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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended September 30, 1996. Commission
file number 0-21018.
TUFCO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 39-1723477
-------------------------------- ---------------------
(State of other jurisdiction (IRS Employer ID No.)
of incorporation or organization)
4800 Simonton Road, Dallas, Texas 75244
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(Address of principal executive offices)
(972) 789-1079
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
--------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [XX]
The aggregate market value of the Common Stock of Tufco Technologies, Inc. held
by non-affiliates, as of December 17, 1996, was approximately $9,608,766. Such
aggregate market value was computed by reference to the closing price of the
Common Stock as reported on the NASDAQ National Market on December 16, 1996.
For purposes of making this calculation only, the registrant has defined
affiliates as including all directors and beneficial owners of more than ten
percent of the Common Stock of the Company. The number of shares of the
registrant's Common Stock outstanding as of December 17, 1996 was 3,723,585.
The number of shares of the registrant's Non-Voting Common Stock outstanding at
December 17, 1996 was 709,870.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1996 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
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PART I
ITEM 1 - BUSINESS
GENERAL
Tufco Technologies, Inc. ("Tufco" or the "Company") manufactures and
distributes business imaging paper products, provides diversified custom
converting and specialty printing services, and distributes paint sundry
products used in home improvement projects. The Company has operated since 1992
and currently has three wholly owned subsidiaries, Tufco Industries, Inc.,
Executive Converting Corporation ("ECC") and Hamco Industries, Inc. On January
28, 1994, the Company completed an initial public offering in which the Company
issued and sold 900,000 shares of its Common Stock, par value $.01 per share
("Common Stock"), and certain stockholders of the Company sold 50,000 shares of
Common Stock. Contemporaneously with the closing of the Company's public
offering, the Company acquired, through ECC, substantially all of the assets of
Executive Roll Manufacturing, Inc., d/b/a Executive Converting Corporation for
$7.5 million and 127,778 shares of Common Stock. On August 23, 1995, the
Company acquired, through Hamco Industries, Inc., substantially all of the
assets of Hamco, Inc. for approximately $12.9 million in cash.
Tufco manufactures a wide range of printed and unprinted business
imaging paper products for a variety of business needs and offers a wide array
of custom converting services for industrial uses including thermal laminating,
precision slitting and rewinding, folding, precision sheeting and packaging for
delivery to the end user. Its specialty printing services provide wide web,
multi-color flexographic and letterpress printing and adhesive laminations to
industrial users and resale distributors.
The Company was incorporated in the state of Delaware in 1992 to
acquire Tufco Industries , Inc. Although the Company was organized in 1992, the
business conducted by Tufco Industries, Inc. has been in continuous operation
since 1974. The Company has become a leading manufacturer of value-added custom
paper products and specialty printing services. The Company's principal
executive offices are located at 4800 Simonton Road, Dallas, Texas 75244, and
its telephone number is (972) 789-1079.
PRODUCTS AND SERVICES
The Company's product and service lines include business imaging paper
products, custom converting, specialty printing, and paint sundry products and
are provided at four manufacturing locations in Green Bay, Wisconsin; Manning,
South Carolina; Dallas, Texas; and Newton, North Carolina.
Business Imaging Paper Products
The Company produces and distributes a wide variety of printed and
unprinted paper products used in business imaging equipment in market sectors
including architectural and engineering design, high speed data processing,
point of sale, automatic teller machines and a variety of office equipment. The
Company's products include roll products ranging in length from 150 feet to
3500 feet and in widths from 1 inch to 54 inches. Additionally, the Company
produces precision sheeted products ranging in size from 11 by 17 inches to 65
by 65 inches. The Company's products are available in a wide range of paper
grades including a variety of weights of bond paper, thermal imaging papers,
fine vellums and films and multi-part forms.
Custom Converting
Tufco Technologies has custom converting capability at each of its
four locations: Green Bay, Wisconsin; Manning, South Carolina; Dallas, Texas;
and Newton, North Carolina.
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Custom Converting (continued)
The Company's converting capabilities at its Green Bay and Manning
facilities include thermal and adhesive laminating, slitting, rewinding,
cutting, and folding. These facilities custom convert a wide array of
materials, including polyethylene films, non-woven materials, paper, and tissue
and toweling for the industrial converting market. Products include operating
room towels, reinforced towels (towels with a polyethylene or polypropylene
mesh to provide strength and durability), industrial wipes, medical drapes,
feminine hygiene components, specialty roll and large roll tissue and toweling
products, polyethylene and paper dropcloths, car wash and golf towels, and
window insulation products. The Company's winders can convert rolls of material
up to 132 inches wide and slit widths as narrow as 3 inches. The Company has
also invested in equipment to perform thermal lamination to bond various
material substrates up to 120 inches wide, such as multi-ply dropcloths,
reinforced material, and breathable moisture barrier wraps. Machinery and
equipment at the Green Bay facility have the capability, developed by the
Company's in-house engineers and technical personnel, to combine or modify
various substrates through the use of precise temperature and pressure control.
The Company's Green Bay and Manning custom converting services have
grown primarily due to its capabilities to convert tissues, industrial and food
service wipes, perforated toweling products, party goods and thermal or
adhesive laminated products. During 1996, the Company re-designed its Green Bay
production floor to improve product through-put, necessitating the move of
fourteen major pieces of equipment.
The Company's Dallas facility has converting capabilities that include
precision slitting, rewinding, sheeting, specialty packaging, folding,
perforating, and trimming. These capabilities are directed toward converting
fine paper materials including specialty and fine printing papers and
paperboards, thermal papers, polyester films, and coated products.
The Dallas facility's custom converting services include final
packaging of products, including items on which the Company has performed other
converting or specialty printing services. Packaging capabilities include high
quality bulk skid wrapping, vacuum sealed carton packed sheets, poly-paper and
poly-film wrapping, and shrink-film packaging. The flexibility of the equipment
at the Dallas facility and the packaging alternatives that the Company can
provide its customers produce finished products that meet and exceed a varied
range of customer specifications and requirements. The Company's Dallas custom
converting services have grown due to the addition of a state-of-the-art
Jagenberg sheeter with specialty paper and paperboard sheeting capabilities and
the investment in a custom designed rewinder for thermal papers and films.
The Company's Newton facility has converting capabilities which
include precision slitting and rewinding of paper rolls in a large variety of
sizes which include variables in width, diameter, core size, single or
multi-ply, and occasionally color. All of the rolls can be printed on one side
or both, providing the customer with advertising, promotional or security
features.
Specialty Printing
The Company's Green Bay facility offers value-added specialty printing
and related graphic arts services, including pre-press work, sheeting,
calendering, printing, finishing, and thermal and adhesive laminating. The
Company provides multi-color printing that uses computerized control to
maintain a high level of print quality. The Company focuses on specialty
printing projects such as paper tablecovers, food and gift wraps, feminine
hygiene components, printed release liners, and novelty and holiday bathroom
tissue.
Green Bay's pre-press staff prepares projects for printing to customer
specifications. The Company uses the customer's preliminary art work and
arranges or performs all preparatory processes for camera ready art, plate
making, layout, plate mounting, and other related services.
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Specialty Printing (continued)
The Green Bay presses use flexographic and letterpress processes and
can print on a wide range of media from lightweight tissue or non-wovens to
heavyweight paperboard. The Company utilizes five wide web presses of various
sizes, three of which are capable of six-color printing. The Company uses
water-based and oil-based inks. The presses can accommodate widths up to 82
inches for one-sided printing and are capable of simultaneous two-sided
printing for widths up to 51 inches. The Company also uses a web press system
that includes in-line operations to produce thermal and adhesive composite
lamination or to apply specialty coatings. The presses have a variety of print
cylinders that provide the Company with the flexibility to meet customer needs.
The presses utilize lower cost rubber printing plates that allow the Company to
maintain quality and achieve a competitive pricing advantage for low volume
jobs relative to printers using engraved printing cylinders.
The Company's Newton facility produces a full range of papers for use
in bank proof or teller machines, including fan-fold forms, cards and printed
rolls of various sizes and types. Additionally, the Company produces an
extensive selection of standard and customized guest checks for use in the
restaurant industry, and the Company's Newton facility owns equipment which
enables the Company to produce a wide variety of multi-part business forms.
Paint Sundry Products
The Company's Green Bay and Manning facilities manufacture and
distribute home improvement products that are sold to paint and hardware
distributors, home centers, and retail paint stores. To provide its customers
with the industry's most complete line of paint sundry products, the Company
supplements the products it manufactures by distributing products manufactured
for the Company by others. Consumer disposable products include polyethylene,
paper and canvas dropcloths, latex and vinyl gloves, paint strainers, and other
allied items. These products are often used by homeowners performing
do-it-yourself home improvement projects and contractors and painting
professionals. The Company also sells a line of masking paper products for the
automotive aftermarket. The Company has increased sales of consumer disposables
by continually broadening and improving its product line, thereby allowing
customers to consolidate their orders with a single vendor. In addition, the
Company has attracted large buying groups through various volume incentives. To
further increase sales, the Company developed a proprietary point of sale
display, the "TUFPRO Paint Management System" that places in one location all
of the necessary supplies (other than paint and brushes) for a typical home
painting project.
MANUFACTURING AND OPERATIONS
In producing and distributing its line of Business Imaging Products,
the Company works closely with various Original Equipment Manufacturers (OEMs)
to develop products which meet or exceed the requirements of the imaging
equipment. The Company then produces and stocks a full line of paper products
to meet the needs of the users of the imaging equipment. With regard to its
Custom Converting operations, the Company either utilizes product
specifications provided by its customers or teams with its customers to develop
specifications which meet customer requirements. Generally, the product begins
with a flexible substrate, which is a base material such as a non-woven
material, paper, or polyethylene. The Company applies one or more of its custom
converting or specialty printing services that it has developed over a period
of years through its distinctive technical knowledge to add value to these
materials.
The Company's growth has been supported by its substantial capital
investment in new facilities and machinery and equipment. During the past three
years, the Company spent over $5 million on capital expenditures at its four
locations and approximately $21 million to acquire the assets of ECC and Hamco.
