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, 1998
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 -----------
(Address of principal executive offices) (Zip Code)
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
Indicate by check mark whether the adjustment (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, 1998 were
$6,486,000.
As of December 7, 1998, 6,965,800 shares of the Issuer's common stock were
issued and outstanding 785,343 of which were held by non-affiliates. As of
December 7, 1998, the aggregate market value of shares held by non-affiliates
(based upon an average price) was approximately $238,138.
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 and selling floor products, supplies and techniques
to its franchisees and licensees. The Company's floors are known as "Tufco
Floors". Effective March 31, 1997, the Company discontinued selling a line of
ceiling and wall systems which it had marketed for several years under the name
of "Arcoplast". The installation of the Company's floors is accomplished by the
Company or by one of the Company's franchisees or licensees.
Industry Overview
The industrial flooring industry is made up of a number of small and
medium size businesses offering a variety of flooring products and surfaces to
industrial customers. Many industries engaged in manufacturing or other lines of
business have flooring requirements as a result of extensive wear or chemical
corrosion. Some businesses are engaged in industries which have specific
industry flooring standards. For example, the USDA has promulgated numerous
standards for flooring used in food operations. Flooring 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. Corrosion of
floors 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 30 years, the USDA has stated
that the chemical composition of Tufco Floors is acceptable for use in food
processing and meat packaging industries.
Company Products
Tufco Floor. The Company's primary product is the TUFCO FLOOR. This
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.
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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 order. 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.
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.
Customers
Tufco Floors 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 operation within the territory in which the Tufco
Floor is to be installed. The franchisee then installs the Tufco Floor 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 Arcoplast ceilings and walls had
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.
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The Company primarily sells its products to its franchisees who in turn
install Tufco Floors 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, 1998 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
1998 Per 1997 Per
Franchisee Sales cent Sales cent
Arkotex, Inc. $1,838,000 28% $1,442,000 19%
Tufco Flooring, Inc $947,000 15% $1,023,000 14%
----------- --- ---------- ---
TOTAL $2,785,000 43% $2,465,000 33%
=========== === ========== ===
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 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.
For the years ending May 31, 1998 and 1997, the Company purchased 38% and
39%, 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 15 franchise areas in the United States and Canada. The earliest
franchise was sold in 1976 and the most recent franchise was
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sold in 1997. 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, 1998
and 1997. Continuing franchise fee revenue recognized for the two years ended
May 31, 1998 and 1997 was $3,700 and $0, respectively.
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.
Each franchisee is required to purchase Tufco Floor components from the Company.
Some materials, such as sand may be purchased locally with 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 Washington, Oregon
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. 1/2/95 Delaware, Virginia, Maryland, Pennsylvania.
15. 1/1/97 Nevada, Idaho, Montana, Wyoming, Utah
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There are currently 9 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-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:
5/31/98 5/31/97
Franchise Sales (1) $5,386,000 $5,319,000
Royalties (2) $283,000 $276,000
Franchise Fees (3) $4,000 0
Company Sales (4) $406,000 $1,504,000
Foreign Sales (5) $407,000 $379,000
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Total Sales $6,486,000 $7,478,000
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(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.
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5/31/98 5/31/97
U.S. Sales $6,079,000 $7,099,000
Foreign Sales $407,000 $ 379,000
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Total Sales $6,486,000 $7,478,000
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For the fiscal year ended May 31, 1998, approximately 100% of the
Company's sales were for Tufco Floors. For the fiscal year ended May 31, 1997,
approximately 93% of the Company's sales were for Tufco Floors and 7% of the
Company's sales were for Arcoplast ceilings and walls.
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.
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 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.
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 with the Department of
Commerce and Industrial Development (SECOFI) in Mexico trademarks for the names
"Tufco". The Company has not sought or obtained patent protection for its floors
but relies on trade secret protection.
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 general. Additionally, the Company is subject to
numerous federal and state laws and regulations
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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.
Employees
The Company employs 8 full-time personnel, 3 of whom are executives, and 2
of whom are clerical. The Company also employs 3 warehouse personnel. 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 12575 Pioneer Lane
in Gentry, Arkansas upon which its offices, warehouse and research and
development facilities are located. The Company's offices, warehouse and
research and development facilities are contained in a building of approximately
14,000 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.
