,406
Deferred income taxes (462,621) (56,958) 540,600
Loss (gain) on disposal of property, plant and equipment 64,254 59,156 (174,528)
Tax benefit on stock options 326,713 - -
Changes in operating assets and liabilities
Accounts receivable (297,236) (1,974,964) (342,197)
Inventories (4,248,853) (64,949) (1,017,075)
Prepaid expenses and other current assets (71,910) (213,326) 286,147
Accounts payable (107,819) 540,792 311,798
Other accrued liabilities 768,779 2,218,454 468,000
---------------------------------------------------
Total adjustments (3,375,921) 1,030,552 530,796
---------------------------------------------------
Net cash (used) provided by operating activities (438,611) 4,268,957 1,752,627
---------------------------------------------------
Investing activities:
Purchase of property, plant and equipment (1,430,530) (443,330) (424,537)
Purchase of patents and trademarks (252,468) (336,673) (115,615)
Proceeds from sale of property, plant and equipment 160,045 51,583 250,196
---------------------------------------------------
Net cash used by investing activities (1,522,953) (728,420) (289,956)
---------------------------------------------------
Financing activities:
Net borrowings (repayments) of long-term debt 4,159,274 (3,467,595) (197,251)
Distributions to shareholders (380,978) (143,007) -
Purchase of treasury stock (3,564,165) (252,798) (470,247)
Issuance of common stock 846,951 694,179 862
---------------------------------------------------
Net cash provided (used) by financing activities 1,061,082 (3,169,221) (666,636)
Effect of exchange rate changes 88,461 126,553 (3,064)
---------------------------------------------------
Net change in cash and cash equivalents (812,021) 497,869 792,971
Cash and cash equivalents at beginning of year 1,888,510 1,390,641 597,670
---------------------------------------------------
Cash and cash equivalents at end of year $ 1,076,489 $ 1,888,510 $ 1,390,641
===================================================
Supplemental cash flow information
Cash paid for income taxes $ 1,716,028 $ 1,390,967 $ 850,600
Cash paid for interest $ 234,523 $ 157,335 $ 235,265
See accompanying notes.
(19)
Acme United Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
The operations of Acme United Corporation (the "Company") consist of three
reportable segments. The operations of the Company are structured and evaluated
based on geographic location. The three reportable segments operate in the
United States, Canada and Germany. Principal products across all segments are
scissors, shears, rulers, first aid kits, and related products which are sold
primarily to wholesale, contract and retail stationery distributors, office
supply super stores, school supply distributors, drug store retailers and mass
market retailers.
2. Accounting Policies
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most sensitive and significant
accounting estimates relate to customer rebates, valuation allowances for
deferred income tax assets, obsolete and slow-moving inventories, potentially
uncollectible accounts receivable and accruals for income taxes. Actual results
could differ from those estimates.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Translation of Foreign Currency - For foreign operations, assets and liabilities
are translated at rates in effect at the end of the year; revenues and expenses
are translated at average rates in effect during the year. Resulting translation
adjustments are made directly to accumulated other comprehensive loss. Foreign
currency transaction gains and losses are recognized in operations. Foreign
currency transaction gains (losses), which are included in other (expense)
income, net, were ($397,535) in 2005, ($110,519) in 2004, and $105,984 in 2003.
Cash Equivalents - Investments with an original maturity of three months or less
at the date of purchase are considered cash equivalents.
Accounts Receivable - Accounts receivable are shown less an allowance for
doubtful accounts of $136,050 in 2005 and $210,914 in 2004.
Inventories - Inventories are stated at the lower of cost, determined by the
first in, first out method, or market.
Property, Plant and Equipment and Depreciation - Property, plant and equipment
is recorded at cost. Depreciation is computed by the straight-line method over
the estimated useful lives of the assets which range from 3 to 30 years.
Asset Impairments - The Company evaluates the propriety of the carrying amounts
of its long-lived assets, including goodwill, at least annually, or when current
events and circumstances indicate a potential impairment. The Company believes
that there are no significant impairments of the carrying amounts of such assets
and no reduction in their estimated useful lives is warranted.
Intangible Assets - Intangible assets with a finite useful life are recorded at
cost upon acquisition and amortized over the term of the related contract.
Intangible assets held by the Company with a finite useful life include deferred
financing costs, patents, and trademarks. Deferred financing costs are amortized
over the term of the related debt. Patents and trademarks are amortized over
their estimated useful life. The weighted average amortization period of
intangible assets at December 31, 2005 is 14 years.
Goodwill - As of January 1, 2002, the Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 142, Goodwill and Other Intangible Assets
(FAS 142) and as such no longer amortizes goodwill but rather tests it annually
for impairment. There was no impairment of goodwill at December 31, 2005 and
December 31, 2004.
(20)
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.
Accounting for Stock-Based Compensation - At December 31, 2005, the Company has
one stock-based employee compensation plan, which is described more fully in
Note 11. The Company has elected to adopt the disclosure only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, and continues to measure costs for its employee stock
compensation plans by using the accounting methods prescribed by APB Opinion No.
25, Accounting for Stock Issued to Employees, which allows that no compensation
cost be recognized unless the exercise price of the options granted is less than
the fair market value of the Company's stock at date of grant. Accordingly, no
stock-based employee compensation cost is reflected in net income, as all
options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share as if the Company had applied
the fair value method under SFAS No. 123, Accounting for Stock Based
Compensation, to stock based employee compensation.
2005 2004 2003
============================================================================================
Net income, as reported $ 2,937,310 $ 3,238,405 $ 1,221,831
Deduct: total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (272,904) (76,929) (84,985)
--------------------------------------------------------------------------------------------
Pro forma net income $ 2,664,406 $ 3,161,476 $ 1,136,846
============================================================================================
Basic-as reported $ 0.84 $ 0.96 $ 0.37
Basic-pro forma $ 0.76 $ 0.94 $ 0.34
Diluted-as reported $ 0.78 $ 0.85 $ 0.34
Diluted-pro forma $ 0.70 $ 0.83 $ 0.32
Revenue Recognition - The Company recognizes revenue from sales of its products
when ownership transfers to the customers. Ownership generally transfers from
the Company to its customer upon shipment of the Company's products. When right
of return exists, the Company recognizes revenue in accordance with SFAS 48,
Revenue Recognition When Right of Return Exists.
Research and Development - Research and development costs ($244,904 in 2005,
$456,905 in 2004 and $347,130 in 2003) are expensed as incurred.
Shipping Costs - Shipping costs ($2,310,596 in 2005, $1,684,448 in 2004 and
$1,439,615 in 2003) are included in selling, general and administrative
expenses.
Advertising Costs - The Company expenses the production costs of advertising the
first time the advertising takes place. Advertising costs ($1,252,366 in 2005,
$1,109,217 in 2004 and $669,065 in 2003) are included in selling, general and
administrative expenses.