The Company has added two Perini winders, a Jagenberg sheeter, an Elsner
folder, an Elsner rewinder and various printing equipment. Included in this
total, the company has spent over $2 million to enhance the capabilities of its
state of the art thermal laminator. Due to the Company's expenditures on new
equipment, it has increased both its manufacturing capacity and the range of
its capabilities. The Company believes it has sufficient capacity to meet its
growth expectations.
The Company's equipment can produce a wide range of sizes of
production output to meet unique customer specifications. The custom converting
equipment can accommodate web widths from 3 inches to 132 inches. Its folding
equipment can fold from 6 inches to 120 inches by 240 inches, in one-inch
increments. The Company's printing presses perform flexographic and letterpress
processes and print from one to six colors on webs as wide as 82 inches. Its
fine printing paper and paperboard converting equipment includes
state-of-the-art rewinders, sheeters, folders, perforators, and equipment that
performs extensive packaging functions.
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SALES AND MARKETING
Tufco Technologies markets its products and services nationally
through its 33 full-time sales and service employees and 114 manufacturer's
representatives and distributors. The Company's sales and service personnel are
compensated on a base salary plus incentive bonus. The Company generally
utilizes referrals and its industry reputation and presence to attract
customers, and advertises on a limited basis in industry periodicals and
shelter media and through cooperative advertising arrangements with its
consumer disposables and fine paper converting services and products suppliers
and customers.
Customers generally purchase the Company's goods and services under
project-specific purchase orders rather than long-term contracts, although
exceptions are made when the Company is required to purchase special machinery
to complete an order. The Company's sales volume by quarter is subject to a
limited amount of seasonal fluctuation. Generally, Tufco's sales volume and
operating income are at their lowest levels in the first and second fiscal
quarters and are generally higher in the third and fourth fiscal quarters.
The customer base consists of approximately 1,000 companies, including
large integrated paper companies, users, dealers and distributors of business
imaging papers, and resalers of paint sundry products. There were no customers
accounting for more than 10% of consolidated sales in fiscal 1996. Sales are
generally made on a credit basis within limits set by the Company's executive
management. The Company generally requires payment to be made within 30 days
following shipment of goods.
COMPETITION
The Company believes the primary areas of competition for its goods
and services are price, quality, production capacity and capability, capacity
for prompt and consistent delivery, service, and continuing relationships. The
Company believes that its key competitive advantages are product quality, quick
response, rapid equipment set-up and turnaround time, long-standing customer
relationships, broad customer base, highly engineered machinery and processes,
production diversity and capacity, continuity of management, and experienced
personnel. Management believes that there is no single competitor that offers
the breadth and variety of products and services offered by the Company. In
addition, customers benefit from the Company's ability to perform its multiple
services and distribute from its national asset base, which reduces freight
costs and increases product and service reliability through use of single
source supplier on a national basis.
Competitors for the Company's products and services vary based upon
the products and services offered. In Business Imaging Products, Tufco competes
with small regional suppliers and a few large national firms. Based on
management's assessment of the market, no single firm offers the breadth of
products offered by Tufco on a national basis. In the Company's industrial
custom converting services, the Company believes that relatively few
competitors offer a wider range of services or can provide them from a single
source. With respect to the Company's specialty printing services and fine
paper converting products, the competition consists primarily of numerous small
regional companies. Management believes that the Company's capabilities in
custom converting and specialty printing give it the flexibility, diversity,
and capacity to compete effectively on a national basis with large companies
and locally with smaller regional companies. The Company does not believe
foreign competition is significant at this time in the custom converting and
specialty printing lines. There is strong domestic competition and a modest
amount of foreign competition in the manufacturing of consumer disposable
products.
Although the Company does not engage in a significant amount of direct
competition with large integrated paper companies that are its customers,
management believes that there are inherent business risks in the expansion of
sales to these customers, given their significant in-house production
capabilities. The Company typically serves as a product development accelerator
to these customers because as sales of specific converting services to these
customers have grown, the customer may discontinue purchases from the Company
and move production in-house due to the economies of scale having been
attained. The Company believes that it is able to evaluate and anticipate
adequately the timing of such changes. Moreover, given the versatility of its
manufacturing capabilities, the Company has been able to replace such lost
sales with new orders of more complex products, often from the same customer.
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PRODUCT DEVELOPMENT AND QUALITY CONTROL
The Company works with its customers to develop new products and
applications. The Company believes that a key factor in its success has been
its willingness and distinctive technical competency to help customers
experiment with various flexible substrates to develop materials with different
attributes such as strength, flexibility, absorbency, breathability,
moisture-resistance, and appearance. As a result, the Company's capabilities
enable it to develop certain laminated substrates at lower costs than if the
customers developed these products themselves. For example, a customer may
request certain physical tests during trial runs that are performed by the
Company's quality control personnel, often with the customer on site. Customers
are charged for machine time use, materials, and operator time in the new
product development process. After completing the development process, the
Company prices a new product or service and designs an ongoing program that
provides information to the customer such as quality checks, inventory reports,
materials data, and production reports.
The Company maintains a quality control laboratory that constantly
monitors its production using statistical process controls (SPC) to observe and
measure quality effectiveness of its production processes, such as temperature,
speed, tension, and pressure. The Company's rigid standards and use of SPC have
allowed it to qualify for the GMP (Good Manufacturing Practices) designation
from several customers, a quality control standard that these companies require
before they will use a company for outsourcing. In addition, several of the
Company's customers perform periodic audits at the Company's Green Bay facility
to ensure that adequate quality control practices are in place at all times.
The Company's Dallas quality control laboratory is part of a collaborative of
33 laboratories sponsored by a large original equipment manufacturer that
utilizes the Dallas facility for its production. The collaborative is utilized
by that company to help set quality standards and ensure that its suppliers,
like the Dallas facility, have in place the process reviews and controls
necessary to ensure that quality products are being manufactured consistently.
RAW MATERIALS AND SUPPLIERS
The Company is not dependent on any particular supplier or group of
affiliated suppliers for raw materials or for equipment needs. The Company
feels it has excellent relationships with its primary suppliers, and the
Company has not experienced difficulties in obtaining raw materials in the
past. The Company's raw materials fall into four general groups: various paper
stocks, inks for specialty printing, non-woven materials, and polyethylene
films. There are numerous suppliers of all of these materials. To ensure
quality control and consistency of its raw material supply, the Company's
Dallas and Newton facilities receive fine paper stock primarily from two major
paper companies instead of a greater number of companies.
The Company's primary raw material, base paper, is subject to periodic
price fluctuations. In the past, the Company has been successful in passing
most of the price increases on to its customers, but management cannot
guarantee that the Company will be able to do this in the future.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, and local environmental laws
and regulations concerning emissions into the air, discharges into waterways,
and the generation, handling, and disposal of waste materials. These laws and
regulations are constantly evolving, and it is impossible to predict accurately
the effect they may have upon the capital expenditures, earnings, and
competitive position of the Company in the future. The Company believes that it
complies with these laws and regulations in all material respects. The Company
does not maintain environmental impairment insurance.
The Company's past expenditures relating to environmental compliance
have not had a material effect on the Company, nor does the Company expect that
such expenditures relating to the Company's recently completed addition to its
manufacturing facility will be material. Further growth in the Company's
production capacity with a resultant increase in discharges and emissions may
require capital expenditures for environmental control facilities in the
future. The Company does not expect such expenditures to be material. No
assurance can be given that future changes to environmental laws or their
application will not have a material adverse effect on the Company's business
or results of operations.
EMPLOYEES
At December 17, 1996, the Company had approximately 447 employees, of
whom 180 were employed at its Green Bay facility, 80 at its Manning facility,
87 at its Dallas facility, and 100 at its Newton facility. The Company has a
non union workforce and believes that its relationship with its employees is
good.
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ITEM 2 - PROPERTIES
The Company's main production and distribution facilities for
industrial converting, specialty printing, and consumer disposable products
manufacturing are located in Green Bay, Wisconsin. The 188,000 square foot
facility (of which approximately 5,000 square feet are used for offices) was
built in stages from 1980 to 1992 and is owned by the Company. The Company has
approximately seven additional acres on which to expand in the future.
The Company leases 44,000 square feet of space in a facility
contiguous to its Green Bay, Wisconsin, facility, which is currently used for
certain warehouse, distribution, and packaging operations. This facility is
leased from a partnership of whom Samuel Bero and Patrick Garland, both
directors of the Company, are two of several partners. The lease for this
facility expires March, 2003. The Company has an option to renew this lease for
an additional three years.
The Company's corporate headquarters are located in facilities which
it leases in Dallas, Texas, in the same building which the Company uses to
produce and distribute business imaging products and in the custom converting
of various fine paper and board grade papers. The lease for the 173,000 square
foot facility expires in February, 2003.
The Company owns a 120,000 square foot facility in Newton, North
Carolina, used in the production and distribution of business imaging products
and in the printing of custom forms.
In June 1996, the Company leased for five years and in October of 1996
occupied a new 62,000 square foot facility in Clarendon County, South Carolina,
which was designed and constructed to house the production and distribution
operations for the Company's paint sundry business. The Company has guaranteed
to the Lessor that, if the lease is not renewed, the residual market value of
the building which was constructed at a cost of $1.5 million, will be at least
$1.1 million. Management expects the building value will be at least $1.1
million; however, the Company cannot provide assurances as to the impact of
future economic factors influencing the future value of the building. The
Company also owns a 42,000 square foot facility in Manning, South Carolina
which it is using for storage of bulk raw materials.
