UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-21018

TUFCO TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		39-1723477
(State of other jurisdiction		(IRS Employer ID No.)
of incorporation of organization)

PO BOX 23500 Green Bay, WI 54305

(920) 336-0054

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller Reporting Company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each or the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of August 12, 2011
Common Stock, par value $0.01 per share		4,308,947

 

 

TUFCO TECHNOLOGIES, INC.

Index

		Page
		Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2011 and September 30, 2010			3
Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2011 and 2010			4
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2011 and 2010			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			11
Item 3. Quantitative and Qualitative Disclosures About Market Risk			16
Item 4 Controls and Procedures			16
PART II: OTHER INFORMATION
Item 1 Legal Proceedings			17
Item 1A. Risk Factors			17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			17
Item 3. Defaults Upon Senior Securities			17
Item 4. [Removed and Reserved]			17
Item 5. Other Information			17
Item 6. Exhibits			17
SIGNATURES			18
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION

ITEM 1.		Condensed Consolidated Financial Statements

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

		June 30,				September 30,
		2011				2010
Assets
CURRENT ASSETS:
Cash		$	7,137			$	7,899
Accounts receivable-net			12,594,218				14,211,275
Inventories-net			17,178,049				14,329,857
Prepaid expenses and other current assets			432,788				157,269
Income taxes receivable			16,343				16,430
Deferred income taxes			364,680				364,680
Total current assets			30,593,215				29,087,410
PROPERTY, PLANT AND EQUIPMENT-Net			17,704,679				18,640,263
GOODWILL			7,211,575				7,211,575
OTHER ASSETS-Net			247,091				135,865
TOTAL		$	55,756,560			$	55,075,113
Liabilities and Stockholders’ Equity
CURRENT LIABILITIES:
Revolving line of credit		$	7,467,028			$	4,476,736
Current portion of note payable			255,329				244,577
Accounts payable			7,904,697				9,974,560
Accrued payroll, vacation and payroll taxes			579,172				554,967
Other current liabilities			526,990				435,167
Total current liabilities			16,733,216				15,686,007
LONG-TERM PORTION OF NOTE PAYABLE			832,784				1,026,966
DEFERRED INCOME TAXES			2,176,828				2,257,071
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value - 9,000,000 shares authorized; 4,708,741 shares issued			47,087				47,087
Non-voting common stock, $.01 par value — 2,000,000 shares authorized and unissued			—				—
Preferred stock, $.01 par value — 1,000,000 shares authorized and unissued			—				—
Additional paid-in capital			25,526,586				25,497,814
Retained earnings			12,597,516				12,717,625
Treasury stock - 399,794 common shares at cost			(2,157,457	)			(2,157,457	)
Total stockholders’ equity			36,013,732				36,105,069
TOTAL		$	55,756,560			$	55,075,113

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

		THREE MONTHS ENDED								NINE MONTHS ENDED
		June 30,								June 30,
		2011				2010				2011				2010
NET SALES		$	27,985,952			$	24,354,879			$	80,758,367			$	65,271,598
COST OF SALES			26,591,816				23,057,635				76,535,966				61,910,038
GROSS PROFIT			1,394,136				1,297,244				4,222,401				3,361,560
OPERATING EXPENSES:
Selling, general & administrative			1,436,286				1,387,687				4,265,045				4,021,222
OPERATING LOSS			(42,150	)			(90,443	)			(42,644	)			(659,662	)
OTHER (EXPENSE) INCOME:
Interest expense			(65,883	)			(48,711	)			(198,148	)			(105,327	)
Interest income and other income			943				125				49,230				15,596
LOSS BEFORE INCOME TAXES			(107,090	)			(139,029	)			(191,562	)			(749,393	)
INCOME TAX BENEFIT			(39,945	)			(51,858	)			(71,453	)			(279,523	)
NET LOSS		$	(67,145	)		$	(87,171	)		$	(120,109	)		$	(469,870	)
BASIC LOSS PER SHARE:
Net Loss		$	(0.02	)		$	(0.02	)		$	(0.03	)		$	(0.11	)
DILUTED LOSS PER SHARE:
Net Loss		$	(0.02	)		$	(0.02	)		$	(0.03	)		$	(0.11	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic			4,308,947				4,308,947				4,308,947				4,308,947
Diluted			4,308,947				4,308,947				4,308,947				4,308,947

See notes to condensed consolidated financial statements.