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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, 1998.
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 42 as of December 7, 1998. 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.
The Class "B" and Class "C" Warrants expired during the fiscal year ended
May 31, 1997. The exercise period of the Class "A" Warrants have been extended
several times and are currently as follows:
1. Class "A" Warrants. Expiration on June 30, 1999.
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
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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. Until March 1, 1997, the Company had offered and sold
Arcoplast wall and ceiling products. The Company discontinued its Arcoplast
operations on March 1, 1997. No significant revenue or profits had ever been
generated from the Arcoplast operations and it is not expected that the
discontinuance of the Arcoplast operations will have any significant adverse
effect on the Company in the future. The financial statements included with the
Form 10-KSB do include Arcoplast operations for fiscal year 1997.
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.
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
1998 1997
Net Sales 100% 100%
Cost of Sales 69% 73%
Gross Profit 31% 27%
Operating Expenses 26% 29%
Operating Income (Loss) 5% (2%)
Other Income (Expenses) 2% .9%
Income Taxes (Benefit) 3% (.4%)
Net Income (Loss) 4% (1%)
Year Ended May 31, 1998 Compared to Year Ended May 31, 1997
Total net sales for the year ended May 31, 1998, were $6,486,000 compared
with $7,478,000 for the year ended May 31, 1997, a decrease of approximately
13.26%. The decrease was attributed
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to the elimination of the Arcoplasr division and a reduction in company
installations due to the sale of the Pennsylvania territory to an existing
franchise who preformed the installations in 1998. There was a decrease in sales
to affiliates. Sales to U.S. customers for the year ended May 31, 1998 amounted
to 94% of total sales compared with 95% for the year ended May 31, 1997. 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 increased to 31% for the year ended
May 31, 1998, from 27% for the year ended May 31, 1997. Gross profit as a
percentage of sales in fiscal 1996 was 30%. The increase in percentage of gross
profit was the result of the elimination of gross profit on floor installations
performed by the Company and lower gross profit on sales of Arcoplast wall and
ceiling panels.
Operating Expenses. Operating expenses decreased in absolute dollar amount
from $2,190,387 for the year ended May 31, 1997, to $1,653,552 for the year
ended May 31, 1998. Operating expenses decreased as a percentage of net sales
from 29% for the year ended May 31, 1997, to 26% for the year ended May 31,
1998. Total selling expenses decreased from $692,414 (9% of sales) for the year
ended May 31, 1997, to $351,126 (5% of sales) for the year ended May 31, 1998.
General and administrative costs decreased from $1,411,870 (19% of total sales)
for the year ended May 31, 1997 to $1,279,938 (19% of total sales) for the year
ended May 31, 1998. The decrease in selling expenses and general and
administrative expenses was due largely impart to the elimination of the
Arcoplast division.
Total cost of sales and operating expenses were $6,134,600 for the year
ended May 31, 1998, as compared to $7,682,941 for the year ended May 31, 1997.
Interest Expense. Net interest expense was $78,241 during the year ended
May 31, 1998, as compared to $68,709 for the year ended May 31, 1997.
Other Income. Other income was $176,932 during the year ended May 31,
1998, as compared to $138,233 for the year ended May 31, 1997. Other income is
primarily attributed to finance and freight charges on franchisees open
accounts.
Net Income (Loss). For the year ended May 31, 1997, the Company incurred
net loss of $106,078 as compared to net income of $252,460 from the year ended
May 31, 1998. For the fiscal year ended May 31, 1996 the Company had net income
of $259,935.
Liquidity and Financial Resources
For the Years Ended May 31, 1998 and 1997
Net cash provided by all activities in fiscal year 1998 was $1,137
compared to $21,937 in fiscal year 1997.
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Total assets as of May 31, 1998, were $3,040,757 as compared to $3,298,429
as of May 31, 1997.
Accounts and notes receivable increased to $1,776,007 at May 31, 1998
compared to $1,663,747 at May 31, 1997.
The Company continues to have limited cash assets. At May 31, 1998, the
Company had cash of $1,137 compared to cash of $21,397 at May 31, 1997.
