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SECURITIES AND EXCHANGE COMMISSION
Washington, DC
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2003
--------------
Commission file number 0-21018
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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
--------------------------------
(Address of principal executive offices)
(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 X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 126-2 of the Exchange Act).
Yes No X
--- ---
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 May 13, 2003
----- ---------------------------
Common Stock, par value $0.01 per share 4,627,844
1
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Page
Number
------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2003 and September 30, 2002 3
Condensed Consolidated Statements of Operations for the three
months and six months ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II: OTHER INFORMATION 19
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, September 30,
2003 2002
--------------- ---------------
Assets
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 3,172,737 $ 251,346
Restricted cash ................................................. 100,000 100,000
Accounts receivable, net ........................................ 5,574,417 11,121,227
Inventories ..................................................... 3,370,315 6,585,100
Prepaid expenses and other current assets ....................... 3,623,909 743,281
Deferred income taxes ........................................... 832,927 832,927
Income taxes receivable ......................................... 183,561 133,242
--------------- ---------------
Total current assets ..................................... 16,857,866 19,767,123
PROPERTY, PLANT AND EQUIPMENT - Net ................................ 15,048,195 16,304,848
GOODWILL - Net...................................................... 7,211,575 10,345,213
OTHER ASSETS - Net ................................................. 540,306 749,959
--------------- ---------------
TOTAL .............................................................. $ 39,657,942 $ 47,167,143
=============== ===============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Current portion of long-term debt ............................... $ 250,000 $ 922,726
Accounts payable ................................................ 3,395,719 5,279,556
Accrued payroll, vacation and payroll taxes ..................... 757,874 935,973
Other current liabilities ....................................... 926,729 1,326,075
--------------- ---------------
Total current liabilities ................................ 5,330,322 8,464,330
LONG-TERM DEBT - Less current portion .............................. 750,000 5,233,882
DEFERRED INCOME TAXES .............................................. 675,401 660,640
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 ............................................... 8,316,709 8,404,112
Treasury stock, 78,497 common shares, at cost ................... (534,045) (534,045)
Stockholder notes receivable .................................... -- (157,246)
Accumulated other comprehensive loss, net of tax ................ (16,139) (40,224)
--------------- ---------------
Total stockholders' equity ................................. 32,902,219 32,808,291
--------------- ---------------
TOTAL .............................................................. $ 39,657,942 $ 47,167,143
=============== ===============
See notes to condensed consolidated financial statements.
3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
NET SALES ............................................. $ 12,793,561 $ 12,186,068 $ 25,323,598 $ 23,852,162
COST OF SALES ......................................... 11,241,804 10,321,917 22,283,889 21,243,605
-------------- -------------- -------------- --------------
GROSS PROFIT .......................................... 1,551,757 1,864,151 3,039,709 2,608,557
OPERATING EXPENSES:
Selling, general & administrative ..................... 1,248,554 1,003,026 2,248,605 1,972,500
Employee severance costs .............................. -- 201,730 46,284 209,324
Facility restructuring costs .......................... -- 232,958 -- 232,958
Property & inventory write downs ...................... -- 311,263 -- 311,263
(Gain)loss on asset sales ............................. (375) (28,912) 31,256 (29,092)
-------------- -------------- -------------- --------------
OPERATING INCOME (LOSS) ............................... 303,578 144,086 713,564 (88,396)
OTHER INCOME (EXPENSE):
Interest expense ................................... (79,155) (114,794) (177,288) (259,678)
Interest and other income .......................... 3,050 2,894 7,606 23,018
-------------- -------------- -------------- --------------
INCOME(LOSS)FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ........................ 227,473 32,186 543,882 (325,056)
INCOME TAX EXPENSE (BENEFIT) .......................... 91,119 6,216 224,428 (107,780)
-------------- -------------- -------------- --------------
INCOME(LOSS)FROM CONTINUING OPERATIONS ................ 136,354 25,970 319,454 (217,276)
LOSS FROM DISCONTINUED OPERATIONS:
Net loss from operations of
discontinued segment, net of tax .................. (146,506) (375,240) (162,451) (539,352)
Net loss from sale of discontinued