Concentrations - The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Allowances for credit
losses are provided and have been within management's expectations. Net sales to
the Company's three major customers represented approximately 41% in 2005, 43%
in 2004 and 46% in 2003.
(21)
Derivatives - The Company accounts for derivative financial instruments
consistent with the requirements of FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities and its amendments, Statements
137, Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133, and Statement No. 138, Accounting
for Derivative Instruments and Certain Hedging Activities. The Company
recognizes all derivative financial instruments, such as interest rate swap
contracts, forward foreign exchange contracts, and foreign currency option
contracts, in the consolidated financial statements at fair value regardless of
the purpose or intent for holding the instrument. Changes in the fair value of
derivative financial instruments are either recognized periodically in
operations or in stockholders' equity as a component of accumulated other
comprehensive income (loss) depending on whether the derivative financial
instrument qualifies for hedge accounting, and if so, whether it qualifies as a
fair value hedge or cash flow hedge. Generally, changes in fair values of
derivatives accounted for as fair value hedges are recorded in operations along
with the portions of the changes in the fair values of the hedged items that
relate to the hedged risk(s). Changes in fair values of derivatives accounted
for as cash flow hedges, to the extent they are effective as hedges, are
recorded in other comprehensive (loss) income, net of deferred income taxes.
Changes in fair value of derivatives used as hedges of the net investment in
foreign operations are reported in other comprehensive income (loss) as part of
the cumulative translation adjustment. Changes in fair values of derivatives not
qualifying as hedges are reported in operations.
Recently Issued Accounting Standards - In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 123 (revised 2004) ("Statement 123 (R)"), "Share-Based Payment",
which revised SFAS No. 123, "Accounting for Stock-Based Compensation". This
statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The revised statement addresses the accounting for share-based
payment transactions with employees and other third parties, eliminates the
ability to account for share-based compensation transactions using APB 25 and
requires that the compensation costs relating to such transactions be recognized
in the consolidated statement of operations. Acme will adopt the provisions of
the statement effective January 1, 2006 as required. The impact of adoption of
Statement 123 (R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However, had Acme adopted
Statement 123 in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of pro
forma net income (loss) and net income (loss) per share in the stock-based
compensation accounting policy note included in Note 2 to the consolidated
financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4," to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted material (spoilage) should be
recognized as current period charges, and that fixed production overheads should
be allocated to inventory based on normal capacity of production facilities.
This statement is effective for Acme's fiscal year 2006. We do not expect the
adoption of this standard to have a material effect on our financial position,
results of operations or cash flows.
Reclassifications - Certain prior year amounts have been reclassified to conform
to the current year presentation.
3. Inventories
Inventories consist of: 2005 2004
------------------------------------------------------------------------
Finished goods $ 11,691,337 $ 7,739,109
Work in process 116,377 91,697
Materials and supplies 722,740 558,422
------------------------------------------------------------------------
$ 12,530,454 $ 8,389,228
========================================================================
Inventories are stated net of valuation allowances for obsolescence of $453,369
in 2005 and $620,538 in 2004.
4. Intangible Assets
Intangible assets consist of: 2005 2004
------------------------------------------------------------------------
Deferred financing costs $ 70,577 $ 70,577
Patents 457,086 283,866
Trademarks 361,886 282,637
------------------------------------------------------------------------
889,549 637,080
Accumulated amortization 119,697 77,434
------------------------------------------------------------------------
$ 769,852 $ 559,646
========================================================================
(22)
Amortization expense for deferred financing costs for the years ended December
31, 2005, 2004 and 2003 was $12,658, $13,615 and $21,262, respectively.
Amortization expense for patents and trademarks for the years ended December 31,
2005, 2004 and 2003 was $29,605, $16,371 and $3,144, respectively. The estimated
aggregate amortization expense for each of the next five succeeding years is as
follows: 2006 -$31,887; 2007 - $31,887; 2008 - $31,887; 2009 - $31,887 and 2010
- $31,887.
5. Other Accrued Liabilities
Other accrued liabilities consist of: 2005 2004
--------------------------------------------------------------------------
Vendor rebates $ 2,657,403 $ 2,517,666
Accrual for demolition cost 1,497,150 -
Other 2,072,212 2,584,945
--------------------------------------------------------------------------
$ 6,226,765 $ 5,102,611
==========================================================================
6. Pension and Profit Sharing
United States employees, hired prior to July 1, 1993, are covered by a funded,
defined benefit pension plan. The benefits are based on years of service and the
average compensation of the highest three consecutive years during the last ten
years of employment. In December 1995, the Company's Board of Directors approved
an amendment to the United States pension plan ceasing all future benefit
accruals as of February 1, 1996, without terminating the pension plan. The
Company uses a December 31 measurement date for the pension plan.
The plan asset weighted average allocation at December 31, 2005, by asset
category, is as follows:
Asset Category 2005 2004
-------------------------------------------------------------------------
Equity 67% 71%
Fixed Income 30% 25%
Other 3% 4%
-------------------------------------------------------------------------
Total 100% 100%
=========================================================================
The Company's investment policy is to minimize risk by balancing investments
between equity and fixed income, utilizing a weighted average approach of 65%
equity securities, 30% fixed income funds, and 5% cash investments. Plan funds
are invested in long-term obligations with a history of moderate to low risk.
At December 31, 2005 and 2004, equity securities include 10,000 and 30,000
shares of the Company's Common Stock having a market value of $139,600 and
$471,000 at those dates, respectively.
(23)
Other disclosures related to the pension plan follow:
2005 2004
---------------------------------
Assumptions used to determine benefit obligation:
Discount rate 5.50% 5.75%
Changes in benefit obligation:
Benefit obligation at beginning of year $ (3,481,433) $ (3,527,592)
Interest cost (204,229) (206,327)
Service cost (35,000) (35,000)
Actuarial loss (326,375) (173,813)
Benefits and plan expenses paid 430,681 461,299
----------------------------------------------------------------------------------------------
Benefit obligation at end of year (3,616,356) (3,481,433)
----------------------------------------------------------------------------------------------
Changes in plan assets:
Fair value of plan assets at beginning of year 3,452,495 3,418,066
Actual return on plan assets 48,727 495,728
Benefits and plan expenses paid (430,681) (461,299)
----------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 3,070,541 3,452,495
----------------------------------------------------------------------------------------------
Funded status (545,815) (28,938)
Unrecognized actuarial loss 1,435,732 964,199
Unrecognized prior service costs 87,760 96,536
Minimum pension liability, including intangible
pension asset of $87,760 in 2005 and $96,536 in 2004 (1,523,492) (1,060,735)
----------------------------------------------------------------------------------------------
Accrued benefit costs $ (545,815) $ (28,938)
==============================================================================================
Accrued benefits costs are included in other accrued liabilities (non-current).
