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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
-------------
Commission file number 0-21018
TUFCO TECHNOLOGIES, INC.
Delaware 39-1723477
- --------------------------------- --------------------
(State of other jurisdiction (IRS Employer ID No.)
of incorporation of organization)
PO Box 23500, Green Bay, WI 54305-3500
----------------------------------------
(Address of principal executive offices)
(972) 789-1079
--------------
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 X No
------ ------
Indicate the number of shares outstanding of each or the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 13, 2002
----- ------------------------------
Common Stock, par value $0.01 per share 4,627,844
Page 1 of 20
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2002 and September 30, 2001 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2002 and 2001 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 18
PART II: OTHER INFORMATION 19
SIGNATURES 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, September 30,
2002 2001
--------------- ---------------
Assets
CURRENT ASSETS:
Cash and cash equivalents ................................... $ 592,182 $ 521,453
Restricted cash ............................................. -- 32,739
Accounts receivable, net .................................... 12,920,043 11,231,668
Inventories ................................................. 7,440,707 9,063,426
Prepaid expenses and other current assets ................... 800,871 806,388
Deferred income taxes ....................................... 633,729 633,729
--------------- ---------------
Total current assets ................................... 22,387,532 22,289,403
PROPERTY, PLANT AND EQUIPMENT-Net .............................. 16,858,059 19,203,899
GOODWILL - Net ................................................. 10,345,213 16,745,213
OTHER ASSETS - Net ............................................. 532,940 705,951
--------------- ---------------
TOTAL .......................................................... $ 50,123,744 $ 58,944,466
=============== ===============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Current portion of long-term debt ........................... $ 6,271,432 $ 9,271,432
Accounts payable ............................................ 6,221,895 3,395,364
Accrued payroll, vacation and payroll taxes ................. 1,023,596 1,347,706
Other current liabilities ................................... 946,241 1,166,225
Income taxes payable ........................................ 540,284 416,328
--------------- ---------------
Total current liabilities .............................. 15,003,448 15,597,055
LONG-TERM DEBT - Less current portion .......................... 1,171,499 3,188,985
DEFERRED INCOME TAXES .......................................... 374,184 2,104,882
STOCKHOLDERS' EQUITY:
Common Stock; $.01 par value; 9,000,000 shares authorized;
4,706,341 shares issued ................................. 47,063 47,063
Additional paid-in capital .................................. 25,088,631 25,088,631
Retained earnings ........................................... 9,178,584 13,808,727
Treasury stock, 78,497 common shares, at cost ............... (534,045) (534,045)
Stock purchase plan notes ................................... (157,246) (280,757)
Accumulated other comprehensive loss, net of tax ............ (48,374) (76,075)
--------------- ---------------
Total stockholders' equity ............................. 33,574,613 38,053,544
--------------- ---------------
TOTAL .......................................................... $ 50,123,744 $ 58,944,466
=============== ===============
See notes to condensed consolidated financial statements.
3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES .................................... $ 20,548,179 $ 22,420,884 $ 56,218,566 $ 61,048,900
COST OF SALES ................................ 17,143,292 18,984,482 49,095,160 53,724,696
------------ ------------ ------------ ------------
GROSS PROFIT ................................. 3,404,887 3,436,402 7,123,406 7,324,204
OPERATING EXPENSES:
Selling, general and administrative .......... 1,868,720 1,686,805 5,656,490 5,067,107
Amortization of goodwill ..................... -- 149,128 -- 447,384
Employee severance costs ..................... -- -- 209,324 --
Facility restructuring costs ................. -- -- 544,222 --
Loss (Gain) on asset disposals-net ........... 1,437 (5) (26,882) (147,877)
------------ ------------ ------------ ------------
OPERATING INCOME ............................. 1,534,730 1,600,474 740,252 1,957,590
Interest expense ............................. (104,360) (255,659) (364,038) (765,867)
Other income (expense)-net ................... (2,111) 169,972 20,907 219,528
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ................... 1,428,259 1,514,787 397,121 1,411,251
INCOME TAX EXPENSE ........................... 650,183 584,820 375,673 621,694
------------ ------------ ------------ ------------
INCOME BEFORE ACCOUNTING CHANGE .............. 778,076 929,967 21,448 789,557
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 2) .............................. -- -- (4,651,591) --
------------ ------------ ------------ ------------
NET INCOME (LOSS) ............................ $ 778,076 $ 929,967 $ (4,630,143) $ 789,557
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Income Before Accounting Change .......... $ 0.17 $ 0.20 $ 0.01 $ 0.17
Cumulative Effect of Accounting Change ... $ -- $ -- $ (1.01) $ --
------------ ------------ ------------ ------------
Net Income (Loss) ........................ $ 0.17 $ 0.20 $ (1.00) $ 0.17
DILUTED EARNINGS (LOSS) PER SHARE:
Income Before Accounting Change .......... $ 0.17 $ 0.20 $ 0.01 $ 0.17
Cumulative Effect of Accounting Change ... $ -- $ -- $ (1.01) $ --
------------ ------------ ------------ ------------
Net Income (Loss) ........................ $ 0.17 $ 0.20 $ (1.00) $ 0.17
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic .................................... 4,627,844 4,619,869 4,627,844 4,609,693
Diluted .................................. 4,629,754 4,660,026 4,627,844 4,640,176
See notes to condensed consolidated financial statements.
