UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
or
[ ] 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.
Delaware 39-1723477
- ---------------------------------- ---------------------------------
(State of other jurisdiction (I.R.S. Employer Identification No.)
of incorporation of organization)
PO Box 23500, Green Bay, WI 54305-3500
- --------------------------------------------------------------------------------
(Address of principal executive offices including zip code)
(920) 336-0054
--------------
(Registrant's telephone number, including area code)
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 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each or the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of August 13, 2003
----- ---------------------------------
Common Stock, par value $0.01 per share 4,592,344
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
June 30, 2003 and September 30, 2002 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II: OTHER INFORMATION 19
SIGNATURES 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>
June 30, September 30,
2003 2002
------------ ------------
Assets
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 3,564,151 $ 251,346
Restricted cash ................................................. -- 100,000
Accounts receivable, net ........................................ 6,214,848 11,121,227
Inventories ..................................................... 4,248,457 6,585,100
Prepaid expenses and other current assets ....................... 1,274,992 743,281
Deferred income taxes ........................................... 832,927 832,927
Income taxes receivable ......................................... 159,570 133,242
------------ ------------
Total current assets ....................................... 16,294,945 19,767,123
PROPERTY, PLANT AND EQUIPMENT-Net .................................. 14,883,037 16,304,848
GOODWILL -Net ...................................................... 7,211,575 10,345,213
OTHER ASSETS- Net .................................................. 447,575 749,959
------------ ------------
TOTAL .............................................................. $ 38,837,132 $ 47,167,143
============ ============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Current portion of long-term debt ............................... $ 250,000 $ 922,726
Accounts payable ................................................ 2,765,330 5,279,556
Accrued payroll, vacation and payroll taxes ..................... 852,559 935,973
Other current liabilities ....................................... 681,979 1,326,075
------------ ------------
Total current liabilities .................................. 4,549,868 8,464,330
LONG-TERM DEBT- Less current portion ............................... 500,000 5,233,882
DEFERRED INCOME TAXES .............................................. 686,357 660,640
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 ............................................... 8,686,338 8,404,112
Treasury stock, 105,997 and 78,497 common shares, at cost ....... (721,125) (534,045)
Stockholder notes receivable .................................... -- (157,246)
Accumulated other comprehensive loss, net of tax ................ -- (40,224)
------------ ------------
Total stockholders' equity ................................. 33,100,907 32,808,291
------------ ------------
TOTAL ........................................................... $ 38,837,132 $ 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 NINE MONTHS ENDED
June 30, June 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET SALES .............................. $ 14,271,525 $ 13,688,942 $ 39,595,123 $ 37,541,104
COST OF SALES .......................... 11,918,246 10,941,117 34,202,135 32,184,722
------------ ------------ ------------ ------------
GROSS PROFIT ........................... 2,353,279 2,747,825 5,392,988 5,356,382
OPERATING EXPENSES:
Selling, general & administrative ...... 1,398,079 1,020,823 3,646,684 2,993,324
Employee severance costs ............... 163,587 -- 209,871 209,324
Facility restructuring costs ........... -- -- -- 232,958
Property & inventory write downs ....... -- -- -- 311,263
Loss(gain)loss on asset sales .......... 19,769 1,437 51,024 (27,655)
------------ ------------ ------------ ------------
OPERATING INCOME ....................... 771,844 1,725,565 1,485,409 1,637,168
OTHER INCOME (EXPENSE):
Interest expense .................... (10,703) (104,360) (187,991) (364,038)
Interest and other income(expense) .. (24,751) (2,111) (17,145) 20,907
------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES ......... 736,390 1,619,094 1,280,273 1,294,037
INCOME TAX EXPENSE ..................... 308,787 737,056 533,216 629,276
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS ...... 427,603 882,038 747,057 664,761
LOSS FROM DISCONTINUED OPERATIONS:
