acu_10k123112.htm
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, 2012
   
  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 MKT
 
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 ( 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 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.   [_]

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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 $26,794,065. Registrant had 3,142,202 shares of its $2.50 par value Common Stock outstanding as of March 2, 2013.

Documents Incorporated By Reference

(1) Certain portions of the Company’s Proxy Statement for the Annual Meeting scheduled for April 22, 2013 are incorporated into the Company’s 2012 Annual Report on Form 10-K, Part III.

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Page
 
Part I
 
  
   
       
Item 1.
Business
  
4
 
       
Item 1A.
Risk Factors
  
6
 
       
Item 1B.
Unresolved Staff Comments
  
10
 
       
Item 2.
Properties
  
10
 
       
Item 3. 
Legal Proceedings
  
10
 
       
Item 4.
Mine Safety Disclosures
  
10
 
       
 Part II
 
  
   
       
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  
11
 
       
Item 6.
Selected Financial Data
  
13
 
       
Item 7. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
13
 
       
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
  
18
 
       
Item 8.
Financial Statements and Supplementary Data
  
18
 
       
Item 9.
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  
39
 
       
Item 9A.
Controls and Procedures
  
39
 
         
Item 9B. 
Other Information
 
40
 
       
 Part III
 
  
   
       
Item 10. 
Directors, Executive Officers and Corporate Governance
  
40
 
       
Item 11.
Executive Compensation
  
41
 
       
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
41
 
       
Item 13. 
Certain Relationships and Related Transactions, and Director Independence
  
42
 
       
Item 14.
Principal Accountant Fees and Services
  
42
 
       
 Part IV
 
  
   
       
Item 15.
Exhibits and Financial Statement Schedules
  
42
 
 
  
  
 
 
Signatures
  
45
 

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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 first aid products to the school, home, office, hardware, sporting goods 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 2012 were: United States (including direct import sales from Asia) - $67.5 million, Canada - $8.8 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 June 7, 2012, the Company purchased certain assets of The C-Thru Ruler Company, a leading supplier of drafting, measuring, lettering and stencil products. The Company purchased inventory and intellectual property related to C-Thru’s lettering and ruler business for approximately $1.47 million using funds borrowed under its revolving loan agreement with HSBC. The Company recorded approximately $0.42 million for inventory, as well as approximately $1.05 million for intangible assets, consisting primarily of customer relationships.

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. The Pac-Kit line of products consists of high quality, unitized first aid kits sold to a broad range of customers and distributors. The Company recorded approximately $1.9 million for assets acquired from Pac-Kit, 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.

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, pencil sharpeners, guillotine paper trimmers, rotary paper trimmers, rotary cutters, knives, hobby knives and blades, utility knives, pruners, loppers, saws, manicure products and medical cutting instruments. .  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.

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Many of the Company’s cutting products have a titanium carbonitride and non-stick coating, making scissor and knife blades more than 3 times harder than stainless steel as well as reducing friction and corrosion.

In 2008, 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 the Company expanded its offering of Camillus knives for tactical outdoor sporting use.

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, drafting tools, lettering products and math tools.  Recent product introductions included Westcott branded compasses, protractors, rulers and math kits with anti-microbial product protection.

On June 7, 2012, the Company extended its line of measuring products by purchasing certain assets of The C-Thru Ruler Company (“C-Thru”), a leading supplier of drafting, measuring, lettering and stencil products.  These C-Thru products have developed a strong reputation in the school and craft markets for high quality measuring devices, and for specialized products for drafting, designing and drawing.
 
First Aid and Safety
 
Principal products within the first aid and safety 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 assets of 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 we sell high quality, unitized kits to a broad range of companies and distributors. This acquisition has allowed us to tailor these items to meet user requirements, with 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 $572,985 in 2012 and $535,500 in 2011.
 
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. Patents and trademarks are amortized over their estimated useful lives. The weighted average amortization period for intangible assets at December 31, 2012 was 14 years.
 
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 2012 and 2011, the Company had two customers and one customer, respectively, that individually exceeded 10% of consolidated net sales. Net sales to these customers amounted to approximately 17% and 12% in 2012 and 20% in 2011.

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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 Maped. The major competitor in the safety category is Johnson and Johnson.
 
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. The remediation was completed during the third quarter of 2012.  See accompanying Note 15 of the Notes to Consolidated Financial Statements in this report for information regarding the cost of remediation and related matters, including ongoing monitoring of contaminant levels.

Employees

As of December 31, 2012, the Company employed 171 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.

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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.
 
Because our products are sold by third parties, our financial results depend in part on the financial health of these parties and any loss of a third party distributor could adversely affect the Company’s revenues.
A number of the Company’s products are sold through third-party distributors and large retailers. Some of our distributors also market products that compete with our products.  Changes in the financial or business conditions ore the purchasing decisions of these third parties or their customers could affect our sales and profitability.

Additionally, 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.

The Company’s operations are increasingly global in nature. Our business, financial condition and results of operations could be adversely affected by the political and economic conditions in the countries in which we conduct business, by fluctuations in currency exchange rates and other factors related to our international operations.
As our international operations and activities expand, we face increasing exposure to the risks of operating in foreign countries. These factors include:

·    
Changes generally in political, regulatory or economic conditions in the countries in which we conduct business.

·    
Trade protection measures in favor of local producers of competing products, including government subsidies, tax benefits,  changes in local tax rates, trade actions (such as anti-dumping proceedings) and other measures giving local producers a competitive advantage over the company.