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

		NINE MONTHS ENDED
		June 30,
		2011				2010
OPERATING ACTIVITIES
Net loss		$	(120,109	)		$	(469,870	)
Noncash items in net loss:
Depreciation and amortization of property, plant and equipment			2,175,716				2,000,663
Deferred income taxes			(80,243	)			(331,317	)
Stock-based compensation expense			28,772				35,533
Changes in operating working capital:
Accounts receivable			1,617,057				(2,726,019	)
Inventories			(2,848,192	)			(3,134,953	)
Prepaid expenses and other assets			(386,745	)			(91,261	)
Accounts payable			(2,077,736	)			1,726,746
Accrued and other current liabilities			116,028				371,982
Income taxes receivable			87				34,806
Net cash used in operating activities			(1,575,365	)			(2,583,690	)
INVESTING ACTIVITIES
Additions to property, plant and equipment			(1,232,259	)			(1,761,359	)
Net cash used in investing activities			(1,232,259	)			(1,761,359	)
FINANCING ACTIVITIES
Net borrowings of revolving debt			2,990,292				4,365,096
Principal payments on note payable			(183,430	)			(19,474	)
Net cash provided by financing activities			2,806,862				4,345,622
NET (DECREASE) INCREASE IN CASH			(762	)			573
CASH:
Beginning of period			7,899				4,092
End of period		$	7,137			$	4,665
NONCASH SUPPLEMENTAL INFORMATION:
Note payable incurred for the purchase of equipment		$	—			$	1,350,000
Change in construction payable		$	7,873			$	29,792

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

1.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by Tufco Technologies, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments necessary for a fair statement of results for each period shown (unless otherwise noted herein, all adjustments are of a normal recurring nature). Operating results for the three month and nine month periods ended June 30, 2011 are not necessarily indicative of results expected for the remainder of the year. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. The Company believes that the disclosures made are adequate to prevent the financial information given from being misleading. The Company’s fiscal 2010 Annual Report on Form 10-K contains a summary of significant accounting policies and includes the consolidated financial statements and the notes to the consolidated financial statements. The same accounting policies are followed in the preparation of interim reports. The Company’s condensed consolidated balance sheet at September 30, 2010 was derived from the audited consolidated balance sheet. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended September 30, 2010.

2.

Financial Instruments

Financial instruments consist of cash, receivables, payables, debt, and letters of credit. Their carrying values are estimated to approximate their fair values unless otherwise indicated due to their short maturities, variable interest rates plus a margin applicable to the credit risk associated with the revolving line of credit and comparable borrowing costs for equipment loans.

3.

Earnings Per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share includes common stock equivalents from dilutive stock options outstanding during the year. During the three months ended June 30, 2011 and 2010, options to purchase 275,000 and 314,650 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive. During the nine months ended June 30, 2011 and 2010, options to purchase 293,000 and 319,650 shares, respectively, were excluded from the diluted earnings per share computation as the effects of including such options would have been anti-dilutive.

4.

Inventories

Inventories consist of the following:

		June 30,				September 30,
		2011				2010
Raw materials		$	13,796,611			$	11,368,089
Finished goods			3,381,438				2,961,768
Total inventories		$	17,178,049			$	14,329,857

Notes to condensed consolidated financial statements—(continued)

5.