Net loss from operations of
discontinued segment, net of tax ..... (57,975) (103,962) (220,426) (643,314)
Net loss from sale of discontinued
operations, net of tax ............... -- -- (244,406) --
------------ ------------ ------------ ------------
LOSS BEFORE ACCOUNTING CHANGE .......... 369,628 778,076 282,225 21,447
CUMULATIVE EFFECT OF ACCOUNTING CHANGE . -- -- -- (4,651,591)
------------ ------------ ------------ ------------
NET INCOME (LOSS) ...................... $ 369,628 $ 778,076 $ 282,225 $ (4,630,144)
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Income from Continuing Operations .... $ 0.09 $ 0.19 $ 0.16 $ 0.14
Net Loss from Operations of Discontinued
Segment ........................... $ (0.01) $ (0.02) $ (0.05) $ (0.13)
Net Loss from Sale of Discontinued
Operations ........................ $ -- $ -- $ (0.05) $ --
------------ ------------ ------------ ------------
Income (Loss) before Accounting Change . $ 0.08 $ 0.17 $ 0.06 $ 0.01
Cumulative Effect of Accounting Change . $ -- $ -- $ -- $ (1.01)
------------ ------------ ------------ ------------
Net Income (Loss) ...................... $ 0.08 $ 0.17 $ 0.06 $ (1.00)
DILUTED EARNINGS (LOSS) PER SHARE:
Income from Continuing Operations .... $ 0.09 $ 0.19 $ 0.16 $ 0.14
Net Loss from Operations of Discontinued
Segment ........................... $ (0.01) $ (0.02) $ (0.05) $ (0.13)
Net Loss from Sale of Discontinued
Operations ........................ $ -- $ -- $ (0.05) $ --
------------ ------------ ------------ ------------
Income (Loss) before Accounting Change . $ 0.08 $ 0.17 $ 0.06 $ 0.01
Cumulative Effect of Accounting Change . $ -- $ -- $ -- $ (1.01)
------------ ------------ ------------ ------------
Net Income (Loss) ...................... $ 0.08 $ 0.17 $ 0.06 $ (1.00)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic .............................. 4,618,677 4,627,844 4,624,788 4,627,844
Diluted ............................ 4,642,807 4,629,754 4,634,272 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>
NINE MONTHS ENDED
June 30,
--------------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income from continuing operations .................... $ 747,057 $ 664,761
Noncash items in net income from continuing operations
Depreciation and amortization ......................... 2,143,733 2,182,777
Loss (gain) on asset disposals-net .................... 51,024 (27,655)
Asset impairment write-down ........................... -- 311,263
Changes in operating working capital:
Accounts receivable ................................... (368,963) (72,640)
Inventories ........................................... (684,508) 603,713
Prepaid expenses and other assets ..................... (529,373) 194,689
Accounts payable ...................................... (1,244,685) 2,472,328
Accrued and other current liabilities ................. (309,376) (413,745)
Income taxes payable & receivable ..................... 136,997 123,956
------------ ------------
Net cash provided (used) by operations activities from
Continuing operations ................................... (58,094) 6,039,447
INVESTING ACTIVITIES
Additions to property, plant and equipment ............... (2,233,176) (678,825)
Proceeds from disposals of property, plant and equipment . 68,110 581,716
Increase in advances to stockholders ..................... (13,854) (15,454)
Decrease in restricted cash .............................. 100,000 32,739
------------ ------------
Net cash used by investing activities
from continuing operations .............................. (2,078,920) (79,824)
FINANCING ACTIVITIES
Repayment of long-term debt .............................. (8,215,027) (4,972,074)
Issuance of long-term debt ............................... 2,874,360 --
Purchase of Treasury Stock ............................... (187,080)
Collections on stockholder notes receivable .............. 157,246 123,510
------------ ------------
Net cash used by financing activities from continuing
operations .............................................. (5,370,501) (4,848,564)
------------ ------------
Net cash provided from discontinued operations:
Proceeds from sale of discontinued operations (net
of transaction costs) .................................. 11,660,603 --
Net cash used by operating activities of discontinued
operations ............................................. (840,283) (1,040,330)
------------ ------------
Net cash provided (used) by discontinued operations ..... 10,820,320 (1,040,330)
NET INCREASE IN CASH AND CASH EQUIVALENTS ................... 3,312,805 70,729
CASH AND CASH EQUIVALENTS:
Beginning of period ........................................ 251,346 521,453
------------ ------------
End of period .............................................. $ 3,564,151 $ 592,182
============ ============
</Table>
See notes to condensed consolidated financial statements.