·    
Changes in foreign currency exchange rates which could adversely affect our competitive position, selling prices and manufacturing costs, and therefore the demand for our products in a particular market

These risks could affect the cost of manufacturing and selling our products, our pricing, sales volume, and ultimately our financial performance. The likelihood of such occurrences and their potential effect on the company vary from country to country and are unpredictable.

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.

Failure to manage growth and continue to expand our operations successfully could adversely affect our financial results.
Our business has experienced significant historical growth over the years, and we expect our business to continue to grow organically and through strategic acquisitions. This growth places significant demands on management and operational systems. If we cannot effectively manage our growth, it is likely to result in operational inefficiencies and ineffective management of our business thus negatively impacting our operating results. To the extent we grow through strategic acquisitions, our success will depend on selecting the appropriate targets, integrating such acquisitions quickly and effectively and realizing any expected synergies and cost savings related to such acquisitions.

7

 
Loss of a major customer could result in a decrease in the Company’s future sales and earnings.
Sales of our products are primarily concentrated in a few major customers including office product superstores and mass market distributors. In 2012 and 2011, the Company had two customers and one customer, respectively that individually exceeded 10% of consolidated net sales. Net sales to these customers amounted to approximately 17% and 12% in 2012 and 20% in 2011. 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 business risks associated with this concentration, including increased credit risks for these and other customer and the possibility of related bad debt write-offs, could negatively affect our margins and profits.  Additionally, the loss of a major customer, whether through competition or consolidation, 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.

Compromises of our information systems or unauthorized access to confidential information or our customers' or associates' personal information may materially harm our business or damage our reputation.
Through our sales and marketing activities and our business operations, we collect and store confidential information and certain personal information from our customers and associates. We also process payment card information and check information. In addition, in the normal course of business, we gather and retain personal information about our associates and generate and have access to confidential business information. Although we have taken steps designed to safeguard such information, there can be no assurance that such information will be protected against unauthorized access or disclosure. Computer hackers may attempt to penetrate our or our vendors' network security and, if successful, misappropriate such information. An Acme United associate, contractor or other third-party with whom we do business may also attempt to circumvent our security measures in order to obtain such information or inadvertently cause a breach involving such information. We could be subject to liability for failure to comply with privacy and information security laws, for failing to protect personal information, or for misusing personal information, such as use of such information for an unauthorized marketing purpose. Loss or misuse of confidential or personal information could disrupt our operations, damage our reputation, and expose us to claims from customers, financial institutions, regulators, payment card associations, employees and other persons, any of which could have an adverse effect on our business, financial condition and results of operations.

8

 
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 HSBC Bank N.A., 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.

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 including at mass merchants, high volume office supply stores and online. 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.

9

 
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.

Our shares of common stock are thinly traded and our stock price may be volatile.
Because our common stock is thinly traded, its market price may fluctuate significantly more than the stock market in general or the stock prices of other companies, listed on major stock exchanges. We believe there are 2,629,447 shares of our common stock held by non-affiliates as of December 31, 2012. Thus, our common stock will be less liquid than the stock of companies with broader public ownership, and as a result, the trading price for our shares of common stock may be more volatile. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock than would be the case if our public float were larger.
 
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. In the United States, the Company owns and leases one manufacturing facility in Connecticut consisting of 40,000 square feet and two warehousing facilities in North Carolina consisting of a total of 175,000 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
There are no pending material legal proceedings to which the Company is a party or, to the actual knowledge of the Company, contemplated by any governmental agency
 
Item 4.  Mine Safety Disclosures
Not Applicable
 
10

 
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 MKT under the symbol "ACU". The following table sets forth the high and low sale prices on the NYSE MKT for the Common Stock for the periods indicated:

 
Year Ended December 31, 2012
 
High
   
Low
   
Dividends
Declared
 
Fourth Quarter
  $ 12.37     $ 10.54     $ .07  
Third Quarter
    11.82       10.20       .07  
Second Quarter
    11.36       9.82       .07  
First Quarter
    11.54       9.47       .07  
                         
 
Year Ended December 31, 2011
                       
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  

As of March 4, 2013 there were approximately 1,301 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 2012: (a) the NYSE MKT Index and (b) a peer group of companies that, like the Company, (i) are currently listed on the NYSE MKT, and (ii) have a market capitalization of $30 million to $40 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.
 
11

 
 
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, 2012, the Company repurchased 43,025 shares of its Common Stock at an average price of $10.20, all of which were purchased under a previously announced program. As of December 31, 2012, there were 143,165 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, 2012.
 
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
    1,686     $ 11.32       1,686       147,754  
November 1 - 30
    4,589     $ 10.87       4,589       143,165  
December 1 - 31
    -     $ -       -       143,165  
 
12

 
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, 2012.  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
1,118,688
$10.97
61,500
Equity compensation plans not approved by security holders
-0-
-0-
-0-
Total
1,118,688
$10.97
61,500
 
Item 6.  Selected Financial Data
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(All figures in thousands except per share data)
   
2012
   
2011
   
2010
   
2009
   
2008
 
Net sales
  $ 84,370     $ 73,302     $ 63,149     $ 59,149     $ 68,719  
Net income
  $ 3,549     $ 2,811     $ 2,573     $ 2,842     $ 4,467  
Total assets
  $ 67,828     $ 55,222     $ 49,581     $ 42,309     $ 45,424  
Long-term debt, less current portion
  $ 24,320     $ 17,568     $ 13,522     $ 9,154     $ 11,749  
Net income
                                       
   Per share (Basic)
  $ 1.14     $ 0.91     $ 0.82     $ 0.86     $ 1.28  
   Per share (Diluted)
  $ 1.13     $ 0.91     $ 0.81     $ 0.85     $ 1.24  
Dividends per share
  $ 0.28     $ 0.26     $ 0.22     $ 0.20     $ 0.18  
 
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.  For a more detailed discussion of these and other factors affecting us, see the Risk Factors described in Item 1A of this Annual Report on Form 10-K.  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.