The Company believes that all of its facilities are in good condition
and suited for their present purpose. The Company believes that the property
and equipment currently used and planned for acquisition is sufficient for its
current and anticipated short-term needs, but that the expansion of the
Company's business or the offering of new services could require the Company to
obtain additional equipment or facilities.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings in the ordinary
course of its business, which are not anticipated to have a material adverse
effect on the Company's results of operations or financial condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since the Company's initial public offering on January 28, 1994 at
$9.00 per share, the Common Stock of Tufco has been traded on the NASDAQ
National Market under the trading symbol "TFCO." The following table sets forth
the range of high and low closing prices for the Common Stock, as reported on
the NASDAQ National Market for the periods indicated:
High Low Close
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Fiscal 1994:
Quarter ended March 31, 1994 $ 9.56 $ 7.50 $ 7.50
Quarter ended June 30, 1994 $ 8.25 $ 6.50 $ 7.00
Quarter ended September 30, 1994 $ 7.25 $ 3.00 $ 6.00
Fiscal 1995:
Quarter ended December 31, 1994 $ 7.25 $ 5.00 $ 6.50
Quarter ended March 31, 1995 $ 6.50 $ 4.25 $ 4.75
Quarter ended June 30, 1995 $ 5.50 $ 4.00 $ 5.50
Quarter ended September 30, 1995 $ 5.50 $ 4.13 $ 4.75
Fiscal 1996:
Quarter ended December 31, 1995 $ 8.25 $ 4.50 $ 7.00
Quarter ended March 31, 1996 $ 8.00 $ 6.25 $ 7.25
Quarter ended June 30, 1996 $ 7.25 $ 5.25 $ 6.75
Quarter ended September 30, 1996 $ 7.25 $ 6.00 $ 6.25
As of December 17, 1996, there were approximately 165 holders of
record of the Common Stock. On December 16, 1996, the last reported sale price
of the Common Stock as reported on the NASDAQ National Market was $7.25 per
share.
The Company has never paid dividends on its Common Stock. All notes
except the Industrial Development Revenue Bonds are supported by loan
agreements which contain certain restrictive covenants, including requirements
to maintain certain levels of cash flow and restriction on the payment of
dividends. The Company does not intend to pay any cash dividends in the
foreseeable future.
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ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA)
Years Ended September 30,
-----------------------------------------------
Pro Forma
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1996 1995 (1) 1994 (2) 1993 1992 (3)
------- ------- ------- ------- -------
Statement of Operations Data:
Net sales ........................... $68,374 $47,987 $36,204 $24,878 $24,726
Cost of sales ....................... 56,042 39,796 29,724 20,439 20,004
------- ------- ------- ------- -------
Gross profit ........................ 12,332 8,191 6,480 4,439 4,722
Selling, general, and
administrative expenses ............. 6,753 4,906 3,797 2,332 2,346
Goodwill amortization and other post-
acquisition expenses ................ 724 437 454 301 405
------- ------- ------- ------- -------
Operating income .................... 4,855 2,848 2,229 1,806 1,971
Interest expense, net ............... 1,093 885 575 392 394
Miscellaneous income ................ 5 46 64 57 66
------- ------- ------- ------- -------
Income before income taxes .......... 3,767 2,009 1,718 1,471 1,643
Income taxes ........................ 1,507 808 690 695 739
------- ------- ------- ------- -------
Net income .......................... $ 2,260 $ 1,201 $ 1,028 $ 776 $ 904
======= ======= ======= ======= =======
Earnings per share .................. $ .51 $ .37 $ .37 $ .37 $ .43
Weighted average common and
common equivalent shares
outstanding .......................... 4,438 3,248 2,790 2,103 2,103
Other Data:
Depreciation and
amortization (4) .................... $ 2,279 $ 1,647 $ 1,337 $ 1,033 $ 1,019
Capital expenditures ................ 2,371 1,280 1,386 863 2,030
Balance Sheet Data: (at September 30)
Working capital ..................... $10,553 $13,914 $ 6,577 $ 3,711 $ 2,103
Total assets ........................ 50,038 51,060 34,004 20,976 20,639
Long-term debt ...................... 13,350 18,897 10,369 6,922 6,921
Stockholders' equity .................. 28,719 26,445 19,164 10,207 9,325
FOOTNOTES
(1) The results of operations of Hamco, Inc. are included in the consolidated
financial data since the date of acquisition (August 1995).
(2) The results of operations of ECC are included in the consolidated
financial data since the date of acquisition (January 1994).
(3) The pro forma statement of operations data for the twelve months ended
September 30, 1992, assumes that the acquisition of Tufco Industries, Inc.
in fiscal 1992 occurred at the beginning of the period and that the
employment agreements with Messrs. Bero and Garland were amended as of
October 1, 1992.
(4) Depreciation and amortization consist of depreciation of buildings,
machinery and equipment, and the amortization of goodwill and
organizational expenses.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Tufco manufactures and distributes business imaging paper products,
performs custom converting and specialty printing services and manufactures and
distributes paint sundry products. The Company's strategy is to work closely
with its customers to develop products or perform services which meet or exceed
the customers' quality standards, and to then use the Company's operating
efficiencies and broad distribution base to supplement or replace its
customers' own production and distribution functions.
The Company's technical proficiencies include slitting and rewinding,
sheeting, multi-color printing, laminating, folding and packaging.
In January 1994, the Company completed an initial public offering of
its stock and concurrently purchased substantially all of the assets of
Executive Converting Corporation (ECC). The Company issued 900,000 shares of
its common stock on the NASDAQ Market at $9.00 per share, resulting in net
proceeds of $6.8 million. The total cost of the ECC acquisition was $8.7
million consisting of $7.5 million in cash and 127,778 shares of the Companies
common stock.
In August 1995, the Company purchased substantially all of the assets
of Hamco Industries, Inc. for a total cost of $14.2 million funded by the
issuance of $1.2 million shares of the Company's common stock and additional
bank borrowings.
Management's discussion of the Company's 1996 year in comparison to
1995, contains forward looking statements regarding current expectations, risks
and uncertainties for 1997 and beyond. The actual results could differ
materially from those discussed here. As well as those factors discussed in the
section entitled Business in this report, other factors that could cause or
contribute to such differences include, among other items, significant changes
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 selected financial data for the periods presented may not be
indicative of the Company's future financial condition or results of
operations.
RESULTS OF OPERATIONS
The following discussion relates to the financial statements of the
Company for the fiscal year ended September 30, 1996 (current year or fiscal
1996), in comparison to the fiscal year ended September 30, 1995 (prior year or
fiscal 1995), as well as the fiscal year ended September 30, 1994 (fiscal
1994).
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RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth, for the years ended September 30 (i)
the percentage relationship of certain items from the Company's statements of
income to total revenues and (ii) the year-to-year changes in these items:
PERCENTAGE OF TOTAL REVENUE YEAR-TO-YEAR CHANGE
----------------------------- -------------------
1995 TO 1994 TO
1996 1995 1994 1996 1995
------- ------- ------- ------- -------
Net sales .............................. 100.0% 100.0% 100.0% 42% 33%
Cost of sales .......................... 82.0 82.9 82.1 41 34
------- ------- ------- ------- -------
Gross margin .................. 18.0 17.1 17.9 51 26
Selling and administrative expense ..... 9.9 10.2 10.5 38 29
Amortization & postacquisition
expenses ........................... 1.1 0.9 1.3 66 -4
------- ------- ------- ------- -------
Operating income .............. 7.1 5.9 6.2 70 28
Net interest expense ................... 1.6 1.8 1.6 23 54
Other income ........................... 0.0 0.1 0.2 -89 -28
------- ------- ------- ------- -------
Income before income taxes .... 5.5 4.2 4.7 88 17
Income tax expense ..................... 2.2 1.7 1.9 87 17
------- ------- ------- ------- -------
Net income .................... 3.3% 2.5% 2.8% 88% 17%
======= ======= ======= ======= =======
The components of net sales are summarized in the table below:
1996 1995 1994
------------ ------------- -------------
% Of % Of % Of
Amount Total Amount Total Amount Total
------------ ------------- -------------
(Dollars In Millions)
Business imaging products ................... $ 34.9 51% $ 18.1 38% $ 11.8 33%
Custom converting and specialty printing .... 24.3 36 20.6 43 15.6 43
Paint sundry products ....................... 9.2 13 9.3 19 8.8 24
------- --- ------- --- ------- ---
Total net revenue ........................... $ 68.4 100% $ 48.0 100% $ 36.2 100%
======= === ======= === ======= ===
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
Net sales for the fiscal 1996 increased $20.4 million, or 42%,
primarily due to the $17.8 million additive impact of Hamco Industries, Inc.
Hamco which was acquired on August 23, 1995, produces and distributes business
imaging products. After adjustment for the impact of Hamco, the Company's
revenue increased 5.4% ($2.6 million) in fiscal 1996. The Company lowered the
prices it charges its customers for certain paper products by 7% to 9% during
the second, third and fourth quarters of 1996 in response to sharp reductions
in the costs of various base paper grades. This reduction in unit price
resulted in a reduction in total annual revenue of approximately $0.9 million
(1.8%) on comparable unit volumes. Management feels that the adjusted growth
rate of 7.2% (considering the above 5.4% and 1.8% factors) is in line with
management's expectations for internal growth.
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FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995 (CONTINUED)
Gross margin increased to 18.0% in fiscal 1996 from 17.1% in fiscal
1995, primarily due to a combination of two factors. A decrease in the cost of
base paper resulted in an increase in gross margin of 0.2 points due to the
portion of the cost decrease which the Company was able to retain. Additionally,
approximately 36% of the Company's inventory is valued using the Last In First
Out (LIFO) method, and the sharp reduction in paper prices resulted in a
reduction in the LIFO reserve and a corresponding increase in gross profit of
$0.5 million (0.7 points of margin), of which $0.3 million was recorded in the
fourth quarter of fiscal 1996. The Company has planned for a nominal increase in
paper prices in 1997, but management does not anticipate any significant
increase in this chief raw material.
Selling and administrative expenses as a percentage of net sales,
decreased to 9.9% in fiscal 1996 from 10.2% in fiscal 1995. Selling and
administrative expenses increased $1.9 million in fiscal 1996 due to the
inclusion of Hamco's selling and administrative expenses. Also, the Company
accrued approximately $0.6 million in post employment costs associated with the
resignation of its Chief Executive Officer and other management personnel in
September 1996. After adjustment for these two factors, selling and
administrative costs decreased $0.8 million from comparable operations for the
prior fiscal year. The decrease was the result of lower payroll and travel
costs in 1996 due to sales and management positions which were either vacant
for a portion of the year or eliminated as a result of organizational
restructuring.
