U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-10984-LA
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TUFCO INTERNATIONAL, INC.
(Name of Small Business Issuer as specified in its charter)
Nevada 95-4071623
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
12575 Pioneer Lane 72734
Gentry, Arkansas (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: (501) 736-2201
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
The Issuer's revenues for the fiscal year ending May 31, 1996 were
$7,373,806.
As of October 15, 1996, 7,777,800 shares of the Issuer's common stock were
issued and outstanding 1,129,373 of which were held by non-affiliates. As of
October 15, 1996, the aggregate market value of shares held by non-affiliates
(based upon an average price) was approximately $1,058,787.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. BUSINESS
General
Tufco International, Inc., (the "Company") is engaged in the business of
installing industrial floors, ceilings and walls and selling floor, ceiling and
wall products, supplies and techniques to its franchisees and licensees. The
Company's floors are known as "Tufco Floors" and the Company's ceilings and
walls are known as "Arcoplast" ceilings and walls in the market place. The
installation of the Company's floors, ceilings and walls is accomplished by the
Company or by one of the Company's franchisees or licensees.
In March, 1992, the Company entered into an agreement with Ghislain
Beauregard to assist the Company in its marketing, selling and installation of
an interior ceiling and wall system (Arcoplast) developed by Mr. Beauregard and
by whom the Company has been granted exclusive rights in the United States and
its possessions, Mexico and South America.
Industry Overview
The industrial flooring, ceiling and wall industry is made up of a number
of small and medium size businesses offering a variety of flooring, ceiling and
wall techniques, products and surfaces to industrial customers. Many industries
engaged in manufacturing or other lines of business have flooring, ceiling and
wall requirements as a result of extensive wear or chemical corrosion. Some
businesses are engaged in industries which have specific industry flooring,
ceiling and wall standards. For example, the USDA has promulgated numerous
standards for flooring, ceilings and walls used in food operations. Flooring,
ceiling and wall standards are generally adopted for health and safety reasons.
Many businesses use a variety of chemicals in their manufacturing
operations which frequently result in corrosion of the floors, ceilings and
walls. Corrosion of floors, ceilings and walls can cause great expense and
unsafe working conditions for such businesses.
The Tufco Floor is designed to provide industrial users with a corrosion
resistant, skid resistant and wear resistant floor. From time to time, the
Company has submitted to the USDA information concerning the chemical components
of Tufco Floor products. For more than 20 years, the USDA has stated that the
chemical composition of Tufco Floors is acceptable for use in food processing
and meat packaging industries.
Arcoplast ceilings and walls are designed for industrial users which
require sanitary, durable, impact-resistant and maintenance-free wall and
ceiling surfaces. For more than six years, the USDA has stated that the chemical
composition of Arcoplast ceilings and walls is acceptable for use in food
processing and packaging industries.
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Company Products
Tufco Floor. The Company's primary product is the TUFCO FLOOR. Its
industrial flooring surface is offered in a variety of colors and formulations
designed to meet the specific needs and requirements of its customers. A Tufco
Floor is a floor made from six laminated layers of various types of resins,
bonding agents, aluminum oxide, high grade finishing sand and other components.
Each of the six separate layers consists of distributed resin squeegeed over the
existing flooring surface. Aggregate is distributed throughout two of the
layers. Aluminum oxide or sand is used in the top layers for maximum wear and to
provide a safe, skid proof surface. The Tufco Floor is installed on top of an
existing floor, generally concrete. The Tufco Flooring process requires that the
existing floor be treated both chemically and mechanically pursuant to Tufco
specifications prior to the application of the Tufco Floor.
The exact composition of a Tufco Floor varies according to the needs and
requirements of the specific customer. Tufco Floors are designed to be chemical
resistant, skid resistant and wear resistant and come with a five year warranty.
Historically, Tufco Floors have been made from a vinyl ester base. Tufco Floors
are now available with a 100% solid epoxy which contains no styrene and is
therefore, free of this styrene odor. This allows a Tufco Floor to be installed
in such industrial plants as food processing plants or open vat breweries
without a shut down in processing lines due to styrene odors.
The Company's product line essentially consists of the various components
of the Tufco Floor sold to its franchisees and licensees. The Company's products
are offered and sold to its franchisees and licensees in bulk which permits such
franchisee or licensee to complete a particular flooring installation project.
The Company also offers and sells "patch kits" which come in several colors and
permit small repairs to be easily made.
Tufco Floors have been installed on various sizes of floors ranging from
200 square feet to 95,000 square feet. The Company estimates that the average
flooring job requires 4,000 square feet of Tufco Flooring and takes
approximately 40 hours to install. The installation of a floor this size
typically requires the services of 6 installers. Tufco Floors are generally
ready for full usage within six hours after installation is complete.
Arcoplast Ceilings and Walls. The Company also sells Arcoplast ceiling and
wall panels. These are sandwich-type composite panels used for wall and ceiling
surfaces requiring sanitary, durable, impact-resistant, maintenance-free
finishes. The exact composition of the Arcoplast ceiling and wall panels varies
according to the needs and requirements of the specific customer. The panels are
used in manufacturing, processing, researching and storing of foods,
pharmaceuticals, human and animal health care units and occupancies subject to
contamination or absorption of chemicals, odors or other deleterious substances,
public washrooms and sewage disposal and areas subject to high maintenance under
demanding conditions.
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The ceiling and wall panels are faced with hard, high-gloss permanently
durable polymer which are bonded over urethane, or water-resistant plywood, or
solid glass fiber reinforced plastic cores which range in thicknesses from 1/4
inches to 3/4 inches. Insulating panels are fabricated in thicknesses from 5/8
inches to 6 inches. Composite panels are fabricated in sections which are 10
feet by 50 feet and can be cut to suit constraints of the site, transport,
access or erection. The composite panels meet all requirements of federal
regulations governing food processing and storage.
Arcoplast ceilings can be constructed by laying the panels in suspended
inverted T-framing, suspending the panels from any roof or floor structure above
or by securing the panels to the undersides of furring, joints, or floor or roof
slabs. Arcoplast walls can be constructed by securing the wall liner panels to
studs, or to furring anchored to concrete or to masonry partitions or by
anchoring the self-supporting insulating panels between the floor and ceiling
above.
The most significant part of the Company's revenue has been generated from
the sales of Tufco Flooring and related products and only a small portion has
been from the sale of Arcoplast ceilings and walls. The Company's revenues are
dependent upon the continued acceptance and use of its Tufco Flooring and
Arcoplast ceilings and walls in the market place.
Warranties
Tufco Floors are warranted to the customer by the franchisees for a period
of five (5) years subject to certain conditions. If the conditions are met, the
Tufco Floor is unconditionally warranted by the franchisee for its normal
intended use for three years and will be replaced or repaired at no charge to
the customer. During the fourth year following installation, the franchisee will
pay 75% of the cost of repair or replacement and the customer will pay 25% of
the cost. During the fifth year following installation, the franchisee will pay
50% of the costs of repairing or replacing the floor and the customer will be
required to pay 50% of the price. During the last two fiscal years, the Company
has not accrued or incurred any material costs for repair or replacement of
floors pursuant to its warranty.
Arcoplast panels and finishes are warranted to the customer by the
franchisee to be free from cracking, crazing or peeling for five (5) years
subject to certain conditions. Labor is not covered under the warranty. In the
event of repair or replacement of ceilings and walls, the Company will pay 100%
of the costs for such repair or replacement. The Company only recently commenced
marketing Arcoplast products and has not accrued or incurred any costs for
repairs or replacement pursuant to its warranty.
Customers
Tufco Floors and Arcoplast ceilings and walls have been installed for
national and local businesses operating in a wide variety of industries.
