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EX-32.1 - EXHIBIT 32.1 - ACME UNITED CORPacme_10k2011ex321.htm
EX-31.2 - EXHIBIT 31.2 - ACME UNITED CORPacme_10k2011ex312.htm
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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, 2011
   
  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 NYSE Amex
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES [X]   NO [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405) 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 large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one).
 
Large accelerated filer [_] Accelerated filer [_]     
   
Non-accelerated filer [_] 
Smaller Reporting Company [X]

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
YES [_]   NO [X]

The aggregate market value of the voting and non-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 $24,711,429. Registrant had 3,139,977 shares of its $2.50 par value Common Stock outstanding as of March 2, 2012.

Documents Incorporated By Reference

(1) Certain portions of the Company’s Proxy Statement for the Annual Meeting scheduled for April 23, 2012 is incorporated into the Company’s 2011 Annual Report on Form 10-K, Part III.

2

 
   
  
Page
 
Part I
 
  
   
       
Item 1.
Business
  
4
 
       
Item 1A.
Risk Factors
  
6
 
       
Item 1B.
Unresolved Staff Comments
  
9
 
       
Item 2.
Properties
  
9
 
       
Item 3. 
Legal Proceedings
  
9
 
       
Item 4.
Mine Safety Disclosures
  
9
 
       
 Part II
 
  
   
       
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
10
 
       
Item 6.
Selected Financial Data
  
12
 
       
Item 7. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
12
 
       
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
  
17
 
       
Item 8.
Financial Statements and Supplementary Data
  
17
 
       
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  
36
 
       
Item 9A.
Controls and Procedures
  
36
 
         
Item 9B. 
Other Information
 
37
 
       
 Part III
 
  
   
       
Item 10. 
Directors, Executive Officers and Corporate Governance
  
37
 
       
Item 11.
Executive Compensation
  
38
 
       
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
38
 
       
Item 13. 
Certain Relationships and Related Transactions, and Director Independence
  
38
 
       
Item 14.
Principal Accountant Fees and Services
  
39
 
       
 Part IV
 
  
   
       
Item 15.
Exhibits and Financial Statement Schedules
  
39
 
 
  
  
 
 
Signatures
  
42
 
 
3

 
PART I
Item 1.  Business

General
Acme United Corporation (together with its subsidiaries, the "Company") was organized as a partnership in l867 and incorporated in l882 under the laws of the State of Connecticut.  The Company is a leading worldwide supplier of innovative cutting, measuring and safety products to the school, home, office, hardware and industrial markets.  The Company's operations are in the United States, Canada, Europe (located in Germany) and Asia (located in Hong Kong and China).  The operations in the United States, Canada and Europe are primarily involved in product development, marketing, sales, administrative and distribution activities.  The operations in Asia consist of sourcing, product development, production planning, quality control and sales activities.  Net sales in 2011 were: United States (including direct import sales from Asia) - $56.7 million, Canada - $8.5 million, and Europe - $8.1 million.

The Company has grouped its operations into three reportable segments based on the Company’s geographical organization and structure: (1) United States (which includes its Asian operations); (2) Canada and (3) Europe.  Refer to Note 10 of the Notes to Consolidated Financial Statements for additional segment information.

Business Strategy

The Company’s business strategy includes the following key elements:

· a commitment to technological innovation achieved through consumer insight, creativity and speed to market;
· a broad selection of products in both brand and private label;
· prompt response and same-day shipping;
· superior customer service; and
· value pricing.

Acquisitions

On February 28, 2011, the Company purchased substantially all of the assets of The Pac-Kit Safety Equipment Company, a leading manufacturer of first aid kits for the industrial, safety, transportation and marine markets. The Company purchased the accounts receivable, inventory, equipment and intangible assets of Pac-Kit for approximately $3.4 million, less liabilities assumed of $310,000, using funds borrowed under the Company’s revolving loan agreement with Wells Fargo.

The Company recorded $1.9 million for assets acquired including accounts receivable, inventory and fixed assets, as well as $1.5 million for intangible assets, consisting of customer relationships and the Pac-Kit trade name. During 2011, the Company incurred approximately $125,000, of integration and transaction costs associated with the acquisition.  These costs were recorded in selling, general and administrative expenses.

Principal Products

The Company markets and sells under five main brands - Westcott®, Clauss®,  Camillus®, PhysiciansCare® and Pac-Kit®.

Cutting
 
Principal products within the cutting device category are scissors, shears, guillotine paper trimmers, rotary paper trimmers, rotary cutters, knives, hobby knives and blades, utility knives, pruners, loppers, saws, manicure products, medical cutting instruments and pencil sharpeners. Products introduced in 2011 included an expanded line of heavy duty school and office iPoint® pencil sharpeners.   Other recent product introductions included Westcott TrimAir® paper trimmers with patented titanium coating and a proprietary blade change system for rotary and personal trimmers, Westcott Ultra Soft Handle scissors with anti-microbial product protection, True Professional™ sewing shears as well as a line of iPoint® pencil sharpeners utilizing the Company’s proprietary non-stick coating. The Company also added to its KleenEarth® family of recycled products by modifying the production process to allow for multi-colored products as opposed to the traditional black.

Three years ago, the Company acquired the patents and intellectual property of Camillus Cutlery, the oldest knife company in the United States and in 2009, launched a new family of knives with proprietary designs and high performance titanium carbonitride coatings. In 2010, Camillus expanded the range of knives for tactical outdoor sporting use.

4

 
In 2011 Clauss introduced the AirShoc® line of titanium coated non stick garden tools.  In 2010 Clauss introduced high performance marine tools for saltwater fishing.

Measuring
 
Principal products within the measuring instrument category are rulers, and math tools.  Recent product introductions included Westcott branded compasses, protractors, rulers and math kits with anti-microbial product protection.

Safety
 
Principal products within the safety product category are first aid kits, personal protection products and over-the-counter medication refills. The Company markets these products under the PhysiciansCare brand.
 
In February, 2011 the Company extended its PhysiciansCare line of first aid kits and refills by acquiring the Pac-Kit Safety Equipment Company, a leading manufacturer of first aid kits for the industrial, safety, transportation, and marine markets.  Pac-Kit was one of the pioneers in industrial first aid products.  Today it sells high quality, unitized kits to a broad range of companies and distributors. It is known for tailoring these items to meet user requirements, and for rapid turnaround.
 
Product Development
 
Our strong commitment to understanding our consumers and defining products that fulfill their needs through innovation drives our product development strategy, which we believe is and will be a key contributor to our success. The Company incurred research and development costs of $535,500 in 2011 and $486,778 in 2010.
 
Intellectual Property
 
The Company has many patents and trademarks that are important to its business. The Company’s success depends in part on its ability to maintain patent protection for its products, to preserve its proprietary technology and to operate without infringing upon the patents or proprietary rights of others. The Company generally files patent applications in the United States and foreign countries where patent protection for its technology is appropriate and available.  The Company also considers its trademarks important to the success of its business. The more significant trademarks include Westcott, Clauss, Camillus, PhysiciansCare and Pac-Kit.
 
Product Distribution; Major Customers

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, mass market retailers and hardware chains.  In each of 2011 and 2010, the Company had one customer that individually exceeded 10% of consolidated net sales. Net sales to this customer amounted to approximately 20% of consolidated net sales in 2011 and 21% in 2010.

Competition

The Company competes with many companies in each market and geographic area.  The Company believes that the principal points of competition in these markets are product innovation, quality, price, merchandising, design and engineering capabilities, product development, timeliness and completeness of delivery, conformity to customer specifications and post-sale support. 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.

5

 
Seasonality

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.
 
Compliance with Environmental Laws

The Company believes that it is in compliance with applicable environmental laws.  The Company believes that there are no environmental matters that would have a material financial impact on the Company. The Company believes that no material adverse financial impact is expected to result from compliance with current environmental rules and regulations.  In December 2008, the Company sold property it owned in Bridgeport, CT. Under the terms of the sales agreement, the Company is responsible for environmental remediation on the property in accordance with the Connecticut Transfer Act. See Note 16 of the Notes to Consolidated Financial Statements for additional information regarding the sale of the Bridgeport property.

