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EXCEL - IDEA: XBRL DOCUMENT - TUFCO TECHNOLOGIES INC | Financial_Report.xls |
EX-10.21 - EXHIBIT 10.21 - TUFCO TECHNOLOGIES INC | c26151exv10w21.htm |
EX-31.1 - EXHIBIT 31.1 - TUFCO TECHNOLOGIES INC | c26151exv31w1.htm |
EX-18.1 - EXHIBIT 18.1 - TUFCO TECHNOLOGIES INC | c26151exv18w1.htm |
EX-23.1 - EXHIBIT 23.1 - TUFCO TECHNOLOGIES INC | c26151exv23w1.htm |
EX-32.1 - EXHIBIT 32.1 - TUFCO TECHNOLOGIES INC | c26151exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - TUFCO TECHNOLOGIES INC | c26151exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - TUFCO TECHNOLOGIES INC | c26151exv32w2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2011
or
o | Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number 0-21018
TUFCO TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 39-1723477 | |
(State or other jurisdiction | (I.R.S. Employer Identification No.) | |
of incorporation or organization) | ||
PO Box 23500, Green Bay, WI | 54305-3500 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code 920-336-0054
Securities registered pursuant to Section 12(b) of the Act:
Title of Class | Name of Each Exchange on Which Registered | |
Common Stock, Par Value $0.01 per share | Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark 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 registrants
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. þ
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company (see definition of Accelerated Filer
and Large Accelerated Filer and Smaller Reporting Company in Rule 12b-2 of the Exchange Act).
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
The aggregate market value of the Common Stock of Tufco Technologies, Inc. held by
non-affiliates, as of March 31, 2011, was approximately $6,541,876. Such aggregate market value
was computed by reference to the closing price of the Common Stock as reported on the Nasdaq Global
Market on March 31, 2011. 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 registrants Common Stock outstanding as
of December 16, 2011 was 4,308,947.
DOCUMENTS INCORPORATED BY REFERENCE: None.
PART I
ITEM 1 | BUSINESS |
General
Tufco Technologies, Inc. (Tufco or the Company), founded in 1992, provides integrated
manufacturing services including wet and dry-wipe converting, wide web flexographic printing, hot
melt adhesive laminating, folding, integrated downstream packaging, quality and microbiological
process management, and manufactures and distributes business imaging paper products.
The Company has become a leading provider of contract manufacturing and specialty printing
services, and supplier of value-added custom paper products. The Companys principal executive
offices are located at 3161 South Ridge Road, Green Bay, WI 54304/PO Box 23500, Green Bay, WI
54305-3500, and its telephone number is (920) 336-0054.
Products and Services
The Company markets its products and services through two market segments: Contract
Manufacturing services and Business Imaging paper products. Tufco conducts operations from two
manufacturing and distribution locations in Green Bay, Wisconsin and Newton, North Carolina. The
Company also leases warehouse space in Las Vegas, Nevada, used primarily for distribution of
Business Imaging products in the Western United States.
1
Contract Manufacturing
Tufco has contract manufacturing capability at its Green Bay, Wisconsin location.
The Companys products manufactured and services provided at its Green Bay, Wisconsin facility
include wet and dry wipe converting, wide web flexographic printing, hot melt adhesive laminating,
folding, integrated downstream packaging, quality, formulation development, blending and
microbiological process management. The facility contract manufactures products from a wide array
of materials, including polyethylene films, a variety of nonwovens, paper and tissue. Products
include disposable wet and dry wipes for home, personal/baby/medical care use, flexible packaging
and disposable table covers.
The Company invested in its first wipes converting asset in December 2002. It has now grown
to be a leading provider of branded contract wet and dry wipes in North America. Since 2004, the
Company has invested heavily to expand the capabilities and capacity of its wipes equipment. These
wet and dry wipe assets can convert a variety of nonwoven materials and include a wide variety of
folding options, wide count versatility and integrated downstream flow wrapping, tubbing and rigid
top application packaging. In fiscal 2009, the Company installed a new canister line. This line
allows for a wide range of roll diameters and is complemented with automated downstream filling and
packaging to support growth in the expanding disposable nonwovens wipes market. In fiscal 2010,
the Company added the capability to formulate and blend its own solutions for wet processes.
The Companys Green Bay, Wisconsin facility also offers wide web flexographic printing
services. The Company offers 8-color, high resolution, wide web flexographic printing and focuses
on products such as paper and poly table covers, flexible packaging used in retail products such as
food, soda and overwraps and nonwovens which are used in feminine care, home cleaning and baby
diaper products. The Company has two 8-color flexographic printing presses capable of printing
solvent and water-based inks, 62 print width at speeds up to 1,500 feet per minute and offers
repeat sizes ranging from 15-3/4 to 47-1/4. The Green Bay flexographic presses can print on a
wide range of media from lightweight tissue or nonwoven to heavyweight paperboard, films and foils.
Additional converting equipment that supports the flexographic presses includes folding and
packaging of finished printed goods such as poly and paper table covers into finished product.
Also, materials can be printed roll-to-roll at the Company and then sent back to the customer for
converting. See Note 11 to the Consolidated Financial Statements included in Item 8 of this Report
as referenced to the Appendix to this Report.
Business Imaging
The Companys Newton, North Carolina facility has capabilities which include precision
slitting, rewinding, specialty packaging, folding, perforating, and trimming of paper rolls in a
large variety of sizes which include variables in width, diameter, core size, single or multi-ply,
and color. All of the rolls can be printed on one side or both, providing the customer with
advertising, promotional or security features. These capabilities are directed toward converting
fine paper materials, including specialty and fine printing papers, thermal papers, inkjet papers
and coated products.
The Companys Newton, North Carolina facility prints and converts a full range of customized
paper products for use in retail, convenience store, restaurant, dry cleaning and bank
applications. Additionally, the Companys Newton facility produces an extensive selection of
business forms products in laser cut sheets and multi-part forms, as well as wide format rolls for
drafting and architectural applications.
The Company has a three-year lease on a 4,800 sq. ft. facility in Las Vegas, Nevada, which
expires on November 30, 2012. The Company distributes from both its Newton and Las Vegas
facilities a wide variety of printed and unprinted paper products used in business imaging
equipment in market segments including architectural and engineering design, high speed data
processing, point of sale, automatic teller machines and a variety of office equipment. The
Companys products include roll products ranging in length from 30 feet to 3,500 feet and in widths
from 1 inch to 54 inches. The Companys products are available in a wide range of paper grades
including a variety of weights of bond paper, thermal imaging papers and fine vellums.
2
Business Imaging (Continued)
The Company also has a line of products for the restaurant market, including childrens
placemats, crayons and guest checks. Many of the Companys Hamco brand distributors provide point
of sale (POS) rolls and other products to individual restaurants as well as major chain
restaurants. This line provides complementary products
that can be sold to restaurants at competitive prices while offering higher margins to the Company
than POS sales alone. The Company believes that the Las Vegas warehouse facility has opened
opportunities for marketing of the Companys products in the Western United States that were not
previously available due to prohibitive shipping costs and longer lead times.
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations, as included in Item 7 of this Report, which sets forth a breakdown by
percentage of the Companys net sales by class for fiscal 2010 through fiscal 2011.
Manufacturing and Operations
With regard to its Contract Manufacturing operations, the Company either utilizes product
specifications provided by its customers or works with its customers to develop specifications
which meet customer requirements. Generally, the product begins with base materials such as
nonwovens, papers, or polyethylene films. In Contract Manufacturing, some customers furnish raw
materials and others request that the Company purchase raw materials and pass the cost plus an
administration fee through the sales price. The Company applies one or more of its contract
converting or specialty printing services to add value to these materials. The Company then
produces and stocks a full line of paper products to meet the needs of the users of the imaging
equipment.
The Companys efforts to grow have been supported by capital investment in machinery and
equipment. During the past two years, the Company spent $4.7 million on capital expenditures.
Through the Companys expenditures on new equipment, it has increased both its manufacturing
capacity and the range of its capabilities. Principal capital improvements include equipment which
has expanded the Companys dry and wet wipes converting and packaging capabilities and its canister
line, which allows for a wide range of roll diameters. The Company believes it has sufficient
capacity to meet its growth expectations.
The Companys equipment can produce a wide range of sizes of production output to meet unique
customer specifications. The Companys printing presses perform flexographic processes and print
from one to eight colors on webs as wide as 64 inches.
Sales and Marketing
Tufco markets its products and services nationally through its 14 full-time sales and customer
service employees and 38 manufacturers representatives and distributors. The Companys sales
personnel are compensated with a base salary plus an opportunity for an incentive bonus. The
Company generally utilizes referrals, prospecting, trade shows and its industry reputation to
attract customers.
The Companys customer base consists of over 250 companies, including multinational consumer
products companies and dealers and distributors of business imaging papers. Sales to such
customers are made pursuant to project specific purchase orders as well as contract service
agreements with multi-year terms. Sales under such contract service agreements are typically
derived from customer directed purchase orders based on unit volume
projections supplied by the customers and demand generated by the customers consumer base. As a
result, there can be no assurance that sales to such customers will continue in the future at
current levels. Sales are generally made on a
credit basis within limits set by the Companys executive management. The Company generally
requires payment to be made within 30 days following shipment of goods or completion of services.
The Company has contracts for both printing and Contract Manufacturing. One of these contract
customers, a multinational consumer products company, accounted for approximately 30% of total
sales in fiscal 2010 and 31% of total sales in fiscal 2011. The current
contract with this customer expires April 2012. There can be no assurance that the contract will
be renewed. Another multinational consumer products company accounted for approximately 20% of
total sales in fiscal 2010 and 19% of total sales in fiscal 2011. The current contract with this
customer has been extended until June 2013. The Company is taking proactive measures to expand its
customer base to provide greater breadth of customers. See Managements Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital Resources, as included
in Item 7 of this Report.
3
Competition
In order to grow based on an outstanding quality and service reputation, the Company has
established and continues to provide customers with innovative, full service solutions. The
Company believes the primary areas of competition for its goods and services are quality,
production capacity and capability, product development, prompt and consistent delivery, service,
flexibility, continuing relationships and price. The Company is a reliable supplier with a
consistently high on-time performance rate that makes it the contract manufacturing partner of
choice for many of its customers. The Company believes that it offers key competitive advantages
such as customized Contract Manufacturing options all under one roof: dedicated customer service
and support personnel, outstanding product quality, speed to market, uncompromised security and
confidentiality, ISO 9001:2008 quality certification, a high performance Lean/Six Sigma
manufacturing culture, microbiological management, technical expertise and lower overall costs.
Competitors for the Companys Contract Manufacturing products and services vary based upon the
products and services offered. In the Companys Contract Manufacturing services, the Company
believes that relatively few competitors offer a wider range of services or can provide them from a
single source. The Company believes it is a leading provider of branded wipes in North America.
In September 2009, Tufco began production of canister wipes. The addition of canister wipes
capability was a significant complement to Tufcos already broad offering of differing
configurations of flat pack wet wipes. With respect to the Companys specialty printing and
converting services and fine paper converting products, the relevant competition consists primarily
of numerous small regional companies. Management believes that the Companys capabilities in
Contract Manufacturing 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
Contract Manufacturing and specialty printing lines. In the wet wipe market, the Company believes
it has built a strong reputation with nationally recognized consumer and industrial products market
leaders. The Company strongly abides by stringent security and confidentiality practices and
provides turn-key solutions to introduce new and innovative products that respond to consumer
demands for applications that are easy to use, disposable, convenient and cost effective.
The Company operates highly technical manufacturing processes to meet a variety of customer
needs. By virtue of being a customized contract manufacturer, the Company continually engineers
and proposes systems to customers and potential customers to solve their manufacturing needs in
product rollouts. The Company offers full, value added services such as microbiology assessment
and management, and wet wipe, lotion and concentrate testing services and equipment that allow the
Company to maintain and assure high product integrity. In the products made at Newton, North
Carolina, raw materials are readily available, and converting equipment is generally easily
purchased. As a result, competition for engineering and transaction papers customers is very
strong, primarily from small regional suppliers and large national companies.
Product Development and Quality Control
The Company works with its customers to develop new products and applications. The Company
believes that a key factor is its willingness and distinctive technical competency to help
customers experiment with a variety of substrates, formulas and packaging materials to develop
products with different attributes such as strength, absorbency, breathability,
moisture-resistance, target retail price points and appearance. As a result, the Company has been
able to support customer product and process development in a way that provides a competitive cost
structure while maintaining flexibility and speed to market. Customers may request certain
physical tests during trial runs that are performed by the Companys quality assurance personnel
and, if requested, with the customer on site. Tufco continues to work with both its customers and
its supply chain on improving sustainable performance of its products. 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.
4
Product Development and Quality Control (Continued)
The Companys Green Bay, Wisconsin facility has now operated under an ISO 9000 certification
for over ten years. ISO 9000 is an internationally recognized Quality Management System (QMS)
standard. The Green Bay facility has upgraded its QMS to meet the revised ISO 9001:2008 standard.
The Green Bay facility has numerous wet converting lines that require additional care to prevent
microbial contamination. To meet the stringent requirements of these processes, the facility has
incorporated current Good Manufacturing Practices (as mandated by the Food and Drug Administration)
into its QMS. The Green Bay site is also registered with both the Environmental Protection Agency
and the Food and Drug Administration. Each year the sites QMS is audited by multiple customers
and undergoes two third party ISO surveillance audits.
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. In the Contract Manufacturing sector the customer, in most
instances, selects which supplier of equipment or raw material the Company is to use. The Company
believes that it has excellent relationships with its primary suppliers, and the Company has not
experienced significant difficulties in obtaining raw materials. The Companys raw materials fall
into six general groups: various paper stocks, inks for specialty printing, nonwoven materials,
polyethylene films, packaging, lotions and chemicals. Sharp increases or decreases in the costs of
key commodities, such as paper or polyethylene, could periodically impact the Companys inventory
values and net income. There are numerous suppliers of all of these materials. To ensure quality
control and consistency of its raw material supply, the Newton, North Carolina facility continues
to receive fine paper stock primarily from six major paper companies instead of a greater number of
companies.
The Companys primary raw materials, base paper and nonwoven materials, are subject to
periodic price fluctuations. In the past, the Company has generally been successful in eventually
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. Under contracts at Green Bay, changes in material
prices are passed on to our customers.