Generally, the Company solicits business from nationally based customers and
then refers such nationally based customers to the franchisee
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operation within the territory in which the Tufco Floor or Arcoplast
ceiling or wall is to be installed. The franchisee then installs the Tufco Floor
or the Arcoplast ceiling or wall for the nationally based company and the
Company sells the floor supplies or ceilings or walls to the franchisee. The
franchisee also solicits local businesses in the franchised or licensed
territory.
Nationally based businesses for which Tufco Floors have been installed
include, but are not limited to the following: Star-Kist Tuna, Van de Kamp,
Ralston-Purina, Kal-Kan, Del Monte, Frito- Lay, Pepsico, Iowa Beef, Tyson's
Foods, Cargill, Con Agra, Proctor & Gamble, Campbell's Soup, General Mills,
Kraft Foods and others.
Nationally based businesses for which Arcoplast ceilings and walls have
been installed include, but are not limited to the following: IBP, Inc.,
Pepsico, La Siesta Foods, Mid-America Dairy, Nestle Carnation, Sara Lee,
Liquimex, Kraft Foods, McKee Baking Co., Hormel and others.
The Company primarily sells its products to its franchisees who in turn
install Tufco Floors and Arcoplast ceilings or Arcoplast walls for the ultimate
user. The Company has a limited number of franchisees and therefore, a limited
number of direct customers. During the years ending May 31, 1995 and 1996, there
were franchisees that accounted for more than 10% of the total sales of the
Company. These franchisees were the following:
Year Ended May 31
1995 Per 1996 Per
Franchisee Sales cent Sales cent
Arkotex, Inc. $1,369,000 22% 1,537,000 21%
Tufco Flooring
Systems of Florida, $ _____ __%
Inc.
Tufco Mid-Atlantic, Inc. $ 665,000 10% $_________ __%
Tufco Flooring, Inc. $ 994,000 16% $1,088,000 15%
TOTAL $3,028,000 48% $2,625,000 36%
Suppliers and Manufacturing
Tufco Floors are made up of various resins, sands, aluminum oxide and other
components. The Company purchases the various components from its suppliers and
has the components shipped to the Company's headquarters. The Tufco Floor
components are stored in the Company's warehouse facilities until needed for a
specific installation project. At such time, the Company's employees prepare and
assemble the specific ingredients required in the Tufco Floor to be installed at
the particular installation project. These ingredients are prepared and
assembled from the various
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components stockpiled at the Company's warehouse facility. The specific
ingredients are then packaged in metal drums and plastic containers and shipped
for installation. The Company ships, in its own trucks and independent common
carriers, the containers of Tufco Flooring mix directly to the franchisee who
installs the Tufco Floor for the customer.
Arcoplast ceilings and walls are composite panels faced with hard,
high-gloss permanently durable polymer. Finishes are permanently bonded over
urethane, or water-resistant plywood, or solid glass fiber reinforced plastic
cores. The panels are fabricated by third party manufacturers in sections 10
feet by 50 feet and can be cut to suit the constraints of site, transport, or
access. The panels are fabricated when there is a particular project to be
installed. The panels are attached mechanically with screws, rivets and/or
bonding adhesives. The Company purchases the various components from its
suppliers and has the components shipped to the Company's headquarters. The
panels are shipped and stored on skids and remain stored flat on their skids
until the time of installation. The panels require protection before, during and
after installation. The Arcoplast ceiling and wall assembly components are
stored at the Company's warehouse facilities until needed for a specific
installation project. Arcoplast ceiling and wall panels are rarely warehoused by
the Company.
For the years ending May 31, 1996 and 1995, the Company purchased 41% and
45%, respectively, of its raw materials from Interplastics Corporation.
Management believes that it could purchase equivalent raw materials from other
sources at comparable cost, and an interruption in the relationship with such
supplier should not have an adverse effect on the continuous flow of the
Company's operations.
The balance of the Company's raw materials are purchased from a number of
different suppliers. Management believes that it would be able to find suitable
alternative suppliers at comparable costs in the event it were not able to
purchase such supplies from its current suppliers.
Franchise Program
The Company primarily sells its flooring products to various franchisees
and licensees located in the United States, Mexico and Canada. There are
currently 14 franchise areas in the United States and Canada. The earliest
franchise was sold in 1976 and the most recent franchise was sold in 1994. Upon
the sale of a franchise territory, a franchisee pays an initial franchise fee
and a continuing franchise fee, the amounts of which depend on the franchise
area granted. The initial franchise fee is payable in advance and the continuing
franchise fee is payable quarterly based upon a percent of the gross revenues
(normally 10%) of the franchisee, until paid in full. Initial franchise fee
revenue received is deferred until all material services or conditions relating
to the franchise agreement have been substantially performed or satisfied by the
Company. Upon completion of substantial performance, continuing franchise fees
are recognized when received. No initial franchise fee revenue was recognized
the two years ended May 31, 1996 and 1995. Continuing franchise fee revenue
recognized for the two years ended May 31, 1996 and 1995 was $80,000 and
$49,000, respectively.
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The franchise agreement grants the franchisee the right to own and operate
Tufco Flooring Franchises at locations approved by the Company. The franchisees
may offer and sell flooring products and services which utilize the trade
secrets, secret processes, formats, designs, methods, specifications, standards,
operating procedures, trademarks and other commercial symbols of the Company.
Arcoplast products and certain coatings and grouts presently under development
are not included in the franchise agreement. Each franchisee is required to
purchase Tufco Floor components from the Company. Some materials, such as sand
may be purchased locally with Company approval. Franchisees must pay royalties
to the Company if they purchase resins from another supplier. The purchase of
resins from another supplier can only be made after Company approval. The sale
of components to franchisees is the principal source of income to the Company
with respect to the franchisees.
There are currently the following operating franchisees:
Date Franchise
Granted Area(1)
1. 8/01/76 Oklahoma, Texas, Arkansas, Louisiana
2. 11/01/82 N. and S. Dakota, Nebraska, Kansas, Iowa,
Missouri, Colorado
3. 11/01/82 Tennessee, North Carolina and South Carolina,
4. 8/02/86 Northern California,
5. 1/04/88 Nevada, Washington, Oregon, Idaho, Montana, Wyoming,
Utah,
6. 11/01/88 Florida, Georgia,
7. 12/10/88 Minnesota, Michigan, Illinois, Indiana, Wisconsin,
8. 10/03/94 Ohio, Kentucky, West Virginia,
9. 2/28/87 Ontario, Canada,
10. 12/01/89 Quebec, Canada,
11. 3/04/86 Maritimes, Canada,
12. 11/1/94 Mississippi, Alabama,
13. 1/1/95 Southern California, Arizona, New Mexico,
14. 12/95 Delaware, Virginia, Maryland, New Jersey.
(1) Franchise Area No. 2 is Tufco Flooring, Inc., which is owned by Melvin Cox,
brother of Donald L. Cox. Franchise Area No. 6 is Tufco Flooring Systems of
Florida, Inc., which is owned by Gilbert Bachellor, brother of Lucille M.
Cox. Franchise Area Nos. 9, 10 and 11 were serviced by Tufco Canada. (See
"Certain Transactions.") No affiliated franchise has been given terms more
favorable than any other franchisee.
There are currently 10 states which are not covered by a franchise
relationship. Any Tufco Floor installation in such states is performed by the
Company or a licensee of the Company. In September 1993, the Caribbean Island
franchise agreement was discontinued by the Company due to non-performance under
the franchise agreement. In January 1994, the franchise agreement for the areas
of Ohio, Kentucky and West Virginia was discontinued by the Company due to non-
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performance under the franchise agreement. In October 1994, this franchise
territory was resold for $425,000.
Sales Information
The Company's products were sold to its franchisees and licensees who
utilize the products to install Tufco Floors and Arcoplast ceilings and walls
for their customers. For purposes of this section, sales are divided into
franchise sales and Company sales (which are revenues primarily generated from
the installation of floors). Information about gross sales during the last two
years is as follows: 5/31/96 5/31/95
5/31/96 5/31/95
Franchise Sales (1) $5,784,000 4,796,000
Royalties (2) $ 288,000 284,000
Franchise Fees (3) $ 80,000 49,000
Company Sales (4) $ 816,000 870,000
Foreign Sales (5) $ 406,000 328,000
Total Sales $7,374,000 $6,327,000
(1) Sales of products to franchisees.