4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
June 30,
--------------------------------
2002 2001
-------------- --------------
OPERATING ACTIVITIES
Net loss .................................................... $ (4,630,143) $ 789,557
Noncash items in net loss:
Depreciation and amortization ......................... 2,290,601 2,770,143
Provision for bad debts ............................... 50,128 (32,188)
Gain on asset disposals-net ........................... (26,882) (147,877)
Asset impairment write-down ........................... 311,263 --
Cumulative effect of accounting change ................ 4,651,591 --
Changes in operating working capital:
Accounts receivable ...................................... (1,738,503) 1,140,351
Inventories .............................................. 1,622,719 (3,945,863)
Prepaid expenses and other assets ........................ 152,948 86,125
Accounts payable ......................................... 2,826,531 (148,142)
Accrued and other current liabilities .................... (544,094) (578,312)
Income taxes payable/receivable .......................... 123,956 365,688
-------------- --------------
Net cash from operations .................................... 5,090,115 299,482
INVESTING ACTIVITIES
Additions to property, plant and equipment .................. (769,824) (1,923,011)
Proceeds from disposals of property, plant and equipment .... 581,716 168,195
Increase in advances to stockholders ........................ (15,454) (14,536)
Decrease in restricted cash ................................. 32,739 19,463
-------------- --------------
Net cash used in investing activities ....................... (170,823) (1,749,889)
FINANCING ACTIVITIES
Repayment of long-term debt ................................. (4,972,074) --
Issuance of long-term debt .................................. -- 1,358,926
Collections on stockholder notes receivable ................. 123,511 25,195
Issuance of common stock .................................... -- 64,125
-------------- --------------
Net cash from (used in) financing activities ................ (4,848,563) 1,448,246
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................... 70,729 (2,161)
CASH AND CASH EQUIVALENTS:
Beginning of period ........................................... 521,453 930,388
-------------- --------------
End of period ................................................. $ 592,182 $ 928,227
============== ==============
See notes to condensed consolidated financial statements.
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
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, 2002 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 condensed consolidated balance sheet at
September 30, 2001, 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 included in the Company's latest
Annual Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions". SFAS No. 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", to eliminate the
exception to consolidation for a subsidiary for which control is likely
to be temporary. SFAS No. 144 requires that one accounting model be
used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 also broadens
the presentation of discontinued operations to include more disposal
transactions. The Company is required to adopt SFAS No. 144, effective
October 1, 2002. The Company is in the process of evaluating the
impact, if any, the adoption of SFAS No. 144 will have on its
consolidated financial statements.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform
to the current presentation.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
2. GOODWILL
The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001. Under SFAS No. 142, goodwill and
certain other intangible assets are no longer systematically amortized
but instead are reviewed for impairment and any excess in carrying
value over the estimated fair value is charged to results of
operations. The previous method for determining impairment prescribed
by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", utilized an undiscounted
cash flow approach for the initial impairment assessment, while SFAS
No. 142 utilizes a fair value approach. The goodwill impairment charge
discussed below is the result of the change in the accounting method
for determining the impairment of goodwill.
