NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2012 AND 2011
1.
|
SIGNIFICANT ACCOUNTING POLICIES
|
Consolidated Financial Statements
Consolidated financial statements
include the accounts of Tufco Technologies, Inc., and its wholly owned subsidiaries, Tufco LLC, and Tufco LP and its wholly owned subsidiary Hamco Manufacturing and Distributing LLC (the Company). Significant intercompany transactions
and balances are eliminated in consolidation. The Company provides integrated manufacturing services including wide web flexographic printing, wet wipe converting, hot melt adhesive laminating, folding, integrated downstream packaging and on-site
quality microbiological process management and manufactures and distributes business imaging paper products.
Financial Statement Preparation
Financial statement
preparation requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses
for the period. Actual amounts could differ from the amounts estimated. Differences from those estimates are recognized in the period they become known.
Accounts Receivable
Management estimates allowances for collectability related
to its accounts receivable balances. These allowances are based on the customer relationships, the aging and turns of accounts receivable, credit worthiness of customers, credit concentrations and payment history. Managements estimates include
providing for 100 percent of specific customer balances when it is deemed probable that the balance is uncollectable. Management estimates the allowance for doubtful accounts by analyzing accounts receivable balances by age, applying historical
trend rates to the most recent 12 months sales, less actual write-offs to date. Although management monitors collections and credit worthiness, the inability of a particular customer to pay its debts could impact collectability of receivables
and could have an impact on future revenues if the customer is unable to arrange other financing. Management does not believe these conditions are reasonably likely to have a material impact on the collectability of its receivables or future
revenues. Recoveries of accounts receivables previously written off are recorded when received. Credit terms to customers in the Contract Manufacturing segment are generally net 30 days. Credit terms to customers in the Business Imaging segment are
generally discounted net 30 terms.
Inventories
Inventories are carried at the lower of cost or market, with cost
determined under the first-in, first-out (FIFO) method of inventory valuation. The Company estimates reserves for inventory obsolescence and shrinkage based on its judgment of future realization.
Property, Plant, and Equipment
Property, plant, and equipment
are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives: 20 to 40 years for buildings, 3 to 10 years for machinery and
equipment, 3 to 5 years for computer equipment and software, 5 to 7 years for furniture and fixtures, and the shorter of the estimated useful life or the lease term for leasehold improvements.
F-7
Impairment of Long-Lived Assets
Impairment of
long-lived assets is reviewed in accordance with Accounting Standards Codification (ASC) 360-10. The Company evaluates the recoverability of the recorded amount of long-lived assets whenever events or changes in circumstances indicate
that the recorded amount of an asset group may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset group are less than its carrying amount. If an asset is determined to be
impaired, the impairment to be recognized is measured as the amount by which the recorded amount of the asset exceeds its fair value. Assets to be disposed of are reported at the lower of the recorded amount or fair value less cost to sell. The
Company determines fair value using discounted future cash flow analysis or other accepted valuation techniques.
Goodwill
The Company tests goodwill annually at the
reporting unit level for impairment as of July 1. The operating segments herein also represent the Companys reporting units for goodwill purposes. The Company uses a discounted cash flow analysis to estimate reporting unit fair values and
also considers multiples of relevant companies. In determining the fair values of the reporting units, the Company was required to make certain assumptions and cannot predict what future events may occur that could adversely affect the reported
value of its goodwill.
Management has completed the Companys annual impairment test and determined there were no changes
in the carrying amount of goodwill by reporting unit at July 1, 2012. However, there can be no assurance that valuation multiples will not decline, growth rates will not be lower than expected, discount rates will not increase, or the projected
cash flows of the individual reporting units will not decline. The Company prepared the discounted cash flow analysis in the same manner as in prior years. The Company further updated all significant assumptions in light of current market and
regulatory conditions. The key assumptions used in preparing the discounted cash flow analysis were (1) projected cash flows, (2) risk adjusted discount rates, and (3) expected long term growth rates. Because each of the reporting
units has distinct characteristics, the Company developed these assumptions separately. Any variance in the underlying assumptions could have a material impact on the evaluation of goodwill impairment. These assumptions included the Companys
actual operating results, future business plans, economic projections and market data, as well as estimates by its management regarding future cash flows and operating results. For example, lower than expected growth or margins or an increase to the
discount rate due to changes in risk premiums or other factors may suggest that an impairment has occurred under Step 1 and require the Company to proceed to Step 2 to measure the fair value of assets and liabilities of the reporting units.