Environmental Matters
The Company is subject to various 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 accurately predict the effect they may have upon the capital expenditures, earnings,
and competitive position of the Company in the future. The Company believes it is in compliance
with all environmental regulations and is current on all applicable permitting and reporting
requirements with federal, state and local jurisdictions. The Company has continuous air emissions
monitoring systems regulated by the Environmental Protection Agency/Department of Natural Resources
and maintains a strong, active relationship with the controlling agencies and a principle based
commitment to stewardship in the community.
The Companys past expenditures relating to environmental compliance have not had a material
effect on the Company. Further growth in the Companys production capacity with a resulting
increase in discharges and emissions may require additional capital expenditures for environmental
control equipment in the future. No assurance can be given that future changes to environmental
laws or their application will not have a material adverse effect on the Companys business or
results of operations.
Each manufacturing line is unique and can generate various types of waste. The Company takes
into account all considerations for environmental impact on all waste streams that occur. The
Company follows a strict waste minimization plan to reduce, recycle or eliminate waste from all of
our manufacturing processes. All processes are reviewed during initial start-up or annually to
make sure that the Company is in compliance with all applicable federal, state and local laws and
regulations.
5
Employees
At September 30, 2011, the Company had 302 employees, of whom 228 were employed at its Green
Bay, Wisconsin facility, 72 at its Newton, North Carolina facility, 1 at its Las Vegas, Nevada
warehouse and 1 in Dallas, Texas. 301 of such employees are employed by the Company on a full time
basis. The Company has a non-union workforce and believes that its relationship with its employees
is good.
Working Capital
Information regarding the Companys working capital position and practices is set forth in
Item 7 of this Report under the caption Liquidity and Capital Resources.
Class of Products
Financial information for the Contract Manufacturing services and the Business Imaging paper
products segments is set forth in Note 11 to the Consolidated Financial Statements included in Item
8 of this Report, as referenced to the Appendix to the Report.
ITEM 1A | RISK FACTORS |
Not required for a smaller reporting company.
ITEM 1B | UNRESOLVED STAFF COMMENTS |
Not required for a smaller reporting company.
ITEM 2 | PROPERTIES |
The Companys main production and distribution facilities for Contract Manufacturing and
specialty printing are located in Green Bay, Wisconsin. The 243,800 square foot facility (of which
approximately 20,700 square feet is used for offices for the facility and the Companys corporate
headquarters) was built in stages from 1980 to 2000 and is owned by the Company. The Company has
approximately seven additional acres on which to expand in the future.
The Company leases 42,600 square feet of space in a facility contiguous to its Green Bay,
Wisconsin facility, which is currently used for certain Contract Manufacturing, warehousing, and
distribution operations. This facility is leased from a partnership of which Samuel Bero, a
director of the Company, is one of several partners. In November 2006, the Company entered into a
new lease with the partnership, which expires in March 2013. The rent under this lease is $17,070
per month beginning in April 2007 and increases by 1.65% each succeeding year. In exchange for the
Companys entering into the new lease, the partnership agreed to pay for up to $300,000 of
improvements to the facility. We believe that the terms of this lease are at least as favorable to
us as could have been obtained from an unaffiliated party.
The Company also owns a 120,000 square foot facility in Newton, North Carolina, used in the
production and distribution of point of sale rolls, transaction paper products, wide format rolls
and in the printing of custom forms and rolls for its Business Imaging products. The Company has a
three-year lease on a 4,800 square foot facility in Las Vegas, Nevada.
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 is sufficient
for its current and anticipated short-term needs, but that the expansion of the Companys business
or the offering of new services could require the Company to obtain additional equipment or
facilities.
ITEM 3 | LEGAL PROCEEDINGS |
The Company is subject to lawsuits, investigations, and potential claims arising out of the
ordinary conduct of its business. The Company is not currently involved in any litigation.
6
ITEM 4 | [REMOVED AND RESERVED] |
PART II
ITEM 5 | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES
OF EQUITY SECURITIES |
From the Companys initial public offering of Common Stock, until October 26, 2009, the Common
Stock of Tufco was traded on the Nasdaq Global Market (formerly known as Nasdaq National Market)
under the trading symbol TFCO. On September 16, 2009, the Company received a letter from the
Nasdaq Stock Market providing notice that, for 30 consecutive trading days, the Companys common
stock had not maintained a minimum market value of publicly held shares of $5 million as required
for continued inclusion on the Nasdaq Global Market. The Company subsequently filed an application
to transfer its securities to the Nasdaq Capital Market, which was approved on October 22, 2009.
The Companys common stock was transferred to the Nasdaq Capital Market at the opening of business
on October 26, 2009 and is still traded under the symbol TFCO.
The following table sets forth the range of high and low selling prices for the Common Stock,
as reported on the Nasdaq Global Market or Nasdaq Capital Market, as applicable, for the periods
indicated:
Fiscal 2010: | High | Low | Close | |||||||||
Quarter ended December 31, 2009 |
$ | 4.00 | $ | 2.41 | $ | 3.10 | ||||||
Quarter ended March 31, 2010 |
$ | 5.35 | $ | 2.80 | $ | 4.32 | ||||||
Quarter ended June 30, 2010 |
$ | 5.00 | $ | 3.03 | $ | 3.25 | ||||||
Quarter ended September 30, 2010 |
$ | 3.49 | $ | 3.06 | $ | 3.43 |
Fiscal 2011: | High | Low | Close | |||||||||
Quarter ended December 31, 2010 |
$ | 3.43 | $ | 3.05 | $ | 3.20 | ||||||
Quarter ended March 31, 2011 |
$ | 4.43 | $ | 3.08 | $ | 3.90 | ||||||
Quarter ended June 30, 2011 |
$ | 4.24 | $ | 3.16 | $ | 4.07 | ||||||
Quarter ended September 30, 2011 |
$ | 4.12 | $ | 3.22 | $ | 3.69 |
As of December 16, 2011, there were approximately 81 holders of record of the Common Stock.
On December 16, 2011, the last reported sale price of the Common Stock as reported on the Nasdaq
Capital Market was $3.48 per share.
The Company has never paid dividends on its Common Stock. The Companys revolving credit
agreement contains certain 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.
ITEM 6 | SELECTED CONSOLIDATED FINANCIAL DATA |
Not required for a smaller reporting company.
7
ITEM 7 | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Statements
Managements discussion of the Companys fiscal 2011 results in comparison to fiscal 2010
contains forward-looking statements regarding current expectations, risks and uncertainties for
future periods. The actual results could differ materially from those discussed herein due to a
variety of factors such as its ability to increase sales, changes in customer demand for its
products, cancellation of production agreements by significant customers including two Contract
Manufacturing customers it depends upon for a significant portion of its business, its ability to
meet competitors prices on products to be sold under these production agreements, the effects of
the economy in general, including the current economic downturn, the Companys inability to benefit
from any general economic improvements, material increases in the cost of raw materials,
competition in the Companys product areas, the ability of management to successfully reduce
operating expenses, the Companys ability to increase sales and earnings as a result of new
projects and services, the Companys ability to successfully install new equipment on a timely
basis and to improve productivity through equipment upgrades, the Companys ability to continue to
produce new products, the Companys ability to return to profitability and then continue to improve
profitability, the Companys ability to successfully attract new customers through its sales
initiatives and strengthening its new business development efforts, and the Companys ability to
improve the run rates for its products. Therefore, the financial data for the periods presented
may not be indicative of the Companys future financial condition or results of operations.
General
Tufco is a leader in providing diversified contract wet and dry wipes converting and printing,
as well as specialty printing services and business imaging products. The Companys business
strategy is to continue to place its converting at the leading edge of existing and emerging growth
opportunities. The Company works closely with its clients to develop products or perform services,
which meet or exceed the customers quality standards, and then uses the Companys operating
efficiencies and technical expertise to supplement or replace its customers own production and
distribution functions.
The Companys technical proficiencies include wide web flexographic printing, wet and dry wipe
converting, hot melt adhesive lamination, folding, integrated downstream packaging and quality and
microbiological process management and the manufacture and distribution of business imaging paper
products.
Results of Operations
The following discussion relates to the financial statements of the Company for the fiscal
year ended September 30, 2011 (current year or fiscal 2011) in comparison to the fiscal year
ended September 30, 2010 (prior year or fiscal 2010).
8
The following table sets forth, for the fiscal years ended September 30, (i) the percentage
relationship of certain items from the Companys statements of operations to net sales, and (ii)
the year-to-year changes in these items:
Percentage of | Year-to-Year | |||||||||||
Net Sales | Percentage Change | |||||||||||
2011 | 2010 | 2011 to 2010 | ||||||||||
Net sales |
100.0 | % | 100.0 | % | 21 | % | ||||||
Cost of sales |
95.2 | 94.6 | 22 | |||||||||
Gross profit |
4.8 | 5.4 | 7 | |||||||||
Selling, general and administrative expenses |
5.2 | 6.0 | 6 | |||||||||
Operating loss |
(0.4 | ) | (0.6 | ) | (4 | ) | ||||||
Interest expense |
(0.2 | ) | (0.2 | ) | 66 | |||||||
Interest income and other income |
0.0 | 0.0 | NM | |||||||||
Loss before income taxes |
(0.6 | ) | (0.8 | ) | 8 | |||||||
Income tax benefit |
(0.2 | ) | (0.3 | ) | 8 | |||||||
Net (loss) |
(0.4 | %) | (0.5 | %) | 8 | % | ||||||
NM = Not Meaningful
The components of net sales and gross profit are summarized in the table below (Dollars in
millions):
2011 | 2010 | |||||||||||||||
% of | % of | |||||||||||||||
Amount | Total | Amount | Total | |||||||||||||
Net Sales |
||||||||||||||||
Contract Manufacturing and
printing |
$ | 84.5 | 77 | % | $ | 66.2 | 73 | % | ||||||||
Business Imaging paper products |
25.4 | 23 | 24.4 | 27 | ||||||||||||
Net Sales |
$ | 109.9 | 100 | % | $ | 90.6 | 100 | % | ||||||||
Margin | Margin | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Gross Profit |
||||||||||||||||
Contract Manufacturing and
printing |
$ | 4.0 | 5 | % | $ | 2.9 | 4 | % | ||||||||
Business Imaging paper products |
1.2 | 5 | % | 2.0 | 8 | % | ||||||||||
Gross profit |
$ | 5.2 | 5 | % | $ | 4.9 | 5 | % | ||||||||
9
Fiscal Year Ended September 30, 2011 Compared to September 30, 2010
Net Sales for fiscal 2011 increased $19.3 million (21%) from net sales for fiscal 2010, due to
an $18.3 million (28%) increase in the Contract Manufacturing segment and a $1.0 million (4%)
increase in the Business Imaging paper products segment. In Contract Manufacturing, the increase
in revenues for fiscal 2011 resulted from an increased pass through of material costs. The
Business Imaging segment sales increase was primarily due to increased sales to several of the
segments Hamco brand distributors as well as several of its large retail accounts.
The Company depends on two Contract Manufacturing customers for a significant portion of its
business. One customer accounted for 31% of the Companys total sales in fiscal 2011, compared to
30% in fiscal 2010. The second customer accounted for 19% of the Companys total sales in fiscal
2011, compared to 20% in fiscal 2010.
Gross profit for fiscal 2011 increased $0.3 million (7%) and gross profit margin remained
unchanged at 5% compared to fiscal 2010. The gross profit for fiscal 2011 in the Contract
Manufacturing segment increased $1.1 million (39%) compared to fiscal 2010 and the gross profit
margin increased to 5% in fiscal 2011 from 4% in fiscal 2010. The increase in gross profit was
primarily due to the above mentioned sales increase offset by a proportional increase in material
costs. The Business Imaging segment experienced a decrease of $0.8 million (39%) in gross profit
and a decrease in gross profit margin to 5% in fiscal 2011 from 8% in fiscal 2010. This decrease
was largely due to increased raw material costs and strong pricing pressure from competitors.
Selling, general and administrative expenses increased $0.3 million (6%) in fiscal 2011 when
compared to fiscal 2010 as a result of increased expenses related to outside Management Information
Systems services, employment cost and reserves for bad debt.
Interest expense increased $0.1 million (66%) in fiscal 2011 compared to fiscal 2010 due to
higher average debt outstanding as a result of the Company borrowing under its revolving credit
line to fund a portion of its increased working capital and equipment needs.
Income tax benefit was ($0.3) million in fiscal 2011 compared to $(0.2) million in fiscal
2010. The income tax benefit represents a net operating loss carryforward that the Company expects
to realize in the future.
Basic and diluted net loss per share was $(0.10) for fiscal 2011 compared to $(0.10) for
fiscal 2010.
Selected Quarterly Financial Data
Not required for a smaller reporting company.
10
Liquidity and Capital Resources
Cash flows used in operations were $0.4 million for fiscal 2011 and $1.0 million for fiscal
2010. Inventories decreased $0.1 million (1%) in fiscal 2011 compared to fiscal 2010, primarily as
a result of efforts to streamline the entire supply chain. Accounts receivable increased $1.2
million (8%) in fiscal 2011 primarily as a result of increased revenues. Accounts payable
decreased $1.0 million (10%) in fiscal 2011 compared to fiscal 2010, largely due to a decrease in
materials purchased. Depreciation was $2.9 million for fiscal 2011 and $2.7 million for fiscal
2010. The Companys working capital position for the years ended September 30, 2011 and 2010 was
$14.2 and $13.4 million, respectively, as a result of the change in components discussed above.
Cash used in investing activities was $1.3 million in fiscal 2011. Contract Manufacturing
spent approximately $1.0 million on capital expenditures during fiscal 2011, primarily related to
capital expenditures to support ongoing operational needs. In the Business Imaging segment, the
amount spent on capital expenditures during fiscal 2011 was $0.3 million.
In June, 2010, the Company entered into a long-term note for the purchase of a second W&H
8-color press for $1.3 million, previously accounted for as an operating lease, which is being
shown as a supplemental non-cash acquisition in the statement of cash flows. The note which has a
five-year term, bears interest at a rate of 5.75% per annum with payments, including principal and
interest, of approximately $26,000 per month. The note is collateralized by the press.
Cash provided by financing activities was $1.7 million in fiscal 2011 consisting of $1.9
million related to the Company borrowing under its revolving credit line to fund a portion of its
increased working capital and equipment needs and $0.2 million related to principal payments of the
note payable mentioned above. Cash provided by financing activities was $3.1 million in fiscal
2010, resulting primarily from the Company borrowing under its revolving credit line.
The Companys primary need for capital resources is to finance inventories, accounts
receivable, and capital expenditures. At September 30, 2011, cash recorded on the balance sheet
was $8,300.