In connection with the adoption of SFAS No. 142, the Company allocated
goodwill to each of its reporting units and tested this goodwill for
impairment as of the beginning of fiscal 2002. The Company completed
the transitional goodwill impairment test during the second quarter of
fiscal 2002. As a result, an impairment charge of $ 6.4 million ($4.7
million after tax, or $1.01 per diluted share) was recorded related to
goodwill at certain Business Imaging and Paint Sundries reporting
units. The fair value of the reporting units was estimated using a
combination of valuation techniques including the expected present
value of future cash flows and prices of comparable businesses.
The charges have been recorded as the cumulative effect of accounting
change in the amount of $6.4 million ($4.7 million after tax, or $1.01
per share) as of October 1, 2001 in the accompanying condensed
consolidated statements of operations.
The changes in the carrying amount of goodwill for the nine months
ended June 30, 2002 are as follows:
Contract Business Paint
Manufacturing Imaging Sundries TOTAL
--------------- --------------- --------------- ---------------
Balance as of September 30, 2001 ....... $ 4,281,759 $ 7,925,269 $ 4,538,185 $ 16,745,213
Impairment charge ...................... -- 4,995,453 1,404,547 6,400,000
--------------- --------------- --------------- ---------------
Balance as of June 30, 2002 ............ $ 4,281,759 $ 2,929,816 $ 3,133,638 $ 10,345,213
=============== =============== =============== ===============
As required by SFAS No. 142, the results for periods prior to its
adoption have not been restated. The following table reconciles the
reported net income (loss) and basic and diluted earnings (loss) per
share to that which would have resulted for the three and nine month
periods ended June 30, 2001 if SFAS No. 142 had been adopted effective
October 1, 2000.
Three Months Nine Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Net Income as reported ....................... $ 929,967 $ 789,557
Goodwill amortization, net of tax ... 128,085 384,255
------------- -------------
Adjusted net income .......................... $ 1,058,052 $ 1,173,812
============= =============
Basic and Diluted earnings per share:
As reported ......................... $ 0.20 $ 0.17
Add back goodwill amortization ...... 0.03 0.08
------------- -------------
Adjusted ............................ $ 0.23 $ 0.25
============= =============
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
3. INVENTORIES
Inventories consist of the following:
June 30, September 30,
2002 2001
--------------- ---------------
Raw materials .................................... $ 4,381,178 $ 6,102,979
Finished goods ................................... 3,059,529 2,960,447
--------------- ---------------
Total inventories ................................ $ 7,440,707 $ 9,063,426
=============== ===============
4. SEVERANCE AND RESTRUCTURING COSTS
During the nine months ended June 30, 2002, the Company incurred
approximately $209,000 of employee severance related costs and
approximately $544,000 of costs (including approximately $311,000
related to impaired asset write-downs) related to restructuring a
component of the Business Imaging sector. As of June 30, 2002,
approximately $ 145,000 of such costs have not been paid and are
scheduled to be paid over the next 8 months.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the three months ended June 30, 2002 was
$779,648 compared to comprehensive income of $929,139 for the three
months ended June 30, 2001.
Comprehensive loss, including the SFAS No. 142 impairment loss of $4.7
million, net of tax, for the nine months ended June 30, 2002 was
$(4,602,442) compared to comprehensive income of $ 743,856 for the nine
months ended June 30, 2001.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
6. SEGMENT INFORMATION
The Company manufactures and distributes paint sundry products, custom
paper-based non-woven products, and provides contract manufacturing,
specialty printing and related services on these types of products. The
Company does, however, separate its operations and prepare information
for management use by the market sectors aligned with the Company's
products and services. Such market sector information is summarized
below. The Contract Manufacturing sector provides services to large
national consumer products companies while the remaining sectors
manufacture and distribute products ranging from paper goods to paint
sundries. Accounts receivable and certain other assets historically
have not been assignable to specific sectors and, therefore, are
included in the intersector column below.