Goodwill amortization and post-acquisition expenses increased to $0.7
million in fiscal 1996 due to the Hamco acquisition and consulting fees
resulting from a consulting agreement between the Company and Bradford
Ventures, Ltd. (BVP). In fiscal 1995, a portion of the management fees paid to
BVP were capitalized as a result of the Hamco acquisition, such was not the
case in 1996 as all fees paid to BVP were expensed.
Net interest expense increased by $0.2 million to $1.1 million in
fiscal 1996 from $0.9 million in fiscal 1995. The increase was due to the fact
that interest costs were incurred as a result of the Hamco acquisition. The
acquisition of Hamco resulted in a net increase in total debt of $5 million at
fiscal year end 1995. However, the Company worked with its primary lender to
restructure all of its outstanding debt and its cash management in the second
quarter of fiscal 1996. The effect of the restructuring was a reduction of one
(1) full point in the weighted average interest rate which the Company pays on
its debt. Additionally, the restructuring of cash management along with strong
cash flow from operations allowed the Company to lower its total borrowings
under its working capital line of credit. The combination of these factors
allowed the Company to significantly mitigate the impact of the additional
long-term debt incurred as a result of the Hamco acquisition and resulted in an
increase in interest expense of only 24%in fiscal 1996 versus fiscal 1995.
Income taxes were 40% of pretax earnings for fiscal 1996 and for the
previous year. Earnings per share were 51 cents in fiscal 1996 compared to 37
cents for fiscal 1995 and 43 cents for the pro forma fiscal 1995 results (see
Note 2 in Notes to Consolidated Financial Statements).
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO SEPTEMBER 30, 1994
Net sales for fiscal 1995, increased $11.8 million, or 33%, to $48.0
million. The increase was primarily due to price increases and growth in sales
of business imaging products and custom converting services, which rose $11.3
million to $38.7 million, primarily from the $5.7 million additive effect of
four additional months of ECC's sales. The ECC acquisition was completed
effective January 28, 1994. Sales of paint sundry products increased $0.5
million to $9.3 million due to expansion of the Company's customer base and a
rebound from the harsh winter of 1994.
Gross margin decreased to 17.1% in fiscal 1995 from 17.9% in fiscal
1994. The primary cause for the decrease in margins is the significant increase
in the price of base paper stock in 1995 and the principal raw material in
approximately 41% of the Company's revenue base. The Company experienced sharp
increases in the costs of paper and polyethylene during the first three
quarters of fiscal 1995 which increased the Company's inventory values, but had
no material effect on 1995 profits as the Company was able to pass these
increases on to its customers. Prices on these commodities stabilized in the
fourth quarter of fiscal 1995.
-12-
13
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO SEPTEMBER 30, 1994 (CONTINUED)
Selling and administrative expenses increased $1.1 million in 1995
primarily due to the inclusion of ECC's selling and administrative expenses for
four additional months in 1995 versus 1994, when ECC was acquired. Three
additional salespersons were added during fiscal 1995 to facilitate market
growth during the upcoming fiscal year. Additionally, the Company incurred
approximately $200,000 in costs to restructure the Green Bay organization,
including severance costs and legal and professional fees.
Goodwill amortization and post-acquisition expenses remained
relatively constant at $437,000 in fiscal 1995 versus $454,000 in fiscal 1994.
The expenses were due to goodwill amortization arising from the ECC acquisition
and consulting fees resulting from a consulting agreement between the Company
and Bradford Ventures, Ltd. (BVP). In fiscal 1995, a portion of the management
fees paid to BVP were capitalized as a result of the Hamco acquisition,
resulting in the decrease in expense from 1994.
Net interest expense increased by $310,000 to $885,000 in fiscal 1995
from $575,000 in fiscal 1994. The increase was largely due to the fact that
interest costs were incurred as a result of the ECC acquisition for a full year
in 1995. Additionally, the Company increased its average borrowing under its
working capital line of credit during 1995 due to the increasing costs of raw
materials. The Company refinanced its bank debt in the final quarter of 1995
resulting in decreased interest rates.
Income taxes were $808,000 or 40% of pretax earnings, for fiscal
1995 compared to $690,000, or 40% of pretax earnings, for the previous year.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations increased $4.5 million to $5.7 million in
fiscal 1996. Net income adjusted for non-cash items accounted for $4.7 million
in cash flow in fiscal 1996. Additionally, $0.6 million in separation costs for
the former CEO and other employees expensed in fiscal 1996 will be paid in 1997
and 1998. The Company's increase in accounts receivable and inventory values
appears disproportionately small compared to its increase in revenues from 1995
to 1996, primarily because of the Hamco acquisition late in fiscal 1995.
Cash used in investing activities totaled $1.5 million in fiscal 1996
and resulted from capital additions, principally improvements to the Company's
Green Bay facility. Also, the Company redeemed $0.8 million in certificates of
deposit purchased in the Hamco acquisition. Cash used in financing activities
totaled $5.5 million in fiscal 1996 due to the repayment of long term debt.
The Company's primary need for capital resources is to finance
inventories, accounts receivable, capital expenditures, and acquisitions.
During the second quarter of fiscal 1996, the Company restructured its
borrowing arrangement with Bank One, Wisconsin, its primary lender, resulting
in a reduction in the Company's weighted average borrowing rate from 7.98% to
6.98% on approximately $13.8 million in debt at the time that the new agreement
became effective on February 1, 1996. The maximum available borrowings and the
term under the restructured revolving credit agreement remained unchanged at
$9.8 million through March 31, 1998. At December 13, 1996, the Company had
approximately $11.8 million in total borrowings outstanding with $8.3 million
available under the revolving credit agreement. Management believes that the
Company's operating cash flow is adequate to service its long-term obligations
as of September 30, 1996, and any budgeted capital expenditures.
The Company's credit facilities are with one bank with the exception
of $1.8 million and are secured by substantially all of the Company's assets.
The credit facilities with Bank One contain certain restrictive covenants,
including minimum required cash flow, limits on capital additions and debt
service coverage ratios.
On January 28, 1994, the Company sold 900,000 shares of its previously
unissued Common Stock in a public offering. The net proceeds to the Company
from this offering was approximately $6.8 million. An additional 127,778 shares
were issued on January 28, 1994, in conjunction with the Company's acquisition
of Executive Converting Corporation. On August 23, 1995, the Company issued 1.2
million shares of its Common Stock in conjunction with the Company's
acquisition of Hamco, Inc. for $6.2 million.
-13-
14
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Sharp increases in the costs of paper and polyethylene impacted the
Company's inventory values and net income during fiscal 1995. In 1996, the
prices of these commodities dropped dramatically which again impacted
inventories and net income. The Company is generally successful in passing
these fluctuations in raw material prices to its customers through increases or
decreases in the selling price of the Company's products. Prior to this period,
the impact of inflation has been minimal on the Company's inventory and net
income.
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 primary lender must approve the payment of
any dividends.
The Company's allowance for uncollectible accounts receivable was
$149,000 at December 13, 1996. Management believes that this allowance is
adequate to provide for losses inherent in its accounts receivable.
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth selected quarterly financial
information. This information is derived from un-audited consolidated financial
statements of the Company and includes, in the opinion of management, all
normal and recurring adjustments that management considers necessary for a fair
statement of results for such periods. The operating results for any quarter
are not necessarily indicative of results for any future period.
1996 (Dollars in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales ................................... $16,367 $16,392 $17,000 $18,615
Gross profit ................................ 2,842 2,223 3,325 3,942
Operating expenses .......................... 1,804 1,486 2,070 2,116
Operating income ............................ 1,038 737 1,255 1,826
Income before taxes ......................... 749 476 969 1,573
Provision for income taxes .................. 298 199 358 652
Net income .................................. 451 277 611 921
Earnings per share .......................... .10 .06 .14 .21
1995 (Dollars in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Net sales ................................... $10,285 $12,080 $11,293 $14,329
Gross profit ................................ 1,480 1,697 1,707 3,307
Operating expenses .......................... 1,062 1,036 928 2,317
Operating income ............................ 418 661 779 990
Income before taxes ......................... 258 484 569 698
Provision for income taxes .................. 103 195 222 288
Net income .................................. 156 290 347 408
Earnings per share .......................... .05 .09 .11 .12
The Company's sales volume by quarter is subject to a limited amount
of seasonal fluctuation. Generally, the Company's sales volume and operating
income are at their lowest levels in the first and second fiscal quarters.
Sales and operating income are generally at higher levels in the third and
especially the fourth fiscal quarters. During the fourth quarter of fiscal 1996
and 1995, the Company performed custom printing services for customers which
market printed paper products with holiday themes. The technical aspects of the
printing and the time sensitive nature of the services enable the Company to
generate higher gross margins than at other times during the year.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are attached as Appendix to this report.
-14-
15
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers, directors, and key employees of the Company are:
Name Age Positions With the Company
- ---- --- --------------------------
Louis LeCalsey, III 57 President and Chief Executive Officer
Gregory L. Wilemon 36 Chief Financial Officer, Chief Operating
Officer and Secretary/Treasurer
Michael A. Schilling 45 Vice President - Human Resources
Robert J. Simon (1)(2)(3) 38 Chairman of the Board of Directors
Samuel J. Bero (1)(3) 61 Director
Patrick J. Garland (1)(3) 65 Director
Robert E. Coghan 68 Director
C. Hamilton Davison, Jr. 37 Director
Edward A. Leinss (2) 55 Director
William J. Malooly (2) 54 Director
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Each director holds office until the next annual meeting of
stockholders of the Company and until his successor has been elected and
qualified. Each director has served on the Board of Directors since Tufco's
inception in February 1992. Executive officers of the Company are elected by
the Board of Directors and serve at the discretion of the Board. There are no
family relationships between any executive officers or directors of the
Company.
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
Louis LeCalsey, III--Mr. LeCalsey assumed the positions of President
and Chief Executive Officer of Tufco in September 1996. Previously he was
President of Tufco Industries, Inc. since April 1996 and prior to that he
served as Vice President of Worldwide Logistics for Scott Paper Company, the
culmination of a 20 year career with Scott in various leadership positions.