operations, net of tax ............................ (244,406) -- (244,406) --
-------------- -------------- -------------- --------------
LOSS BEFORE ACCOUNTING CHANGE ......................... (254,558) (349,270) (87,403) (756,628)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ................ -- -- -- (4,651,591)
-------------- -------------- -------------- --------------
NET LOSS .............................................. $ (254,558) $ (349,270) $ (87,403) $ (5,408,219)
============== ============== ============== ==============
BASIC EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations ........... $ 0.03 $ 0.01 $ 0.07 $ (0.05)
Net Loss from Operations of Discontinued
Segment .............................................. $ (0.04) $ (0.08) $ (0.04) $ (0.11)
Net Loss from Sale of Discontinued
Operations ........................................... $ (0.05) $ -- $ (0.05) $ --
-------------- -------------- -------------- --------------
Income (Loss) before Accounting Change ................ $ (0.06) $ (0.07) $ (0.02) $ (0.16)
Cumulative Effect of Accounting Change ................ $ -- $ -- $ -- $ (1.01)
-------------- -------------- -------------- --------------
Net Loss .............................................. $ (0.06) $ (0.07) $ (0.02) $ (1.17)
DILUTED EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations ............ $ 0 .03 $ 0.01 $ 0.07 $ (0.05)
Net Loss from Operations of
Discontinued Segment ............................... $ (0.04) $ (0.08) $ (0.04) $ (0.11)
Net Loss from Sale of Discontinued
Operations ......................................... $ (0.05) $ -- $ (0.05) $ --
-------------- -------------- -------------- --------------
Income (Loss) before Accounting Change .............. $ (0.06) $ (0.07) $ (0.02) $ (0.16)
Cumulative Effect of Accounting Change .............. $ -- $ -- $ -- $ (1.01)
-------------- -------------- -------------- --------------
Net Loss ............................................ $ (0.06) $ (0.07) $ (0.02) $ (1.17)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic ............................................. 4,627,844 4,627,844 4,627,844 4,627,844
Diluted ........................................... 4,627,844 4,627,844 4,627,844 4,627,844
See notes to condensed consolidated financial statements.
4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
March 31,
----------------------------------
2003 2002
--------------- ---------------
OPERATING ACTIVITIES
Net income (loss) from continuing operations ...................... $ 319,454 $ (217,276)
Noncash items in net income (loss) from continuing
operations
Depreciation and amortization .................................. 1,509,394 1,487,485
(Gain)loss on asset sales ...................................... 31,256 (29,091)
Asset impairment write-down .................................... -- 311,263
Changes in operating working capital:
Accounts receivable ............................................ 269,893 1,062,848
Inventories .................................................... 193,634 715,065
Prepaid expenses and other assets .............................. (1,158,847) 118,629
Accounts payable ............................................... (614,297) 765,694
Accrued and other current liabilities .......................... (192,231) (340,596)
Income taxes payable & receivable .............................. 113,006 (515,357)
--------------- ---------------
Net cash provided by operating activities from continuing
operations ....................................................... 471,262 3,358,664
INVESTING ACTIVITIES FROM CONTINUING OPERATIONS
Additions to property, plant and equipment ........................ (1,757,426) (243,497)
Deposits made on lease of equipment ............................... (1,786,000) --
Proceeds from disposition of property, plant and equipment ........ 67,260 581,716
Increase in advances to stockholders .............................. (11,809) (49,359)
Increase in restricted cash ....................................... -- (280)
--------------- ---------------
Net cash provided (used) by investing activities from
continuing operations ............................................ (3,487,975) 288,580
FINANCING ACTIVITIES
Repayment of long-term debt ....................................... (7,965,027) (2,841,715)
Issuance of long-term debt ........................................ 2,874,360 --
Collections on stockholder notes receivable ....................... 157,247 123,510
--------------- ---------------
Net cash used by financing activities from continuing
operations ....................................................... (4,933,420) (2,718,205)
Net cash provided from discontinued operations:
Proceeds from sale of discontinued operations (net
of transaction costs) ........................................... 11,740,052 --
Net cash used by operating activities of discontinued
operations ...................................................... (868,528) 590,181
--------------- ---------------
Net cash provided (used) by discontinued operations .............. 10,871,524 (590,181)
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 2,921,391 338,858
CASH AND CASH EQUIVALENTS:
Beginning of period ................................................. 251,346 521,453
--------------- ---------------
End of period ....................................................... $ 3,172,737 $ 860,311
=============== ===============
See notes to condensed consolidated financial statements.
