<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 1999. Commission file number 0-21018.
TUFCO TECHNOLOGIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware 39-1723477
---------------------------- ---------------------
(State of other jurisdiction (IRS Employer ID No.)
of incorporation or organization)
4800 Simonton Road, Dallas, Texas 75244
---------------------------------------
(Address of principal executive offices)
(972) 789-1079
--------------
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock of Tufco Technologies, Inc. held
by non-affiliates, as of December 10, 1999, was approximately $7,789,596. Such
aggregate market value was computed by reference to the closing price of the
Common Stock as reported on the NASDAQ National Market on December 10, 1999. For
purposes of making this calculation only, the registrant has defined affiliates
as including all directors and beneficial owners of more than ten percent of the
Common Stock of the Company. The number of shares of the registrant's Common
Stock outstanding as of December 10, 1999 was 4,420,121.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its Annual Meeting
of Stockholders to be held in 2000 are incorporated by reference into Part III
of this report.
<PAGE> 2
PART I
ITEM 1 - BUSINESS
GENERAL
Tufco Technologies, Inc. ("Tufco" or the "Company") provides
diversified contract manufacturing and specialty printing services, manufactures
and distributes business imaging paper products, and distributes paint sundry
products used in home improvement projects. Since 1992 and until its
organizational restructuring on February 7, 1997, the Company operated as three
wholly owned subsidiaries, Tufco Industries, Inc., Executive Converting
Corporation ("ECC") and Hamco Industries, Inc. ("Hamco"). On January 28, 1994,
the Company completed an initial public offering in which the Company issued and
sold 900,000 shares of its Common Stock, par value $.01 per share ("Common
Stock"), and certain stockholders of the Company sold 50,000 shares of Common
Stock. Contemporaneously with the closing of the Company's public offering, the
Company acquired, through ECC, substantially all of the assets of Executive Roll
Manufacturing, Inc., d/b/a Executive Converting Corporation for $7.5 million and
127,778 shares of Common Stock. On August 23, 1995, the Company acquired,
through Hamco, substantially all of the assets of Hamco, Inc. for approximately
$12.9 million in cash. On February 7, 1997, the Company reorganized its
corporate structure to better serve its business needs. Through this
restructuring, the net assets of Tufco Industries, Inc., ECC and Hamco were
transferred to Tufco, L.P., a Nevada limited partnership, in which Tufco Tech,
Inc. is the sole managing general partner and is wholly owned by the Company. On
November 13, 1997 the Company purchased all of the outstanding common stock of
Foremost Manufacturing Company, Inc. for $5.9 million and 25,907 shares of
Common Stock.
Tufco offers a wide array of contract manufacturing services for
industrial uses including thermal laminating, coating, folding, precision
slitting and rewinding, precision sheeting and custom packaging for delivery to
the end user. Its specialty printing services provide wide web, multi-color
flexographic and letterpress printing and adhesive laminations to industrial
users and resale distributors. Tufco also manufactures a wide range of printed
and unprinted business imaging paper products for a variety of business needs,
and the Company's Paint Sundry sector manufactures and distributes products used
by professional painters and do-it-yourself home owners.
The Company was incorporated in the state of Delaware in 1992 to
acquire Tufco Industries, Inc. Although the Company was organized in 1992, the
business conducted by Tufco Industries, Inc. has been in continuous operation
since 1974. The Company has become a leading provider of contract manufacturing
and specialty printing services, and supplier of value-added custom paper
products, and it has the most complete line of paint sundry products in the
industry. The Company's principal executive offices are located at 4800 Simonton
Road, Dallas, Texas 75244, and its telephone number is (972) 789-1079.
PRODUCTS AND SERVICES
The Company markets its products and services through three market
sectors: Contract Manufacturing services, Business Imaging paper products, and
Paint Sundry products. Until its exit from the market place in June of fiscal
1999, the Company also produced and distributed a line of Away-From-Home tissue
and towel products. Tufco conducts operations from five manufacturing and
distribution locations in Green Bay, Wisconsin, Manning, South Carolina, Dallas,
Texas, Newton, North Carolina and St. Louis, Missouri.
Contract Manufacturing Market Sector
Tufco Technologies has contract manufacturing capability at three
locations: Green Bay, Wisconsin, Dallas, Texas and Newton, North Carolina.
The Company's capabilities at its Green Bay facilities include custom
packaging, coating, cutting, folding, thermal and adhesive laminating, embossed
bonding, slitting and rewinding. These facilities custom convert a wide array of
materials, including polyethylene films, non-woven materials (coated and
uncoated), paper, and tissue. Products include household cleaning wipes, facial
wipes, various health care products, reinforced towels (towels with a
polyethylene or polypropylene mesh to provide strength and durability), medical
drapes, feminine hygiene components and polyethylene and paper dropcloths. The
Company has invested in equipment to perform
1
<PAGE> 3
Contract Manufacturing Market Sector (continued)
thermal lamination to bond various material substrates up to 120 inches wide,
such as multi-ply dropcloths, reinforced material and breathable moisture
barrier wraps. Machinery and equipment at the Green Bay facility have the
capability, developed by the Company's in-house engineers and technical
personnel, to combine or modify various substrates through the use of precise
temperature and pressure control.
The Company's Green Bay facility offers value-added specialty printing
and related graphic arts services, including pre-press work, sheeting,
calendering, printing, finishing, and thermal and adhesive laminating. The
Company provides multi-color printing that uses computerized control to maintain
a high level of print quality. The Company focuses on specialty printing
projects such as paper tablecovers, food and gift-wraps, flexible packaging,
feminine hygiene components, printed release liners, and novelty and holiday
bathroom tissue. The Company is currently installing a fully automated,
state-of-the-art Windmoeller & Hoelscher (W&H) Astroflex printing press which
has the capability to print up to 54 inches in width at speeds up to 1500 feet
per minute.
Green Bay's pre-press staff prepares projects for printing to customer
specifications. The Company uses the customer's preliminary artwork and arranges
or performs all preparatory processes for camera ready art, video plate making,
layout, and other related services.
The Green Bay presses use flexographic and letterpress processes and
can print on a wide range of media from lightweight tissue or non-wovens to
heavyweight paperboard, films and foils. The Company utilizes four wide-web
presses of various sizes, three of which are capable of six-color printing with
the new W&H press at eight colors. The Company uses water-based and oil-based
inks. The presses can accommodate widths up to 82 inches for one-sided printing
and are capable of simultaneous two-sided printing for widths up to 51 inches.
The presses have a variety of print cylinders that provide the Company with the
flexibility to meet customer needs, utilizing lower cost rubber printing plates
that allow the Company to maintain quality and achieve a competitive pricing
advantage for low volume jobs relative to printers using engraved printing
cylinders.
The Company's Dallas facility has capabilities that include precision
slitting, rewinding, sheeting, specialty packaging, folding, perforating, and
trimming. These capabilities are directed toward converting fine paper materials
including specialty and fine printing papers and paperboards, thermal papers,
polyester films, and coated products.
The Dallas facility's contract manufacturing services include final
packaging of products, including items on which the Company has performed other
converting or specialty printing services. Packaging capabilities include high
quality bulk skid wrapping, vacuum-sealed carton packed sheets, poly-paper and
poly-film wrapping, and shrink-film packaging. The flexibility of the equipment
at the Dallas facility and the packaging alternatives that the Company can
provide its customers produce finished products that meet and exceed a varied
range of customer specifications and requirements. The Company's Dallas custom
converting services have grown due to the addition of a state-of-the-art
Jagenberg sheeter with specialty paper and paperboard sheeting capabilities and
the investment in a custom designed rewinder for thermal papers and films.
The Company's Newton facility has capabilities which include precision
slitting and rewinding of paper rolls in a large variety of sizes which include
variables in width, diameter, core size, single or multi-ply, and color. All of
the rolls can be printed on one side or both, providing the customer with
advertising, promotional or security features.
The Company's Newton facility also produces a full range of papers for
use in bank proof or teller machines, including fan-fold forms, cards and
printed rolls of various sizes and types. Additionally, the Company produces an
extensive selection of standard and customized guest checks for use in the
restaurant industry, and the Company's Newton facility owns equipment which
enables the Company to produce a wide variety of multi-part business forms.
2
<PAGE> 4
Business Imaging Market Sector
The Company produces and distributes a wide variety of printed and
unprinted paper products used in business imaging equipment in market sectors
including architectural and engineering design, high speed data processing,
point of sale, automatic teller machines and a variety of office equipment. The
Company's products include roll products ranging in length from 150 feet to 3500
feet and in widths from 1 inch to 54 inches. Additionally, the Company produces
precision-sheeted products ranging in size from 11 by 17 inches to 65 by 65
inches. The Company's products are available in a wide range of paper grades
including a variety of weights of bond paper, thermal imaging papers, fine
vellums and films and multi-part forms.
Paint Sundry Market Sector
The Company's Manning and St. Louis facilities manufacture and
distribute home improvement products that are sold to paint and hardware
distributors, home centers, and retail paint stores. To provide its customers
with the industry's most complete line of paint sundry products, the Company
supplements the products it manufactures by distributing products manufactured
for the Company by others. Consumer disposable products include polyethylene,
paper and canvas dropcloths, painters' apparel, latex and vinyl gloves, paint
strainers, and other allied items. These products are often used by homeowners
performing do-it-yourself home improvement projects, contractors and painting
professionals. The Company also sells a line of masking paper products and shop
towels for the automotive aftermarket. The Company has increased sales of
consumer disposables by continually broadening and improving its product line,
thereby allowing customers to consolidate their orders with a single vendor. In
addition, the Company has attracted large buying groups through various volume
incentives.
Away From Home Market Sector
Until June of 1999, the Company produced and distributed its own line
of tissues, towels and wipes for use in public washrooms. Additionally, the
Company provided converting services for large manufacturers in the Away From
Home (AFH) market place. In fiscal 1999, Company management chose to exit the
AFH market due to intense price competition and due to the lack of strategic
emphasis which management placed on that market. On June 28, 1999, the Company
sold all of the fixed assets and inventory related to the AFH product line to a
company located in Green Bay, Wisconsin.
MANUFACTURING AND OPERATIONS
In producing and distributing its line of Business Imaging Products,
the Company works closely with various Original Equipment Manufacturers (OEMs)
to develop products which meet or exceed the requirements of the imaging
equipment. The Company then produces and stocks a full line of paper products to
meet the needs of the users of the imaging equipment. With regard to its
Contract Manufacturing operations, the Company either utilizes product
specifications provided by its customers or teams with its customers to develop
specifications which meet customer requirements. Generally, the product begins
with a flexible substrate, which is a base material such as a non-woven
material, paper, or polyethylene. The Company applies one or more of its custom
converting or specialty printing services that it has developed over a period of
years through its distinctive technical knowledge to add value to these
materials.
The Company's growth has been supported by its substantial capital
investment in new facilities and machinery and equipment. During the past three
years, the Company spent over $8 million on capital expenditures at its five
locations. Through the Company's expenditures on new equipment, it has increased
both its manufacturing capacity and the range of its capabilities. Principal
capital additions include equipment which expand the Company's custom folding
and packaging capabilities, and presses which enable the Company to print
poly-laminate and thermal coated substrates. The Company has also expanded and
modernized its roll-to-roll winding capacity. The Company believes it has
sufficient capacity to meet its growth expectations.
3
<PAGE> 5
Manufacturing and Operations (continued)
The Company's equipment can produce a wide range of sizes of production
output to meet unique customer specifications. The custom converting equipment
can accommodate web widths from 3 inches to 132 inches. Its folding equipment
can fold from 6 inches to 120 inches by 240 inches, in one-inch increments. The
Company's printing presses perform flexographic and letterpress processes and
print from one to eight colors on webs as wide as 82 inches. Its fine printing
paper and paperboard converting equipment includes state-of-the-art rewinders,
sheeters, folders, perforators, and equipment that performs extensive packaging
functions.