The Contract Manufacturing segments sales are made pursuant to project-specific purchase
orders as well as contract service agreements with multi-year terms. Sales under such contract
service agreements are typically derived from customer directed purchase orders based on unit
volume projections supplied by the customers and demand generated by the customers consumer bases.
The Company has contracts for both printing and Contract Manufacturing. One of these contract
customers, a multinational consumer products company, accounted for approximately 30% of total
sales in fiscal 2010 and 31% of total sales in fiscal 2011. The current contract with this
customer expires in April 2012. Another multinational consumer products company accounted for
approximately 20% of total sales in fiscal 2010 and 19% in fiscal 2011. The current contract with
this customer has been extended until June 2013. However, because the Companys contract revenue
agreements described above generally do not have minimum purchase requirements, the revenues
attributable to the contracts are subject to normal business fluctuations.
The Company has an unsecured $10.0 million revolving line of credit facility. The Companys
revolving line of credit is classified as a current liability on the accompanying balance sheets
because provisions in the credit agreement include deposit account requirements and a material
adverse effect covenant which is subjective in nature. It is also the Companys policy to classify
borrowings under the revolving line of credit as current based on how it manages working capital.
Borrowings under the new credit facility bear interest at a rate equal to LIBOR plus 2.50%. The
Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility.
The Company had $3.6 million available under the line of credit as of September 30, 2011.
Availability under the facility is based upon specified percentages of eligible accounts receivable
and inventory. If the Company fails to meet a specified funded debt to EBITDA ratio for two
consecutive fiscal quarters, the Companys lender will have the right to take a security interest
in the Companys accounts receivables and inventory. The credit agreement contains certain
covenants, including requirements to maintain a minimum tangible net worth and net income (or net
loss) within specified levels. On September 30, 2011, the Company amended its credit agreement to
extend its termination date to January 31, 2013 and modified the required levels of after tax net
income (or loss) under its financial covenants for periods commencing September 30, 2011 and
thereafter. At September 30, 2011, the Company was in compliance with all of its covenants under
the credit agreement.
11
Liquidity and Capital Resources (Continued)
Consistent with the sales concentration previously discussed, amounts due from two
multinational consumer products customers represent 45% and 53% of total accounts receivable at
September 30, 2011 and 2010, respectively.
Management believes that the Companys operating cash flow, together with amounts available
under its credit agreement, are adequate to service the Companys current obligations as of
September 30, 2011 and any budgeted capital expenditures, assuming the Company meets its business
plan.
The Company intends to retain earnings to finance future operations and expansion and does not
expect to pay any dividends within the foreseeable future. In addition, pursuant to the credit
agreement, the Companys primary lenders must approve the payment of any dividends over $2.0
million.
Inflation
In fiscal years 2011 and 2010, the impact of inflation was minimal on the Companys inventory
and net income. Management believes that 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 Companys products, although the timing of selling price increases may lag behind cost
increases. Prior to these periods, the impact of inflation has been minimal on the Companys
inventory and operations.
Off Balance Sheet Arrangements
The Company has no Off Balance Sheet Arrangements (as defined in Item 303 (a)(4) of Regulation
S-K).
12
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America. The reported financial results and disclosures
were determined using significant accounting policies, practices and estimates as described below.
We believe the reported financial disclosures are reliable and present fairly, in all material
respects, the financial position and results of operations for the Company.
Financial statement preparation 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.
Actual amounts could differ from the amounts estimated. Differences from those estimates are
recognized in the period they become known.
Revenue Recognition- The Company only has one type of revenue recognition activity which
recognizes revenue when title and risk of loss transfers to the customer and there is evidence of
an agreement and collectability of consideration to be received is reasonably assured, all of which
generally occur at the time of shipment. Sales are recorded net of sales returns and allowances.
Shipping and handling fees billed to customers are recorded as revenue and costs incurred for
shipping and handling are recorded in cost of sales. Amounts related to raw materials provided by
customers are excluded from revenue and cost of sales.
Accounts Receivable- Management estimates allowances for collectability related to its
accounts receivable balances. These allowances are based on the customer relationships, the aging
and turns of accounts receivable, credit worthiness of customers, credit concentrations and payment
history. Managements estimates include providing for 100 percent of specific customer balances
when it is deemed probable that the balance is uncollectable. Management estimates the
allowance for doubtful accounts by analyzing accounts receivable balances by age, applying
historical trend rates to the most recent 12 months sales, less actual write-offs to date.
Although management monitors collections and credit worthiness, the inability of a particular
customer to pay its debts could impact collectability of receivables and could have an impact on
future revenues if the customer is unable to arrange other financing. Management does not believe
these conditions are reasonably likely to have a material impact on the collectability of its
receivables or future revenues. Recoveries of accounts receivables previously written off are
recorded when received. Credit terms to customers in the Contract Manufacturing segment are
generally net 30 days. Credit terms to customers in the Business Imaging segment are generally
discounted net 30 terms.
Management estimates sales returns and allowances by analyzing historical returns and credits,
and applies these trend rates to the most recent 12 months sales data to calculate estimated
reserves for future credits. Actual results could differ from these estimates under different
assumptions.
Inventories- Inventories are carried at the lower of cost or market, with cost determined
under the first-in, first-out (FIFO) method of inventory valuation. The Company estimates reserves
for inventory obsolescence and shrinkage based on its judgment of future realization.
Goodwill- The Company tests goodwill annually at the reporting unit level for impairment as of
June 30. The operating segments herein also represent the Companys reporting units for goodwill
purposes. The Company uses a discounted cash flow analysis to estimate reporting unit fair values
and also considers multiples of relevant companies. In determining the fair values of the
reporting units, the Company was required to make certain assumptions and cannot predict what
future events may occur that could adversely affect the reported value of its goodwill.
Management has completed the Companys annual impairment test and determined there were no
changes in the carrying amount of goodwill by reporting unit at June 30, 2011. However, there can
be no assurance that valuation multiples will not decline, growth rates will not be lower than
expected, discount rates will not increase, or the projected cash flows of the individual reporting
units will not decline. The Company prepared the discounted cash flow analysis in the same manner
as in prior years. The Company further updated all significant assumptions in light of current
market and regulatory conditions. The key assumptions used in preparing the discounted cash flow
analysis were (1) projected cash flows, (2) risk of adjusted discount rates, and (3) expected long
term growth rates. Because each of the reporting units has distinct characteristics, the Company
developed these assumptions separately. Any variance in the underlying assumptions could have a
material impact on the evaluation of goodwill
impairment. These assumptions included the Companys actual operating results, future business
plans, economic projections and market data, as well as estimates by its management regarding
future cash flows and operating results. For example, lower than expected growth or margins or an
increase to the discount rate due to changes in risk premiums or other factors may suggest that an
impairment has occurred under Step 1 and require the Company to proceed to Step 2 to measure the
fair value of assets and liabilities of the reporting units.
13
Critical Accounting Policies and Estimates (Continued)
At the annual measurement date of June 30, 2011, the estimated fair value of Contract
Manufacturing exceeded its carrying value by approximately 96%. The estimated fair value of
Business Imaging exceeded its carrying value by approximately 6% at June 30, 2011. The current
discount rate would need to increase 5.4% for Contract Manufacturing and increase 0.5% for Business
Imaging before the Company would be required to proceed to Step 2. The results of the Business
Imaging test reflect an increase in paper costs during 2011 that the segment has not been able to
pass on through sales price increases; management believes this is a temporary detriment to
margins. Management plans to increase sales prices over the next twelve months to recover this
temporary decrease in margins and expects to sustain these margins in future periods.
The Company recognizes that its common stock regularly trades below book value per share and
will continue to monitor the relationship of its market capitalization to both its book value and
tangible book value. While management plans to return the Companys business fundamentals to
levels that support the book value per share, there is no assurance that the plan will be
successful, or that the market price of the common stock will increase to such levels in the
foreseeable future.
During fiscal year 2011, the Company changed its annual goodwill measurement date from June 30
to July 1. The assessment was performed as of June 30, 2011 and an updated assessment was
performed as of July 1, 2011. The assessment included comparing the carrying amount of net assets
of each reporting unit to its respective implied fair value as of each date.
In accordance with Accounting Standards Codification (ASC) 360-10 (formerly SFAS No. 144),
Accounting for the Impairment for Disposal of Long-Lived Assets, the Company evaluates the
recoverability of the recorded amount of long-lived assets whenever events or changes in
circumstances indicate that the recorded amount of an asset may not be fully recoverable. An
impairment is assessed when the undiscounted expected future cash flows derived from an asset are
less than its carrying amount. If an asset is determined to be impaired, the impairment to be
recognized is measured as the amount by which the recorded amount of the asset exceeds its fair
value. Assets to be disposed of are reported at the lower of the recorded amount or fair value
less cost to sell. The Company determines fair value using discounted future cash flow analysis or
other accepted valuation techniques.
Additional information on the Companys accounting policies is set forth in Note 1 to the
Consolidated Financial Statements included in Item 8 of this Report as referenced to the Appendix
to this Report.
Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update
(ASU) No. 2011-08, Intangibles Goodwill and Other (Topic 350): Testing Goodwill for
Impairment. This ASU gives an entity the option in its annual goodwill impairment test to first
assess revised qualitative factors to determine whether it is more likely than not (a likelihood of
more than 50%) that the fair value of a reporting unit is less than its carrying amount
(qualitative assessment). If it is more likely than not the fair value of a reporting unit is
less than its carrying amount, an entity would not be required to perform the existing two-step
impairment test. The amendments to Topic 350 are effective for annual and interim goodwill
impairment tests performed for fiscal years beginning after December 15, 2011. The Company does
not believe the adoption of ASU 2011-08 will have a material effect on its consolidated financial
statements.
ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Not required for a smaller reporting company.
14
ITEM 8 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The Companys Consolidated Financial Statements are attached as an Appendix to this Report.
ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A | CONTROLS AND PROCEDURES |
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its reports filed pursuant to the Securities Exchange Act
of 1934, as amended (the Securities Exchange Act), is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
The Company carried out an evaluation, under the supervision and with the participation of its
management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures. Based on the
foregoing, the Companys Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act) were effective as of the end of the Companys 2011 fiscal year.
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) or
15d-15(f)). The Companys internal control system was designed to provide reasonable assurance to
the Companys management and Board of Directors regarding the preparation and fair presentation of
published financial statements.
All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
The Companys management assessed the effectiveness of its internal control over financial
reporting as of September 30, 2011. In making this assessment, it used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on its assessment, the Company believes that as of September 30, 2011,
the Companys internal control over financial reporting was effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public accounting
firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide
only managements report in this Annual Report on Form 10-K.
There have been no changes in the Companys internal control over financial reporting during
the fiscal quarter ended September 30, 2011, that have materially affected, or are reasonably
likely to materially affect the Companys internal control over financial reporting.
ITEM 9B | OTHER INFORMATION |
None.
15
PART III
ITEM 10 | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Set forth below is certain biographical information concerning our directors and executive
officers as of December 16, 2011:
Name | Age | Position Held | ||
Robert J. Simon |
53 | Chairman of the Board of Directors | ||
Samuel J. Bero |
76 | Director | ||
C. Hamilton Davison |
52 | Director | ||
George Hare |
54 | General Manager, Business Imaging Sector | ||
Brian Kelly |
68 | Director | ||
Louis LeCalsey, III |
72 | Director and until September 19, 2011, President and Chief Executive Officer | ||
James F. Robinson |
43 | Director, President and Chief Executive Officer | ||
Richard M. Segel |
71 | Director | ||
Michael B. Wheeler |
66 | Executive Vice President, Chief Financial Officer and Chief Operating Officer | ||
William R. Ziemendorf |
52 | Director |
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
James F. Robinson Mr. Robinson assumed the positions of President and Chief Executive
Officer of Tufco on September 20, 2011. Previously he was Vice President, Business Development
since January, 2010. Prior to joining Tufco he served as Business Development & Technical Director
and Business Director-Latin America for Mondi, a publicly traded multinational company
headquartered in Johannesburg, South Africa. Mr. Robinson was also a founding member of Hygenitec,
a Wisconsin-based wet wipes manufacturer. Mr. Robinson is a member of the Board of Directors of
Tufco Technologies, Inc. and Independent Printing Company, Inc. He received a BA in Business
Administration/Economics from Lakeland College and attended graduate school at La Universidad
Autónoma Del Estado de Morelos-Centro Bilingűe in Mexico and is fluent in Spanish and Portuguese.
Louis LeCalsey, III Mr. LeCalsey retired from the positions of President and Chief
Executive Officer of Tufco on September 19, 2011. Prior to that time, Mr. LeCalsey had been the
President and Chief Executive Officer of Tufco since October 1996. Previously he was President of
Tufco Industries, Inc. since April 1996. Prior to joining Tufco, he served as Vice President of
Worldwide Logistics and North American Procurement for Scott Paper Company, the culmination of a
23-year career with Scott in various leadership positions. Mr. LeCalsey continues to serve as a
director of Tufco Technologies, Inc., as well as a member of the Advisory Board for Bradford
Equities Management, LLC. Mr. LeCalsey earned his undergraduate degree from Franklin & Marshall
College and attended the University of Wisconsin-Oshkosh for his Masters course work in finance and
marketing. He received Executive Certificates in business from the University of Michigan and the
Thunderbird American Graduate School of International Business in Phoenix, AZ.
Michael B. Wheeler Mr. Wheeler assumed the position of Executive Vice President, Chief
Financial Officer and Chief Operating Officer in June 2006, retaining his position as Secretary and
Treasurer. He had served as Vice President, Chief Financial Officer, Secretary and Treasurer since
March 27, 2002. From 1999 to 2001, Mr. Wheeler consulted for several companies as a senior
financial consultant. Prior to that, Mr. Wheeler was with Stone Container Corporation for
twenty-five years serving as Vice President and Treasurer from 1983 to 1998.
16
Executive Officers (Continued)
George Hare Mr. Hare assumed the position of General Manager, Business Imaging Sector on
June 30, 2008. Prior to joining Tufco he had been Vice President of the Contract Manufacturing
Division of Diversapack, LLC from 2006 to 2008 and was General Manager with Pratt Industries from
2004 to 2006. Mr. Hare was General Manager with Pratt Industries and at Georgia Pacific
Corporation, Inland Container, and International Paper in various ascending leadership positions
from 1986 to 2006.