2005 2004 2003
==============================================================================================================
Assumptions used to determine net periodic benefit cost:
Discount rate 5.75% 6.00% 6.50%
Expected return on plan assets 8.00% 8.00% 8.00%
--------------------------------------------------------------------------------------------------------------
Components of net benefit expense:
Interest cost $ 204,229 $ 206,327 $ 221,265
Service cost 35,000 35,000 35,000
Expected return on plan assets (260,089) (257,424) (246,124)
Amortization of prior service costs 8,776 8,776 8,776
Amortization of actuarial gain 66,204 67,972 80,687
--------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 54,120 $ 60,651 $ 99,604
==============================================================================================================
Acme United Corporation employs a building block approach in determining the
long-term rate of return for plan assets. Historical markets are studied and
long-term historical relationships between equities and fixed income are
preserved congruent with the widely-accepted capital market principle that
assets with higher volatility generate return over the long run. Current market
factors such as inflation and interest rates are evaluated before long-term
capital market assumptions are determined.
The following table discloses the change in other comprehensive income:
2005 2004 2003
-------------------------------------------------
(Increase) decrease in minimum liability included in other
comprehensive income, excluding income tax effect $ (471,532) $ 132,463 $ 412,912
(24)
The following benefits, which reflect expected future service, as appropriate,
are expected to be paid:
2006 $ 387,691
2007 376,100
2008 380,736
2009 371,046
2010 352,276
Years 2011 - 2015 1,495,168
The Company also has a qualified, non-contributory profit sharing plan covering
substantially all United States employees. Annual Company contributions are
determined by the Compensation Committee. For the years ended December 31, 2005,
2004 and 2003, contributions amounted to a 50% match up to the first 6% of
employee contributions. Total contribution expense under this plan approximated
$60,000, $63,000 and $61,000 for 2005, 2004 and 2003, respectively.
7. Income Taxes
The amounts of income taxes (benefit) reflected in operations follow:
2005 2004 2003
-----------------------------------------------------------------------------
Current:
Federal $ 1,817,861 $ 1,714,456 $ 513,057
State 236,019 211,927 66,783
Foreign 237,497 232,486 -
-----------------------------------------------------------------------------
2,291,377 2,158,869 579,840
-----------------------------------------------------------------------------
Deferred:
Federal (393,334) (70,436) 557,886
State (69,287) 4,397 2,813
Foreign 9,081 (20,099)
-----------------------------------------------------------------------------
(462,621) (56,958) 540,600
-----------------------------------------------------------------------------
$ 1,828,756 $ 2,101,911 $ 1,120,440
=============================================================================
The current state tax provision is comprised of taxes on income, the minimum
capital tax and other franchise taxes related to the jurisdictions in which the
Company's facilities are located.
A summary of United States and foreign income (loss) before income taxes
follows:
2005 2004 2003
-----------------------------------------------------------------------------
United States $ 4,288,531 $ 4,927,741 $ 3,142,489
Foreign 477,535 412,575 (800,218)
-----------------------------------------------------------------------------
$ 4,766,066 $ 5,340,316 $ 2,342,271
=============================================================================
(25)
The following schedule reconciles the amounts of income taxes computed at the
United States statutory rate to the actual amounts reported in operations.
2005 2004 2003
-------------------------------------------------------------------------------
Federal income
taxes at
34% statutory rate $ 1,620,462 $ 1,815,707 $ 796,372
State and local
taxes, net of
federal income
tax effect 155,773 147,373 80,199
Permanent items 65,935 (31,907) (25,710)
Foreign tax rate difference (92,908)
Non-recognition
of foreign tax loss
carryforwards 79,494 170,738 269,579
-------------------------------------------------------------------------------
Provision for income taxes $ 1,828,756 $ 2,101,911 $ 1,120,440
===============================================================================
Income taxes paid, net of refunds received, were $1,716,028 in 2005, $1,390,967
in 2004 and $850,600 in 2003.
2005 2004
--------------------------------------------------------------------------------
Deferred income tax liabilities:
Plant, property and equipment $ 140,774 $ 156,227
--------------------------------------------------------------------------------
140,774 156,227
Deferred income tax assets:
Asset valuations 255,131 195,048
Operating loss carryforwards and credits 1,482,907 1,418,433
Pension 168,424 24,999
Other 429,945 1,627
--------------------------------------------------------------------------------
2,336,407 1,640,107
--------------------------------------------------------------------------------
Net deferred income tax asset
before valuation allowance 2,195,633 1,483,880
Valuation allowance (1,415,401) (1,335,907)
--------------------------------------------------------------------------------
Net deferred income tax asset $ 780,232 $ 147,973
================================================================================
The Company provides deferred income taxes on foreign subsidiary earnings, which
are not considered permanently reinvested. Earnings permanently reinvested would
become taxable upon the sale or liquidation of a foreign subsidiary or upon the
remittance of dividends. Foreign subsidiary earnings of $2,300,000 and
$2,189,000 are considered permanently reinvested as of December 31, 2005 and
2004, respectively, and the amount of deferred income taxes thereon cannot be
readily determined.
(26)
In December 2004, the FASB issued FSP No. FAS 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation provision within the American
Jobs Creation Act of 2004 ("AJCA"). The AJCA provides a one-time 85% dividends
received deduction for certain foreign earnings that are repatriated under a
plan for reinvestment in the United States, provided certain criteria are met.
FSP No. 109-2 is effective immediately and provides accounting and disclosure
guidance for the repatriation provision. FSP No. 109-2 allows companies
additional time to evaluate the effects of the law on its unremitted earnings
for the purpose of applying the "indefinite reversal criteria" under APB Opinion
No. 23, Accounting for Income Taxes - Special Areas, and requires explanatory
disclosures from companies that have not yet completed the evaluation. Under the
provisions of the AJCA, the Company repatriated approximately $500,000 of
qualifying dividends in the fourth quarter of 2005, which resulted in additional
income tax expense of approximately $28,000 for the year.
Due to the uncertain nature of the realization of the Company's deferred income
tax assets based on past performance and carry forward expiration dates, the
Company has recorded a valuation allowance for the amount of deferred income tax
assets which are not expected to be realized. This valuation allowance is
subject to periodic review, and if the allowance is reduced, the tax benefit
will be recorded in future operations as a reduction of the Company's tax
expense.
At December 31, 2005, the Company has tax operating loss carry forwards
aggregating $4,718,004, all of which are applicable to Germany, and can be
carried forward indefinitely.