(2) Royalties received from sales of products to franchisees.
(3) Initial and continuing franchise fees.
(4) Sales made directly by the Company or by its subsidiaries which are
unrelated to revenues generated from transactions with franchisees.
(5) Sales generated by the Company from sales of products to Tufco Canada and
the Canadian Franchises and sales of products and installations performed
by the Company in Mexico.
The Company's products were sold in the United States, Mexico and Canada
during the last two years. The following chart provides information as to the
allocation of sales between United States and foreign markets.
5/31/96 5/31/95
U.S. Sales $6,968,000 $5,999,000
Foreign Sales $ 406,000 $ 328,000
Total Sales $7,374,000 $6,327,000
For the fiscal year ended May 31, 1996, approximately 93% of the Company's
sales were for Tufco Floors and 7% of the Company's sales were for Arcoplast
ceilings and walls. For the fiscal year ended May 31, 1995, approximately 95% of
the Company's sales were for Tufco Floors and 5% of the Company's sales were for
Arcoplast ceilings and walls.
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Marketing
The Company's products are primarily marketed by its franchisees and
licensees who conduct their own marketing campaigns and develop their own
marketing strategies. The Company does attend various trade shows and advertises
in various trade journals. In October 1994 and August 1995, the Company released
its first technical three ring binder and flooring guides which includes
technical information, specification sheets, product selector and sample cards.
In October, 1994, the Company had also began a pilot market and product
development program targeting the Industrial Petrochemical and Pulp and Paper
Industries in Texas, Louisiana, and the Mississippi Gulf Cost.
Competition
The business in which the Company competes is fragmented and subject to
numerous competitive factors which include price, quality, reliability and
market acceptance. The Company faces competition from numerous sources which
operate on a national, regional or local basis. Although Management believes the
Company's Tufco Floor and Arcoplast ceilings and walls offer advantages over
competitive products, there can be no assurance that the Company will be able to
effectively compete in the market place. Competing producers of the Company's
Tufco Floor include, but are not limited to: Stonhard, General Polymers,
Ceilcote and Trowelon. Competing producers of the Company's Arcoplast ceilings
and walls include, but are not limited to: Kemlite, Lasco, Sequentia and Kal
Lite.
Trademarks
The Company has obtained a trademark for the name "Tufco" from the United
States Patent and Trademark Office. The trademark was granted for a term of 20
years ending March 11, 1994. The trademark renewal was registered on March 12,
1994 under Registration No. 980205 in class 12 for "laminated seamless acid
resistant flooring". The Company has also obtained a trademark for the name
Arcoplast" from the United States Patent and Trademark Office. The trademark was
granted for a term of 6 years ending June 20, 2001. The trademark was registered
June 20, 1995 under Registration No. 1900648 in class 12 for "fiberglass
reinforced wall and ceiling panels." The Company has also obtained with the
Department of Commerce and Industrial Development (SECOFI) in Mexico trademarks
for the names "Tufco" and "Arcoplast." The Company has applied for trademarks on
its Nemean line of products, which includes Terralith grouts and Lioncoat
protective epoxy coatings. The Company has not sought or obtained patent
protection for its floors but relies on trade secret protection. The Company
also relies on trade secret protection for its Arcoplast ceilings and walls.
Research and Development
During the past two years, the Company's expenditures in regards to
research and development have been insignificant. The Company is now in the
process of developing several new products to be used in conjunction with the
Tufco Floors and the Arcoplast ceilings and walls. The Company has developed
Tuf-base, a polymer baseboard. Tuf-base is fabricated by third party
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manufacturers from flexible, dimensionally stable thermoplastic polymers
selected to suit aesthetic and functional requirements of severe occupancies.
Occupancies benefitting from Tuf-base include: facilities processing, handling
or storing dairy, poultry or meat products; laboratories with finishes exposed
to chemical attack; hospitals, infirmaries or health care facilities with
essential sanitary requirements; and plants manufacturing pharmaceuticals or
other products requiring sterile environments.
The Company has also developed a high heat service polymer grout suitable
for use at constant temperatures of up to 500 degrees Fahrenheit and higher
excursion temperatures. This polymer grout combines the thermal stability of
epoxy novolac resin (the same resin used as a binder for abrasives in grinding
wheels and in electrical laminates for elevated temperature service and hot
solder resistance) and a tightly graded aggregate blend containing hollow
ceramic spheres to yield superior strength and stability under high temperature
conditions. Applications for the high heat service polymer grout include: high
temperature machinery grouting; heat sinks beneath ovens, cookers or fryers; hot
liquid spill containment dike liners; trowelable floor in cooker and fryer
rooms; and proven replacement for acid brick floors.
Additionally, the Company has also developed several chemical resistant
coatings to be used in secondary containment structures surrounding above-ground
tanks. The coating was developed due to regulations promulgated through the
Environmental Protection Agency ("EPA") under the Resource Conservation and
Recovery Act ("RCRA") to protect groundwater sources from being contaminated by
hazardous wastes and from subsequently harming human health and the environment.
Title 40 of the Code of Federal Regulations, part 264 (40 CFR 264) covers
standards for owners and operators with options on how to contain hazardous
chemicals should one of their storage tanks or pumps spring a leak. One such
option is to store the tanks in concrete vaults. The regulations state that
vaults must be:
- Constructed with chemical-resistant water stops in place at all joints.
- Provided with an impermeable interior coating or lining that is compatible
with the stored hazardous chemicals and that will prevent migration of
waste into the concrete and, ultimately, into the soil.
The Company believes this chemical-resistant coating could have
applications in residential and commercial buildings, bridges, tanks and
industrial facilities.
There can be no assurance that the Company will receive any significant
revenues from any of its recently developed technologies.
Governmental Regulation
The Company is, and will continue to be, subject to numerous governmental
regulations by federal, state, local and foreign government agencies which are
applicable to all businesses in
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general. Additionally, the Company is subject to numerous federal and state
laws and regulations which are specifically designated for businesses involved
in the franchise industry and businesses which may be required to dispose of
chemical products, such as the resins, which are components of the Company's
Tufco Flooring. The Company is subject to the franchise rules and regulations of
the Federal Trade Commission and the various states in which it offers and sells
franchises. The Company will continue to be subject to franchise regulations
both on a federal and state basis and will continue to incur costs in complying
with such rules and regulations.
Management believes the Company is currently in compliance in all material
respects with applicable federal, state, local and foreign regulations, statutes
and ordinances regulating the discharge of materials into the environment and
otherwise relating to the protection of the environment. Management does not
believe the Company will be required to expend any material amounts in order to
remain in compliance with these laws and regulations or that compliance will
materially affect its capital expenditures, earnings or competitive position in
the marketplace.
Some of the Company's floor installations include the use of a chemical
known as styrene. On March 17, 1993, the Styrene Information and Research Center
filed a report with the EPA which indicated that preliminary results of a recent
epidemiological study showed an increase of incidents of cancers in a group of
employees and former employees of the fiber reinforcement plastics industry.
Based on information received from Ashland Chemical, Inc., a supplier of the
Company, the Company understands that this latest study contradicted past
studies and that the data will be further reviewed. The Company is unable to
determine what effect, if any, this recent study will have on its business. The
Company does offer products which do not utilize styrene.
Employees
The Company employs 16 full-time personnel, 3 of whom are executives, 3 of
whom are clerical, 1 of whom is involved in research and development, 1 of whom
is involved in safety compliance, and 3 of whom are engaged in sales. The
Company also employs 3 warehouse personnel and 2 installation supervisors. The
Company hires part-time employees on an as-needed basis.