13

 
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.
 
14

 
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, 2012 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, 2012 and 2011, 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 $4,240,401 as of December 31, 2012, from $3,284,663 as of December 31, 2011 primarily as a result of the C-Thru 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 2.99% to be appropriate as of December 31, 2012, which is a decrease of 1.0 percentage point from the rate used as of December 31, 2011. An increase of 1.0% in the discount rate would have decreased our plan liabilities as of December 31, 2012 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 2012. 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 in this report.
 
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 2012 Compared with 2011

On June 7, 2012, the Company purchased certain assets of The C-Thru Ruler Company, a leading supplier of drafting, measuring, lettering and stencil products. The Company purchased inventory and intellectual property related to C-Thru’s lettering and ruler business for approximately $1.47 million using funds borrowed under its revolving loan agreement with HSBC. The Company recorded approximately $0.42 million for inventory, as well as approximately $1.05 million for intangible assets, consisting primarily of customer relationships.

15

 
Net Sales
 
In 2012, sales increased by $11,067,906 or 15% (16% in constant currency) to $84,369,770 compared to $73,301,864 in 2011.  The U.S. segment sales increased by $10,846,000 or 19% in 2012 compared to 2011.  Sales in Canada increased by $294,000 or 3% (5% in local currency) in 2012 compared to 2011.  European sales decreased by 1% in U.S. dollars but increased 9% in local currency in 2012 compared to 2011.
 
The increase in net sales for the twelve months ended December 31, 2012 in the U.S. segment was primarily due to increased sales volume of pencil sharpeners, first aid products and additional sales resulting from the acquisition of the C-Thru Ruler Company.  Also contributing to the increase in sales were revenues from new distribution of Camillus knives at major retailers. The increase in net sales in Canada for the twelve months ended December 31, 2012 was primarily due to the introduction of Camillus knives.  The increase in sales in Europe was primarily due to increased sales in the mass market channel partially offset by the loss of Schlecker, a major customer, due to their liquidation.

Gross Profit
 
Gross profit was 35.3% of net sales in 2012 compared to 35.9% in 2011.

Selling, General and Administrative
 
Selling, general and administrative expenses were $24,386,000 in 2012 compared with $22,040,000 in 2011, an increase of $2,346,000 or 11%.  SG&A expenses were 29% of net sales in 2012 compared to 30% in 2011.  The increase in SG&A expenses was primarily the result of higher personnel related expenses ($1.1 million) higher delivery costs and sales commissions as a result of higher sales ($800,000), and increased spending on new product development ($250,000).
 
Operating Income
 
Operating income was $5,361,000 in 2012, compared with $4,285,000 in 2011, an increase of $1,076,000.  Operating income in the U.S. increased by approximately $909,000 primarily as a result of higher sales. Operating income in the European segment increased by $316,000 principally due to higher sales in local currency, improved margins and lower selling and administration expenses. Operating income in Canada decreased by approximately $150,000 principally due to lower gross margins which resulted from the mix of products sold.
 
Interest Expense, Net
 
Net interest expense for 2012 was $264,000, compared with $255,000 for 2011, an increase of $9,000. The increase in interest expense, net for 2012, was primarily the result of higher average borrowings during 2012 under the Company’s bank revolving credit facility compared to 2011 partially offset by a lower average borrowing rate.
 
Other Expense, Net
 
Net other expense was $99,000 in 2012 compared to net other expense of $4,000 in 2011.  The increase in other expense, net for 2012, was primarily due to gains/losses from foreign currency transactions.
 
Income Tax
 
The effective tax rate in 2012 was 29%, compared to 30% in 2011.
 
Off-Balance Sheet Transactions

The Company did not engage in any off-balance sheet transactions during 2012.

Liquidity and Capital Resources
 
During 2012, working capital increased by approximately $8.9 million compared to December 31, 2011.  Inventory increased by approximately $5.8 million.  The increase in inventory is principally related to new Camillus products, as well as a general increase in advance of anticipated new orders. Inventory turnover, calculated using a twelve month average inventory balance, decreased to 1.9 from 2.0 at December 31, 2011.

16

 
Receivables increased approximately $3.5 million at December 31, 2012 compared to December 31, 2011 due to the increase in sales. The average number of days sales outstanding in accounts receivable was 61 days in 2012 compared to 65 days in 2011.
 
The Company's working capital, current ratio and long-term debt to equity ratio follow:
 
   
2012
   
2011
 
             
Working Capital
  $ 46,678,949     $ 37,818,344  
Current Ratio
    4.98       5.34  
Long-Term Debt to Equity Ratio
    78.8%       63.3%  
 
During 2012, total debt outstanding under the Company’s revolving credit facility (referred to below) increased by approximately $6.7 million compared to total debt at December 31, 2011. The increase in debt outstanding is primarily related to the purchase of inventory as well as financing the acquisition of certain assets of The C-Thru Ruler Company for $1.5 million. As of December 31, 2012, $24,319,829 was outstanding and $5,680,171 was available for borrowing under the revolving credit facility.
 
