UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended December 31, 2002
-----------------
Commission file number 0-21018
TUFCO TECHNOLOGIES, INC.
Delaware 39-1723477
- --------------------------------- ---------------------
(State of other jurisdiction (IRS Employer ID No.)
of incorporation of organization)
PO Box 23500, Green Bay, WI 54305-3500
(Address of principal executive offices)
(920) 336-0054
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 126-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each or the issuer's
classes of common stock, as of the latest practicable date.
<Table>
<Caption>
Class Outstanding at February 13, 2003
----- --------------------------------
Common Stock, par value $0.01 per share 4,627,844
</Table>
1
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
December 31, 2002 and September 30, 2002 3
Condensed Consolidated Statements of Operations for the three
months ended December 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II: OTHER INFORMATION 17
SIGNATURES 18
</Table>
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
December 31, September 30,
2002 2002
------------ --------------
Assets
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 262,197 $ 251,346
Restricted cash .............................................. 100,000 100,000
Accounts receivable, net ..................................... 10,344,148 11,121,227
Inventories .................................................. 6,234,961 6,585,100
Prepaid expenses and other current assets .................... 2,017,401 743,281
Income tax receivable ........................................ 12,075 133,242
Deferred income taxes ........................................ 832,927 832,927
------------ --------------
Total current assets .................................... 19,803,709 19,767,123
PROPERTY, PLANT AND EQUIPMENT-Net ............................... 17,900,631 16,304,848
GOODWILL -Net ................................................... 10,345,213 10,345,213
OTHER ASSETS- Net ............................................... 706,165 749,959
------------ --------------
TOTAL ........................................................... $ 48,755,718 $ 47,167,143
============ ==============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Current portion of long-term debt ............................ $ 1,022,726 $ 922,726
Accounts payable ............................................. 4,671,431 5,279,556
Accrued payroll, vacation, and payroll taxes ................. 714,513 935,973
Other current liabilities .................................... 1,020,787 1,326,075
------------ --------------
Total current liabilities ............................... 7,429,457 8,464,330
LONG-TERM DEBT- Less current portion ............................ 7,670,379 5,233,882
DEFERRED INCOME TAXES ........................................... 668,163 660,640
STOCKHOLDERS' EQUITY:
Common Stock; $.01 par value; 9,000,000 shares authorized;
4,706,341 shares issued .................................. 47,063 47,063
Additional paid-in capital ................................... 25,088,631 25,088,631
Retained earnings ............................................ 8,571,266 8,404,112
Treasury stock, 78,497 common shares, at cost ................ (534,045) (534,045)
Stockholder notes receivable ................................. (157,246) (157,246)
Accumulated other comprehensive loss, net of tax ............. (27,950) (40,224)
------------ --------------
Total stockholders' equity .............................. 32,987,719 32,808,291
------------ --------------
TOTAL ........................................................ $ 48,755,718 $ 47,167,143
============ ==============
</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
December 31,
----------------------------
2002 2001
------------ ------------
NET SALES ........................................ $ 18,419,126 $ 17,263,662
COST OF SALES .................................... 16,188,996 15,904,952
------------ ------------
GROSS PROFIT ..................................... 2,230,130 1,358,710
OPERATING EXPENSES:
Selling, general and administrative .............. 1,769,783 1,824,800
Employee severance cost .......................... 46,284 7,594
Loss (gain) on asset sales ....................... 31,631 (179)
------------ ------------
OPERATING INCOME (loss) .......................... 382,432 (473,505)
OTHER INCOME (EXPENSE):
Interest expense .............................. (98,133) (144,884)
Interest and other income ..................... 4,555 20,124
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ................ 288,854 (598,265)
INCOME TAX EXPENSE (BENEFIT) ..................... 121,700 (190,907)
------------ ------------
INCOME (LOSS) BEFORE ACCOUNTING CHANGE ........... 167,154 (407,358)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ........... -- (4,651,591)
------------ ------------
NET INCOME (LOSS) ................................ $ 167,154 $ (5,058,949)
============ ============
EARNINGS (LOSS) PER SHARE:
Basic:
Income (loss) before accounting change ....... $ 0.04 $ (0.09)
Cumulative effective of accounting change .... -- (1.01)
------------ ------------
Net income (loss) ............................ $ 0.04 $ (1.10)
Diluted:
Income (loss) before accounting change ....... $ 0.04 $ (0.09)
Cumulative effective of accounting change .... -- (1.01)
------------ ------------
Net income (loss) ............................ $ 0.04 $ (1.10)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic ........................................ 4,627,844 4,627,844
Diluted ...................................... 4,627,844 4,627,844
</Table>
See notes to condensed consolidated financial statements.