5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Tufco Technologies, Inc., (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments necessary
for a fair statement of results for each period shown (unless otherwise
noted herein, all adjustments are of a normal recurring nature) (See
Note 6). Operating results for the three-month and nine-month periods
ended June 30, 2003 are not necessarily indicative of results expected
for the remainder of the year. Certain information and note disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are
adequate to prevent the financial information given from being
misleading. The Company's condensed consolidated balance sheet at
September 30, 2002, was derived from the audited consolidated balance
sheet. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-K.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions". SFAS No. 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", to eliminate the
exception to consolidation for a subsidiary for which control is likely
to be temporary. SFAS No. 144 requires that one accounting model be
used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS No. 144 also broadens
the presentation of discontinued operations to include more disposal
transactions. The Company adopted SFAS No. 144, effective October 1,
2002. Adoption of SFAS No. 144 did not have a material impact on the
Company's financial position or results of operations. The sale and
discontinued operations of the Paint Sundries segment in the second
quarter 2003 have been recorded in accordance with SFAS No. 144.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", 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. The relocation
and closing of the Dallas Corporate services office has been recorded
in accordance with SFAS No. 146.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT--(CONTINUED).
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure". SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" and
provides alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require disclosures in interim
financial statements of the effects of stock-based compensation. The
interim disclosure requirements of SFAS No. 148 are effective for
periods beginning after December 15, 2002. The Company's stock-based
compensation related to employees and non-employee directors is
recognized using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and thus there is no compensation expense for
options granted with exercise prices equal to the fair value of the
Company's common stock on the date of the grant.
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
As of June 30, 2003 and 2002, options representing 453,700 and 548,900
shares of common stock, respectively, were outstanding. For the three
month period ended June 30, 2003 and 2002 options in the amount of
24,130 and 1,910, respectively, were included in the diluted earnings
per share calculations. For the nine months ended June 30, 2003, 9,484
options were included in diluted earnings per share. For the nine
months ended June 30, 2002, all of the existing options were excluded
from diluted earnings per share because they were anti-dilutive.
STOCK OPTION PLAN
The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans. No compensation cost has been
recognized for the Company's stock option plans because the quoted
market price of the common stock at the date of grant was not in excess
of the option exercise price. SFAS No. 123 prescribes a method to
record compensation cost at the fair value of the options granted.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
EARNINGS PER SHARE--(CONTINUED)
Pro forma disclosures as if the Company had adopted the cost
recognition requirements under SFAS No. 123 for the three and nine
months ended June 30, 2003 and 2002 are presented below.
<Table>
<Caption>
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net Income (loss)
As reported $ 369,628 $ 778,076 $ 282,225 $ (4,630,144)
Less: Stock based
Compensation expense
Applying fair value
Based method, net of
Related tax effects 14,428 0 72,286 159,436
------------- ------------- ------------- -------------
Pro forma net
Income $ 355,200 $ 778,076 $ 209,939 $ (4,789,580)
============= ============= ============= =============
Basic earnings per
share:
As reported $ 0.08 $ 0.17 $ 0.06 $ (1.00)
Pro forma 0.08 0.17 0.05 (1.03)
Diluted earnings per
share:
As reported $ 0.08 $ 0.17 $ 0.06 $ (1.00)
Pro forma 0.08 0.17 0.05 (1.03)
</Table>
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.
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 annual test for impairment of goodwill was done during the third
quarter of fiscal 2003 at the reporting unit level. The fair value of
the reporting units was calculated using a combination of an income and
market approach with the conclusion that no impairment existed as of
October 31, 2002.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED).
GOODWILL - (CONTINUED).