Employees

As of December 31, 2011, the Company employed 157 people, all of whom are full time and none of whom is covered by union contracts. Employee relations are considered good and no foreseeable problems with the work force are evident.

Available Information
 
The Company files its annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) of the Securities Exchange Act of 1934 with the SEC electronically. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
 
You may obtain a free copy of the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the Company’s website at http://www.acmeunited.com or by contacting the Investor Relations Department at the Company’s corporate offices by calling (203) 254-6060. Such reports and other information are made available as soon as reasonably practicable after such material is filed with or furnished to the SEC.

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:

·     
achieving planned revenue and profit growth in each of the Company's business segments;

·     
changes in customer requirements and in the volume of sales to principal customers;

·     
the timing of orders and shipments;

·     
emergence of new competitors or consolidation of existing competitors; and

·     
industry demand fluctuations.

The Company’s expectations for both short- and long-term future net revenues are based on the Company’s estimates of future demand. Orders from the Company’s principal customers are ultimately based on demand from end-users and end-user demand can be difficult to predict. Low end-user demand would negatively affect orders the Company receives from distributors and other principal customers which could, in turn adversely affect the Company’s revenues in any fiscal period. If the Company’s estimates of sales are not accurate and the Company experiences unforeseen variability in its revenues and operating results, the Company may be unable to adjust its expense levels accordingly and its profit margins could be adversely affected.

6

 
A number of the Company’s products are sold through distributors and large retailers. No assurances can be given that any or all of such distributors or retailers will continue their relationships with the Company. Distributors and other significant retail customers cannot easily be replaced and the loss of revenues and the Company’s inability to reduce expenses to compensate for the loss of revenues could adversely affect the Company’s net revenues and profit margins.
 
Uncertainty in the global economy could negatively impact our business.
Uncertainty in the global economy could adversely affect our customers and our suppliers and businesses such as ours. In addition, any uncertainty could have a variety of negative effects on the Company such as reduction in revenues, increased costs, lower gross margin percentages, increased allowances for doubtful accounts and/or write-offs of accounts receivable and could otherwise have material adverse effects on our business, results of operations, financial condition and cash flows.

Loss of a major customer could result in a decrease in the Company’s future sales and earnings.
In 2011 and 2010, the Company had one customer that individually exceeded 10% of consolidated net sales. Net sales to this customer amounted to approximately 20% in 2011 and 21% in 2010. The Company anticipates that a limited number of customers may account for a substantial portion of its 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 the Company’s future sales and earnings.

Reliance on foreign suppliers could adversely affect the Company’s business.
The Company purchases the majority of its products from foreign manufacturing partners and, as a result, its business is exposed to risks due to:
·     
Increases in transportation costs;
·     
New or increased import duties;
·     
Transportation delays;
·     
Work stoppages;
·     
Capacity constraints;
·     
Poor quality; and
·     
Inflation and exchange rate fluctuations that could increase the cost of foreign manufactured goods.

The loss of key management could adversely affect the Company’s ability to run its business.
The Company’s success depends, to a large extent, on the continued service of its 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 its projected growth.

The Company’s inability to meet its staffing requirements in the future could adversely affect its results of operations.

Failure to protect the Company’s proprietary rights or the costs of protecting these rights could adversely affect its 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 has 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 similar and/or compatible competing products. If other companies were to sell similar and/or compatible competing 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 believes that, under current conditions,  the Company’s current cash and cash equivalents, cash generated by operations, together with the borrowing availability under its revolving loan agreement with Wells Fargo Bank, will be sufficient to fund planned operations for the next twelve months. However, if the Company is unable to generate sufficient cash from operations, it may be required to find additional funding sources. If adequate financing is unavailable or is unavailable on acceptable terms, the Company may be unable to maintain, develop or enhance its operations, products and services, take advantage of future opportunities or adequately respond to competitive pressures.

7

 
The Company 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 the Company’s customers could have a negative effect on its results of operations.

The Company is subject to intense competition in all of the markets in which it competes.
The Company’s products are sold in highly competitive markets. The Company believes that the principal points of competition in these markets are product innovation, quality, price, merchandising, design and engineering capabilities, product development, timeliness and completeness of delivery, conformity to customer specifications and post-sale support. Competitive conditions may require the Company to match or better competitors’ prices to retain business or market shares. The Company believes that its competitive position will depend on continued investment in innovation and product development, manufacturing and sourcing, quality standards, marketing and customer service and support. The Company’s success will depend in part on its ability to anticipate and offer products that appeal to the changing needs and preferences of our customers in the various market categories in which it competes. The Company may not have sufficient resources to make the investments that may be necessary to anticipate those changing needs and the Company may not anticipate, identify, develop and market products successfully or otherwise be successful in maintaining its competitive position. There are no significant barriers to entry into the markets for most of the Company’s products.

Product liability claims or regulatory actions could adversely affect the Company's financial results and reputation.
Claims for losses or injuries allegedly caused by some of the Company’s products arise in the ordinary course of its business. In addition to the risk of substantial monetary judgments, product liability claims or regulatory actions could result in negative publicity that could harm the Company’s reputation in the marketplace or the value of its brands. The Company also could be required to recall possible defective products, which could result in adverse publicity and significant expenses. Although the Company maintains product liability insurance coverage, potential product liability claims are subject to a deductible or could be excluded under the terms of the policy.

The Company’s business is subject to risks associated with seasonality which could adversely affect its cash flow, financial condition, or results of operations.
The Company’s business, historically, has experienced higher sales volume in the second and third quarters of the calendar year, when compared to the first and fourth quarters. The Company is a major supplier of products related to the “back-to-school” season, which occurs principally during the months of May, June, July and August. If this typical seasonal increase in sales of certain portions of the Company’s product line does not materialize, the Company could experience a material adverse effect on its business, financial condition and results of operations.

To compete successfully, the Company must develop and commercialize a continuing stream of innovative new products that create consumer demand.
The Company’s long-term success in the current competitive environment depends on its ability to develop and commercialize a continuing stream of innovative new products that create and maintain consumer demand. The Company also faces the risk that its competitors will introduce innovative new products that compete with the Company’s products. The Company’s strategy includes increased investment in new product development and increased focus on innovation. There are, nevertheless, numerous uncertainties inherent in successfully developing and commercializing innovative new products on a continuing basis, and new product launches may not provide expected growth results.

8

 
The Company is subject to environmental regulation and environmental risks.
The Company is subject to national, state, provincial and/or local environmental laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal and management of, certain materials and waste. These environmental laws and regulations also impose liability for the costs of investigating and cleaning up sites, and certain damages resulting from present and past spills, disposals, or other releases of hazardous substances or materials. Environmental laws and regulations can be complex and may change often. Capital and operating expenses required to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties. In addition, environmental laws and regulations, such as the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, in the United States impose liability on several grounds for the investigation and cleanup of contaminated soil, ground water and buildings and for damages to natural resources on a wide range of properties. For example, contamination at properties formerly owned or operated by the Company, as well as at properties it will own and operate, and properties to which hazardous substances were sent by the Company, may result in liability for the Company under environmental laws and regulations. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future could have a material adverse effect on the Company’s financial condition or results of operations. Refer to Note 16 – Sale of Property - of the Notes to Consolidated Financial Statements for further discussion on the environmental costs related to the sale of property by the Company.
 
Item 1B. Unresolved Staff Comments

Not applicable to smaller reporting companies.

Item 2.  Properties
The Company 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 215,000 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 facility owned by the Company in Solingen, Germany. The Company also leases office space in Hong Kong and 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 and may encounter other contingencies, which may include 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.

Item 4.  Mine Safety Disclosures
Not Applicable
 
9

 
PART II
Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's Common Stock is traded on the NYSE Amex under the symbol "ACU". The following table sets forth the high and low sale prices on the NYSE Amex for the Common Stock for the periods indicated:

 
Year Ended December 31, 2011
 
High
   
Low
   
Dividends
Declared
 
Fourth Quarter
  $ 11.02     $ 8.52     $ .07  
Third Quarter
    10.45       9.00       .07  
Second Quarter
    9.95       9.05       .06  
First Quarter
    10.95       8.51       .06  
                         
 
Year Ended December 31, 2010
                       
Fourth Quarter
  $ 10.64     $ 9.40     $ .06  
Third Quarter
    11.00       9.62       .06  
Second Quarter
    13.04       10.21       .05  
First Quarter
    11.73       8.55       .05  

As of March 2, 2012 there were approximately 2,065 holders of record of the Company's Common Stock.