Gregory L. Wilemon--Mr. Wilemon has been Chief Financial Officer since
September 18, 1995 and was appointed Secretary/Treasury by the board effective
November 12, 1995 and Chief Operating Officer in September 1996. Mr. Wilemon
had been Chief Operating Officer at Executive Roll Manufacturing from 1991
until May of 1993. From 1993 until he rejoined the Company, Mr. Wilemon was
Vice President of Finance at Great North American Companies. Prior to his
earlier tenure with the Company, Mr. Wilemon was a Senior Business Planner with
PepsiCo from 1987 to 1991.
Michael A. Schilling--Mr. Schilling has been Vice President of Human
Resources since November 1992 and prior to that was Director of Human Resources
of Tufco since 1989. Prior to that time, Mr. Schilling was Manager of Human
Resources at Nu-Line Industries, a division of Huffy Bicycle Corp., from
January 1988 to September 1989 and Human Resources Manager of Vlasic Foods,
Inc., a division of the Campbell Soup Company, from 1986 to 1988.
-15-
16
Robert J. Simon--Mr. Simon has been Chairman of the Board of Directors
of Tufco since February 1992. Mr. Simon has been a senior managing director of
Bradford Ventures, Ltd., a private investment firm, since 1992 and a general
partner of Bradford Associates since 1989. Prior to that time, Mr. Simon held
the following positions with Bradford Ventures Ltd.: Managing Director from
1990 to 1992; Senior Vice President from 1987 to 1990, and Vice President from
1985 to 1987. Mr. Simon is Chairman of the Board of HoloPak Technologies, Inc.,
Adco Technologies, Inc., and The Sunbelt Companies, Inc. and is also a director
of the C.R. Gibson Company, all of which are publicly held companies. Mr. Simon
is either Chairman of the Board or a director of Paramount Cards, Inc.,
Parmarco Technologies, Inc., VSC Corporation, Overseas Equity Investors Ltd.,
Overseas Private Investors Ltd., and several other privately held companies.
Samuel J. Bero--Mr. Bero had been President and Chief Executive
Officer from November 1993 until he retired in July 1995, Executive Vice
President since November 1992, and General Manager of Tufco since 1974, when he
co-founded the Predecessor with Mr. Garland and two other individuals. Mr. Bero
has over 33 years of experience in the converting industry.
Patrick J. Garland--Mr. Garland was the President of Tufco from 1974,
when he co-founded the Predecessor with Mr. Bero and two other individuals,
until November 1993. Mr. Garland retired from Tufco Industries in February 1994
when his employment agreement expired. He continues to serve as a director of
Tufco Technologies, Inc. Mr. Garland has over 33 years of experience in the
converting industry.
Robert E. Coghan--Mr. Coghan has been the President and a director of
HoloPak Technologies, Inc., a manufacturer of holographic and hot stamp foils,
since 1990. From 1979 to such time, Mr. Coghan was President of Transfer Print
Foils, Inc., which was acquired by HoloPak Technologies, Inc. in January 1990.
C. Hamilton Davison, Jr.--Mr. Davison has been the President and a
director of Paramount Cards, Inc., a manufacturer of greeting cards, since
1988. Prior to that time, Mr. Davison was Vice President, International and
Marketing of Paramount Cards, Inc. since 1986. Mr. Davison is also a director
and serves on the executive committee of the greeting card industry trade
association and is a Director on the Board of Valley Resources.
Edward A. Leinss--Mr. Leinss has been President and Chief Executive
Officer of Ahlstrom Filtration, Inc., a manufacturer of filtration media, since
1989 and of its predecessor, Filtration Sciences, Inc., from 1981 to 1989.
William J. Malooly--Mr. Malooly has been the Chairman and Chief
Executive Officer of Bank One, Green Bay since 1977.
COMPLIANCE WITH SECTION 16 (A) OF THE SECURITIES EXCHANGE ACT
The information called for by Item 10 with respect to compliance with Section
16 (a) of the Securities Exchange Act is incorporated by reference from the
1996 Proxy Statement which is to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days of the end of the fiscal
year covered by this report.
ITEM 11 - EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference
from the 1996 Proxy Statement which is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the end of
the fiscal year covered by this report.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference
from the 1996 Proxy Statement which is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the end of
the fiscal year covered by this report.
-16-
17
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference
from the 1996 Proxy Statement which is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the end of
the fiscal year covered by this report.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. Financial statements are attached as Appendix
to this report. The index to the financial statements is found on F-1
of the Appendix.
(a) 2. Financial Statement Schedules. All schedules are omitted since the
required information is not present or is not present in amounts
sufficient to require a submission of the schedules, or because the
information required is included in the financial statements and
notes thereto.
(a) 3. Exhibits. See Exhibit Index in part ( c ), below.
(b) The Company did not file any reports on Form 8-K during the quarter
ended September 30, 1996.
-17-
18
(c) Exhibit
Number Description
------ -----------
3.1 Restated Certificate of Incorporation (1) (Exhibit 3.1)
3.2 Bylaws (1) (Exhibit 3.2)
10.1 Stock Purchase and Contribution Agreement, dated as of February
25, 1992, among the Company, Tufco Industries, Inc. ("Tufco"),
and the Stockholders of Tufco. (1) (Exhibit 10.1)
10.2 Amended and Restated Consulting Agreement with Bradford
Investment Partners, L.P. (3) (Exhibit 10)
10.3 Loan Agreement, dated May 1, 1992, between the Village of
Ashwaubenon, Wisconsin, and the Company. (1) (Exhibit 10.11)
10.4 1992 Non-Qualified Stock Option Plan (1) (Exhibit 10.12)
10.5 Form of Employee Stock Purchase Agreement between the Company
and certain key employees of the Company. (1) (Exhibit 10.17)
10.6 1993 Non-Employee Director Stock Option Plan. (2) (Exhibit
10.19)
10.7 Amendment to Loan Agreement dated as of March 29, 1995 between
Bank One, Green Bay; Tufco Industries, Inc.; and Executive
Converting Corporation.(3)
10.8 Amendment to Loan Agreement dated as of May 18, 1995 between
Bank One, Green Bay; Tufco Industries, Inc.; and Executive
Converting Corporation. (4) (Exhibit 6(a))
10.10 Loan Agreement, dated August 22, 1995, between Tufco Industries,
Inc., Executive Converting Corporation, Hamco Industries, Inc.,
and Bank One, Green Bay. (5) (Exhibit 2.1)
10.11* ** Amended Employment Agreement with Greg Wilemon, dated September
18, 1995.
10.13 Lease Agreement, dated as of March 1, 1995, between Bero,
Garland, Gebhardt and McClure, a Wisconsin partnership, and
Tufco.
10.14 Stock Option Plan for Carl B. Francis dated April 21, 1995. (6)
(Exhibit 10.14)
10.15* Lease Agreement dated as of April 1, 1996, between Bero,
Garland, Gebhardt and McClure, a Wisconsin partnership, and
Tufco.
10.16* Amendment to Loan Agreement dated August 22, 1995, between
Tufco Industries, Inc., Executive Converting Corporation, Hamco
Industries, Inc. and Bank One, Green Bay.
10.17* Separation Agreement dated October 1, 1996 between Carl B.
Francis and Tufco Technologies, Inc.
10.18* ** Employment Agreement with Louis LeCalsey, III dated
September 19, 1996.
21* Subsidiaries of the Company.
23* Independent Auditors' Report of Wipfli Ullrich Bertelson on the
fiscal 1995 and 1994 consolidated financial statements.
27 Financial Data Schedule
- ------------------
* Filed Herewith
** Management Contract or Compensatory Plan
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (Reg. No. 33-55828) (the "Registration
Statement") as filed with the Commission on December 16, 1992.
(2) Incorporated by reference to Amendment No. 1 to the Registration
Statement as filed with the Commission on November 23, 1993.
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1995.
(4) As well as those factors discussed in the section entitled
Business in this report, other factors.
(5) Incorporated by reference to the Company's Current Report on
Form 8-K dated August 23, 1995.
(6) Incorporated by reference to the Company's Annual Report on Form
10-K for the period ended September 30, 1995.
(b) Form 8-K was filed by the registrant August 23, 1995.
(c) See (a)(3) above for the list of exhibits required to be filed as part of
the Annual Report on Form 10-K.
-18-
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in Green Bay,
Wisconsin, on December 17, 1996.
Tufco Technologies, Inc.
By: /s/ Louis LeCalsey, III
--------------------------------------
Louis LeCalsey, III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Louis LeCalsey, III President, Chief Executive Officer December 17, 1996
- ----------------------------------- and Director (Principal Executive
Louis LeCalsey, III Officer)
/s/ Robert J. Simon Chairman of the Board December 17, 1996
- -----------------------------------
Robert J. Simon
/s/ Gregory L. Wilemon Chief Financial Officer, Chief December 17, 1996
- ----------------------------------- Operating Officer and Secretary
Gregory L. Wilemon (Principal Financial and
Accounting Officer)