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(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) (See
Note 6). Operating results for the three-month and sixth-month periods
ended March 31, 2003 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, 2002, 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 (FASB) 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 adopted SFAS No. 144, effective October 1,
2002. Adoption of SFAS No. 144 did not have a material impact on the
Company's financial position or results of operations. The sale and
discontinued operations of the Paint Sundries segment in the second
quarter 2003 have been recorded in accordance with SFAS No. 144.
SFAS No. 146, "Accounting for Costs Associated with Exit of Disposal
Activities", which was issued by the FASB in July 2002, requiring
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 supercedes EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Cost
Incurred in a Restructuring)". SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December
31, 2002.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT--CONTINUED
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" and
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require disclosures in interim
financial statements of the effects of stock-based compensation. The
interim disclosure requirements of SFAS No. 148 are effective for
periods beginning after December 15, 2002. The Company's stock-based
compensation related to employees and non-employee directors is
recognized using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and thus there is no compensation expense for
options granted with exercise prices equal to the fair value of the
Company's common stock on the date of the grant. The Company has no
stock based employee compensation as defined by SFAS No. 148.
In November 2002, FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Guarantees of Indebtedness of Others". FIN No. 45 requires
that a guarantor must recognize, at the inception of a guarantee, a
liability for the fair value of the obligation that is has undertaken
in issuing a guarantee. FIN No. 45 also addresses the disclosure
requirements that a guarantor must include in its financial statements
for guarantees issued. The disclosure requirements in this
interpretation are effective for financial statements ending after
December 15, 2002. The initial recognition and measurement provisions
of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company has
no guarantees as defined in FIN No. 45.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform
to the current presentation.
EARNINGS PER SHARE
At March 31, 2003 and 2002, options representing 516,400 and 548,900
shares of common stock, respectively, were outstanding. For the
three-month period ended March 31, 2003 and 2002, all of these options
were excluded from the diluted earnings per share calculations because
of their existing anti-diluted qualities.
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 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
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
GOODWILL-CONTINUED
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 for the Business
Imaging and Paint Sundries reporting units $5.0 million and $1.4
million, respectively. 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 Company will continue to review for impairment on an annual basis,
and such analysis will be completed in the third quarter of 2003.
The changes in the carrying amount of goodwill for the six months ended
March 31, 2003 are as follows:
Contract Business Paint
Manufacturing Imaging Sundries TOTAL
--------------- --------------- --------------- ---------------
Balance as of September 30, 2002 ........... $ 4,281,759 $ 2,929,816 $ 3,133,638 $ 10,345,213
Sale of Segment ............................ -- -- 3,133,638 3,133,638
--------------- --------------- --------------- ---------------
Balance as of March 31, 2003 ............... $ 4,281,759 $ 2,929,816 $ -- $ 7,211,575
=============== =============== =============== ===============
3. INVENTORIES
Inventories consist of the following:
March 31, September 30,
2003 2002
--------------- ---------------
Raw materials ......................................... $ 2,156,795 $ 4,838,569
Finished goods ........................................ 1,213,520 1,746,531
--------------- ---------------
Total inventories ..................................... $ 3,370,315 $ 6,585,100
=============== ===============
4. SEVERANCE COSTS
For the three months ended March 31, 2003, the severance cost was $0
compared to $201,730 for the same period last year. For the six months
ended March 31, 2003, the severance cost was $46,284 compared to
$209,324 during the six months ended March 31, 2002. The 2003 costs are
related to the elimination of several salary positions. The 2002
expense relates primarily to severance pursuant to an employment
agreement with a former executive.
5. RESTRUCTURING COSTS AND ASSET WRITE DOWNS
During the three months ended March 31, 2002, the Company incurred
approximately $544,000 of costs (including approximately $311,000
related to impaired asset write-downs) related to restructuring a
component of the Business Imaging segment completed in fiscal year
2002.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
6. DISCONTINUED OPERATIONS
The condensed financial statements present the Paint Sundries segment
as a discontinued operation as a result of the sale of the business on
March 31, 2003 pursuant to authorization of the Board of Directors on
January 27, 2003. The Company sold the assets and business of the Paint
Sundries segment for $12.3 million in cash to Trimaco, LLC and its
affiliate. The sale included all Paint Sundries segment assets,
including the Manning, South Carolina manufacturing facility. Prior
period amounts have been restated, including the reallocation of
general overhead charges. The Company recorded a $0.4 million loss
($0.2 million after tax) on the sale of the Paint Sundries segment
which includes a $0.1 million gain on the sale of the assets offset by
$0.5 million of fees and expenses associated with the sale. The Company
does not expect any material adjustment to the loss when determination
of the final purchased net assets and the performance of certain
services are complete. The Company will provide certain accounting and
information technology services to Trimaco, LLC during the transition
period for an agreed upon fee.