To estimate the fair value of each reporting unit, the Company applied a discount rate of 13.4% in the 2012 measurement
compared to a discount rate of 12.8% in the 2011 measurement. The change in the discount rate is caused by, amongst other things, an increase in the estimated risk premium to provide for uncertainty in the long-term cash flows of the business.
Management believes it has been difficult in recent years to accurately predict business performance for the reporting units due to industry conditions. In the Contract Manufacturing business, cyclical economic conditions have impacted demand for
branded consumer products. In the Business Imaging business, volatility in paper costs experienced by the converting industry has been unfavorable to historical operating results. To improve profit margins, management believes it has implemented
business plans related to growth, pricing, product mix and cost reduction strategies. Management notes that recent operating results have improved and it expects the business initiatives it has implemented to continue to have a favorable impact on
operating results.
Management believes the estimated risk premiums give reasonable consideration to both the historical
results as well as recent performance. If the improved business performance is not sustained as expected, the projected cash flows may not be sufficient to support the carrying value of the reporting units, and an impairment of goodwill will likely
occur. As part of its review, management considers the sensitivity of the discount rate, and notes that using its current growth assumptions, the maximum discount rate that allows Contract Manufacturing to pass Step 1 is 17.9%, and the maximum
discount rate that allows Business Imaging to pass Step 1 is 13.9%. In addition, the Company is in the process of implementing a labor efficiency plan in Business Imaging. Including these cost reductions, the maximum discount rate that allows
Business Imaging to pass Step 1 is 16.6%.
F-8
The Company recognizes that its common stock regularly trades below book value per share and
will continue to monitor the relationship of its market capitalization to both its book value and tangible book value. While management plans to return the Companys business fundamentals to levels that support the book value per share,
there is no assurance that the plan will be successful, or that the market price of the common stock will increase to such levels in the foreseeable future.
During fiscal year 2011, the Company changed its annual goodwill measurement date from June 30 to July 1. The assessment was performed as of June 30, 2011 and an updated assessment was
performed as of July 1, 2011. The assessment included comparing the carrying amount of net assets of each reporting unit to its respective implied fair value as of each date.
Goodwill by reporting unit is:
|
|
|
|
|
Contract
Manufacturing
|
|
Business
Imaging
|
|
Total
|
$4,281,759
|
|
$2,929,816
|
|
$7,211,575
|
|
|
|
|
|
Income Taxes
Income taxes are provided for the tax effects of
transactions reported in the consolidated financial statements and consist of taxes currently due, if any, plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting.
Deferred tax assets and liabilities represent the future tax return consequences of those differences that will either be deductible or taxable when the assets and liabilities are recovered or settled. Deferred tax assets will include recognition of
operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. When applicable, valuation allowances are recognized to limit recognition of deferred tax assets where appropriate.
Such allowances may be reversed when circumstances provide evidence that the deferred tax assets will more likely than not be realized.
The Company has not recorded a valuation allowance against its deferred tax assets as of September 30, 2012 based on its evaluation of the available evidence, which includes consideration of reversal
patterns for long-term deferred tax liabilities and the expected taxable income generated in future periods. The assessment of a valuation allowance is an estimate and changes in future taxable income or loss can result in change in the assessment
of a valuation allowance. In addition, if net operating loss carryforwards will not reverse and be realized over the same long-term period as the difference primarily for depreciation on property and equipment, a change in the assessment of a
valuation allowance could occur.
F-9
The Company recognizes in its financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the technical merits of the position. When and if applicable, potential interest and penalty costs are accrued as incurred, with expense being recognized as income tax expense in
the statement of operations. No expense for interest and penalties was recognized for the years ended September 30, 2012 and 2011.
Revenues
The Company only has one type of revenue recognition activity
which recognizes revenue when title and risk of loss transfers to the customer and there is evidence of an agreement and collectibility of consideration to be received is reasonably assured, all of which generally occur at the time of shipment.