/s/ Samuel J. Bero Director December 17, 1996
- -----------------------------------
Samuel J. Bero
/s/ Patrick J. Garland Director December 17, 1996
- -----------------------------------
Patrick J. Garland
/s/ Robert E. Coghan Director December 17, 1996
- -----------------------------------
Robert E. Coghan
/s/ C. Hamilton Davison Jr. Director December 17, 1996
- -----------------------------------
C. Hamilton Davison, Jr.
/s/ Edward A. Leinss Director December 17, 1996
- -----------------------------------
Edward A. Leinss
/s/ William J. Malooly Director December 17, 1996
- -----------------------------------
William J. Malooly
-19-
20
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS - ITEM 8 OF FORM 10-K
- -------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT.............................................. F-2
FINANCIAL STATEMENTS AND NOTES:
Consolidated Balance Sheets as of September 30, 1996 and 1995.......... F-3
Consolidated Statements of Income
for the Years Ended September 30, 1996, 1995 and 1994............... F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended September 30, 1996, 1995 and 1994............... F-5
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1996, 1995 and 1994............... F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
21
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of
Tufco Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of Tufco
Technologies, Inc. and subsidiaries as of September 30, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Tufco Technologies, Inc. and subsidiaries for the years ended September 30,
1995 and 1994, were audited by other auditors whose report, dated November 9,
1995, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such 1996 consolidated financial statements present fairly, in
all material respects, the financial position of Tufco Technologies, Inc. and
subsidiaries at September 30, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Dallas, Texas
December 16, 1996
F-2
22
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 844,615 $ 2,129,382
Certificates of deposit 843,218
Accounts receivable (Notes 3 and 7) 8,360,911 8,373,065
Inventories (Notes 4 and 7) 9,556,023 9,092,197
Prepaid expenses and other current assets 212,072 193,412
Deferred income taxes (Note 8) 616,498 260,758
------------ ------------
Total current assets 19,590,119 20,892,032
PROPERTY, PLANT AND EQUIPMENT - Net (Notes 5 and 7) 15,746,729 15,362,242
GOODWILL - Net (Note 1) 14,112,390 14,017,541
OTHER ASSETS - Net (Note 6) 588,995 788,103
------------ ------------
TOTAL $ 50,038,233 $ 51,059,918
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 7) $ 2,866,654 $ 2,587,990
Accounts payable 2,356,305 2,451,221
Accrued payroll, vacation and payroll taxes 1,729,956 797,409
Other current liabilities 1,471,875 743,251
Income taxes payable (Note 8) 612,674 398,310
------------ ------------
Total current liabilities 9,037,464 6,978,181
LONG-TERM DEBT - Less current portion (Note 7) 10,483,128 16,309,178
DEFERRED INCOME TAXES (Note 8) 1,798,246 1,327,855
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 11):
Voting common stock, $.01 par value; 9,000,000 shares authorized;
3,723,585 and 3,700,363 shares issued, respectively 37,236 37,004
Nonvoting common stock, $.01 par value; 2,000,000 shares authorized;
709,870 shares issued and outstanding 7,099 7,099
Additional paid-in capital 23,491,130 23,375,176
Retained earnings (Note 7) 5,895,257 3,635,740
Treasury stock at cost, 43,632 and 20,575 voting common shares, respectively (236,074) (112,568)
Stock purchase plan notes (475,253) (497,747)
------------ ------------
Total stockholders' equity 28,719,395 26,444,704
------------ ------------
TOTAL $ 50,038,233 $ 51,059,918
============ ============
See notes to consolidated financial statements.
F-3
23
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
1996 1995 1994
NET SALES $ 68,373,654 $ 47,986,550 $ 36,204,763
COST OF SALES 56,042,088 39,795,291 29,724,196
------------ ------------ ------------
GROSS PROFIT 12,331,566 8,191,259 6,480,567
OPERATING EXPENSES:
Selling, general and administrative 6,752,663 4,906,687 3,797,472
Amortization and other postacquisition expenses 723,966 436,575 453,811
------------ ------------ ------------
Total 7,476,629 5,343,262 4,251,283
------------ ------------ ------------
OPERATING INCOME 4,854,937 2,847,997 2,229,284
OTHER INCOME (EXPENSE):
Interest expense (1,134,489) (910,894) (597,325)
Interest income 41,628 26,275 22,328
Miscellaneous 4,671 45,845 63,989
------------ ------------ ------------
Total (1,088,190) (838,774) (511,008)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 3,766,747 2,009,223 1,718,276
INCOME TAX EXPENSE (Note 8) 1,507,230 808,000 690,000
------------ ------------ ------------
NET INCOME $ 2,259,517 $ 1,201,223 $ 1,028,276
============ ============ ============
EARNINGS PER SHARE $ .51 $ .37 $ .37
============ ============ ============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 4,437,702 3,248,408 2,789,841
============ ============ ============
See notes to consolidated financial statements.
F-4
24
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
COMMON STOCK
------------------------------------------
VOTING NONVOTING
-------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
BALANCES AT OCTOBER 1, 1993 1,334,771 $13,348 760,684 $7,607
Issuance of common stock:
Initial public offering of Tufco Technologies, Inc. 900,000 9,000
Acquisition of Executive Converting Corporation 127,778 1,278
Stock issued to Tufco Industries, Inc. profit sharing plan 2,000 20
Conversion to voting common stock 50,814 508 (50,814) (508)
Purchase of treasury stock, 2,800 shares
Net income
--------- ------- ------- ------
BALANCES AT SEPTEMBER 30, 1994 2,415,363 24,154 709,870 7,099
Issuance of common stock - Acquisition of Hamco, Inc. 1,285,000 12,850
Repayment of stock purchase plan notes
Purchase of treasury stock, 17,775 shares
Net income
--------- ------- ------- ------
BALANCES AT SEPTEMBER 30, 1995 3,700,363 37,004 709,870 7,099
Exercise of employee stock options 6,285 63
Issuance of common stock 16,937 169
Repayment of stock purchase plan notes
Purchase of treasury stock, 23,057 shares
Net income
--------- ------- ------- ------
BALANCES AT SEPTEMBER 30, 1996 3,723,585 $37,236 709,870 $7,099
========= ======= ======= ======
ADDITIONAL STOCK TOTAL
PAID-IN RETAINED TREASURY PURCHASE STOCKHOLDERS'
CAPITAL EARNINGS STOCK PLAN NOTES EQUITY
BALANCES AT OCTOBER 1, 1993 $ 8,852,373 $1,406,241 $ - $ (73,000) $ 10,206,569
Issuance of common stock:
Initial public offering of Tufco Technologies, Inc. 7,011,742 (240,497) 6,780,245
Acquisition of Executive Converting Corporation 1,148,724 1,150,002
Stock issued to Tufco Industries, Inc. profit sharing plan 15,380 15,400
Conversion to voting common stock -
Purchase of treasury stock, 2,800 shares (16,725) (16,725)
Net income 1,028,276 1,028,276
----------- ---------- -------- --------- -----------
BALANCES AT SEPTEMBER 30, 1994 17,028,219 2,434,517 (16,725) (313,497) 19,163,767
Issuance of common stock - Acquisition of Hamco, Inc. 6,346,957 (200,000) 6,159,807
Repayment of stock purchase plan notes 15,750 15,750
Purchase of treasury stock, 17,775 shares (95,843) (95,843)
Net income 1,201,223 1,201,223
----------- ---------- -------- --------- -----------
BALANCES AT SEPTEMBER 30, 1995 23,375,176 3,635,740 (112,568) (497,747) 26,444,704
Exercise of employee stock options 29,421 29,484
Issuance of common stock 86,533 (75,000) 11,702
Repayment of stock purchase plan notes 97,494 97,494
Purchase of treasury stock, 23,057 shares (123,506) (123,506)
Net income 2,259,517 2,259,517
----------- ---------- -------- --------- -----------
BALANCES AT SEPTEMBER 30, 1996 $23,491,130 $5,895,257 $(236,074) $(475,253) $28,719,395
=========== ========== ========= ========= ===========
See notes to consolidated financial statements.
F-5
25
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
1996 1995 1994
OPERATING ACTIVITIES:
Net income $ 2,259,517 $ 1,201,223 $ 1,028,276
Noncash items in net income:
Depreciation and amortization of property, plant and equipment 1,884,719 1,325,094 1,039,141
Amortization of goodwill and other assets 394,517 321,846 298,293
Deferred income taxes 114,651 154,097 6,090
Increase in allowance for doubtful accounts 44,476 15,000 30,000
(Gain) loss on disposition of equipment (4,671) 29,052 (10,202)
Changes in operating working capital:
Accounts receivable (32,322) (1,008,306) (126,578)
Inventories (463,826) (748,791) (468,514)
Prepaid expenses and other assets 71,650 (146,608) 201,164
Accounts payable (94,916) (548,375) (55,271)
Accrued and other current liabilities 1,323,717 624,771 (413,040)
Income taxes payable 214,364
------------ ------------ ------------
Net cash from operations 5,711,876 1,219,003 1,529,359
------------ ------------ ------------
INVESTING ACTIVITIES:
Acquisition of Hamco, Inc. - net of cash acquired (11,725) (12,894,783)
Acquisition of Executive Converting Corporation - net of cash acquired (7,742,871)
Additions to property, plant and equipment (2,371,334) (1,280,056) (1,386,380)
Proceeds from disposition of property, plant and equipment 106,799 37,700 21,700
Advances to directors and employees (31,389) (28,421) (29,245)
Decrease in certificates of deposit 843,218
Repayment of advances to directors and employees 161,909
Withdrawal of funds out of restricted account 55,101
------------ ------------ ------------
Net cash used in investing activities (1,464,431) (14,165,560) (8,919,786)
------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of long-term debt 10,016,535 1,809,319
Repayment of long-term debt (5,547,386) (1,488,123) (1,527,241)
Issuance of common stock 41,186 6,159,807 6,795,645
Purchase of treasury stock (123,506) (95,843) (16,725)
Repayment of stock purchase plan notes 97,494 15,750
------------ ------------ ------------
Net cash from (used in) financing activities (5,532,212) 14,608,126 7,060,998
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,284,767) 1,661,569 (329,429)
CASH AND CASH EQUIVALENTS:
Beginning of year 2,129,382 467,813 797,242
------------ ------------ ------------
End of year $ 844,615 $ 2,129,382 $ 467,813
============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,125,036 $ 871,730 $ 625,305
============ ============ ============
Income taxes paid $ 1,178,215 $ 522,022 $ 799,779
============ ============ ============
Noncash investing and financing activities:
Issuance of common stock for stock purchase plan notes $ 75,000 $ 200,000 $ 240,497
============ ============ ============
Increase in goodwill for other assets and increase
in other current liabilities $ 453,251 $ -- $ --
============ ============ ============
See notes to consolidated financial statements.
F-6
26
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS include the accounts of Tufco
Technologies, Inc. (the "Company") and its wholly owned subsidiaries,
Tufco Industries, Inc., Executive Converting Corporation and Hamco
Industries, Inc., acquired in 1992, January 1994 and August 1995,
respectively. Significant intercompany transactions and balances are
eliminated in consolidation. The Company, through its wholly owned
subsidiaries, markets its own line of business imaging paper products,
and performs specialty printing, custom converting and packaging. The
Company also manufactures and distributes a wide variety of consumer
disposables that are sold in the home improvement and paint retailing
industries. Preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingencies at the date of the
financial statements and the reported amounts of revenues and expenses
for the period. Differences from those estimates are recorded in the
period they become known.