The changes in the carrying amount of goodwill for the nine months
ended June 30, 2003 are as follows:
<Table>
<Caption>
Contract Business Paint
Manufacturing Imaging Sundries TOTAL
Balance as of September 30, 2002 $ 4,281,759 $ 2,929,816 $ 3,133,638 $10,345,213
Sale of Segment . . . . . . . . -- -- 3,133,638 3,133,638
----------- ----------- ----------- -----------
Balance as of June 30, 2003 . $ 4,281,759 $ 2,929,816 $ -- $ 7,211,575
=========== =========== =========== ===========
</Table>
3. INVENTORIES
Inventories consist of the following:
<Table>
<Caption>
June 30, September 30,
2003 2002
--------------- ---------------
Raw materials $ 3,375,158 $ 4,838,569
Finished goods 873,299 1,746,531
--------------- ---------------
Total inventories $ 4,248,457 $ 6,585,100
=============== ===============
</Table>
4. SEVERANCE COSTS
Pursuant to authorization by the Board of Directors, the Company
formalized a plan in March 2003 to relocate the accounting and
information technology departments from the Dallas, TX location to the
Green Bay, WI Corporate office. As a result, the Company provided
one-time termination benefits payable August 31, 2003 for employees in
the Dallas office. The liability for the termination benefits is being
recognized ratably over the future service period as required by SFAS
No. 146. In compliance with SFAS 146, $164,000 of employee termination
benefits payable August 31, 2003 were recorded in the three months
ended June 30, 2003 as employment severance costs in the consolidated
statements of operations. For the nine months ending June 30, 2003
severance costs also included costs related to the elimination of
several salary positions. The 2002 expense relates primarily to
severance pursuant to an employment agreement with a former executive.
Severance costs incurred for the fiscal year 2003 are as follows:
Accrued Employee Severance Costs $ 209,871
Severance Payouts (69,871)
---------
Balance as of June 30, 2003 $ 140,000
Total costs for these benefits are expected to be $275,000 with
approximately $135,000 to be incurred in the fiscal fourth quarter of
2003.
5. RESTRUCTURING COSTS AND ASSET WRITE DOWNS
During the nine months ended June 30, 2002, the Company incurred
approximately $544,000 of costs (including approximately $311,000
related to impaired asset write-downs) related to restructuring a
component of the Business Imaging segment completed in fiscal year
2002. No such costs were incurred in 2003.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
6. DISCONTINUED OPERATIONS
The condensed financial statements present the Paint Sundries segment
as a discontinued operation as a result of the sale of the business on
March 31, 2003 pursuant to authorization of the Board of Directors on
January 27, 2003. The Company sold the assets and business of the Paint
Sundries segment for $12.3 million in cash (subject to adjustment based
on audited working capital) to Trimaco, LLC and its affiliate. The sale
included all Paint Sundries segment assets, including the Manning,
South Carolina manufacturing facility. Prior period amounts have been
restated, including the reallocation of general overhead charges. The
Company recorded a $0.4 million loss ($0.2 million after tax) on the
sale of the Paint Sundries segment which includes a $0.1 million gain
on the sale of the assets offset by $0.5 million of fees and expenses
associated with the sale. The Company will provide certain accounting
and information technology services to Trimaco, LLC during the
transition period for an agreed upon fee.
Operating results from discontinued operations were as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales $ -- $ 6,859,237 $ 9,708,068 $ 18,677,462
Loss before (99,841) (190,835) (371,804) (896,916)
income tax
The components of disposed assets and liabilities were as follows:
Accounts Receivable (net of reserve) $ 4,872,707
Inventory (net of reserve) 3,122,830
Equipment 328,090
Building 2,448,916
Goodwill 3,133,638
Other assets 292,500
Accounts payable (1,848,388)
Other accruals (281,959)
------------
Total net book value of disposed assets $ 12,068,334
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income for the three months ended June 30, 2003 was
$384,992 compared to comprehensive income of $779,648 for the three
months ended June 30, 2002.
Comprehensive income, for the nine months ended June 30, 2003 was
$321,674 compared to comprehensive loss of $(4,602,442), (which
includes the SFAS No. 142 impairment loss of $4.7 million, net of tax),
for the nine months ended June 30, 2002. A loss on the change in fair
value of a swap contract in the amount of $27,000 which was cancelled
in May 2003 was recorded in the other income and expense section of the
consolidated statements of operations.