8. Debt
Long term debt consists of:
2005 2004
-----------------------------------------------------------------------------
Notes payable:
North American arrangements $ 5,544,500 $ 1,207,500
Other 42,882 226,436
-----------------------------------------------------------------------------
5,587,382 1,433,936
Less current portion 10,000 -
-----------------------------------------------------------------------------
$ 5,577,382 $ 1,433,936
=============================================================================
During September 2004, the Company renewed its revolving loan agreement, which
originally allowed for borrowings up to a maximum of $10,000,000 based on a
borrowing base formula, which applied specific percentages to balances of
accounts receivable and inventory. The renewal modified several characteristics
of the original agreement, the most significant of which are reducing the
interest rate to LIBOR plus 1.50% from LIBOR plus 1.75%, eliminating the
borrowing base formula, allowing the Company to borrow up to $10,000,000,
regardless of its inventory and receivable levels, and extending the maturity of
the loan to June 30, 2007. As of December 31, 2005, $5,544,500 was outstanding
and $4,455,500 was available for borrowing under this agreement. Amounts
outstanding under the Agreement bear interest at the LIBOR rate plus 1.50%
(5.89% at December 31, 2005). Prior year outstanding balances under this loan
agreement have been reclassified to long-term debt to conform to current year
classification.
The Company, among other things, is restricted with respect to additional
borrowings, investments, mergers, and property and equipment acquisitions.
Further, the Company is required to maintain specific amounts of tangible net
worth, a specified debt service coverage ratio, and a fixed charge coverage
ratio, all as defined in the revolving loan agreement. The Company was in
compliance with these financial covenants at December 31, 2005.
Maturities of long-term debt for the next five years follow: 2006 - $10,000;
2007- $5,553,000; 2008 - $8,000; 2009 - $8,000; and 2010 - $8,000.
Interest paid was $234,523 in 2005, $157,335 in 2004 and $235,265 in 2003.
(27)
9. Commitments and Contingencies
The Company leases certain office, manufacturing and warehouse facilities and
various equipment under non-cancelable operating leases. Total rent expense was
$332,644 in 2005, $309,107 in 2004 and $252,294 in 2003. Minimum annual rental
commitments under non-cancelable leases with initial or remaining terms of one
year or more as of December 31, 2005 to their expiration follow: 2006 -
$492,435; 2007 - $363,207; 2008 - $295,305; 2009 - $290,000 and 2010 - $260,000.
The Company is involved from time to time in disputes and other litigation in
the ordinary course of business, including certain environmental and other
matters. The Company presently believes that none of these matters, individually
or in the aggregate, would be likely to have a material adverse impact on
financial position, results of operations, or liquidity from these matters.
10. Segment Information
Prior to 2005, the Company reported only one business segment. In 2005, the
Company reassessed its business segments for reporting purposes and is reporting
financial information based on the organization structure used by management for
making operating and investment decisions and for assessing performance. The
Company's reportable business segments include (1) United States; (2) Canada and
(3) Europe. The financial results of the Company's Asian operating segment have
been aggregated with the results of the United States to form one reportable
segment. The determination of reportable segments is based on the guidance set
forth in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". Each reportable segment derives its revenue from the sales of
cutting devices, measuring instruments and safety products for school, office,
home and industrial use.
The Chief Operating Decision Maker evaluates the performance of each operating
segment based on segment revenues and operating income. Segment revenues are
defined as total revenues, including both external customer revenue and
intersegment revenue. Segment operating earnings are defined as segment revenues
less cost of goods sold and operating expenses. Identifiable assets by segment
are those assets used in the respective reportable segment's operations.
Intersegment amounts are eliminated to arrive at consolidated financial results.
Net sales to the Company's top three customers amounted to approximately 18%,
12% and 11%, of total net sales in 2005, 18%, 14% and 11% in 2004, and 20%, 15%
and 11% in 2003. Sales to no other customer exceeded 10% of consolidated net
sales.
(28)
Financial data by segment:
(000's omitted)
2005
---- United States Canada Europe Elimination Consolidated
Sales to unaffiliated customers $ 39,060 $ 6,837 $ 4,049 $ 49,946
InterCompany sales 75 5 1,115 $ (1,195) -
--------------------------------------------------------------------
Net sales 39,135 6,842 5,164 (1,195) 49,946
Operating income 5,010 484 (159) 7 5,342
Assets 21,734 5,490 2,754 (1,784) 28,194
Additions to property, plant and equipment 1,299 80 52 0 1,431
Depreciation and amortization 511 51 91 - 653
2004
----
Sales to unaffiliated customers $ 33,741 $ 5,986 $ 3,654 $ $ 43,381
InterCompany sales 84 3 656 (743) -
--------------------------------------------------------------------
Net sales 33,825 5,989 4,310 (743) 43,381
Operating income 5,537 463 (664) 154 5,490
Assets 16,401 5,413 2,835 (1,682) 22,967
Additions to property, plant and equipment 291 57 95 - 443
Depreciation and amortization 366 44 112 - 522
2003
Sales to unaffiliated customers $ 26,482 $ 5,611 $ 2,882 $ $ 34,975
InterCompany sales 155 6 901 (1,062) -
--------------------------------------------------------------------
Net sales 26,637 5,617 3,783 (1,062) 34,975
Operating income 3,179 249 (859) (83) 2,486
Assets 13,613 4,498 3,013 (1,381) 19,743
Additions to property, plant and equipment 398 10 17 - 425
Depreciation and amortization 302 45 111 - 458
11. Stock Option Plans
The Company has two stock option plans: the 2002 Employee Stock Option Plan, as
amended (the "Employee's Plan") and the 2005 Non-Salaried Director Stock Option
Plan (the "Director Plan").
With respect to the Employee's Plan, in connection with the April 2005 Annual
Meeting of Shareholders, the shareholders approved an increase to the maximum
number of shares reserved and authorized for issuance to 300,000 shares of Acme
United Common Stock. The Employee's Plan provides for the issuance of incentive
and nonqualified stock options at an exercise price equal to the Fair Market
Value of the Common Stock on the date the option is granted. The terms of the
options granted are subject to the provisions of the Employee's Plan. As of
December 31, 2005, the number of shares available for grant under the Employee's
Plan was 108,688.
(29)
The Director Plan, approved by shareholders at the Annual Meeting of
Shareholders on April 25, 2005, provides for the issuance of up to 50,000
nonqualified stock options of the Company's Common Stock to non-salaried
directors. Directors elected on April 25, 2005 and at subsequent Annual Meetings
who have not received any prior grant under this or previous plans shall receive
an initial grant of an option to purchase 5,000 shares of Common Stock (the
"Initial Option"). Each elected Director not receiving an initial grant will
receive a 2,500 share option (the "Annual Option"). The Initial Option vests 25%
on the date of grant and 25% in each of the next three years. The Annual Option
becomes exercisable one day after the date of grant. The exercise price of all
options granted shall equal the Fair Market Value of the Common Stock on the
date the option is granted and shall expire ten (10) years from the date of
grant. As of December 31, 2005, the number of shares available for grant under
the Director Plan was 42,500.