4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
December 31,
----------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net Income (loss) ............................................ $ 167,154 $ (5,058,949)
Noncash items in net income (loss):
Depreciation and amortization ............................. 708,308 779,221
Provision for bad debts ................................... (200) 50,000
Loss (gain)on asset disposals-net ......................... 31,631 (179)
Cumulative effect of accounting change .................... -- 4,651,591
Changes in operating working capital:
Accounts receivable ....................................... 777,279 1,202,681
Inventories ............................................... 350,139 27,317
Prepaid expenses and other assets ......................... (319,562) 108,811
Accounts payable .......................................... (608,125) 1,019,297
Accrued and other current liabilities ..................... (526,747) (800,643)
Income taxes payable/receivable ........................... 121,167 (419,222)
------------ ------------
Net cash from operations ..................................... 701,044 1,559,925
INVESTING ACTIVITIES
Additions to property, plant and equipment ................... (2,367,347) (128,469)
Proceeds from disposals of property, plant and equipment ..... 31,625 716
Deposit made on purchases of equipment ....................... (901,000) --
Increase in advances to stockholders ......................... (9,764) (12,045)
Decrease in restricted cash .................................. -- 20,060
------------ ------------
Net cash used in investing activities ........................ (3,246,486) (119,738)
FINANCING ACTIVITIES
Repayment of long-term debt .................................. (193,182) (880,357)
Issuance of long-term debt ................................... 2,749,475 --
------------ ------------
Net cash from (used in) financing activities ................. 2,556,293 (880,357)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 10,851 559,830
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................ 251,346 521,453
------------ ------------
End of period .................................................. $ 262,197 $ 1,081,283
============ ============
</Table>
See notes to condensed consolidated financial statements.
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 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 period ended December 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, 2002, was derived
from the audited consolidated balance sheet. These condensed
consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto
included in the Company's latest Annual Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions". SFAS No. 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", to eliminate the
exception to consolidation for a subsidiary for which control is likely
to be temporary. SFAS No. 144 requires that one accounting model be
used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 also broadens
the presentation of discontinued operations to include more disposal
transactions. The Company adopted SFAS No. 144, effective October 1,
2002. Adoption of SFAS No. 144 did not have a material impact on the
Company's financial position or results of operations.
SFAS No. 146, "Accounting for Costs Associated with Exit of Disposal
Activities", which was issued by the FASB in July 2002, requiring
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 supercedes EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Cost
Incurred in a Restructuring)". SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December
31, 2002. Management does not believe that adoption of SFAS No. 146
will have a material impact on the Company's financial position or
results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" and
provides alternative methods of
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No.
148 amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements of the
effects of stock-based compensation. The interim disclosure
requirements of SFAS No. 148 are effective for periods beginning after
December 15, 2002. The Company's stock-based compensation related to
employees and non-employee directors is recognized using the intrinsic
value method in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and thus there is no
compensation expense for options granted with exercised prices equal to
the fair value of the Company's common stock on the date of the grant.
