SECURITIES AND EXCHANGE COMMISSION
Washington, DC
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
----------
Commission file number 0-21018
TUFCO TECHNOLOGIES, INC.
Delaware 39-1723477
- ---------------------------------- -------------------------
(State of other jurisdiction of (IRS Employer ID No.)
incorporation of organization)
4800 Simonton Road, Dallas, Texas 75244
-------------------------------------------
(Address of principal executive offices)
(972) 789-1079
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each or the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 13, 2002
----- ---------------------------
Common Stock, par value $0.01 per share 4,627,844
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<Table>
<Caption>
Page
Number
------
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2002 and September 30, 2001 3
Condensed Consolidated Statements of Operations for the three
months and six months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II: OTHER INFORMATION 19
SIGNATURES 20
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
March 31, September 30,
2002 2001
------------- -------------
Assets
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 860,311 $ 521,453
Restricted cash .............................................. 33,019 32,739
Accounts receivable, net ..................................... 11,292,151 11,231,668
Inventories .................................................. 7,343,347 9,063,426
Prepaid expenses and other current assets .................... 808,631 806,388
Deferred income taxes ........................................ 633,729 633,729
Income taxes receivable ...................................... 99,029 --
------------- -------------
Total current assets .................................... 21,070,217 22,289,403
PROPERTY, PLANT AND EQUIPMENT-Net ............................... 17,046,074 19,203,899
GOODWILL -Net ................................................... 10,345,213 16,745,213
OTHER ASSETS- Net ............................................... 600,987 705,951
------------- -------------
TOTAL ........................................................... $ 49,062,491 $ 58,944,466
============= =============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 7,771,432 $ 9,271,432
Accounts payable ............................................. 4,275,495 3,395,364
Accrued payroll, vacation and payroll taxes .................. 1,126,106 1,347,706
Other current liabilities .................................... 916,880 1,166,225
Income taxes payable ......................................... -- 416,328
------------- -------------
Total current liabilities ............................... 14,089,913 15,597,055
LONG-TERM DEBT- Less current portion ............................ 1,804,434 3,188,985
DEFERRED INCOME TAXES ........................................... 373,179 2,104,882
STOCKHOLDERS' EQUITY:
Common Stock; $.01 par value; 9,000,000 shares authorized;
4,706,341 shares issued .................................. 47,063 47,063
Additional paid-in capital ................................... 25,088,631 25,088,631
Retained earnings ............................................ 8,400,509 13,808,727
Treasury stock, 78,497 common shares, at cost ................ (534,045) (534,045)
Stock purchase plan notes .................................... (157,247) (280,757)
Accumulated other comprehensive loss, net of tax ............. (49,946) (76,075)
------------- -------------
Total stockholders' equity .............................. 32,794,965 38,053,544
------------- -------------
TOTAL ........................................................ $ 49,062,491 $ 58,944,466
============= =============
</Table>
See notes to condensed consolidated financial statements.