At May 31, 1998, current maturities on long-term debt was $50,057.
Accounts payable at May 31, 1998 were $1,088,159 compared to $1,449,195 at May
31, 1997.
At May 31, 1998, shareholders equity was $1,125,540 which was a decrease
of $22,232 over shareholders equity at May 31, 1997.
During the year ended May 31, 1998, the Company had capital expenditures
of approximately $38,995 for property and equipment. At the beginning of the
fiscal year, the Company had anticipated that such expenditures would be
approximately $100,000. For the current year, management anticipates it will
spend approximately $25,000 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.
Forward Looking Statement
The foregoing discussion in "Management's Discussion and Analysis"
contains forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act, which
reflect Management's current views with respect to future events and financial
performance. Such forward looking statements may be deemed to include, among
other things, statements relating to anticipated growth, and increased
profitability, as well as to statements relating to the Company's strategic
plan, including plans to develop and increase loan originations and to
selectively acquire other companies. These forward-looking statements are
subject to certain risks and uncertainties, including, but not limited to,
future financial performance and future events, competitive pricing for
services, costs of obtaining capital as well as national, regional and local
economic conditions. Actual results could differ materially from those addressed
in the forward looking statements. Due to such uncertainties and risks, readers
are cautioned not to place undue reliance on such forward-looking statement,
which speak only as of the date whereof.
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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
Independent Accountants' Report
Year ended May 31, 1998 and 1997
Consolidated Balance Sheet
May 31, 1998
Consolidated Statements of Operations
Years ended May 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity
Years ended May 31, 1998 and 1997
Consolidated Statements of Cash Flows
Years ended May 31, 1998 and 1997
Notes to Consolidated Financial Statements
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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, 1998 and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the two years in
the period ended May 31, 1998. 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, 1998, and the results of its operations and
its cash flows for each of the two years in the period ended May 31, 1998, in
conformity with generally accepted accounting principles.
MOORE STEPHENS FROST
Certified Public Accountants
Little Rock, Arkansas
August 7, 1998
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TUFCO INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 1998
Assets
Current assets
Cash $ 1,137
Accounts receivable, less allowance for doubtful
accounts of $185,000
Trade 1,269,310
Affiliates 474,720
Notes receivable - current 9,175
Inventories 361,850
Refundable income taxes -
Prepaid expenses and other 32,654
Current deferred income tax benefit 79,085
-------------
Total current assets 2,227,931
Property and equipment
Land 83,500
Buildings 455,896
Machinery and equipment 381,937
Furniture and fixtures 121,975
Vehicles 169,993
-------------
1,213,301
Accumulated depreciation (509,112)
Net property and equipment 704,189
Other assets
Notes receivable - long-term 22,802
Reacquired franchise territory, net of
accumulated amortization of $274,429 82,130
Other 3,705
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Total other assets 108,637
Total assets $3,040,757
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Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $1,088,159
Accrued expenses 80,582
Income taxes payable 179,383
Current maturities of long-term debt 50,057
---------------
Total current liabilities 1,398,181
Long-term debt, less current maturities 482,887
Deferred income taxes 34,149
Stockholders' equity
Common stock, $.001 par value; authorized
50,000,000 shares; issued and outstanding
6,965,800 shares 6,966
Additional paid-in capital 261,964
Retained earnings 1,226,310
Cumulative translation adjustment (2,910)
--------------
1,492,330
Capital contributions receivable (90,616)
Unearned employee stock ownership shares (276,174)
Total stockholders' equity 1,125,540
Total liabilities and stockholders' equity $3,040,757
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1998 AND 1997
1998 1997
---- ----
Net sales
Trade customers $5,011,114 $5,753,890