 
Performance Graph
 
The graph below compares the yearly cumulative total shareholder return on the Company’s Common Stock with the yearly cumulative total return of the following for the period 2007 to 2011: (a) the NYSE Amex Index and (b) a peer group of companies that, like the Company, (i) are currently listed on the NYSE Amex, and (ii) have a market capitalization of $30 million to $35 million.
 
The Company does not believe that it can reasonably identify a peer group of companies, on an industry or line-of-business basis, for the purpose of developing a comparative performance index.  While the Company is aware that some other publicly-traded companies market products in the Company’s line-of-business, none of these other companies provide most or all of the products offered by the Company, and many offer products or services not offered by the Company.  Moreover, some of these other companies that engage in the Company’s line-of-business do so through divisions or subsidiaries that are not publicly-traded.  Furthermore, many of these other companies are substantially more highly capitalized than the Company.  For these reasons, any such comparison would not, in the opinion of the Company, provide a meaningful index of comparative performance.
 
The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, the possible future performance of the Company’s Common Stock.
 
10

 
GRAPHIC
 
Issuer Purchases of Equity Securities
 
On November 22, 2010, the Company announced a Common Stock Repurchase program of 200,000 shares.  The program does not have an expiration date. During the twelve months ended December 31, 2011, the Company repurchased 13,810 shares of its Common Stock at an average price of $9.68, all of which were purchased under a previously announced program. As of December 31, 2011, there were 186,190 shares that may be purchased under the repurchase program announced in 2010.
 
Set forth in the table below is certain information regarding purchases of Common Stock by the Company during the quarter ended December 31, 2011.
 
Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Yet be Purchased Under these Plans or Programs
 
October 1 - 31
    0     $ -       -       190,000  
November 1 - 30
    1,200     $ 9.50       1,200       188,800  
December 1 - 31
    2,610     $ 9.63       2,610       186,190  
 
11

 
Equity Compensation Plan Information
 
The following table sets forth information regarding compensation payable under the Company’s equity compensation plans (the Non-Salaried Director Stock Option Plan and the Employee Stock Option Plan) in effect as of December 31, 2011.  The Company’s shareholders have approved each equity compensation plan.
 
Plan Category
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for future issuance under equity compensation plans, (excluding securities reflected in
column (a))
(c)
Equity compensation plans approved by security holders
943,000
$10.84
107,438
Equity compensation plans not approved by security holders
-0-
-0-
-0-
Total
943,000
$10.84
107,438

 
Item 6.  Selected Financial Data
                             
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
 
(All figures in thousands except per share data)
                             
                               
   
2011
   
2010
   
2009
   
2008
   
2007
 
Net sales
  $ 73,302     $ 63,149     $ 59,149     $ 68,719     $ 63,173  
Net income
  $ 2,811     $ 2,573     $ 2,842     $ 4,467     $ 4,022  
Total assets
  $ 55,222     $ 49,581     $ 42,309     $ 45,424     $ 42,222  
Long-term debt, less current portion
  $ 17,568     $ 13,522     $ 9,154     $ 11,749     $ 10,187  
Net income
                                       
   Per share (Basic)
  $ 0.91     $ 0.82     $ 0.86     $ 1.28     $ 1.14  
   Per share (Diluted)
  $ 0.91     $ 0.81     $ 0.85     $ 1.24     $ 1.09  
Dividends per share
  $ 0.26     $ 0.22     $ 0.20     $ 0.18     $ 0.16  
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information
The Company may from time to time make written or oral “forward-looking statements” including statements contained in this report and in other communications by the Company, which are made in good faith pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements include statements of the Company’s plans, objectives, expectations, estimates and intentions, which are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, in addition to others not listed, could cause the Company’s actual results to differ materially from those expressed in forward looking statements: the strength of the domestic and local economies in which the Company conducts operations, the impact of uncertainties in global economic conditions, changes in client needs and consumer spending habits, the impact of competition and technological change on the Company, the Company’s ability to manage its growth effectively, including its ability to successfully integrate any business which it might acquire, and currency fluctuations.  All forward-looking statements in this report are based upon information available to the Company on the date of this report.  The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law.

12

 
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 the Notes to Consolidated Financial Statements. 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 and 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 its 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.  Although the Company’s management has used available information to make judgments on the appropriate estimates to account 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. However, historically, actual results have not been materially different than original estimates:

Revenue Recognition.  The Company recognizes revenue from the sales of its products when ownership transfers to the customers, which occurs either at the time of shipment or upon delivery based upon contractual terms with the customer.  The Company recognizes customer program costs, including rebates, cooperative advertising, slotting fees and other sales related discounts, as a reduction to sales.

Allowance for doubtful accounts.  The Company provides an allowance for doubtful accounts based upon a review of outstanding accounts receivable, historical collection information and existing economic conditions. The allowance for doubtful accounts represents estimated uncollectible accounts receivables associated with potential customer defaults on contractual obligations, usually due to potential insolvencies. The allowance includes amounts for certain customers where a risk of default has been specifically identified. In addition, the allowance includes a provision for customer defaults based on historical experience. The Company actively monitors its accounts receivable balances and its historical experience of annual accounts receivable write offs has been negligible.
 
Customer Rebates.  Customer rebates and incentives are a common practice in the office products industry. We incur customer rebate costs to obtain favorable product placement, to promote sell-through of products and to maintain competitive pricing. Customer rebate costs and incentives, including volume rebates, promotional funds, catalog allowances and slotting fees, are accounted for as a reduction to gross sales. These costs are recorded at the time of sale and are based on individual customer contracts. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when appropriate.
 
Obsolete and Slow Moving Inventory.  Inventories are stated at the lower of cost, determined on the first-in, first-out method, or market. An allowance is established to adjust the cost of inventory to its net realizable value. Inventory allowances are recorded for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as discontinued products. These estimates could vary significantly from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from expectations.
 
 Income Taxes. Deferred income tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce deferred income tax assets to an amount that is more likely than not to be realized.
 
13

 
Intangible Assets.  Intangible assets with finite useful lives are recorded at cost upon acquisition and amortized over the term of the related contract, if any, or useful life, as applicable.  Intangible assets held by the Company with finite useful lives include patents and trademarks.  The weighted average amortization period for intangible assets at December 31, 2011 was 14 years.  The Company periodically reviews the values recorded for intangible assets to assess recoverability from future operations whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. At December 31, 2011 and 2010, the Company assessed the recoverability of its long-lived assets and believed that there were no events or circumstances present that would that would require a test of recoverability on those assets. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives. The net book value of the Company’s intangible assets increased to $3,284,663 as of December 31, 2011, from $1,866,231 as of December 31, 2010 primarily as a result of the Pac-Kit acquisition. Refer to Note 17 – Business Combinations - in the Notes to Consolidated Financial Statements in this report for a more detailed discussion.
 
Pension Obligation. The pension benefit obligation is based on various assumptions used by third-party actuaries in calculating this amount.  These assumptions include discount rates, expected return on plan assets, mortality rates and other factors.  Revisions in assumptions and actual results that differ from the assumptions affect future expenses, cash funding requirements and obligations.  Our funding policy is to fund the Plan in accordance with applicable requirements of the Internal Revenue Code and regulations.
 
These assumptions are reviewed annually and updated as required. The Company has a frozen defined benefit pension plan.   Two assumptions, the discount rate and the expected return on plan assets, are important elements of expense and liability measurement.
 
We determine the discount rate used to measure plan liabilities as of the December 31 measurement date. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. In estimating this rate, we look at rates of return on fixed-income investments of similar duration to the liabilities in the plan that receive high, investment grade ratings by recognized ratings agencies. Using these methodologies, we determined a discount rate of 3.99% to be appropriate as of December 31, 2011, which is a decrease of 0.43 percentage points from the rate used as of December 31, 2010. An increase of 1.0% in the discount rate would have decreased our plan liabilities as of December 31, 2011 by $0.1 million.
 