3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
March 31, March 31,
-------------------------------- --------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
NET SALES ................................... $ 18,406,725 $ 21,858,024 $ 35,670,387 $ 38,628,016
COST OF SALES ............................... 16,046,916 18,498,652 31,951,868 34,740,214
------------- ------------- ------------- -------------
GROSS PROFIT ................................ 2,359,809 3,359,372 3,718,519 3,887,802
OPERATING EXPENSES:
Selling, general and administrative ......... 1,962,968 1,719,106 3,787,769 3,380,302
Amortization of goodwill .................... -- 149,128 -- 298,256
Employee severance costs .................... 201,730 -- 209,324 --
Facility restructuring costs ................ 544,222 -- 544,222 --
Gain on asset sales ......................... (28,139) (8,562) (28,318) (147,872)
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) ..................... (320,972) 1,499,700 (794,478) 357,116
OTHER INCOME (EXPENSE):
Interest expense ......................... (114,794) (273,813) (259,678) (510,208)
Interest and other income ................ 2,894 19,772 23,019 49,556
------------- ------------- ------------- -------------
INCOME(LOSS)BEFORE INCOME TAXES ............. (432,872) 1,245,659 (1,031,137) (103,536)
INCOME TAX EXPENSE (BENEFIT) ................ (83,602) 477,026 (274,509) 36,874
------------- ------------- ------------- -------------
INCOME(LOSS)BEFORE ACCOUNTING CHANGE ........ (349,270) 768,633 (756,628) (140,410)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 2) ............................. -- -- (4,651,591) --
------------- ------------- ------------- -------------
NET INCOME (LOSS) ........................... $ (349,270) $ 768,633 $ (5,408,219) $ (140,410)
============= ============= ============= =============
BASIC EARNINGS (LOSS) PER SHARE:
Income (Loss) Before Accounting Change .. $ (0.07) $ 0.17 $ (0.16) $ (0.03)
Cumulative Effect of Accounting Change .. $ -- $ -- $ (1.01) $ --
------------- ------------- ------------- -------------
Net Income (Loss) ....................... $ (0.07) $ 0.17 $ (1.17) $ (0.03)
DILUTED EARNINGS (LOSS) PER SHARE:
Income (Loss) Before Accounting Change .. $ (0.07) $ 0.17 $ (0.16) $ (0.03)
Cumulative Effect of Accounting Change .. $ -- $ -- $ (1.01) $ --
------------- ------------- ------------- -------------
Net Income (Loss) ....................... $ (0.07) $ 0.17 $ (1.17) $ (0.03)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic ................................... 4,627,844 4,606,022 4,627,844 4,604,605
Diluted ................................. 4,627,844 4,616,660 4,627,844 4,604,605
</Table>
See notes to condensed consolidated financial statements.
4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
March 31,
----------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net Loss ..................................................... $(5,408,219) $ (140,410)
Noncash items in net loss:
Depreciation and amortization ............................. 1,566,215 1,854,888
Provision for bad debts ................................... 50,072 (24,093)
Gains on asset sales ...................................... (28,318) (147,872)
Asset impairment write-down ............................... 311,263 --
Cumulative effect of accounting change..................... 4,651,591 --
Changes in operating working capital:
Accounts receivable ....................................... (110,555) (92,124)
Inventories ............................................... 1,720,079 (2,856,999)
Prepaid expenses and other assets ......................... 133,232 (2,670)
Accounts payable .......................................... 880,131 292,393
Accrued and other current liabilities ..................... (470,945) 35,984
Income taxes payable/receivable ........................... (515,357) 27,418
----------- -----------
Net cash from (used in) operations ........................... 2,779,189 (1,053,485)
INVESTING ACTIVITIES
Additions to property, plant and equipment ................... (254,203) (1,303,661)
Proceeds from disposition of property, plant and equipment ... 581,716 167,804
Increase in advances to stockholders ......................... (49,359) (12,491)
(Increase) decrease in restricted cash ....................... (280) 965
----------- -----------
Net cash from (used in) investing activities ................. 277,874 (1,147,383)
FINANCING ACTIVITIES
Repayment of long-term debt .................................. (2,841,715) --
Issuance of long-term debt ................................... -- 2,489,284
Collections on Stockholder notes receivable ................. 123,510 25,195
Issuance of common stock ..................................... -- 64,125
----------- -----------
Net cash from (used in) financing activities ................. (2,718,205) 2,578,604
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 338,858 377,736
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................ 521,453 930,388
----------- -----------
End of period .................................................. $ 860,311 $ 1,308,124
=========== ===========
</Table>
See notes to condensed consolidated financial statements.
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Tufco Technologies, Inc., (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") and, in
the opinion of the Company, include all adjustments necessary for a fair
statement of results for each period shown (unless otherwise noted herein,
all adjustments are of a normal recurring nature). Operating results for
the three-month and sixth-month periods ended March 31, 2002 are not
necessarily indicative of results expected for the remainder of the year.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted
pursuant to such SEC rules and regulations. The Company believes that the
disclosures made are adequate to prevent the financial information given
from being misleading. The Company's condensed consolidated balance sheet
at September 30, 2001, was derived from the audited consolidated balance
sheet. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's latest Annual Report
on Form 10-K.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
SFAS No. 144 also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. SFAS No. 144
requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired.