On April 5, 2012, the Company entered into a new revolving loan agreement with HSBC Bank, N.A. In conjunction with signing the new revolving loan agreement, the Company ended its agreement with Wells Fargo and used funds borrowed under the new loan agreement to pay all amounts then outstanding under the revolving loan agreement with Wells Fargo Bank.

The new five-year credit facility provides for increased borrowings of up to an aggregate of $30 million at an interest rate of LIBOR plus 1.75%, which is 0.25% lower than the interest rate under the former loan agreement with Wells Fargo. All principal amounts outstanding under the agreement are required to be repaid in a single amount on April 5, 2017, the date the agreement expires; interest is payable monthly.  Funds borrowed under the agreement may be used for working capital, general operating expenses, share repurchases, acquisitions and certain other purposes.  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. These financial covenants in the new loan agreement are similar to the covenants in the prior agreement with Wells Fargo. At December 31, 2012 the Company was in compliance with these covenants under the new agreement with HSBC.

In 2012, Schlecker, a major customer of the Company’s and once one of Germany’s largest drug store chains, filed for bankruptcy and liquidated a majority of its business. Sales to Schlecker represented approximately 2% of the Company’s total net sales in 2011.  The Company has not incurred and does not expect to incur any material charges related to the write-off of receivables or inventory as a result of the loss of the Schlecker business.

Capital expenditures during 2012 and 2011 were $681,135 and $940,713, respectively, which were, in part, financed with borrowings under the Company’s revolving credit facility.  Capital expenditures in 2013 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 at least the next twelve months.
 
Recently Issued Accounting Standards
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update on the reporting of amounts reclassified out of accumulated other comprehensive income, to improve the transparency of reporting. These reclassifications present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income – but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. This standard update is effective for reporting periods beginning after December 15, 2012. We are currently evaluating the impact of adopting this accounting standards update on our consolidated financial statements.
 
17

 
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,
 
   
2012
   
2011
 
             
Net sales
  $ 84,369,770     $ 73,301,864  
                 
Cost of goods sold
    54,623,328       46,976,944  
                 
Gross profit
    29,746,442       26,324,920  
                 
Selling, general and administrative expenses
    24,385,922       22,039,956  
Operating income
    5,360,520       4,284,964  
                 
Non operating items:
               
Interest:
               
Interest expense
    (443,657 )     (404,326 )
Interest income
    179,259       149,761  
Interest expense, net
    (264,398 )     (254,565 )
Other expense
    (99,076 )     (4,379 )
Total other expense, net
    (363,474 )     (258,944 )
Income before income tax expense
    4,997,046       4,026,020  
Income tax expense
    1,447,815       1,214,827  
Net income
  $ 3,549,231     $ 2,811,193  
                 
Earnings per share:
               
Basic
  $ 1.14     $ 0.91  
Diluted
  $ 1.13     $ 0.91  
                 
See accompanying Notes to Consolidated Financial Statements.
         
 
18

 
ACME UNITED CORPORATION
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
             
             
   
For the Years Ended
 
   
December 31,
 
   
2012
   
2011
 
             
Net income
  $ 3,549,231     $ 2,811,193  
Other comprehensive income (loss) -
               
Foreign currency translation
   
194,235
      (229,853 )
Change in net prior service credit
               
and actuarial losses, net of
               
income tax expense
    57,191       66,691  
Total other comprehensive income (loss)
    251,426       (163,162 )
Comprehensive income
  $ 3,800,657     $ 2,648,031  
                 
See notes to accompanying consolidated financial statements.
 
 
19

 
Acme United Corporation and Subsidiaries
           
CONSOLIDATED BALANCE SHEETS
           
   
December 31,
   
December 31,
 
   
2012
   
2011
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 9,749,864     $ 7,853,343  
Accounts receivable, less allowance
    16,441,970       12,904,168  
Inventories
    30,292,120       24,494,992  
Deferred income taxes
    402,467       281,573  
Prepaid expenses and other current assets
    1,522,745       988,288  
Total current assets
    58,409,166       46,522,364  
                 
Property, plant and equipment:
               
Land
    291,310       288,313  
Buildings
    2,294,327       2,276,662  
Machinery and equipment
    8,282,926       7,657,373  
Total property, plant and equipment
    10,868,563       10,222,348  
Less: accumulated depreciation
    8,515,327       7,716,224  
Net plant, property and equipment
    2,353,236       2,506,124  
Note receivable
    1,701,987       1,765,831  
Intangible assets, less accumulated amortization
    4,240,401       3,284,663  
Deferred income taxes
    967,892       1,053,926  
Other assets
    155,134       88,828  
Total assets
  $ 67,827,816     $ 55,221,736  
                 
LIABILITIES
               
Current liabilities:
               
Accounts payable
  $ 6,480,146     $ 4,935,495  
Other accrued liabilities
    5,250,071       3,768,525  
Total current liabilities
    11,730,217       8,704,020  
Long-term debt
    24,319,829       17,568,484  
Other accrued liabilities - non current
    911,467       1,174,305  
Total liabilities
    36,961,513       27,446,809  
                 
STOCKHOLDERS' EQUITY
               
Common stock, par value $2.50: authorized 8,000,000
               
shares; issued - 4,487,524 shares in 2012 and 4,454,024
               
shares in 2011, including treasury stock
    11,218,055       11,134,303  
Treasury stock, at cost, 1,362,072 shares in 2012
               
and 1,319,047 shares in 2011
    (12,283,251 )     (11,844,354 )
Additional paid-in capital
    5,636,274       5,120,277  
Accumulated other comprehensive loss
    (786,893 )     (1,038,319 )
Retained earnings
    27,082,118       24,403,020  
Total stockholders' equity
    30,866,303       27,774,927  
Total liabilities and stockholders' equity
  $ 67,827,816     $ 55,221,736  
                 
See accompanying Notes to Consolidated Financial Statements.
         