A summary of changes in options issued under the Company's stock option plans
follows:
2005 2004 2003
-----------------------------------------------------------------------------------------
Options outstanding at the beginning of the year 673,200 867,150 766,850
Options granted 111,500 6,500 102,500
Options forfeited (938) (3,750) (1,700)
Options exercised (312,312) (196,700) (500)
-----------------------------------------------------------------------------------------
Options outstanding at the end of the year 471,450 673,200 867,150
=========================================================================================
Options exercisable at the end of the year 368,700 622,263 747,940
=========================================================================================
Common stock available for future grants
at the end of the year 151,188 60,500 64,500
=========================================================================================
Weighted average price of options:
Granted $ 15.64 $ 5.50 $ 3.89
Forfeited 4.00 4.33 2.67
Exercised 2.71 3.53 2.53
Outstanding 6.56 3.27 3.31
Exercisable 4.62 3.19 3.26
A summary of options outstanding at December 31, 2005 follows:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------- ----------------------------
Weighted-
Average Weighted-
Remaining Weighted- Average
Number Contractual Average Number Exercise
Range of Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Price
---------------------------------------------------------------------------------------------- ----------------------------
$1.25 to $2.49 46,600 4 $ 2.07 46,600 $ 2.07
$2.50 to $3.65 158,850 6 3.11 155,225 3.10
$3.66 to $5.00 73,750 5 4.08 62,875 4.10
$5.01 to $7.25 80,750 3 5.65 76,125 5.66
$7.26 to $17.02 111,500 10 15.64 27,875 16.53
---------------------------------------------------------------------------------------------- ----------------------------
471,450 368,700
================ ===============
The weighted average remaining contractual life of outstanding stock options is
5 years.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations to recognize compensation expense under its stock
option plans. As such, no expense is recognized if, at the date of grant, the
exercise price of the option is at least equal to the fair market value of the
Company's Common Stock. No compensation expense related to the Company's stock
option plans was required to be recognized for its plans in 2005, 2004 and 2003
except as discussed in Note 2.
(30)
The weighted average fair value at the date of grant for options granted during
2005, 2004, and 2003 was $7.42, $2.59, and $1.79 per option, respectively.
The fair value of options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
2005 2004 2003
-----------------------------------------------
Expected life in years 5 5 5
Interest rate 3.84% 3.84% 3.00%
Volatility 0.546 0.527 0.480
Dividend yield 0.70% 1.09% 0%
12. Earnings Per Share
The calculation of earnings per share follows:
2005 2004 2003
------------------------------------------------------------------------------------------------
Numerator:
Net income $ 2,937,310 $ 3,238,405 $ 1,221,831
------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share
Weighted average shares outstanding 3,509,031 3,364,033 3,317,231
Effect of dilutive employee stock options 279,913 442,995 240,663
------------------------------------------------------------------------------------------------
Denominator for dilutive earnings per share 3,788,944 3,807,028 3,557,894
------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.84 $ 0.96 $ 0.37
------------------------------------------------------------------------------------------------
Dilutive earnings per share $ 0.78 $ 0.85 $ 0.34
------------------------------------------------------------------------------------------------
For 2005 and 2003, 9,500 and 87,000 stock options were excluded from diluted
earnings per share calculations because they would have been anti-dilutive.
There were no anti-dilutive stock options for 2004.
(31)
13. Accumulated Other Comprehensive Loss
The components of the accumulated other comprehensive loss follow:
Derivative Minimum
Translation Financial Pension
Adjustment Instruments Liability Total
-----------------------------------------------------------------------------------------------------------------
Balances, December 31, 2003 $ (679,544) $ (690,897) $ (1,370,441)
Change in fair value of
derivative financial
Instruments $ (82,268) (82,268)
Change in minimum pension liability 132,463 132,463
Income taxes relating
to minimum pension
liability (39,369) (39,369)
Translation adjustment 328,028 328,028
-----------------------------------------------------------------------------------------------------------------
Balances, December 31, 2004 (351,516) (82,268) (597,803) (1,031,587)
Change in fair value of
derivative financial
Instruments 82,268 82,268
Change in minimum pension liability (471,532) (471,532)
Income taxes relating
to minimum pension
liability 179,183 179,183
Translation adjustment 170,432 170,432
-----------------------------------------------------------------------------------------------------------------
Balances, December 31, 2005 $ (181,084) $ - $ (890,152) $ (1,071,236)
=================================================================================================================
14. Financial Instruments
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet for
cash and cash equivalents approximates fair value.
Accounts receivable and accounts payable: The carrying amounts reported in the
balance sheet for accounts receivable and accounts payable approximate fair
value.
Long-and short-term debt: The carrying amounts of the Company's borrowings under
its short-term notes payable and revolving credit arrangements approximate their
fair value. The fair values of the Company's long-term debt are estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Forward foreign exchange contracts and interest rate swaps: The fair values of
the Company's forward foreign currency contracts and interest rate swaps are
estimated based on dealer quotes.
The carrying amounts and fair values of the Company's financial instruments
follow (000's omitted):
(32)
2005 2004
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------------------------------------
Cash and cash equivalent $ 1,076 $ 1,076 $ 1,889 $ 1,889
Accounts receivable 9,392 9,392 8,885 8,885
Accounts payable (2,174) (2,174) (2,316) (2,316)
Long term debt (5,587) (5,587) (1,434) (1,434)
Forward foreign exchange contract - - (82) (82)
Derivative Financial Instruments
The Company uses derivatives for cash flow hedging purposes as part of its risk
management strategy. Following is a summary of the Company's risk management
strategies and derivatives and the effect of them on the Company's consolidated
financial statements.
The Company and its foreign subsidiaries utilize bank loans to finance their
operations. To mitigate foreign currency risk, foreign loans are denominated in
the local currency of the foreign subsidiary wherever possible.
In September 2004, the Company entered into a forward foreign currency contract
to hedge forecasted 2005 inventory purchases by the Company's Canadian
subsidiary in a foreign currency other than the Canadian subsidiary's functional
currency, the Canadian dollar. The fair value of the forward foreign currency
contract totaled $0 and $82,268 at December 31, 2005 and 2004, respectively, and
was reflected as a liability and component of accumulated other comprehensive
loss in the accompanying consolidated balance sheet. In 2005, the Company
recognized a loss on the forward foreign currency contract of $116,000.
In 2000, the Company entered into an interest-rate swap agreement that
effectively converted a portion of its floating-rate debt to a fixed-rate basis
through January 19, 2003, the agreement maturity date, thus reducing the impact
of interest-rate changes on future income. During 2003, the Company recognized
expense of $26,874, related to the net amounts paid and accrued on interest rate
swaps, which are included in interest expense in that year's consolidated
statements of income.