CASH EQUIVALENTS represent liquid investments with maturities at
acquisition of three months or less.
INVENTORIES are stated at the lower of cost or market. Cost of raw
materials and finished goods inventories at Tufco Industries, Inc.'s
Wisconsin division is determined by the last-in, first-out ("LIFO")
method. Cost of all other inventories is determined by the first-in,
first-out ("FIFO") method.
PROPERTY, PLANT, AND EQUIPMENT are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided
using the straight-line method over the following estimated useful lives:
20 to 40 years for buildings, 3 to 20 years for machinery and equipment,
and the shorter of the lease term or the asset's useful life for
leasehold improvements.
GOODWILL represents the excess of cost over fair value of net assets
acquired in business combinations, is amortized on a straight-line basis
over 40 years and is stated net of accumulated amortization of $1,125,040
and $754,913 at September 30, 1996 and 1995, respectively.
FINANCIAL INSTRUMENTS consist of cash, short-term investments,
receivables, payables, debt and letters of credit, the carrying value or
disclosed value of which are a reasonable estimate of their fair values
due to their short maturities or variable interest rates.
OTHER ASSETS include loan origination fees, which are amortized on a
straight-line basis over the terms of the related long-term debt, and
organization costs, which are amortized on a straight-line basis over
five years.
DEFERRED INCOME TAXES are provided under the asset and liability method
for temporary differences in the recognition of certain revenues and
expenses for tax and financial reporting purposes.
REVENUES are recognized as sales when goods are shipped and title
transfers to the customer.
F-7
27
STOCK-BASED COMPENSATION arising from stock option grants is accounted
for by the intrinsic value method under APB Opinion No. 25. Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," will be effective for the Company beginning October 1,
1996. This statement requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of the
equity instrument awarded. As permitted by SFAS No. 123, the Company will
continue to apply APB Opinion No. 25 to its stock-based compensation
awards to employees and will disclose the required pro forma effect on
net income and earnings per share.
EARNINGS PER SHARE is based on the weighted average number of common
voting and nonvoting shares and common equivalent shares from dilutive
stock options outstanding during the year.
RECLASSIFICATIONS of certain 1995 and 1994 amounts have been made to
conform to the 1996 presentation.
2. ACQUISITIONS
Effective August 23, 1995, the Company acquired substantially all of the
assets and assumed certain liabilities of Hamco, Inc. in Newton, North
Carolina, which is engaged primarily in printing and converting fine
grade paper products sold principally through distributorships. The
assets were acquired by the Company's wholly owned subsidiary, Hamco
Industries, Inc., using the proceeds from the sale of 1,200,000 shares of
voting common stock and additional bank borrowings. The total cost of the
acquisition, $14,190,591, including $11,725 paid and $453,251 accrued in
1996, exceeded the fair value of the net assets acquired by $3,439,720.
Effective January 28, 1994, the Company completed its acquisition of
substantially all of the assets of Executive Roll Manufacturing, Inc. in
Dallas, Texas, which is engaged primarily in converting fine printing
grade paper products. The assets were acquired by the Company's wholly
owned subsidiary, Executive Converting Corporation ("ECC"), using the
proceeds of an initial public offering of common stock and additional
bank borrowings completed on January 28, 1994. The total cost of the
acquisition, $8,667,698, consisting of $7,517,696 in cash and $1,150,002
in the Company's common stock, exceeded the fair value of the net assets
acquired by $6,179,940.
These acquisitions were accounted for under the purchase method. The
results of the acquired operations are included in the consolidated
financial statements from their acquisition dates. The unaudited
consolidated results of operations on a pro forma basis as though Hamco
and ECC were acquired and the related common shares were issued as of the
beginning of the Company's fiscal years 1995 and 1994 are as follows:
1995 1994
Net sales $62,906,732 $55,399,404
=========== ===========
Net income $ 1,896,706 $ 1,855,175
=========== ===========
Earnings per share $ 0.43 $ 0.42
=========== ===========
Weighted average common shares outstanding 4,396,107 4,411,740
=========== ===========
F-8
28
3. ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMER
Accounts receivable are stated net of allowances for doubtful accounts of
$149,476 and $105,000 at September 30, 1996 and 1995, respectively.
Amounts due from a significant customer represent 10% and 13% of total
accounts receivable at September 30, 1996 and 1995, respectively.
4. INVENTORIES
Inventories at September 30 consist of the following:
1996 1995
At the lower of FIFO cost or market:
Raw materials $ 5,656,189 $ 5,069,067
Finished goods 3,924,834 4,537,811
----------- -----------
9,581,023 9,606,878
Excess of above FIFO cost over the LIFO cost used for
inventories of $3,492,496 and $2,908,395 at September 30, 1996
and 1995, respectively (25,000) (514,681)
----------- -----------
Total inventories $ 9,556,023 $ 9,092,197
=========== ===========
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30 consist of the following:
1996 1995
Land and land improvements $ 495,656 $ 497,662
Buildings 6,812,072 6,170,657
Leasehold improvements 575,365 366,241
Machinery and equipment 15,766,119 14,977,616
Furniture and fixtures 1,165,259 941,081
Vehicles 76,206 118,328
----------- -----------
24,890,677 23,071,585
Less accumulated depreciation and amortization 9,189,761 7,709,343
----------- -----------
Net depreciated value 15,700,916 15,362,242
Construction in progress 45,813
----------- -----------
Property, plant and equipment - net $15,746,729 $15,362,242
=========== ===========
F-9
29
6. OTHER ASSETS
Other assets at September 30 consist of the following:
1996 1995
Loan origination and other fees $ 164,297 $ 138,836
Less accumulated amortization (19,002) (5,189)
--------- ---------
Subtotal 145,295 133,647
Notes receivable bearing interest at 6% to 7%, due in
variable monthly installments through 2001 108,860 127,429
Advances to certain directors and former employees 265,298 233,909
Cash value of life insurance 8,317 174,871
Deposits 61,225 118,247
--------- ---------
Other assets - net $ 588,995 $ 788,103
========= =========
7. LONG-TERM DEBT
Long-term debt at September 30 consists of the following:
1996 1995
Note payable to bank, collateralized by substantially all assets
of the Company, bearing interest at 0.25% below the bank's reference rate
(7.03% fixed through January 31, 2000, at September 30, 1996); installments are
due monthly beginning at $95,833, increasing to $104,166 on August 31, 1997,
$112,439 on August 31, 1998, $91,606 on February 29, 2000, and $95,833 on
August 31, 2000, with final payment due on
July 31, 2001 $ 5,933,333 $ 5,875,000
Notes payable to bank, under a revolving line-of-credit agreement (not to
exceed maximum borrowings of $9,750,000, reduced by outstanding letters of
credit - see Note 9), collateralized by accounts receivable and certain other
elements of working capital, bearing interest at 0.25% below the bank's
reference rate, a combination of 150 basis points over LIBOR or 0.25% below the
bank's reference rate (approximately 7.23%)
at September 30, 1996, payable monthly, due March 30, 1998 2,916,429 5,944,921
Variable rate (4.05% and 4.45% at September 30, 1996 and 1995, respectively)
note payable underlying Industrial Development Revenue Bonds, collateralized by
substantially all assets of the Company, due in annual installments of $250,000
beginning 2000 through 2006, interest payable monthly 1,750,000 1,750,000
F-10
30
1996 1995
Note payable to bank, collateralized by substantially all assets
of the Company, due in monthly installments of $41,666 plus
interest at 7.23%, with final payment due May 30, 1999 $ 1,550,020 $ 2,091,678
Note payable to bank, collateralized by equipment, due in one installment of
$50,000 on June 1, 1997, plus interest at
6.75% payable monthly, with final payment due July 2, 1997 1,200,000 1,200,000
Other notes payable to banks, collateralized by equipment and
real estate, interest from 6.43% to 8.65% - paid in fiscal 1996 2,035,569
------------- -----------
Total 13,349,782 18,897,168
Less current portion 2,866,654 2,587,990
-------------- -----------
Long-term debt - less current portion $ 10,483,128 $16,309,178
============= ===========
Long-term debt - less current portion matures as follows:
1998 $ 4,682,959
1999 1,899,304
2000 1,441,058
2001 1,209,807
Thereafter 1,250,000
-----------
Total $10,483,128
===========
Loan agreements for all notes except that underlying the Industrial
Development Revenue Bonds contain certain restrictive covenants,
including requirements to maintain certain levels of cash flow and to
restrict capital expenditures, stock purchases, mergers and payment of
dividends. As of September 30, 1996, retained earnings of $225,952 are
available for the payment of dividends, subject to maintaining minimum
levels of cash flow. During fiscal 1996, the Company failed to achieve
minimum cash flow as defined by the bank and exceeded the limitation on
capital expenditures, resulting in a violation of its loan agreement,
under which outstanding debt totaled $11,599,782 at September 30, 1996.
The violation was waived by the bank as of September 30, 1996, and
management believes the Company will meet these covenants during fiscal
1997. The loans are subject to prepayment penalty. The Company has a
standby letter of credit for the outstanding balance associated with
Industrial Development Revenue Bonds (see Note 9).