SFAS No. 144 also broadens the presentation of discontinued operations to
include more disposal transactions. The Company is required to adopt SFAS
No. 144, effective October 1, 2001. The Company is in the process of
evaluating the impact, if any, the adoption of SFAS No. 144 will have on
its consolidated financial statements.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform to
the current presentation.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED).
2. GOODWILL
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective October 1, 2001. Under SFAS No. 142, goodwill and certain other
intangible assets are no longer systematically amortized but instead are
reviewed for impairment and any excess in carrying value over the estimated
fair value is charged to results of operations. The previous method for
determining impairment prescribed by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of",
utilized an undiscounted cash flow approach for the initial impairment
assessment, while SFAS No. 142 utilizes a fair value approach. The goodwill
impairment charge discussed below is the result of the change in the
accounting method for determining the impairment of goodwill.
In connection with the adoption of SFAS No. 142, the Company allocated
goodwill to each of its reporting units and tested this goodwill for
impairment as of the beginning of fiscal 2002. The Company allocated
goodwill to each of its reporting units and tested this goodwill for
impairment as of the beginning of fiscal 2002. The Company completed the
transitional goodwill impairment test during the second quarter of fiscal
2002. As a result, an impairment charge of $ 6.4 million ($4.7 million
after tax, or $1.01 per diluted share) was recorded related to goodwill at
certain Business Imaging and Paint Sundries reporting units. The fair value
of the reporting units was estimated using a combination of valuation
techniques including the expected present value of future cash flows and
prices of comparable businesses.
The charges have been recorded as the cumulative effect of accounting
change in the amount of $6.4 million ($4.7 million after tax, or $1.01 per
share) as of October 1, 2001 in the accompanying condensed consolidated
statements of operations.
The changes in the carrying amount of goodwill for the six months ended
March 31, 2002 are as follows:
<Table>
<Caption>
Contract Business Paint
Manufacturing Imaging Sundries TOTAL
------------- ------------- ------------- -------------
Balance as of September 30, 2001 ............ $ 4,281,759 $ 7,925,269 $ 4,538,185 $ 16,745,213
Impairment charge ........................... -- 4,995,453 1,404,547 6,400,000
------------- ------------- ------------- -------------
Balance as of March 31, 2002 ................ $ 4,281,759 $ 2,929,816 $ 3,133,638 $ 10,345,213
============= ============= ============= =============
</Table>
As required by SFAS No. 142, the results for periods prior to its adoption
have not been restated. The following table reconciles the reported net
income (loss) and basic and diluted earnings (loss) per share to that which
would have resulted for the three and six month periods ended March 31,
2001 if SFAS No. 142 had been adopted effective October 1, 2000.
<Table>
<Caption>
Three Months Six Months
Ended Ended
March 31, 2001 March 31, 2001
-------------- --------------
Net Income (Loss) as reported ......................... $ 768,633 $ (140,410)
Goodwill amortization, net of tax ............ 128,085 256,170
----------- -----------
Adjusted net income ................................... $ 896,718 $ 115,760
=========== ===========
</Table>
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED).
<Table>
Basic and Diluted earnings (loss) per share:
Add back goodwill amortization.............. $ 0.02 $ 0.06
As reported................................. 0.17 (0.03)
----------- -------------
Adjusted.................................... $ 0.19 $ 0.03
=========== =============
</Table>
3. INVENTORIES
Inventories consist of the following:
<Table>
<Caption>
March 31, September 30,
2002 2001
-------------- --------------
Raw materials ........... $ 5,102,994 $ 6,102,979
Finished goods .......... 2,240,353 2,960,447
-------------- --------------
Total inventories ....... $ 7,343,347 $ 9,063,426
============== ==============
</Table>
4. SEVERANCE AND RESTRUCTURING COSTS
During the three months ended March 31, 2002, the Company incurred
approximately $202,000 of employee severance related costs and
approximately $544,000 of costs (including approximately $311,000 related
to impaired asset write-downs) related to restructuring a component of the
Business Imaging sector. As of March 31, 2002, approximately $ 217,000 of
such costs have not been paid and are scheduled to be paid over the next 11
months.