SALES AND MARKETING
Tufco markets its products and services nationally through its 30
full-time sales and service employees and 114 manufacturer's representatives and
distributors. The Company's sales and service personnel are compensated on a
base salary plus incentive bonus. The Company generally utilizes referrals and
its industry reputation and presence to attract customers, and advertises on a
limited basis in industry periodicals and through cooperative advertising
arrangements with its suppliers and customers.
Prior to fiscal 1999, customers generally purchase the Company's goods
and services under project-specific purchase orders rather than long-term
contracts; however, beginning in fiscal 1998, management shifted its strategic
focus in Contract Manufacturing away from overflow converting towards
longer-term cooperative manufacturing projects which usually include a
multi-year contract. The Company reached agreements with several companies
including Hallmark Cards, Inc., Procter & Gamble Manufacturing, Amoco Fabrics
and Fibers, and Amscan, Inc. for specialized contract converting services
focused on printing, coating, cutting, folding, and packing. The Company's sales
volume by quarter is subject to a limited amount of seasonal fluctuation.
Generally, Tufco's sales volume and operating income are at their lowest levels
in the first and second fiscal quarters and are generally higher in the third
and fourth fiscal quarters.
The customer base consists of approximately 1,000 companies, including
large consumer products companies, dealers and distributors of business imaging
papers, and resellers of paint sundry products. There were no customers
accounting for more than 10% of consolidated sales in fiscal 1998. Sales are
generally made on a credit basis within limits set by the Company's executive
management. The Company generally requires payment to be made within 30 days
following shipment of goods.
COMPETITION
The Company believes the primary areas of competition for its goods and
services are quality, production capacity and capability, capacity for prompt
and consistent delivery, service, continuing relationships and price. The
Company believes that its key competitive advantages are product quality, quick
response, rapid equipment set-up and turnaround time, long-standing customer
relationships, broad customer base, highly engineered machinery and processes,
production diversity and capacity, continuity of management, and experienced
personnel. Management believes that there is no single competitor that offers
the breadth and variety of products and services offered by the Company. In
addition, customers benefit from the Company's ability to perform its multiple
services and distribute from its national asset base, which reduces freight
costs and increases product and service reliability through use of single source
supplier on a national basis.
Competitors for the Company's products and services vary based upon the
products and services offered. In the Company's Contract Manufacturing services,
the Company believes that relatively few competitors offer a wider range of
services or can provide them from a single source. With respect to the Company's
specialty printing services and fine paper converting products, the competition
consists primarily of numerous small regional companies. Management believes
that the Company's capabilities in Contract Manufacturing and specialty printing
give it the flexibility, diversity, and capacity to compete effectively on a
national basis with large companies and locally with smaller regional companies.
The Company does not believe foreign competition is significant at this time in
the Contract Manufacturing and specialty printing lines. In Business Imaging
Products, raw materials are inexpensive and readily available, and converting
equipment is easily purchased. As a result, competition for Business Imaging
customers is very strong, primarily from small regional suppliers and a few
large national companies. Based on management's assessment of the market, no
single firm offers the breadth
4
<PAGE> 6
Competition (continued)
of products offered by Tufco on a national basis. There is strong domestic
competition and a modest amount of foreign competition in the manufacturing of
Away-From-Home and paint sundry products.
Historically, the Company has been subject to surges and declines in
sales due to the short term nature of its converting projects with large
integrated paper products companies. Since the Company began emphasizing longer
term contractual arrangements, management believes that it is now better able to
forecast declines in sales. However, volume requirements in Contract
Manufacturing arrangements are ultimately controlled by the Company's customers,
and a certain amount of short-term fluctuation is expected.
PRODUCT DEVELOPMENT AND QUALITY CONTROL
The Company works with its customers to develop new products and
applications. The Company believes that a key factor in its success has been its
willingness and distinctive technical competency to help customers experiment
with various flexible substrates to develop materials with different attributes
such as strength, flexibility, absorbency, breathability, moisture-resistance,
and appearance. As a result, the Company's capabilities enable it to develop
certain laminated substrates at lower costs than if the customers developed
these products themselves. For example, a customer may request certain physical
tests during trial runs that are performed by the Company's quality control
personnel, often with the customer on site. Customers are charged for machine
time use, materials, and operator time in the new product development process.
After completing the development process, the Company prices a new product or
service and designs an ongoing program that provides information to the customer
such as quality checks, inventory reports, materials data, and production
reports.
The Company maintains a multiple quality control laboratories that
constantly monitor its production using statistical process controls (SPC) to
observe and measure quality effectiveness of its production processes, such as
temperature, speed, tension, and pressure. The Company's rigid standards and use
of SPC have allowed it to qualify for the GMP (Good Manufacturing Practices)
designation from several customers, a quality control standard that these
companies require before they will use a company for outsourcing. In addition,
several of the Company's customers perform periodic audits at the Company's
Green Bay and Dallas facilities to ensure that adequate quality control
practices are in place at all times. The Company's Dallas quality control
laboratory is part of a collaborative of 33 laboratories sponsored by a large
original equipment manufacturer that utilizes the Dallas facility for its
production. The collaborative is utilized by that company to help set quality
standards and ensure that its suppliers, like the Dallas facility, have in
places the process reviews and controls necessary to ensure that quality
products are being manufactured consistently. In fiscal 2000, the Company will
begin, and incur costs for, a program to obtain ISO 2002 certification for its
Green Bay facility.
RAW MATERIALS AND SUPPLIERS
The Company is not dependent on any particular supplier or group of
affiliated suppliers for raw materials or for equipment needs. The Company
believes it has excellent relationships with its primary suppliers, and the
Company has not experienced difficulties in obtaining raw materials in the past.
The Company's raw materials fall into four general groups: various paper stocks,
inks for specialty printing, non-woven materials, and polyethylene films. There
are numerous suppliers of all of these materials. To ensure quality control and
consistency of its raw material supply, the Company's Dallas and Newton
facilities receive fine paper stock primarily from three major paper companies
instead of a greater number of companies.
The Company's primary raw material, base paper, is subject to periodic
price fluctuations. In the past, the Company has been successful in passing most
of the price increases on to its customers, but management cannot guarantee that
the Company will be able to do this in the future.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, and local environmental laws
and regulations concerning emissions into the air, discharges into waterways,
and the generation, handling, and disposal of waste materials. These laws and
regulations are constantly evolving, and it is impossible to predict accurately
the effect they may have upon the capital expenditures, earnings, and
competitive position of the Company in the future. The
5
<PAGE> 7
ENVIRONMENTAL MATTERS (CONTINUED)
Company believes that it complies with these laws and regulations in all
material respects. The Company does not maintain environmental impairment
insurance.
The Company's past expenditures relating to environmental compliance
have not had a material effect on the Company, nor does the Company expect that
such expenditures relating to the Company's recently completed addition to its
manufacturing facility will be material. Further growth in the Company's
production capacity with a resultant increase in discharges and emissions may
require capital expenditures for environmental control facilities in the future.
The Company does not expect such expenditures to be material. No assurance can
be given that future changes to environmental laws or their application will not
have a material adverse effect on the Company's business or results of
operations.
EMPLOYEES
At September 30, 1999, the Company had approximately 725 employees, of
whom 400 were employed at its Green Bay facility, 100 at its Manning facility,
80 at its Dallas facility, 95 at its Newton facility, and 50 at its St. Louis
facility. The Company has a non-union workforce and believes that its
relationship with its employees is good.
ITEM 2 - PROPERTIES
The Company's main production and distribution facilities for Contract
Manufacturing and specialty printing are located in Green Bay, Wisconsin. The
188,000 square foot facility (of which approximately 10,000 square feet are used
for offices) was built in stages from 1980 to 1996 and is owned by the Company.
The Company has approximately seven additional acres on which to expand in the
future.
The Company leases 44,000 square feet of space in a facility contiguous
to its Green Bay, Wisconsin, facility, which is currently used for certain
Contract Manufacturing, warehousing, and distribution operations. This facility
is leased from a partnership of which Samuel Bero, a director of the Company, is
one of several partners. The lease for this facility expires March, 2003. The
Company has an option to renew this lease for an additional three years.
The Company's corporate headquarters are located in facilities which it
leases in Dallas, Texas, in the same building in which the Company produces and
distributes Business Imaging products and provides custom converting of various
fine paper and board grade papers. The lease for the 173,000 square foot
facility expires in February, 2003.
The Company owns a 120,000 square foot facility in Newton, North
Carolina, used in the production and distribution of Business Imaging products
and in the printing of custom forms.
In June 1996, the Company leased for five years and in October of 1996
occupied a new 62,000 square foot facility in Clarendon County, South Carolina,
which was designed and constructed to house the production and distribution
operations for the Company's paint sundry business. The Company has guaranteed
to the lessor that, if the lease is not renewed, the residual market value of
the building which was constructed at a cost of $1.5 million, will be at least
$0.9 million. Management expects the building value will be at least $0.9
million; however, the Company cannot provide assurances as to the impact of
future economic factors influencing the future value of the building. The
Company also owns a 42,000 square foot facility in Manning, South Carolina which
is not used in operations. In fiscal 1998, the Company decreased its carrying
value of this facility and began marketing the property for sale or lease.
The Company leases a 60,000 square foot building in St. Louis, Missouri
from the former owners of Foremost Manufacturing Company in which it packages
and distributes paint sundry products. This lease expires in November 2000.
The Company believes that all of its facilities are in good condition
and suited for their present purpose. The Company believes that the property and
equipment currently used and planned for acquisition is sufficient for
6
<PAGE> 8
ITEM 2 - PROPERTIES (CONTINUED)
its current and anticipated short-term needs, but that the expansion of the
Company's business or the offering of new services could require the Company to
obtain additional equipment or facilities.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various legal proceedings in the ordinary
course of its business, which are not anticipated to have a material adverse
effect on the Company's results of operations or financial condition.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
<PAGE> 9
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since the Company's initial public offering on January 28, 1994 at
$9.00 per share, the Common Stock of Tufco has been traded on the NASDAQ
National Market under the trading symbol "TFCO." The following table sets forth
the range of high and low closing prices for the Common Stock, as reported on
the NASDAQ National Market for the periods indicated:
<TABLE>
<CAPTION>
High Low Close
---- --- -----
<S> <C> <C> <C>
Fiscal 1998:
Quarter ended December 31, 1997 $12.00 $ 9.50 $10.06
Quarter ended March 31, 1998 $11.25 $ 8.25 $ 8.75
Quarter ended June 30, 1998 $10.00 $ 6.50 $ 7.00
Quarter ended September 30, 1998 $ 8.00 $ 6.50 $ 7.00
Fiscal 1999:
Quarter ended December 31, 1998 $ 7.50 $ 4.13 $ 5.00
Quarter ended March 31, 1999 $ 6.38 $ 3.25 $ 6.00
Quarter ended June 30, 1999 $ 8.50 $ 5.50 $ 8.00
Quarter ended September 30, 1999 $ 8.25 $ 7.00 $ 7.50
</TABLE>
As of December 10, 1999, there were approximately 133 holders
of record of the Common Stock. On December 10, 1999, the last reported sale
price of the Common Stock as reported on the NASDAQ National Market was $8.88
per share.
The Company has never paid dividends on its Common Stock. All notes
except the Industrial Development Revenue Bonds are supported by loan agreements
which contain certain restrictive covenants, including requirements to maintain
certain levels of cash flow and restriction on the payment of dividends. The
Company does not intend to pay any cash dividends in the foreseeable future.