Goodwill

As previously disclosed, the Company tests goodwill annually at the reporting unit level for impairment as of June 30. The operating segments herein also represent the Company’s reporting units for goodwill purposes. The Company uses a discounted cash flow analysis to estimate reporting unit fair values and also considers multiples of relevant companies. Management has completed the Company’s annual impairment test and determined there were no changes in the carrying amount of goodwill by reporting unit for the three months and nine months ended June 30, 2011. However, there can be no assurance that valuation multiples will not decline, growth rates will not be lower than expected, discount rates will not increase, or the projected cash flows of the individual reporting units will not decline. For example, lower than expected growth or margins or an increase to the discount rate due to changes in risk premiums or other factors may suggest that an impairment has occurred under Step 1 and require the Company to proceed to Step 2 to measure the fair value of assets and liabilities of the reporting units. At the annual measurement date of June 30, 2011, the estimated fair value of Contract Manufacturing exceeded its carrying value by approximately 96%. The estimated fair value of Business Imaging exceeded its carrying value by approximately 6% at June 30, 2011. The current discount rate would need to increase by 5.4% for Contract Manufacturing and increase by 0.5% for Business Imaging before the Company would be required to proceed to Step 2. The results of the Business Imaging test reflect an increase in paper costs during 2011 that the segment has not been able to pass on, which management believes is temporary.

The Company recognizes that its common stock regularly trades below book value per share and will continue to monitor the relationship of its market capitalization to both its book value and tangible book value. While management plans to return the Company’s business fundamentals to levels that support the book value per share, there is no assurance that the plan will be successful, or that the market price of the common stock will increase to such levels in the foreseeable future.

6.

Revolving Line of Credit

On March 15, 2010, the Company entered into an $8.0 million amended and restated unsecured revolving line of credit facility with a termination date of January 31, 2011. On December 28, 2010, the Company further amended its credit agreement to increase the revolving credit availability from $8.0 million to $10.0 million, extend its termination date to January 31, 2012 and modify the required levels of after tax net income (or loss) under its financial covenants for periods commencing December 31, 2010 and thereafter. On June 30, 2011, the Company entered into a Second Amendment to its credit facility. Pursuant to the amendment, the Company received relief under a financial covenant. The Company’s revolving line of credit is classified as a current liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and a material adverse effect covenant which is subjective in nature. Borrowings under the amended credit facility bear interest at a rate equal to LIBOR plus 2.50%. The Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility.

Availability under the facility is based upon specified percentages of eligible accounts receivable and inventory. The credit agreement is unsecured. The credit agreement contains certain covenants, including requirements to maintain a minimum tangible net worth and net income (or net loss) within specified levels.

As of June 30, 2011, the Company had approximately $2.5 million available and $7.5 million outstanding under its revolving credit line pursuant to its credit agreement.

Notes to condensed consolidated financial statements—(continued)

7.

Stock Based Compensation

During the three months ended June 30, 2011, Messrs. Robert J. Simon, Samuel J. Bero, C. Hamilton Davison, Brian Kelly, Richard M. Segel and William R. Ziemendorf, in conjunction with their re-election to serve on the Tufco Technologies, Inc. Board of Directors, each received a grant on May 26, 2011 to acquire 3,000 shares of common stock under Tufco’s 2004 Non-Employee Director Stock Option Plan at an exercise price of $3.53 per share, the closing price of the Company’s common stock on the NASDAQ Capital Market as of that date. The grant date fair value of these options was estimated at $2.20 using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 0.48%, expected volatility of 124.9%, no dividend yield and an expected life of two years.

8.

Segment Information

The Company manufactures and distributes custom paper-based and nonwoven products, and provides contract manufacturing, specialty printing and related services on these types of products. The Company separates its operations and prepares information for management use by the market segment aligned with the Company’s products and services. Corporate costs, such as interest income, interest expense and income tax (benefit) expense are recorded under the Corporate and Other segment. Such market segment information is summarized below. The Contract Manufacturing segment provides services to multinational consumer products companies while the Business Imaging segment manufactures and distributes printed and unprinted business imaging paper products for a variety of business needs.

Substantially all of the Company’s revenues are attributed to domestic external customers. There are no long-lived assets located outside of the United States.