Operating results from discontinued operations are as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net sales $ 3,818,979 $ 6,220,657 $ 9,708,068 $ 11,818,225
Loss before (244,409) (465,059) (271,963) (706,081)
income tax
The components of disposed assets and liabilities are as follows:
Accounts Receivable (net of reserve) $ 4,893,816
Inventory (net of reserve) 3,122,830
Equipment 328,090
Building 2,448,916
Goodwill 3,133,638
Other assets 292,663
Accounts payable (1,790,211)
Other accruals (281,959)
-----------
Total net book value of disposed assets $12,147,783
7. COMPREHENSIVE LOSS
Comprehensive loss for the three months ended March 31, 2003 was
$(242,747) compared to comprehensive loss of $(327,964) for the three
months ended March 31, 2002.
Comprehensive loss for the six months ended March 31, 2003 was
$(63,318), including the SFAS No. 142 impairment loss of $4.7 million,
net of tax, $(5,382,090) for the six months ended March 31, 2002.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
7. COMPREHENSIVE LOSS--CONTINUED
The components of comprehensive loss are as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net Loss (254,558) (349,270) (87,403) (5,408,219)
Other comprehensive income,
Net of tax: Change in fair
Value of interest rate
Swap contract 11,811 21,306 24,085 26,129
--------------- --------------- --------------- ---------------
Comprehensive Loss (242,747) (327,964) (63,318) (5,382,090)
=============== =============== =============== ===============
8. STOCK OPTION PLAN
The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans. No compensation cost has been
recognized for the Company's stock option plans because the quoted
market price of the common stock at the date of grant was not in excess
of the option exercise price. SFAS No. 123 prescribes a method to
record compensation cost at the fair value of the options granted. Pro
forma disclosures as if the Company had adopted the cost recognition
requirements under SFAS No. 123 for the three and six months ended
March 31, 2003 and 2002 are presented below.
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net Income (loss):
As reported (254,558) (349,270) (87,403) (5,408,219)
Pro forma (282,624) (389,523) (198,573) (5,640,917)
Basic earnings per
share:
As reported (0.06) (0.07) (0.02) (1.17)
Pro forma (0.06) (0.08) (0.04) (1.22)
Diluted earnings per
share:
As reported (0.06) (0.07) (0.02) (1.17)
Pro forma (0.06) (0.08) (0.04) (1.22)
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
9. SEGMENT INFORMATION
The Company manufactures and distributes business forms, custom
paper-based non-woven products, and provides contract manufacturing,
specialty printing and related services on these types of products. In
second quarter of fiscal 2003, the Company sold its Paint Sundries
segment, and presented the financials related to this segment as
discontinued operations. Prior period amounts have been restated,
including the intersector information to reflect the sale of this
business. The Company separates its current operations and prepares
information for management use by the market segments aligned with the
Company's products and services. Such market information is summarized
below. The Contract Manufacturing segment provides services to large
national consumer products companies while the Business Imaging segment
manufactures and distributes paper good products. Accounts receivable
and certain other assets historically have not been assignable to
specific segments and, therefore, are included in the intersector
column below.