Insurance
The Company maintains liability insurance in the amount of $1,000,000 per
occurrence and $2,000,000 in the aggregate. While Management believes its
insurance policies to be adequate in amount and coverage for its current
operations, there can be no assurance that coverage will continue to be
available in adequate amounts or at a reasonable cost, and there can be no
assurance that the insurance proceeds, if any, will cover the full extent of
loss resulting from the claims.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns approximately 15 acres of property on Pioneer Lane in
Gentry, Arkansas upon which its offices, warehouse and research and development
facilities are located. The
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Company's offices, warehouse and research and development facilities are
contained in a building of approximately 17,000 square feet. Management believes
its facilities are adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
There are not presently any material legal proceedings to which the Company
is a party or which any of its property or wholly-owned subsidiary is subject
and no such proceedings are known to be threatened or contemplated against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to the Company's shareholders for voting during the
fourth quarter of the fiscal year ending May 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND WARRANTS AND RELATED
SECURITY HOLDER MATTERS
A. The Company's common stock is quoted on the NASD's Electronic Bulletin
Board, however, during the last two years there has been only a limited number
of actual transactions. There can be no assurance that an active market in the
Company's common stock will ever develop or if developed that it will be
sustained.
B. Holders of Common Stock. The approximate number of holders of record of
the Company's common stock was 47 as of October 15, 1996. Management believes
the actual number of beneficial holders of its Common Stock is greater than the
number of shareholders of record.
C. Dividends. The Company has never paid a cash dividend to date and does
not anticipate or contemplate paying dividends in the foreseeable future. It is
the present intention of management to utilize all available funds for the
development of the Company's business.
Outstanding Warrants
Each Unit offered and sold in the Company's initial public offering
consisted of ten (10) shares of common stock, one hundred (100) Class "A" Common
Stock Purchase Warrants, one hundred (100) Class "B" Common Stock Purchase
Warrants and one hundred (100) Class "C" Common Stock Purchase Warrants. Each
Class "A" Warrant entitles the holder to purchase one share of the Company's
common stock at $.75 per share, each Class "B" Warrant entitles the holder to
purchase one share of the Company's common stock at $.95 per share and each
Class "C" Warrant entitles the holder to purchase one share of common stock at
$1.15 per share.
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The Class "A" Warrants were originally scheduled to expire on January 11,
1989. The Class "B" Warrants were originally scheduled to expire on January 11,
1990. The Class "C" Warrants were originally scheduled to expire on January 11,
1991. The exercise period of all Warrants have been extended and modified on
several occasions and are currently as follows:
1. Class "A" Warrants. Expiration on the later of December 31, 1996 or 45 days
from the effective date of the Company's Prospectus.
2. Class "B" Warrants. Expiration on the later of December 31, 1996 or 90 days
from the effective date of the Company's Prospectus.
3. Class "C" Warrants. Expiration on the later of December 31, 1996 or one
year from the effective date of the Company's Prospectus.
The Warrants may be further extended at the discretion of the Board of
Directors.
The Warrants may not be exercised unless and until there is a current
registration statement on file with the Securities and Exchange Commission
relating to the shares of common stock underlying the Warrants. There is not a
current registration statement on file with the Securities and Exchange
Commission and, therefore, the Warrants are not currently exercisable.
The Warrants may be exercised only in those states in which it is legally
permissible to do so.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The Company is engaged in the business of selling and installing industrial
flooring and ceiling and wall systems directly to customers and to franchisees
who install ceiling, wall and floor systems to the ultimate customer. The
following discussion of the Company's results of operations and financial
condition should be read in conjunction with the financial statements and notes
thereto of the Company.
Results of Operations
The Company's revenues are primarily attributed to the sale of flooring
components to its franchisees and licensees, the sale and installation of
complete flooring jobs by the Company and the sale and installation of interior
ceiling and wall systems to which the Company has been granted exclusive rights.
13
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The following table sets forth certain items from the Company's
consolidated statements of operations as a percentage of net sales for the
period indicated:
Years Ended
May 31st
1996 1995 1994
Net Sales 100% 100% 100%
Cost of Sales 70% 66% 68%
Gross Profit 30% 34% 32%
Operating Expenses 24% 26% 28%
Operating Income 6% 8% 4%
Interest and Other
Expenses (income) 7% 2% (.1%)
Income
before Income Taxes 6% 8% 4%
Cumulative effect of
change in Accounting
principle
Provision for Income Taxes 2% 3% 1%
Change in Accounting Method -0- -0- (1%)
Net Income 4% 5% 2%
Year Ended May 31, 1996 Compared to Year Ended May 31, 1995.
Total net sales for the year ended May 31, 1996, were $7,373,806 compared
with $6,327,190 for the year ended May 31, 1995, an increase of approximately
16.5%. The increase was attributed both to sales to trade customers and sales to
affiliates. Sales to U.S. customers for the year ended May 31, 1996 amounted to
94% of total sales compared with 95% for the year ended May 31, 1995. The
Company has not identified any trend in sales and cannot predict whether
installation orders will continue to increase in the immediate future.
Gross profit as a percentage of sales decreased to 30% for the year ended
May 31, 1996, from 34% for the year ended May 31, 1995. The decrease in
percentage of gross profit was the result of increased freight and installation
costs to STS. There has been no significant price increase to franchisees for
flooring materials during the last fiscal year.
Operating Expenses. Operating expenses increased in absolute dollar amount
from $1,679,664 for the year ended May 31, 1995, to $1,804,805 for the year
ended May 31, 1996. Operating expenses decreased slightly as a percentage of net
sales from 26% for the year ended May 31, 1995, to 24% for the year ended May
31, 1996. Total selling expenses decreased significantly from $720,761 for the
year ended May 31, 1995, to $639,714 for the year ended May 31, 1996 which
14
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was a decrease from 11% of sales for the year ended May 31, 1996 compared
to 9% of sales for the year ended May 31, 1996. General and administrative costs
increased from $843,374 for the year ended May 31, 1995 to $1,040,091 for the
year ended May 31, 1996, representing a slight increase of percentage of total
revenue from 13% for the year ended May 31, 1995 to 14% for the year ended May
31, 1996.
Total cost of sales and operating expenses were $6,990,944 for the year
ended May 31, 1996, as compared to $5,825,839 for the year ended May 31, 1995.
Interest Expense. Net interest expense was $45,983 during the year ended
May 31, 1996, as compared to $41,609 for the year ended May 31, 1995.
Other Income. Other income was $100,112 during the year ended May 31, 1996,
as compared to $55,618 for the year ended May 31, 1995. Other income is
primarily attributed to finance charges on franchisees open accounts.
Net Income. For the year ended May 31, 1996, the Company incurred net
income of $259,935 as compared to net income of $311,849 for the year ended May
31, 1995, a decrease of more than 16.5%. The decrease in net income was
primarily the result of increased costs of sales which is discussed above.
Liquidity and Financial Resources
For the Years Ended May 31, 1996 and 1995.
Total assets as of May 31, 1996, were $3,527,512 as compared to $2,617,157
as of May 31, 1995 an increase of 35%.
Accounts and notes receivable increased to $1,932,932 at May 31, 1996
compared to $1,171,834 at May 31, 1995. Although 1996 sales increased by
approximately 16.55% over 1995 sales, at May 31, 1996, accounts receivables were
68% greater than at May 31, 1995. The increase was largely due to slower
collections from franchisees in the current year.
The Company continues to have limited cash assets. At May 31, 1996, there
was a cash balance of $14,606 compared to $784 at May 31, 1995.
Short term notes payable to banks was $125,000 at May 31, 1996. The Company
had no short term notes payable to banks at May 31, 1995. Accounts payable at
May 31, 1996 were $1,170,517 compared to $747,789 at May 31, 1995. At May 31,
1996, the Company owed $0 to affiliates compared with $16,673 at May 31, 1995.