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
Components of Comprehensive Income are as follows:
<Table>
<Caption>
Three Months Ended Nine Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) $ 369,628 $ 778,076 $ 281,450 $(4,630,144)
Other comprehensive income, net of tax:
Changes in fair value
of interest rate
swap contract (411) 1,572 23,286 27,702
Reclassification
adjustment to interest
rate swap contract 16,550 0 16,938 0
----------- ----------- ----------- -----------
Comprehensive income (loss) $ 384,992 $ 779,648 $ 321,674 $(4,602,442)
=========== =========== =========== ===========
</Table>
8. SEGMENT INFORMATION
The Company manufactures and distributes business forms, custom
paper-based non-woven products, and provides contract manufacturing,
specialty printing and related services on these types of products. In
second quarter of fiscal 2003, the Company sold its Paint Sundries
segment, and presented the financials related to this segment as
discontinued operations. Prior period amounts have been restated,
including the intersector information to reflect the sale of this
business. The Company separates its current operations and prepares
information for management use by the market segments aligned with the
Company's products and services. Such market information is summarized
below. The Contract Manufacturing segment provides services to large
national consumer products companies while the Business Imaging segment
manufactures and distributes paper good products. Accounts receivable
and certain other assets historically have not been assignable to
specific segments and, therefore, are included in the intersector
column below.
<Table>
<Caption>
THREE MONTHS ENDED CONTRACT BUSINESS
JUNE 30, 2003 MANUFACTURING IMAGING INTERSECTOR CONSOLIDATED
Net Sales $ 8,333,294 $ 5,938,231 $ -- $ 14,271,525
Gross Profit 1,604,543 748,736 -- 2,353,279
Employee Severance -- -- 163,587 163,587
Operating Income (loss) 1,167,977 313,061 (709,194) 771,844
Interest Expense -- -- 10,703 10,703
Income Tax Expense (Benefit) -- -- 308,787 308,787
Assets:
Inventories 1,851,489 2,396,968 -- 4,248,457
Property, plant and
equipment-net 10,250,102 3,265,798 1,367,137 14,883,037
Goodwill-net 4,281,759 2,929,816 -- 7,211,575
Accounts receivable
and other assets 12,489,063 12,489,063
------------ ------------ ------------ ------------
Total assets $ 16,383,350 $ 8,592,582 $ 13,861,200 $ 38,837,132
============ ============ ============ ============
</Table>
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED).
SEGMENT INFORMATION-CONTINUED
<Table>
<Caption>
THREE MONTHS ENDED CONTRACT BUSINESS PAINT
JUNE 30, 2002 MANUFACTURING IMAGING SUNDRIES INTERSECTOR CONSOLIDATED
Net Sales $ 8,146,286 $ 5,542,656 $ -- $ -- $ 13,688,942
Gross Profit 2,163,278 584,547 -- -- 2,747,825
Operating Income (loss) 1,791,700 89,485 -- (155,620) 1,725,565
Interest Expense -- -- -- 104,360 104,360
Income Tax Expense (Benefit) -- -- -- 737,056 737,056
Assets:
Inventories 1,424,619 2,213,589 3,802,499 -- 7,440,707
Property, plant and
equipment-net 8,825,552 4,202,743 1,786,910 2,042,854 16,858,059
Goodwill-net 4,281,759 2,929,816 3,133,638 -- 10,345,213
Accounts receivable
and other assets 15,479,765 15,479,765
------------ ------------ ------------ ------------ ------------
Total assets $ 14,531,930 $ 9,346,148 $ 8,723,047 $ 17,522,619 $ 50,123,744
============ ============ ============ ============ ============
</Table>
<Table>
<Caption>
NINE MONTHS ENDED CONTRACT BUSINESS
JUNE 30, 2003 MANUFACTURING IMAGING INTERSECTOR CONSOLIDATED
Net Sales $ 21,824,083 $ 17,771,040 $ -- $ 39,595,123
Gross Profit 3,207,971 2,185,017 -- 5,392,988
Employee Severance -- -- 209,871 209,871
Operating Income (loss) 2,059,028 984,573 (1,558,192) 1,485,409
Interest Expense -- -- 187,991 187,991
Income Tax Expense (Benefit) -- -- 533,216 533,216
</Table>
<Table>
<Caption>
NINE MONTHS ENDED CONTRACT BUSINESS
JUNE 30, 2002 MANUFACTURING IMAGING INTERSECTOR CONSOLIDATED
Net Sales $ 21,121,533 $ 16,419,571 $ -- $ 37,541,104
Gross Profit 4,083,198 1,273,184 -- 5,356,382
Operating Income (loss) 3,006,359 (332,677) (1,036,514) 1,637,168
Interest Expense -- -- 364,038 364,038
Income Tax Expense (Benefit) -- -- 629,275 629,275
</Table>
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL INFORMATION:
The Company has manufacturing operations in Green Bay, WI and Newton,
NC. The Company's corporate headquarters are located in Green Bay, WI.