Sales are recorded net of sales returns and allowances. Shipping and handling fees billed to customers are recorded as revenue and costs incurred for shipping and handling are recorded in cost of sales. Amounts related to raw materials provided by
customers are excluded from net sales and cost of sales.
Stock-Based Compensation
The Company
has an incentive stock plan under which the Board of Directors may grant non-qualified stock options to employees. Additionally, the Company has a Non-Qualified Stock Option Plan for Non-Employee Directors, under which options are available for
grant.
The options have an exercise price equal to the fair market value of the underlying stock at the date of grant.
Employee options vest ratably over a three-year period and non-employee director options vest immediately. Options issued under these plans generally expire ten years from the date of grant.
Earnings Per Share
Basic earnings per share is computed using the
weighted average number of common shares outstanding. Diluted earnings per share includes common equivalent shares from dilutive stock options outstanding during the year. During fiscal 2012 and 2011, options to purchase 227,725 shares, and 348,300
shares, respectively, were excluded from the diluted earnings per share computation, as the effects of such options would have been anti-dilutive.
Financial Instruments
Financial instruments consist of cash,
receivables, payables, debt, and letters of credit. Their carrying values are estimated to approximate their fair values unless otherwise indicated due to their short maturities, variable interest rates and comparable borrowing costs for equipment
loans.
Recently Issued Accounting Standards
The Financial
Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) No. 2011-08,
Intangibles Goodwill and Other (Topic 350): Testing Goodwill for Impairment
. This ASU gives an entity the option
in its annual goodwill impairment test to first assess revised qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount
(qualitative assessment). If it is more likely than not the fair value of a reporting unit is less than its carrying amount, an entity would not be required to perform the existing two-step impairment test. The amendments to Topic 350
are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not believe the adoption of ASU 2011-08 will have a material effect on its consolidated financial
statements.
Accounts receivable are stated net of allowances for doubtful accounts of $267,000 and $128,000 at September 30,
2012 and 2011, respectively. Amounts due from two multinational consumer products customers of the Contract Manufacturing segment represent 56% and 45% of total accounts receivable at September 30, 2012 and 2011, respectively.
F-10
Inventories at September 30, 2012 and 2011, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Raw materials
|
|
$
|
11,857,627
|
|
|
$
|
10,908,178
|
|
Finished goods
|
|
|
5,592,733
|
|
|
|
3,292,398
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
17,450,360
|
|
|
$
|
14,200,576
|
|
|
|
|
|
|
|
|
|
|
Finished goods inventories are stated net of allowance for inventory obsolescence and shrinkage of $309,000 and $393,000
at September 30, 2012 and 2011, respectively.
4.
|
PROPERTY, PLANT, AND EQUIPMENT
|
Property, plant, and equipment at September 30, 2012 and 2011, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Land and land improvements
|
|
$
|
660,324
|
|
|
$
|
660,324
|
|
Buildings
|
|
|
10,160,396
|
|
|
|
10,160,396
|
|
Leasehold improvements
|
|
|
771,476
|
|
|
|
766,395
|
|
Machinery and equipment
|
|
|
32,194,623
|
|
|
|
32,082,618
|
|
Computer equipment and software
|
|
|
5,725,120
|
|
|
|
5,805,435
|
|
Furniture and fixtures
|
|
|
567,823
|
|
|
|
571,566
|
|
Vehicles
|
|
|
29,453
|
|
|
|
44,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,109,215
|
|
|
|
50,091,187
|
|
Less accumulated depreciation and amortization
|
|
|
35,082,497
|
|
|
|
33,072,461
|
|
|
|
|
|
|
|
|
|
|
Net depreciated value
|
|
|
15,026,718
|
|
|
|
17,018,726
|
|
|
|
|
Construction in progress
|
|
|
820,742
|
|
|
|
8,280
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipmentnet
|
|
$
|
15,847,460
|
|
|
$
|
17,027,006
|
|
|
|
|
|
|
|
|
|
|
5.
|
REVOLVING LINE OF CREDIT AND NOTE PAYABLE
|
The Company amended its credit agreement effective July 31, 2012 to extend its maturity date to June 30, 2013
and modified the required levels of after tax net income (or loss) under its financial covenants for fiscal years 2012 and 2013. However, there can be no assurances that the Company will be able to maintain such specified minimum levels of after tax
net income in such years. The credit agreement also includes a minimum tangible net worth covenant. The amount available for borrowing under the revolving line of credit facility was increased to $10.5 million subject to borrowing base limitations
based on percentages of eligible accounts receivable and inventory as defined in the agreement. The amendment also limits capital expenditures as defined in the agreement. The Companys revolving line of credit is classified as a current
liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and a material adverse effect covenant which is subjective in nature.