In November 2002, FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Guarantees of Indebtedness of Others". FIN No. 45 requires
that a guarantor must recognize, at the inception of a guarantee, a
liability for the fair value of the obligation that is has undertaken
in issuing a guarantee. FIN No. 45 also addresses the disclosure
requirements that a guarantor must include in its financial statements
for guarantees issued. The disclosure requirements in this
interpretation are effective for financial statements ending after
December 15, 2002. The initial recognition and measurement provisions
of this interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company has
no guarantees as defined in FIN No. 45.
RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to conform
to the current presentation.
EARNINGS PER SHARE
At December 31, 2002 and 2001, options representing 501,400 and 518,900
shares of common stock, respectively, were outstanding. For the
three-month period ended December 31, 2002 and 2001, options
representing 501,400 shares and 508,213 shares of stock, respectively,
were excluded from the diluted earnings per share calculations because
the exercise price exceeded the average market price of the Company's
stock for these periods.
2. GOODWILL
The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001. Under SFAS No. 142, goodwill and
certain other intangible assets are no longer systematically amortized
but instead are reviewed for impairment and any excess in carrying
value over the estimated fair value is charged to results of
operations. The previous method for determining impairment prescribed
by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", utilized an undiscounted
cash flow approach for the initial impairment assessment, while SFAS
No. 142 utilizes a fair value approach. The goodwill impairment charge
discussed below is the result of the change in the accounting method
for determining the impairment of goodwill.
In connection with the adoption of SFAS No. 142, the Company allocated
goodwill to each of its reporting units and tested this goodwill for
impairment as of the beginning of fiscal 2002. The Company completed
the transitional goodwill impairment test during the second quarter of
fiscal 2002. As a result, an impairment charge of $ 6.4 million ($4.7
million after tax, or $1.01 per diluted share) was recorded related to
goodwill at certain Business Imaging and Paint Sundries reporting
units. The fair value of the reporting units was estimated using a
combination of valuation techniques including the expected present
value of future cash flows and prices of comparable businesses.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
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.
Beginning fiscal 2003, goodwill will be tested for impairment on an
annual basis.
3. INVENTORIES
Inventories consist of the following:
<Table>
<Caption>
December 31, September 30,
2002 2002
------------ --------------
Raw materials ........... $ 4,429,146 $ 4,838,569
Finished goods .......... 1,805,815 1,746,531
------------ --------------
Total inventories ....... $ 6,234,961 $ 6,585,100
============ ==============
</Table>
4. SEVERANCE COSTS
For the three months ended December 31, 2002 severance cost was $46,284
compared to $7,594 for the same period last year. These costs are
related to the elimination of several salary positions.
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the three months ended December 31, 2002 was
$179,428 compared to comprehensive loss, including the SFAS No. 142
impairment loss of $4.7 million, net of tax, $ (5,054,126) for the
three months ended December 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
DECEMBER 30, 2002 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
Net Sales $ 6,666,759 $ 5,863,278 $ 5,889,089 $ -- $ 18,419,126
Gross Profit 797,781 692,225 740,124 -- 2,230,130
Operating Income (loss) 420,926 323,037 210,374 (571,905) 382,432
Assets:
Inventories 1,141,581 2,097,030 2,996,350 -- 6,234,961
Property, plant and
equipment-net 9,769,776 3,588,231 2,970,895 1,571,729 17,900,631
Goodwill-net 4,281,759 2,929,816 3,133,638 -- 10,345,213
Accounts receivable
and other assets 14,274,913 14,274,913
------------- ------------ ------------ ------------ ------------
Total assets $ 15,193,116 $ 8,615,077 $ 9,100,883 $ 15,846,642 $ 48,755,718
============= ============ ============ ============ ============
</Table>
<Table>
<Caption>
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
DECEMBER 31, 2001 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
Net Sales $ 6,936,752 $ 5,121,155 $ 5,205,755 $ -- $ 17,263,662
Gross Profit 395,826 276,626 686,258 -- 1,358,710
Operating Income (loss) 48,987 (75,277) 114,821 (562,036) (473,505)
Assets:
Inventories 1,368,232 2,862,128 4,805,749 -- 9,036,109
Property, plant and
equipment-net 8,965,191 5,440,115 1,773,531 2,373,773 18,552,610
Goodwill-net 4,281,759 2,929,816 3,133,638 -- 10,345,213
Accounts receivable
and other 14,873,553 14,873,553
------------- ------------ ------------ ------------ ------------
Total assets $ 14,615,182 $ 11,232,059 $ 9,712,918 $ 17,247,326 $ 52,807,485
============= ============ ============ ============ ============
</Table>
9
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,
Newton, NC and Manning, SC as well as a sales office in St. Louis, MO.