Corporate support services currently are located in Dallas, TX and are
currently being transitioned to Green Bay, WI.
The Company provides diversified Contract Manufacturing and specialty
printing services and manufactures and distributes Business Imaging
paper products.
There are seasonal demand characteristics for the Company's products
occurring because of the seasonal demand for certain Contract
Manufacturing printed products displaying a holiday theme as well as
products which are used by customers in conjunction with end-of-year
activities. These products are normally shipped during the Company's
fourth fiscal quarter. Point of sale Business Imaging products peak
during second and fourth quarters due to seasonal demand for products
related to end-of-year holiday activities and due to summer vacation
activities.
The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which require
the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and revenues and expenses during the periods
reported. Actual results could differ from those estimates. Unless
otherwise noted, the Company has not made any changes in estimates or
assumptions that have had a significant effect on the reported amounts.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
RESULTS OF OPERATIONS:
CONDENSED OPERATING DATA, PERCENTAGES OF NET SALES AND PERIOD-TO-PERIOD CHANGES
IN THESE ITEMS ARE AS FOLLOWS (DOLLARS IN THOUSANDS):
<Table>
<Caption>
Three Months Ended Period-to-Period Nine Months Ended Period-to-Period
June 30, Change June 30, Change
--------------------- ---------------------
2003 2002 $ % 2003 2002 $ %
-------- -------- -------- -------- -------- -------- -------- --------
Net Sales $ 14,272 $ 13,689 583 4 $ 39,595 $ 37,541 2,054 5
Gross Profit 2,353 2,748 (395) -14 5,393 5,356 37 1
16.5% 20.1% 13.6% 14.3%
Operating Expenses 1,581 1,022 559 55 3,907 3,719 188 5
11.1% 7.5% 9.9% 9.9%
Operating Income 772 1,726 (954) -55 1,486 1,637 (151) -9
5.4% 12.6% 3.8% 4.4%
Interest Expense 11 104 (93) -89 188 364 (176) -48
0.1% 0.8% 0.5% 1.0%
Net Income from
Continuing Operations 428 882 (454) -52 747 665 82 12
3.0% 6.4% 1.9% 1.8%
Loss from Discontinued
Operations, Net of Tax (58) (104) 46 -44 (465) (643) 178 -28
-0.4% -0.8% -1.2% -1.7%
Cumulative Effect of
Accounting Change -- -- -- (4,652) 4,652 -100
-12.4%
Net Income (Loss) $ 370 $ 778 (408) -53 $ 282 $ (4,630) 4,912 -106
2.6% 5.7% 0.7% -12.3%
</Table>
14
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
June 30,
--------------------------------------------------
2003 2002
----------------------- -----------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
---------- ---------- ---------- ---------- ---------- ----------
Net Sales
Contract manufacturing and printing $ 8,333 58% $ 8,146 60% $ 187 2%
Business imaging paper products 5,939 42 5,543 40 396 7
---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 14,272 100% $ 13,689 100% $ 583 4%
========== ========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Margin Margin Period-to-Period Change
Amount % Amount % $ %
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit (loss)
Contract manufacturing and printing $ 1,604 19% $ 2,163 27% $ -559 -26%
Business imaging paper products 749 13 585 11 164 28
---------- ---------- ---------- ---------- ---------- ----------
Gross profit $ 2,353 16% $ 2,748 20% $ -395 -14%
========== ========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Nine Months Ended
June 30,
----------------------------------------------------
2003 2002
------------------------ ------------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
---------- ---------- ---------- ---------- ---------- ----------
Net Sales
Contract manufacturing and printing $ 21,824 55% $ 21,121 56% $ 703 3%
Business imaging paper products 17,771 45 16,420 44 1,351 8
---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 39,595 100% $ 37,541 100% $ 2,054 5%
========== ========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Margin Margin Period-to-Period Change
Amount % Amount % $ %
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit
Contract manufacturing and printing $ 3,208 15% $ 4,083 19% $ -875 -21%
Business imaging paper products 2,185 12 1,273 8 912 72
---------- ---------- ---------- ---------- ---------- ----------
Gross profit $ 5,393 14% $ 5,356 14% $ 37 1%
========== ========== ========== ========== ========== ==========
</Table>
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -CONTINUED
NET SALES:
Net sales increased $0.6 million (4%) to $14.3 million in the third quarter of
fiscal 2003, when compared to this period last year. This is due to increases of
$0.4 million or 7% in the Business Imaging segment and $0.2 million or 2% in the
Contract Manufacturing segment. The increase in the Business Imaging segment was
due to an increase in the point of sale rolls to a major discount retail
customer.