8
<PAGE> 10
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA)
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------------
1999 1998(1) 1997 1996 1995(2)
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................................. $ 76,331 $ 76,973 $ 65,750 $ 68,374 $ 47,987
Cost of sales .............................. 63,225 65,903 53,835 56,042 39,796
-------- -------- -------- -------- --------
Gross profit ............................... 13,106 11,070 11,915 12,332 8,191
Selling, general, and
administrative expenses .................. 7,317 7,803 6,396 6,753 4,906
Amortization and other post-
acquisition expenses ..................... 1,010 1,025 706 724 437
Write-down of property ..................... -- 250 -- -- --
-------- -------- -------- -------- --------
Operating income ........................... 4,779 1,992 4,813 4,855 2,848
Interest expense ........................... (1,086) (1,177) (889) (1,134) (911)
Interest and other income .................. 40 66 266 41 101
Gain on sale of assets ..................... 1,048 (37) 101 5 (29)
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary item ................... 4,781 844 4,291 3,767 2,009
Income tax expense ......................... 1,803 452 1,638 1,507 808
-------- -------- -------- -------- --------
Net income before extraordinary item ....... 2,978 392 2,653 2,260 1,201
Extraordinary item-loss from early
repayment of debt, net of income
tax benefit of $32 ....................... -- 62 -- -- --
-------- -------- -------- -------- --------
Net income ................................. $ 2,978 $ 330 $ 2,653 $ 2,260 $ 1,201
======== ======== ======== ======== ========
Earnings per share:
Income before extraordinary item
Basic ................................. $ .67 $ .09 $ .61 $ .52 $ .37
Diluted ............................... $ .67 $ .09 $ .60 $ .51 $ .37
Net income
Basic ................................. $ .67 $ .07 $ .61 $ .52 $ .37
Diluted ............................... $ .67 $ .07 $ .60 $ .51 $ .37
Weighted average common
shares outstanding:
Basic ................................. 4,419 4,420 4,384 4,386 3,247
Diluted ............................... 4,475 4,518 4,448 4,438 3,248
OTHER DATA:
Depreciation and
amortization (3) ......................... $ 3,090 $ 2,605 $ 2,363 $ 2,279 $ 1,647
Capital expenditures ....................... 3,130 2,629 3,234 2,371 1,280
BALANCE SHEET DATA: (AT SEPTEMBER 30)
Working capital ............................ $ 13,934 $ 12,630 $ 10,225 $ 10,553 $ 13,914
Total assets ............................... 59,081 58,767 49,045 50,038 51,060
Total current and long-term debt ........... 14,530 17,697 10,498 13,350 18,897
Stockholders' equity ....................... 35,246 32,250 31,368 28,719 26,445
</TABLE>
- -----------
FOOTNOTES
(1) Includes Foremost Manufacturing Company since its acquisition in
November 1997.
(2) Includes Hamco, Inc. since its acquisition in August 1995.
(3) Includes depreciation and amortization of goodwill and organizational
expenses.
9
<PAGE> 11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Management's discussion of the Company's 1999 fiscal year in comparison
to fiscal 1998, contains forward-looking statements regarding current
expectations, risks and uncertainties for 2000 and beyond. The actual results
could differ materially from those discussed here. As well as those factors
discussed in the section entitled "Business" in this report, other factors that
could cause or contribute to such differences include, among other items,
significant changes in the cost of base paper stock, competition in the
Company's product areas, or an inability of management to successfully reduce
operating expenses in relation to net sales without damaging the long-term
direction of the Company. Therefore, the selected financial data for the periods
presented may not be indicative of the Company's future financial condition or
results of operations.
GENERAL
Tufco performs contract manufacturing and specialty printing services,
manufactures and distributes business imaging paper products and paint sundry
products. The Company's strategy is to provide services, manufacture and
distribute products in niche markets relying on close customer contact and high
levels of quality and service. The Company works closely with its contract
manufacturing clients to develop products or perform services which meet or
exceed the customers' quality standards, and to then use the Company's operating
efficiencies and technical expertise to supplement or replace its customers' own
production and distribution functions.
The Company's technical proficiencies include folding, packaging,
coating, slitting and rewinding, sheeting, multi-color printing and laminating.
In January 1994, the Company completed an initial public offering of
its stock and concurrently purchased substantially all of the assets of ECC. The
Company issued 900,000 shares of its Common Stock on the NASDAQ Market at $9.00
per share, resulting in net proceeds of $6.8 million. The total cost of the ECC
acquisition was $8.7 million consisting of $7.5 million in cash and 127,778
shares of Common Stock.
In August 1995, the Company purchased substantially all of the assets
of Hamco for a total cost of $14.2 million funded by the issuance of 1.2 million
shares of Common Stock and additional bank borrowings.
In November 1997, the Company purchased all of the outstanding common
stock of Foremost Manufacturing Company, Inc. for a total cost of $6.2 million,
including transaction costs, funded by the issuance of 25,907 shares of common
stock and additional bank borrowings.
RESULTS OF OPERATIONS
The following discussion relates to the financial statements of the
Company for the fiscal year ended September 30, 1999("current year" or "fiscal
1999"), in comparison to the fiscal year ended September 30, 1998 ("prior year"
or "fiscal 1998"), as well as the fiscal year ended September 30, 1997 ("fiscal
1997").
10
<PAGE> 12
RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth, for the years ended September 30 (i)
the percentage relationship of certain items from the Company's statements of
income to net sales and (ii) the year-to-year changes in these items:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES YEAR-TO-YEAR CHANGE
---------------------------------- --------------------
1998 TO 1997 TO
1999 1998 1997 1999 1998
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net sales ...................................... 100.0% 100.0% 100.0% (1)% 17%
Cost of sales .................................. 82.8 85.6 81.9 (4) 22
------ ------ ------
Gross margin .......................... 17.2 14.4 18.1 18 (7)
Selling and administrative expenses ............ 9.6 10.1 9.7 (6) 22
Amortization and post-acquisition
expenses ....................................... 1.3 1.4 1.1 (1) 45
Write-down of property ......................... -- 0.3 -- -- --
------ ------ ------
Operating income ...................... 6.4 2.6 7.3 140 (59)
Interest expense ............................... (1.4) (1.5) (1.3) (8) 32
Interest and other income ...................... 0.0 .1 .4 (41) (75)
Gain on sale of assets ......................... 1.4 (.1) .1 -- --
------ ------ ------ ------ ------
Income before income taxes
and extraordinary item ............... 6.3 1.1 6.5 466 (80)
Income tax expense ............................. 2.4 0.6 2.5 299 (72)
------ ------ ------
Net income before extraordinary item ........... 3.9 0.5 4.0 660 (85)
Extraordinary item ............................. -- 0.1 -- -- --
------ ------ ------
Net income ..................................... 3.9% 0.4% 4.0% 660% (88)%
====== ====== ====== ====== ======
</TABLE>
The components of net sales and gross profit are summarized in the
table below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
% of % of % of
Amount Total Amount Total Amount Total
----------------- ----------------- -----------------
(Dollars in millions)
Net Sales
<S> <C> <C> <C> <C> <C> <C>
Contract manufacturing and printing $ 26.0 34% $ 19.2 25% $ 20.2 30%
Business imaging paper products 24.9 33 32.5 42 33.4 51
Paint sundry products 21.0 27 18.0 24 9.0 14
Away-from-home products 4.4 6 7.3 9 3.2 5
------ ------ ------ ------ ------ ------
Net sales $ 76.3 100% $ 77.0 100% $ 65.8 100%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Margin Margin
Amount % Amount %
----------------- -----------------
Gross Profit
<S> <C> <C> <C> <C>
Contract manufacturing and printing $ 6.4 25% $ 2.2 11%
Business imaging paper products 3.5 14 5.0 15
Paint sundry products 2.8 13 3.2 18
Away-from-home products 0.4 9 0.7 10
Gross profit $ 13.1 17% $ 11.1 14%
====== ====== ====== ======
</TABLE>
11
<PAGE> 13
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
NET SALES for fiscal 1999 decreased $0.6 million, or 1%, in part due to
the discontinuance of the Company's Away From Home (AFH) product line in June of
fiscal 1999. Sales in the Company's remaining market sectors increased 3%. The
Company discontinued its AFH sales efforts because management believed that the
Company's relatively small market share, the lack of a reliable long term source
of base paper and the frequency of heavy price discounting in the market sector
made AFH products a poor fit with the Company's chosen strategic direction.
Instead, management has reallocated plant space and personnel previously
allocated to the AFH sector toward expanding its Contract Manufacturing
services, the Company's primary strategic focus for the future. Sales of
Contract Manufacturing services increased $6.8 million (35%) over the prior
year, primarily due to new agreements to provide contract folding, packaging and
printing services for large consumer products companies. Management identified
Contract Manufacturing as its key growth sector during development of its
strategic plan in fiscal 1998 and began allocating capital and personnel
resources toward growth in that sector. To further its capabilities in the
sector, the Company is installing a new eight color flexographic printing press
in its Green Bay facility. The total value of the press will exceed $4 million,
for which the Company will enter into a long term operating lease by December
31, 1999. Management believes that the expanded services made possible by the
new press will enable the Company to further grow its specialty printing
services. Sales in the Company's Business Imaging sector declined $7.6 million
(23%) primarily due to continued deep discounts in the selling price of its
engineering and point-of-sale (POS) roll products as a result of increased
competition, as well as the loss of several large POS national account customers
which were at lower profit margins. Finally, sales of the Company's Paint Sundry
products increased $3.0 million (17%) over the prior year. A portion of the
increase ($0.9 million) results from the timing of the Foremost acquisition for
which only eleven months of sales were recognized in fiscal 1998. Adjusted for
this fact, sales in this sector increased (12%), primarily due to increased
sales to large do-it-yourself home centers.
GROSS PROFIT increased $2.0 million, or 18%, to $13.1 million in fiscal
1999, and gross profit margins increased to 17% in the current year from 14% in
the prior year. The Company was able to increase gross profit primarily due to
the growth in sales of Contract Manufacturing services, for which the Company is
generally able to earn higher margins due to the high levels of capital
investment, project management skills and technical competence required by
customers in that sector. Strong competition continued to depress gross profit
margins in the Company's Business Imaging sector, as the Company continued to
lower its selling prices in response to market conditions. While management
believes it is effectively retaining its key customer base, profitability is
still depressed and management cannot provide assurance that Business Imaging
selling prices will rebound in the near term. Opportunities exist to provide
contract manufacturing services for several large companies in the Business
Imaging sector, and management is pursuing some of those opportunities. Margins
in the Company's Paint Sundries sector declined during the year due to costs
incurred to consolidate operations and absorb the Foremost acquisition.
Management believes that Paint Sundries margins should improve prospectively as
the Company takes advantage of the marketing synergies and purchasing power of
the combined operations.
SELLING AND ADMINISTRATIVE EXPENSES decreased $0.5 million or 6% from
fiscal 1998. The decrease was the result of lower selling expenses resulting
from the elimination of the AFH marketing group as well as reductions in certain
costs which were higher than normal in the prior year, including severance and
health insurance costs.
GOODWILL AMORTIZATION AND POST-ACQUISITION EXPENSES were relatively
unchanged from the prior year, as the Company did not complete any acquisitions
during the current fiscal year.
NET INTEREST EXPENSE decreased $0.1 million due to lower average
borrowings during the current fiscal year.
GAINS ON ASSETS SALES totaled $1.0 million in fiscal 1999 resulting
primarily from the discontinuance of the AFH business sector and the sale of
production equipment and inventory which were previously dedicated to that
sector. Additionally, the Company sold two other pieces of production equipment
which had limited ongoing production value to the Company.
12
<PAGE> 14
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998 (CONTINUED)
INCOME TAXES were 38% of pretax earnings for fiscal 1999 compared to
54% for the prior year. Fiscal 1998 was an anomaly because the low level of
pre-tax income served to accentuate the effect that non-deductible goodwill
amortization expense had on the overall tax rate. By comparison, income taxes
for fiscal year 1997 were 38% of pre-tax earnings as well.
BASIC AND DILUTED EARNINGS PER SHARE after the effect of the
extraordinary item were both 67 cents in fiscal 1999 compared to 7 cents in
fiscal 1998. Adjusted for the gains from the sale of equipment and other assets,
basic and diluted earnings per share were both 53 cents per share in fiscal
1999.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
NET SALES for fiscal 1998 increased $11.2 million, or 17%, primarily
due to the additive impact on the Paint Sundries sector of Foremost acquisition
as well as growth in the Company's AFH market sector. Since the date of its
acquisition by the Company in November 1997, Foremost had net sales of $9.1
million. Adjusted for this fact, the Company's net sales increased $2.1 million.
Sales of the Company's AFH products increased $4.0 million or 122% in fiscal
1998 as the Company continued to penetrate this market. Due to the competitive
nature of the AFH market and to the lack of an established base of customers,
Tufco utilized aggressive pricing to secure new sales, resulting in low margins.