The expected long-term rate of return on assets considers the Company’s historical results and projected returns for similar allocations among asset classes. In accordance with generally accepted accounting principles, actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligation in future periods. For the U.S. pension plan, our assumption for the expected return on plan assets was 8.25% for 2011. For more information concerning these costs and obligations, see the discussion in Note 6 – Pension and Profit Sharing, in the Notes to the Company’s Consolidated Financial Statements.
 
Accounting for Stock-Based Compensation.  Stock based compensation cost is measured at the grant date fair value of the award and is recognized as expense over the requisite service period.  The Company uses the Black-Scholes option - pricing model to determine fair value of the awards, which involves certain subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock price over the expected term (“volatility”) and the number of options for which  vesting requirements will not be completed (“forfeitures”). Changes in the subjective assumptions can materially affect estimates of fair value stock-based compensation, and the related amount recognized on the consolidated statements of operations. Refer to Note 11 - Stock Option Plans - in the Notes to Consolidated Financial Statements in this report for a more detailed discussion.

Results of Operations 2011 Compared with 2010

On February 28, 2011, the Company purchased substantially all of the assets of The Pac-Kit Safety Equipment Company, a leading manufacturer of first aid kits for the industrial, safety, transportation and marine markets. The Company purchased the accounts receivable, inventory, equipment and intangible assets of Pac-Kit for approximately $3.4 million using funds borrowed under its revolving loan agreement with Wells Fargo. The Pac-Kit line of products consist of high quality, unitized first aid kits sold to a broad range of customers and distributors.
 
14

 
The Company recorded approximately $1.9 million for assets acquired including accounts receivable, inventory and fixed assets, as well as approximately $1.5 million for intangible assets, consisting of customer relationships and the Pac-Kit trade name. In 2011, the Company incurred approximately $125,000 of integration and transaction costs associated with the acquisition. These costs were recorded in selling, general and administrative expenses.
 
Net Sales
 
In 2011, sales increased by $10,152,931 or 16% (14% in constant currency) to $73,301,864 compared to $63,148,933 in 2010.  The U.S. segment sales increased by $9,480,000 or 20% in 2011 compared to 2010.  Sales in Canada increased by $794,000 or 10% (5% in local currency) in 2011 compared to 2010.  European sales decreased by $120,000 or 2% in U.S. dollars (8% in local currency) in 2011 compared to 2010.  The decline in European net sales is primarily related to the timing of shipments to mass market customers.
 
The increase in net sales for the twelve months ended December 31, 2011 in the U.S. segment was primarily due to the additional sales resulting from the acquisition of the Pac-Kit Company of approximately $5.2 million, strong sales of first aid products and market share gains in the mass market channel.  The increase in net sales in Canada for the twelve months ended December 31, 2011 was primarily due to the introduction of new products including the Company’s new line of AirShoc lawn and garden tools, sold to a major retail hardware chain.

Gross Profit
 
Gross profit was 36% of net sales in 2011 compared to 37% in  2010.  The anticipated decline in gross profit as a percentage of sales for 2011 was primarily related to the addition of the Pac-Kit line of products, which in general, yield a lower gross profit than the Company’s historical average gross margins. The sales of Pac-Kit products reduced the overall gross profit percentage by approximately 80 basis points.

Selling, General and Administrative
 
Selling, general and administrative expenses were $22,040,000 in 2011 compared with $20,385,000 in 2010, an increase of $1,655,000 or 8%.  SG&A expenses were 30% of net sales in 2011 compared to 32% in 2010.  The increase in SG&A expenses was primarily the result of incremental expenses from the addition of Pac-Kit, higher delivery costs and sales commissions as a result of higher sales as well as higher personnel related expenses.
 
Operating Income
 
Operating income was $4,285,000 in 2011, compared with $2,980,000 in 2010, an increase of $1,305,000.  Operating income in the U.S. and Canadian segments increased by approximately $825,000 and $117,000, respectively, principally due to higher sales. The European operating loss declined by $363,000 principally due to cost cutting measures initiated in 2011 and improvement in the gross margin.
 
Interest Expense, Net
 
Net interest expense for 2011 was $255,000, compared with $142,000 for 2010, an increase of $113,000. The increase in interest expense, net for 2011, was primarily the result of higher average borrowings during 2011 under the Company’s bank revolving credit facility compared to 2010. The higher average borrowings were principally related to the acquisition of Pac-Kit.
 
Other Expense, Net
 
Net other expense was $4,000 in 2011 compared to net other income of $72,000 in 2010.  The decrease in other income, net for 2011, was primarily related to a $100,000 benefit recorded for the change in estimated costs associated with the remediation of the Bridgeport, CT property in 2010.  There was no such gain recorded in 2011.
 
15

 
Income Tax
 
The effective tax rate in 2011 was 30%, compared to 12% in 2010.  The effective tax rate in 2010 included a tax credit of $360,000 related to land that the Company donated to the City of Bridgeport.  Also, in 2011, the Company had a higher proportion of earnings in the United States, compared to 2010, which has a higher tax rate than the countries in which our subsidiaries operate. Excluding the effect of the tax credit in 2010, the effective tax rate would have been 24%.
 
Off-Balance Sheet Transactions

The Company did not engage in any off-balance sheet transactions during 2011.
 
Liquidity and Capital Resources
 
During 2011, working capital increased by approximately $4.4 million compared to December 31, 2011.  Inventory increased by approximately $2.2 million.  The Company purchased approximately $1.2 million of inventory as part of the acquisition of Pac-Kit and spent an additional $1.0 million on inventory in anticipation of new business in 2012. Inventory turnover, calculated using a twelve month average inventory balance, decreased to 2.0 from 2.1 at December 31, 2010.
 
Receivables increased approximately $600,000 at December 31, 2011 compared to December 31, 2010. The average number of days sales outstanding in accounts receivable was 65 days in both 2011 and 2010.
 
The Company's working capital, current ratio and long-term debt to equity ratio follow:
 
    December 31,  
   
2011
   
2010
 
             
Working Capital
  $ 37,818,344     $ 33,409,776  
Current Ratio
    5.34       4.62  
Long-Term Debt to Equity Ratio
    63.3%       53.3%  
 
During 2011, total debt outstanding under the Company’s revolving credit facility (referred to below) increased by approximately $4.0 million compared to total debt at December 31, 2010. The increase in debt outstanding is primarily related to the financing of the acquisition of substantially all of the assets of The Pac-Kit Company for $3.4 million. As of December 31, 2011, $17,568,484 was outstanding and $2,431,516 was available for borrowing under the revolving credit facility.
 
On February 23, 2011, the Company modified its revolving loan agreement with Wells Fargo Bank; the amendments include an increase in the maximum borrowing amount from $18 million to $20 million; and an extension of the maturity date of the loan from February 1, 2012 to March 31, 2013.  Funds borrowed under the Modified Loan Agreement may be used for working capital, general operating expenses, share repurchases and certain other purposes.
 
Under the provisions of the modified loan agreement, the Company, among other things, is restricted with respect to outside borrowings, investments and mergers.  Further, the modified loan agreement continues to require the Company to maintain specific amounts of tangible net worth, a specified debt service coverage ratio and a fixed charge coverage ratio. This modified loan agreement continues to be secured by the assets of the U.S. parent company. This modification did not change the permissible use of funds or the quantitative covenants that the Company is required to comply with. The Company was in compliance with all financial covenants under the revolving loan agreement as of and through December 31, 2011, and believes it will be able to continue to comply with these covenants under the modified loan agreement for the remainder of the term of the credit facility.

Capital expenditures during 2011 and 2010 were $940,713 and $937,083, respectively, which were, in part, financed with borrowings under the Company’s revolving credit facility.  Capital expenditures in 2012 are not expected to differ materially from recent years.

The Company believes that cash generated from operating activities, together with funds available under its revolving credit facility, are expected, under current conditions, to be sufficient to finance the Company’s planned operations for the next twelve months.
16

 
Recently Issued Accounting Standards
 
In June 2011 the Financial Accounting Standards Board (“FASB”) issued an update, Accounting Standards Update (“ASU”) No. 2011-5, to existing standards on comprehensive income (Accounting Standards Codification (“ASC”) Topic 220). ASU No. 2011-5 was issued to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-5 is effective for annual and interim periods ending beginning after December 15, 2011, and early adoption is permitted. In December 2011 the FASB issued an update to ASU No. 2011-5, ASU No. 2011-12, which was issued to defer the effective date for amendments to the reclassifications of items out of accumulated other comprehensive income in ASU No. 2011-05. The adoption of this guidance affects the presentation of certain elements of the Company’s financial statements, but management believes that these changes in presentation would not be likely to have a material impact on our financial statements.
 