15. Quarterly Data (unaudited)
Quarters (000's omitted, except per share data)
2005 First Second Third Fourth Total
----------------------------------------------------------------------------------------------------
Net sales $ 10,583 $ 14,904 $ 13,400 $ 11,059 $ 49,946
----------------------------------------------------------------------------------------------------
Cost of goods sold 5,722 8,173 7,234 6,463 27,592
----------------------------------------------------------------------------------------------------
Net income 650 1,314 200 773 2,937
----------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.19 $ 0.37 $ 0.06 $ 0.22 $ 0.84
Diluted earnings per share $ 0.17 $ 0.34 $ 0.05 $ 0.21 $ 0.78
2004 First Second Third Fourth Total
----------------------------------------------------------------------------------------------------
Net sales $ 8,567 $ 12,298 $ 11,595 $ 10,921 $ 43,381
----------------------------------------------------------------------------------------------------
Cost of goods sold 4,848 6,779 6,142 5,959 23,728
----------------------------------------------------------------------------------------------------
Net income 392 1,075 1,017 754 3,238
----------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.12 $ 0.32 $ 0.30 $ 0.22 $ 0.96
Diluted earnings per share $ 0.11 $ 0.29 $ 0.26 $ 0.19 $ 0.85
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
necessarily equal the total for the year.
(33)
16. Capital Structure
In 2005, the Company issued 312,312 shares of common stock with proceeds of
$846,951 upon the exercise of outstanding stock options. The Company also
repurchased 242,900 shares of common stock in open market transactions for
treasury. The shares were purchased at fair market value, with a total cost to
the Company of $3,564,165.
17. Business Combination
On May 28, 2004, the Company purchased Clauss Cutlery, a division of Alco
Industries, Inc. The purchase price was the aggregate value of inventory,
trademarks and brand names totaling $446,754. Included in the purchase price was
a stand-by letter of credit the Company issued in the amount of $230,000 for a
trademark from Alco Industries, Inc. that was renewed by the U.S. Patent and
Trademark Office on July 13, 2004. The letter of credit was set-up to expire on
May 28, 2005, if the trademark was not renewed. Since the trademark was renewed
prior to the expiration date, Alco Industries, Inc. enforced the letter of
credit and drew down the funds. Included in the accompanying Statement of
Operations are the operations of the acquired business since the date of
acquisition. Proforma operating information for the periods prior to the
acquisition is not provided because of the immateriality of the transaction on a
proforma basis.
18. Impairment of Equipment
During the second quarter of 2004, the Company abandoned its ruler manufacturing
equipment. In accordance with FASB 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company recorded an impairment loss of
$84,820, or $0.02 a share, for the full amount of the assets at the time of
abandonment. There was no such impairment charge recorded during the year ended
December 31, 2005.
19. Non-Recurring Charge
The Company is the owner of certain commercial property located in Bridgeport,
Connecticut. Buildings, totaling approximately 150,000 square feet, are located
on this property. The Company ceased using the Bridgeport property as a
manufacturing facility in September 1996 and operations were consolidated into
Acme's North Carolina facility. For approximately the next two years, the
Company continued to pay property taxes, insurance, maintenance and other
operating costs which totaled approximately $107,000 annually and the Company
leased a small part of the property for $32,000 resulting in a net cost of
$75,000 annually. In October 1998, the Company leased the entire property to an
unrelated commercial real estate company for a term of 24 years. The lease had
provided for the payment of one dollar ($1.00) per year as base rent and
required that the tenant pay all taxes, insurance and other expenses in
connection with the property. At the time, Acme considered the cost savings from
leasing the property, for which Acme had no specific use, an appropriate basis
for the arrangement.
The Company had written off the book value of the property by the end of 1998.
Since October 1998, the tenant leased portions of the buildings to subtenants,
primarily for use as commercial warehouses. Approximately 30% of the total
square footage is subject to subleases. The remainder has been empty since 1996.
On July 28, 2005, the Building Department of Bridgeport informed Acme United
that pursuant to a call from the Bridgeport Fire Department, an inspection of
the premises was made on July 21, 2005. The roof of a portion of a building had
collapsed that day. The Company received notice that it must either repair
certain portions of the damaged building and two others or demolish them because
of unsafe conditions. The Company was ordered to begin the necessary work to
make the buildings safe within 30 days from receipt of the letter.
The lessee filed an insurance claim on August 24, 2005. The insurance company
investigated the facts and circumstances surrounding the claim and determined
that the roof had collapsed due to wear, tear, deterioration, wet rot, dry rot
and lack of maintenance of the premises. They stated in a letter dated October
18, 2005 that the causes of the loss were not insured perils under the tenant's
policy and denied coverage.
On July 29, 2005, the Company notified the tenant of the action by the building
inspector and that under the terms of the lease the tenant had the entire
responsibility for compliance with the order. The lessee subsequently refused to
assume responsibility for the repair or demolition. Acme considered legal action
under the terms of the lease to force the lessee to pay for the repair or
demolition. However, the Company believed that the city would require action
over a time period shorter than the time required to file a lawsuit and to bring
the action to a conclusion.
(34)
As a result of discussions between the Company and the tenant regarding the
required repair or demolition, the Company and the tenant agreed to terminate
the lease. Pursuant to a Termination of Lease agreement entered into by the
Company and the tenant on September 16, 2005, the parties terminated this lease,
effective September 1, 2005. As part of the lease termination, the Company paid
$400,000 to the tenant in exchange for rights to the rental income from the
leases with current sub-tenants. This cost has been deferred and is being
amortized over the term of the subleases.
The Company also decided to demolish all unoccupied structures on the property.
The unoccupied structures are abandoned manufacturing buildings that had been
constructed over one hundred years ago.
Several subtenants continue to occupy portions of the property and are paying
rent presently totaling approximately $190,000 per year to the Company. In
addition, the principal subtenant pays a portion of the taxes and insurance
expenses related to the property it leases.
In the quarter ended September 30, 2005, the Company accrued a charge of
approximately $1.5 million related to the estimated cost to demolish the
structures and remove certain environmentally hazardous material included in the
buildings to be demolished. The estimated costs are based on a third party
contractor's estimate. Adjustments to the cost will be recorded when better
estimates or actual costs are known. After the demolition is complete, the
Company will explore options to sell the property.
20. Subsequent Event
On March 6, 2006, the Company modified its Revolving Loan Agreement (the
Modified Loan Agreement) with Wachovia Bank. The Modified Loan Agreement amends
certain provisions of the original agreement. The amendments include an increase
in the maximum borrowing amount from $10 million to $15 million; an extension of
the maturity date to June 30, 2009; a decrease in the interest rate to LIBOR
plus 1% from LIBOR plus 1.5% as well as modifications to certain covenant
restrictions. Funds borrowed under the Modified Loan Agreement will be used for
working capital and general operating expenses.
(35)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Acme United Corporation
We have audited the accompanying consolidated balance sheets of Acme United
Corporation and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2005. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Acme United
Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/Ernst & Young LLP
Hartford, Connecticut
February 28, 2006, except for Note 20,
as to which the date is March 9, 2006
(36)
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 2005.