Information technology and accounting support personnel are located in
Dallas, TX.
The Company, through its wholly owned subsidiaries, provides
diversified Contract Manufacturing and specialty printing services,
manufactures and distributes Business Imaging paper products and
distributes Paint Sundry products used in home improvement projects.
The Company normally operates at lower operating levels during the
first and second quarters of its fiscal year which ends September 30.
This occurs because of the seasonal demand for certain Contract
Manufacturing printed products displaying a holiday theme as well as
products which are used by customers in conjunction with calendar year
end activities. These products are normally shipped during the
Company's fourth fiscal quarter. Demand for its Paint Sundry products
is generally lower during the first and second fiscal quarters as cold
weather restricts the amount of new construction and remodeling
projects that require the Company's products. Point-of-sale Business
Imaging products peak during second and fourth quarters due to seasonal
demand for products related to end-of-year holiday activities and due
to summer vacation activities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America 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.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with revenue terms.
Typically revenues are recognized as sales when goods are shipped and
title transfers to the customer.
TRADE AND NOTES RECEIVABLE
Management estimates allowances for collectibility related to its trade
accounts and note receivables. These allowances are based on the
customer relationships, the aging and turns of accounts receivable,
credit worthiness of customers, economic conditions, credit
concentrations and payment history. Although management monitors
collections and credit worthiness, the inability of a particular
customer to pay its debts could impact collectibility 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
collectibility of its receivables or future revenues.
10
TRADE AND NOTES RECEIVABLE-CONTINUED
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. 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. Management's estimates include providing for 100
percent of specific customer balances when it is deemed probable that
the balance is uncollectible. 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
evaluation. The Company estimates reserves for inventory obsolescence
and shrinkage based on its judgment of future demand and market
conditions. A large portion of the Company's inventory is saleable to
multiple customers, and a portion of the inventory is manufactured to
specifications provided by original equipment manufacturers and is not
subject to rapid technological change.
Management does not believe changes are reasonably likely to have a
material impact on the valuation of its inventories.
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 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.
11
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
December 31, Change
-------------------- --------------------
2002 2001 $ %
-------- -------- -------- --------
Net Sales $ 18,419 $ 17,264 1,155 7
Gross Profit 2,230 1,359 871 64
12.1% 7.9%
Operating Expenses 1,816 1,832 (16) -1
9.9% 8.2%
Operating Income (Loss) 382 (474) 856 +181
2.1% -2.7%
Interest Expense 98 145 (47) -32
0.5% 0.8%
Income (Loss) Before
Accounting Change 167 (407) 574 +141
0.9% -2.4%
Cumulative Effect of
Accounting Change -- (4,652) 4,652 +100
0.0% -26.9%
Net Income (Loss) $ 167 $ (5,059) 5,226 +103
0.9% -29.3%
</Table>
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
The components of net sales and gross profit are summarized in the
table below (dollars in thousands):
<Table>
<Caption>
Three Months Ended
December 31,
------------------------------------------
2002 2001
------------------- -------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
-------- ------- -------- ------- ------- -------
Net Sales
Contract manufacturing and printing $ 6,667 36% $ 6,937 40% $ -270 -4%
Business imaging paper products 5,863 32 5,121 30 742 14
Paint sundry products 5,889 32 5,206 30 683 13
-------- ------- -------- ------- ------- -------
Net sales $ 18,419 100% $ 17,264 100% $ 1,155 7%
======== ======= ======== ======= ======= =======
</Table>
<Table>