Sales in Tufco's Business Imaging market sector declined $0.9 million or 3% from
fiscal year 1997 due to reduced selling prices which were a result of increased
competition in this market. Raw materials costs continued to decline in fiscal
1998, and the combination of low cost raw materials and the availability of used
production assets allowed several new competitors to enter the market place for
Business Imaging products. While the Company did not lose significant business
volumes to these competitive intrusions, it did sacrifice margin and sales
dollars due to the lower selling prices. Custom Converting sales declined $1.1
million or 5% due to the continued decline in service revenue from the
outsourced converting of tissue and towels products, a trend which began in
fiscal 1997 as several of the Company's customers merged, thereby decreasing
their need to outsource these services. Tufco management has chosen to pursue
multi-year agreements with companies who are seeking high quality technical
printing and packaging services as a replacement of the sales lost as the tissue
and towel producers internalized their converting needs. Establishment of these
longer-term agreements generally requires an investment of one to two years in
order to establish relationships and reach quality and productivity
certifications which these customers require. As a result, the Company did not
have significant sales or profit gains in Custom Converting in fiscal 1998.
However, subsequent to the end of the 1998 fiscal year, the Company reached an
agreement with Procter & Gamble Manufacturing whereby the Company will provide
custom packaging and procurement support services for the introduction of three
new products in the U.S. market. Additionally, the Company has reached a
multi-year agreement with Hallmark Cards, Inc. to produce printed and unprinted
tablecovers. Both of these agreements were the result of trial work which began
in fiscal 1998.
GROSS PROFIT decreased $0.8 million or 7% to $11.1 million in fiscal
1998. Adjusted for the effect of the Foremost acquisition, gross profit
decreased $2.5 million or 21%. Gross margin decreased to 14.4% in fiscal 1998
from 18.1% in fiscal 1997. Gross margin was 13.8% in the current year after
adjusting for the Foremost acquisition. Definitive gross profit by sector was
not available until fiscal 1998; however, management believes that the primary
cause for the gross profit decline is the reduction in selling prices for
products sold in the Company's Business Imaging market sector. In order to
combat competitive intrusions into its customer base, the Company has lowered
its prices and corresponding profit margins on its Business Imaging products.
While management believes it is effectively retaining its customer base,
profitability is still depressed and management cannot provide assurance that
Business Imaging selling prices will rebound in the near term. Margins in the
Custom Converting sector declined due to lower sales volume as well as higher
raw material costs without corresponding increases in selling prices resulting
in reduced coverage of fixed costs. Management believes the new contract
converting agreements with Procter & Gamble Manufacturing and Hallmark Cards,
Inc. will help increase margins in the Custom Converting sector. In addition to
pricing concessions in Business Imaging and volume reductions in Custom
Converting, the Company incurred higher than normal costs in employee benefit
and worker's compensation expense. In both cases, the Company is responsible for
paying all the claims up to a designated stop-loss. In fiscal 1998, the
Company's cost for payment of health insurance claims increased $0.6
13
<PAGE> 15
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997 (CONTINUED)
GROSS PROFIT (CONTINUED)
million or 100% over the prior year. Similarly, the cost of the Company paid
workers' compensation claims increased $0.1 million or 32%. While management
cannot be assured that these costs will decline in future years, historical
trends indicate that the claims expense in 1998 was abnormal. Finally, margins
in the AFH sector remained low due to low selling prices charged by the Company
as it built its customer base. Management plans to increase its selling prices
in fiscal 1999, and utilize its expanded volumes to negotiate lower casts of raw
materials, thus improving margins in this sector.
SELLING AND ADMINISTRATIVE EXPENSES increased $1.4 million or 22% over
fiscal 1997. Selling and administrative costs for Foremost from the date of
acquisition totaled $1.0 million, so the adjusted increase for the Company was
$0.4 million or 6% over fiscal 1997. The increase was the result of annual wage
increases and additional sales personnel added at the end of fiscal 1997.
Included in the fiscal 1998 expense, the Company incurred $0.4 million in
severance costs, primarily for certain executive positions which were eliminated
during the year.
GOODWILL AMORTIZATION AND POST-ACQUISITION EXPENSES increased $0.3
million in fiscal 1998 due to the amortization of Goodwill related to the
acquisition of Foremost ($0.2 million) and to the establishment of a $0.1
million reserve for potential costs relating to an indemnification agreement
with a related party.
WRITE-DOWN OF PROPERTY relates to the $0.3 million reduction in the
carrying value of certain property, which the Company owns in South Carolina, to
its estimated market value as the Company prepares to list the property for
sale. The Company has occupied a new leased facility in Manning, South Carolina,
and by December 1998, the Company had ceased all remaining operations in the
property, which it owns.
NET INTEREST EXPENSE increased $0.3 million due to the debt incurred to
finance the acquisition of Foremost. Adjusted for this fact, interest expense
declined $0.1 million due to reduced average borrowings throughout fiscal 1998.
MISCELLANEOUS INCOME decreased $0.3 million in fiscal 1998. The income
in fiscal 1997 related to the gain on the sale of converting assets ($0.1
million) and a favorable settlement of litigation ($0.2 million).
INCOME TAXES were 54% of pretax earnings for fiscal 1998 compared to
38% for the prior year. The primary cause for the increase in the effective tax
rate is the non-deductibility of amortization of Goodwill associated with the
Foremost acquisition.
EXTRAORDINARY ITEM in fiscal 1998 relates to loss on the early
repayment of debt incurred by the Company to refinance virtually all of its
debt. In August 1998, the Company signed a new syndicated debt agreement with
First Union National Bank and Chase Bank of Texas which provided $10.7 million
in term loans and up to $9.0 million in revolving loans.
BASIC AND DILUTED EARNINGS PER SHARE after the effect of the
extraordinary item were both 7 cents in fiscal 1998 compared to 61 and 60 cents
respectively in fiscal 1997.
14
<PAGE> 16
SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth selected quarterly financial
information. This information is derived from unaudited consolidated financial
statements of the Company and includes, in the opinion of management, all normal
and recurring adjustments that management considers necessary for a fair
statement of results for such periods. The operating results for any quarter are
not necessarily indicative of results for any future period.
FISCAL 1999 (Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net sales ...................................... $ 18,341 $ 18,519 $ 19,416 $ 20,055
Gross profit ................................... 2,974 2,801 3,493 3,838
Operating expenses ............................. 2,245 2,014 1,927 2,141
Operating income ............................... 729 787 1,566 1,697
Income before income taxes and
extraordinary item ............................ 781 516 1,960 1,524
Income tax expense (benefit) ................... 312 181 714 596
Income before extraordinary item ............... 469 335 1,246 928
Net income ..................................... 469 335 1,246 928
Earnings per share:
Basic ................................. .11 .08 .28 .20
Diluted ............................... .11 .08 .28 .20
</TABLE>
FISCAL 1998 (Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net sales ...................................... $ 16,690 $ 19,006 $ 19,921 $ 21,356
Gross profit ................................... 2,670 2,572 3,102 2,726
Operating expenses ............................. 1,909 1,920 1,884 3,365
Operating income (loss) ........................ 761 652 1,218 (639)
Income (loss) before income taxes and
extraordinary item ............................ 553 358 877 (944)
Income tax expense (benefit) ................... 221 124 311 (204)
Income (loss) before extraordinary item ........ 332 234 566 (740)
Net income (loss) .............................. 332 234 566 (802)
Earnings (loss) per share:
Basic ................................. .08 .05 .13 (.18)
Diluted ............................... .07 .05 .13 (.18)
</TABLE>
The Company's sales volume by quarter is subject to a limited amount of
seasonal fluctuation. Generally, the Company's sales volume is at its lowest
levels in the first and second fiscal quarters. Sales are generally at higher
levels in the third and especially the fourth fiscal quarters.
In the first and third quarters of fiscal 1999, the Company sold
equipment resulting in pre-tax gains of $0.3 million (per share: $0.05 basic and
diluted) and $0.7 million (per share: $0.09 basic and diluted) respectively.
In the fourth quarter of fiscal 1998, the Company reported diminished
gross profit and gross margin on sales as well as higher operating expenses.
Gross profit and operating expenses were negatively impacted by higher health
benefit and workers' compensation costs incurred under the Company's self funded
programs. Expenses for these two programs increased by $0.8 million over the
same period a year ago. These costs, combined with other unusual or
extraordinary cost discussed previously, totaled $1.5 million in the fourth
quarter of fiscal 1998. Additionally, the impact of strong competition in the
Company's Business Imaging sector had a negative impact on gross profit in the
fourth quarter of fiscal 1998 as selling prices for the Company's products were
at their lowest point for the year. Operating expenses were also negatively
impacted by higher costs of sales commissions paid to independent paint sundries
sales representatives, higher than normal travel and meeting costs and the
write-down of the South Carolina real property.
15
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations decreased $0.4 million to $2.0 million in
fiscal 1999. Cash generated from net income adjusted for non-cash expenses and
non-operating gains was $5.7 million compared to $3.4 million in the prior year.
Offsetting this increase, accounts receivable increased $2.5 million due
primarily to slow payments from the Company's largest customer. Management is
working with this customer to accelerate the payment of invoices outstanding,
and believes that all amounts due from this customer will be paid in full.
Additionally, an increase in inventory ($0.9 million, net of AFH inventory sold
at the end of June of fiscal 1999) and a decrease in accounts payable ($0.8
million) offset the improvement in cash flow generated from net income. The
increased investment in inventory was in advance of announced October price
increases in certain grades of base paper which the Company uses to produce its
Business Imaging products, and the decrease in accounts payable was the result
of the timing of the receipt of vendor invoices, a portion of which related to
the increased purchases of base paper. The Company negotiates, and takes
advantage of, early payment discounts on the raw materials it buys, so the
timing of the receipt of vendor invoices often dictates the balance of accounts
payable at the end of an accounting period.
Cash generated from investing activities totaled $0.9 million in fiscal
1999 resulting primarily from the sale of idle equipment and AFH assets,
totaling $4.0 million net of transaction costs, offset by purchases of fixed
assets. Cash used in financing activities totaled $3.2 million and was used to
repay debt.
The Company's primary need for capital resources is to finance
inventories, accounts receivable, capital expenditures, and acquisitions. On
August 28, 1998, the Company entered into a syndicated financing arrangement
with First Union National Bank (First Union) and Chase Bank of Texas, N.A. with
First Union acting as agent. Under the agreement, the Company has $6.6 million
of term debt at September 30, 1999, repayable in equal quarterly payments
maturing in August 2005 and up to $9.0 million under a revolving credit
agreement through June 2001. In fiscal 1998, the Company paid approximately $0.1
million to its former lender to exit the prior credit agreement, principally in
the form of prepayment penalties on the early repayment of term debt.
Simultaneous with the refinancing, the Company entered into an interest rate
swap arrangement with First Union which had the effect of creating a fixed rate
of interest on the Company's term debt. As a result of this arrangement, the
rate of interest on the term debt is fixed at 5.87%, plus a profit spread for
the syndicated banks of between 100 and 150 basis points, depending on certain
financial ratios achieved by the Company. Management believes that this hedge
arrangement creates a desirable stability of future interest payments. At
December 10, 1999, the Company had approximately $12.3 million in total
borrowings outstanding under this agreement, with $2.9 million available under
the revolving credit agreement. Management believes its operating cash flow is
adequate to service its long-term obligations as of September 30, 1998, and any
budgeted capital expenditures. However, Company management is currently
discussing business opportunities which would require expansion of its Green Bay
production facility which may require the assumption of additional debt.
The credit facility is secured by substantially all of the Company's
assets and contains certain restrictive covenants, including minimum required
net worth, minimum required cash flow, maximum allowable indebtedness and
maximum allowable capital expenditures. At September 30, 1999, the Company was
in compliance with all of its debt covenants. The Company had previously
obtained a waiver from the banks permitting it to sell various production assets
during fiscal 1999.