Item 7A. Quantitative and Qualitative Disclosure about Market Risk

Not applicable to smaller reporting companies.

Item 8.  Financial Statements and Supplementary Data
 
Acme United Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
             
             
   
For the years ended
December 31,
 
   
2011
   
2010
 
             
Net sales
  $ 73,301,864     $ 63,148,933  
                 
Cost of goods sold
    46,976,944       39,783,509  
                 
Gross profit
    26,324,920       23,365,424  
                 
Selling, general and administrative expenses
    22,039,956       20,385,268  
Operating income
    4,284,964       2,980,156  
                 
Non operating items:
               
Interest:
               
Interest expense
    (404,326 )     (301,304 )
Interest income
    149,761       159,555  
Interest expense, net
    (254,565 )     (141,749 )
Other (expense) income
    (4,379 )     72,440  
Total other (expense) income , net
    (258,944 )     (69,309 )
Income before income tax expense
    4,026,020       2,910,847  
Income tax expense
    1,214,827       337,883  
Net income
  $ 2,811,193     $ 2,572,964  
                 
Earnings per share:
               
Basic
  $ 0.91     $ 0.82  
Diluted
  $ 0.91     $ 0.81  
                 
                 
See accompanying Notes to Consolidated Financial Statements.
 
 
17

 
Acme United Corporation and Subsidiaries
           
CONSOLIDATED BALANCE SHEETS
           
   
December 31,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 7,853,343     $ 6,601,416  
Accounts receivable, less allowance
    12,904,168       12,330,665  
Inventories
    24,494,992       22,292,909  
Deferred income taxes
    281,573       206,732  
Prepaid expenses and other current assets
    988,288       1,195,613  
Total current assets
    46,522,364       42,627,335  
                 
Property, plant and equipment:
               
Land
    288,313       160,405  
Buildings
    2,276,662       2,298,712  
Machinery and equipment
    7,657,373       6,859,056  
Total property, plant and equipment
    10,222,348       9,318,173  
Less: accumulated depreciation
    7,716,224       7,102,419  
Net plant, property and equipment
    2,506,124       2,215,754  
Note receivable
    1,765,831       1,839,262  
Intangible assets, less accumulated amortization
    3,284,663       1,866,231  
Deferred income taxes
    1,053,926       943,606  
Other assets
    88,828       88,828  
Total assets
  $ 55,221,736     $ 49,581,018  
                 
LIABILITIES
               
Current liabilities:
               
Accounts payable
  $ 4,935,495     $ 5,678,910  
Other accrued liabilities
    3,768,525       3,538,649  
Total current liabilities
    8,704,020       9,217,559  
Long-term debt
    17,568,484       13,522,000  
Other accrued liabilities - non current
    1,174,305       1,489,648  
Total liabilities
    27,446,809       24,229,207  
                 
STOCKHOLDERS' EQUITY
               
Common stock, par value $2.50: authorized 8,000,000
               
shares; issued - 4,454,024 shares in 2011 and  4,374,574 shares in 2010, including treasury stock
    11,134,303       10,935,676  
Treasury stock, at cost, 1,319,047 shares in 2011
               
and 1,305,237 shares in 2010
    (11,844,354 )     (11,710,616 )
Additional paid-in capital
    5,120,277       4,603,194  
Accumulated other comprehensive loss
    (1,038,319 )     (875,157 )
Retained earnings
    24,403,020       22,398,714  
Total stockholders' equity
    27,774,927       25,351,811  
Total liabilities and stockholders' equity
  $ 55,221,736     $ 49,581,018  
                 
See accompanying Notes to Consolidated Financial Statements.
 
 
18

  
Acme United Corporation and Subsidiaries
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
                                           
                                           
   
Outstanding Shares of Common Stock
   
Common Stock
   
Treasury Stock
   
Additional Paid-In Capital
   
Accumulated Other Comprehensive Income (Loss)
   
Retained Earnings
   
Total
 
Balances, December 31, 2009
    3,157,859     $ 10,782,555     $ (10,144,325 )   $ 4,208,112     $ (812,970 )   $ 20,507,878     $ 24,541,250  
Net income
                                            2,572,964       2,572,964  
Translation adjustment
                                    (40,237 )             (40,237 )
Change in pension plan
                                                       
net prior service credit and
                                                       
actuarial losses, net of tax
                                                       
of $35,049
                                    (21,950 )             (21,950 )
Comprehensive income
                                                    2,510,777  
Stock compensation expense
                            385,732                       385,732  
Distribution to shareholders
                                            (682,128 )     (682,128 )
Issuance of common stock
    61,550       153,121               9,350                       162,471  
Purchase of treasury stock
    (150,072 )             (1,566,290 )                             (1,566,290 )
Balances, December 31, 2010
    3,069,337       10,935,676       (11,710,616 )     4,603,194       (875,157 )     22,398,714     $ 25,351,811  
Net income
                                            2,811,193       2,811,193  
Translation adjustment
                                    (229,853 )             (229,853 )
Change in pension plan
                                                       
net prior service credit and
                                                       
actuarial losses, net of tax
                                                       
of $25,094
                                    66,691               66,691  
Comprehensive income
                                                    2,648,031  
Stock compensation expense
                            428,439                       428,439  
Tax benefit from exercise of
                                                       
employee stock options
                            24,034                       24,034  
Distribution to shareholders
                                            (806,887 )     (806,887 )
Issuance of common stock
    79,450       198,627               64,610                       263,237  
Purchase of treasury stock
    (13,810 )             (133,738 )                             (133,738 )
Balances, December 31, 2011
    3,134,977       11,134,303       (11,844,354 )     5,120,277       (1,038,319 )     24,403,020     $ 27,774,927  
                                                         
See accompanying Notes to Consolidated Financial Statements.
                                 
 
19

 
Acme United Corporation and Subsidiaries
           
CONSOLIDATED STATEMENTS OF CASH FLOWS
           
             
   
For the years ended December 31,
 
   
2011
   
2010
 
Operating activities:
           
Net income
  $ 2,811,193     $ 2,572,964  
Adjustments to reconcile net income to net
               
cash (used) provided by operating activities
               
Depreciation
    795,452       755,334  
Amortization
    183,385       114,822  
Stock compensation expense
    428,439       385,732  
Deferred income taxes
    (185,162 )     (348,713 )
Change in estimated cost of environmental remediation
    -       (100,000 )
Changes in operating assets and liabilities
               
Accounts receivable
    (76,021 )     (1,635,185 )
Inventories
    (1,127,005 )     (5,015,837 )
Prepaid expenses and other current assets
    271,550       (137,266 )
Accounts payable
    (1,031,524 )     2,208,634  
Other accrued liabilities
    (7,239 )     64,430  
Total adjustments
    (748,125 )     (3,708,048 )
Net cash provided (used) by operating activities
    2,063,068       (1,135,084 )
Investing activities:
               
Purchase of property, plant and equipment
    (940,713 )     (937,083 )
Purchase of patents and trademarks
    (101,853 )     (117,405 )
Acquisition of Pac-Kit Safety Equipment Company
    (3,126,986 )     -  
Net cash used by investing activities
    (4,169,552 )     (1,054,488 )
Financing activities:
               
Net borrowings of long-term debt
    4,046,484       4,368,000  
Distributions to shareholders
    (771,582 )     (655,832 )
Purchase of treasury stock
    (133,738 )     (1,566,290 )
Issuance of common stock
    287,269       162,475  
Net cash provided by financing activities
    3,428,433       2,308,353  
Effect of exchange rate changes
    (70,022 )     (36,429 )
Net increase in cash and cash equivalents
    1,251,927       82,351  
Cash and cash equivalents at beginning of year
    6,601,416       6,519,065  
Cash and cash equivalents at end of year
  $ 7,853,343     $ 6,601,416  
                 
Supplemental cash flow information
               
          Cash paid for income taxes
  $ 1,293,036     $ 464,576  
          Cash paid for interest expense
  $ 390,418     $ 278,165  
                 
See accompanying Notes to Consolidated Financial Statements.
               