<Caption>
Margin Margin Period-to-Period Change
Amount % Amount % $ %
-------- ------- -------- ------- ------- -------
Gross Profit
Contract manufacturing and printing $ 798 12% $ 396 6% $ 402 102%
Business imaging paper products 692 12 277 5 415 150
Paint sundry products 740 13 686 13 54 8
-------- ------- -------- ------- ------- -------
Gross profit $ 2,230 12% $ 1,359 8% $ 871 64%
======== ======= ======== ======= ======= =======
</Table>
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -CONTINUED
NET SALES:
Net sales increased $1.2 million (7%) to $18.4 million in first quarter of
fiscal 2003, when compared to this period last year. This is due to increases of
$0.7 million or 14% in the Business Imaging sector and $0.7 million or 13% in
the Paint Sundries sector offset by the lower sales in the Contract
Manufacturing sector (down $0.3 million or 4%). The increase in the Business
Imaging sector was due to an increase in sales of point-of-sales rolls to the
sector's network of products distributors. The increase in the Paint Sundries
sector was due to volume increases to the sector's largest customer, a large
do-it-yourself home center. The decline in Contract Manufacturing sector is due
to the Company's strategic decision to exit the contract sheeting market in
March 2002 which represents a $224,000 decrease when comparing first quarter
fiscal year 2003 to the same quarter fiscal year 2002.
GROSS PROFIT:
Gross profit increased $0.9 million (64%) for first quarter of fiscal 2003 when
compared to first quarter of fiscal 2002. The Contract Manufacturing sector
increased $0.4 million or 102% and was able to improve margins to 12% from 6%
for the same period last year, primarily through personnel reductions and higher
margins on the printing business. The Business Imaging sector's gross profit
increased $0.4 million (150%) as a result of growth in the point-of-sales rolls
market. This sector also improved margins by shedding overhead by closing the
Dallas, Texas facility and moving the remaining production to its Newton, North
Carolina facility. Gross profit in the Paint Sundry sector increased $54,000
(8%) as a result of increased sales mentioned earlier.
OPERATING EXPENSES:
Operating expenses decreased $15,000 (1%) for first quarter of fiscal 2003 when
compared to the same period of fiscal 2002. This decrease for the quarter was
primarily related to a reduction in expenses as a result of closing the Dallas,
Texas facility, as mentioned earlier. This decrease was offset by an increase in
the amortization of loan fees as a result of the Company entering into an
amended and restated financing arrangement with its primary lender in the fourth
quarter of fiscal 2002.
OPERATING INCOME:
Operating income improved $0.9 million to income of $0.4 million for first
quarter of fiscal 2003, when compared to the same period of fiscal 2002. The
increase was primarily a result of improved gross profit margins and reduced
expenses as a result of the Dallas facility closure mentioned earlier.
Additionally, these improvements were offset by severance costs as the result of
the relocation of personnel from Dallas, Texas to St. Louis, Missouri and
elimination of positions for the Paint Sundries sector as well as charges due to
the disposal of assets in Green Bay, Wisconsin.
INTEREST EXPENSE AND OTHER INCOME (EXPENSE)-NET:
Interest expense was $47,000 lower compared to last year due to a $2.9 million
reduction in debt since December 31, 2001, and lower interest rates on
borrowings. Other income decreased $16,000 in first quarter of fiscal 2002 when
compared to last year as a result of lower interest income following the
repayment of shareholder notes receivable.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
NET INCOME (LOSS) AND EARNINGS (LOSS) PER SHARE:
The Company reported net income of $0.2 million (per share: $0.04-basic and
diluted) for first quarter of fiscal 2003, versus a net loss of $5.1 million
(per share: (($1.10)-basic and diluted) for the same period one year ago. The
increase was mostly due to the Company adopting SFAS No. 142, "Goodwill and
Other Intangible Assets" in October 2001 resulting in a cumulative charge of
$6.4 million ($4.7 million after tax) related to the impairment of goodwill, as
discussed below, offset by improvements in gross profit and expense reductions
as previously discussed.