THREE MONTHS ENDED CONTRACT BUSINESS
MARCH 31, 2003 MANUFACTURING IMAGING INTERSECTOR CONSOLIDATED
- ------------------------------ --------------- --------------- --------------- ---------------
Net Sales $ 6,824,030 $ 5,969,531 $ -- $ 12,793,561
Gross Profit 825,541 726,216 -- 1,551,757
Operating Income (loss) 490,018 330,636 (517,076) 303,578
Assets:
Inventories 1,251,417 2,118,898 -- 3,370,315
Property, plant and
equipment-net 10,088,810 3,388,627 1,570,758 15,048,195
Goodwill-net 4,281,759 2,929,816 -- 7,211,575
Accounts receivable
and other assets 14,027,857 14,027,857
--------------- --------------- --------------- ---------------
Total assets $ 15,621,986 $ 8,437,341 $ 15,598,615 $ 39,657,942
=============== =============== =============== ===============
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
MARCH 31, 2002 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
- ----------------------------------- --------------- --------------- --------------- --------------- ---------------
Net Sales $ 6,719,696 $ 5,466,372 $ -- $ -- $ 12,186,068
Gross Profit 1,437,950 426,201 -- -- 1,864,151
Operating Income (loss) 1,079,528 (332,695) -- (602,747) 144,086
Assets:
Inventories 1,367,140 2,159,716 3,816,491 -- 7,343,347
Property, plant and
equipment-net 8,733,415 4,372,864 1,733,422 2,206,373 17,046,074
Goodwill-net 4,281,759 2,929,816 3,133,638 -- 10,345,213
Accounts receivable
and other assets -- 14,327,857 14,327,857
--------------- --------------- --------------- --------------- ---------------
Total assets $ 14,382,314 $ 9,462,396 $ 8,683,551 $ 16,534,230 $ 49,062,491
=============== =============== =============== =============== ===============
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
SIX MONTHS ENDED CONTRACT BUSINESS
MARCH 31, 2003 MANUFACTURING IMAGING INTERSECTOR CONSOLIDATED
- ----------------------------------- --------------- --------------- --------------- ---------------
Net Sales $ 13,490,789 $ 11,832,809 $ -- $ 25,323,598
Gross Profit 1,603,428 1,436,281 -- 3,039,709
Operating Income (loss) 891,051 671,512 (848,999) 713,564
SIX MONTHS ENDED CONTRACT BUSINESS
MARCH 31, 2002 MANUFACTURING IMAGING INTERSECTOR CONSOLIDATED
- ----------------------------------- --------------- --------------- --------------- ---------------
Net Sales $ 12,975,247 $ 10,876,915 $ -- $ 23,852,162
Gross Profit 1,919,920 688,637 -- 2,608,557
Operating Income (loss) 1,214,659 (422,162) (880,893) (88,396)
12
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
and Newton, NC. Corporate headquarters are located in Green Bay, WI.
Corporate support services currently located in Dallas, TX are being
transitioned to Green Bay, WI.
The Company provides diversified Contract Manufacturing and specialty
printing services and manufactures and distributes Business Imaging
paper products.
There are seasonal demand characteristics for the Company's products
occurring 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 end-of-year
activities. These products are normally shipped during the Company's
fourth fiscal quarter. 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.
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. Unless
otherwise noted, the Company has not made any changes in estimates or
assumptions that had a significant effect on the reported amounts.
13
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 Six Months Ended
March 31, Period-to-Period March 31, Period-to-Period
--------------------- Change -------------------- Change
2003 2002 $ % 2003 2002 $ %
-------- -------- -------- -------- -------- -------- -------- --------
Net Sales $ 12,794 $ 12,186 608 5 $ 25,324 $ 23,852 1,472 6
Gross Profit 1,552 1,864 (312) (17) 3,040 2,609 431 17
12.1% 15.3% 12.0% 10.9%
Operating Expenses 1,248 1,720 (472) (27) 2,326 2,697 (371) 14
9.8% 14.1% 9.2% 11.3%
Operating Income (Loss) 304 144 160 111 714 (88) 802 911
2.4% 1.2% 2.8% (0.4)%
Interest Expense 79 115 (36) (31) 177 260 (83) (32)
0.6% 0.9% 0.7% 1.1%
Net Income (Loss) from
Continuing Operations 136 26 110 423 319 (217) 536 247
1.1% 0.2% 1.3% (0.9)%
Net loss from Discontinued
Operations, Net of Tax (391) (375) (16) (4) (407) (539) 132 24
(2.9)% (3.1)% (1.6)% (2.3)%
Cumulative Effect of
Accounting Change -- -- -- -- -- 4,651 (4,651) (100)
(19.5)%
Net Loss $ (255) (349) 94 27 (87) (5,408) 5,321 98
(2.0)% (2.9)% (0.3)% (22.7)%
The components of net sales and gross profit are summarized in the
table below (dollars in thousands):
Three Months Ended
March 31,
------------------------------------------------------
2003 2002
------------------------- -------------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
----------- ----------- ----------- ----------- ----------- -----------
Net Sales
Contract manufacturing and printing $ 6,824 53% $ 6,720 55% 104 2%
Business imaging paper products 5,970 47 5,466 45 504 9