 
20

 
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 (including Asian operations), Canada and Germany.  Principal products across all segments are scissors, shears, knives, rulers, pencil sharpeners, 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, industrial distributors, wholesale florists, mass market retailers and hardware chains.

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 by the Company.  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 operating results.  Foreign currency transaction losses, which are included in other income, net, were $25,732 in 2011 and $58,992 in 2010.

Cash Equivalents - Investments with an original maturity of three months or less, as well as time deposits and certificates of deposit that are readily redeemable at the date of purchase, are considered cash equivalents.  Included with the cash and equivalents are Certificates of Deposit totaling approximately $1.0 million.

Accounts Receivable - Accounts receivable are shown less an allowance for doubtful accounts of $129,242 in 2011 and $57,125 in 2010.

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.

Intangible Assets– Intangible assets with finite useful lives are recorded at cost upon acquisition, and amortized over the term of the related contract or useful life, as applicable.  Intangible assets held by the Company with finite useful lives include patents and trademarks.  Patents and trademarks are amortized over their estimated useful lives.  The weighted average amortization period for intangible assets at December 31, 2011 was 14 years.  The Company periodically reviews the values recorded for intangible assets to assess recoverability from future operations whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.  At December 31, 2011 and 2010, the Company assessed the recoverability of its long-lived assets and believed that there were no events or circumstances present that would that would require a test of recoverability on those assets. As a result, there was no impairment of the carrying amounts of such assets and no reduction in their estimated useful lives.
 
Deferred Income Taxes - Deferred income taxes are provided for the differences between the financial statement and tax bases of assets and liabilities, and on operating loss carryovers, using tax rates in effect in years in which the differences are expected to reverse.

21

 
Revenue Recognition – The Company recognizes revenue from the sales of its products when ownership transfers to the customers, which occurs either at the time of shipment or upon delivery based upon contractual terms with the customer.  The Company recognizes customer program costs, including rebates, cooperative advertising, slotting fees and other sales related discounts, as a reduction to sales.
 
Research and Development – Research and development costs ($535,500 in 2011 and $486,778 in 2010) are expensed as incurred.

Shipping Costs – The costs of shipping product to our customers ($3,084,925 in 2011 and $2,656,653 in 2010) are included in selling, general and administrative expenses.
 
Advertising Costs – The Company expenses the production costs of advertising the first time that the related advertising takes place.  Advertising costs ($1,239,693 in 2011 and $1,039,302 in 2010) are included in selling, general and administrative expenses.

Subsequent Events - The Company has evaluated events and transactions subsequent to December 31, 2011 through the date the consolidated financial statements were included in this Form 10-K and filed with the SEC.
 
Concentration – The Company performs ongoing credit evaluations of its customers and generally does not require collateral for the extension of credit. Allowances for credit losses are provided and have been within management's expectations.  In 2011, with respect to concentration risk related to accounts receivable, the Company had one customer that accounted for greater than 10% of total net receivables. In 2011 and 2010, the Company had one customer that individually exceeded 10% of consolidated net sales. Net sales to this customer amounted to approximately 20% in 2011 and 21% in 2010.

Recently Issued Accounting Standards
 
In June 2011 the Financial Accounting Standards Board (“FASB”) issued an update, Accounting Standards Update (“ASU”) No. 2011-5, to existing standards on comprehensive income (Accounting Standards Codification (“ASC”) Topic 220). ASU No. 2011-5 was issued to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. ASU No. 2011-5 is effective for annual and interim periods ending beginning after December 15, 2011, and early adoption is permitted. In December 2011 the FASB issued an update to ASU No. 2011-5, ASU No. 2011-12, which was issued to defer the effective date for amendments to the reclassifications of items out of accumulated other comprehensive income in ASU No. 2011-05. The adoption of this guidance affects the presentation of certain elements of the Company’s financial statements, but management believes that these changes in presentation would not be likely to have a material impact on our financial statements.
 
3.  Inventories
 
Inventories consisted of:
 
2011
   
2010
 
Finished goods
  $ 22,887,381     $ 21,108,954  
Work in process
    44,564       171,673  
Materials and supplies
    1,563,047       1,012,282  
    $ 24,494,992     $ 22,292,909  
 
Inventories are stated net of valuation allowances for slow moving and obsolete inventory of $551,827 as of December 31, 2011 and $470,749 as of December 31, 2010.

22

 
4.  Intangible Assets
 
Intangible assets consisted of:
 
2011
   
2010
 
Patents
  $ 1,885,888     $ 1,794,754  
Trademarks
    565,273       554,590  
Pac-Kit Tradename, Customer List
    1,500,000       -  
      3,951,161       2,349,344  
Accumulated amortization
    666,498       483,113  
    $ 3,284,663     $ 1,866,231  
 
Amortization expense for patents and trademarks for the years ended December 31, 2011, and 2010 were $183,385 and $114,822, respectively.   The estimated aggregate amortization expense for each of the next five succeeding years, calculated on a similar basis, is as follows:  2012 - $195,423; 2013 - $195,283; 2014 - $182,053; 2015 - $169,345; and 2016 - $167,521.

5.  Other Accrued Liabilities
 
Other current and long-term accrued liabilities consisted of:
 
   
2011
   
2010
 
Customer rebates
  $ 2,747,352     $ 2,436,993  
Remediation liability
    239,016       343,539  
Pension liability
    1,012,786       1,164,217  
Other
    943,679       1,083,548  
    $ 4,942,832     $ 5,028,297  
 
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 of this pension plan 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 that terminated all future benefit accruals as of February 1, 1996, without terminating the pension plan.

The Company’s funding policy with respect to its qualified plan is to contribute at least the minimum amount required by applicable laws and regulations. In 2011, the Company contributed $240,000 to the plan and expects to contribute approximately $230,000 during 2012.

The plan asset weighted average allocation at December 31, 2011 and December 31, 2010, by asset category, were as follows:
 
Asset Category
2011
2010
Equity Securities
  68%
  68%
Fixed Income Securities
  29%
  30%
Other Securities / Investments
    3%
    2%
Total
100%
100%
 
The Company’s investment policy for the pension plan is to minimize risk by balancing investments between equity securities and fixed income securities, utilizing a weighted average approach of 65% equity securities, 30% fixed income securities, and 5% cash investments.  Plan funds are invested in long-term obligations with a history of moderate to low risk.

As of each December 31, 2011 and 2010, equity securities in the pension plan included 10,000 shares of the Company's Common Stock, having a market value of $95,000 and $95,200, respectively.

23

 
The pension plan asset information included below is presented at fair value. ASC 820 establishes a framework for measuring fair value and requires disclosures about assets and liabilities measured at fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

·     
Level 1 – Inputs to the valuation methodology based on unadjusted quoted market prices in active markets that are accessible at the measurement date.
·     
Level 2 – Inputs to the valuation methodology that include quoted market prices that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly.
·     
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table presents the pension plan assets by level within the fair value hierarchy as of December 31, 2011.
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Money Market Fund
  $ 32,819     $ -     $ -     $ 32,819  
Acme United Common Stock
    95,000       -       -       95,000  
Equity Common and Collected Funds
    -       757,371       -       757,371  
Fixed Income Common and Collected Funds     -       361,544       -       361,544  
Total
  $ 127,819     $ 1,118,915     $ -     $ 1,246,734  
 
 Other disclosures related to the pension plan follow:
           
             
   
2011
   
2010
 
Assumptions used to determine benefit obligation:
           
Discount rate
    3.99%       4.42%  
Changes in benefit obligation:
               
Benefit obligation at beginning of year
  $ (2,479,645 )   $ (2,555,196 )
Interest cost
    (99,122 )     (122,416 )
Service cost
    (19,000 )     (25,000 )
Actuarial gain
    22,235       (117,417 )
Benefits and plan expenses paid
    316,010       340,384  
Benefit obligation at end of year
    (2,259,522 )     (2,479,645 )
                 
Changes in plan assets:
               
Fair value of plan assets at beginning of year
    1,315,428       1,246,541  
Actual return on plan assets
    7,665       144,274  
Employer contribution
    239,653       264,997  
Benefits and plan expenses paid
    (316,010 )     (340,384 )
Fair value of plan assets at end of year
    1,246,736       1,315,428  
Funded status
  $ (1,012,786 )   $ (1,164,217 )
 
   
2011
   
2010
 
Assumptions used to determine net periodic benefit cost:
           
  Discount rate
    4.42%       5.06%  
  Expected return on plan assets
    8.25%       8.25%  
Components of net benefit expense:
               
Interest cost
  $ 99,122     $ 122,416  
Service cost
    19,000       25,000  
Expected return on plan assets
    (95,470 )     (95,422 )
Amortization of prior service costs
    9,154       9,154  
Amortization of actuarial loss
    124,536       154,555  
Net periodic benefit cost
  $ 156,342     $ 215,703  
 
24

 
The Company 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 equity securities and fixed income securities are preserved consistent with the widely-accepted capital market principle that assets with higher volatility generate higher returns over the long run.   Our expected 8.25% long-term rate of return on plan assets is determined based on long-term historical performance of plan assets, current asset allocation and projected long-term rates of return.
 