Item 9A. Controls and Procedures
(a) Evaluation of Internal Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have reviewed and
evaluated the effectiveness of our disclosure controls and procedures, which
included inquiries made to certain other of our employees. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have each
concluded that, as of December 31, 2005, our disclosure controls and procedures
were effective and sufficient to ensure that we record, process, summarize and
report information required to be disclosed by us in our periodic reports filed
under the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2005, there were no changes in our
internal control over financial reporting that materially affected, or was
reasonably likely to materially affect, this control.
Item 9B. Other Information
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information with respect to the directors
and executive officers of the Company. All directors of the Company hold office
until the next annual meeting of the shareholders or until their successors have
been elected and qualified. Executive officers are elected by the Board of
Directors to hold office until their successors are elected and qualified.
Name Age Position Held with Company
--------------------------------------------------------------------------------
Walter C. Johnsen 55 President, Chief Executive Officer and Director
Gary D. Penisten 74 Chairman of the Board and Director
Brian S. Olschan 49 Executive Vice President, Chief Operating
Officer and Director
Paul G. Driscoll 45 Vice President, Chief Financial Officer,
Secretary and Treasurer
George R. Dunbar 82 Director
Richmond Y. Holden, Jr. 52 Director
Wayne R. Moore 73 Director
Stevenson E. Ward III 60 Director
Susan H. Murphy 54 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. Before joining the Company he was Vice
Chairman and a principal of Marshall Products, Inc., a medical supply
distributor.
Gary D. Penisten has served as director since 1994 and Chairman of the Board
since February 27, 1996. From 1977 to 1988, he was Senior Vice President of
Finance, Chief Financial Officer and a Director of Sterling Drug Inc. in New
York City. From 1974 to 1977 he served as Assistant Secretary of the United
States Navy. Prior to that he was employed by General Electric for twenty-one
years.
Brian S. Olschan served as Senior Vice President-Sales and Marketing from
September 10, 1996 until February 22, 1999. Effective January 23, 1999, he was
promoted to Executive Vice President and Chief Operating Officer. From 1984 to
1996, he was employed by General Cable Corporation in various executive
positions including Vice President and General Manager of the Cordset and
Assembly Business from 1994 to 1996.
Paul G. Driscoll has served as Vice President and Chief Financial Officer,
Secretary and Treasurer since October 2, 2002. Mr. Driscoll joined Acme as
Director International Finance on March 19, 2001. From 1997 to 2001 he was
employed by Ernest and Julio Gallo Winery including Director of Finance and
Operations in Japan. Prior to Gallo he served in several increasingly
responsible positions in Sterling Winthrop Inc. in New York City and Sanofi S.A.
in France.
(37)
George R. Dunbar has served as director since 1977. He is currently President of
The U.S. Baird Corporation and Dunbar Associates, a municipal management
consulting firm. He is a former Chief Administrative Officer for the City of
Bridgeport and served as President (1972-1987) of the Bryant Electric Division
of Westinghouse Electric Corporation, manufacturer of electrical distribution
and utilization products, Bridgeport, Connecticut.
Richmond Y. Holden, Jr. has served as director since 1998. He has served as
President and Chief Executive Officer of J.L. Hammett Co. since 1992; Executive
Vice President from 1989 to 1992. J.L. Hammett Co. is a distributor and online
retailer of educational products throughout the United States, and is one of the
largest distributors to the K-12 educational marketplace.
Wayne R. Moore has served as director since 1976. He is presently Chairman
Emeritus of The Producto Machine Company, manufacturer of machine tools, special
machines, and tool die and mold components. He was Chairman of the Board of The
Producto Machine Company and the Moore Special Tool Company, manufacturer of
machine tools, measuring machines and metrology products. Mr. Moore was Chairman
of the U.S. Machine Tool Builders/ Association for Manufacturing Technology
(1985-1986) and Committee Member of U.S. Eximbank (1984). He is a Trustee of the
American Precision Museum and on the Board of advisors of the Fairfield
University School of Engineering.
Stevenson E. Ward III has served as director since 2001. He is presently Vice
President and Chief Financial Officer of Triton Thalassic Technologies, Inc.
From 1999 through 2000, Mr. Ward served as Senior Vice President -
Administration of Sanofi-Synthelabo, Inc. He also served as Executive Vice
President (1996 - 1999) and Chief Financial Officer (1994 - 1995) of Sanofi,
Inc. and Vice President, Pharmaceutical Group, Sterling Winthrop, Inc. (1992 -
1994). Prior to joining Sterling he was employed by General Electric.
Susan H. Murphy has served as director since 2003. She is presently Vice
President for Student and Academic Services at Cornell University. From 1985
through 1994, Ms. Murphy served as Dean of Admissions and Financial Aid. Ms.
Murphy has been employed at Cornell since 1978.
The Company has adopted a Code of Conduct that is applicable to our employees,
including the Chief Executive Officer, Chief Financial Officer and Controller.
The Code of Conduct is available in the investor relations section on our
website at www.acmeunited.com
If we make any substantive amendments to the Code of Conduct which apply to our
Chief Executive Officer, Chief Financial Officer or Controller or grant any
waiver, including any implicit waiver, from a provision of the Code of Conduct
to our executive officers, we will disclose the nature of the amendment or
waiver on our website or in a report on Form 8-K.
Item 11. Executive Compensation
Information with respect to executive compensation is incorporated
herein by reference to the section entitled "Executive Compensation"
contained in our Proxy Statement to be filed with the Securities and
Exchange Commission in connection with our 2006 Annual Meeting of
Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners,
directors and executive officers is incorporated herein by reference
to the information in the section entitled "Security Ownership of
Directors and Officers" contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our
2006 Annual Meeting of Shareholders.
(38)
Item 13. Certain Relationships and Related Transactions
(None)
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services is
incorporated herein by reference to the section entitled "Fees to
Auditors" contained in our Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2006
Annual Meeting of Shareholders.
(39)
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
o Consolidated Balance Sheets
o Consolidated Statements of Operations
o Consolidated Statements of Changes in Stockholders' Equity
o Consolidated Statements of Cash Flows
o Notes to Consolidated Financial Statements
o Report of Independent Registered Public Accounting Firm
(a)(2) Financial Statement Schedules
o Schedule 2--Valuation and Qualifying Accounts
o Schedules other than those listed above have been omitted because of
the absence of conditions under which they are required or because the
required information is presented in the Financial Statements or Notes
thereto.
(a)(3) The exhibits listed under Item 15(b) are filed or incorporated by
reference herein.
(b) Exhibits.
The exhibits listed below are filed as part of this Annual Report on form 10-K.
Certain of the exhibits, as indicated, have been previously filed and are
incorporated herein by reference.