During the fourth quarter of fiscal 1999, the Company agreed to enter
into a lease to own and operate a Windmoeller and Hoelscher eight color
flexographic printing press. Management anticipates that the terms of this lease
will be finalized by December 31, 1999. The lease will be structured as an
operating lease over ten years with payments totaling approximately $0.5 million
annually. The Company will have the right to purchase the asset at varying
points during the lease.
The Company intends to retain earnings to finance future operations and
expansion and does not expect to pay any dividends within the foreseeable
future. In addition, the Company's primary lender must approve the payment of
any dividends.
The Company's allowance for uncollectible accounts receivable was $0.3
million at December 10, 1999. Management believes that this allowance is
adequate to provide for losses inherent in its accounts receivable.
16
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Sharp increases or decreases in the costs of key commodities, such as
paper or polyethylene, periodically impact the Company's inventory values and
net income. This was the case in fiscal year 1997, when the prices of these
commodities dropped. In fiscal years 1998 and 1999, the impact of inflation was
minimal on the Company's inventory and net income. The Company is generally
successful in passing these fluctuations in raw material prices to its customers
through increases or decreases in the selling price of the Company's products.
Prior to these periods, the impact of inflation has been minimal on the
Company's inventory and net income.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" will be effective for the Company's year ending September 30, 2001;
this Statement establishes standards for the valuation, classification and
accounting of derivative instruments. The Company expects that the
implementation of these standards will have no material effect on the financial
statements.
YEAR 2000 SYSTEMS ISSUES
Many existing computer programs use only two digits to identify a year
in the date field, and if not corrected, many computer applications could fail
or create erroneous results by or at the year 2000. Left uncorrected, year 2000
systems issues could have a material negative impact on the Company's operations
and its profitability.
In response to ongoing business needs, Tufco has implemented a new
Enterprise Resource Planning System, and the year 2000 issue was one of the
design pre-requisites for this new system. As of September 30, 1999, the Company
has spent $2.5 million for hardware, software and consulting services related to
this project and other projects designed to convert its systems in response to
the year 2000 issue. While the Company has taken every precaution to ensure that
the new information systems will operate properly in the year 2000, management
has relied on assurances and warranties by its hardware and software vendors.
The Company has performed its own tests on the various software it uses, and it
has not discovered any unresolved year 2000 issues. The Company has evaluated
the possible negative impact on the Company of year 2000 issues relating to its
significant vendors and customers, and it has obtained assurances that its key
vendors are taking steps to insure year 2000 compliance. While management has
not uncovered any specific instances where year 2000 issues have not been
addressed, the Company cannot rule out the possibility of difficulties arising
from year 2000 issues.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk- The Company has entered into an interest rate swap
contract as a hedge under which the interest rate on its term debt is fixed at
5.87%, plus a profit spread for the lender of between 100 and 150 basis points,
depending on certain financial ratios achieved by the Company (see Note 7 to
the Company's Financial Statements). At September 30, 1999, prevailing market
interest rates were higher than the fixed rate in the Company's swap agreement,
and the Company would have received a premium of $45,000 from its lender if the
debt under the swap were to have been paid in full at that time. Prior to
entering into the swap agreement, management had determined, and still believes,
that the Company's risk of potential future liability resulting from a material
decline in interest rates below the fixed level under the swap was not
significant.
Foreign Currency Exchange Risk- The Company had no transactions in
foreign currencies, nor had it entered into any foreign currency futures
contracts as of September 30, 1999.
Commodity Price Risk- The Company had not entered into any forward
buying agreements for the raw materials it uses to produce its goods and
services as of September 30, 1999. The Company presents its assessment of the
risks of short-term commodity price fluctuations in the section entitled Raw
materials and Supplies under Part I, Item 1 of this document.
Other Relevant Market Risks- The Company does not own any marketable
securities, and management has not identified any other relevant market risks.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are attached as an Appendix to this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
17
<PAGE> 19
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers, directors, and key employees of the Company
are:
<TABLE>
<CAPTION>
Name Age Positions With the Company
- ---- --- --------------------------
<S> <C> <C>
Louis LeCalsey, III 60 President and Chief Executive Officer
Gregory L. Wilemon 39 Chief Financial Officer, Chief Operating
Officer and Secretary/Treasurer
Robert J. Simon (1)(2)(3) 41 Chairman of the Board of Directors
Samuel J. Bero (1)(3) 64 Director
C. Hamilton Davison, Jr. (3) 40 Director
William J. Malooly (2) 57 Director
Seymour S. Preston III (2) 66 Director
</TABLE>
- --------------------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
Each director holds office until the next annual meeting of
stockholders of the Company and until his successor has been elected and
qualified. Each director with the exception of Mr. Bero and Mr. LeCalsey has
served on the Board of Directors since Tufco's inception in February 1992. Mr.
Bero was elected to the Board in 1994 and Mr. LeCalsey was elected in 1996.
Executive officers of the Company are elected by the Board of Directors and
serve at the discretion of the Board. There are no family relationships between
any executive officers or directors of the Company.
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
Louis LeCalsey, III--Mr. LeCalsey assumed the positions of President
and Chief Executive Officer of Tufco in September 1996. Previously he was
President of Tufco Industries, Inc. since April 1996 and prior to that he served
as Vice President of Worldwide Logistics for Scott Paper Company, the
culmination of a 20-year career with Scott in various leadership positions. Mr.
LeCalsey serves as a director for Foodserv Equipment & Supply Inc., as well as a
member of the Advisory group for Bradford Ventures, Ltd.
Gregory L. Wilemon--Mr. Wilemon has been Chief Financial Officer since
September 18, 1995 and was appointed Secretary/Treasurer by the board effective
November 12, 1995 and Chief Operating Officer in September 1996. Mr. Wilemon had
been Chief Operating Officer at Executive Roll Manufacturing from 1991 until May
of 1993. From 1993 until he rejoined the Company, Mr. Wilemon was Vice President
of Finance at Great North American Companies. Prior to his earlier tenure with
the Company, Mr. Wilemon was a Senior Business Planner with PepsiCo from 1987 to
1991.
Robert J. Simon--Mr. Simon has been Chairman of the Board of Directors
of Tufco since February 1992. Mr. Simon has been a Senior Managing Director of
Bradford Ventures, Ltd., a private investment firm, since 1992 and a General
Partner of Bradford Associates since 1989. Prior to that time, Mr. Simon held
the following positions with Bradford Ventures Ltd.: Managing Director from 1990
to 1992; Senior Vice President from 1987 to 1990, and Vice President from 1984
to 1987. Mr. Simon is Chairman of the Board of Foilmark, Inc., a public company.
Mr. Simon is either Chairman of the Board or a director of Ampco Metal Inc.,
Parmarco Technologies, Inc., Foodserv Equipment & Supply Inc., Mexican Accent,
Inc., Overseas Equity Investors Ltd., Overseas Private Investors Ltd., and
Overseas Callander Fund, Ltd. and several other privately held companies.
18
<PAGE> 20
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES (CONTINUED)
Samuel J. Bero--Mr. Bero had been President and Chief Executive Officer
from November 1993 until he retired in July 1995, Executive Vice President since
November 1992, and General Manager of Tufco since 1974, when he co-founded the
Predecessor with Mr. Garland and two other individuals.
Mr. Bero has over 33 years of experience in the converting industry.
C. Hamilton Davison, Jr.--Mr. Davison has been the President and a
director of Paramount Cards, Inc., a manufacturer and retailer of greeting
cards, since 1988, and Chief Executive Officer since 1995. Prior to that time,
Mr. Davison was Vice President, International and Marketing of Paramount Cards,
Inc. Mr. Davison is also a director and former president of the greeting card
industry trade association. In addition to other private companies and not "for"
profit boards, he serves as a director and member of the audit committee of
Valley Resources (AMEX:VR). Mr. Davison received a Bachelors Degree from
Vanderbilt University and a masters degree from the University of Texas.
William J. Malooly--Mr. Malooly has been the Chairman and Chief
Executive Officer of Bank One, Green Bay since 1977.
Seymour S. Preston, III--Mr. Preston is the Chairman and Chief
Executive Officer of AAC Engineered Systems, Inc. a manufacturer of deburring
and metal finishing equipment. From 1990 to 1993, Mr. Preston was President and
Chief Executive Officer of Elf Atochem North America, Inc., a manufacturer and
marketer of plastics and specialty chemicals. Prior to 1990, Mr. Preston was
President, Chief Operating Officer and Director of Pennwalt Corporation. Mr.
Preston is currently is a Director of Albemarle Corporation, Scott Specialty
Gases, Inc., The Barra Foundation, and is the Chairman of the Board of Trustees
of the Academy of Natural Sciences of Philadelphia. Mr. Preston received a BA in
chemistry from Williams College and an MBA from the Harvard Business School.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
The information called for by Item 10 with respect to compliance with Section
16(a) of the Securities Exchange Act is incorporated by reference from the Proxy
Statement relating to the Company's annual meeting to be held in 1999 (the
"Proxy Statement"), which Proxy Statement is to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the end of the
fiscal year covered by this report.
ITEM 11 - EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference from
the Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference from
the Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated by reference from
the Proxy Statement.
19
<PAGE> 21
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. Financial statements are attached as an
Appendix to this report. The index to the financial statements is
found on F-1 of the Appendix.
(a) 2. Financial Statement Schedules. All schedules are omitted since
the required information is not present or is not present in
amounts sufficient to require a submission of the schedules, or
because the information required is included in the financial
statements and notes thereto.
(a) 3. Exhibits. See Exhibit Index in part (c), below.
(b) The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1998.
(c) Exhibit
Number Description
2.1 Stock Purchase Agreement dated as of November 12, 1997 by and
among Tufco Technologies, Inc. (the "Company"), Charles
Cobaugh and James Barnes (filed as exhibit 2.1 to the
Company's Form 8-K dated November 13, 1997 filed with the
Commission on November 26, 1997 file number 0-21018,
incorporated by reference herein).
3.1 Restated Certificate of Incorporation (1) (Exhibit 3.1)
3.2 Bylaws (1) (Exhibit 3.2)
10.1 Stock Purchase and Contribution Agreement, dated as of
February 25, 1992, among the Company, Tufco Industries, Inc.
("Tufco"), and the Stockholders of Tufco. (1) (Exhibit 10.1)
10.2 Amended and Restated Consulting Agreement with Bradford
Investment Partners, L.P. (3) (Exhibit 10)
10.3 Loan Agreement, dated May 1, 1992, between the Village of
Ashwaubenon, Wisconsin, and the Company. (1) (Exhibit 10.11)
10.4 1992 Non-Qualified Stock Option Plan (1) (Exhibit 10.12)
10.5 Form of Employee Stock Purchase Agreement between the Company
and certain key employees of the Company. (1) (Exhibit 10.17)
10.6 1993 Non-Employee Director Stock Option Plan. (2) (Exhibit
10.19)
10.7 Amended Employment Agreement with Greg Wilemon, dated
September 18, 1995. (5) (Exhibit 10.11)
10.8 Lease Agreement, dated as of March 1, 1995, between Bero,
Garland, Gebhardt and McClure, a Wisconsin partnership, and
Tufco. (4) (Exhibit 10.13)
10.9 Stock Option Plan for Carl B. Francis dated April 21, 1995.
(4) (Exhibit 10.14)
10.10 Lease Agreement dated as of April 1, 1996, between Bero,
Garland, Gebhardt and McClure, a Wisconsin partnership, and
Tufco. (5) (Exhibit 10.15)
10.11 Separation Agreement dated October 1, 1996 between Carl B.
Francis and the Company. (5) (Exhibit 10.17)
10.12 Employment Agreement with Louis LeCalsey, III dated September
19, 1996. (5) (Exhibit 10.18)
10.13 Credit Agreement among Tufco L.P. as Borrower, the Company as
the Parent First Union National Bank as agent and the banks
named herein dated August 28, 1998. (6)
10.14 ISDA Master Agreement and Schedule to the Master Agreement
dated as of July 30, 1998 between First Union National Bank
and Tufco, L.P. (6)
10.15 First Amendment to Credit Agreement. (6)
21.1 Subsidiaries of the Company. (6)
27.1* Financial Data Schedule
---------------
* Filed herewith
20
<PAGE> 22
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (Reg. No. 33-55828) (the "Registration
Statement") as filed with the Commission on December 16, 1992.