5. COMPREHENSIVE LOSS
Comprehensive loss for the three months ended March 31, 2002 was
$(327,964)compared to comprehensive income of $ 725,811 for the three
months ended March 31, 2001.
Comprehensive loss, including the SFAS No. 142 impairment loss of $4.7
million, net of tax, for the six months ended March 31, 2002 was
$(5,382,090) compared to comprehensive loss of $(185,283) for the six
months ended March 31, 2001.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED).
6. SEGMENT INFORMATION
The Company manufactures and distributes paint sundry products, custom
paper-based non-woven products, and provides contract manufacturing,
specialty printing and related services on these types of products. The
Company does, however, separate its operations and prepare information for
management use by the market sectors aligned with the Company's products
and services. Such market sector information is summarized below. The
Contract Manufacturing sector provides services to large national consumer
products companies while the remaining sectors manufacture and distribute
products ranging from paper goods to paint sundries. Accounts receivable
and certain other assets historically have not been assignable to specific
sectors and, therefore, are included in the intersector column below.
<Table>
<Caption>
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
MARCH 31, 2002 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
------------------ ------------- ------------- ------------- ------------- -------------
Net Sales $ 7,239,643 $ 5,364,698 $ 5,802,384 $ -- $ 18,406,725
Gross Profit 1,302,321 462,858 594,630 -- 2,359,809
Operating Income (loss) 943,899 (296,038) 2,790 (971,623) (320,972)
Assets:
Inventories 1,367,140 2,159,716 3,816,491 -- 7,343,347
Property, plant and
equipment-net 8,733,415 4,372,864 1,733,422 2,206,373 17,046,074
Goodwill-net 4,281,759 2,929,816 3,133,638 -- 10,345,213
Accounts receivable
and other assets 14,327,857 14,327,857
------------- ------------- ------------- ------------- -------------
Total assets $ 14,382,314 $ 9,462,396 $ 8,683,551 $ 16,534,230 $ 49,062,491
============= ============= ============= ============= =============
</Table>
<Table>
<Caption>
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
MARCH 31, 2001 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
------------------ ------------- ------------- ------------- ------------- -------------
Net Sales $ 11,144,538 $ 5,546,168 $ 5,167,318 $ -- $ 21,858,024
Gross Profit 2,460,879 492,224 406,269 -- 3,359,372
Operating Income (loss) 2,000,700 140,116 (147,779) (493,337) 1,499,700
Assets:
Inventories 2,434,798 4,242,554 4,092,129 -- 10,769,481
Property, plant and
equipment-net 9,717,586 6,086,554 1,584,848 2,539,795 19,928,783
Goodwill-net 4,352,144 8,045,514 4,645,810 -- 17,043,468
Accounts receivable
and other assets 17,157,987 17,157,987
------------- ------------- ------------- ------------- -------------
Total assets $ 16,504,528 $ 18,374,622 $ 10,322,787 $ 19,697,782 $ 64,899,719
============= ============= ============= ============= =============
</Table>
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED).
<Table>
<Caption>
SIX MONTHS ENDED CONTRACT BUSINESS PAINT
MARCH 31, 2002 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
------------------ ------------- ------------- ------------- ------------- -------------
Net Sales $ 14,176,395 $ 10,485,853 $ 11,008,139 $ -- $ 35,670,387
Gross Profit 1,698,147 739,484 1,280,888 -- 3,718,519
Operating Income (loss 992,886 (371,315) 117,611 (1,533,660) (794,478)
</Table>
<Table>
<Caption>
SIX MONTHS ENDED CONTRACT BUSINESS PAINT
MARCH 31, 2002 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
------------------ ------------- ------------- ------------- ------------- -------------
Net Sales $ 18,264,713 $ 10,747,637 $ 9,615,666 $ -- $ 38,628,016
Gross Profit 2,257,105 879,355 751,342 -- 3,887,802
Operating Income (loss) 1,380,398 105,941 (319,963) (809,260) 357,116
</Table>
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL INFORMATION:
Tufco Technologies, Inc. has manufacturing operations in Green Bay, WI,
Dallas, TX, Newton, NC and Manning, SC as well as a sales office in St.