Non-Employee Directors
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, having started
at the firm in 1984. Mr. Simon is either Chairman of the Board or a director of Alkota Cleaning
Systems, Inc., Electron Beam Technologies, Inc., Independent Printing Company, Inc., Indo-European
Foods, Inc., Overseas Equity Investors Ltd., Professional Plumbing Group, Inc., Sunbelt Modular,
Inc., Globe Food Equipment Company, Inc. and CT Color Holdings, Inc. as well as several other
privately held companies. Mr. Simon received an MBA from New York University Graduate School of
Business Administration and a B.S. from the University of Minnesota School of Management.
Director Qualifications: Mr. Simon has worked in private equity for more than twenty-five
years and has served on the board or as Chairman of the Board of more than twenty-five companies.
As a result of these and other professional experiences, Mr. Simon possesses particular knowledge
and experience in accounting, finance, and capital structure and board practices of other major
corporations that strengthen the Boards collective qualifications, skills and experience.
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
since 1974, when he co-founded Tufco Industries, Inc., our predecessor. Mr. Bero has been a
director since 1992 and has over 33 years of experience in the converting industry.
Director Qualifications: Mr. Bero has forty years of experience in the converting industry,
with experience in procurement, cost control and sales and was CEO of the Company prior to his
retirement. As a result of these and other professional experiences, Mr. Bero possesses particular
knowledge and experience in the converting industry and marketing products that strengthen the
Boards collective qualifications, skills and experience.
C. Hamilton Davison Mr. Davison has been a director since 1992. Mr. Davison is currently a
Principal with Advantaged In Strategy, LLC, a management consulting firm which began operations in
2007, and also serves as the Executive Director of the American Catalog Mailers Association, a
Washington-based 501(c)(6) advocacy group. Formerly, he was President and a director of Paramount
Cards, Inc., a manufacturer and retailer of greeting cards, since 1988 and Chief Executive Officer
from 1995 to 2006. Prior to that time, Mr. Davison was Vice
President, International and Marketing of Paramount Cards, Inc. In addition to other private
companies and not-for-profit boards, he served as a director and member of the audit committee of
Valley Resources until 2000 when the company was sold to Southern Union (NYSE:SUG). Mr. Davison
received a Bachelors Degree from Vanderbilt University and a Masters Degree from the University of
Texas.
Director Qualifications: Mr. Davison has experience as an operating company CEO with
experience in a number of adjacent and relevant businesses, marketing and strategic management
experience. As a result of these and other professional experiences, Mr. Davison possesses
particular knowledge and considerable experience in consumer products, national retail, distributor
and wholesale as well as international business practices that strengthen the Boards collective
qualifications, skills and experience.
Brian Kelly Mr. Kelly became a director in November 2006. He founded Waverly Partners,
Inc., a company that provides assistance in the acquisition and operation of niche metals component
manufacturing businesses, in 1994, and has been President since its inception. Prior to starting
Waverly, Mr. Kelly was President of Fitchburg Coated Products. From 1984 to 1989 he served as
Chief Financial Officer of Technographics, Inc. Mr. Kelly is a CPA, received an AB in Political
Science from Providence College and an MBA from McGill University.
17
Non-Employee Directors (Continued)
Director Qualifications: Mr. Kelly is a CPA and has a financial background. He has run
companies and has large customer experience. As a result of these and other professional
experiences, Mr. Kelly possesses particular knowledge and experience in accounting, finance and
capital structure and board practices of other corporations that strengthen the Boards collective
qualifications, skills and experience.
Richard M. Segel Mr. Segel has been a director since February 2008. He is President of
Highlands, LLC, founded in 2005, which provides consulting, investment and advisory services to
businesses and private equity investors. From 1998 to 2004, Mr. Segel was President and CEO of
Pamarco Technologies, Inc., a manufacturer/re-manufacturer of printing and converting equipment and
key wear components. From 1993 to 1997, Mr. Segel was President and CEO of Dunmore Corporation, a
privately held converter of plastic films. From 1990 to 1993, he was an Executive Vice President
with Bell and Howell. Mr. Segel is currently a director of Pelagus Fund, Inc. and several
privately held companies. He is a Trustee of George School in Newtown, PA. Mr. Segel received
Bachelors and Masters Degrees in Mechanical Engineering from Yale University, and an MBA from the
University of Chicago. He has over 35 years experience in the printing and converting industry.
Director Qualifications: Mr. Segel has experience as CEO of similar businesses in the
converting industry and of converting industry suppliers. As a result of these and other
professional experiences, Mr. Segel possesses particular knowledge and experience in the converting
industry and marketing products that strengthen the Boards collective qualifications, skills and
experience.
William R. Ziemendorf Mr. Ziemendorf has been a director since May 2008. He has been
President and Chief Executive Officer of Independent Printing Company, Inc. since 1998. Mr.
Ziemendorf began working at Independent Printing in 1986 and held various positions with the
company prior to becoming President. Mr. Ziemendorf was employed at Shinners, Hucovski and
Company, S.C. as a Certified Public Accountant from June 1981 through April 1986. Mr. Ziemendorf
received his Bachelors degree from the University of Wisconsin-Eau Claire.
Director Qualifications: Mr. Ziemendorf has experience as a CEO in the printing industry and
is a CPA. As a result of these and other professional experiences, Mr. Ziemendorf possesses
particular knowledge and experience in accounting, finance and capital structure and board
practices of other corporations that strengthen the Boards collective qualifications, skills and
experience.
None of the directors listed herein is related to any other director or executive officer of
the Company.
18
Certain Corporate Governance Matters
The Board of Directors has adopted a number of measures designed to comply with the
requirements of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) and final rules of the
Securities and Exchange Commission (SEC) interpreting and implementing the Sarbanes-Oxley Act, as
well as listing rules of the Nasdaq Capital Market relating to corporate governance matters. Among
the significant measures implemented by the Board of Directors to date are the following:
Audit Committee Composition
The Audit Committee is comprised solely of independent directors in accordance with the
Nasdaq Listing Rules.
The Audit Committee is currently composed of Mr. C. Hamilton Davison, Mr. Brian Kelly, and Mr.
William R. Ziemendorf. The Audit Committee operates under a written charter adopted by the Board
of Directors. The amended and restated Audit Committee Charter was ratified by the Board of
Directors on February 9, 2007. The amended and restated Audit Committee Charter was attached as an
exhibit to the Companys definitive Proxy Statement filed in fiscal 2007. For fiscal 2011, the
Board of Directors of the Company has determined that Brian Kelly is the Audit Committee Financial
Expert (as defined in Item 407(d)(5)(ii) of Regulation S-K).
Code of Ethics
In December of 2003, the Audit Committee adopted a Code of Ethics applicable to senior
financial officers of the Company. This Code of Ethics constitutes a code of ethics applicable to
senior financial officers within the meaning of the Sarbanes-Oxley Act of 2002 and SEC rules. The
Code of Ethics was filed as an exhibit to the Companys Form 10-K for its fiscal year ended
September 30, 2003, and is incorporated by reference as Exhibit 14.1 hereto. The Code of Ethics
was ratified by the Board of Directors on January 13, 2004.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, and
persons who own more than 10% of a registered class of our equity securities, to file reports of
ownership and changes in ownership of such securities with the SEC. Officers, directors and
greater than 10% beneficial owners are required by applicable regulations to furnish us with copies
of all Section 16(a) forms they file.
Based solely upon a review of the copies of the forms furnished to the Company, or written
representations from certain reporting persons that no Forms 3, 4 or 5 were required, the Company
believes that during the 2011 fiscal year all Section 16(a) filing requirements were complied with
on a timely basis.
ITEM 11 | EXECUTIVE COMPENSATION |
Compliance with Section 162(m)
The Compensation Committee currently intended for all compensation paid to the executive
officers to be tax deductible to the Company pursuant to Section 162(m) of the Internal Revenue
Code of 1986, (as amended (Section 162(m)). Section 162(m) provides that compensation paid to
the executive officers in excess of $1,000,000 cannot be deducted by the Company for Federal income
tax purposes unless, in general (1) such compensation is performance-based, established by a
committee of outside directors and objective, and (2) the plan or agreement providing for such
performance-based compensation has been approved in advance by stockholders. In the future, to
maintain flexibility in the compensatory arrangements of the Company, the Compensation Committee
may determine to adopt a compensation program that does not satisfy the conditions of Section
162(m) if in its judgment, after considering the additional costs of not satisfying Section 162(m),
such program is appropriate.
19
Summary Compensation Table
The table below sets forth the cash and non-cash compensation for the last fiscal
year awarded to or earned by our named executive officers.
Option | All Other | |||||||||||||||||||
Name and Principal Position | Year | Salary | Awards(1) | Compensation(2) | Total | |||||||||||||||
James F. Robinson (3) |
2011 | $ | 166,458 | $ | 22,219 | $ | 2,233 | $ | 190,910 | |||||||||||
Director, President and CEO |
2010 | $ | 112,716 | $ | 11,807 | | $ | 124,523 | ||||||||||||
Louis LeCalsey, III(4) |
2011 | $ | 274,614 | $ | 8,809 | $ | 9,083 | $ | 292,506 | |||||||||||
Director |
2010 | $ | 258,566 | $ | 26,673 | $ | 8,176 | $ | 293,415 | |||||||||||
Michael B. Wheeler |
2011 | $ | 182,756 | $ | 13,887 | $ | 13,427 | $ | 210,070 | |||||||||||
Executive Vice President, CFO, COO, Secretary
and Treasurer |
2010 | $ | 182,756 | $ | 19,734 | $ | 12,006 | $ | 214,496 | |||||||||||
George Hare(5) |
2011 | $ | 145,080 | $ | 11,109 | $ | 1,674 | $ | 157,863 | |||||||||||
General Manager, Business Imaging Sector |
2010 | $ | 145,080 | $ | 13,975 | $ | 1,623 | $ | 160,678 |
(1) | For awards of options, the dollar amount recognized is based on the aggregate grant date
fair value of the awards computed in accordance with FASB Accounting Standards Codification Topic
718, Compensation Stock Compensation. |
|
(2) | The compensation reported represents the Companys contributions to the Companys 401(k) Plan,
car allowances and country club dues. The Company has suspended such contributions to the 401(k)
Plan since March, 2009. |
|
(3) | Mr. Robinson assumed the position of Director, President and CEO of the Company on September
20, 2011. |
|
(4) | Mr. LeCalsey retired from his positions with the Company on September 19, 2011. Mr. LeCalsey
continues to serve as a Director of Tufco Technologies, Inc. |
|
(5) | Mr. Hare has resigned from his position with the Company effective February 29, 2012. |
Employment Agreements
Mr. Robinson entered into an employment agreement with the Company effective October 11, 2010
for an initial term of one year with successive one-year renewal terms. The employment agreement
provided that if we terminate his employment for cause, or as a result of his death or disability,
our obligation to compensate him would immediately terminate. The employment agreement provided
that if he is terminated without cause, we would be obligated to compensate him for a period of one
year. The employment agreement prohibited him from competing with us while employed by us and for
eighteen months after the later of his termination of employment or the termination of severance
pay. The employment agreement provided for an annual base salary of $165,000, an annual bonus and
various fringe benefits. In connection with his promotion to President and Chief Executive
Officer, Mr. Robinson entered into a new employment agreement with the Company effective September
19, 2011 for an initial term of one year commencing on September 19, 2011 with successive one-year
renewal terms and Mr. Robinsons prior employment agreement with the Company was terminated. If we
terminate his employment for cause, or as a result of his death, our obligation to compensate him
immediately terminates. If we terminate his employment as a result of six months partial or total
disability, our obligation to compensate him ceases. If he is terminated without cause, we will be
obligated to compensate him for a period of one year. The new employment agreement prohibits him
from competing with us while employed by us and for twelve months after the later of his
termination of employment or the termination of severance pay. The new employment agreement
provides for a current annual base salary of $200,000, an annual bonus and various fringe benefits.
The bonus is based upon a target for pre-tax income determined by the Compensation Committee. Mr.
Robinson did not receive a bonus for fiscal year 2011 or 2010.
20
Mr. LeCalsey entered into an employment agreement with the Company effective September 19,
1996, as amended, under which he served as the President and Chief Executive Officer for an initial
term of three years with successive one-year renewal terms. The employment agreement provided that
if we terminated his employment for cause, or as a result of his death or disability, our
obligation to compensate him would immediately terminate and that if we terminated his employment
without cause, we would be obligated to compensate him for a period of one year. The employment
agreement prohibited him from competing with us while employed by us and for one year after
termination of his employment with us. The employment agreement provided for a base salary of
$286,500, an annual bonus and various fringe benefits. The bonus is based upon a target for
operating income determined by the Compensation Committee. Mr. LeCalsey did not receive a bonus
for fiscal year 2011 or 2010. In connection with Mr. LeCalseys retirement from his position as
President and Chief Executive Officer, the Company did not renew Mr. LeCalseys employment term
under his employment agreement upon its expiration on September 19, 2011.
Mr. LeCalsey entered into a consulting agreement with the Company effective
September 19, 2011 under which he serves as a senior advisor to the Company until March 19, 2012,
unless extended for additional one month periods by mutual agreement between Mr. LeCalsey and the
Company. Pursuant to the consulting agreement, Mr. LeCalsey is paid a consulting fee of $5,000 per
month during the term of the consulting agreement.
Mr. Wheeler entered into an employment agreement with the Company effective March 27, 2002,
under which he served as Vice President, Chief Financial Officer, Secretary and Treasurer for an
initial term of one year with successive one-year renewal terms. Mr. Wheeler was promoted to
Executive Vice President, Chief Financial
Officer, Chief Operating Officer, Secretary and Treasurer in June, 2006. If we terminate his
employment for cause, or as a result of his death or disability, our obligation to compensate him
immediately terminates. If we terminate his employment without cause, we will be obligated to
compensate him for a period of one year (and if such termination occurs in the fourth quarter of
any year, a pro-rated portion of his bonus, if applicable). The employment agreement prohibits him
from competing with us while employed by us and for one year after termination of his employment by
us. The employment agreement provides for a current annual base salary of $202,500, an annual
bonus and various fringe benefits. The bonus is based upon a target for operating income
determined by the Compensation Committee. Mr. Wheeler did not receive a bonus for fiscal year 2011
or 2010.