F-11
Borrowings under the credit facility in place during the years ended September 30, 2012
and 2011 bore interest at a rate equal to LIBOR plus 2.50%. LIBOR was 0.23% at September 30, 2012 and 2011. The Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility. Borrowings under the
Companys revolving line of credit facility were $7,279,718 and $6,449,133 at September 30, 2012 and 2011, respectively.
On April 3, 2012, the Company entered into a Commercial Security Agreement in favor of the lender to secure obligations under the First Amended and Restated Credit Agreement. The Commercial Security
Agreement grants to the lender a security interest in all of the accounts and inventory of Tufco, L.P., a subsidiary of the Company, as collateral for outstanding borrowings.
As of September 30, 2012, the Company had approximately $3.2 million available under the $10.5 million revolving line of credit facility.
Tufco LP is the borrower under the credit agreement. Tufco LLC is an affiliated guarantor and is 100% owned by the parent company, Tufco
Technologies, Inc., which is also a guarantor. Under the credit agreement, Hamco Manufacturing and Distributing LLC, a subsidiary of Tufco LP, is also a guarantor. All guarantees are full and unconditional, as well as joint and several. The
underlying borrowings are not registered securities.
In June, 2010, the Company entered into a long-term note for the purchase
of a 8-color press for $1.3 million. The note which has a five-year term, bears interest at a rate of 5.75% per annum with payments, including principal and interest, of approximately $26,000 per month. The note is collateralized by the press
with a net book value of $742,500 as of September 30, 2012.
Future principal payments under the five-year note at
September 30, 2012, are as follows:
|
|
|
|
|
2013
|
|
$
|
274,309
|
|
2014
|
|
|
290,504
|
|
2015
|
|
|
203,137
|
|
|
|
|
|
|
Total
|
|
$
|
767,950
|
|
|
|
|
|
|
F-12
The tax effects of significant items composing the Companys net deferred tax liability as of September 30,
2012 and 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Valuation allowances for accounts receivable and inventoriesnot currently deductible
|
|
$
|
232,534
|
|
|
$
|
233,296
|
|
Inventory costs capitalized for tax purposes
|
|
|
17,099
|
|
|
|
80,898
|
|
Vacation and severance accrualsnot currently deductible
|
|
|
85,084
|
|
|
|
85,084
|
|
Other accrualsnot currently deductible
|
|
|
79,223
|
|
|
|
107,600
|
|
Net operating loss and tax credit carryforwards
|
|
|
1,328,776
|
|
|
|
1,470,177
|
|
Stock compensation
|
|
|
189,002
|
|
|
|
167,134
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
1,931,718
|
|
|
|
2,144,189
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Basis difference on property and equipment
|
|
|
2,415,859
|
|
|
|
2,633,117
|
|
Basis difference on goodwill
|
|
|
1,092,821
|
|
|
|
1,092,821
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
3,508,680
|
|
|
|
3,725,938
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
1,576,962
|
|
|
$
|
1,581,749
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities are classified in the accompanying consolidated balance sheets at
September 30, 2012 and 2011, as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Current deferred tax assets
|
|
$
|
411,658
|
|
|
$
|
503,683
|
|
|
|
|
Noncurrent deferred tax liability
|
|
|
1,988,620
|
|
|
|
2,085,432
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
1,576,962
|
|
|
$
|
1,581,749
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2012, the Company had federal and state net operating loss carryforwards of approximately
$2,962,000 and $2,136,000, respectively, for income tax purposes expiring beginning 2029 for federal and 2021 for state. The Company has federal and state tax credit carryforwards of approximately $213,000 as of September 30, 2012. During 2012,
the Company utilized a total of $600,000 of federal and state net operating loss carryforwards. The Company did not utilize any net operating loss carryforwards in 2011.