------------- ------------------------------------------------------------------
Exhibit No. Identification of Exhibit
------------- ------------------------------------------------------------------
3(i) Certificate of Organization of the Company (1)
------------- ------------------------------------------------------------------
Amendment to Certificate of Organization of Registrant dated
September 24, 1968 (1)
------------- ------------------------------------------------------------------
Amendment to Certificate of Incorporation of the Company dated
April 27, 1971 (2)
------------- ------------------------------------------------------------------
Amendment to Certificate of Incorporation of the Company dated
June 29, 1971 (2)
------------- ------------------------------------------------------------------
3(ii) Amendment to the Company's Bylaws (10)
------------- ------------------------------------------------------------------
4 Specimen of Common Stock certificate (2)
------------- ------------------------------------------------------------------
10.1 Non-Salaried Director Stock Option Plan dated April 22, 1996* (3)
------------- ------------------------------------------------------------------
10.1(a) Amendment No. 1 to the Non-Salaried Director Stock Option Plan*(4)
------------- ------------------------------------------------------------------
(40)
------------- ------------------------------------------------------------------
10.1(b) Amendment No. 2 to the Non-Salaried Director Stock Option Plan*(5)
------------- ------------------------------------------------------------------
10.2 1992 Amended and Restated Stock Option Plan* (6)
------------- ------------------------------------------------------------------
10.2(a) Amendment No. 1 to the Amended and Restated Stock Option Plan* (7)
------------- ------------------------------------------------------------------
10.2(b) Amendment No. 2 to the Amended and Restated Stock Option Plan* (8)
------------- ------------------------------------------------------------------
10.2(c) Amendment No. 3 to the Amended and Restated Stock Option Plan* (9)
------------- ------------------------------------------------------------------
10.2(d) Amendment No. 4 to the Amended and Restated Stock Option Plan* (9)
------------- ------------------------------------------------------------------
10.3 Acme United Employee Stock Option Plan dated February 26, 2002*
as amended (11)
------------- ------------------------------------------------------------------
10.4 Severance Pay Plan dated September 28, 2004*
------------- ------------------------------------------------------------------
10.5 Salary Continuation Plan dated September 28, 2004*
------------- ------------------------------------------------------------------
10.6 2005 Non-Salaried Director Stock Option Plan (12)
------------- ------------------------------------------------------------------
10.7 Second Modification to Revolving Promissory Note and Revolving
Credit and Security Agreement, and Reaffirmation of Guaranty
------------- ------------------------------------------------------------------
21 Subsidiaries of the Registrant
------------- ------------------------------------------------------------------
23 Consent of Ernst & Young, Independent Auditors
------------- ------------------------------------------------------------------
31.1 Certification of Walter Johnsen pursuant to Rule 13a-14(a) and
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
------------- ------------------------------------------------------------------
31.2 Certification of Paul Driscoll pursuant to Rule 13a-14(a) and
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
------------- ------------------------------------------------------------------
32.1 Certification of Walter Johnsen pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
------------- ------------------------------------------------------------------
32.2 Certification of Paul Driscoll pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
------------- ------------------------------------------------------------------
* Indicates a management contract or a compensatory plan or arrangement
(1) Previously filed in S-1 Registration Statement No. 230682 filed with
the Commission on November 7, 1968 and amended by Amendment No. 1 on
December 31, 1968 and by Amendment No. 2 on January 31, 1969.
(2) Previously filed as an exhibit to the Company's Form 10-K filed in
1971.
(3) Previously filed in the Company's Form S-8 Registration Statement No.
333-26739 filed with the Commission on May 9, 1997.
(4) Previously filed in the Company's Form S-8 Registration Statement No.
333-84505 filed with the Commission on August 4, 1999.
(5) Previously filed in the Company's Form S-8 Registration Statement No.
333-70348 filed with the Commission on September 21, 2000.
(6) Previously filed as an exhibit to the Company's Proxy Statement filed
on March 29, 1996.
(7) Previously filed in the Company's Form S-8 Registration Statement No.
333-26737 filed with the Commission on May 9, 1997.
(41)
(8) Previously filed in the Company's Form S-8 Registration Statement No.
333-84499 filed with the Commission on August 4, 1999.
(9) Previously filed in the Company's Form S-8 Registration Statement No.
333-70346 filed with the Commission on September 27, 2001.
(10) Previously filed in the Company's form 8-K filed on February 28, 2006.
(11) Previously filed in the Company's Proxy statement for the 2005 Annual
Meeting of Shareholders.
(12) Previously filed in the Company's Form S-8 Registration Statement No.
333-126478 filed with the Commission on July 8, 2005.
SCHEDULE II
Acme United Corporation and Subsidiaries
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2005, 2004 and 2003
Balance at Charged to Deductions Balance at
Beginning of Costs and and Other End of
Period Expenses Adjustments Period
--------------------------------------------------------------------------------------------------------------------
2005
Allowance for doubtful accounts $ 210,914 $ (60,971) $ 13,893 $ 136,050
Allowance for inventory obsolescence 620,538 218,269 385,438 453,369
Deferred income tax asset valuation allowance 1,335,907 79,494 - 1,415,401
--------------------------------------------------------------------------------------------------------------------
2004
Allowance for doubtful accounts $ 199,102 $ 123,809 $ 111,997 $ 210,914
Allowance for inventory obsolescence 374,665 425,127 179,253 620,538
Deferred income tax asset valuation allowance 1,139,875 196,032 - 1,335,907
--------------------------------------------------------------------------------------------------------------------
2003
Allowance for doubtful accounts $ 205,213 $ 61,924 $ 68,035 $ 199,102
Allowance for inventory obsolescence 407,881 273,447 306,663 374,665
Deferred income tax asset valuation allowance 1,130,777 9,098 - 1,139,875
--------------------------------------------------------------------------------------------------------------------
(42)
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 10, 2006.
ACME UNITED CORPORATION
(Registrant)
Signatures Titles
/s/ Walter C. Johnsen
--------------------------
Walter C. Johnsen President, Chief Executive Officer
and Director
/s/ Gary D. Penisten
--------------------------
Gary D. Penisten Chairman of the Board and Director
/s/ Brian S. Olschan
--------------------------
Brian S. Olschan Executive Vice President, Chief
Operating Officer and Director
/s/ Paul G. Driscoll
--------------------------
Paul G. Driscoll Vice President, Chief Financial Officer,
Secretary and Treasurer
/s/ George R. Dunbar
--------------------------
George R. Dunbar Director
/s/ Richmond Y. Holden, Jr.
--------------------------
Richmond Y. Holden, Jr. Director
/s/ Wayne R. Moore
--------------------------
Wayne R. Moore Director
/s/ Susan H. Murphy
--------------------------
Susan H. Murphy Director
/s/ Stevenson E. Ward III
--------------------------
Stevenson E. Ward III Director
(43)