GROSS PROFIT:
Gross profit decreased $0.4 million (14%) for third quarter of fiscal 2003 when
compared to the third quarter of fiscal 2002. The Contract Manufacturing segment
decreased $0.6 million (26%) primarily due to a price reduction (effective July
1, 2003) to a major customer. That contract with that customer expires in
December 2003 and will not be renewed. Warehouse costs were higher due to
increased production of another contract. The Business Imaging segment's gross
profit increased $0.2 million (28%) as a result of growth in the point-of-sales
rolls market. This segment also improved margins by reducing overhead by closing
the Dallas, Texas facility and moving the remaining production to its Newton,
North Carolina facility.
OPERATING EXPENSES:
Operating expenses increased $0.5 million for third quarter of fiscal 2003 when
compared to the same period of fiscal 2002. This increase for the quarter
includes $164,000 in severance costs and $227,000 in reporting and legal costs.
OPERATING INCOME:
Operating income decreased $1.0 million to income of $0.8 million for the third
quarter of fiscal 2003, when compared to the same period of fiscal 2002. The
decrease was primarily due to $0.5 million additional legal and closing costs
related to the sale of the Paint Sundries segment.
INTEREST EXPENSE AND OTHER INCOME (EXPENSE)-NET:
Interest expense was $0.1 million lower compared to last year due to a $8.5
million reduction in debt since June 30, 2002, primarily with proceeds from the
sale of the Paint Sundry segment (See note 6) and lower interest rates on
borrowings.
NET INCOME AND EARNINGS PER SHARE:
The Company reported net income of $0.4 million (per share: $0.08 basic and
diluted) for third quarter of fiscal 2003, versus net income of $0.8 million
(per share: $0.17-basic and diluted) for the same period one year ago. Net
income from continuing operations was $0.4 million (per share: $0.09-basic and
diluted) for the third quarter of 2003 compared to $0.9 million (per share:
$0.19 basic and diluted) for 2002.
ACCOUNTING CHANGE:
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". This standard requires that companies no longer amortize
goodwill and indefinite life intangible assets, such as trademarks. In addition,
this standard requires that companies evaluate all goodwill for impairment
annually. Upon completion of this evaluation, the Company recorded a charge in
an amount of $6.4 million ($4.7 million, net of income tax effects, or $1.01 per
diluted share) in fiscal 2002 for the goodwill recorded in the Business Imaging
and Paint Sundries segments. The annual goodwill impairment test performed in
third quarter fiscal 2003 resulted in no additional impairment.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
LIQUIDITY AND CAPITAL RESOURCES:
The Company used $58,000 in cash from continuing operations through the first
nine months of fiscal 2003, compared to cash flow from continuing operations
generated of $6.0 million for the same period last year. Net income plus
non-cash items aggregated $2.9 million, a decrease of $0.2 million from the same
period last year. The Company used $0.5 million for prepaid and other assets and
$1.4 million to pay accounts payable and accrued liabilities. Increases in
accounts receivable used $0.4 million and increases in inventories used $0.7
million in cash flows.
Net cash used in investing activities was $2.1 million through the third quarter
of fiscal 2003. Additions to property, plant and equipment include $2.2 million
related primarily to the purchase and installation of equipment for the
wet-wipes production line.
Net cash used in financing activities was $5.4 million through the third quarter
of fiscal 2003 due to repayment of all of the Company's outstanding bank term
debt and revolving line of credit.
Net cash provided by discontinued operations in the third quarter of 2003 was
$10.8 million which represented $11.7 million of net proceeds from the sale of
the Paint Sundries segment offset by $0.9 million of cash used by the operating
activities for the five months ended February 28, 2003.