F-13
The components of income tax (benefit) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Current tax (benefit) expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(41,116
|
)
|
|
$
|
33,867
|
|
State
|
|
|
14,625
|
|
|
|
11,025
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(26,491
|
)
|
|
|
44,892
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,114
|
)
|
|
|
(271,369
|
)
|
State
|
|
|
(3,673
|
)
|
|
|
(39,272
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(4,787
|
)
|
|
|
(310,641
|
)
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
$
|
(31,278
|
)
|
|
$
|
(265,749
|
)
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense varies from the amount determined by applying the applicable statutory income tax rates to
pretax income as follows:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Federal income taxes computed at statutory rates
|
|
$
|
(28,512
|
)
|
|
$
|
(242,238
|
)
|
State income taxesnet of federal tax benefit
|
|
|
7,228
|
|
|
|
(18,643
|
)
|
Other nondeductibles
|
|
|
13,165
|
|
|
|
7,360
|
|
Tax credits
|
|
|
(4,293
|
)
|
|
|
|
|
Change in prior year estimates
|
|
|
(20,564
|
)
|
|
|
|
|
Other
|
|
|
1,698
|
|
|
|
(12,228
|
)
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)
|
|
$
|
(31,278
|
)
|
|
$
|
(265,749
|
)
|
|
|
|
|
|
|
|
|
|
At September 30, 2012 and 2011, the Company had no material unrecognized tax benefits. The Company files tax
returns in all appropriate jurisdictions, which include a federal tax return and all required state jurisdictions. Open tax years for federal and state jurisdictions are fiscal years 2009 through 2011 and fiscal years 2008 through 2011,
respectively. The 2012 tax returns have not yet been filed.
F-14
7.
|
COMMITMENTS AND CONTINGENCIES
|
Leases
The Company leases facilities in Green Bay, Wisconsin from a partnership composed of
certain current and former stockholders. In November 2006, the Company entered into a new lease with the partnership that expires in March 2013, which is classified as an operating lease and requires monthly rental payments of $17,070 which increase
1.65% every twelve months. Rental expense under the related party lease totaled $220,502 for fiscal 2012 and $216,923 for fiscal 2011. On the expiration date there is an option for an additional five-year term to be negotiated. On November 28,
2012, the Company renewed the lease for a one year term effective April 1, 2013 with three one year renewal options. Rental expense will be reduced to $12,825 per month. If the Company exercises its renewal options, rental expense will increase
2.5% for each renewal period.
The Company also leases other facilities and equipment under operating leases. Office and
warehouse leases expire on varying dates over the next five years.
Future minimum rental commitments under operating leases
with initial or remaining terms in excess of one year at September 30, 2012, are as follows:
|
|
|
|
|
2013
|
|
$
|
720,531
|
|
2014
|
|
|
579,222
|
|
2015
|
|
|
544,618
|
|
2016
|
|
|
484,260
|
|
2017
|
|
|
401,330
|
|
Thereafter
|
|
|
855,131
|
|
|
|
|
|
|
Total
|
|
$
|
3,585,092
|
|
|
|
|
|
|
Rental expense for all operating leases totaled $1,084,736 and $713,892 for the years ended September 2012 and 2011,
respectively.
Litigation
The Company is subject to lawsuits, investigations, and potential claims arising
out of the ordinary conduct of its business.
8.
|
PROFIT SHARING SAVINGS AND INVESTMENT PLAN
|
The Company has a defined contribution 401(k) plan covering substantially all employees. The Company may make annual
contributions at the discretion of the board of directors. In addition, the Company may match certain amounts of an employees contribution. Subsequent to year-end, the Company has currently resumed contributions to the plan. Expenses relating
to the defined contribution 401(k) plan totaled zero for fiscal 2012 and 2011.
F-15
Non-voting Common Stock and Preferred Stock
At September 30, 2012 and 2011, the Company has
authorized and unissued 2,000,000 shares of $.01 par value non-voting common stock and 1,000,000 shares of $.01 par value preferred stock.