(2) Incorporated by reference to Amendment No. 1 to the
Registration Statement as filed with the Commission on
November 23, 1993.
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1995.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended September 30, 1995.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended September 30, 1997.
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended September 30, 1998.
(c) See (a)(3) above for the list of exhibits required to be filed as part
of the Annual Report on Form 10-K.
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Green Bay,
Wisconsin, on December 15, 1999.
Tufco Technologies, Inc.
By: /s/ Louis LeCalsey, III
-------------------------------------
Louis LeCalsey, III
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Louis LeCalsey, III President, Chief Executive Officer December 15, 1999
- ------------------------------------ and Director (Principal Executive
Louis LeCalsey, III Officer)
/s/ Robert J. Simon Chairman of the Board December 15, 1999
- ------------------------------------
Robert J. Simon
/s/ Gregory L. Wilemon Chief Financial Officer, Chief December 15, 1999
- ------------------------------------ Operating Officer and Secretary
Gregory L. Wilemon (Principal Financial and
Accounting Officer)
/s/ Samuel J. Bero Director December 15, 1999
- ------------------------------------
Samuel J. Bero
/s/ C. Hamilton Davison_Jr. Director December 15, 1999
- ------------------------------------
C. Hamilton Davison, Jr.
/s/ William J. Malooly Director December 15, 1999
- ------------------------------------
William J. Malooly
/s/ Seymour S. Preston, III Director December 15, 1999
- ------------------------------------
Seymour S. Preston, III
</TABLE>
22
<PAGE> 24
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS - ITEM 8 OF FORM 10-K
- --------------------------------------------------------------------------------
PAGE
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT................................................F-2
FINANCIAL STATEMENTS AND NOTES:
Consolidated Balance Sheets as of September 30, 1999 and 1998............F-3
Consolidated Statements of Income
for the Years Ended September 30, 1999, 1998 and 1997.................F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended September 30, 1999, 1998 and 1997.................F-5
Consolidated Statements of Cash Flows
for the Years Ended September 30, 1999, 1998 and 1997.................F-6
Notes to Consolidated Financial Statements...............................F-7
</TABLE>
F-1
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Directors and Stockholders of
Tufco Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Tufco
Technologies, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended September 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 audit 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Tufco Technologies, Inc. and
subsidiaries at September 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1999, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Dallas, Texas
December 3, 1999
F-2
<PAGE> 26
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C>
CURRENT ASSETS (Note 7):
Cash and cash equivalents $ 692,002 $ 1,006,110
Restricted cash (Note 9) 20,050 20,328
Accounts receivable - net (Note 3) 12,721,698 10,351,740
Inventories (Note 4) 8,248,876 8,956,949
Prepaid expenses and other current assets 763,972 303,605
Deferred income taxes (Note 8) 447,096 596,678
------------ ------------
Total current assets 22,893,694 21,235,410
PROPERTY, PLANT AND EQUIPMENT - Net (Notes 5 and 7) 16,636,756 17,360,302
GOODWILL - Net (Notes 1 and 2) 17,948,930 18,423,999
OTHER ASSETS - Net (Note 6) 1,601,409 1,747,486
------------ ------------
TOTAL $ 59,080,789 $ 58,767,197
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 7) $ 1,902,435 $ 1,670,810
Accounts payable 3,764,026 4,559,341
Accrued payroll, vacation and payroll taxes 1,537,041 681,236
Other current liabilities 1,580,744 1,629,519
Income taxes payable (Note 8) 175,001 64,367
------------ ------------
Total current liabilities 8,959,247 8,605,273
LONG-TERM DEBT - Less current portion (Note 7) 12,627,136 16,025,796
DEFERRED INCOME TAXES (Note 8) 2,248,871 1,885,653
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 11):
Voting common stock; $.01 par value; 9,000,000 shares authorized;
4,498,618 and 3,786,223 shares issued, respectively 44,986 37,862
Nonvoting common stock; $.01 par value; 2,000,000 shares authorized;
0 and 709,870 shares issued and outstanding 7,099
Additional paid-in capital 23,973,017 23,961,301
Retained earnings (Note 7) 11,856,772 8,878,453
Treasury stock at cost, 78,497 voting common shares (534,045) (534,045)
Stock purchase plan notes (95,195) (100,195)
------------ ------------
Total stockholders' equity 35,245,535 32,250,475
------------ ------------
TOTAL $ 59,080,789 $ 58,767,197
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 27
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
NET SALES $ 76,330,563 $ 76,972,776 $ 65,750,571
COST OF SALES 63,224,285 65,902,280 53,835,318
------------ ------------ ------------
GROSS PROFIT 13,106,278 11,070,496 11,915,253
OPERATING EXPENSES:
Selling, general and administrative (Note 10) 7,317,325 7,803,493 6,395,727
Amortization and other postacquisition expenses 1,009,868 1,024,620 706,180
Write-down of property 250,000
------------ ------------ ------------
Total 8,327,193 9,078,113 7,101,907
------------ ------------ ------------
OPERATING INCOME 4,779,085 1,992,383 4,813,346
OTHER INCOME (EXPENSE):
Interest expense (1,085,511) (1,176,623) (888,566)
Interest and other income 39,370 65,096 264,782
Gains (loss) on asset sales (Note 5) 1,047,591 (36,925) 101,327
------------ ------------ ------------
Total 1,450 (1,148,452) (522,457)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 4,780,535 843,931 4,290,889
INCOME TAX EXPENSE (Note 8) 1,802,216 451,790 1,637,603
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 2,978,319 392,141 2,653,286
EXTRAORDINARY ITEM - Loss from early
repayment of debt, net of income tax
benefit of $32,059 (Note 7) 62,231
------------ ------------ ------------
NET INCOME $ 2,978,319 $ 329,910 $ 2,653,286
============ ============ ============
EARNINGS PER SHARE:
Income before extraordinary item:
Basic $ .67 $ .09 $ .61
============ ============ ============
Diluted $ .67 $ .09 $ .60
============ ============ ============
Net income:
Basic $ .67 $ .07 $ .61
============ ============ ============
Diluted $ .67 $ .07 $ .60
============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,418,859 4,419,763 4,383,752
============ ============ ============
Diluted 4,474,802 4,517,849 4,447,727
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 28
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------
Voting NONVOTING ADDITIONAL
----------------------- ------------------------ PAID-IN
Shares Amount Shares Amount Capital
--------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 1996 3,723,585 $ 37,236 709,870 $ 7,099 $23,491,130
Exercise of employee stock options 10,245 102 48,290
--------- ----------- --------- ----------- -----------
Repayment of stock purchase plan notes
--------- ----------- --------- ----------- -----------
Purchase of treasury stock, 16,172 shares
--------- ----------- --------- ----------- -----------
Net income
--------- ----------- --------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1997 3,733,830 37,338 709,870 7,099 23,539,420
--------- ----------- --------- ----------- -----------
Exercise of employee stock options 26,486 265 172,140
--------- ----------- --------- ----------- -----------
Issuance of common stock - Foremost acquisition (Note 2) 25,907 259 249,741
--------- ----------- --------- ----------- -----------
Repayment of stock purchase plan notes
--------- ----------- --------- ----------- -----------
Purchase of treasury stock, 18,693 shares
--------- ----------- --------- ----------- -----------
Net income
--------- ----------- --------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1998 3,786,223 37,862 709,870 7,099 23,961,301
--------- ----------- --------- ----------- -----------
Exercise of employee stock options 2,525 25 11,716
--------- ----------- --------- ----------- -----------
Conversion of nonvoting to voting common stock 709,870 7,099 (709,870) (7,099
--------- ----------- --------- ----------- -----------
Repayment of stock purchase plan notes
--------- ----------- --------- ----------- -----------
Net income
--------- ----------- --------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1999 4,498,618 $ 44,986 -- $ -- $23,973,017
--------- ----------- --------- ----------- -----------
<CAPTION>
STOCK TOTAL
RETAINED TREASURY PURCHASE STOCKHOLDERS'
Earnings Stock Plan Notes Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 1996 $ 5,895,257 $ (236,074) $ (475,253) $28,719,395
Exercise of employee stock options 48,392
----------- ----------- ----------- -----------
Repayment of stock purchase plan notes 60,201 60,201
----------- ----------- ----------- -----------
Purchase of treasury stock, 16,172 shares (113,297) (113,297)
----------- ----------- ----------- -----------
Net income 2,653,286 2,653,286
----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1997 8,548,543 (349,371) (415,052) 31,367,977
----------- ----------- ----------- -----------
Exercise of employee stock options 172,405
----------- ----------- ----------- -----------
Issuance of common stock - Foremost acquisition (Note 2) 250,000
----------- ----------- ----------- -----------
Repayment of stock purchase plan notes 314,857 314,857
----------- ----------- ----------- -----------
Purchase of treasury stock, 18,693 shares (184,674) (184,674)
----------- ----------- ----------- -----------
Net income 329,910 329,910
----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1998 8,878,453 (534,045) (100,195) 32,250,475
----------- ----------- ----------- -----------
Exercise of employee stock options 11,741
----------- ----------- ----------- -----------
Conversion of nonvoting to voting common stock --
----------- ----------- ----------- -----------
Repayment of stock purchase plan notes 5,000 5,000
----------- ----------- ----------- -----------
Net income 2,978,319 2,978,319
----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1999 $11,856,772 $ (534,045) $ (95,195) $35,245,535
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 29
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,978,319 $ 329,910 $ 2,653,286
Noncash items in net income:
Depreciation and amortization of property, plant and equipment 2,473,370 2,057,458 1,918,895
Amortization of goodwill and other assets 617,069 547,322 444,519
Deferred income taxes 512,800 127,975 (20,748)
Increase in allowance for doubtful accounts 121,270 36,957 927
(Gain) loss on asset sales (1,047,591) 36,925 (101,327)
Write-down of property 250,000
Changes in operating working capital:
Accounts receivable (2,491,228) (1,641,425) 722,863
Inventories (864,788) 424,124 1,005,135
Prepaid expenses and other assets (453,678) (60,076) (208,517)
Accounts payable (795,315) 541,150 780,872
Accrued and other current liabilities 807,030 372,939 (1,389,546)
Income taxes payable 110,634 (626,841) 36,896
----------- ----------- -----------
Net cash from operations 1,967,892 2,396,418 5,843,255
----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisition of Foremost - net of cash acquired (142,000) (5,985,019)
Additions to property, plant and equipment (3,129,687) (2,628,927) (2,777,594)
Deposits (made on) applied to purchases of equipment 144,853 (1,068,286)
Advances to directors and former owners (45,513) (22,221) (29,121)
Collection of advances to directors and former owners 65,979
Proceeds from asset sales, net of transaction cost 4,040,363 26,103 169,466
(Increase) decrease in restricted cash 278 39,800 (60,128)
----------- ----------- -----------
Net cash from (used in) investing activities 868,294 (9,638,550) (2,631,398)
----------- ----------- -----------
FINANCING ACTIVITIES:
Issuance of long-term debt 8,797,280
Repayment of long-term debt (3,167,035) (1,599,030) (3,304,364)
Issuance of common stock 11,741 172,405 48,392
Purchase of treasury stock (184,674) (71,239)
Repayment of stock purchase plan notes 5,000 314,857 18,143
----------- ----------- -----------
Net cash from (used in) financing activities (3,150,294) 7,500,838 (3,309,068)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (314,108) 258,706 (97,211)
CASH AND CASH EQUIVALENTS:
Beginning of year 1,006,110 747,404 844,615
----------- ----------- -----------
End of year $ 692,002 $ 1,006,110 $ 747,404
=========== =========== ===========
</TABLE>
SUPPLEMENTAL INFORMATION (Note 13)
See notes to consolidated financial statements.
F-6
<PAGE> 30
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATED FINANCIAL STATEMENTS include the accounts of Tufco
Technologies, Inc. and its wholly owned subsidiaries (the "Company").