Affiliates 1,474,923 1,723,710
----------- -----------
Total net sales 6,486,037 7,477,600
Cost of sales 4,481,048 5,492,554
----------- -----------
Gross profit 2,004,989 1,985,046
----------- -----------
Operating expenses
Selling 351,126 692,414
General and administrative 1,279,938 1,411,870
Bad debts 22,488 86,103
----------- ------------
Total operating expenses 1,653,552 2,190,387
----------- ------------
Income (loss) from operations 351,437 (205,341)
----------- ------------
Other income (expense)
Interest expense (78,241) (68,709)
Other income 176,932 138,233
----------- ------------
Total other income (expense) 98,691 69,524
----------- ------------
Income (loss) before income taxes 450,128 (135,817)
Income taxes (benefit) 197,668 (29,739)
----------- -------------
Net income (loss) $ 252,460 $ (106,078)
=========== =============
Enumerator - net income (loss) $ 252,460 $ (106,078)
Denominator - weighted average number of shares
outstanding 6,965,800 7,775,575
------------ ------------
Basic earnings per share $ 0.036 $ (0.014)
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Unearned
Employee
Additional Cumulative Capital Stock
Common Paid-In Retained Translation Contributions Ownership
Stock Capital Earnings Adjustment Receivable Shares Total
Balance - May 31, 1996 $7,778 $301,752 $1,241,551 $ (2,846) $ (97,627) $ - $1,450,608
Net loss - - (106,078) - - - (106,078)
Recognition of capital
contributions receivable - - - - 5,511 - 5,511
Issuance of 125,000 shares
of common stock 125 6,125 - - - - 6,250
Purchase and retirement of
937,000 shares of common
stock (937) (45,913) (161,623) - - - (208,473)
Current year translation
adjustment - - - (46) - - (46)
-------------------------------------------------------------------------------------
Balance - May 31, 1997 6,966 261,964 973,850 (2,892) (92,116) - 1,147,772
Net income - - 252,460 - - - 252,460
Recognition of capital
contributions receivable - - - - 1,500 - 1,500
Current year translation
adjustment - - - (18) - - (18)
Employer loan for the
purchase of ESOP shares
of common stock - - - - - (276,174) (276,174)
---------------------------------------------------------------------------------------
Balance - May 31, 1998 $6,966 $261,964 $1,226,310 $(2,910) $(90,616) $(276,174) $1,125,540)
====== ======== ========== ======== ========= ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1998 AND 1997
<TABLE>
<S> <C> <C>
1998 1997
---- ----
Cash flows from operating activities
Net income (loss) $ 252,460 $(106,078)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 83,351 88,335
Amortization 27,282 27,640
(Gain) loss on sale of property and equipment (5,234) 1,885
Change in deferred compensation liability - (61,130)
Change in deferred income taxes 28,326 24,490
Changes in assets and liabilities:
Accounts and notes receivable (112,260) 245,074
Inventories 173,305 (188,348)
Refundable income taxes 15,752 (15,752)
Prepaid expenses and other 37,016 4,369
Other assets 1,285 (1,349)
Accounts payable (361,036) 278,688
Accrued expenses (105,784) 98,239
Income taxes payable 179,383 (353,956)
---------- ----------
Net cash provided by (used in) operating activities 213,846 42,107
---------- ----------
Cash flows from investing activities
Purchase of property and equipment (38,995) (157,331)
Proceeds from sale of property and equipment 30,500 -
Proceeds from sale of reacquired franchise territory - 7,121
---------- ----------
Net cash provided by (used in) investing activities (8,495) (150,210)
---------- ----------
Cash flows from financing activities
Net change in notes payable (444,323) (125,000)
Proceeds from long-term borrowings 513,500 275,000
Principal payments on long-term debt (20,096) (40,571)
Collection of capital contributions receivable 1,500 5,511
Employer loan for purchase of ESOP shares (276,174) -
---------- ----------
Net cash provided by (used in) financing activities (225,593) 114,940
---------- ----------
Effect of exchange rate changes on cash (18) (46)
---------- ----------
Increase (decrease) in cash (20,260) 6,791
Cash - beginning of year 21,397 14,606
---------- ----------
Cash - end of year $ 1,137 $ 21,397
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998 AND 1997
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.
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. Inventories - 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 stated at cost and
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.
20
<PAGE>
1. Organization and Summary of Significant Accounting Policies (cont'd)
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, 1998 and 1997.