F-11
31
8. INCOME TAXES
The tax effects of significant items comprising the Company's net
deferred tax liability as of September 30 are as follows:
1996 1995
Current deferred tax asset:
Valuation allowances for accounts receivable and
inventories, not currently deductible $ 191,542 $ 57,800
Uniform capitalization of inventory costs 35,229 43,600
Vacation and severance accruals, not currently deductible 260,647 72,200
Other accruals, not currently deductible 69,259 47,158
Other 59,821 40,000
----------- -----------
Total 616,498 260,758
Noncurrent deferred tax liability:
Accelerated tax depreciation on property and equipment (1,434,626) (1,177,855)
Accelerated tax amortization of goodwill (320,817) (150,000)
Other (42,803)
----------- -----------
Total (1,798,246) (1,327,855)
----------- -----------
Net deferred tax liability $(1,181,748) $(1,067,097)
=========== ===========
The resulting components of income tax expense are as follows:
1996 1995 1994
Current tax expense:
Federal $1,147,439 $ 505,903 $ 573,910
State 245,140 148,000 110,000
---------- ---------- ----------
Total 1,392,579 653,903 683,910
Deferred tax expense:
Federal 98,463 132,500 5,240
State 16,188 21,597 850
---------- ---------- ----------
Total 114,651 154,097 6,090
---------- ---------- ----------
Income tax expense $1,507,230 $ 808,000 $ 690,000
========== ========== ==========
F-12
32
Income tax expense varies from the amount determined by applying the
applicable statutory income tax rates to pretax income as follows:
1996 1995 1994
Federal income taxes computed at statutory rates $ 1,280,694 $ 683,000 $ 584,000
State income taxes, net of federal tax benefit 172,476 97,000 73,000
Certain goodwill amortization and other
nondeductibles 77,659 53,000 62,000
Other (23,599) (25,000) (29,000)
----------- ----------- -----------
Income tax expense $ 1,507,230 $ 808,000 $ 690,000
=========== =========== ===========
9. COMMITMENTS AND CONTINGENCIES
LEASES - Tufco Industries, Inc. leases warehouse facilities from a
partnership composed of current and former stockholders. The lease
expires in 2003, is classified as an operating lease and requires monthly
rental payments of $9,255. The Company has the option of renewing the
lease for a three-year period with rental amounts renegotiated. Rental
expense for the lease totaled $105,843, $120,428 and $132,912 for fiscal
1996, 1995 and 1994, respectively.
In June 1996, the Company entered into an agreement with a third party to
construct and lease a 62,000- square-foot facility in Manning, South
Carolina, which the Company occupied in October 1996. The five-year
agreement is an operating lease with rental payments of $12,659 per
month. At the end of the fifth year, the Company has the option of
renewing the lease for an additional five years or purchasing the
building. If the lease is not renewed or the purchase option not
exercised, the Company may be required to pay the lessor a residual
amount of up to $1,093,587, depending upon the extent, if any, that the
facility's value has diminished during the lease term.
The Company also leases other facilities and equipment under operating
leases. An office and warehouse lease expires on February 28, 2003. The
equipment leases expire on varying dates over the next five years.
Future minimum rental commitments under operating leases with initial or
remaining terms in excess of one year at September 30, 1996, are as
follows:
1997 $ 861,042
1998 902,198
1999 900,634
2000 901,402
2001 818,028
Thereafter 831,275
----------
Total $5,214,579
==========
Net rental expense for all operating leases totaled $692,765, $633,501
and $436,446 for fiscal 1996, 1995 and 1994, respectively. The Company
charges its customers for storage, which is netted against rental
expense.
F-13
33
LETTERS OF CREDIT - The Company has outstanding commercial import letters
of credit of $106,863 and $183,292 as of September 30, 1996 and 1995,
respectively. These letters of credit collateralize the Company's
obligations to third parties for the purchase of inventory. The Company
has unused letters of credit of $643,137 available at September 30, 1996.
LITIGATION - The Company is subject to lawsuits, investigation and
potential claims arising out of the ordinary conduct of its business.
Management believes the outcome of these matters will not materially
affect the financial position, results of operations or cash flows of the
Company.
10. PROFIT-SHARING PLANS
Tufco Industries, Inc. and Hamco Industries, Inc. have a defined
contribution profit-sharing 401(k) plan covering substantially all
employees. Both companies make annual contributions at the discretion of
the board of directors. In addition, the Companies match certain amounts
of employees' contributions. Effective October 1, 1996, ECC also adopted
this plan. Profit-sharing plan expense relating to the defined
contribution profit-sharing 401(k) plan totaled $42,017, $30,462 and
$30,345 for fiscal 1996, 1995 and 1994, respectively.
11. STOCKHOLDERS' EQUITY
Each record holder of nonvoting common stock is entitled at any time to
convert any or all of such shares into the same number of shares of
voting common stock.
The Non-Qualified Stock Option Plan currently reserves 200,000 shares of
common stock for grants to selected employees through April 30, 2002, and
provides that the price and exercise period be determined by the board of
directors. Options vest primarily over three years and expire five years
from date of grant. During fiscal 1996, 1995 and 1994, options to
purchase 77,635, 20,200 and 23,825 shares, respectively, of voting
common stock were granted. In addition, during fiscal 1995, options to
purchase 125,000 shares of voting common stock were granted to a key
employee under a non-qualified stock option agreement providing for
immediate exercise and expiring five years from date of grant.
The Non-Employee Director Stock Option Plan for nonemployee members of
the board of directors reserves 50,000 shares of common stock for grant
and provides that the purchase price be fair market value at the date of
grant. Options are exercisable immediately and for a period of ten
years. The plan terminates in 1999. During fiscal 1996, 1995 and 1994,
options to purchase 14,000, 12,000 and 10,000 shares, respectively, of
voting common stock were granted.
F-14
34
Stock option activity is as follows:
SHARES
UNDER OPTION PRICE
OPTION PER SHARE
Outstanding at October 1, 1993 7,410 $ 4.86
Granted:
1994 33,825 $6.60 - $9.00
1995 157,200 $4.65 - $5.00
1996 91,635 $4.50 - $7.00
Canceled:
1995 (10,570) $4.65 - $9.00
1996 (17,413) $4.50 - $9.00
Exercised:
1996 (6,285) $4.65 - $4.86
--------
Outstanding at September 30, 1996 255,802 $4.50 - $9.00
========
Exercisable at September 30, 1996 188,315 $4.50 - $9.00
========
The Company sold shares to management employees under various stock
purchase agreements as follows: 29,997 shares at $9.00 per share in 1994;
85,000 shares at $5.00 per share in 1995; and 16,937 shares at $4.80 to
$6.75 per share in 1996. The purchases are financed by the Company
through notes with the employees at 5% to 8% interest payable annually
and are due as follows: $98,976 in 1997, $35,000 in 1998, $34,998 in
1999, $241,279 in 2000, and $65,000 in 2001. The outstanding balances of
$475,253 and $497,747 at September 30, 1996 and 1995, respectively, are
presented as a reduction of stockholders' equity.
The Company has 1,000,000 shares authorized and unissued $.01 par value
preferred stock.
12. RELATED-PARTY TRANSACTIONS
The Company has an agreement with Bradford Ventures, Ltd., an affiliate
of the two largest stockholders of the Company, under which Bradford
Ventures, Ltd. provides various financial and management consulting
services until January 2004, when the agreement will be automatically
renewed unless terminated by either party. The agreement calls for an
annual fee of $210,000 with annual increases of 5% plus reimbursement of
reasonable out-of-pocket expenses. The Company believes the terms of its
consulting agreement are comparable to those available from unaffiliated
third parties for similar services. Consulting expense was $210,000,
$100,833 and $177,083 for fiscal 1996, 1995 and 1994, respectively. Also,
in 1995, $105,000 was capitalized as part of the purchase price of Hamco,
Inc.
******
F-15
35
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation (1) (Exhibit 3.1)
3.2 Bylaws (1) (Exhibit 3.2)
10.1 Stock Purchase and Contribution Agreement, dated as of February
25, 1992, among the Company, Tufco Industries, Inc. ("Tufco"),
and the Stockholders of Tufco. (1) (Exhibit 10.1)
10.2 Amended and Restated Consulting Agreement with Bradford
Investment Partners, L.P. (3) (Exhibit 10)
10.3 Loan Agreement, dated May 1, 1992, between the Village of
Ashwaubenon, Wisconsin, and the Company. (1) (Exhibit 10.11)
10.4 1992 Non-Qualified Stock Option Plan (1) (Exhibit 10.12)
10.5 Form of Employee Stock Purchase Agreement between the Company
and certain key employees of the Company. (1) (Exhibit 10.17)
10.6 1993 Non-Employee Director Stock Option Plan. (2) (Exhibit
10.19)
10.7 Amendment to Loan Agreement dated as of March 29, 1995 between
Bank One, Green Bay; Tufco Industries, Inc.; and Executive
Converting Corporation.(3)
10.8 Amendment to Loan Agreement dated as of May 18, 1995 between
Bank One, Green Bay; Tufco Industries, Inc.; and Executive
Converting Corporation. (4) (Exhibit 6(a))
10.10 Loan Agreement, dated August 22, 1995, between Tufco Industries,
Inc., Executive Converting Corporation, Hamco Industries, Inc.,
and Bank One, Green Bay. (5) (Exhibit 2.1)
10.11* ** Amended Employment Agreement with Greg Wilemon, dated September
18, 1995.
10.13 Lease Agreement, dated as of March 1, 1995, between Bero,
Garland, Gebhardt and McClure, a Wisconsin partnership, and
Tufco.
10.14 Stock Option Plan for Carl B. Francis dated April 21, 1995. (6)
(Exhibit 10.14)
10.15* Lease Agreement dated as of April 1, 1996, between Bero,
Garland, Gebhardt and McClure, a Wisconsin partnership, and
Tufco.
10.16* Amendment to Loan Agreement dated August 22, 1995, between
Tufco Industries, Inc., Executive Converting Corporation, Hamco
Industries, Inc. and Bank One, Green Bay.
10.17* Separation Agreement dated October 1, 1996 between Carl B.
Francis and Tufco Technologies, Inc.
10.18* ** Employment Agreement with Louis LeCalsey, III dated
September 19, 1996.
21* Subsidiaries of the Company.
23* Independent Auditors' Report of Wipfli Ullrich Bertelson on the
fiscal 1995 and 1994 consolidated financial statements.
27 Financial Data Schedule
- ------------------
* Filed Herewith
** Management Contract or Compensatory Plan
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (Reg. No. 33-55828) (the "Registration
Statement") as filed with the Commission on December 16, 1992.
(2) Incorporated by reference to Amendment No. 1 to the Registration
Statement as filed with the Commission on November 23, 1993.
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1995.
(4) As well as those factors discussed in the section entitled
Business in this report, other factors.
(5) Incorporated by reference to the Company's Current Report on
Form 8-K dated August 23, 1995.
(6) Incorporated by reference to the Company's Annual Report on Form
10-K for the period ended September 30, 1995.
(b) Form 8-K was filed by the registrant August 23, 1995.
(c) See (a)(3) above for the list of exhibits required to be filed as part of
the Annual Report on Form 10-K.