Notes to condensed consolidated financial statements—(continued)

Three Months Ended		Contract				Business				Corporate
June 30, 2011		Manufacturing				Imaging				and Other				Consolidated
Net sales		$	21,566,135			$	6,419,817			$	—			$	27,985,952
Gross profit			1,070,618				323,518				—				1,394,136
Operating income (loss)			659,643				6,668				(708,461	)			(42,150	)
Depreciation and amortization expense			702,308				34,463				123				736,894
Capital expenditures			313,042				109,689				—				422,731

Three Months Ended		Contract				Business				Corporate
June 30, 2010		Manufacturing				Imaging				and Other				Consolidated
Net sales		$	17,979,347			$	6,375,532			$	—			$	24,354,879
Gross profit			716,907				580,337				—				1,297,244
Operating income (loss)			289,081				254,114				(633,638	)			(90,443	)
Depreciation and amortization expense			618,344				31,338				419				650,101
Capital expenditures			253,089				21,066				—				274,155

Nine Months Ended		Contract				Business				Corporate
June 30, 2011		Manufacturing				Imaging				and Other				Consolidated
Net sales		$	62,514,099			$	18,244,268			$	—			$	80,758,367
Gross profit			3,265,876				956,525				—				4,222,401
Operating income (loss)			2,016,844				3,576				(2,063,064	)			(42,644	)
Depreciation and amortization expense			2,081,374				93,897				445				2,175,716
Capital expenditures			893,709				338,550				—				1,232,259

Nine Months Ended		Contract				Business				Corporate
June 30, 2010		Manufacturing				Imaging				and Other				Consolidated
Net sales		$	47,107,717			$	18,163,881			$	—			$	65,271,598
Gross profit			1,895,826				1,465,734				—				3,361,560
Operating income (loss)			722,111				505,037				(1,886,810	)			(659,662	)
Depreciation and amortization expense			1,864,453				134,616				1,594				2,000,663
Capital expenditures			1,691,514				69,845				—				1,761,359

Notes to condensed consolidated financial statements—(continued)

		Contract				Business				Corporate
June 30, 2011		Manufacturing				Imaging				and Other				Consolidated
Assets:
Inventories-net		$	13,879,396			$	3,298,653			$	—			$	17,178,049
Property, plant and equipment-net			15,618,233				2,084,027				2,419				17,704,679
Accounts receivable and other (including goodwill)			14,415,388				5,823,193				635,251				20,873,832
Total assets		$	43,913,017			$	11,205,873			$	637,670			$	55,756,560

		Contract				Business				Corporate
September 30, 2010		Manufacturing				Imaging				and Other				Consolidated
Assets:
Inventories-net		$	11,096,525			$	3,233,332			$	—			$	14,329,857
Property, plant and equipment-net			16,798,025				1,839,374				2,864				18,640,263
Accounts receivable and other (including goodwill)			15,333,831				6,246,288				524,874				22,104,993
Total assets		$	43,228,381			$	11,318,994			$	527,738			$	55,075,113

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Management’s discussion of the Company’s fiscal 2011 results in comparison to fiscal 2010 contains forward-looking statements regarding current expectations, risks and uncertainties for future periods. The actual results could differ materially from those discussed herein due to a variety of factors such as the Company’s ability to increase sales, changes in customer demand for its products, cancellation of production agreements by significant customers including two Contract Manufacturing customers it depends upon for a significant portion of its business, its ability to meet competitors’ prices on products to be sold under these production agreements, the effects of the economy in general, including the slow economic recovery from the recent economic downturn, the Company’s ability to refinance or replace its line of credit, which expires January 31, 2012, the Company’s inability to benefit from any general economic improvements, material increases in the cost of raw materials, competition in the Company’s product areas, the ability of management to successfully reduce operating expenses including labor and waste costs in relation to net sales, the Company’s ability to increase sales and earnings as a result of new projects, the Company’s ability to successfully install new equipment on a timely basis, the Company’s ability to continue to produce new products, the Company’s ability to continue to improve profitability, the Company’s ability to successfully attract new customers through its sales initiatives and strengthening its new business development efforts, and the Company’s ability to improve the run rates for its products. Therefore, the financial data for the periods presented may not be indicative of the Company’s future financial condition or results of operations.