At May 31, 1996, shareholders equity was $1,450,608 and increase of
$1,182,023 over shareholders equity at May 31, 1995.
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During the year ended May 31, 1996, the Company had capital expenditures of
approximately $161,000 for property and equipment. At the beginning of the
fiscal year, the Company had anticipated that such expenditures would be
approximately $75,000. For the current year, management anticipates it will
spend approximately $150,000 to purchase capital equipment to be used primarily
in ongoing research and development, new product development and marketing
efforts.
Short-term cash flow needs are generally met by current revenues.
Management believes that its presently anticipated short-term and long-term
needs for operating capital and debt repayments will be satisfied by funds
currently available.
Impact of Future Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 109
regarding accounting for income taxes. This statement requires an asset and
liability approach to determining deferred income tax amounts and income tax
expense for the period. The Company first applied this statement during the
first quarter of the fiscal year ending May 31, 1994.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Financial Statements Page
Independent Accountants' Report
Year ended May 31, 1996 17
Consolidated Balance Sheet 18-19
May 31, 1996
Consolidated Statements of Income
Years ended May 31, 1996 and 1995 20
Consolidated Statements of Changes in Stockholders'
Equity
Years ended May 31, 1996 and 1995 21
Consolidated Statements of Cash Flows
Years ended May 31, 1996 and 1995 22
Notes to Consolidated Financial Statements 23-29
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Independent Auditor's Report
Board of Directors and Stockholders
Tufco International, Inc.
Gentry, Arkansas
We have audited the accompanying consolidated balance sheet of Tufco
International, Inc. as of May 31, 1996 and the related consolidated statements
of income, stockholders' equity and cash flows for each of the two years in the
period ended May 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tufco
International, Inc. as of May 31, 1996 and the results of its operations and its
cash flows for each of the two years in the period ended May 31, 1996, in
conformity with generally accepted accounting principles.
Moore Stephens Frost
Little Rock, Arkansas
August 2, 1996
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TUFCO INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
Assets
Current assets
Cash $ 14,606
Accounts receivable, less allowance for doubtful
accounts of $175,000
Trade 1,050,421
Affiliates 864,371
Notes receivable 18,140
Inventories 487,566
Prepaid expenses and other 74,039
Deferred income tax benefits 73,988
Total current assets 2,583,131
Property and equipment
Land 83,500
Buildings 433,689
Machinery and equipment 377,935
Furniture and fixtures 107,194
Vehicles 182,728
1,185,046
Accumulated depreciation
(412,243)
Net property and equipment
772,803
Other assets
Reacquired franchise territory, net of
accumulated amortization of $219,507 144,173
Deferred income tax benefits 23,764
Other 3,641
Total other assets 171,578
Total assets $3,527,512
The accompanying notes are an integral part of these consolidated financial
statements.
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TUFCO INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MAY 31, 1996 (Continued)
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 125,000
Accounts payable 1,170,517
Accrued expenses 88,127
Income taxes payable 353,956
Current maturities of long-term debt 38,592
Total current liabilities 1,776,182
Long-term debt, less current maturities 210,842
Deferred compensation 89,880
Commitments and contingencies (Note 5, 6, 8 and 9)
Stockholders' equity
Common stock, $.001 par value; authorized
50,000,000 shares; issued and outstanding
7,777,800 shares 7,778
Additional paid-in capital 301,752
Retained earnings 1,241,551
Cumulative translation adjustment (2,846)
1,548,235
Capital contributions receivable (97,627)
Total stockholders' equity 1,450,608
Total liabilities and stockholders' equity $3,527,512
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MAY 31, 1996 AND 1995
1996 1995
Net sales
Trade customers $5,614,348 $4,929,168
Affiliates 1,759,458 1,398,022
Total net sales 7,373,806 6,327,190
Cost of sales 5,186,139 4,146,175
Gross profit 2,187,667 2,181,015
Operating expenses
Selling 639,714 720,761
General and administrative 1,040,091 843,374
Bad debts 125,000 115,529
Total operating expenses 1,804,805 1,679,664
Income from operations 382,862 501,351
Other income (expense)
Interest expense (45,983) (41,609)
Other income 100,112 55,618
Total other income (expense) 54,129 14,009
Income before income taxes 436,991 515,360
Provision for income taxes 177,056 203,511
Net income $ 259,935 $ 311,849
Earnings per share $ 0.033 $ 0.040
Weighted average number of shares
outstanding 7,777,800 7,777,800
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1996 AND 1995
Additional Cumulative Capital
Common Paid-In Retained Translation Contributions
Stock Capital Earnings Adjustment Receivables Total
Balance -
May 31, 1994 $7,778 $301,752 $669,767 - $(125,619) $ 853,678
Net income - - 311,849 - - 311,849
Recognition of
capita contribu-
tions receivable - - - - 16,496 16,496
Balance -
May 31, 1995 7,778 301,752 981,616 - (109,123) 1,182,023
Net income - - 259,935 - - 259,935
Recognition of
capital contribu-
tions receivable - - - 11,496 11,496
Current year
translation
adjustment - - - $(2,846) - (2,846)
Balance -
May 31, 1996 $7,778 $301,752 $1,241,551 $2,846) $(97,627) $1,450,608
The accompanying notes are an integral part of these consolidated financial
statements.
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TUFCO INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1996 AND 1995
1996 1995
Cash flows from operating activities
Net income $ 259,935 $ 311,849
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 83,740 89,857
Amortization 32,884 39,272
Gain (loss) on sale of property and
equipment (1,008) 3,250
Change in deferred compensation 18,782 40,277
Deferred income tax benefit (56,765) (22,718)
Changes in assets and liabilities:
Accounts and notes receivable (761,098) (314,623)
Inventories (60,487) (119,402)
Prepaid expenses and other (14,87) 8,002
Other assets (1,801) -
Accounts payable 413,914 (130,022)
Accrued expenses 20,141 (10,544)
Income taxes payable 115,490 119,177
Net cash provided by (used in) operating activities 48,857 14,375
Cash flows from investing activities
Purchase of property and equipment (161,360) (71,367)
Proceeds from sale of property and equipment 10,000 10,000
Proceeds from sale of reacquired franchise
territory 34,232 28,164
Net cash provided by (used in) investing activities(117,128) (33,203)
Cash flows from financing activities
Net change in notes payable 125,000 (35,033)
Net change in due to affiliates (16,673) 11,242
Proceeds from long-term borrowings 9,535 -
Principal payments on long-term debt (44,419) (55,664)
Collection of capital contributions receivable 11,496 5,000
Net cash provided by (used in) financing activities 84,939 (74,455)
Effect of exchange rate changes on cash (2,846) -
Increase (decrease) in cash 13,822 (93,283)
Cash - beginning of year 784 94,067
Cash - end of year $ 14,606 $ 784
The accompanying notes are an integral part of these consolidated financial
statements.
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TUFCO INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995
1. Organization and Summary of Significant Accounting Policies
a. Nature of business - Tufco International, Inc. ("the Company") and its
subsidiaries sell and install wall, ceiling and flooring materials
through independent franchises to industrial, meat processing, food
service and retailing customers throughout the continental United
States, Canada and Mexico. Certain of these independent franchises are
owned by relatives of the primary stockholders. All transactions with
these franchises are engaged in for a profit. The Company extends
unsecured credit to these independent franchises.
b. Principles of consolidation - The consolidated financial statements
include the accounts of Tufco International, Inc. and its wholly owned
subsidiaries:
Tufco, Inc.
Tufco, Flooring East, Inc.
Tufco De Mexico S.A. de C.V.