----------- ----------- ----------- ----------- ----------- -----------
Net sales $ 12,794 100% $ 12,186 100% $ 608 5%
=========== =========== =========== =========== =========== ===========
Margin Margin Period-to-Period Change
Amount % Amount % $ %
----------- ----------- ----------- ----------- ----------- -----------
Gross Profit (loss)
Contract manufacturing and printing $ 826 12% $ 1,438 21% (612) (43)
Business imaging paper products 726 12 426 8 300 70
----------- ----------- ----------- ----------- ----------- -----------
Gross profit $ 1,552 12% $ 1,864 15% $ (312) (17)%
=========== =========== =========== =========== =========== ===========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
Six Months Ended
March 31,
------------------------------------------------------
2003 2002
------------------------- -------------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
----------- ----------- ----------- ----------- ----------- -----------
Net Sales
Contract manufacturing and printing $ 13,491 53% $ 12,975 54% 516 4
Business imaging paper products 11,833 47 10,877 46 956 9
----------- ----------- ----------- ----------- ----------- -----------
Net sales $ 25,324 100% $ 23,852 100% 1,472 6
=========== =========== =========== =========== =========== ===========
Margin Margin Period-to-Period Change
Amount % Amount % $ %
----------- ----------- ----------- ----------- ----------- -----------
Gross Profit
Contract manufacturing and printing $ 1,604 12% $ 1,920 15% (316) (16)
Business imaging paper products 1,436 12 689 6 747 108
----------- ----------- ----------- ----------- ----------- -----------
Gross profit $ 3,040 12% $ 2,609 11% 431 17
=========== =========== =========== =========== =========== ===========
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
NET SALES:
Net sales increased $0.6 million (5%) to $12.8 million in the second quarter of
fiscal 2003, when compared to this period last year. This is due to increases of
$0.5 million or 9% in the Business Imaging segment and $0.1 million or 2% in the
Contract Manufacturing segment. The increase in the Business Imaging segment was
due to new business from a large chain of office supply retail stores.
GROSS PROFIT:
Gross profit decreased $0.3 million (17%) for second quarter of fiscal 2003 when
compared to second quarter of fiscal 2002. The Contract Manufacturing segment
decreased $0.6 million or 43% primarily due to a price reduction to a major
customer and increased warehouse costs due to increased production. The Business
Imaging segment's gross profit increased $0.3 million (70%) as a result of
growth in the point-of-sales rolls market. This segment also improved margins by
reducing overhead by closing the Dallas, Texas facility and moving the remaining
production to its Newton, North Carolina facility.
OPERATING EXPENSES:
Operating expenses decreased $0.5 million for second quarter of fiscal 2003 when
compared to the same period of fiscal 2002. This decrease for the quarter was
primarily related to a reduction in expenses as a result of closing the Dallas,
Texas facility. This decrease was offset by the write-off of loan fees as a
result of the reduction of debt with the proceeds from the sale of the Paint
Sundries segment.
OPERATING INCOME:
Operating income improved $0.2 million to income of $0.3 million for the second
quarter of fiscal 2003, when compared to the same period of fiscal 2002. The
increase was primarily due to reduced expenses as a result of the Dallas
facility closure mentioned earlier.
INTEREST EXPENSE AND OTHER INCOME (EXPENSE)-NET:
Interest expense was $36,000 lower compared to last year due to a $8.5 million
reduction in debt since March 31, 2002, and lower interest rates on borrowings.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE:
The Company reported net loss of $0.3 million (per share: ($0.06) basic and
diluted) for first quarter of fiscal 2003, versus a net loss of $0.3 million
(per share: (($0.07)-basic and diluted) for the same period one year ago. Net
income from continuing operations was $0.1 million or $.03 per share for the
second quarter of 2003 compared to $25,000, or $.01 per share for 2002.
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
annually. 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 in the Business Imaging
and Paint Sundry segments.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
LIQUIDITY AND CAPITAL RESOURCES:
The Company generated $0.5 million in cash from continuing operations through
the first six months of fiscal 2003, compared to cash flow from continuing
operations generated of $3.4 million for the same period last year. Net income
plus non-cash items aggregated $1.9 million, an increase of $0.3 million from
the same period last year. The Company used $1.2 million for prepaid and other
assets and $0.7 million to pay accounts payable and accrued liabilities.