Stock Compensation Arrangements
The 2003 Non-Qualified Stock Option Plan, the (2003 Plan) reserves 300,000 shares of common stock for grants to selected employees through
April 30, 2013, and provides that the price and exercise period be determined by the board of directors which should be at least equal to fair value at the date of grant. Options vest primarily over three years and expire 10 years from date of
grant. During fiscal 2012 and 2011, options to purchase 52,000 shares, and 22,000 shares, respectively, of voting common stock were granted.
The 2004 Non-Employee Director Stock Option Plan (2004 Plan) for non-employee members of the board of directors reserves 150,000 shares of common stock for grants through March 2014 and
provides that the exercise price be at least equal to fair value at the date of grant. Options are exercisable immediately and for a period of 10 years. During fiscal years 2012 and 2011, options to purchase 15,000 shares, and 22,000 shares,
respectively, of voting common stock were granted under the 2004 Plan.
The Company estimates fair value on the date of grant
using the Black-Scholes option valuation model. The Company uses historical data regarding stock option exercise behaviors to estimate the expected term of options granted based on the period of time that options granted are expected to be
outstanding. Compensation expense is recognized only on awards expected to vest. Expected volatilities are based on the historical volatility of the Company's stock. The expected dividend yield of zero is based on the Company's historical dividend
payments and anticipated future payments. The risk-free interest rate is based on the U.S. Treasury yield curve in effect on the grant date for the length of time corresponding to the expected term of the option.
For the years ended September 30, 2012 and 2011, the total stock compensation expense recognized by the Company was $58,628 and
$51,425, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $21,868 and $19,182 for the years ended September 30, 2012 and 2011, respectively. There was $95,209 of
unrecognized compensation cost as of September 30, 2012, which will be recognized over a remaining weighted average period of three years.
F-16
A summary of the stock option activity under the Companys share-based compensation
plans for the years ended September 30, 2012 and 2011 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2010
|
|
|
342,650
|
|
|
$
|
5.90
|
|
|
|
|
|
|
|
|
|
New grants
|
|
|
44,000
|
|
|
|
3.72
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(38,350
|
)
|
|
|
6.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2011
|
|
|
348,300
|
|
|
$
|
5.57
|
|
|
|
|
|
|
|
|
|
New grants
|
|
|
67,000
|
|
|
|
3.25
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(157,575
|
)
|
|
|
5.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
257,725
|
|
|
$
|
4.92
|
|
|
|
6.2
|
|
|
$
|
103,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2012
|
|
|
189,233
|
|
|
$
|
5.48
|
|
|
|
5.0
|
|
|
$
|
42,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during fiscal 2012 and 2011 was estimated at $1.54 and
$2.49 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Risk-free interest rate
|
|
|
0.29
|
%
|
|
|
0.33
|
%
|
Expected volatility
|
|
|
75.8
|
%
|
|
|
123.4
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected option life, standard option (years)
|
|
|
2.8
|
|
|
|
2.5
|
|
In fiscal 2012 and 2011, no employee stock options were exercised. The aggregate intrinsic value in the table above is
based on the Companys closing stock price of $4.25 on the last business day of the year ended September 30, 2012. The realized tax benefit is recognized, when material, as an increase to additional paid-in capital or a decrease to income
tax expense with an offset to deferred tax assets, depending on the accumulation of windfalls and shortfalls.
F-17
10.
|
RELATED-PARTY TRANSACTIONS
|
The Company has an agreement with Bradford Ventures, Ltd., an affiliate of the two largest stockholders of the Company,
under which Bradford Ventures, Ltd. provides various financial and management consulting services which was initially set to expire in January 2004, and is thereafter automatically renewable on an annual basis if not terminated by either party. The
agreement calls for an initial annual fee of $210,000 with annual increases of 5% plus reimbursement of reasonable out-of-pocket expenses. Consulting expense was $473,691 and $451,134 for fiscal 2012 and 2011, respectively.
As discussed in footnote 7 Commitments and Contingencies, the Company leases facilities from a partnership composed of
current and former stockholders.