General Information:

Tufco is a leader in providing diversified contract wet and dry wipes converting, as well as specialty printing services and business imaging products. The Company works closely with its customers to develop products or perform services which meet or exceed the customers’ quality standards, and then uses the Company’s operating efficiencies and technical expertise to supplement or replace its customers’ own production and distribution functions.

The Company’s technical proficiencies include wide web flexographic printing, wet and dry wipe converting, hot melt adhesive lamination, folding, integrated downstream packaging and quality and microbiological process management and the manufacture and distribution of business imaging paper products.

The Company has manufacturing operations in Green Bay, WI, which is ISO certified, and Newton, NC. The Company’s corporate headquarters, including corporate support services, are located in Green Bay, WI.

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations-Continued

Results of Operations:

Condensed operating data, percentages of net sales and period-to-period changes in these items are as follows (dollars in thousands):

		Three Months Ended								Period-to-Period								Nine Months Ended								Period-to-Period
		June 30,								Change								June 30,								Change
		2011				2010				$				%				2011				2010				$				%
Net Sales		$	27,986			$	24,355			$	3,631				15	%		$	80,758			$	65,272			$	15,486				24	%
Gross Profit			1,394				1,297				97				7	%			4,222				3,362				860				26	%
			5.0	%			5.3	%											5.2	%			5.2	%
Operating Expenses			1,436				1,388				48				3	%			4,265				4,021				244				6	%
			5.1	%			5.7	%											5.3	%			6.2	%
Operating Loss			(42	)			(90	)			48				(53	%)			(43	)			(660	)			617				(93	%)
			(0.2	%)			(0.4	%)											(0.1	%)			(1.0	%)
Interest and Other-Net			65				49				16				33	%			149				90				59				66	%
			0.2	%			0.2	%											0.2	%			0.1	%
Loss Before Income Taxes			(107	)			(139	)			32				(23	%)			(192	)			(749	)			557				(74	%)
			(0.4	%)			(0.6	%)											(0.2	%)			(1.1	%)
Income Tax Benefit			(40	)			(52	)			12				(23	%)			(71	)			(280	)			209				(75	%)
			(0.1	%)			(0.2	%)											(0.1	%)			(0.4	%)
Net Loss		$	(67	)		$	(87	)			20				(23	%)		$	(120	)		$	(470	)			350				(74	%)
			(0.2	%)			(0.4	%)											(0.1	%)			(0.7	%)
Basic and Diluted Loss Per Share		$	(0.02	)		$	(0.02	)										$	(0.03	)		$	(0.11	)

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

		Three Months Ended
		June 30,
		2011								2010								Period-to-Period
						% of								% of				Change
		Amount				Total				Amount				Total				$				%
Net Sales
Contract Manufacturing and printing		$	21,566				77	%		$	17,979				74	%		$	3,587				20	%
Business Imaging paper products			6,420				23				6,376				26				44				1	%
Net Sales		$	27,986				100	%		$	24,355				100	%		$	3,631				15	%

		2011								2010								Period-to-Period
						Margin								Margin				Change
		Amount				%				Amount				%				$				%
Gross Profit
Contract Manufacturing and printing		$	1,071				5	%		$	717				4	%		$	354				49	%
Business Imaging paper products			323				5	%			580				9	%			(257	)			(44	%)
Gross Profit		$	1,394				5	%		$	1,297				5	%		$	97				7	%

		Nine Months Ended
		June 30,
		2011								2010								Period-to-Period
						% of								% of				Change
		Amount				Total				Amount				Total				$				%
Net Sales
Contract Manufacturing and printing		$	62,514				77	%		$	47,108				72	%		$	15,406				33	%
Business Imaging paper products			18,244				23				18,164				28				80				0.4	%
Net Sales		$	80,758				100	%		$	65,272				100	%		$	15,486				24	%

		2011								2010								Period-to-Period
						Margin								Margin				Change
		Amount				%				Amount				%				$				%
Gross Profit
Contract Manufacturing and printing		$	3,266				5	%		$	1,896				4	%		$	1,370				72	%
Business Imaging paper products			956				5	%			1,466				8	%			(510	)			(35	%)
Gross Profit		$	4,222				5	%		$	3,362				5	%		$	860				26	%

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Net Sales:

Consolidated net sales increased $3.6 million (15%) to $28.0 million in the third quarter of fiscal 2011, when compared to the same period last year. This was primarily due to an increase of $3.6 million (20%) in the Contract Manufacturing segment and a slight increase of $44,000 (1%) in the Business Imaging segment.