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2002 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
Net Sales ........................ $ 8,558,278 $ 5,508,646 $ 6,481,255 $ -- $ 20,548,179
Gross Profit ...................... 2,114,886 625,257 664,744 -- 3,404,887
Operating Income (loss) ........... 1,743,308 114,194 48,729 (371,501) 1,534,730
Assets:
Inventories ................... 1,424,619 2,213,589 3,802,499 -- 7,440,707
Property, plant and
equipment-net ............... 8,825,552 4,202,743 1,786,910 2,042,854 16,858,059
Goodwill-net ................... 4,281,759 2,929,816 3,133,638 -- 10,345,213
Accounts receivable
and other assets ............ -- -- -- 15,479,765 15,479,765
--------------- --------------- --------------- --------------- ---------------
Total assets .................... $ 14,531,930 $ 9,346,148 $ 8,723,047 $ 17,522,619 $ 50,123,744
=============== =============== =============== =============== ===============
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2001 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
Net Sales ......................... $ 11,832,084 $ 5,141,488 $ 5,447,312 $ -- $ 22,420,884
Gross Profit ...................... 2,288,938 468,756 678,708 -- 3,436,402
Operating Income (loss) ........... 1,886,071 92,895 76,236 (454,728) 1,600,474
Assets:
Inventories ................... 1,399,042 4,896,894 5,562,409 -- 11,858,345
Property, plant and
equipment-net ............... 9,410,042 5,914,169 1,835,905 2,632,676 19,792,792
Goodwill-net ................... 4,316,952 7,985,391 4,591,998 -- 16,894,341
Accounts receivable
and other assets ............ -- -- -- 15,099,019 15,099,019
--------------- --------------- --------------- --------------- ---------------
Total assets .................... $ 15,126,036 $ 18,796,454 $ 11,990,312 $ 17,731,695 $ 63,644,497
=============== =============== =============== =============== ===============
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
NINE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2002 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
Net Sales $ 22,734,673 $ 15,994,499 $ 17,489,394 $ -- $ 56,218,566
Gross Profit 3,813,033 1,364,741 1,945,632 -- 7,123,406
Operating Income (loss) 2,736,194 (257,121) 166,340 (1,905,161) 740,252
NINE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2001 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
--------------- --------------- --------------- --------------- ---------------
Net Sales $ 30,096,797 $ 15,889,125 $ 15,062,978 $ -- $ 61,048,900
Gross Profit 4,546,043 1,348,111 1,430,050 -- 7,324,204
Operating Income (loss) 3,266,469 198,836 (243,727) (1,263,988) 1,957,590
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL INFORMATION:
Tufco Technologies, Inc. has manufacturing operations in Green Bay, WI,
Dallas, TX, Newton, NC and Manning, SC as well as a sales office in St.
Louis, MO.
The Company, through its wholly owned subsidiaries, provides
diversified Contract Manufacturing and specialty printing services,
manufactures and distributes Business Imaging paper products and
distributes Paint Sundry products used in home improvement projects.
The Company normally operates at lower operating levels during the
first and second quarters of its fiscal year which ends September 30.
This occurs because of the seasonal demand for certain Contract
Manufacturing printed products displaying a holiday theme as well as
products which are used by customers in conjunction with calendar year
end activities. These products are normally shipped during the
Company's fourth fiscal quarter. Demand for its Paint Sundry products
is generally lower during the first and second fiscal quarters as cold
weather restricts the amount of new construction and remodeling
projects that require the Company's products. Point of sale Business
Imaging products peak during second and fourth quarters due to seasonal
demand for products related to end-of-year holiday activities and due
to summer vacation activities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which require
the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and revenues and expenses during the periods
reported. Actual results could differ from those estimates. The Company
believes the following are the critical accounting policies which have
the most significant effect on the Company's reported results and
require the most difficult, subjective or complex judgments by
management. Unless otherwise noted, the Company has not made any
changes in estimates or assumptions that had a significant effect on
the reported amounts.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records allowances for doubtful accounts based on
customer-specific analysis, and general matters such as current
assessment of past due balances and economic conditions. Additional
allowances for doubtful accounts may be required if there is
deterioration in past due balances, if economic conditions are less
favorable than the Company has anticipated, or for customer-specific
circumstances such as bankruptcy.
EXCESS AND OBSOLETE INVENTORIES
The Company records allowances for excess and obsolete inventories
based on usage, estimated future demand and market conditions.