Mr. Hare entered into an employment agreement with the Company effective June 30, 2008, under
which he serves as General Manager, Business Imaging Sector for an initial term of one year with
successive one-year renewal terms. If we terminate his employment for cause, or as a result of his
death or disability, our obligation to compensate him immediately terminates. If he is terminated
without cause, we will be obligated to compensate him for a period of one year. The employment
agreement prohibits him from competing with us while employed by us and for one year after the
later of his termination of employment or the termination of severance pay. The employment
agreement provides for a current annual base salary of $156,000, an annual bonus and various fringe
benefits. The bonus is based upon a target for operating income determined by the Compensation
Committee. Mr. Hare did not receive a bonus for fiscal year 2011 or 2010.
21
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information concerning the value of the unexercised options
as of September 30, 2011 held by the named executive officers.
Number of Securities | ||||||||||||||||||||
Number of Securities | Underlying Unexercised | Option | ||||||||||||||||||
Underlying Unexercised | Options (#) | Exercise | Option Expiration | |||||||||||||||||
Name | Options (#) Exercisable | Unexercisable | Price($) | Grant Date | Date | |||||||||||||||
James F. Robinson |
5,000 | 3,333 | $ | 3.25 | 9/14/10 | 9/14/20 | ||||||||||||||
8,000 | 8,000 | $ | 3.90 | 8/24/11 | 8/24/21 | |||||||||||||||
Louis LeCalsey, III |
30,000 | | $ | 7.00 | 10/01/01 | 10/01/11 | ||||||||||||||
16,500 | | $ | 4.92 | 10/01/02 | 10/01/12 | |||||||||||||||
15,000 | | $ | 5.71 | 11/26/03 | 11/26/13 | |||||||||||||||
12,000 | | $ | 7.87 | 11/19/04 | 11/19/14 | |||||||||||||||
6,000 | | $ | 7.60 | 10/01/07 | 10/01/17 | |||||||||||||||
9,000 | | $ | 5.56 | 9/03/08 | 9/03/18 | |||||||||||||||
5,000 | 3,333 | $ | 3.19 | 11/30/09 | 11/30/19 | |||||||||||||||
6,500 | 4,333 | $ | 3.25 | 9/14/10 | 9/14/20 | |||||||||||||||
4,000 | | $ | 3.60 | 9/19/11 | 9/19/21 | |||||||||||||||
Michael B. Wheeler |
15,000 | | $ | 5.70 | 3/27/02 | 3/27/12 | ||||||||||||||
12,500 | | $ | 4.92 | 10/01/02 | 10/01/12 | |||||||||||||||
11,000 | | $ | 5.71 | 11/26/03 | 11/26/13 | |||||||||||||||
9,000 | | $ | 7.87 | 11/19/04 | 11/19/14 | |||||||||||||||
6,000 | | $ | 7.60 | 10/01/07 | 10/01/17 | |||||||||||||||
6,000 | | $ | 5.56 | 9/03/08 | 9/03/18 | |||||||||||||||
3,500 | 2,333 | $ | 3.19 | 11/30/09 | 11/30/19 | |||||||||||||||
5,000 | 3,333 | $ | 3.25 | 9/14/10 | 9/14/20 | |||||||||||||||
5,000 | 5,000 | $ | 3.90 | 8/24/11 | 8/24/21 | |||||||||||||||
George Hare |
2,000 | | $ | 6.35 | 6/30/08 | 6/30/18 | ||||||||||||||
500 | | $ | 5.56 | 9/03/08 | 9/03/18 | |||||||||||||||
2,000 | 1,333 | $ | 3.19 | 11/30/09 | 11/30/19 | |||||||||||||||
4,000 | 2,667 | $ | 3.25 | 9/14/10 | 9/14/20 | |||||||||||||||
4,000 | 4,000 | $ | 3.90 | 8/24/11 | 8/24/21 |
The options have an exercise price equal to the fair market value of the underlying stock at
the date of grant. Employee stock options vest ratably over a three-year period. Options issued
under the 2003 Non-Qualified Stock Option Plan generally expire ten years from the date of grant.
22
Potential Payment Of Termination Or Change In Control
The employment agreements provide for a current annual base salary, an annual bonus and
various fringe benefits. The bonus is based upon a target for operating income determined by the
Compensation Committee. As of September 30, 2011, the following table sets forth the potential
payment that each of our named executive officers would receive upon termination or change in
control.
Compensation of Individual if | ||||||||
Compensation Following | Terminated Within 180 Days | |||||||
Name | Termination Without Cause (1) | Following Change in Control (1) | ||||||
James F. Robinson |
$ | 200,000 | $ | 200,000 | ||||
Michael B. Wheeler |
$ | 202,500 | $ | 202,500 | ||||
George Hare |
$ | 156,000 | $ | 156,000 |
(1) | Some officers would receive a bonus based upon a target for operating income determined by the
Compensation Committee. |
23
Director Compensation
Our directors who are not employees receive:
| an annual fee of $12,000, |
||
| a payment of $1,500 for each board meeting attended, |
||
| a payment of $1,500 for each committee meeting attended, and |
||
| per diem fees for supplemental Audit Committee services. |
In addition, upon election or reelection to the Board of Directors at the annual meeting, each
non-employee director receives an option to acquire 3,000 shares of common stock under Tufcos 2004
Non-Employee Director Stock Option Plan. The options are exercisable immediately at an exercise
price equal to the fair market value of the common stock on the date of the annual meeting. On May
26, 2011, Messrs. Bero, Davison, Kelly, Segel, Simon and Ziemendorf each received options to
acquire 3,000 shares of common stock under Tufcos 2004 Non-Employee Director Stock Option Plan, as
amended, with an exercise price of $3.53 per share. In addition, on September 19, 2011, Mr.
LeCalsey received a discretionary grant to acquire 4,000 shares of common stock under Tufcos 2004
Non-Employee Director Stock Option Plan at an exercise price of $3.60 per share.
Fiscal 2011 Director Compensation
Fees Earned or | Option | |||||||||||
Name | Paid in Cash | Awards (1) | Total | |||||||||
Robert J. Simon |
$ | 27,000 | $ | 6,614 | $ | 33,614 | ||||||
Samuel J. Bero |
$ | 27,000 | $ | 6,614 | $ | 33,614 | ||||||
C. Hamilton Davison |
$ | 27,000 | $ | 6,614 | $ | 33,614 | ||||||
Brian Kelly |
$ | 27,000 | $ | 6,614 | $ | 33,614 | ||||||
Louis LeCalsey, III |
$ | 333 | $ | 8,809 | $ | 9,142 | ||||||
Richard M. Segel |
$ | 18,000 | $ | 6,614 | $ | 24,614 | ||||||
William R. Ziemendorf |
$ | 24,000 | $ | 6,614 | $ | 30,614 |
(1) | For awards of options, the dollar amount recognized is based on the aggregate grant date
fair value of the awards computed in accordance with FASB Accounting Standards Codification
Topic 718, Compensation Stock Compensation. |
24
ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information regarding the beneficial ownership of our
common stock as of December 16, 2011, by (1) each person known by us to own beneficially more than
5% of our outstanding common stock, (2) each current director, (3) each named executive officer,
and (4) all current directors and executive officers as a group. Unless otherwise indicated, the
shares listed in the table are owned directly by the individual or entity, or by both the
individual and the individuals spouse. The individual or entity has sole voting and investment
power as to shares shown or, in the case of the individual, such power is shared with the
individuals spouse.
Certain of the shares listed below are deemed to be owned beneficially by more than one stockholder
under SEC rules. Accordingly, the sum of the ownership percentages listed exceeds 100%.
AMOUNT AND NATURE OF | PERCENT OF | |||||||
BENEFICIAL OWNERSHIP | CLASS | |||||||
Over 5% Stockholders |
||||||||
Robert J.Simon(1)(3)(4)(14) |
2,661,543 | 61.3 | % | |||||
Barbara M. Henagan(1)(3) |
2,621,661 | 60.8 | % | |||||
Bradford Venture Partners, L.P.(1)(6) |
2,619,740 | 60.8 | % | |||||
Overseas Equity Investors Partners(3)(2) |
2,619,740 | 60.8 | % | |||||
Other Directors and Executive Officers |
||||||||
Samuel J. Bero(7) |
207,500 | 4.8 | % | |||||
Louis LeCalsey, III(8) |
229,379 | 5.2 | % | |||||
C. Hamilton Davison(5) |
33,482 | * | ||||||
Richard M. Segel(9) |
14,000 | * | ||||||
Brian Kelly(15) |
68,590 | 1.6 | % | |||||
William R. Ziemendorf(16) |
12,000 | * | ||||||
Michael B. Wheeler(10) |
64,500 | 1.5 | % | |||||
George Hare(11) |
5,167 | * | ||||||
James F. Robinson(12) |
12,767 | * | ||||||
Directors and Executive Officers as a Group (10 persons)(1)(3)(13) |
3,309,288 | 71.8 | % |
* | Less than one percent |
|
(1) | The amounts shown for Mr. Simon and Ms. Henagan include the shares owned of record by
Bradford Venture Partners, L.P., as to which they may be deemed to share beneficial ownership
due to their having voting and dispositive power over such shares. Bradford Associates, a
general partnership of which such two persons are the partners, is the sole general partner of
Bradford Venture Partners, L.P. and, as such, holds a 1% interest in that partnership. The
business address of each of Mr. Simon and Ms. Henagan is 92 Nassau Street, Princeton, New
Jersey, 08542. |
|
(2) | The address of the stockholder is 92 Nassau Street, Princeton, New Jersey 08542. The amount
shown for the stockholder includes 709,870 shares owned of record by Overseas Equity Investors
Partners (Overseas Equity), as to which the stockholder may be deemed to share beneficial
ownership due to the formation of a group comprised of the stockholder and Overseas Equity
for purposes of SEC rules. |
|
(3) | The amounts shown for Mr. Simon and Ms. Henagan includes the shares owned of record by
Overseas Equity as to which they may be deemed to share beneficial ownership due to their
having voting power over such shares. Mr. Simon serves as chairman of the board of directors
of the corporation that acts as the managing partner of Overseas Equity. Bradford Associates
holds a 1% partnership interest in Overseas Equity, which may increase upon the satisfaction
of certain contingencies related to the overall performance of Overseas Equitys investment
portfolio, and also acts as an investment advisor for Overseas Equity. |
25
Security Ownership of Certain Beneficial Owners (Continued)
(4) | The stockholder is also one of our directors. |
|
(5) | The amount shown includes 30,000 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
|
(6) | The address of the stockholder is Clarendon House, Church Street, Hamilton 5-31, Bermuda.
The amount shown for the stockholder includes 1,909,870 shares owned of record by Bradford
Venture Partners, L.P., as to which the stockholder may be deemed to share beneficial
ownership due to the information of a group comprised of the stockholder and Bradford
Venture Partners, L.P. for purposes of SEC rules. |
|
(7) | The amount shown includes 30,000 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
|
(8) | The amount shown includes 98,000 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
|
(9) | The amount shown includes 14,000 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
|
(10) | The amount shown includes 63,500 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
|
(11) | The amount shown includes 5,167 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
|
(12) | The amount shown includes 1,667 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
|
(13) | The amount shown includes an aggregate of 301,334 shares that may be acquired under options
exercisable within 60 days of December 16, 2011. |
|
(14) | The amount shown includes 30,000 shares that may be acquired under options exercisable within
60 days of December 16, 2011 |
|
(15) | The amount shown includes 17,000 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
|
(16) | The amount shown includes 12,000 shares that may be acquired under options exercisable within
60 days of December 16, 2011. |
Equity Compensation Plan Information
The following table sets forth information concerning the equity compensation plans of the
Company as of September 30, 2011.
(C) | ||||||||||||
(A) | Number of Securities | |||||||||||
Number of | (B) | Remaining Available for | ||||||||||
Securities to be Issued | Weighted Average | Future Issuance under | ||||||||||
Upon Exercise of | Exercise Price of | Equity Compensation Plans | ||||||||||
Outstanding Options, | Outstanding Options, | (Excluding Securities | ||||||||||
Plan Category | Warrants and Rights | Warrants and Rights | Reflected in Column (A)) | |||||||||
Equity compensation plans approved
by security holders (1) |
348,300 | $ | 5.57 | 194,200 | ||||||||
Equity compensation plans not
approved by security holders (2) |
| | |
(1) | Plans represent (i) the 1992 Non-Qualified Stock Option Plan, which expired in April 2002, (ii)
the 2003 Non-Qualified
Stock Option Plan, which expires April 2013 and the 1993 Non-Employee Director Stock Option
Plan, which expired March
2004, and (iii) the 2004 Non-Employee Director Stock Option Plan, which expires March 2014. |
|
(2) | There are no equity compensation plans not approved by security holders. |
26
ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
We lease one of our facilities from a partnership in which Samuel J. Bero is a
partner. We paid total rent of $216,923 to the partnership that is the lessor of this facility for
fiscal year 2011. In November 2006, we entered into a new lease with the partnership, which
expires in March 2013. The rent under this lease is $17,070 per month beginning in April 2007 and
increases by 1.65% each succeeding year. In exchange for the Companys entering into the new
lease, the partnership agreed to pay for up to $300,000 of improvements to the facility. We
believe that the terms of this lease are at least as favorable to us as could have been obtained
from an unaffiliated party.
In 1994, the Company entered into a consulting agreement with Bradford Ventures, Ltd., an
affiliate of Bradford Venture Partners, L.P., and Overseas Equity Investors Partners, two of our
largest stockholders, under which Bradford Ventures provides various financial consulting services
to us for an initial term of ten years, with successive automatic renewal terms of one year each
unless terminated by either party. Under this agreement, Bradford Ventures has assisted us in
structuring our initial public offering, various acquisitions and divestitures and restructuring
our long-term obligations. In addition, Bradford Ventures provides general business consulting and
advice. We expect to use the services of Bradford Ventures in the future for similar services as
well as in any major transaction, such as loans, subsequent public offerings and acquisitions and
divestitures. We are obligated to pay Bradford Ventures an initial annual fee of $210,000 under
the agreement, subject to a 5% annual increase for each year since 1994, plus reasonable
out-of-pocket expenses. During fiscal year 2011, we paid Bradford Ventures Ltd. $451,134 in fees.
We believe that the terms of the agreement with Bradford Ventures Ltd. are customary and are at
least as favorable to us as could be obtained from an unaffiliated party.
The Company is a Controlled Company as defined in Nasdaq Listing Rule 5615(c)(1). The Board
of Directors has based this determination on the fact that approximately 61% of the voting stock
of the Company is held by Bradford Venture Partners, L.P. and Overseas Equity Investors Ltd., which
together constitute a group for purposes of Nasdaq Listing Rule 5615(c)(1). The Companys
compensation committees include one director, Robert J. Simon, who is not independent under the
Nasdaq Listing Rules. However, as the Company is a Controlled Company it is not required under
the standards of the Nasdaq Listing Rules to have a compensation committee consisting solely of
independent directors.