The following table discloses the change recorded in other comprehensive income related to benefit costs:
 
   
2011
   
2010
 
             
Balance at beginning of the year
  $ 1,830,465     $ 1,925,609  
Change in net loss
    65,570       68,565  
Amortization of actuarial loss
    (124,536 )     (154,555 )
Amortization of prior service cost
    (9,154 )     (9,154 )
     Change recognized in other comprehensive income
    (68,120 )     (95,144 )
Total recognized in other comprehensive income
  $ 1,762,345     $ 1,830,465  
 
Amounts recognized in Accumulated Other Comprehensive Income:
           
Net actuarial loss
  $ 1,723,016     $ 1,781,982  
Prior service cost
    39,329       48,483  
Total
  $ 1,762,345     $ 1,830,465  
 
In 2012, net periodic benefit cost will include approximately $154,000 of net actuarial loss and $9,000 of prior service cost.
 
The following benefits are expected to be paid:
2012
  $ 271,000  
2013
    255,000  
2014
    247,000  
2015
    230,000  
2016
    213,000  
Years 2017 - 2021
    814,000  

The Company also has a qualified, profit sharing plan covering substantially all of its United States employees. Annual Company contributions to this profit sharing plan are determined by the Company’s Compensation Committee.  For the years ended December 31, 2011 and 2010, the Company contributed 50% of employee’s contributions, up to the first 6% of salary contributed by each employee.  Total contribution expense under this profit sharing plan was $95,088 in 2011 and $114,085 in 2010.

25

 
7.  Income Taxes
           
The amounts of income tax expense (benefit) reflected in operations is as follows:
 
   
2011
   
2010
 
Current:
           
Federal
  $ 756,126     $ 103,040  
State
    88,741       11,312  
Foreign
    532,827       594,110  
      1,377,694       708,462  
                 
Deferred:
               
Federal
    (142,281 )     (8,160 )
State
    (18,802 )     (356,950 )
Foreign
    (1,784 )     (5,469 )
      (162,867 )     (370,579 )
    $ 1,214,827     $ 337,883  

The current state tax provision was 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 before income taxes follows:
 
   
2011
   
2010
 
United States
  $ 1,901,905     $ 12,481  
Foreign
    2,124,115       2,898,366  
    $ 4,026,020     $ 2,910,847  
 
As discussed in Note 10 below, for segment reporting, Direct Import sales are included in the United States segment. However, the revenues are earned by our Asian subsidiary and income taxes are paid in Hong Kong.  As such, income of the Asian subsidiary is included in the foreign income before taxes.
 
The following schedule reconciles the amounts of income taxes computed at the United States statutory rates to the actual amounts reported in operations.
 
   
2011
   
2010
 
Federal income
           
taxes at
           
34% statutory rate
  $ 1,368,847     $ 989,688  
State and local
               
taxes, net of
               
federal income
               
tax effect
    46,160       3,322  
Permanent items
    7,149       24,316  
Charitable Donations
    -       (350,672 )
Foreign tax rate difference
    (308,250 )     (383,179 )
Change in deferred income tax
               
valuation allowance
    100,921       54,358  
                 
 Provision for income taxes
  $ 1,214,827     $ 337,833  
 
26

 
The following summarizes deferred income tax assets and liabilities:
 
   
2011
   
2010
 
Deferred income tax liabilities:
           
Plant, property
           
and equipment
  $ 322,604     $ 383,875  
      322,604       383,875  
                 
Deferred income tax assets:
               
Asset valuations
    426,429       372,774  
Contribution carryforward
    296,802       309,818  
Operating loss
               
carryforwards and credits
    2,148,208       2,047,287  
Pension
    467,087       522,903  
Foreign tax credit
    48,847       -  
Other
    418,938       328,718  
      3,806,311       3,581,500  
Net deferred
               
income tax asset before valuation allowance
    3,483,707       3,197,625  
Valuation
               
allowance
    (2,148,208 )     (2,047,287 )
Net deferred
               
 income tax asset
  $ 1,335,499     $ 1,150,338  
 
In 2011, the Company evaluated its tax positions for years which remain subject to examination by major tax jurisdictions, in accordance with the requirements of ASC 740 and as a result concluded no adjustment was necessary. The Company files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company’s evaluation of uncertain tax positions was performed for the tax years ended December 31, 2008 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2011.

In accordance with the Company’s accounting policies, any interest and penalties related to uncertain tax positions are recognized as a component of income tax expense.
 
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.  During 2011, the Company repatriated $650,000 of foreign earnings from its Canadian subsidiary. U.S. income taxes on those repatriated earnings have been partially offset by foreign tax credits. The Company plans to continue to repatriate future earnings of its Canadian subsidiary and will provide for U.S. income taxes accordingly.  Foreign subsidiary earnings of $9,855,053 and $8,616,398 are considered permanently reinvested as of December 31, 2011 and 2010, respectively, and no deferred income taxes have been provided on these foreign earnings.

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, 2011, the Company had tax operating loss carry forwards aggregating $6,952,423, all of which were applicable to Germany, and can be carried forward indefinitely.

27

 
8.  Debt

Long term debt consists of borrowings under the Company’s revolving loan agreement with Wells Fargo Bank. As of December 31, 2011, $17,568,484 was outstanding and $2,431,516 was available for borrowing under the Company’s revolving loan agreement.

Under the revolving loan agreement, the Company is required to maintain specific amounts of tangible net worth, a specified debt service coverage ratio, and a fixed charge coverage ratio.  The Company was in compliance with these financial covenants at December 31, 2011.

On February 23, 2011, the Company modified its revolving loan agreement with Wells Fargo Bank to amend certain provisions of the agreement.  The amendments include an increase in the maximum borrowing amount from $18 million to $20 million and an extension of the maturity date of the loan from February 1, 2012 to March 31, 2013.  The modified loan agreement continues to be secured by the assets of the U.S. parent company. Funds borrowed under the modified loan agreement may be used for working capital, general operating expenses, share repurchases and certain other purposes.
 
 
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 $713,925 and $624,734 in 2011 and 2010. Minimum annual rental commitments under non-cancelable leases with remaining terms of one year or more as of December 31, 2011:  2012 - $712,665; 2013 - $287,141; 2014 - $210,087; 2015 - $159,594; and 2016 - $33,548.

The Company is involved, from time to time, in litigation and other 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 effect on its financial position, results of operations, or liquidity.
 
 
10. Segment Information

The Company reports financial information based on the organizational 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 for the Company’s Asian operations have been aggregated with the results of its United States operations to form one reportable segment called the “United States segment”.  Sales in the United States segment include both domestic sales as well as direct import sales.  Each reportable segment derives its revenue from the sales of cutting devices, measuring instruments and safety products for school, office, home, hardware and industrial use.

Domestic sales orders are filled from the Company’s distribution center in North Carolina. The Company is responsible for the costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products.  Orders filled from the Company’s inventory are generally for less than container-sized lots.

Direct import sales are products sold by the Company’s Asian subsidiary, directly to major U.S. retailers who take ownership of the products in Asia. These sales are completed by delivering product to the customers’ common carriers at the shipping points in Asia. Direct import sales are made in larger quantities than domestic sales, typically full containers. Direct Import Sales represented approximately 15% and 16% of the Company’s total net sales in 2011 and 2010, respectively.
 