Decreases in accounts receivable generated $0.3 million and decreases in
inventories generated $0.2 million in cash flows.
Net cash used in investing activities was $3.5 million through the second
quarter of fiscal 2003. Additions to property, plant and equipment include $1.8
million related to the purchase and installation of production and office
equipment. The Company made a deposit of $1.8 million for the purchase of a
flexo-graphic printing press which the Company ultimately plans to finance
through an operating lease. Thus this expenditure will be refunded upon
consummation of the lease transaction.
Net cash used in financing activities was $5.0 million through the second
quarter of fiscal 2003 due to repayment of all outstanding bank term debt and
revolving line of credit.
Net cash provided by discontinued operations in the second quarter of 2003 was
$10.9 million which represented $11.7 million of net proceeds from the sale of
the Paint Sundries segment offset by $0.9 million of cash used by the operating
activities for the six months ended March 31, 2003.
As of May 12, 2003, the Company had approximately $6.0 million available under
its revolving credit line which was reduced to a $6.0 million facility
concurrent with the Paint Sundries sale. According to the terms of its credit
facility with its lenders, the Company is required to maintain certain financial
and operational covenants. As of March 31, 2003, the Company was in compliance
with all of its debt covenants under the credit facility.
The Company intends to retain earnings to finance future operations and
expansion and does not expect to pay any dividends within the foreseeable
future.
STOCK REPURCHASE PLAN
In March 2003, the Company's Board of Directors approved the purchase by the
Company of up to 100,000 shares given that the cash and debt position would
enable these purchases without impairment to the Company's capital. The purchase
plan began in April 2003, and extends over a nine-month period. As of May 12,
2003 no shares have been purchased.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies for the Company remain unchanged from prior
periods. For a more detailed discussion refer to the Company's latest September
30, 2002 annual report on Form 10-K.
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 24 in Item 7A, 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, 2002. Management believes that as of
March 31, 2003, there has been no material change to this information.
FORWARD LOOKING STATEMENTS:
Management's discussion of the Company's 2003 quarterly periods in comparison to
2002, 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.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c)
within 90 days of the filing date of this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
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
The following summarizes the Annual Meeting highlights:
(a) The Annual Meeting of Shareholders of the Company was held on
March 12, 2003.
(b) See the response to Item 4 (c) below.
(c) At the Annual Meeting, shareholders elected the following
individuals to the Board of Directors for one-year terms:
Director For Withheld
-------- --------- --------
Robert J. Simon 4,489,213 54,772
Samuel J. Bero 4,509,035 34,950
C. Hamilton Davison, Jr. 4,508,535 35,450
Louis LeCalsey III 4,488,773 55,212
William J. Malooly 4,509,035 34,950
Seymour S. Preston, III 4,509,035 34,950
The shareholders ratified the selection of Deloitte & Touche
LLP as independent auditors for the fiscal year ending
September 30, 2003. The results at the voting for the
ratification of Deloitte & Touche LLP are as follows:
For Against Abstain
--------- ------- -------
4,530,585 10,100 3,300
The shareholders approved the 2003 Non-Qualified Stock Option
Plan. The results at the voting for the approval of the 2003
Plan are as follows:
For Against Abstain
--------- ------- -------
3,311,143 105,030 3,415
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS.
99.1 Certification Pursuant to 18 U.S.C. Section 350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
19
(a) On February 27, 2003, The Company filed a Current Report on Form 8-K,
dated February 21, 2003, reporting under Item 5 the Company's agreement
to sell the assets of the Company's Paint Sundries Division to Trimaco,
LLC, including the capital stock of Foremost Manufacturing, Inc., a
wholly owned subsidiary of the Company, and the Company's Manning,
South Carolina manufacturing plant.
20
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: May 13, 2003 /s/ Louis LeCalsey, III
------------------------------------------
Louis LeCalsey, III
President and Chief Executive Officer
Date: May 13, 2003 /s/ Michael B. Wheeler
------------------------------------------
Michael B. Wheeler
Vice President and Chief Financial Officer
21
I, Michael B. Wheeler, Vice President and Chief Financial Officer of Tufco
Technologies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tufco
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003
/s/Michael B. Wheeler
Vice President and Chief Financial Officer
22
I, Louis LeCalsey, President and Chief Executive Officer of Tufco Technologies,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tufco
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003
/s/Louis LeCalsey
President and Chief Executive Officer
23
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002