Additional allowances may be required if future demand or market
conditions are less favorable than the Company had projected.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of the carrying amount of
long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. The
Company evaluates the recoverability of
11
IMPAIRMENT OF LONG-LIVED ASSETS-(CONTINUED)
goodwill annually or more frequently if events or circumstances
indicate that the asset might be impaired. The Company applies judgment
when applying the impairment rules to determine when an impairment test
is necessary. Factors the Company considers which could trigger an
impairment review include significant underperformance relative to
historical operating results or forecasted operating results, a
significant decrease in the market value of an asset, a significant
change in the extent or manner in which an asset is used, and
significant negative industry or economic trends.
Impairment losses are measured as the amount by which the carrying
value of an asset exceeds its fair value. The Company is required to
make estimates of its future cash flows related to the asset subject to
review. These forecasts require assumptions about demand for the
Company's products and services, future market conditions and
technological developments. Significant and unanticipated changes to
these assumptions and discount rates could result in an impairment
charge in future periods.
12
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
---------------------- ----------------------- ---------------------- ---------------------
2002 2001 $ % 2002 2001 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
Net Sales $ 20,548 $ 22,421 (1,873) -8 $ 56,219 $ 61,049 (4,830) -8
Gross Profit 3,405 3,436 (31) -1 7,123 7,324 (201) -3
16.6% 15.3% 12.7% 12.0%
Operating Expenses 1,870 1,836 34 2 6,383 5,366 1,017 19
9.1% 8.2% 11.4% 8.8%
Operating Income 1,535 1,600 (65) -4 740 1,958 (1,218) -62
7.5% 7.1% 1.3% 3.2%
Interest Expense 104 256 (152) -59 364 766 (402) -52
0.5% 1.1% 0.6% 1.3%
Income (Loss) Before
Accounting Change 778 930 (152) -16 21 790 (769) -97
3.8% 4.1% 0% 1.3%
Cumulative Effect of
Accounting Change -- -- (4,652) -- (4,652) 100
-8.3%
Net Income (Loss) $ 778 $ 930 (152) -16 $ (4,630) $ 790 (5,420) -686
3.8% 4.1% 8.2% 1.3%
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
The components of net sales and gross profit are summarized in the
table below (dollars in thousands):
Three Months Ended
June 30,
---------------------------------------------------------
2002 2001
--------------------------- --------------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
------------ ------------ ------------ ------------ ------------ -------------
Net Sales
Contract manufacturing and printing $ 8,558 42% $ 11,832 53% $ (3,274) (28)%
Business imaging paper products 5,509 27 5,141 23 368 7
Paint sundry products 6,481 31 5,448 24 1,033 19
------------ ------------ ------------ ------------ ------------ ------------
Net sales $ 20,548 100% $ 22,421 100% $ (1,873) (8)%
============ ============ ============ ============ ============ ============
Margin Margin Period-to-Period Change
Amount % Amount % $ %
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit (loss)
Contract manufacturing and printing $ 2,115 25% $ 2,289 19% $ (174) (8)%
Business imaging paper products 625 11 469 9 156 33
Paint sundry products 665 10 678 12 (13) (2)
------------ ------------ ------------ ------------ ------------ ------------
Gross profit $ 3,405 17% $ 3,436 15% $ (31) (1)%
============ ============ ============ ============ ============ ============
Nine Months Ended
June 30,
----------------------------------------------------------
2002 2001
------------ ------------ ------------ ------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
------------ ------------ ------------ ------------ ------------ ------------
Net Sales
Contract manufacturing and printing $ 22,735 40% $ 30,097 49% $ (7,362) (24)%
Business imaging paper products 15,995 28 15,889 26 106 1
Paint sundry products 17,489 32 15,063 25 2,426 16
------------ ------------ ------------ ------------ ------------ ------------
Net sales $ 56,219 100% $ 61,049 100% $ (4,830) (8)%
============ ============ ============ ============ ============ ============
Margin Margin Period-to-Period Change
Amount % Amount % $ %
------------ ------------ ------------ ------------ ------------ ------------
Gross Profit
Contract manufacturing and printing $ 3,813 17% $ 4,546 15% $ (733) (16)%
Business imaging paper products 1,365 9 1,348 8 17 1
Paint sundry products 1,945 11 1,430 9 515 36
------------ ------------ ------------ ------------ ------------ ------------
Gross profit $ 7,123 13% $ 7,324 12% $ (201) (3)%
============ ============ ============ ============ ============ ============
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -CONTINUED
NET SALES:
Net sales decreased $1.9 million (8%) to $20.5 million in third quarter of
fiscal 2002, when compared to this period last year. This decline is due mostly
to lower sales at the Contract Manufacturing sector (down $3.3 million or 28%)
related to reduced product demand from a major customer for which the Company
manufactures and packages a variety of consumer products as well as unit price
adjustments to the customer. Business Imaging sector product sales increased
$0.4 million or 7% mostly due to an increase in sales of point-of-sales rolls to
the sector's network of products distributors. Net sales from the Paint Sundries
segment increased $1.0 million (19%) primarily the result of higher demand for
certain new products in the Paint Sundry sector as well as seasonal demand for
full panel and remnant drop cloths.