For the nine months ended June 30, 2011, net sales increased $15.5 million (24%) when compared to the first nine months of fiscal 2010. This was primarily due to an increase of $15.4 million (33%) in the Contract Manufacturing segment and a slight increase of $80,000 (0.4%) in the Business Imaging segment.

In Contract Manufacturing, the increase in revenues for the three and nine months ended June 30, 2011, was primarily due to increased sales from both new and existing customers.

The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 18% of the Company’s total net sales in the third quarter of fiscal 2011 compared to 20% for the same period in fiscal 2010. This same customer accounted for 19% of the Company’s total net sales in the first nine months of fiscal 2011, compared to 21% for the same period last year. The other significant customer accounted for 28% of the Company’s total net sales in the third quarter of fiscal 2011 compared to 29% for the same period in fiscal 2010. This customer accounted for 34% of the Company’s total net sales in the first nine months of fiscal 2011 compared to 29% for the same period last year.

Gross Profit:

Consolidated gross profit increased $0.1 million (7%) for the third quarter of fiscal 2011 when compared to the third quarter of fiscal 2010. This was due to an increase of $0.4 million (49%) in the Contract Manufacturing segment and a decrease of $0.3 million (44%) in the Business Imaging segment.

For the nine months ended June 30, 2011, gross profit increased $0.9 million (26%) when compared to the same period last year. This was due to an increase of $1.4 million (72%) in the Contract Manufacturing segment and a decrease of $0.5 million (35%) in the Business Imaging segment.

The Company’s Contract Manufacturing operation has reported increased margins and improved gross profit for both the quarter and year to date. The Company’s Business Imaging operation has reported flat sales, decreased margins and decreased gross profit, for both the quarter and year to date, due to an inability to pass on paper cost increases through sales price increases. The Company continues to focus on increasing sales and reducing costs.

As more fully described in Note 5 to the condensed consolidated financial statements, the Company tested for goodwill impairment as of June 30, 2011 for both Contract Manufacturing and Business Imaging reporting units. The estimated fair value of Contract Manufacturing exceeded its carrying value by approximately 96%. The estimated fair value of Business Imaging exceeded its carrying value by approximately 6% at June 30, 2011. The current discount rate would need to increase by 5.4% for Contract Manufacturing and increase by 0.5% for Business Imaging before the Company would be required to proceed to Step 2. The results of the Business Imaging test reflect the decrease in gross profit during 2011, which management believes is temporary. Lower than expected growth or margins in the future may suggest that an impairment has occurred. For the three and nine months ended June 30, 2011, there were no changes in the carrying amount of goodwill in either Contract Manufacturing or Business Imaging.

Operating Expenses:

Selling, general and administrative expenses increased $48,000 (3%) for the third quarter of fiscal 2011 when compared to the same period in fiscal 2010, and increased $244,000 (6%) when compared to the first nine months of fiscal 2010 as a result of increased expenses related to additional sales personnel, employment cost, outside Management Information Systems services and reserves for bad debt.

Interest Expense and Other Income (Expense) net:

Interest expense increased $17,000 to $66,000 for the third quarter of fiscal 2011 when compared to the same period in fiscal 2010 and increased $93,000 to $198,000 for the first nine months of fiscal 2011 when compared to the same period in fiscal 2010 due to higher average debt outstanding as a result of the Company borrowing from its revolving credit line to fund a portion of its increased working capital and equipment needs.

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Income Tax Benefit:

Income tax benefit for the third quarter of fiscal 2011 was $40,000, compared to an income tax benefit of $52,000 for the same period of fiscal 2010. For the first nine months of fiscal 2011, the Company had an income tax benefit of $71,000 compared to an income tax benefit of $280,000 for the same period of fiscal 2010. The income tax benefit for the first nine months of 2011 represents a net operating loss carryforward that the Company expects to realize in the future.