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 inter-segment 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. Inter-segment amounts are eliminated to arrive at consolidated financial results.
 
28

 
Financial data by segment:
                       
                         
2011                        
(000's omitted)
 
United States
   
Canada
   
Europe
   
Consolidated
 
Sales to unaffiliated customers
  $ 56,663       8,514       8,125     $ 73,302  
                                 
Operating income (loss)
    3,485       924       (124 )     4,285  
Assets
    43,174       6,033       6,015       55,222  
Additions to property, plant and equipment
    912       26       3       941  
Depreciation and amortization
    857       36       85       978  
                                 
2010                                
                                 
Sales to unaffiliated customers
  $ 47,184     $ 7,720     $ 8,245     $ 63,149  
                                 
Operating income (loss)
    2,660       807       (487 )     2,980  
Assets
    37,683       6,205       5,691       49,581  
Additions to property, plant and equipment
    788       40       110       937  
Depreciation and amortization
    745       52       73       870  

The following is a reconciliation of segment operating income to consolidated income before taxes:
 
   
2011
   
2010
 
Total operating income
  $ 4,285     $ 2,980  
Interest expense, net
    255       142  
Other (expense)  income, net
    (4 )     72  
Consolidated income before taxes
  $ 4,026     $ 2,910  
                 
Net Income
  $ 2,811     $ 2,573  

The table below presents revenue by geographic area. Revenues are attributed to countries based on location of the customer.
 
Revenues
 
2011
   
2010
 
United States
  $ 55,856     $ 46,639  
International:
               
Canada
    8,514       7,720  
Europe
    8,125       8,245  
Other
    807       545  
Total International
  $ 17,446     $ 16,510  
                 
Total Revenues
  $ 73,302     $ 63,149  
 
11.  Stock Option Plans

The Company has two stock option plans: (1) the 2002 Employee Stock Option Plan, as amended (the “Employee Plan”) and (2) the 2005 Non-Salaried Director Stock Option Plan (the “Director Plan”).
 
The Employee Plan, which became effective February 26, 2002, 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 Plan. Options granted under the Employee Plan after July 1, 2006 vest 25% one day after the first anniversary of the grant date and 25% one day after each of the next three anniversaries. Options granted prior to July 1, 2006 vest 25% one day after the date of grant and 25% one day after each of the next three anniversaries.  As of December 31, 2011, the number of shares available for grant under the Employee Plan was 66,938.  Under the terms of the Employee Plan, no option may be granted under that plan after the tenth anniversary of the adoption of the plan.

29

 
The Director Plan, as amended, provides for the issuance of stock options for up to 140,000 shares of the Company's common stock to non-salaried directors.  Under the Director Plan, Directors elected on April 25, 2005 and at subsequent Annual Meetings who have not received any prior grant under this or previous plans receive an initial grant of an option to purchase 5,000 shares of Common Stock (the “Initial Option”). Each year, each elected Director not receiving an Initial Option will receive a 4,500 share option (the “Annual Option”).  The Initial Option vests 25% on the date of grant and 25% on the anniversary of the grant date in each of the following 3 years. Each Annual Option becomes fully exercisable one day after the date of grant. The exercise price of all options granted equals the fair market value of the Common Stock on the date the option is granted and expires ten (10) years from the date of grant. As of December 31, 2011, the number of shares available for grant under the Director Plan was 40,500.
 
A summary of changes in options issued under the Company’s stock option plans follows:
 
   
2011
   
2010
 
             
Options outstanding  at the
           
beginning of the year
    838,950       722,500  
Options granted
    185,500       203,000  
Options forfeited
    (2,000 )     (25,000 )
Options exercised
    (79,450 )     (61,550 )
Options outstanding at
               
the end of the year
    943,000       838,950  
Options exercisable at the
               
end of the year
    554,500       499,387  
Common stock available for future
               
grants at the end of the year
    107,438       70,938  
Weighted average exercise price per share:
         
Granted
  $ 9.67     $ 10.13  
Forfeited
    10.10       14.77  
Exercised
    3.31       2.71  
Outstanding
    10.84       10.38  
Exercisable
    11.69       10.67  
 
A summary of options outstanding at December 31, 2011 is as follows:

      Options Outstanding    
Options Exercisable
 
Range of Exercise Prices
   
Number Outstanding
   
Weighted-Average Remaining Contractual Life (Years)
   
Weighted-Average Exercise Price
   
Number Exercisable
   
Weighted-Average Exercise Price
 
$1.70 to $5.11       58,750    
  < 1
    $ 3.73       58,750     $ 3.73  
$5.12 to $8.51       156,000       7       7.71       90,000       7.57  
$8.52 to $10.21       367,500       9       9.82       63,500       9.77  
$10.22 to $13.62       121,000       7       12.98       103,500       12.95  
$13.63 to $17.02       239,750       4       15.16       238,750       15.16  
          943,000                       554,500          
 
 
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The weighted average remaining contractual life of all outstanding stock options is 6 years.

Stock Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The Company uses the Black-Scholes option pricing model to determine the fair value of employee and non-employee director stock options. The determination of the fair value of stock-based payment awards on the date of grant, using an option-pricing model, is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s Common Stock price over the expected term (“volatility”) and the number of options that will not fully vest in accordance with applicable vesting requirements (“forfeitures”).
 
The Company estimates the expected term of options granted by evaluating various factors, including the vesting period, historical employee information, as well as current and historical stock prices and market conditions. The Company estimates the volatility of its common stock by calculating historical volatility based on the closing stock price on the last day of each of the 60 months leading up to the month the option was granted. The risk-free interest rate that the Company uses in the option valuation model is the interest rate on U.S. Treasury zero-coupon bond issues with remaining terms similar to the expected term of the options granted. Historical information was the basis for calculating the dividend yield. The Company is required to estimate forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company used a mix of historical data and future assumptions to estimate pre-vesting option forfeitures and to record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized over the requisite service periods of the awards, which are generally the vesting periods.
 
The assumptions used to value option grants for the twelve months ended December 31, 2011 and December 31, 2010 were as follows:
 
       
   
2011
   
2010
 
Expected life in years
    5       5  
Interest rate
    0.91 – 2.10%       1.55 – 2.54%  
Volatility
    .327-.330       .336-.359  
Dividend yield
    2.37% - 2.70%       1.80% - 2.30%  
 
Total stock-based compensation recognized in the Company’s consolidated statements of operations for the years ended December 31, 2011 and 2010 was $428,439 and $385,732, respectively.  At December 31, 2011, there was approximately $685,386 of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based payments granted to the Company’s employees. As of December 31, 2011, the remaining unamortized expense is expected to be recognized over a weighted average period of 3 years.
 
The weighted average fair value at the date of grant for options granted during 2011 and 2010 was $2.26 and $2.71 per option, respectively.  The aggregate intrinsic value of outstanding options was $622,710 at December 31, 2011. The aggregate intrinsic value of exercisable options was $517,010 at December 31, 2011.  The aggregate intrinsic value of options exercised during 2011 was $482,233.
 
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12.  Earnings Per Share
The calculation of earnings per share follows:

   
2011
   
2010
 
Numerator:
           
   Net income
  $ 2,811,193     $ 2,572,964  
Denominator:
               
   Denominator for basic earnings per share:
               
      Weighted average shares outstanding
    3,099,982       3,128,509  
   Effect of dilutive employee stock options
    (0 )     65,805  
   Denominator for dilutive earnings per share
    3,099,983       3,194,314  
   Basic earnings per share
  $ 0.91     $ 0.82  
   Dilutive earnings per share
  $ 0.91     $ 0.81  

For 2011 and 2010, respectively, 602,895 and 473,750 stock options were excluded from diluted earnings per share calculations because they would have been anti-dilutive.
 
13. Accumulated Other Comprehensive (loss) income
 
The components of accumulated other comprehensive (loss) income follow:
 
   
Foreign currency translation adjustment
   
Net prior service credit and actuarial losses
   
Total
 
Balances, December 31, 2009   $ 321,201     $ (1,134,170 )   $ (812,970 )
Change in net prior service credit                        
and actuarial losses, net of
                       
income tax expense of $35,053,
            (21,950