GROSS PROFIT:
Gross profit decreased $31,000 (1%) for third quarter of fiscal 2002 when
compared to third quarter of fiscal 2001. This decrease came primarily from the
Contract Manufacturing sector which decreased $0.2 million or 8%. As discussed
earlier, this was related to reduction in volume as well as unit price
adjustments to a major customer of the Contract Manufacturing sector. The
Contract Manufacturing sector was able to improve margins to 25% up from 19% for
the same period last year primarily through personnel reductions. Gross profit
in the Paint Sundry sector decreased $13,000 (2%), which was mostly the result
of unit price adjustments to a major customer of the sector offset by volume
increases when compared to the third quarter of fiscal 2001. The Business
Imaging sector's gross profit increased $0.2 million (33%) as a result of
increased sales mentioned earlier.
OPERATING EXPENSES:
Operating expenses increased $34,000 (2%) for third quarter of fiscal 2002 when
compared to the same period of fiscal 2001. This increase for the quarter was
related to sales commissions resulting from increased Paint Sundries sector
sales, rising health care costs, and increases to the sales force. These
expenses were partially offset as the result of implementation of SFAS 142
mentioned earlier, in which the Company no longer records goodwill amortization
expense which was $0.1 million in the third quarter of fiscal 2001. Operating
expenses for the nine months ended June 30, 2002, increased $1.0 million (19%)
when compared to the same period of fiscal 2001. This increase for the year was
related to sales commissions mentioned earlier, rising health care costs,
increased expenses for outside professional services, increases to the sales
force and employee recruiting costs. These expenses were partially offset as the
result of implementation of SFAS 142 mentioned earlier, in which the Company no
longer records goodwill amortization expense which was $0.4 million for the nine
months ended June 30, 2001.
OPERATING INCOME:
Operating income declined $65,000 (4%) to an income of $1.5 million. This
decline was primarily related to the decrease in Contract Manufacturing sales
discussed earlier. Operating income also declined as a result of price
adjustments to a major customer of the Paint Sundry sector offset by volume
increases when compared to third quarter of fiscal 2001. Additionally, this was
offset as the result of implementation of SFAS No. 142 mentioned earlier, the
Company no longer records goodwill amortization expense which was $0.1 million
in the third quarter of fiscal 2001.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
INTEREST EXPENSE AND OTHER INCOME (EXPENSE)-NET:
Interest expense was $0.2 million lower compared to last year due to $7.1
million reduction in debt since third quarter of fiscal 2001 and lower interest
rates during third quarter of fiscal 2002. Other income decreased $0.2 million
in third quarter of fiscal 2002 when compared to last year related to a
settlement of a lawsuit in fiscal 2001 under which the Company had been required
to indemnify a related party. The actual settlement was less than the amount
previously provided for by the Company resulting in a reversal of an amount
previously expensed in prior periods.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE:
The Company reported a net income before accounting change of $0.8 million (per
share: $0.17-basic and diluted) for third quarter of fiscal 2002, versus net
income of $0.9 million (per share: $0.20-basic and diluted) for the same period
one year ago. The decline was mostly due to lower sales in the Contract
Manufacturing sector and third quarter fiscal 2001 material costs for the Paint
Sundry sector mentioned earlier. The Company reported a net loss of $4.6 million
(per share: $1.00-basic and diluted) for the nine months ended June 30, 2002, of
which $4.6 million net of income tax effects, or $1.01 per diluted share was
recorded as a result of the Company adopting SFAS No. 142, "Goodwill and Other
Intangible Assets" as discussed below.