Louis, MO.
The Company, through its wholly owned subsidiaries, provides diversified
Contract Manufacturing and specialty printing services, manufactures and
distributes Business Imaging paper products and distributes Paint Sundry
products used in home improvement projects.
The Company normally operates at lower operating levels during the first
and second quarters of its fiscal year which ends September 30. This
occurs because of the seasonal demand for certain Contract Manufacturing
printed products displaying a holiday theme as well as products which
are used by customers in conjunction with end-of-year activities. These
products are normally shipped during the Company's fourth fiscal
quarter. Demand for its Paint Sundry products is generally lower during
the first and second fiscal quarters as cold weather restricts the
amount of new construction and remodeling projects that require the
Company's products. Point of sale Business Imaging products peak during
second and fourth quarters due to seasonal demand for products related
to end-of-year holiday activities and due to summer vacation activities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which require
the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and revenues and expenses during the periods
reported. Actual results could differ from those estimates. The Company
believes the following are the critical accounting policies which have
the most significant effect on the Company's reported results and
require the most difficult, subjective or complex judgments by
management. Unless otherwise noted, the Company has not made any changes
in estimates or assumptions that had a significant effect on the
reported amounts.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records allowances for doubtful accounts based on
customer-specific analysis, and general matters such as current
assessment of past due balances and economic conditions. Additional
allowances for doubtful accounts may be required if there is
deterioration in past due balances, if economic conditions are less
favorable than the Company has anticipated, or for customer-specific
circumstances such as bankruptcy.
EXCESS AND OBSOLETE INVENTORIES
The Company records allowances for excess and obsolete inventories based
on usage, estimated future demand and market conditions. Additional
allowances may be required if future demand or market conditions are
less favorable than the Company had projected.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of the carrying amount of
long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable. The
Company evaluates the recoverability of
11
IMPAIRMENT OF LONG-LIVED ASSETS -- (CONTINUED)
goodwill annually or more frequently if events or circumstances indicate
that the asset might be impaired. The Company applies judgment when
applying the impairment rules to determine when an impairment test is
necessary. Factors the Company considers which could trigger an
impairment review include significant underperformance relative to
historical operating results or forecasted operating results, a
significant decrease in the market value of an asset, a significant
change in the extent or manner in which an asset is used, and
significant negative industry or economic trends.
Impairment losses are measured as the amount by which the carrying value
of an asset exceeds its fair value. The Company is required to make
estimates of its future cash flows related to the asset subject to
review. These forecasts require assumptions about demand for the
Company's products and services, future market conditions and
technological developments. Significant and unanticipated changes to
these assumptions and discount rates could result in an impairment
charge in future periods.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS --CONTINUED
RESULTS OF OPERATIONS:
CONDENSED OPERATING DATA, PERCENTAGES OF NET SALES AND PERIOD-TO-PERIOD CHANGES
IN THESE ITEMS ARE AS FOLLOWS (DOLLARS IN THOUSANDS):
<Table>
<Caption>
Three Months Ended Period-to-Period Six Months Ended Period-to-Period
March 31, Change March 31, Change
------------------------ ------------------ ------------------------ -------------------
2002 2001 $ % 2002 2001 $ %