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
basis and financial reporting basis 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. During
the year ended May 31, 1998, payments from independent franchises
totaled $1,500.
k. Earnings per share - Earnings per share have been calculated using the
weighted average number of shares outstanding for each year. Options to
purchase $2,480,440 shares of common stock at $0.75 per share were
outstanding during the year ended May 31, 1998 but were not included in
the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares. Employee
stock ownership plan shares are considered outstanding and are
considered in the weighted average number of shares outstanding.
l. Advertising - The Company expenses the production costs of advertising
when such costs are incurred. Total advertising expenses were
approximately $83,000 and $156,000 for the years ended May 31, 1998 and
1997, respectively.
2. Long-Term Debt
Long-term debt consists of:
Note payable to bank; remaining balance due June
2007; payable in monthly installments of $7,100,
including interest at 10%; secured by buildings
and land; guaranteed by an officer and director
of the Company. $506,163
Note payable to individual; due June 2001; payable
$1,000 monthly, including interest at 8.5%; unsecured. 24,110
Note payable to a financing company; due March
1999; payable in monthly installments of $311,
including interest at 10.5%; secured
by certain equipment. 2,671
532,944
21
<PAGE>
Less current maturities 50,057
Long-term debt, less current maturities $482,887
Aggregate maturities of long-term debt are as follows:
Year Ended Amount
1999 $ 50,057
2000 51,354
2001 46,790
2002 384,743
---------
$532,944
The Company made interest payments on long-term debt totaling approximately
$42,700 and $42,800 during the years ended May 31, 1998 and 1997, respectively.
3. Income Taxes
The provision for income taxes at May 31, 1998 and 1997 includes:
1998 1997
---- ----
Current tax expense (benefit) $169,342 $(54,229)
Deferred income tax expense (benefit) 28,326 24,490
---------- ----------
$197,668 $(29,739)
Reconciliation of the differences between income taxes computed at the
Federal statutory tax rates and the consolidated provision for income taxes is
as follows:
1998 1997
---- ----
Income taxes computed at Federal statutory tax rate $153,044 $(46,178)
State tax provision, net of Federal benefits 19,310 (5,828)
Other 25,314 22,267
---------- ----------
Provision (benefit) for income taxes $197,668 $(29,739)
======== ========
The Company has available at May 31, 1998, an unused operating loss
carry forward of approximately $36,000 for Federal income tax purposes,
which expire in the year 2007. The Federal income tax loss carry forward was
acquired in a prior year merger and is limited as to the amounts which can
be recognized annually.
22
<PAGE>
Temporary differences which give rise to significant deferred tax assets
(liabilities) are as follows:
Net operating loss carry forward $ 13,032
Bad debts 70,837
Vacation accrued 6,266
----------
Total deferred income tax assets 90,135
---------
Accelerated depreciation (45,199)
Total deferred tax liabilities (45,199)
Net deferred tax asset $ 44,936
========
The Company made tax payments totaling approximately $315,500 during the
year ended May 31, 1997. There were no tax payments in 1998.
4. Deferred Compensation Agreements
In 1993, the Company entered into employment agreements with three key
employees. The agreements provided for total monthly compensation of $11,750
over the periods set forth in the individual employment agreements; total
stock compensation in the amount of 1,150,000 shares of the Company stock;
future payment of $100,000 to one individual and a total of 575,000 shares
of the Company stock at the end of the employment agreements. During 1994,
1,150,000 shares were issued to the individuals as part of these employment
agreements.
During 1997, 125,000 shares were issued to an individual in connection
with these employment agreements. In connection with the purchase and
retirement of the Company stock discussed in note 7, the stock rights on the
remaining 450,000 shares were surrendered.
5. Employee Stock Ownership Plan
During the year ended May 31, 1997, the Company established an Employee
Stock Ownership Plan (the "ESOP") for the purpose of providing retirement
benefits for eligible employees. To be eligible to participate in the plan,
employees must have completed one year of service and be at least 21 years
of age. The Company's contribution to the plan is discretionary and will be
determined by the Board of Directors. Participants in the plan generally
vest after six years. The Company has given participants holding ESOP shares
certain put rights which require the Company to repurchase any shares held
for the fair value at the time the put option is exercised.