All significant intercompany accounts and transactions have been eliminated
in consolidation. Tufco De Mexico S.A. de C.V. was formed during the year ended
May 31, 1996.
c. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
d. Cash equivalents - The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be
cash equivalents.
e. Inventory pricing - Inventories, consisting of raw materials, are
stated at the lower of cost or market using the FIFO (first-in,
first-out) method.
f. Property and equipment - Property and equipment are depreciated over
the estimated useful lives of the assets. Annual depreciation is
computed using the straight-line method.
g. Reacquired franchise territories - The Company's cost of reacquiring
franchise territories is being amortized over ten years using the
straight-line method.
h. Franchise fee revenue - Upon the sale of a franchise territory, the
franchisee agrees to pay the Company an initial franchise fee and a
percentage of its sales, not to exceed an agreed upon amount. Payment
of the continuing fee is contingent upon sales generated by the
franchisee.
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TUFCO INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995 (continued)
Initial franchise fee revenue received is deferred until all material
services or conditions relating to the franchise agreement have been
substantially performed or satisfied by the Company. Upon completion of
substantial performance, continuing franchise fees are recognized when received.
There was no initial franchise fee revenue recognized during the years ended May
31, 1996 and 1995.
i. Income taxes - The Company utilizes the asset and liability method of
accounting for deferred income taxes. The asset and liability method
requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between
tax bases and financial reporting bases of assets and liabilities.
j. Capital contributions receivable - Capital contributions receivable
consist primarily of rights to receive future payments from
independent franchises exchanged by a major shareholder for common
stock. Payments received will be applied against capital contributions
receivable. Any future payments in excess of these receivables will be
recognized as income in the year received. The rights to receive
future payments consist of an agreement with an independent franchisee
which provides for payments based on a percentage of sales of the
franchisee. There were no payments in 1996.
In addition, included in capital contributions receivable at May 31, 1996
are amounts attributable to the Employee Stock Compensation Plan (Note 6).
k. Earnings per share - Earnings per share have been calculated using the
weighted average number of shares outstanding for each year. Common
stock equivalents, consisting of stock warrants, have been determined
to be anti-dilutive and, therefore, are excluded from the earnings per
share calculation.
l. Fair value - The stated value of notes payable and long-term debt
approximates market based on current rates offered to the Company for
notes of the same remaining maturities.
m. Reclassifications - Certain reclassifications have been made to the
1995 balances to conform to the 1996 presentation.
2. Notes Payable
Notes payable consists of a $125,000 unsecured note payable to a bank
bearing interest at 10%. This note was guaranteed by an officer and director of
the Company.
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TUFCO INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995 (continued)
3. Long-Term Debt
Long-term debt consists of:
1996
Note payable to bank; due June 1997; payable
in monthly installments of $4,000, including
interest at 10%; secured by buildings
and land; guaranteed by an officer and
director of the Company. $198,000
Note payable to individual; due June 2001; payable
$1,000 monthly, including interest at 8.5%; unsecured. 42,354
Note payable to a financing company; due March
1999; payable in monthly installments of $311,
including interest 10.5%; secured by certain equipment. 9,080
249,434
Less current maturities 38,592
$210,842
Aggregate maturities of long-term debt are as follows:
Year Ended Amount
1997 $ 38,592
1998 183,777
1999 13,303
2000 11,262
2001 2,500
$249,434
In connection with the reacquisition of the franchise territory discussed
in note 1g, the Company acquired approximately $35,000 of property and equipment
through the assumption of outstanding notes payable.
The Company made interest payments totaling $45,982 and $41,609 during the
years ended May 31, 1996 and 1995, respectively.
25
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TUFCO INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995 (continued)
4. Income Taxes
The provision for income taxes at May 31, 1996 and 1995 includes:
1996 1995
Current tax expense $233,821 $226,229
Deferred income tax expense (benefit) (56,765) (22,718)
$177,056 $203,511
Reconciliation of the differences between income taxes computed at Federal
statutory tax rates and the consolidated provision for income taxes is as
follows:
1996 1995
Income taxes computed at Federal
statutory tax rate $148,577 $175,222
State tax provision, net of Federal
benefits 18,747 22,109
Other 9,732 6,180
Provision for income taxes $177,056 $203,511
The Company has available at May 31, 1996, unused operating loss carry
forwards of approximately $46,000 for Federal income tax purposes, which expire
principally in the year 2007. The Federal income tax loss carry forwards were
acquired in a prior year merger and are limited as to the amounts which can be
recognized annually.
Temporary differences which give rise to significant deferred tax assets
(liabilities) are as follows: 1996
1996
Net operating loss carry forward $ 16,996
Bad debts 67,007
Deferred compensation and bonus agreements 54,322
Vacation accrued 4,999
Total deferred income tax benefits 143,324
Accelerated depreciation (45,572)
Total deferred tax liabilities (45,572)
Net deferred tax asset $ 97,752
26
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TUFCO INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995 (continued)
The Company made tax payments totaling approximately $118,300 during the
year ended May 31, 1996. There were no tax payments during the year ended May
31, 1995.
5. Deferred Compensation Agreements
In 1992, the Company entered into an agreement with an individual to assist
the Company in its marketing, selling and installation of an interior ceiling
and wall system developed by this individual and by whom the Company has been
granted exclusive rights in the United States, Mexico and South America. The
agreement provided for monthly compensation of $6,250 for five years, future
payment of $100,000 and 400,000 shares of the Company's stock at the end of five
years. During 1994, 400,000 shares were issued to the individual as part of the
Employee Stock Compensation Plan.
During 1994, the Company entered into employment agreements with certain
key employees. The agreements provide for payments totaling $28,750 at the end
of various periods as set forth in the individual employee's employment
agreements. The Company is accruing the payments under these agreements as they
are earned over the periods set forth in the agreements.
During both 1996 and 1995, approximately $29,000 has been charged to
expense relating to these plans.
6. Employee Stock Compensation Plan
During 1993, the Company adopted a restricted stock program whereby key
employees will be granted restricted shares of the Company's stock of up to
1,600,000 shares. Shares will be awarded in the name of the employee, who has
all rights of a stockholder, subject to certain restrictions or forfeitures.
Restrictions generally limit the sale or transfer of shares during a restricted
period, not to exceed two years. Participants generally become fully vested in
the shares granted upon completion of five years of service. Since no quoted
market price of the Company's stock currently exists, estimated market value of
the shares to be issued has been determined to approximate the book value of
said shares at the date of issuance.
During 1994, a total of 1,600,000 restricted shares of the Company's common
stock were granted to certain employees under this plan. In connection with the
issuance of these shares, the accrued compensation liability was relieved. The
estimated market value of the unearned shares has been included in capital
contributions receivable and is shown as a separate component of stockholders'
equity. Capital contributions receivable attributable to these shares is being
amortized to expense over the periods set forth in the individual employees
employment agreements and amounted to approximately $11,500 in both 1996 and
1995.
27
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TUFCO INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995 (continued)
7. Related Party Transactions
During the years ended May 31, 1996 and 1995, the Company paid consulting
fees to an officer and director of $149,908 and $75,000, respectively.
Certain company officers and directors have personally guaranteed an
unsecured trade account payable with a major supplier (Note 9) to a maximum of
$500,000. At May 31, 1996 this trade payable approximated $520,000.
Certain company officers and directors have personally guaranteed certain
secured and unsecured notes payable to a bank in the aggregate amount of
$198,000 at May 31, 1996.
8. Stock Warrants
Under the Company's stock warrant plan, 7,500,000 shares of common stock
were reserved for issuance upon exercise of warrants granted to certain
shareholders as well as other brokers and individuals. At May 31, 1996, the
Company had warrants outstanding with their exercise price as follows:
Warrants Exercise Expiration
Outstanding Class Price Date
2,480,440 A $0.75 Later of December 31, 1996 or 45 days
from the effective date of the Company's
Prospectus
2,500,000 B $0.95 Later of December 31, 1996 or 90 days
from the effective date of the Company's
Prospectus
2,500,000 C $1.15 Later of December 31, 1996 or one year
from the effective date of the Company's
Prospectus
7,480,440
The stock warrants may be exercised only if a current registration
statement is in effect. A registration statement was filed with the Securities
and Exchange Commission during the year ended May 31, 1994. During the year
ended May 31, 1995, this registration statement was abandoned. Management is
presently unable to estimate when a registration statement will be refiled.