----------- ----------- ------- ------- ----------- ----------- ------- -------
Net Sales $ 18,407 $ 21,858 (3,451) -16 $ 35,670 $ 38,628 (2,958) -8
Gross Profit 2,360 3,359 (999) -30 3,719 3,888 (169) -4
12.8% 15.4% 10.4% 10.1%
Operating Expenses 2,681 1,859 822 44 4,513 3,531 982 28
14.6% 8.5% 12.7% 9.1%
Operating Income (321) 1,500 (1,821) -121 (794) 357 (1,151) -322
-1.7% 6.9% -2.2% 0.9%
Interest Expense 115 274 (159) -58 260 510 (250) -49
0.6% 1.3% 0.7% 1.3%
Income (Loss) Before
Accounting Change (349) 769 (1,118) -145 (757) (140) (617) 441
-1.4% 3.5% -2.1% -0.4%
Cumulative Effect of
Accounting Change -- -- (4,651) -- (4,651) 100
-13.0%
Net Income (Loss) $ (349) 759 (1,118) -145 (5,408) (140) (5,268) 3,762
-1.4% 3.5% -15.2% 0.4%
</Table>
The components of net sales and gross profit are summarized in the
table below (dollars in thousands):
<Table>
<Caption>
Three Months Ended
March 31,
----------------------------------------------------
2002 2001
----------------------- ----------------------- Period-to-Period Change
% of % of -----------------------
Net Sales Amount Total Amount Total $ %
--------- --------- -------- --------- -------- --------- ---------
Contract manufacturing and
printing $ 7,240 39% $ 11,145 51% -3,905 -35%
Business imaging paper products 5,365 29 5,546 25 -181 -3
Paint sundry products 5,802 32 5,167 24 635 12
--------- -------- --------- -------- --------- ---------
Net sales $ 18,407 100% $ 21,858 100% $ -3,451 -16%
========= ======== ========= ======== ========= =========
<Caption>
Period-to-Period Change
Margin Margin -----------------------
Gross Profit (loss) Amount % Amount % $ %
------------------- --------- -------- --------- -------- --------- ---------
Contract manufacturing and
printing $ 1,302 18% $ 2,461 22% -1,159 -47%
Business imaging paper products 463 9 492 9 -29 -6
Paint sundry products 595 10 406 8 189 47
--------- --------- --------- --------- --------- ---------
Gross profit $ 2,360 13% $ 3,359 15% $ -999 -30%
========= ========= ========= ========= ========= =========
</Table>
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
<Table>
<Caption>
Six Months Ended
March 31,
----------------------------------------------------
2002 2001
----------------------- ----------------------- Period-to-Period Change
% of % of -----------------------
Net Sales Amount Total Amount Total $ %
--------- --------- -------- --------- -------- --------- ---------
Contract manufacturing and
printing $ 14,176 40% $ 18,265 47% -4,089 -22
Business imaging paper products 10,486 29 10,748 28 -262 -2
Paint sundry products 11,008 31 9,615 25 1,393 14
--------- --------- --------- --------- --------- ---------
Net sales $ 35,670 100% $ 38,628 100% -2,958 -8
========= ========= ========= ========= ========= =========
<Caption>
Period-to-Period Change
Margin Margin -----------------------
Gross Profit (loss) Amount % Amount % $ %
------------------- --------- -------- --------- -------- --------- ---------
Contract manufacturing and
printing $ 1,698 12% $ 2,257 12% -559 -25
Business imaging paper products 740 7 879 8 -139 -16
Paint sundry products 1,281 12 752 8 529 70
--------- --------- --------- --------- --------- ---------
Gross profit $ 3,719 10% $ 3,888 10% -169 -4
========= ========= ========= ========= ========= =========
</Table>
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
NET SALES:
Net sales decreased $3.5 million (16%) to $18.4 million in second quarter of
fiscal 2002, when compared to this period last year, due to lower sales at the
Contract Manufacturing sector (down $3.9 million or 35%). The Contract
Manufacturing sector sales decline was mostly related to reduced product demand
from a major customer for which the Company manufactures and packages a variety
of consumer products. The lower sales to this customer was a reduction in volume
production related to the recent economic downturn as well as unit price
adjustments to the customer. Also, in the second quarter of fiscal 2001, the
Company's Contract Manufacturing sector received its last significant order from
a large manufacturer of wide-format printers and copiers before the customer's
decision to reassess its inventory stocking program and change suppliers.