The Board of Directors does not have a standing Nominating Committee or committee performing
similar functions; however, the Board of Directors functions in the capacity of the Nominating
Committee. As the Company is a Controlled Company and a majority of the members of the Board are
independent, the Board has determined not to create a separate nominating committee. The Board of
Directors has determined that five of the seven directors meet the independence standards under the
Nasdaq Listing Rules. These Directors are Messrs. Bero, Davison, Kelly, Segel and Ziemendorf.
The Audit Committee or another independent committee of the Board of Directors is required to
approve all related-party transactions required to be disclosed pursuant to Item 404 of Regulation
S-K (or such approval may be made by another independent committee of the Board).
27
ITEM 14 | PRI`NCIPAL ACCOUNTING FEES AND SERVICES |
The following table shows the fees paid or accrued by the Company for the audit and other
services provided by McGladrey & Pullen LLP, Tufcos independent auditor, for fiscal years 2011 and
2010.
McGladrey | McGladrey | |||||||
& Pullen | & Pullen | |||||||
FY 2011 | FY 2010 | |||||||
Audit Fees |
$ | 169,292 | $ | 183,839 | ||||
Audit-Related Fees |
0 | 0 | ||||||
Tax Fees |
0 | 0 | ||||||
All Other Fees |
0 | 0 |
Audit fees of McGladrey & Pullen LLP for fiscal 2011 consisted of the examination of the
consolidated financial statements of the Company, quarterly reviews of consolidated financial
statements, review of SEC filings and consultation on various financial reporting matters in
support of the Companys consolidated financial statements. There were no Audit-Related Fees,
Tax Fees or All Other Fees paid to McGladrey & Pullen LLP during fiscal 2011. The Audit
Committee approved all of the services described above.
Audit fees of McGladrey & Pullen LLP for fiscal 2010 consisted of the examination of the
consolidated financial statements of the Company, quarterly reviews of consolidated financial
statements, review of SEC filings and consultation on various financial reporting matters in
support of the Companys consolidated financial statements. There were no Audit-Related Fees,
Tax Fees or All Other Fees paid to McGladrey & Pullen LLP during fiscal 2010. The Audit
Committee approved all of the services described above.
The Audit Committee has adopted a statement of principles with respect to the pre-approval of
services provided by the independent registered public accounting firm. In accordance with the
statement of principles, the Audit Committee determined that all non-prohibited services to be
provided by the independent registered public accounting firm are to be approved in advance
pursuant to a proposal from such independent registered public accounting firm and a request by
management for approval.
28
PART IV
ITEM 15- | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) | 1. | Financial Statements. Financial statements are attached as an Appendix to this Report. The index to the consolidated financial statements is found on F-1 of the Appendix. | |
2. | Financial Statement Schedules. All schedules are omitted because the
information required is
included in the consolidated financial statements and notes thereto
or are not required for a smaller
reporting company. |
||
3. | Exhibits. See Exhibit Index in Item 15(b), below. |
(b) Exhibit | ||||
Number | Description | |||
3.1 | Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Companys
Registration Statement
as filed with the Commission on December 16, 1992, incorporated by reference herein). |
|||
3.2 | Bylaws (filed as Exhibit 3.2 to the Companys Registration Statement as filed with
the Commission
on December 16, 1992, incorporated by reference herein). |
|||
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 (filed as Exhibit
10.1 to the
Companys Registration Statement as filed with the Commission on December 16,
1992,incorporated by reference herein). |
|||
10.2 | Amended and Restated Consulting Agreement with Bradford Investment Partners, L.P.
(filed as
Exhibit 10 to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended March
31, 1995, incorporated by reference herein). |
|||
10.3 | 1992 Non-Qualified Stock Option Plan (filed as Exhibit 10.12 to the Companys
Registration
Statement as filed with the Commission on December 16, 1992, incorporated by
reference herein). |
|||
10.4 | 1993 Non-Employee Director Stock Option Plan (filed as Exhibit 10.19 to the Companys
Amendment No. 1 to the Registration Statement as filed with the Commission on
November 23,
1993, incorporated by reference herein). |
|||
10.5 | Lease between Bero and McClure Partnership and Tufco, L.P, dated October 15, 2002
(filed as
Exhibit 10.8 to the Companys Annual Report on Form 10-K for the period ended
September 30,
2002, incorporated by reference herein). |
|||
10.6 | Employment Agreement with Louis LeCalsey, III dated September 19, 1996 (filed as
Exhibit 10.18
to the Companys Report on Form 10-K for the period ended September 30, 1997,
incorporated by
reference herein). |
|||
10.7 | 2003 Non-Qualified Stock Option Plan (filed as Exhibit 10.19 to the Companys Annual
Report on
Form 10-K for the period ended September 30, 2003, incorporated by reference herein). |
|||
10.9 | 2004 Non-Employee Director Stock Option Plan (incorporated by reference to the
Companys
definitive proxy statement filed on January 29, 2004). |
|||
10.11 | Amended lease between Bero and McClure Partnership and Tufco LP dated November 22,
2006
(filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on November
22, 2006,
incorporated by reference herein). |
|||
10.14 | Credit Agreement dated May 13, 2009 (filed as Exhibit 10.1 to the Companys Current
Report on
Form 8-K filed on May 14, 2009, incorporated by reference herein). |
|||
10.15 | First Amended and Restated Credit Agreement, dated March 15, 2010 (filed as Exhibit
10.1 to the
Companys Current Report on Form 8-K filed March 24, 2010, incorporated by reference
herein). |
|||
10.16 | First Amendment to the Amended and Restated Credit Agreement, dated December 28,
2010 (filed
as Exhibit 10.16 to the Companys Annual Report on Form 10-K filed December 29, 2010,
incorporated by reference herein). |
|||
10.17 | Consulting Agreement, dated May 31, 2011, by and between Tufco Technologies, Inc.
and Louis
LeCalsey, III (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on May 31,
2011, incorporated by reference herein). |
|||
10.18 | Employment Agreement, dated May 31, 2011, by and between Tufco Technologies, Inc.
and James
F. Robinson (filed as Exhibit 10.12 to the Companys Current Report on Form 8-K
filed on May 31,
2011, incorporated by reference herein). |
29
ITEM 15- | EXHIBITS, FINANCIAL STATEMENT SCHEDULES (Continued) |
Exhibit | ||||
Number | Description | |||
10.19 | Second Amendment to the First Amended and Restated Credit Agreement, dated June 30, 2011,
among Tufco, L.P., the Company, JPMorgan Chase Bank N.A., as lender, and the guarantors party
thereto (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 1,
2011,
incorporated by reference herein). |
|||
10.20 | Third Amendment to the First Amended and Restated Credit Agreement, dated November 8, 2011,
among Tufco, L.P., the Company, JPMorgan Chase Bank N.A., as lender, and the guarantors party
thereto (filed as Exhibit 10.1 to the Companys Current Report on Form 8-K filed on November
9,
2011, incorporated by reference herein). |
|||
10.21 | *Employment Agreement effective as of June 30, 2008, by and between Tufco Technologies,
Inc. and George Hare. |
|||
14.1 | Code of Ethics (filed as Exhibit 14.1 to the Companys Annual Report on Form 10-K for the
period ended September 30, 2003, incorporated by reference herein). |
|||
18.1 | *Preferability Letter issued by McGladrey & Pullen, LLP regarding a change in accounting principle. |
|||
21.1 | Subsidiaries of the Company (filed as Exhibit 23.1 to the Companys Annual Report on Form
10-K
for the period ended September 30, 2006, incorporated by reference herein). |
|||
23.1 | *Consent of McGladrey & Pullen, LLP |
|||
31.1 | *Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934 of James F. Robinson. |
|||
31.2 | *Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934
of Michael B. Wheeler. |
|||
32.1 | **Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 of James F. Robinson. |
|||
32.2 | **Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 of Michael B. Wheeler. |
* | Filed herewith |
|
** | Furnished herewith |
30
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 29, 2011.
Tufco Technologies, Inc. |
||||
By: | /s/ James F. Robinson | |||
James F. Robinson | ||||
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/ James F. Robinson
|
President, Chief Executive Officer and Director (Principal Executive Officer) | December 29, 2011 | ||
/s/ Robert J. Simon
|
Chairman of the Board | December 29, 2011 | ||
/s/ Michael B. Wheeler
|
Executive VP, Chief Financial
Officer and Chief Operating Officer (Principal Financial Officer and Principal Accounting Officer) |
December 29, 2011 | ||
/s/ Samuel J. Bero
|
Director | December 29, 2011 | ||
/s/ C. Hamilton Davison
|
Director | December 29, 2011 | ||
/s/ Brian Kelly
|
Director | December 29, 2011 | ||
/s/ Louis LeCalsey, III
|
Director | December 29, 2011 | ||
/s/ Richard M. Segel
|
Director | December 29, 2011 | ||
/s/ William R. Ziemendorf
|
Director | December 29, 2011 |
31
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 F-19 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Tufco Technologies, Inc.
Tufco Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Tufco Technologies, Inc. and
subsidiaries as of September 30, 2011 and 2010, and the related consolidated statements of
operations, stockholders equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Tufco Technologies, Inc. and subsidiaries as of
September 30, 2011 and 2010, and the results of their operations and their cash flows for the years
then ended in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Schaumburg, Illinois
December 29, 2011
December 29, 2011
F-2
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2011 AND 2010
AS OF SEPTEMBER 30, 2011 AND 2010
2011 | 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash |
$ | 8,300 | $ | 7,899 | ||||
Accounts receivablenet |
15,362,710 | 14,211,275 | ||||||
Inventoriesnet |
14,200,576 | 14,329,857 | ||||||
Prepaid expenses and other current assets |
831,000 | 157,269 | ||||||
Income taxes receivable |
| 16,430 | ||||||
Deferred income taxes |
503,683 | 364,680 | ||||||
Total current assets |
30,906,269 | 29,087,410 | ||||||
PROPERTY, PLANT, AND EQUIPMENTNet |
17,027,006 | 18,640,263 | ||||||
GOODWILL |
7,211,575 | 7,211,575 | ||||||
OTHER ASSETSNet |
136,047 | 135,865 | ||||||
TOTAL |
$ | 55,280,897 | $ | 55,075,113 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Revolving line of credit |
$ | 6,449,133 | $ | 4,476,736 | ||||
Current portion of note payable |
259,017 | 244,577 | ||||||
Accounts payable |
8,968,222 | 9,974,560 | ||||||
Accrued payroll, vacation, and payroll taxes |
571,319 | 554,967 | ||||||
Other current liabilities |
452,186 | 435,167 | ||||||
Income taxes payable |
17,858 | | ||||||
Total current liabilities |
16,717,735 | 15,686,007 | ||||||
LONG-TERM PORTION OF NOTE PAYABLE |
767,950 | 1,026,966 | ||||||
DEFERRED INCOME TAXES |
2,085,432 | 2,257,071 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
STOCKHOLDERS EQUITY: |
||||||||
Common stock, $.01 par value9,000,000 shares authorized;
4,708,741 shares issued |
47,087 | 47,087 | ||||||
Non-voting common stock, $.01 par value2,000,000 shares
authorized and unissued |
| | ||||||
Preferred stock, $.01 par value1,000,000 shares authorized
and unissued |
| | ||||||
Additional paid-in capital |
25,549,239 | 25,497,814 | ||||||
Retained earnings |
12,270,911 | 12,717,625 | ||||||
Treasury stock 399,794 common shares at cost |
(2,157,457 | ) | (2,157,457 | ) | ||||
Total stockholders equity |
35,709,780 | 36,105,069 | ||||||
TOTAL |
$ | 55,280,897 | $ | 55,075,113 | ||||
See notes to consolidated financial statements.
F-3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
2011 | 2010 | |||||||
NET SALES |
$ | 109,906,454 | $ | 90,613,851 | ||||
COST OF SALES |
104,662,598 | 85,707,198 | ||||||
GROSS PROFIT |
5,243,856 | 4,906,653 | ||||||
OPERATING EXPENSES: |
||||||||
Selling, general, and administrative |
5,730,626 | 5,415,163 | ||||||
Loss on asset sales |
| 483 | ||||||
OPERATING LOSS |
(486,770 | ) | (508,993 | ) | ||||
OTHER (EXPENSE) INCOME: |
||||||||
Interest expense |
(275,510 | ) | (165,710 | ) | ||||
Interest income and other income |
49,817 | 15,694 | ||||||
Total |
(225,693 | ) | (150,016 | ) | ||||
LOSS BEFORE INCOME TAXES |
(712,463 | ) | (659,009 | ) | ||||
INCOME TAX BENEFIT |
(265,749 | ) | (245,810 | ) | ||||
NET LOSS |
$ | (446,714 | ) | $ | (413,199 | ) | ||
NET LOSS PER SHARE: |
||||||||
Basic |
$ | (0.10 | ) | $ | (0.10 | ) | ||
Diluted |
$ | (0.10 | ) | $ | (0.10 | ) | ||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||
Basic |
4,308,947 | 4,308,947 | ||||||
Diluted |
4,308,947 | 4,308,947 |
See notes to consolidated financial statements.
F-4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
Common Stock | Non-voting | Additional | Total | |||||||||||||||||||||||||||||
Voting | Common | Preferred | Paid-In | Retained | Treasury | Stockholders | ||||||||||||||||||||||||||
Shares | Amount | Stock | Stock | Capital | Earnings | Stock | Equity | |||||||||||||||||||||||||
BALANCESSeptember 30, 2009 |
4,708,741 | $ | 47,087 | $ | | $ | | $ | 25,421,007 | $ | 13,130,824 | $ | (2,157,457 | ) | $ | 36,441,461 | ||||||||||||||||
Stock-based compensation expense |
| | | | 76,807 | | | 76,807 | ||||||||||||||||||||||||
Net loss |
| | | | | (413,199 | ) | | (413,199 | ) | ||||||||||||||||||||||
BALANCESSeptember 30, 2010 |
4,708,741 | 47,087 | | | 25,497,814 | 12,717,625 | (2,157,457 | ) | 36,105,069 | |||||||||||||||||||||||
Stock-based compensation expense |
| | | | 51,425 | | | 51,425 | ||||||||||||||||||||||||
Net loss |
| | | | | (446,714 | ) | | (446,714 | ) | ||||||||||||||||||||||
BALANCESSeptember 30, 2011 |
4,708,741 | $ | 47,087 | $ | | $ | | $ | 25,549,239 | $ | 12,270,911 | $ | (2,157,457 | ) | $ | 35,709,780 | ||||||||||||||||
See notes to consolidated financial statements.