28
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TUFCO INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995 (continued)
9. Commitments
There are no significant minimum rental commitments under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
at May 31, 1996 and 1995. Total rent expense included in the statement of income
for the years ended May 31, 1996 and 1995 was approximately $28,600 and $13,300,
respectively.
10. Major Customers and Supplier
The Company has a limited number of franchisee customers. During the years
ended May 31, 1996 and 1995, there were three franchisees who, individually,
provided in excess of 10% of total sales. The aggregate sales to these
franchisees were 36% in 1996 and 48% in 1995 of the total sales. Of these
amounts, sales to related parties approximated 24% in 1996 and 22% in 1995 of
total sales.
During the year ended May 31, 1996 and 1995, the Company purchased 41% and
45%, respectively, of total raw materials from a single supplier. Management
believes the materials could be purchased from other sources at comparable cost
and an interruption of the relationship should not have an adverse effect on the
continuous flow of operations.
11. Foreign Currency Translation
For translation of its international currency, the Company has determined
that the local currency of its international subsidiary is the functional
currency. In consolidating the international subsidiary, assets and liabilities
of the international subsidiary are translated into U.S. dollars using current
(year end) exchange rates. The U.S. dollar effects that arise from translating
the assets and liabilities of this international subsidiary at changing rates
during the year are recorded in the cumulative translation adjustment account in
stockholders' equity.
Translation adjustments are primarily attributable to receivables,
inventories, plant and equipment. Such adjustments are not reported as part of
operating results since realization is remote unless the international business
is sold or liquidated.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 1, 1994, the Board of Directors of the Company appointed Moore
Stephens Frost as the Company's independent certifying accountant. The Company's
previous accountant was Baird, Kurtz & Dobson. There had been no disagreements
with the previous accountant of the Company on any matter of accounting
principles or practices, financial statement disclosure or auditing scope of
procedure. The accountants' reports on the financial statements of Tufco
International, Inc. for the two years previous to the appointment of Moore
Stephens Frost did not
29
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contain adverse opinions or disclaimer of opinions nor were such reports
qualified as to audit scope or accounting principles. The decision to change
accountants was recommended by the Company's Board of Directors. The Company
currently has no audit committee.
On August 16, 1994, the Company filed a Form 8-K with the SEC relating to
the appointment of Moore Stephens Frost as its independent accountant. A letter
from the Company's former accountant stating that it agreed with the statements
set forth in the Form 8-K was attached as an exhibit to the Form 8-K.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
A. Identification of Directors and Executive Officers
The current directors and executive officers of the Company who will serve
until the next annual meeting of shareholders or until their successors are
elected or appointed and qualified, are set forth below:
Name Age Position
Donald L. Cox 62 Chairman of the Board/Chief
Executive Officer/
President/Director
Lucille M. Cox 56 Secretary/
Director
Russell D. Cox 39 Vice President/Director
Thomas P. Jakubik 50 Director
Leslie P. Lagoni 71 Director
Ghislain Beauregard 46 Director
Brent Mills 34 Chief Financial Officer/
Treasurer
Background information concerning the Company's officers and directors is
as follows:
Donald L. Cox. Mr. Cox has been the Chairman of the Board, Chief Executive
Officer, and President of Tufco International, Inc. and its subsidiaries for the
past 35 years. Mr. Cox has had the responsibility for operating and franchising
Tufco while further developing many new products for Tufco International, Inc.
Mr. Cox is the founder of Tufco International, Inc., and Tufco, Inc. Mr.
30
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Cox is the husband of Lucille M. Cox and the father of Russell D. Cox, both
of whom are directors of the Company.
Lucille M. Cox. Mrs. Cox has been associated with Tufco International, Inc.
since its inception. Mrs. Cox is presently the Secretary of Tufco International,
Inc.
Russell D. Cox. Mr. Cox has been and is currently the operations manager
for the Company. His responsibilities include assisting franchisees and
licensees with job scheduling, raw material ordering and scheduling, serving as
a service technician to the franchisees and licensees, and conducting training
classes in the preparation and application of Tufco Flooring. Mr. Cox graduated
from high school in 1975. He started working for Tufco in 1973.
Thomas P. Jakubik. Mr. Jakubik has been the Company's research and
development director since 1991. From 1988 to 1991, he was president of Polymer
Systems, Inc. From 1988 to 1989, Mr. Jakubik was a consultant to and part owner
of Polymer Concrete, Inc. Mr. Jakubik was employed by Dow Chemical from 1969 to
1988. Mr. Jakubik earned his B.S. Degree in chemistry from Stephen F. Austin
State University and took various graduate courses in chemistry at Texas A & M
University.
Leslie P. Lagoni. Mr. Lagoni has been an independent corporate consultant
in marketing, shareholder relations and financial relations for the past 15
years. From 1985 to 1987 he was President and Director of Upland Capital
Associates, Inc., the past Chairman of Parker Medical Ventures, Inc., and is
past President, Treasurer and Director of Pinnacle Associates, Inc., blind-pool
organizations. Since May 1985 he has been a Director of Traditional Industries,
Inc. Mr. Lagoni is a director of Sports Time, Inc. and an officer and director
of Terry Home Design, Inc. Mr. Lagoni was a founder and promoter of Coastech,
Inc. He has been a director of the Company since 1986.
Ghislain Beauregard. Mr. Beauregard has been employed by the Company since
1992. From 1975 to 1992, he was president and CEO of Systems Interieure Atlas,
Inc. Mr. Beauregard is also an officer and director of a company engaged in the
marketing and distribution of building materials. He obtained a degree in
construction at the Technical and Trade School of Granby.
Brent E. Mills. Mr. Mills has been employed by the Company since April
1992. Prior to that time he was employed by the regional accounting firm of
Baird, Kurtz and Dobson as an auditor. Mr. Mills is a CPA. He earned his
Bachelor's of Science Degree in Business Administration from Henderson State
University. He is currently a member of the AICPA and ASCPA.
B. Significant Employees. None.
C. Familial Relationships. Donald L. Cox is the husband of Lucille
M. Cox and the father of Russell D. Cox.
D. Other: Involvement in Certain Legal Proceedings.
There have been no events under any bankruptcy act, no criminal proceedings
and no judgments or injunctions material to the evaluation of the ability and
integrity of any director or executive officer during the past five years.
31
<PAGE>
E. Compliance With Section 16(a). The Company currently has no class
of security registered pursuant to Section 12 of the Exchange Act
and is therefore not subject to Section 16(a).
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid by the
Company for services rendered during the last three years to the Company's Chief
Executive Officer.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name and Annual Restrict Option/ LTIP Other
Principal ($) ($) Compen- Stock SAR's Payouts Compensa-
Position Year Salary Bonus sation(s) Awards(s) (#) ($) tion ($)
Donald L.Cox 1996 $150,000 $ -0- $ -0- $-0- -0- $ -0- -0-
President,CEO 1995 $ 75,0000 $ -0- $ -0- $-0- -0- $ -0- -0-
Chairman 1994 $ 72,0000 $ -0- $ -0- $-0- -0- $ -0- -0-
(1) This compensation was attributed to consulting fees paid to Mr. Cox by
the Company.
No options, stock appreciation rights or long-term incentive plan awards
were issued or granted to the Company's executive officers during the fiscal
year ended May 31, 1996. As of May 31, 1996, the end of the Company's last
fiscal year, the Company's management owned no options or stock appreciation
rights. Accordingly, no tables relating to such items have been included in this
Item 10.