Finally, during the second quarter of fiscal 2002, printing service net sales
declined in the Contract Manufacturing sector. Business Imaging sector product
sales declined $0.2 million or 3% due to competitive pricing and reduced point
of purchase sales which resulted from the economic downturn that has continued
from 2001. Net sales from the Paint Sundries segment increased $0.6 million
(12%) primarily the result of higher demand for certain new products in the
Paint Sundry sector.
GROSS PROFIT:
Gross profit decreased $1.0 million or 30% for second quarter of fiscal 2002
when compared to second quarter of fiscal 2001. This decrease came primarily
from the Contract manufacturing sector which decreased $1.2 million or 47%. As
discussed earlier, this was related to reduction in volume as well as unit price
adjustments to a major customer of the Contract Manufacturing sector. Margins
declined from 22% to 18% for second quarter of fiscal 2002 when compared to the
same period last year for the Contract Manufacturing sector. The largest factor
contributing to the decline in margin percentages was increased pass throughs of
raw material costs in certain Contract Manufacturing agreements which basically
contribute additional sales dollars with little or no margin dollar
contributions. Gross profit in the Paint Sundry sector increased $0.2 million
(47%), which was a result of cost savings from the consolidation of the
Company's St. Louis operations into the expanded Manning, South Carolina plant
in April of fiscal 2001 offset by higher than expected freight cost. The
Business Imaging sector's gross profit declined only slightly as a result of
lower sales and continued strong competition from numerous suppliers driving
prices down in this sector.
OPERATING EXPENSES:
Operating expenses increased $0.8 million (44%) for second quarter of fiscal
2002 when compared to the same period of fiscal 2001. This increase was the
result of expenses of $ 0.7 million relating to restructuring the Dallas, Texas
manufacturing facility, and for severance and related costs. These expenses were
partially offset as the result of implementation of SFAS 142 mentioned earlier,
in which the Company no longer records goodwill amortization expense which was
$0.1 million in the second quarter of fiscal 2001.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- CONTINUED
OPERATING INCOME:
Operating income declined $1.8 million to a loss of $0.3 million. This decline
was primarily related to the decrease in Contract Manufacturing sales discussed
earlier. Also discussed earlier, the increase of $0.7 million of restructuring
and severance operating expenses contributed to the operating loss. These losses
were partially offset by cost reductions achieved as a result of completing the
consolidation of the St Louis, Missouri operations into the Company's expanded
Manning, South Carolina plant. Additionally, as the result of implementation of
SFAS No. 142 mentioned earlier, the Company no longer records goodwill
amortization expense which was $0.1 million in the second quarter of fiscal
2001.
INTEREST EXPENSE:
Interest expense was $0.2 million lower compared to last year due to $2.0
million reduction in debt since second quarter of fiscal 2001 and lower interest
rates during second quarter of fiscal 2002.
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE:
The Company reported a net loss before accounting change of $0.3 million (per
share: $0.07-basic and diluted) for second quarter of fiscal 2002, versus net
income of $0.8 million (per share: $0.17-basic and diluted) for the same period
one year ago. The decline was mostly due to lower sales in the Contract
Manufacturing sector and severance and restructuring costs discussed earlier.
The Company reported a net loss of $5.0 million (per share: $1.08-basic and
diluted) for the six months ended March 31, 2002, of which $4.7 million net of
tax effects, or $1.01 per diluted share was recorded following the Company's
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" discussed
below.
ACCOUNTING CHANGE:
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". This standard requires that companies no longer amortize
goodwill and indefinite life intangible assets, such as trademarks. In addition,
this standard requires that companies evaluate all goodwill for impairment. Upon
completion of this evaluation, the Company recorded a charge in an amount of
$6.4 million ($4.7 million, net of income tax effects, or $1.01 per diluted
share) in fiscal 2002 for the goodwill recorded at the Business Imaging sector
and to a lesser extent to the Paint Sundries sector.
LIQUIDITY AND CAPITAL RESOURCES:
The Company generated $2.8 million in cash from operations through the first six
months of fiscal 2002, compared to $1.1 million of cash used in operations for
the same period last year. The net loss, plus non-cash items, aggregated $1.1
million, a decrease from $1.5 million for the same period last year. The Company
used $1.0 million to pay accrued liabilities and income taxes. Reductions in
inventories generated $1.7 million in cash flows and increases in accounts
payable generated $0.9 million.