The Company accounts for the ESOP in accordance with Statement of Position
93-6. Accordingly, the ESOP's borrowing from the Company are considered unearned
employee benefit expense and, as such, are recorded as a reduction of the
Company's stockholders' equity. The borrowings are collateralized by the
unallocated shares of common stock. On January 14, 1998, the trustees of the
ESOP signed an option agreement whereby, the two majority stockholders of the
Company granted the ESOP options to purchase 4,677,364 shares of the Company's
common stock over the fifteen-year period ended January 14, 2013. The total
purchase price for these options is $1,092,149 with interest on the unexercised
options at an annual rate of 10%. During the Year ended May 31, 1998, the ESOP
23
<PAGE>
purchased 1,051,282 shares under the above noted option agreement. The Company
loaned the ESOP $276,174 in connection with this purchase and this amount has
been reflected in the accompanying balance sheet as unearned employee stock
ownership shares.
Company contributions and dividends will be used to repay the Company's loan
to the ESOP and accordingly, no interest income will be recognized. The ESOP
shares purchased through the borrowings are maintained in a suspense account
until realized and allocated to individual participants' accounts. The release
of shares from the suspense account is determined by multiplying the number of
shares in the suspense account by the ratio of debt service payments (principal
plus any interest) made by the ESOP during the year to the sum of the debt
service payments to be made by the ESOP in future years. When shares are
released through Company contributions, the Company reports compensation expense
equal to the loan principal. When shares are released through dividends, the
dividend on allocated shares is charged to retained earnings. If the dividend on
unallocated shares is used to pay debt service, the dividend is charged against
the related debt. If the dividend is used to compensate participants by adding
the value of the dividends to participants accounts, the dividends are expensed
as compensation expense. Contribution expense for the years ended May 31, 1998
and 1997 were $37,327 and $77,985, respectively. There was no compensation
expense for the years ended May 31, 1998 and 1997.
6. Related Party Transactions
During the year ended May 31, 1997, the Company purchased and retired a
total of 937,000 shares of the Company's stock which was previously held by
two key individuals. Consideration given in connection with these
acquisitions consisted of the following:
Distribution of certain inventory items $140,759
Distribution of certain fixed assets 66,103
Relief of outstanding amounts owed by the individuals 24,111
Relief of deferred compensation liability owed to
the individuals (22,500)
$208,473
During the years ended May 31, 1998 and 1997, the Company paid
consulting fees to an officer and director of approximately $129,600 and
$175,700, respectively.
Certain company officers and directors have personally guaranteed an
unsecured trade account payable with a major supplier (note 9) up to a
maximum of $500,000. At May 31, 1998, this trade payable approximated
$521,500.
Certain company officers and directors have personally guaranteed
certain secured and unsecured notes payable to a bank in the aggregate
amount of $506,162 at May 31, 1998.
7. Stock Warrants
During the year ended May 31, 1996, pursuant to 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. During the year ended May 31,
24
<PAGE>
1997, 2,500,000 Class B warrants with an exercise price of $0.95 and
2,500,000 Class C warrants with an exercise price of $1.15 expired with no
warrants being issued. At May 31, 1997, the Company had warrants outstanding
with exercise prices as follows:
Warrants Exercise Expiration
Outstanding Class Price Date
Later of June 30, 1998 or 90 days
2,480,440 A $0.75 from the effective date of the
Company's Prospectus
The stock warrants may be exercised only if a current registration
statement is in effect. Management is presently unable to estimate when a
registration statement will be filed.
8. 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, 1998. Total rent expense included in the statement of
operations for the years ended May 31, 1998 and 1997 was approximately
$32,400 and $27,800, respectively.
The Company has entered into employment agreements with the two majority
stockholders for a period of six years with monthly salaries of $10,000 and
$5,000, respectively, as a result of the option agreement described in note
5.
9. Major Customers and Supplier
The Company has a limited number of franchisee customers. During the
years ended May 31, 1998 and 1997, there were two franchisees who,
individually, provided in excess of 10% of total sales. The aggregate sales
to these franchisees were 44% in 1998 and 33% in 1997 of the total sales.
Sales to related parties approximated 23% of total sales in 1998 and 1997.
During the year ended May 31, 1998 and 1997, the Company purchased 38%
and 39%, respectively, of total raw materials from a supplier. Also, during
the year ended May 31, 1998, the Company purchased 16% of total raw
materials from another 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.