Compensation of Directors
The Company's non-employee director is not compensated for attending Board
of Directors meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
A. & B. Security Ownership of Management and Certain Beneficial Owners.
The following table sets forth information regarding shares of the
Company's common stock owned beneficially as of October 15, 1996, by (i) each
director of the Company, (ii) all officers and
32
<PAGE>
directors as a group, and (iii) each person known by the Company to
beneficially own 5% or more of the outstanding shares of the Company's common
stock:
Name Amount
and Address and Nature
of Beneficial of Beneficial Percent
Owner Ownership of Class (1)
Donald L. Cox (1) 3,533,337 45.43%
12575 Pioneer Lane
Gentry, AR 72734
Lucille M. Cox (1) 764,169 9.83%
12575 Pioneer Lane
Gentry, AR 72734
Russell D. Cox (1) 694,171 8.93%
12575 Pioneer Lane
Gentry, AR 72734
Thomas Jakubik(1)(2) 565,000 7.26%
12575 Pioneer Lane
Gentry, AR 72734
Leslie P. Lagoni(1)(3) 425,000 5.46%
21345 Las Pilas Rd.
Woodland Hills, CA 91364
Ghislain Beauregard(1)(4) 400,000 5.14%
12575 Pioneer Lane
Gentry, AR 72734
Brent Mills(1)(5) 250,000 3.21%
Pioneer Lane
Gentry, AR 72734
Richard Graves 400,000 5.14%
106 Ruth Lane
Rogers, AR 72756
________________
All Officers and Directors 6,631,677 85.26%
as a Group (7 persons)
Total Shares Issued
and Outstanding 7,777,800 100.00%
33
<PAGE>
(1) These individuals are the officers and/or directors of the Company.
(2) Mr. Jakubik owns 31,250 of such shares in his own name and 500,000
shares in joint ownership with Galyn Todd, Mr. Jakubik's wife. Galyn
Todd is the record owner of 31,250 of such shares and Janie Jakubik,
Mr. Jakubik's mother, is the record owner of 2,500 of such shares.
(3) Mr. Lagoni owns 62,500 of such shares in his own name. Growth Science
Ventures, Inc., an affiliate of Mr. Lagoni, owns 212,500 of such
shares of record and Astoria Productions, Inc., an affiliate of Mr.
Lagoni, owns 150,000 of such shares of record.
(4) Mr. Beauregard owns 400,000 shares in joint ownership with Louise
Beauregard, his wife.
(5) Mr. Mills owns 250,000 shares in joint ownership with Tina Mills, his
wife.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Real Estate Transaction. The Company's office and warehouse are located
upon approximately 15 acres in Gentry, Arkansas. Legal title to the land was
originally acquired in the name of Donald L. Cox and Lucille M. Cox. Site
improvements were paid for by a Tufco subsidiary. The office/warehouse building
was financed from the Tufco subsidiary's cash flow and from a mortgage loan
obtained by Donald L. Cox and Lucille M. Cox. In August, 1991, Donald L. Cox and
Lucille M. Cox conveyed the land and the improvements and buildings situated
thereon, to the Company. The Company did not pay any consideration to Mr. and
Mrs. Cox for such conveyance. Prior to such conveyance, Mr. and Mrs. Cox held
title to the property as a nominee for the Tufco subsidiary. Mr. and Mrs. Cox
continue to be guarantors of the mortgage debt which, as of October 15, 1996 was
approximately $189,000.
Tufco Canada. Donald L. Cox was an officer, director and part owner of
Tufco Canada, a privately-held Canadian company formed in October, 1984 to sell
Tufco products in Canada. Tufco Canada was not a franchisee of the Company but
did have a license to use the Company's trademarks and sell Tufco products.
Tufco Canada would pay the Company for products on the same basis as
non-affiliated franchisees. Tufco Canada had established three franchises: (1)
Tufco Flooring (Montreal), Ltd.; (2) Tufco Flooring Maritimes, Ltd.; and (3)
Tufco Flooring of Ontario, Ltd. In July 1994, the Company and the three Canadian
franchisees reached an agreement with Tufco Canada to terminate all franchise
and licensing agreements between the companies. The three Canadian franchisees
have become franchisees of the Company, Mr. Cox had resigned as an officer,
director and part owner of Tufco Canada before an Agreement was reached.
Affiliated Franchisees. Two other franchisees are affiliated with the
officers and directors of the Company. Tufco Flooring Systems of Florida, Inc.
is owned by Gilbert Bachellor, the brother of Lucille M. Cox. Tufco Flooring,
Inc., is owned by Melvin Cox, brother of Donald L. Cox.
Guarantee. Donald L. Cox and Lucille M. Cox have personally guaranteed an
unsecured trade accounts payable with Interplastics Corporation, a supplier of
the Company's raw materials up to a maximum of $500,000. As of May 31, 1996 and
May 31, 1995, the outstanding payable to such creditor was approximately
$520,000 and $407,000, respectively. Donald L. Cox and Lucille M. Cox have also
guaranteed a bank loan of $300,000 to the Company which is secured by the
Company's real property.
34
<PAGE>
Receivables from Affiliates. As of May 31, 1996 and 1995, the Company had
receivables of $529,000 and $271,000, respectively, from the following
affiliated franchisees: Tufco Flooring Systems of Florida, Inc., and Tufco
Flooring, Inc., which are owned by relatives of Donald L. Cox, and Tufco
Flooring of Canada, Ltd., which was previously partially owned by Donald L. Cox.
These receivables arose in connection with the purchase and sale of the
Company's products in the normal course of business.
Issuance of Shares. On June 1, 1993, the Board of Directors of the Company
approved the issuance of 1,600,000 shares of the Company's common stock to
certain of the Company's executives and employees for services rendered during
the year ended May 31, 1993 and in future years. Donald L. Cox received 450,000
shares of restricted common stock for services rendered during the year ended
May 31, 1993. Ghislain Beauregard, Thomas P. Jakubik and Brent E. Mills received
400,000, 500,000 and 250,000 shares of restricted common stock, respectively,
pursuant to employment contracts with the Company.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. No Exhibits are filed with this Report.
B. No Form 8-K's were filed during the last quarter of the fiscal year
ended May 31, 1996.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TUFCO INTERNATIONAL, INC.
Date: October 21, 1996 By /s/ Donald L. Cox
Donald L. Cox
Principal Executive Officer
By /s/ Brent Mills
Principal Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.
Signature Capacity Date
/s/ Donald L. Cox Chairman/President/ October 21, 1996
Donald L. Cox CEO/Director
/s/ Lucille M. Cox Secretary/ Director October 21, 1996
Lucille M. Cox
/s/ Russell D. Cox Vice President/ October 21 1996
Russell D. Cox Director
/s/ Thomas P. Jakubik Director October 21, 1996
Thomas P. Jakubik
Director October ___, 1996
Leslie P. Lagoni
/s/ Ghislain Beauregard Director October 21, 1996
Ghislain Beauregard
36
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TUFCO
INTERNATIONAL, INC.'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-1-1995
<PERIOD-END> MAY-31-1996
<CASH> 14,606
<SECURITIES> 0
<RECEIVABLES> 1,932,932
<ALLOWANCES> 175,000
<INVENTORY> 487,566
<CURRENT-ASSETS> 2,583,131
<PP&E> 1,185,046
<DEPRECIATION> 412,243
<TOTAL-ASSETS> 3,527,512
<CURRENT-LIABILITIES> 1,776,182
<BONDS> 0
0
0
<COMMON> 309,530
<OTHER-SE> 1,241,551
<TOTAL-LIABILITY-AND-EQUITY> 3,527,512
<SALES> 7,373,806
<TOTAL-REVENUES> 7,373,806
<CGS> 5,186,139
<TOTAL-COSTS> 1,804,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (45,983)
<INCOME-PRETAX> 436,991
<INCOME-TAX> 177,056
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 259,935
<EPS-PRIMARY> 0.033
<EPS-DILUTED> 0
</TABLE>