ACCOUNTING CHANGE:
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". This standard requires that companies no longer amortize
goodwill and indefinite life intangible assets, such as trademarks. In addition,
this standard requires that companies evaluate all goodwill for impairment. Upon
completion of this evaluation, the Company recorded a charge in an amount of
$6.4 million ($4.7 million, net of income tax effects, or $1.01 per diluted
share) in fiscal 2002 for the goodwill recorded at the Business Imaging sector
and to a lesser extent to the Paint Sundries sector.
LIQUIDITY AND CAPITAL RESOURCES:
The Company generated $5.1 million in cash from operations through the first
nine months of fiscal 2002, compared to $0.3 million for the same period last
year. The net loss, plus non-cash items, aggregated $2.6 million, a decrease
from $3.4 million for the same period last year. The Company used $0.4 million
to pay accrued liabilities and income taxes. Increases in accounts receivable
used $1.7 million, reductions in inventories generated $1.6 million in cash
flows and increases in accounts payable generated $2.8 million.
Net cash used in investing activities was $0.2 million through the third quarter
of fiscal 2002 which was due mostly to equipment sales as part of the Dallas,
Texas restructuring offset by $0.8 million from purchases of equipment.
Net cash used in financing activities was $4.8 million through the third quarter
of fiscal 2002 due to $5.0 million repayment of long-term debt offset by $0.1
million decrease in key employee stock purchase plan notes.
16
LIQUIDITY AND CAPITAL RESOURCES-(CONTINUED):
As of August 13, 2002, the Company had approximately $4.5 million available
under its revolving credit line. According to the terms of its credit facility
with its lenders, the Company is required to maintain certain financial and
operational covenants. As of June 30, 2002, the Company is in compliance with
all of its debt covenants under the credit facility and has received consent
from its principal lenders to sell assets in excess of $0.1 million net book
value. The Company's credit agreement which was to mature in June 2002, was
extended for 90 days by its principal lenders to provide sufficient time for an
amendment of its credit facilities. The Company has obtained a commitment to
amend its credit facilities during August 2002, which would among other matters,
extend the maturity the revolving portion until June 2004 and the term portion
until August 2007.
The Company intends to retain earnings to finance future operations and
expansion and does not expect to pay any dividends within the foreseeable
future. In addition, the Company's credit facility restricts the payment of any
dividends.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to the Company's exposure to interest rate risk,
foreign currency risk, commodity price risk and other relevant market risks is
contained on page 20 in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Company's Annual Report on
Form 10-K for the year ended September 30, 2001. Management believes that as of
August 13, 2002, there has been no material change to this information.
FORWARD LOOKING STATEMENTS:
Management's discussion of the Company's 2002 quarterly periods in comparison to
2001, contains forward-looking statements regarding current expectations, risks
and uncertainties for future periods. The actual results could differ materially
from those discussed here. As well as those factors discussed in this report,
other factors that could cause or contribute to such differences include, among
other items, cancellation of production agreements by significant customers,
material increases in the cost of base paper stock, competition in the Company's
product areas, or an inability of management to successfully reduce operating
expenses in relation to net sales without damaging the long-term direction of
the Company. Therefore, the condensed financial data for the periods presented
may not be indicative of the Company's future financial condition or results of
operations.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.16 Fifth Amendment to Credit Agreement
10.17 Sixth Amendment to Credit Agreement
19
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.
TUFCO TECHNOLOGIES, INC.
Date: August 13, 2002 /s/ Louis LeCalsey, III
--------------------------------------------------
Louis LeCalsey, III
President and Chief Executive Officer
Date: August 13, 2002 /s/ Michael B. Wheeler
--------------------------------------------------
Michael B. Wheeler
Vice President and Chief Financial Officer
Date: August 13, 2002 /s/ Drew W. Cook
--------------------------------------------------
Drew W. Cook
Chief Accounting Officer and Corporate Controller
20
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.16 Fifth Amendment to Credit Agreement
10.17 Sixth Amendment to Credit Agreement