10. 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.
25
<PAGE>
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
NONE.
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 64 Chairman of the Board/Chief
Executive Officer/
President/Director
Lucille M. Cox 58 Secretary/
Director
Russell D. Cox 40 Vice President/Director
Leslie P. Lagoni 74 Director
Brent Mills 36 Chief Financial Officer/
Treasurer/Director
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 36 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. Cox is
the husband of Lucille M. Cox and the father of Russell D. Cox, both of whom are
directors of the Company.
26
<PAGE>
Lucille M. Cox. Mrs. Cox has been associated with Tufco International, Inc.
since its inception.
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.
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.
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.
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.
27
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> >C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name and Annual Restrict Option/ LTIP Other
Principal ($) ($) Compen- Stock SAR's Payouts Compensa-
Position Year Salary Bonus sation($) Awards($) (#) ($) tion ($)
Donald L. Cox 1998 $ 81,000 $ -0- $125,237(1) $-0- -0- $-0- $-0-
President, CEO 1997 $ 23,403 $ -0- $175,700(1) $-0- -0- $-0- $-0-
Chairman 1996 $150,000 $ -0- $149,909(1) $-0- -0- $-0- $-0-
Russell D. Cox 1998 $ 93,333 $75,000 $-0- $-0- -0- $-0- $-0-
1997 $ 66,033 $75,000 $-0-
(1) This compensation was attributed to consulting fees paid to Mr. Cox
by the Company.
</TABLE>
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, 1998. As of May 31, 1998, 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.
ESOP
During the year ended May 31, 1997, the Company established an Employee
Stock Ownership Plan (the "ESOP") for the purpose of providing retirement
benefits for eligible employees. To be eligible to participate in the plan,
employees must have completed one year of service and be at least 21 years of
age. The Company's contribution to the plan is discretionary and will be
determined by the Board of Directors. Participants in the plan generally vest
after six years. The Company has given participants holding ESOP shares certain
put rights which require the Company to repurchase any shares held for the fair
value at the time the put option is exercised.
The Company accounts for the ESOP in accordance with Statement of
Position 93-6. Accordingly, the ESOP's borrowing from the Company are considered
unearned employee benefit expense and, as such, are recorded as a reduction of
the Company's stockholders' equity. The borrowings are collateralized by the
unallocated shares of common stock. On January 14, 1998, the trustees of the
ESOP signed an option agreement whereby, the two majority stockholders of the
Company granted the ESOP options to purchase 4,677,364 shares of the Company's
common stock over the fifteen-year period ended January 14, 2013. The total
purchase price for these options is $1,092,149 with interest on the unexercised
options at an
28
<PAGE>
annual rate of 10%. During the Year ended May 31, 1998, the ESOP purchased
1,051,282 shares under the above noted option agreement. The Company loaned the
ESOP $276,174 in connection with this purchase and this amount has been
reflected in the accompanying balance sheet as unearned employee stock ownership
shares.
Company contributions and dividends will be used to repay the Company's
loan to the ESOP and accordingly, no interest income will be recognized. The
ESOP shares purchased through the borrowings are maintained in a suspense
account until realized and allocated to individual participants' accounts. The
release of shares from the suspense account is determined by multiplying the
number of shares in the suspense account by the ratio of debt service payments
(principal plus any interest) made by the ESOP during the year to the sum of the
debt service payments to be made by the ESOP in future years. When shares are
released through Company contributions, the Company reports compensation expense
equal to the loan principal. When shares are released through dividends, the
dividend on allocated shares is charged to retained earnings. If the dividend on
unallocated shares is used to pay debt service, the dividend is charged against
the related debt. If the dividend is used to compensate participants by adding
the value of the dividends to participants accounts, the dividends are expensed
as compensation expense. Contribution expense for the years ended May 31, 1998
and 1997 were $37,327 and $77,985, respectively. There was no compensation
expense for the years ended May 31, 1998 and 1997.