F-5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
2011 | 2010 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (446,714 | ) | $ | (413,199 | ) | ||
Noncash items in net loss: |
||||||||
Depreciation and amortization |
2,915,120 | 2,715,413 | ||||||
Deferred income taxes |
(310,642 | ) | (337,520 | ) | ||||
Loss on sale of assets |
| 483 | ||||||
Stock-based compensation expense |
51,425 | 76,807 | ||||||
Changes in operating working capital: |
||||||||
Accounts receivable |
(1,151,435 | ) | (3,134,017 | ) | ||||
Inventories |
129,281 | (3,684,689 | ) | |||||
Prepaid expenses and other assets |
(673,913 | ) | 81,084 | |||||
Accounts payable |
(1,006,338 | ) | 3,113,393 | |||||
Accrued and other current liabilities |
33,371 | (16,136 | ) | |||||
Income taxes receivable |
16,430 | 587,714 | ||||||
Income taxes payable |
17,858 | | ||||||
Net cash used in operating activities |
(425,557 | ) | (1,010,667 | ) | ||||
INVESTING ACTIVITIES: |
||||||||
Additions to property, plant, and equipment |
(1,301,863 | ) | (2,113,806 | ) | ||||
Proceeds from disposals of assets |
| 100 | ||||||
Net cash used in investing activities |
(1,301,863 | ) | (2,113,706 | ) | ||||
FINANCING ACTIVITIES: |
||||||||
Net borrowings from revolving debt |
1,972,397 | 3,206,637 | ||||||
Principal payments on note payable |
(244,576 | ) | (78,457 | ) | ||||
Net cash provided by financing activities |
1,727,821 | 3,128,180 | ||||||
NET INCREASE IN CASH |
401 | 3,807 | ||||||
CASH: |
||||||||
Beginning of year |
7,899 | 4,092 | ||||||
End of year |
$ | 8,300 | $ | 7,899 | ||||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: |
||||||||
Note payable incurred for the purchase of equipment |
| 1,350,000 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash payments for: |
||||||||
Interest |
265,957 | 164,967 | ||||||
Income Taxes |
11,268 | 59,212 |
See notes to consolidated financial statements.
F-6
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010
1. | SIGNIFICANT ACCOUNTING POLICIES |
Consolidated Financial StatementsConsolidated financial statements include the accounts of
Tufco Technologies, Inc., and its wholly owned subsidiaries, Tufco LLC, and Tufco LP and its
wholly owned subsidiary Hamco Manufacturing and Distributing LLC (the Company). Significant
intercompany transactions and balances are eliminated in consolidation. The Company provides
integrated manufacturing services including wide web flexographic printing, wet and dry wipe
converting, hot melt adhesive laminating, folding, integrated downstream packaging and on-site
quality microbiological process management and manufactures and distributes business imaging
paper products. |
Financial Statement PreparationFinancial statement preparation 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. Actual amounts could differ from the amounts estimated.
Differences from those estimates are recognized in the period they become known. |
Accounts Receivable Management estimates allowances for collectability related to
its accounts receivable balances. These allowances are based on the customer relationships, the
aging and turns of accounts receivable, credit worthiness of customers, credit concentrations
and payment history. Managements estimates include providing for 100 percent of specific
customer balances when it is deemed probable that the balance is uncollectable. Management
estimates the allowance for doubtful accounts by analyzing accounts receivable balances by age,
applying historical trend rates to the most recent 12 months sales, less actual write-offs to
date. Although management monitors collections and credit worthiness, the inability of a
particular customer to pay its debts could impact collectability of receivables and could have
an impact on future revenues if the customer is unable to arrange other financing. Management
does not believe these conditions are reasonably likely to have a material impact on the
collectability of its receivables or future revenues. Recoveries of accounts receivables
previously written off are recorded when received. Credit terms to customers in the Contract
Manufacturing segment are generally net 30 days. Credit terms to customers in the Business
Imaging segment are generally discounted net 30 terms. |
Inventories Inventories are carried at the lower of cost or market, with cost determined
under the first-in, first-out (FIFO) method of inventory valuation. The Company estimates
reserves for inventory obsolescence and shrinkage based on its judgment of future realization. |
Property, Plant, and EquipmentProperty, 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 10 years for machinery and equipment, 3 to 5 years for computer equipment and software, 5 to
7 years for furniture and fixtures, and the shorter of the estimated useful life or the lease
term for leasehold improvements. |
F-7
Impairment of Long-Lived AssetsImpairment of long-lived assets is reviewed in accordance with
Accounting Standards Codification (ASC) 360-10. The Company evaluates the recoverability of
the recorded amount of long-lived assets whenever events or changes in circumstances indicate
that the recorded amount of an asset may not be fully recoverable. An impairment is assessed
when the undiscounted expected future cash flows derived from an asset are less than its
carrying amount. If an asset is determined to be impaired, the impairment to be recognized is
measured as the amount by which the recorded amount of the asset exceeds its fair value. Assets
to be disposed of are reported at the lower of the recorded amount or fair value less cost to
sell. The Company determines fair value using discounted future cash flow analysis or other
accepted valuation techniques. |
Goodwill The Company tests goodwill annually at the reporting unit level for impairment as of
June 30. The operating segments herein also represent the Companys reporting units for
goodwill purposes. The Company uses a discounted cash flow analysis to estimate reporting unit
fair values and also considers multiples of relevant companies. In determining the fair values
of the reporting units, the Company was required to make certain assumptions and cannot predict
what future events may occur that could adversely affect the reported value of its goodwill. |
Management has completed the Companys annual impairment test and determined there were no
changes in the carrying amount of goodwill by reporting unit at June 30, 2011. However, there
can be no assurance that valuation multiples will not decline, growth rates will not be lower
than expected, discount rates will not increase, or the projected cash flows of the individual
reporting units will not decline. The Company prepared the discounted cash flow analysis in
the same manner as in prior years. The Company further updated all significant assumptions in
light of current market and regulatory conditions. The key assumptions used in preparing the
discounted cash flow analysis were (1) projected cash flows, (2) discount rates, and (3)
expected long term growth rates. Because each of the reporting units has distinct
characteristics, the Company developed these assumptions separately. Any variance in the
underlying assumptions could have a material impact on the evaluation of goodwill impairment.
These assumptions included the Companys actual operating results, future business plans,
economic projections and market data, as well as estimates by its management regarding future
cash flows and operating results. For example, lower than expected growth or margins or an
increase to the discount rate due to changes in risk premiums or other factors may suggest that
an impairment has occurred under Step 1 and require the Company to proceed to Step 2 to measure
the fair value of assets and liabilities of the reporting units. |
At the annual measurement date of June 30, 2011, the estimated fair value of Contract
Manufacturing exceeded its carrying value by approximately 96%. The estimated fair value of
Business Imaging exceeded its carrying value by approximately 6% at June 30, 2011. The current
discount rate would need to increase by 5.4% for Contract Manufacturing and increase by 0.5%
for Business Imaging before the Company would be required to proceed to Step 2. The results of
the Business Imaging test reflect an increase in paper costs during 2011 that the segment has
not been able to pass on through sales price increases; management believes this is a temporary
detriment to margins. Management plans to increase sales prices over the next twelve months to
recover this temporary decrease in margins and expects to sustain these margins in future
periods. |
The Company recognizes that its common stock regularly trades below book value per share and
will continue to monitor the relationship of its market capitalization to both its book value
and tangible book value. While management plans to return the Companys business fundamentals
to levels that support the book value per share, there is no assurance that the plan will be
successful, or that the market price of the common stock will increase to such levels in the
foreseeable future. |
During fiscal year 2011, the Company changed its annual goodwill measurement date from June 30
to July 1. The assessment was performed as of June 30, 2011 and an updated assessment was
performed as of July 1, 2011. The assessment included comparing the carrying amount of net
assets of each reporting unit to its respective implied fair value as of each date.
|
F-8
Goodwill by reporting unit is: |
Contract | Business | |||||||||||
Manufacturing | Imaging | Total | ||||||||||
$ | 4,281,759 | $ | 2,929,816 | $ | 7,211,575 | |||||||
Income TaxesIncome taxes are provided for the tax effects of transactions reported in the
consolidated financial statements and consist of taxes currently due, if any, plus deferred
taxes related primarily to differences between the basis of assets and liabilities for
financial and income tax reporting. Deferred tax assets and liabilities represent the future
tax return consequences of those differences that will either be deductible or taxable when the
assets and liabilities are recovered or settled. Deferred tax assets will include recognition
of operating losses that are available to offset future taxable income and tax credits that are
available to offset future income taxes. When applicable, valuation allowances are recognized
to limit recognition of deferred tax assets where appropriate. Such allowances may be reversed
when circumstances provide evidence that the deferred tax assets will more likely than not be
realized. |
The Company recognizes in its financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the technical merits of
the position. When and if applicable, potential interest and penalty costs are accrued as
incurred, with expense being recognized as income tax expense in the statement of operations.
No expense for interest and penalties was recognized for the years ended September 30, 2011 and
2010. |
RevenuesThe Company only has one type of revenue recognition activity which recognizes
revenue when title and risk of loss transfers to the customer and there is evidence of an
agreement and collectibility of consideration to be received is reasonably assured, all of
which generally occur at the time of shipment. Sales are recorded net of sales returns and
allowances. Shipping and handling fees billed to customers are recorded as revenue and costs
incurred for shipping and handling are recorded in cost of sales. Amounts related to raw
materials provided by customers are excluded from net sales and cost of sales. |
Stock-Based CompensationThe Company has an incentive stock plan under which the Board of
Directors may grant non-qualified stock options to employees. Additionally, the Company has a
Non-Qualified Stock Option Plan for Non-Employee Directors, under which options are available
for grant. |
The options have an exercise price equal to the fair market value of the underlying stock at
the date of grant. Employee options vest ratably over a three-year period and non-employee
director options vest immediately. Options issued under these plans generally expire ten years
from the date of grant. |
Earnings Per ShareBasic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share includes common equivalent shares from
dilutive stock options outstanding during the year, the effect of which was zero shares in
fiscal 2011 and 2010, respectively. During fiscal 2011 and 2010, options to purchase 348,300
shares, and 342,650 shares, respectively, were excluded from the diluted earnings per share
computation, as the effects of such options would have been anti-dilutive.
|
F-9
Financial InstrumentsFinancial instruments consist of cash, receivables, payables, debt, and
letters of credit. Their carrying values are estimated to approximate their fair values unless
otherwise indicated due to their short maturities, variable interest rates and comparable
borrowing costs for equipment loans. |
Recently Issued Accounting Standards The Financial Accounting Standards Board (FASB) has
issued Accounting Standards Update (ASU) No. 2011-08, Intangibles Goodwill and Other
(Topic 350): Testing Goodwill for Impairment. This ASU gives an entity the option in its
annual goodwill impairment test to first assess revised qualitative factors to determine
whether it is more likely than not (a likelihood of more than 50%) that the fair value of a
reporting unit is less than its carrying amount (qualitative assessment). If it is more
likely than not the fair value of a reporting unit is less than its carrying amount, an entity
would not be required to perform the existing two-step impairment test. The amendments to
Topic 350 are effective for annual and interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011. The Company does not believe the adoption of ASU
2011-08 will have a material effect on its consolidated financial statements. |
2. | ACCOUNTS RECEIVABLE |
Accounts receivable are stated net of allowances for doubtful accounts of $128,000 and $64,000
at September 30, 2011 and 2010, respectively. Amounts due from two multinational consumer
products customers of the Contract Manufacturing segment represent 45% and 53% of total
accounts receivable at September 30, 2011 and 2010, respectively. |
3. | INVENTORIES |
Inventories at September 30, 2011 and 2010, consist of the following: |
2011 | 2010 | |||||||
Raw materials |
$ | 10,908,178 | $ | 11,368,089 | ||||
Finished goods |
3,292,398 | 2,961,768 | ||||||
Total inventories |
$ | 14,200,576 | $ | 14,329,857 | ||||
Finished goods inventories are stated net of allowance for inventory obsolescence and shrinkage
of $393,000 and $356,000 at September 30, 2011 and 2010, respectively. |
F-10
4. | PROPERTY, PLANT, AND EQUIPMENT |
Property, plant, and equipment at September 30, 2011 and 2010, consist of the following: |
2011 | 2010 | |||||||
Land and land improvements |
$ | 660,324 | $ | 660,324 | ||||
Buildings |
10,160,396 | 9,897,423 | ||||||
Leasehold improvements |
766,395 | 766,395 | ||||||
Machinery and equipment |
32,082,618 | 30,497,478 | ||||||
Computer equipment and software |
5,805,435 | 5,809,001 | ||||||
Furniture and fixtures |
571,566 | 571,616 | ||||||
Vehicles |
44,453 | 44,206 | ||||||
50,091,187 | 48,246,443 | |||||||
Less accumulated depreciation and amortization |
33,072,461 | 30,233,664 | ||||||
Net depreciated value |
17,018,726 | 18,012,779 | ||||||
Construction in progress |
8,280 | 627,484 | ||||||
Property, plant, and equipmentnet |
$ | 17,027,006 | $ | 18,640,263 | ||||
F-11
5. | REVOLVING LINE OF CREDIT AND NOTE PAYABLE |
The Company amended its credit agreement effective September 30, 2011 to extend its termination
date to January 31, 2013 and modified the required levels of after tax net income (or loss)
under its financial covenants for periods commencing September 30, 2011 and thereafter. The
amount available for borrowing under the revolving line of credit facility is $10.0 million.
The Companys revolving line of credit is classified as a current liability on the accompanying
balance sheets because provisions in the credit agreement include deposit account requirements
and a material adverse effect covenant which is subjective in nature. |
Borrowings under the new credit facility bear interest at a rate equal to LIBOR plus 2.50%.
LIBOR was 0.23% and 0.26% at September 30, 2011 and 2010, respectively. The Company is
required to pay a non-usage fee of .50% per annum on the unused portion of the facility.