As of August 13, 2003, the Company had $6.0 million available under its
revolving credit line which was reduced to a $6.0 million facility concurrent
with the sale of the Paint Sundries segment. According to the terms of its
credit facility with its lenders, the Company is required to maintain certain
financial and operational covenants. As of June 30, 2003, the Company was in
compliance with all of its debt covenants under the credit facility.
The Company intends to retain earnings to finance future operations and
expansion and does not expect to pay any dividends within the foreseeable
future.
STOCK REPURCHASE PLAN
In March 2003, the Company's Board of Directors approved the purchase by the
Company of up to 100,000 of its shares of common stock given that the cash and
debt position would enable these purchases without impairment to the Company's
capital. The purchase plan began in April 2003, and extends over a nine-month
period. As of August 13, 2003, 35,500 shares have been purchased, including
8,000 shares purchased subsequent to June 30, 2003.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies for the Company remain unchanged from prior
periods except for the discussion below. For a more detailed discussion, refer
to Item 7 "Critical Accounting Policies" of the Company's annual report on Form
10-K for the year ended September 30, 2002 and "Recently Issued Accounting
Pronouncements" (See Note 1) of this report Form 10-Q for the quarter ending
June 30, 2003.
The Company adopted SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective October 1, 2002. Adoption of SFAS No. 144 did not
have a material impact on the Company's financial position or results of
operations. The sale and discontinued operations of the Paint Sundries segment
in the second quarter 2003 have been recorded in accordance with SFAS No. 144.
SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities"
is to be applied prospectively to exit or disposal activities initiated after
December 31, 2002. The relocation and closing of the Dallas Corporate services
office has been recorded in accordance with SFAS No. 146.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to the Company's exposure to interest rate risk,
foreign currency risk, commodity price risk and other relevant market risks is
contained on page 24 in Item 7A, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of the Company's Annual Report on
Form 10-K for the year ended September 30, 2002. Management believes that as of
June 30, 2003, there has been no material change to this information.
FORWARD LOOKING STATEMENTS:
Management's discussion of the Company's 2003 quarterly periods in comparison to
2002, contains forward-looking statements regarding current expectations, risks
and uncertainties for future periods. The actual results could differ materially
from those discussed here. As well as those factors discussed in this report,
other factors that could cause or contribute to such differences include, among
other items, cancellation of production agreements by significant customers,
material increases in the cost of base paper stock, competition in the Company's
product areas, or an inability of management to successfully reduce operating
expenses in relation to net sales without damaging the long-term direction of
the Company. Therefore, the condensed financial data for the periods presented
may not be indicative of the Company's future financial condition or results of
operations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As required by Exchange Act
Rule 13a-15(b), the Company's management, including the Chief Executive Officer
and Chief Financial Officer, conducted an evaluation as of the end of the period
covered by this report, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. As defined in Exchange Act Rule
13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and
procedures are controls and other procedures of the Company that are designed to
ensure that information required to be disclosed by the Company in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is accumulated
and communicated to the Company's management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of the end of the period covered by this report. It should be noted
that any system of controls, however well designed and operated, is based in
part upon certain assumptions and can provide only reasonable, and not absolute,
assurance that the objectives of the system are met.
Changes in Internal Control Over Financial Reporting. As required by Exchange
Act Rule 13a-15(d), the Company's management, including the Chief Executive
Officer and Chief Financial Officer, also conducted an evaluation of the
Company's internal control over financial reporting to determine whether any
change occurred during the quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting. Based on that evaluation, there has been no
such change during the quarter covered by this report.
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
31.1 Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934.
31.2 Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934.
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
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
(b) Reports on Form 8-K.
The Company filed Current Reports on Form 8-K on April 15, 2003
regarding the sale of the Company's Paint Sundries segment and on May
14, 2003 discussing the Company's second fiscal quarter.
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: August 14, 2003 /s/ Louis LeCalsey, III
--------------------------------------------
Louis LeCalsey, III
President and Chief Executive Officer
Date: August 14, 2003 /s/ Michael B. Wheeler
--------------------------------------------
Michael B. Wheeler
Vice President and Chief Financial Officer
20