Significant intercompany transactions and balances are eliminated in
consolidation. The organizational structure of the Company's subsidiaries
was changed in February 1997 by transferring to Tufco, L.P., a Nevada
limited partnership, all of the assets and liabilities of Tufco
Industries, Inc., Executive Converting Corporation and Hamco Industries,
Inc., acquired in 1992, 1994 and 1995, respectively. Tufco Tech, Inc.,
wholly owned subsidiary of Tufco Technologies, Inc., is the sole managing
general partner of Tufco, L.P. Foremost Manufacturing Company, Inc.
("Foremost") was acquired in November 1997 and is included in the
consolidated financial statements of the Company since the date of
acquisition. The Company markets its own line of business imaging paper
products, tissues, towels and wipes for public-use facilities, and
performs specialty printing, custom converting and packaging. The Company
also manufactures and distributes a wide variety of consumer disposables
that are sold in the home improvement and paint retailing industries.
FINANCIAL STATEMENT PREPARATION requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingencies at the date of the financial statements
and the reported amounts of revenues and expenses for the period.
Differences from those estimates are recognized in the period they become
known.
CASH EQUIVALENTS represent liquid investments with maturities at
acquisition of three months or less.
INVENTORIES are stated at the lower of cost or market. Cost is determined
by the first-in, first-out ("FIFO") method.
PROPERTY, PLANT AND EQUIPMENT are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided
using the straight-line method over the following estimated useful lives:
20 to 40 years for buildings, 3 to 10 years for machinery and equipment,
3 to 5 years for computer equipment and software, 5 to 7 years for
furniture and fixtures, and the shorter of the lease term or the asset's
useful life for leasehold improvements. Management periodically reviews
asset carrying values for recoverability and, where appropriate, provides
for write-downs to estimated fair value.
GOODWILL represents the excess of cost over fair value of net assets
acquired in business combinations, is amortized on a straight-line basis
over 25 to 40 years and is stated net of accumulated amortization of
$2,669,747 and $2,052,678 at September 30, 1999 and 1998, respectively.
FINANCIAL INSTRUMENTS consist of cash, receivables, payables, debt and
letters of credit. Their carrying values or disclosed values are
estimated to approximate their fair values unless otherwise indicated due
to their short maturities, variable interest rates or fixed rates
approximating current rates available for similar instruments.
F-7
<PAGE> 31
OTHER ASSETS include loan origination fees, which are amortized on a
straight-line basis (approximating the interest method) over the terms of
the related long-term debt.
DEFERRED INCOME TAXES are provided under the asset and liability method
for temporary differences in the recognition of certain revenues and
expenses for tax and financial reporting purposes.
REVENUES are recognized as sales when goods are shipped and title
transfers to the customer.
STOCK-BASED COMPENSATION arising from stock option grants is accounted
for by the intrinsic value method under Accounting Principles Board
("APB") Opinion No. 25. Statement of Financial Accounting Standards
("SFAS") No. 123 encourages (but does not require) the cost of stock
options and other stock-based compensation arrangements with employees to
be measured based on the fair value of the equity instrument awarded. As
permitted by SFAS No. 123, the Company applies APB Opinion No. 25 to its
stock-based compensation awards to employees and discloses in Note 11 the
required pro forma effect on net income and earnings per share.
BASIC EARNINGS PER SHARE is based on the weighted average number of
common voting and nonvoting shares outstanding, and diluted earnings per
share includes common equivalent shares from dilutive stock options
outstanding during the year.
RECLASSIFICATIONS of certain 1997 and 1998 amounts have been made to
conform to the 1999 presentation.
2. ACQUISITION
Effective November 13, 1997, the Company acquired all of the outstanding
stock of Foremost Manufacturing Company, Inc. in St. Louis, Missouri,
which is engaged primarily in the manufacture and distribution of paint
sundry products. The Foremost stock was acquired for $5,250,000 in cash,
which the Company financed with additional bank borrowings, and 25,907
common shares of the Company valued at $250,000. During fiscal 1999, the
Company paid $500,000 as additional purchase price consideration under an
earn-out provision, of which the Company had accrued $400,000 in 1998.
The total cost of the acquisition, $6,183,208, including transaction
costs, exceeded the fair value of the net assets acquired by $5,341,248,
which was recorded as goodwill.
F-8
<PAGE> 32
This acquisition was accounted for under the purchase method. The results
of the acquired operations are included in the consolidated financial
statements from the acquisition date. The unaudited consolidated results
of operations on a pro forma basis as though Foremost were acquired and
the related common shares were issued as of the beginning of the
Company's fiscal year 1998 is as follows:
<TABLE>
<S> <C>
Net sales $77,702,435
Income before extraordinary item $ 401,070
===========
Net income $ 338,839
===========
Earnings per share:
Income before extraordinary item:
Basic $ .09
===========
Diluted $ .09
===========
Net income:
Basic $ .08
===========
Diluted $ .08
===========
Weighted average common shares outstanding:
Basic 4,421,922
===========
Diluted 4,520,008
===========
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for doubtful accounts of
$339,630 and $218,360 at September 30, 1999 and 1998, respectively.
Amounts due from two customers represent 45% and one customer represents
7% of total accounts receivable at September 30, 1999 and 1998,
respectively. Accounts receivable at September 30, 1999, includes $1.8
million for the cost of equipment to be reimbursed by one of these
customers.
4. INVENTORIES
Inventories at September 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Raw materials $4,670,120 $4,766,165
Finished goods 3,578,756 4,190,784
---------- ----------
Total inventories $8,248,876 $8,956,949
========== ==========
</TABLE>
F-9
<PAGE> 33
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land and land improvements $ 517,928 $ 517,928
Buildings 6,942,036 6,901,006
Leasehold improvements 1,433,497 957,702
Machinery and equipment 17,357,747 17,141,861
Computer equipment and software 4,052,167 1,213,832
Furniture and fixtures 690,748 1,495,749
Vehicles 97,255 97,255
----------- -----------
31,091,378 28,325,333
Less accumulated depreciation and amortization 14,678,060 13,149,385
----------- -----------
Net depreciated value 16,413,318 15,175,948
Construction in progress related primarily to a new
centralized computer system
being implemented:
Hardware and software under capital lease 420,360
Other hardware and software costs 223,438 1,763,994
----------- -----------
223,438 2,184,354
----------- -----------
Property, plant and equipment - net $16,636,756 $17,360,302
=========== ===========
</TABLE>
Costs of internal-use software are capitalized when the project is
authorized for funding and evaluated as probable for completion and use
for the functions intended. These costs consist of the external direct
costs of acquisition and the related consulting services for
implementation of the software.
Gains on asset sales in fiscal 1999 include $699,000 realized from the
sale of equipment and inventory related to the Away-From-Home ("AFH")
product line (see Note 14) and $349,000 from the sale of other equipment,
primarily in the Green Bay facility.
6. OTHER ASSETS
Other assets at September 30 consist of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Loan origination and other fees $ 372,281 $ 281,645
Less accumulated amortization 110,110 73,460
---------- ----------
Subtotal 262,171 208,185
Note receivable bearing interest at 7%, due in
variable monthly installments through 2001 10,495 27,520
Advances to certain directors and former owners 296,174 250,661
Cash value of life insurance 8,316 8,317
Deposits on equipment to be acquired and other 1,024,253 1,252,803
---------- ----------
Other assets - net $1,601,409 $1,747,486
========== ==========
</TABLE>
F-10
<PAGE> 34
7. LONG-TERM DEBT
Long-term debt at September 30 consists of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Note payable to bank, collateralized by substantially all assets of the
Company, bearing a variable interest of 6.54% and 6.64% (fixed at 6.87% under
an interest rate swap arrangement discussed below), at September 30, 1999 and
1998, respectively, installments are due quarterly at $380,358, with final
payment due on August 1, 2005 $ 6,628,568 $10,650,000
Notes payable to bank, under a revolving line-of-credit agreement (not to
exceed maximum borrowings of $9 million, reduced by outstanding letters of
credit - see Note 9), collateralized by substantially all assets of the
Company, bearing interest at a combination of 100 basis points over LIBOR or
.75% below the bank's reference rate (effective rate of 6.95% and 6.85% at
September 30, 1999 and 1998, respectively), payable quarterly, due on
June 1, 2001 6,020,000 5,013,230
Variable rate (3.95% and 4.25% at September 30, 1999 and 1998, respectively)
note payable underlying Industrial Development Revenue Bonds, collateralized by
substantially all assets of the Company, due in annual installments of $250,000
beginning 2000 through 2006, interest payable monthly 1,750,000 1,750,000
Capital lease obligation, payable in monthly installments of $13,109 through
2000, net of $28,859 discount based on interest
at 3.88%, collateralized by computer hardware and software 131,003 283,376
----------- -----------
Total 14,529,571 17,696,606
Less current portion 1,902,435 1,670,810
----------- -----------
Long-term debt - less current portion $12,627,136 $16,025,796
=========== ===========
</TABLE>
Long-term debt - less current portion matures as follows:
<TABLE>
<S> <C>
2001 $ 7,791,432
2002 1,771,432
2003 1,771,432
2004 792,840
2005 250,000
Thereafter 250,000
-----------
Total $12,627,136
===========
</TABLE>
In connection with the $10,650,000 term debt, in 1998, the Company paid
$94,000 to its former lender to exit the prior credit agreement,
principally in the form of prepayment penalties on the early repayment of
term debt. These costs are reflected as an extraordinary item in the
consolidated
F-11
<PAGE> 35
statements of income. With the refinancing, the Company entered into an
interest rate swap agreement, as a hedge under which the interest rate on
the term debt is fixed at 5.87%, plus a profit spread for the lender of
between 100 and 150 basis points, depending on certain financial ratios
achieved by the Company. The fair value of this swap agreement is
estimated to be a net receivable position of $45,000 and a net payable
position of $75,000 at September 30, 1999 and 1998, respectively.
Loan agreements for all notes except those underlying the Industrial
Development Revenue Bonds contain certain restrictive covenants,
including requirements to maintain minimum fixed charge coverage, minimum
tangible net worth, and restrictions on maximum allowable debt, capital
purchases, stock purchases, mergers and payment of dividends. The Company
has a standby letter of credit for the outstanding balance associated
with the Industrial Development Revenue Bonds.
8. INCOME TAXES
The tax effects of significant items composing the Company's net deferred
tax liability as of September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Current deferred tax asset:
Valuation allowances for accounts receivable and inventories,
not currently deductible $ 227,068 $ 251,252
Inventory costs capitalized for tax purposes 29,064 68,225
Vacation and severance accruals, not currently deductible 64,711 122,291
Other accruals, not currently deductible 60,640 96,385
Other 65,613 58,525
----------- -----------
Total 447,096 596,678
Noncurrent deferred tax liability:
Accelerated tax depreciation on property and equipment (1,571,859) (1,497,149)
Accelerated tax amortization of goodwill (734,206) (439,732)
Other 57,194 51,228
----------- -----------
Total (2,248,871) (1,885,653)
----------- -----------
Net deferred tax liability $(1,801,775) $(1,288,975)
=========== ===========
</TABLE>
F-12
<PAGE> 36
The resulting components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Current tax expense:
Federal $ 1,213,557 $ 301,474 $ 1,512,810
State 75,859 22,341 145,541
----------- ----------- -----------
Total 1,289,416 323,815 1,658,351
Deferred tax expense (benefit):
Federal 480,011 119,210 75,717
State 32,789 8,765 12,946
Adjustment for tax rate changes due to
corporate restructuring (Note 1) (109,411)
----------- ----------- -----------
Total 512,800 127,975 (20,748)
----------- ----------- -----------
Income tax expense $ 1,802,216 $ 451,790 $ 1,637,603
=========== =========== ===========
</TABLE>
Income tax expense varies from the amount determined by applying the
applicable statutory income tax rates to pretax income as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Federal income taxes computed at statutory rates $ 1,625,382 $ 286,937 $ 1,458,902
State income taxes, net of federal tax benefit 71,708 20,530 32,390
Certain goodwill amortization and other
nondeductibles 157,641 114,182 81,789
Other (52,515) 30,141 64,522
----------- ----------- -----------
Income tax expense $ 1,802,216 $ 451,790 $ 1,637,603
=========== =========== ===========
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEASES - Tufco Industries, Inc. leases warehouse facilities in Green Bay,
Wisconsin, from a partnership composed of certain current and former
stockholders. The lease expires in 2003, is classified as an operating
lease and requires monthly rental payments of $9,255. The Company has the
option of renewing the lease for a three-year period with rental amounts
renegotiated. Rental expense for the lease totaled $111,060 annually for
fiscal 1999, 1998 and 1997.