Borrowings under the Companys revolving line of credit facility were $6,449,133 and $4,476,736
at September 30, 2011 and 2010, respectively. |
Availability under the facility is based upon specified percentages of eligible accounts
receivable and inventory. The credit agreement is unsecured. If the Company fails to meet a
specified funded debt to EBITDA ratio for two consecutive fiscal quarters, the Companys lender
will have the right to take a security interest in the Companys accounts receivables and
inventory. The credit agreement contains certain covenants, including requirements to maintain
a minimum tangible net worth and net income (or net loss) within specified levels. |
As of September 30, 2011, the Company had approximately $3.6 million available under the $10.0
million revolving line of credit facility. |
Tufco LP is the borrower under the credit agreement. Tufco LLC is an affiliated guarantor
and is 100% owned by the parent company, Tufco Technologies, Inc., which is also a guarantor.
Under the credit agreement, Hamco Manufacturing and Distributing LLC, a subsidiary of Tufco LP,
is also a guarantor. All guarantees are full and unconditional, as well as joint and several.
The underlying borrowings are not registered securities. |
In June, 2010, the Company entered into a long-term note for the purchase of a W&H 8-color
press for $1.3 million, previously accounted for as an operating lease, which is being shown as
a supplemental non-cash acquisition in the statement of cash flows. The note which has a
five-year term, bears interest at a rate of 5.75% per annum with payments, including principal
and interest, of approximately $26,000 per month. The note is collateralized by the press with
a net book value of $1,012,500 as of September 30, 2011. |
Future principal payments under the five-year note at September 30, 2011, are as follows: |
2012 |
$ | 259,017 | ||
2013 |
274,309 | |||
2014 |
290,504 | |||
2015 |
203,137 | |||
Total |
$ | 1,026,967 | ||
F-12
6. | INCOME TAXES |
The tax effects of significant items composing the Companys net deferred tax liability as of
September 30, 2011 and 2010, are as follows: |
2011 | 2010 | |||||||
Deferred tax assets: |
||||||||
Valuation allowances for accounts receivable
and inventoriesnot currently deductible |
$ | 233,296 | $ | 156,745 | ||||
Inventory costs capitalized for tax purposes |
80,898 | 42,052 | ||||||
Vacation and severance accrualsnot currently deductible |
85,084 | 85,084 | ||||||
Other accrualsnot currently deductible |
107,600 | 85,272 | ||||||
Net operating loss and tax credit carryforwards |
1,470,177 | 1,043,777 | ||||||
Stock compensation |
167,134 | 147,952 | ||||||
Total gross deferred tax assets |
2,144,189 | 1,560,882 | ||||||
Deferred tax liabilities: |
||||||||
Basis difference on property and equipment |
2,633,117 | 2,360,452 | ||||||
Basis difference on goodwill |
1,092,821 | 1,092,821 | ||||||
Total gross deferred tax liabilities |
3,725,938 | 3,453,273 | ||||||
Net deferred tax liability |
$ | 1,581,749 | $ | 1,892,391 | ||||
Net deferred tax assets and liabilities are classified in the accompanying consolidated balance
sheets at September 30, 2011 and 2010, as follows: |
2011 | 2010 | |||||||
Current deferred tax assets |
$ | 503,683 | $ | 364,680 | ||||
Noncurrent deferred tax liability |
2,085,432 | 2,257,071 | ||||||
Net deferred tax liability |
$ | 1,581,749 | $ | 1,892,391 | ||||
As of September 30, 2011, the Company had federal and state net operating loss carryforwards of
approximately $3,301,000 and $2,237,000, respectively, for income tax purposes through 2029 for
federal and 2021 for state. The Company has federal and state tax credit carryforwards of
approximately $234,000 as of September 30, 2011. |
F-13
The components of income tax (benefit) expense are as follows: |
2011 | 2010 | |||||||
Current tax (benefit): |
||||||||
Federal |
$ | 33,867 | $ | 32,474 | ||||
State |
11,025 | 59,236 | ||||||
Total |
44,892 | 91,710 | ||||||
Deferred tax (benefit): |
||||||||
Federal |
(271,369 | ) | (325,230 | ) | ||||
State |
(39,272 | ) | (12,290 | ) | ||||
Total |
(310,641 | ) | (337,520 | ) | ||||
Income tax (benefit) |
$ | (265,749 | ) | $ | (245,810 | ) | ||
Income tax (benefit) varies from the amount determined by applying the applicable statutory
income tax rates to pretax income as follows: |
2011 | 2010 | |||||||
Federal income taxes computed at
statutory rates |
$ | (242,238 | ) | $ | (224,063 | ) | ||
State income taxesnet of federal tax benefit |
(18,643 | ) | 30,985 | |||||
Other nondeductibles |
7,360 | 5,291 | ||||||
Other |
(12,228 | ) | (58,023 | ) | ||||
Income tax (benefit) |
$ | (265,749 | ) | $ | (245,810 | ) | ||
At September 30, 2011 and 2010, the Company had no material unrecognized tax benefits. The
Company files tax returns in all appropriate jurisdictions, which include a federal tax
return and all required state jurisdictions. Open tax years for all jurisdictions are fiscal
years 2008 through 2011. |
F-14
7. | COMMITMENTS AND CONTINGENCIES |
LeasesThe Company leases facilities in Green Bay, Wisconsin, from a partnership composed of
certain current and former stockholders. In November 2006, the Company entered into a new lease
with the partnership that expires in March 2013, which is classified as an operating lease and
requires monthly rental payments of $17,070 which increase 1.65% every twelve months. Rental
expense under the related party lease totaled $216,923 for fiscal 2011 and $213,402 for fiscal
2010, respectively. On the expiration date there is an option for an additional five-year term
to be negotiated. |
The Company also leases other facilities and equipment under operating leases. Office and
warehouse 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, 2011, are as follows: |
2012 |
$ | 605,740 | ||
2013 |
452,381 | |||
2014 |
299,439 | |||
2015 |
276,226 | |||
2016 |
234,000 | |||
Thereafter |
1,029,000 | |||
Total |
$ | 2,896,786 | ||
Rental expense for all operating leases totaled $713,892 and $1,002,684 for the years ended
September 2011 and 2010, respectively. |
CommitmentsAs of December 16, 2011, the Company had unconditional purchase obligations of
approximately $1.2 million relating to equipment which was purchased to support the Companys
participation in the disposable nonwovens wipes market. |
LitigationThe Company is subject to lawsuits, investigations, and potential claims arising
out of the ordinary conduct of its business. The Company is not currently involved in any
litigation. |
8. | PROFIT SHARING SAVINGS AND INVESTMENT PLAN |
The Company has a defined contribution 401(k) plan covering substantially all employees. The
Company may make annual contributions at the discretion of the board of directors. In addition,
the Company may match certain amounts of an employees contribution. The Company has currently
suspended contributions to the plan. Expenses relating to the defined contribution 401(k) plan
totaled zero for fiscal 2011 and 2010, respectively. |
F-15
9. | STOCKHOLDERS EQUITY |
Non-voting Common Stock and Preferred StockAt September 30, 2011 and 2010, the Company has
authorized and unissued 2,000,000 shares of $.01 par value non-voting common stock and
1,000,000 shares of $.01 par value preferred stock. |
Stock Compensation ArrangementsThe 2003 Non-Qualified Stock Option Plan, the (2003 Plan)
reserves 300,000 shares of common stock for grants to selected employees through April 30,
2013, and provides that the price and exercise period be determined by the board of directors
which should be at least equal to fair value at the date of grant. Options vest primarily over
three years and expire 5 to 10 years from date of grant. During fiscal 2011 and 2010, options
to purchase 22,000 shares, and 37,000 shares, respectively, of voting common stock were
granted. |
The 2004 Non-Employee Director Stock Option Plan (2004 Plan) for non-employee members of the
board of directors reserves 150,000 shares of common stock for grants through March 2014 and
provides that the exercise price be at least equal to fair value at the date of grant. Options
are exercisable immediately and for a period of 10 years. During fiscal years 2011 and 2010,
options to purchase 22,000 and 18,000 shares, respectively, of voting common stock were granted
under the 2004 Plan. |
The Company estimates fair value on the date of grant using the Black-Scholes option valuation
model. The Company uses historical data regarding stock option exercise behaviors to estimate
the expected term of options granted based on the period of time that options granted are
expected to be outstanding. Compensation expense is recognized only on awards expected to vest.
Expected volatilities are based on the historical volatility of the Companys stock. The
expected dividend yield of zero is based on the Companys historical dividend payments and
anticipated future payments. The risk-free interest rate is based on the U.S. Treasury yield
curve in effect on the grant date for the length of time corresponding to the expected term of
the option. |
For the years ended September 30, 2011 and 2010, the total stock compensation expense
recognized by the Company was $51,425 and $76,807, respectively. There was $76,624 of
unrecognized compensation cost as of September 30, 2011, which will be recognized over a
remaining weighted average period of three years. |
F-16
A summary of the stock option activity under the Companys share-based compensation plans for the
years ended September 30, 2011 and 2010 is presented below:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Shares | Price | Term | Value | |||||||||||||
Outstanding at September 30, 2009 |
296,650 | $ | 6.46 | |||||||||||||
New grants |
55,000 | 3.55 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited or expired |
(9,000 | ) | 10.00 | |||||||||||||
Outstanding at September 30, 2010 |
342,650 | $ | 5.90 | |||||||||||||
New grants |
44,000 | 3.72 | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited or expired |
(38,350 | ) | 6.32 | |||||||||||||
Outstanding at September 30, 2011 |
348,300 | $ | 5.57 | 4.9 | $ | 18,545 | ||||||||||
Exercisable at September 30, 2011 |
304,133 | $ | 5.87 | 4.3 | $ | 8,342 | ||||||||||
The weighted average grant date fair value of options granted during fiscal 2011 and 2010 was
estimated at $2.49, and $2.43 per share, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 2011 and 2010:
2011 | 2010 | |||||||
Risk-free interest rate |
0.33 | % | 0.63 | % | ||||
Expected volatility |
123.4 | % | 124.9 | % | ||||
Dividend yield |
0.0 | % | 0.0 | % | ||||
Expected option life, standard option (years) |
2.5 | 2.7 |
In fiscal 2011 and 2010, no employee stock options were exercised. The aggregate
intrinsic value in the table above is based on the Companys closing stock price of $3.69 on
the last business day of the year ended September 30, 2011. The realized tax benefit is
recognized, when material, as an increase to additional paid-in capital or a decrease to income
tax expense with an offset to deferred tax assets, depending on the accumulation of windfalls
and shortfalls. |
F-17
10. | 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 which was initially set to expire in January 2004, and is
thereafter automatically renewable on an annual basis if not terminated by either party. The
agreement calls for an initial annual fee of $210,000 with annual increases of 5% plus
reimbursement of reasonable out-of-pocket expenses. Consulting expense was $451,134 and
$429,652 for fiscal 2011 and 2010, respectively. |
As discussed in footnote 7 Commitments and Contingencies, the Company leases facilities from
a partnership composed of current and former stockholders. |
11. | MAJOR CUSTOMER AND SEGMENT INFORMATION |
Two significant customers of the Contract Manufacturing segment are multinational consumer
products companies with whom the Company has confidentiality and non-disclosure agreements.
They accounted for the following percentage of total sales: |
2011 | 2010 | |||||||
Contract Manufacturing segment |
||||||||
Customer A |
31 | % | 30 | % | ||||
Customer B |
19 | % | 20 | % |
The current manufacturing contract with Customer A expires April 2012 and the current
manufacturing contract with Customer B expires June 2013. |
The Company manufactures and distributes custom paper-based and nonwoven products, and provides
contract manufacturing, specialty printing and related services on these types of products. The
Company separates its operations and prepares information for management use by the market
segment aligned with the Companys products and services. Corporate costs, such as interest
income, interest expense and income tax (benefit) expense are recorded under the Corporate and
Other segment. Such market segment information is summarized below. The Contract Manufacturing
segment provides services to multinational consumer products companies while the Business
Imaging segment manufactures and distributes printed and unprinted business imaging paper
products for a variety of business needs. |
Substantially all of the Companys revenues are attributed to domestic external customers.
There are no long-lived assets located outside of the United States. |
F-18
Contract | Business | Corporate | ||||||||||||||
Fiscal 2011 | Manufacturing | Imaging | and Other | Consolidated | ||||||||||||
Net sales |
$ | 84,492,793 | $ | 25,413,661 | $ | | $ | 109,906,454 | ||||||||
Gross profit |
4,017,383 | 1,226,473 | | 5,243,856 | ||||||||||||
Operating income (loss) |
2,351,702 | (23,800 | ) | (2,814,672 | ) | (486,770 | ) | |||||||||
Depreciation and amortization
expense |
2,783,444 | 131,108 | 568 | 2,915,120 | ||||||||||||
Capital expenditures |
963,313 | 338,550 | | 1,301,863 | ||||||||||||
Assets: |
||||||||||||||||
Inventoriesnet |
$ | 11,010,125 | $ | 3,190,451 | $ | | $ | 14,200,576 | ||||||||
Property, plant, and
equipmentnet |
14,977,893 | 2,046,816 | 2,297 | 17,027,006 | ||||||||||||
Accounts receivable and other
(including goodwill) |
16,837,134 | 6,568,152 | 648,029 | 24,053,315 | ||||||||||||
Total assets |
$ | 42,825,152 | $ | 11,805,419 | $ | 650,326 | $ | 55,280,897 | ||||||||
Contract | Business | Corporate | ||||||||||||||
Fiscal 2010 | Manufacturing | Imaging | and Other | Consolidated | ||||||||||||
Net sales |
$ | 66,237,969 | $ | 24,375,882 | $ | | $ | 90,613,851 | ||||||||
Gross profit |
2,882,747 | 2,023,906 | | 4,906,653 | ||||||||||||
Operating income (loss) |
1,287,323 | 751,190 | (2,547,506 | ) | (508,993 | ) | ||||||||||
Depreciation and amortization
expense |
2,548,270 | 165,131 | 2,012 | 2,715,413 | ||||||||||||
Capital expenditures |
2,027,701 | 86,105 | | 2,113,806 | ||||||||||||
Assets: |
||||||||||||||||
Inventoriesnet |
$ | 11,096,525 | $ | 3,233,332 | $ | | $ | 14,329,857 | ||||||||
Property, plant, and
equipmentnet |
16,798,025 | 1,839,374 | 2,864 | 18,640,263 | ||||||||||||
Accounts receivable and other (including goodwill) |
15,333,831 | 6,246,288 | 524,874 | 22,104,993 | ||||||||||||
Total assets |
$ | 43,228,381 | $ | 11,318,994 | $ | 527,738 | $ | 55,075,113 | ||||||||
F-19