 
20

 
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, 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  
Total other comprehensive income (loss)
                              (163,162 )             (163,162 )
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  
Net income
                                            3,549,231       3,549,231  
Total other comprehensive income (loss)
                              251,426               251,426  
Stock compensation expense
                            427,877                       427,877  
Distribution to shareholders
                                            (870,133 )     (870,133 )
Issuance of common stock
    33,500       83,752               88,120                       171,872  
Purchase of treasury stock
    (43,025 )             (438,897 )                             (438,897 )
Balances, December 31, 2012
    3,125,452       11,218,055       (12,283,251 )     5,636,274       (786,893 )     27,082,118     $ 30,866,303  
                                                         
See accompanying Notes to Consolidated Financial Statements.
                                 
 
21

 
Acme United Corporation and Subsidiaries
           
CONSOLIDATED STATEMENTS OF CASH FLOWS
           
             
   
For the years ended
December 31,
 
   
2012
   
2011
 
Operating activities:
           
Net income
  $ 3,549,231     $ 2,811,193  
Adjustments to reconcile net income to net
               
cash (used) provided by operating activities
               
Depreciation
    862,035       795,452  
Amortization
    227,662       183,385  
Stock compensation expense
    427,877       428,439  
Deferred income taxes
    (34,860 )     (185,162 )
Changes in operating assets and liabilities
               
Accounts receivable
    (3,556,267 )     (76,021 )
Inventories
    (5,310,860 )     (1,127,005 )
Prepaid expenses and other current assets
    (395,291 )     271,550  
Accounts payable
    1,484,949       (1,031,524 )
Other accrued liabilities
    1,472,912       (7,239 )
Total adjustments
    (4,821,843 )     (748,125 )
Net cash (used) provided by operating activities
    (1,272,612 )     2,063,068  
Investing activities:
               
Purchase of property, plant and equipment
    (681,135 )     (940,713 )
Purchase of patents and trademarks
    (133,436 )     (101,853 )
Acquisition of assets in business combination
    (1,473,793 )     (3,126,986 )
Net cash used by investing activities
    (2,288,364 )     (4,169,552 )
Financing activities:
               
Net borrowings of long-term debt
    6,751,345       4,046,484  
Distributions to shareholders
    (1,089,627 )     (771,582 )
Purchase of treasury stock
    (438,897 )     (133,738 )
Issuance of common stock
    171,872       287,269  
Net cash provided by financing activities
    5,394,693       3,428,433  
Effect of exchange rate changes
    62,804       (70,022 )
Net increase in cash and cash equivalents
    1,896,521       1,251,927  
Cash and cash equivalents at beginning of year
    7,853,343       6,601,416  
Cash and cash equivalents at end of year
  $ 9,749,864     $ 7,853,343  
                 
Supplemental cash flow information
               
Cash paid for income taxes
  $ 831,791     $ 1,293,036  
Cash paid for interest expense
  $ 436,084     $ 390,418  
                 
See accompanying Notes to Consolidated Financial Statements.
               
 
22

 
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 Europe.  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 whose functional currencies are not U.S. dollars, 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 $141,882 in 2012 and $25,732 in 2011.

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 $3.1 million.

Accounts Receivable - Accounts receivable are shown less an allowance for doubtful accounts of $166,732 in 2012 and $129,242 in 2011.

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, 2012 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, 2012 and 2011, 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.

23

 
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 ($572,985 in 2012 and $535,500 in 2011) are expensed as incurred.

Shipping Costs – The costs of shipping product to our customers ($3,318,917 in 2012 and $3,084,925 in 2011) 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 ($1,521,464 in 2012 and $1,239,693 in 2011) are included in selling, general and administrative expenses.

Subsequent Events - The Company has evaluated events and transactions subsequent to December 31, 2012 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 2012, 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 2012, the Company had two customers that individually exceeded 10% of consolidated net sales. In 2011, the Company had one customer that exceeded 10% of consolidated net sales. Net sales to these customers amounted to approximately 17% and 12% in 2012.  Net sales to the one customer amounted to approximately 20% in 2011.

Recently Issued Accounting Standards
 
In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update on the reporting of amounts reclassified out of accumulated other comprehensive income, to improve the transparency of reporting. These reclassifications present the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income – but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. This standard update is effective for reporting periods beginning after December 15, 2012. We are currently evaluating the impact of adopting this accounting standards update on our consolidated financial statements.
 
3.  Inventories
 
Inventories consisted of:
 
   
2012
   
2011
 
Finished goods
  $ 28,819,060     $ 22,887,381  
Work in process
    71,285       44,564  
Materials and supplies
    1,401,775       1,563,047  
    $ 30,292,120     $ 24,494,992  
 
Inventories are stated net of valuation allowances for slow moving and obsolete inventory of $563,268 as of December 31, 2012 and $551,827 as of December 31, 2011.