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 $0.7 million in cash for operations through the first
three months of fiscal 2003, compared to generated cash of $1.6 million for the
same period last year. Net income plus non-cash items aggregated $0.9 million,
an increase of $0.5 million for from the same period last year. The Company used
$0.5 million to pay accrued liabilities. Decreases in accounts receivable
generated $0.8 million and decreases in inventories generated $0.4 million in
cash flows, and decreases in accounts payable used $0.6 million.
Net cash used in investing activities was $3.2 million through the first quarter
of fiscal 2003. Additions to property, plant and equipment include $1.2 million
related to the purchase and installation of production and office equipment. The
Company entered into an agreement with a third party to construct and lease for
an initial 5-year term a 62,000 square foot facility in Manning, South Carolina,
which the Company occupied in October 1996. The facility was financed pursuant
to a $1.5 million industrial revenue bond for which the Company was indirectly
liable pursuant to a lease backed by a letter of credit issued by its former
senior lenders. As a result of the refinancing with JP Morgan Chase Bank, the
Company was required to replace this letter of credit with a substitute letter
of credit issued under the Credit Facility. On December 5, 2002 the Company
caused the prepayment of the $1.1 million principal amount and related accrued
interest on the industrial revenue bonds and in connection therewith purchased
the building for $1.2 million. This transaction was funded by additional
borrowings under the Credit Facility. Additionally, the Company made a deposit
of $0.9 million for the purchase of a flexo-graphic printing press which the
Company ultimately plans to finance through an operating lease.
Net cash generated in financing activities was $2.6 million through the first
quarter of fiscal 2003 due to issuance of long-term debt.
As of February 12, 2003, the Company had approximately $6.6 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 December 31, 2002, the Company was in compliance
with all of its debt covenants under the credit facility.
15
LIQUIDITY AND CAPITAL RESOURCES:-CONTINUED
The Company intends to retain earnings to finance future operations and
expansion and does not expect to pay any dividends within the foreseeable
future. In addition, the Company's credit facility restricts the payment of any
dividends.
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, 2002. Management believes that as of
February 13, 2003, there has been no material change to this information.
FORWARD LOOKING STATEMENTS:
Management's discussion of the Company's 2003 quarterly period in comparison to
2002, contains forward-looking statements regarding current expectations, risks
and uncertainties for future periods. The actual results could differ materially
from those discussed here. As well as those factors discussed in this report,
other factors that could cause or contribute to such differences include, among
other items, cancellation of production agreements by significant customers,
material increases in the cost of base paper stock, competition in the Company's
product areas, or an inability of management to successfully reduce operating
expenses in relation to net sales without damaging the long-term direction of
the Company. Therefore, the condensed financial data for the periods presented
may not be indicative of the Company's future financial condition or results of
operations.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14(c)
within 90 days of the filing date of this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective. There
were no significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of their evaluation.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
None.
17
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: February 13, 2003 /s/ Louis LeCalsey, III
------------------------------------------
Louis LeCalsey, III
President and Chief Executive Officer
Date: February 13, 2003 /s/ Michael B. Wheeler
------------------------------------------
Michael B. Wheeler
Vice President and Chief Financial Officer
Date: February 13, 2003 /s/ Drew W. Cook
------------------------------------------
Drew W. Cook
Chief Accounting Officer and Corporate
Controller
18
I, Michael B. Wheeler, Vice President and Chief Financial Officer of Tufco
Technologies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tufco
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/ Michael B. Wheeler
Vice President and Chief Financial Officer
19
I, Louis LeCalsey, President and Chief Executive Officer of Tufco Technologies,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tufco
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/ Louis LeCalsey
President and Chief Executive Officer
20