Net cash from investing activities was $0.3 million through the second quarter
of fiscal 2002 which was due mostly to equipment sales as part of the Dallas,
Texas right sizing offset by $0.3 million from purchases of equipment.
Net cash used in financing activities was $2.7 million through the second
quarter of fiscal 2002 due to $2.8 million repayment of long-term debt offset by
$0.1 million decrease in key employee stock purchase plan notes.
16
LIQUIDITY AND CAPITAL RESOURCES-(CONTINUED):
As of May 13, 2002, the Company had approximately $7.0 million available under
its revolving credit line. According to the terms of its credit facility with
its lenders, the Company is required to maintain certain financial and
operational covenants. As of March 31, 2002, the Company is in compliance with
all of its debt covenants under the credit facility and has received consent
from its principal lenders to sell assets in excess of $0.1 million net book
value. The Company's revolving credit agreement matures in June 2002. The
Company has begun discussions with one of its principal lenders, as well as
other banks, to refinance its credit facilities. Accordingly, the revolving debt
of $6.0 million which matures in June 2002, is listed as current debt on the
balance sheet. The Company has received verbal confirmation that it has been
granted a 60-day extension of its revolving credit facility to provide
sufficient time for a refinancing of all bank credit facilities (if necessary)
and may incur additional charges in the third quarter if it chooses to refinance
all bank credit.
The Company intends to retain earnings to finance future operations and
expansion and does not expect to pay any dividends within the foreseeable
future. In addition, the Company's primary lender must approve the payment of
any dividends.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to the Company's exposure to interest rate risk,
foreign currency risk, commodity price risk and other relevant market risks is
contained on page 20 in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Company's Annual Report on
Form 10-K for the year ended September 30, 2001. Management believes that as of
May 13, 2002, there has been no material change to this information.
FORWARD LOOKING STATEMENTS:
Management's discussion of the Company's 2002 quarterly periods in comparison to
2001, contains forward-looking statements regarding current expectations, risks
and uncertainties for future periods. The actual results could differ materially
from those discussed here. As well as those factors discussed in this report,
other factors that could cause or contribute to such differences include, among
other items, cancellation of production agreements by significant customers,
material increases in the cost of base paper stock, competition in the Company's
product areas, or an inability of management to successfully reduce operating
expenses in relation to net sales without damaging the long-term direction of
the Company. Therefore, the condensed financial data for the periods presented
may not be indicative of the Company's future financial condition or results of
operations.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following summarizes the Annual Meeting highlights:
(a) The Annual Meeting of Shareholders of the Company was held on March
15, 2002.
(b) At the Annual Meeting, shareholders elected the following individuals
to the Board of Directors for one-year terms:
Director For Withheld
-------- --- --------
Robert J. Simon 3,601,642 171,525
Samuel J. Bero 3,718,252 54,915
C. Hamilton Davison, Jr. 3,717,852 55,315
Louis LeCalsey III 3,602,342 170,825
William J. Malooly 3,717,852 55,315
Seymour S. Preston, III 3,717,352 55,815
(c) The shareholders ratified the selection of Deloitte & Touche LLP as
independent auditors for the fiscal year ending September 30, 2002.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.15 Waiver, Consent and Fourth Amendment
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUFCO TECHNOLOGIES, INC.
Date: May 13, 2002 /s/ Louis LeCalsey, III
--------------------------------------------
Louis LeCalsey, III
President and Chief Executive Officer
Date: May 13, 2002 /s/ Michael B. Wheeler
--------------------------------------------
Michael B. Wheeler
Vice President and Chief Financial Officer
Date: May 13, 2002 /s/ Drew W. Cook
--------------------------------------------
Drew W. Cook
Chief Accounting Officer and Corporate
Controller
20
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NO. DESCRIPTION
------- -----------
10.15 Waiver, Consent and Fourth Amendment
</Table>