24

 
4.  Intangible Assets
 
Intangible assets consisted of:
 
   
2012
   
2011
 
Patents
  $ 1,982,918     $ 1,885,888  
Trademarks
    601,716       565,273  
Pac-Kit Tradename, Customer List
    1,500,000       1,500,000  
C-Thru, Customer List
    1,050,000       -  
      5,134,634       3,951,161  
accumulated amortization
    894,233       666,498  
    $ 4,240,401     $ 3,284,663  
 
Amortization expense for patents and trademarks for the years ended December 31, 2012, and 2011 were $227,662 and $183,385, respectively.   The estimated aggregate amortization expense for each of the next five succeeding years, calculated on a similar basis, is as follows:  2013 - $270,033; 2014 - $256,803; 2015 - $244,095; 2016 - $242,271; and 2017 - $238,328.
 
5.  Other Accrued Liabilities
 
Other current and long-term accrued liabilities consisted of:
 
   
2012
   
2011
 
Customer rebates
  $ 3,404,720     $ 2,747,352  
Remediation liability
    123,587       239,016  
Pension liability
    900,291       1,012,786  
Other
    1,732,940       943,676  
    $ 6,161,538     $ 4,942,830  
 
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 2012, the Company contributed $221,000 to the plan and expects to contribute approximately $230,000 during 2013.

The plan asset weighted average allocation at December 31, 2012 and December 31, 2011, by asset category, were as follows:
 
Asset Category
 
2012
   
2011
 
Equity Securities
    70%       68%  
Fixed Income Securities
    29%       29%  
Other Securities / Investments
    1%       3%  
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.

25

 
As of December 31, 2012 and 2011, equity securities in the pension plan included 10,000 shares of the Company's Common Stock, having a market value of $110,400 and $95,000, respectively.

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 tables present the pension plan assets by level within the fair value hierarchy as of December 31, 2012 and 2011:

2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Money Market Fund
  $ 19,609     $ -     $ -     $ 19,609  
Acme United Common Stock
    110,400       -       -       110,400  
Equity Common and Collected Funds
    -       811,113       -       811,113  
Fixed Income Common and Collected Funds             384,280               384,280  
Total
  $ 130,009     $ 1,195,393     $ -     $ 1,325,402  

 
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
    -       757,373       -       757,373  
Fixed Income Common and Collected Funds             361,544               361,544  
Total
  $ 127,819     $ 1,118,917     $ -     $ 1,246,736  
 
Other disclosures related to the pension plan follow:
 
   
2012
   
2011
 
Assumptions used to determine benefit obligation:
           
  Discount rate
    2.99%       3.99%  
Changes in benefit obligation:
               
Benefit obligation at beginning of year
  $ (2,259,522 )   $ (2,479,645 )
Interest cost
    (85,108 )     (99,122 )
Service cost
    (36,000 )     (19,000 )
Actuarial (loss) gain
    (137,609 )     22,235  
Benefits and plan expenses paid
    292,546       316,010  
Benefit obligation at end of year
    (2,225,693 )     (2,259,522 )
                 
Changes in plan assets:
               
Fair value of plan assets at beginning of year
    1,246,736       1,315,428  
Actual return on plan assets
    149,717       7,665  
Employer contribution
    221,495       239,653  
Benefits and plan expenses paid
    (292,546 )     (316,010 )
Fair value of plan assets at end of year
    1,325,402       1,246,736  
Funded status
  $ (900,291 )   $ (1,012,786 )
 
26

 
   
2012
   
2011
 
Assumptions used to determine net periodic benefit cost:
           
  Discount rate
    3.99%       4.42%  
  Expected return on plan assets
    8.25%       8.25%  
Components of net benefit expense:
               
Interest cost
  $ 85,109     $ 99,122  
Service cost
    36,000       19,000  
Expected return on plan assets
    (94,765 )     (95,470 )
Amortization of prior service costs
    9,154       9,154  
Amortization of actuarial loss
    135,759       124,536  
Net periodic benefit cost
  $ 171,257     $ 156,342  
 
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:
 
   
2012
   
2011
 
             
Balance at beginning of the year
  $ 1,762,345     $ 1,830,465  
Change in net loss
    82,657       65,570  
Amortization of actuarial loss
    (135,759 )     (124,536 )
Amortization of prior service cost
    (9,154 )     (9,154 )
     Change recognized in other comprehensive income
    (62,256 )     (68,120 )
Total recognized in other comprehensive income
  $ 1,700,089     $ 1,762,345  
 
Amounts recognized in Accumulated Other Comprehensive Income:
 
Net actuarial loss
  $ 1,669,914     $ 1,723,016  
Prior service cost
    30,175       39,329  
Total
  $ 1,700,089     $ 1,762,345  
 
Accrued benefits costs are included in other accrued liabilities (non-current).
 
In 2013, net periodic benefit cost will include approximately $154,000 of net actuarial loss and $9,000 of prior service cost.

 
27

 
The following benefits are expected to be paid:
 
2013
  $ 254,000  
2014
    247,000  
2015
    231,000  
2016
    214,000  
2017
    194,000  
Years 2018 - 2022
    742,000  

The Company also has a 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, 2012 and 2011, the Company contributed 50% of employee’s contributions, up to the first 6% contributed by each employee.  Total contribution expense under this profit sharing plan was $99,105 in 2012 and $95,088 in 2011.
 