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 May 31, 1998, by (i) each
director of the Company, (ii) all officers and 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:
29
<PAGE>
- ------------------------------------------------------------------------------
Name Amount
and Address and Nature
of Beneficial of Beneficial Percent
Owner Ownership of Class (1)
- ------------------------------------------------------------------------------
* Donald L. Cox (1) 3,533,337 50.72%
12575 Pioneer Lane
Gentry, AR 72734
* Lucille M. Cox (1) 764,169 10.97%
12575 Pioneer Lane
Gentry, AR 72734
* Russell D. Cox (1) 694,171 9.97%
12575 Pioneer Lane
Gentry, AR 72734
Leslie P. Lagoni(1)(2) 425,000 6.10%
21345 Las Pilas Rd.
Woodland Hills, CA 91364
Brent Mills(1)(3) 375,000 5.38%
Pioneer Lane
Gentry, AR 72734
Richard Graves 400,000 5.74%
106 Ruth Lane
Rogers, AR 72756
All Officers and Directors 6,191,677 88.89%
as a Group (5 persons)
Total Shares Issued
and Outstanding 6,965,800 100.00%
- ------------------------------------------------------------------------------
* During the year ended May 31, 1998, the ESOP purchased 1,051,282 shares
under the Option Agreement.
(1) These individuals are the officers and/or directors of the Company.
(2) 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.
30
<PAGE>
(3) Mr. Mills owns 375,000 shares in joint ownership with Tina Mills, his
wife.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Repurchase of Stock. During the year ended May 31, 1998, the Company
purchased and retired a total of 937,000 shares of the Company's stock which was
previously held by Ghislain Beauregard and Thomas Jakubik. These individuals
were formerly officers and directors of the Company. Consideration given in
connection with these acquisitions consisted of the following:
Distribution of certain inventory items $140,759
Distribution of certain fixed assets 66,103
Relief of outstanding amounts owed by the individuals 24,111
Relief of deferred compensation liability owed to the
individuals (22,500)
---------
$208,473
=========
Issuance of Shares. In September, 1997, subsequent to the 1997 fiscal year
end, the Company issued 125,000 shares of its common stock to Brent Mills, an
officer and director of the Company, pursuant to an Employment Agreement.
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.
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, 1998 and
May 31, 1997, the outstanding payable to such creditor was approximately
$521,000 and $504,000, respectively. Brent E. Mills guaranteed a bank loan of
$513,500 to the Company which is secured by the Company's real property.
31
<PAGE>
Receivables from Affiliates. As of May 31, 1998 and 1997, the Company had
receivables of $180,000 and $188,000, 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. These receivables
arose in connection with the purchase and sale of the Company's products in the
normal course of business.
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, 1998.
32
<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: December ____, 1998 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/ December ____, 1998
Donald L. Cox CEO/Director
/s/ Lucille M. Cox Secretary/ Director December ____, 1998
Lucille M. Cox
/s/ Russell D. Cox Vice President/ December ____, 1998
Russell D. Cox Director
/s/ Leslie P. Lagoni Director December ____, 1998
Leslie P. Lagoni
33
<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: December ____, 1998 By
Donald L. Cox
Principal Executive Officer
By
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
Donald L. Cox Chairman/President/ December ____, 1998
CEO/Director
Lucille M. Cox Secretary/Director December_____, 1998
Russell D. Cox Vice President/ December _____,1998
Director
Brent Mills Director December _____.1998
Leslie P. Lagoni Director December_____, 1998
34
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CYCLO3PSS
CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 1,137
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,137
<SECURITIES> 0
<RECEIVABLES> 1,961,007
<ALLOWANCES> 185,000
<INVENTORY> 361,850
<CURRENT-ASSETS> 2,227,931
<PP&E> 1,213,301
<DEPRECIATION> 509,112
<TOTAL-ASSETS> 3,040,757
<CURRENT-LIABILITIES> 1,398,181
<BONDS> 0
0
0
<COMMON> 6,966
<OTHER-SE> 1,118,574
<TOTAL-LIABILITY-AND-EQUITY> 3,040,757
<SALES> 6,486,037
<TOTAL-REVENUES> 6,486,037
<CGS> 4,481,048
<TOTAL-COSTS> 6,134,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,241
<INCOME-PRETAX> 450,128
<INCOME-TAX> 197,668
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252,460
<EPS-PRIMARY> .036
<EPS-DILUTED> 0
</TABLE>