11.
|
MAJOR CUSTOMER AND SEGMENT INFORMATION
|
Two significant customers of the Contract Manufacturing segment are multinational consumer products companies with whom
the Company has confidentiality and non-disclosure agreements. They accounted for the following percentage of total sales:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
Contract Manufacturing segment
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
31
|
%
|
|
|
31
|
%
|
Customer B
|
|
|
18
|
%
|
|
|
19
|
%
|
The current manufacturing contract with Customer A expires March 31, 2013. The Company is currently negotiating
renewal terms with this customer. The current manufacturing contract with Customer B expires June 2013.
The Company
manufactures and distributes custom paper-based and nonwoven products, and provides contract manufacturing, specialty printing and related services on these types of products. The Company separates its operations and prepares information for
management use by the market segment aligned with the Companys products and services. Corporate costs, such as interest income, interest expense and income tax (benefit) expense are recorded under the Corporate and Other segment. Such market
segment information is summarized below. The Contract Manufacturing segment provides services to multinational consumer products companies while the Business Imaging segment manufactures and distributes printed and unprinted business imaging paper
products for a variety of business needs.
External customer revenues attributed to foreign countries were approximately 3% and
4% of total sales for fiscal 2012 and 2011, respectively. The revenues are attributed to countries in Europe and to Japan. There are no long-lived assets located outside of the United States at September 30, 2012 and 2011.
F-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Business
|
|
|
Corporate
|
|
|
|
|
Fiscal 2012
|
|
Manufacturing
|
|
|
Imaging
|
|
|
and Other
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
80,695,957
|
|
|
$
|
26,345,899
|
|
|
$
|
|
|
|
$
|
107,041,856
|
|
|
|
|
|
|
Gross profit
|
|
|
4,535,130
|
|
|
|
1,269,215
|
|
|
|
|
|
|
|
5,804,345
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3,214,245
|
|
|
|
(86,474
|
)
|
|
|
(2,947,569
|
)
|
|
|
180,202
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
2,784,373
|
|
|
|
149,385
|
|
|
|
245
|
|
|
|
2,934,003
|
|
|
|
|
|
|
Capital expenditures
|
|
|
1,750,525
|
|
|
|
4,708
|
|
|
|
|
|
|
|
1,755,233
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventoriesnet
|
|
$
|
12,989,387
|
|
|
$
|
4,460,973
|
|
|
$
|
|
|
|
$
|
17,450,360
|
|
Property, plant, and equipmentnet
|
|
|
13,943,270
|
|
|
|
1,902,139
|
|
|
|
2,051
|
|
|
|
15,847,460
|
|
Accounts receivable and other (including goodwill)
|
|
|
17,787,992
|
|
|
|
5,996,318
|
|
|
|
573,759
|
|
|
|
24,358,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
44,720,649
|
|
|
$
|
12,359,430
|
|
|
$
|
575,810
|
|
|
$
|
57,655,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
Business
|
|
|
Corporate
|
|
|
|
|
Fiscal 2011
|
|
Manufacturing
|
|
|
Imaging
|
|
|
and Other
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
84,492,793
|
|
|
$
|
25,413,661
|
|
|
$
|
|
|
|
$
|
109,906,454
|
|
|
|
|
|
|
Gross profit
|
|
|
4,017,383
|
|
|
|
1,226,473
|
|
|
|
|
|
|
|
5,243,856
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,351,702
|
|
|
|
(23,800
|
)
|
|
|
(2,814,672
|
)
|
|
|
(486,770
|
)
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
2,783,444
|
|
|
|
131,108
|
|
|
|
568
|
|
|
|
2,915,120
|
|
|
|
|
|
|
Capital expenditures
|
|
|
963,313
|
|
|
|
338,550
|
|
|
|
|
|
|
|
1,301,863
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventoriesnet
|
|
$
|
11,010,125
|
|
|
$
|
3,190,451
|
|
|
$
|
|
|
|
$
|
14,200,576
|
|
Property, plant, and equipmentnet
|
|
|
14,977,893
|
|
|
|
2,046,816
|
|
|
|
2,297
|
|
|
|
17,027,006
|
|
Accounts receivable and other (including goodwill)
|
|
|
16,837,134
|
|
|
|
6,568,152
|
|
|
|
648,029
|
|
|
|
24,053,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
42,825,152
|
|
|
$
|
11,805,419
|
|
|
$
|
650,326
|
|
|
$
|
55,280,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19