7.  Income Taxes
 
The amounts of income tax expense (benefit) reflected in operations is as follows:
 
   
2012
   
2011
 
Current:
           
Federal
  $ 843,812     $ 756,126  
State
    115,111       88,741  
Foreign
    523,752       532,827  
      1,482,675       1,377,694  
                 
Deferred:
               
Federal
    (31,374 )     (142,281 )
State
    (4,685 )     (18,802 )
Foreign
    1,199       (1,784 )
      (34,860 )     (162,867 )
    $ 1,447,815     $ 1,214,827  
 
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:
 
   
2012
   
2011
 
United States
  $ 2,169,451     $ 1,901,905  
Foreign
    2,827,595       2,124,115  
    $ 4,997,046     $ 4,026,020  
 
28

 
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 Hong Kong subsidiary and related income taxes are paid in Hong Kong whose rate approximates 16.5%.  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.
 
   
2012
   
2011
 
Federal income taxes at 34% statutory rate
  $ 1,698,996     $ 1,368,847  
State and local taxes, net of federal income tax effect
    75,697       46,160  
Permanent items
    79,892       7,149  
Foreign tax rate difference
    (460,351 )     (308,250 )
Change in deferred income tax valuation allowance
    53,581       100,921  
 Provision for income taxes
  $ 1,447,815     $ 1,214,827  
 
The following summarizes deferred income tax assets and liabilities:

   
2012
   
2011
 
Deferred income tax liabilities:
           
Plant, property and equipment
  $ 413,160     $ 322,604  
      413,160       322,604  
                 
Deferred income tax assets:
               
Asset valuations
    543,002       426,429  
Contribution carryforward
    157,297       296,802  
Operating loss carryforwards and credits
    2,201,789       2,148,208  
Pension
    448,579       467,087  
Foreign tax credit
    43,575       48,847  
Other
    591,066       418,938  
      3,985,308       3,806,311  
Net deferred income tax asset before valuation allowance
    3,572,148       3,483,707  
Valuation allowance
    (2,201,789 )     (2,148,208 )
Net deferred income tax asset
  $ 1,370,359     $ 1,335,499  
 
29

 
In 2012, 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, 2009 and forward, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2012.

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 2012, the Company repatriated $750,000 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 $11,576,094 and $9,855,053 are considered permanently reinvested as of December 31, 2012 and 2011, 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, 2012, the Company had tax operating loss carry forwards aggregating $7,110,013, all of which were applicable to Germany, and can be carried forward indefinitely.
 
8.  Debt

Long term debt consists of borrowings under the Company’s revolving loan agreement with HSBC Bank, N.A. As of December 31, 2012, $24,319,829 was outstanding and $5,680,171 was available for borrowing under the Company’s revolving loan agreement.

On April 5, 2012, the Company entered into a new revolving loan agreement with HSBC Bank, N.A. In conjunction with signing the new revolving loan agreement, the Company ended its agreement with Wells Fargo and used funds borrowed under the new loan agreement to pay all amounts then outstanding under the revolving loan agreement with Wells Fargo Bank.

The new five-year credit facility provides for increased borrowings of up to an aggregate of $30 million at an interest rate of LIBOR plus 1.75% (2.00% at December 31, 2012), which is 0.25% lower than the interest rate under the former loan agreement with Wells Fargo. All principal amounts outstanding under the agreement are required to be repaid in a single amount on April 5, 2017, the date the agreement expires; interest is payable monthly.  Funds borrowed under the agreement may be used for working capital, general operating expenses, share repurchases, acquisitions and certain other purposes.  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. These financial covenants in the new loan agreement are similar to the covenants in the prior agreement with Wells Fargo. At December 31, 2012 the Company was in compliance with these covenants under the new agreement with HSBC.
 
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 $760,856 and $713,925 in 2012 and 2011. Minimum annual rental commitments under non-cancelable leases with remaining terms of one year or more as of December 31, 2012:  2013 - $791,278; 2014 - $482,591; 2015 - $384,427; 2016 - $44,234; and 2017 - $3,917.
 
There are no pending material legal proceedings to which the Company is a party or, to the actual knowledge of the Company, contemplated by any governmental authority.

30

 
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 first aid 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 19% and 15% of the Company’s total net sales in 2012 and 2011, 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.
 
Financial data by segment:
 
2012
                       
(000's omitted)
 
United States
   
Canada
   
Europe
   
Consolidated
 
Sales to unaffiliated customers
  $ 67,510       8,808       8,052     $ 84,370  
                                 
Operating income
    4,394       775       192       5,361  
Assets
    56,115       6,107       5,606       67,828  
Additions to property, plant and equipment
    656       14       11       681  
Depreciation and amortization
    980       36       73       1,089  
                                 
2011
                               
                                 
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  
 
31

 
The following is a reconciliation of segment operating income to consolidated income before taxes:
 
   
2012
   
2011
 
Total operating income
  $ 5,361     $ 4,285  
Interest expense, net
    264       255  
Other expense, net
    99       4  
Consolidated income before taxes
  $ 4,998     $ 4,026  
                 
Net Income
  $ 3,549     $ 2,811  

The table below presents revenue by geographic area. Revenues are attributed to countries based on location of the customer.