Net Income:

The Company reported a net loss of $67,000 [per share: $(0.02) basic and diluted] for the third quarter of fiscal 2011, versus a net loss of $87,000 [per share: $(0.02) basic and diluted] for the same period in fiscal 2010. For the nine months ended June 30, 2011, the net loss was $120,000 [per share: $($0.03) basic and diluted] compared to a net loss of $470,000 [per share: $(0.11) basic and diluted] for the first nine months of fiscal 2010.

Liquidity and Capital Resources:

Cash flows used in operations were $1.6 million through the first nine months of fiscal 2011, compared to cash used in operations of $2.6 million for the same period last year. Accounts receivable decreased $1.6 million for the first nine months of fiscal 2011 and accounts payable decreased $2.1 million in the first nine months of fiscal 2011 compared to the same period last year. Inventories increased $2.8 million, primarily as a result of increased sales volume, purchases of inventory based upon customer forecasts, and price increases of raw materials being purchased. Depreciation was $2.2 million for the first nine months of fiscal 2011.

Net cash used in investing activities was $1.2 million for the first nine months of fiscal 2011, primarily related to capital expenditures to support ongoing operational needs.

Net cash provided by financing activities was $2.8 million for the first nine months of fiscal 2011, consisting of $3.0 million related to the Company borrowing from its revolving credit line to fund a portion of its increased working capital and equipment needs.

The Company’s primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of June 30, 2011, cash recorded on the balance sheet was $7,137.

On March 15, 2010, the Company entered into an $8.0 million amended and restated unsecured revolving line of credit facility with a termination date of January 31, 2011. On December 28, 2010, the Company further amended its credit agreement to increase the revolving credit availability from $8.0 million to $10.0 million, extend its termination date to January 31, 2012 and modify the required levels of after tax net income (or loss) under its financial covenants for periods commencing December 31, 2010 and thereafter. On June 30, 2011, the Company entered into a Second Amendment to its credit facility. Pursuant to the amendment, the Company received relief under a financial covenant. The Company’s revolving line of credit is classified as a current liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and a material adverse effect covenant which is subjective in nature. It is also the Company’s policy to classify borrowings under the revolving line of credit as current based on how it manages working capital. Borrowings under the amended credit facility bear interest at a rate equal to LIBOR plus 2.50%. The Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility.

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued

Availability under the facility is based upon specified percentages of eligible accounts receivable and inventory. The credit agreement is unsecured. The credit agreement contains certain covenants, including requirements to maintain a minimum tangible net worth and net income (or net loss) within specified levels. As of June 30, 2011, the Company was in compliance with all of its covenants under the credit agreement, as amended.

As of August 11, 2011, the Company had approximately $3.3 million available and $6.7 million outstanding under its revolving credit line pursuant to its credit agreement, as amended.

Management believes that the Company’s operating cash flow, together with amounts available under its credit agreement, are adequate to service the Company’s current obligations as of June 30, 2011 and any budgeted capital expenditures, assuming the Company meets its business plan.

The Company intends to retain earnings to finance future operations and expansion and does not expect to pay any dividends within the foreseeable future.

Off Balance Sheet Arrangements:

The Company has no Off Balance Sheet Arrangements (as defined in Item 303(a)(4) of Regulation S-K).

ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

ITEM 4.		Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) were effective as of the end of the Company’s fiscal quarter ended June 30, 2011.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.		Legal Proceedings

The Company is subject to lawsuits, investigations, and potential claims arising out of the ordinary conduct of its business. The Company is not currently involved in any material litigation.

ITEM 1A.		Risk Factors

A smaller reporting company is not required to provide the information required by this Item.

ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds

None

ITEM 3.		Defaults Upon Senior Securities

None

ITEM 4.		[Removed and Reserved]

ITEM 5.		Other Information

None

ITEM 6.		Exhibits

	31.1			Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
	31.2			Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
	32.1			Certification furnished pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2			Certification furnished Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.