Revenues
 
2012
   
2011
 
United States
  $ 66,694     $ 55,856  
International:
               
Canada
    8,808       8,514  
Europe
    8,052       8,125  
Other
    816       807  
Total International
  $ 17,676     $ 17,446  
                 
Total Revenues
  $ 84,370     $ 73,302  
 
11.  Stock Option Plans

The Company has two stock option plans: (1) the 2012 Employee Stock Option Plan, (the “Employee Plan”) and (2) the 2005 Non-Salaried Director Stock Option Plan (the “Director Plan”).

The Employee Plan, which became effective April 23, 2012, 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 vest 25% one day after the first anniversary of the grant date and 25% one day after each of the next three anniversaries. As of December 31, 2012, the number of shares available for grant under the Employee Plan was 40,000.  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.  Options outstanding under the Company’s 2002 Employee Stock Option Plan have the same vesting schedule as the 2012 Employee plan.

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, 2012, the number of shares available for grant under the Director Plan was 21,500.
 
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A summary of changes in options issued under the Company’s stock option plans follows:

   
2012
   
2011
 
             
Options outstanding  at the beginning of the year
    943,000       838,950  
Options granted
    215,438       185,500  
Options forfeited
    (6,250 )     (2,000 )
Options exercised
    (33,500 )     (79,450 )
Options outstanding at the end of the year
    1,118,688       943,000  
Options exercisable at the end of the year
    672,125       554,500  
Common stock available for future grants at the end of the year
    61,500       107,438  
Weighted average exercise price per share:
         
 Granted
  $ 10.47     $ 9.67  
 Forfeited
    6.98       10.10  
 Exercised
    5.13       3.31  
 Outstanding
    10.96       10.84  
 Exercisable
    11.65       11.69  
 
A summary of options outstanding at December 31, 2012 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       30,500    
  < 1
    $ 3.84       30,500     $ 3.84  
$5.12 to $8.51       151,750       6       7.70       118,750       7.65  
$8.52 to $10.21       427,688       8       9.85       146,125       9.81  
$10.22 to $13.62       270,500       8       11.70       139,500       12.69  
$13.63 to $17.02       238,250       3       15.16       237,250       15.16  
        1,118,688                       672,125          

The weighted average remaining contractual life of all outstanding stock options is 7 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”).
 
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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, 2012 and December 31, 2011 were as follows:
       
   
2012
   
2011
 
Expected life in years
    5       5  
Interest rate
    0.60 – .92%       0.91 – 2.10%  
Volatility
    .327-.333       .327-.330  
Dividend yield
    2.50% - 2.70%       2.37% - 2.70%  
 
Total stock-based compensation recognized in the Company’s consolidated statements of operations for the years ended December 31, 2012 and 2011 was $427,877 and $428,439, respectively.  At December 31, 2012, there was approximately $745,698 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, 2012, 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 2012 and 2011 was $2.36 and $2.26 per option, respectively.  The aggregate intrinsic value of outstanding options was $1,290,457 at December 31, 2012. The aggregate intrinsic value of exercisable options was $805,223 at December 31, 2012.  The aggregate intrinsic value of options exercised during 2012 was $190,235.
 
12.  Earnings Per Share
 
The calculation of earnings per share follows:
 
   
2012
   
2011
 
Numerator:
           
   Net income
  $ 3,549,231     $ 2,811,193  
Denominator:
               
Denominator for basic earnings per share:
               
Weighted average shares outstanding
    3,115,574       3,099,982  
Effect of dilutive employee stock options
    16,935       0  
   Denominator for dilutive earnings per share
    3,132,510       3,099,983  
   Basic earnings per share
  $ 1.14     $ 0.91  
   Dilutive earnings per share
  $ 1.13     $ 0.91  

For 2012 and 2011, respectively, 507,750 and 602,895 stock options were excluded from diluted earnings per share calculations because they would have been anti-dilutive.

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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, 2010
  $ 280,964     $ (1,156,120 )   $ (875,157 )
Change in net prior service credit
                       
and actuarial losses, net of tax
      66,691       66,691  
Translation adjustment
    (229,853 )             (229,853 )
Balances, December 31, 2011
  $ 51,111     $ (1,089,429 )   $ (1,038,319 )
Change in net prior service credit
                       
and actuarial losses, net of tax
      57,191       57,191  
Translation adjustment
    194,235               194,235  
Balances, December 31, 2012
  $ 245,346     $ (1,032,238 )   $ (786,893 )
 
14.  Financial Instruments
 
The carrying value of the Company’s bank debt is a reasonable estimate of fair value because of its short term nature. The carrying value of the Company’s note receivable approximates fair value. Fair value was determined using a discounted cash flow analysis.
 
15.  Quarterly Data (unaudited)
 
Quarters (000's omitted, except per share data)
       
                               
2012
 
First
   
Second
   
Third
   
Fourth
   
Total
 
Net sales
  $ 16,878     $ 27,594     $ 20,363     $ 19,535     $ 84,370  
Cost of goods sold
    10,934       17,773       12,937       12,979       54,623  
Net income
    260       2,061       798       430       3,549  
Basic earnings per share
  $ 0.08     $ 0.66     $ 0.26     $ 0.14     $ 1.14  
Diluted earnings per share
  $ 0.08     $ 0.66     $ 0.26     $ 0.13     $ 1.13  
Dividends per share
  $ 0.07     $ 0.07     $ 0.07     $ 0.07     $ 0.28