The Company entered into an agreement with a third party to construct and
lease a 62,000-square-foot facility in Manning, South Carolina, which the
Company occupied in October 1996. The five-year agreement is an operating
lease with rental payments of $11,489 per month. The Company has three
contiguous options to renew the lease for successive five-year terms
beginning at the end of the fifth year. The Company also has the option
of purchasing the building for $1,100,000. If the purchase and renewal
options are not exercised, the Company may be required to pay the lessor
a residual amount of up to $900,000, depending upon the extent, if any,
that the facility's value has diminished during the lease term. A portion
of the scheduled lease payments is placed in escrow and is included in
restricted cash of $20,050 and $20,328 at September 30, 1999 and 1998,
respectively. The Company has a standby letter of credit with its bank
for the payment of the future lease obligations.
F-13
<PAGE> 37
The Company also leases other facilities and equipment under operating
leases. Office and warehouse leases expire in November 2000 and February
2003. The equipment leases expire on varying dates over the next five
years.
Future minimum rental commitments under operating leases with initial or
remaining terms in excess of one year at September 30, 1999, are as
follows:
<TABLE>
<S> <C>
2000 $1,243,227
2001 984,187
2002 1,740,617
2003 380,921
2004 35,567
Thereafter
----------
Total $4,384,519
==========
</TABLE>
Net rental expense for all operating leases totaled $1,270,833,
$1,123,912 and $898,497 for fiscal 1999, 1998 and 1997, respectively. The
Company charges its customers for storage, which is netted against rental
expense.
COMMERCIAL LETTERS OF CREDIT - The Company has outstanding commercial
import letters of credit of $0 and $57,543 as of September 30, 1999 and
1998, respectively. These letters of credit collateralize the Company's
obligations to third parties for the purchase of inventory. The Company
has unused letters of credit of $750,000 available at September 30, 1999.
LITIGATION - The Company is subject to lawsuits, investigation and
potential claims arising out of the ordinary conduct of its business.
Management believes the outcome of these matters will not materially
affect the financial position, results of operations or cash flows of the
Company.
10. PROFIT SHARING PLANS
The Company has a defined contribution profit sharing 401(k) plan
covering substantially all employees. The Company makes annual
contributions at the discretion of the board of directors. In addition,
the Company matches certain amounts of employees' contributions. Profit
sharing plan expense relating to the defined contribution profit sharing
401(k) plan totaled $268,657, $209,215 and $132,788 for fiscal 1999, 1998
and 1997, respectively.
11. STOCKHOLDERS' EQUITY
NONVOTING COMMON STOCK AND PREFERRED STOCK - Each record holder of
nonvoting common stock was entitled at any time to convert any or all of
such shares into the same number of shares of voting common stock. During
fiscal 1999, the holders of all 709,870 shares of nonvoting common stock
exercised their right to convert the shares to voting common stock. The
Company has 1,000,000 shares authorized and unissued $.01 par value
preferred stock.
STOCK COMPENSATION ARRANGEMENTS - The Non-Qualified Stock Option Plan
currently reserves 400,000 shares of common stock for grants to selected
employees through April 30, 2002, and provides that the price and
exercise period be determined by the board of directors. Options vest
primarily over three years and expire five years from date of grant.
During fiscal 1999, 1998 and 1997, options to purchase 70,000, 86,000 and
104,000 shares, respectively, of voting common stock were granted.
F-14
<PAGE> 38
The Non-Employee Director Stock Option Plan for nonemployee members of
the board of directors reserves 100,000 shares of common stock for grant
and provides that the purchase price be fair market value at the date of
grant. Options are exercisable immediately and for a period of ten years.
With respect to future grants, the plan terminates in 1999, and its
renewal will be subject to stockholder approval. During fiscal 1999, 1998
and 1997, options to purchase 8,000, 12,000 and 14,000 shares,
respectively, of voting common stock were granted.
The following information summarizes the shares subject to options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE
NUMBER OF SHARES PRICE PER SHARE
-------------------------------- ------------------------------
1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 412,441 364,127 256,372 $ 6.69 $ 6.01 $ 5.61
Granted 78,000 98,000 118,000 6.92 9.62 6.82
Exercised (2,525) (37,396) (10,245) 4.65 6.50 4.72
Terminated (50,610) (12,290) 7.32 10.07
------- ------- -------
Options outstanding, end of year 437,306 412,441 364,127 6.63 6.69 6.01
======= ======= =======
Options exercisable, end of year 303,639 261,332 225,136 6.12 5.89 5.68
======= ======= =======
Reserved for future options at
September 30, 1999 62,694
=======
</TABLE>
The following table summarizes additional information about stock options
outstanding and exercisable at September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C>
$4.50 - 6.75 215,221 1.7 years $ 5.31 206,221 $ 5.25
7.00 - 9.50 222,085 3.4 years 7.91 97,418 7.97
-------- --------
4.50 - 9.50 437,306 2.6 years 6.63 303,639 6.12
======== ========
</TABLE>
The Company applies APB No. 25 and related Interpretations in accounting
for its stock option plans. No compensation cost has been recognized for
the Company's stock option plans because the quoted market price of the
common stock at the date of grant was not in excess of the option
exercise price. SFAS No. 123 prescribes a method to record compensation
cost at the fair value of the options granted. Pro forma disclosures as
if the Company had adopted the cost recognition requirements under SFAS
No. 123 in fiscal 1999, 1998 and 1997 are presented below. Because the
SFAS No. 123 method
F-15
<PAGE> 39
of accounting has not been applied to options granted prior to October 1,
1995, the resulting pro forma compensation cost may not be representative
of that expected in future years.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $ 2,978,319 $ 329,910 $ 2,653,286
Pro forma 2,807,000 129,000 2,450,000
Basic earnings per share:
As reported .67 .07 .61
Pro forma .63 .03 .56
Diluted earnings per share:
As reported .67 .07 .60
Pro forma .63 .03 .55
</TABLE>
In the pro forma calculations, the weighted average fair value of options
granted during 1999, 1998 and 1997 was estimated at $3.18, $4.40 and
$2.96 per share, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in
1999, 1998 and 1997: risk-free interest rates of 5.0%, 5.0% and 6.2%,
respectively; dividend yield of 0.0% for all years; expected lives of
four to five years; and expected volatility of 50%, 50% and 55%,
respectively, based on the historical weekly trading ranges of the
Company's stock since its initial public offering in January 1994.
The Company sold shares to management employees under various stock
purchase agreements, which included 16,937 shares at $4.80 to $6.75 per
share in 1996. The purchases are financed by the Company through notes
with the employees at 5% interest payable annually and are due as
follows: $35,195 in 2000 and $60,000 in 2001. The outstanding balances of
$95,195 and $100,195 at September 30, 1999 and 1998, respectively, are
presented as a reduction of stockholders' equity.
12. RELATED-PARTY TRANSACTIONS
The Company has an agreement with Bradford Ventures, Ltd., an affiliate
of the two largest stockholders of the Company, under which Bradford
Ventures, Ltd. provides various financial and management consulting
services until January 2004, when the agreement will be automatically
renewed unless terminated by either party. The agreement calls for an
annual fee of $210,000 with annual increases of 5% plus reimbursement of
reasonable out-of-pocket expenses. The Company believes the terms of its
consulting agreement are comparable to those available from unaffiliated
third parties for similar services. Consulting expense was $251,161,
$236,440 and $226,931 for fiscal 1999, 1998 and 1997, respectively.
F-16
<PAGE> 40
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest paid $ 1,125,346 $ 1,098,538 $ 873,366
=========== =========== ==========
Income taxes paid $ 1,178,782 $ 927,431 $1,621,455
=========== =========== ==========
Noncash investing and financing activities:
Issuance of common stock - Foremost acquisition $ -- $ 250,000 $ --
=========== =========== ==========
Conversion of nonvoting to voting common stock $ 7,099 $ -- $ --
=========== =========== ==========
Addition to property, plant and equipment and
other assets for capital lease obligation $ -- $ -- $ 452,938
=========== =========== ==========
Purchase of treasury stock by reduction in
stock purchase plan notes $ -- $ 160,962 $ 42,058
=========== =========== ==========
</TABLE>
14. MAJOR CUSTOMER AND SEGMENT INFORMATION
In fiscal 1999, the Company had two significant customers, each of which
accounted for approximately 10% of total sales. Both customers are
Fortune 500 companies, one of which related to the Contract Manufacturing
sector, and the other was primarily concentrated in the Paint Sundries
sector. No customers accounted for greater than 10% of sales in fiscal
1998.
The Company operates in a single industry since it manufactures and
distributes custom paper-based and woven products, and provides contract
manufacturing, specialty printing and related services on these types of
products. The Company does, however, separate its operations and prepare
information for management use by the market sectors aligned with the
Company's products and services. Such market sector information is
summarized below. The Contract Manufacturing sector provides services to
large national consumer products companies while the remaining sectors
manufacture and distribute products ranging from paper goods to paint
sundries. Accounts receivable and certain other assets are not assignable
to specific sectors and, therefore, are included in the intersector
column below. In June 1999, the Company sold its equipment and inventory
related to its AFH products and services, and has ceased selling into
this market sector.
F-17
<PAGE> 41
<TABLE>
<CAPTION>
CONTRACT BUSINESS PAINT AWAY
FISCAL 1999 MANUFACTURING IMAGING SUNDRIES FROM HOME INTERSECTOR CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 25,987,095 $ 24,965,919 $ 20,955,389 $ 4,422,160 $ -- $ 76,330,563
Gross profit 6,393,221 3,499,667 2,781,787 431,603 13,106,278
Operating income (loss) 5,287,659 1,272,918 195,474 (268,325) (1,708,641) 4,779,085
Assets:
Inventories 1,013,403 3,781,685 3,453,788 8,248,876
Property, plant and
equipment - net 7,167,498 7,076,601 644,440 1,748,217 16,636,756
Accounts receivable and other
(including goodwill) 34,195,157 34,195,157
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 8,180,901 $ 10,858,286 $ 4,098,228 $ -- $ 35,943,374 $ 59,080,789
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
CONTRACT BUSINESS PAINT AWAY
FISCAL 1998 MANUFACTURING IMAGING SUNDRIES FROM HOME INTERSECTOR CONSOLIDATED
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 19,204,220 $ 32,487,928 $ 18,021,615 $ 7,259,013 $ -- $ 76,972,776
Gross profit 2,153,047 5,016,128 3,192,841 708,480 11,070,496
Operating income (loss) 533,235 2,101,685 981,279 147,894 (1,771,710) 1,992,383
Assets:
Inventories 1,319,741 3,234,836 2,929,511 1,472,861 8,956,949
Property, plant and
equipment - net 5,965,794 7,774,502 893,284 1,322,096 1,404,626 17,360,302
Accounts receivable and other
(including goodwill) 32,449,946 32,449,946
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 7,285,535 $ 11,009,338 $ 3,822,795 $ 2,794,957 $ 33,854,572 $ 58,767,197
============ ============ ============ ============ ============ ============
</TABLE>
* * * * *
F-18
<PAGE> 42
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated as of November 12, 1997 by and
among Tufco Technologies, Inc. (the "Company"), Charles
Cobaugh and James Barnes (filed as exhibit 2.1 to the
Company's Form 8-K dated November 13, 1997 filed with the
Commission on November 26, 1997 file number 0-21018,
incorporated by reference herein).
3.1 Restated Certificate of Incorporation (1) (Exhibit 3.1)
3.2 Bylaws (1) (Exhibit 3.2)
10.1 Stock Purchase and Contribution Agreement, dated as of
February 25, 1992, among the Company, Tufco Industries, Inc.
("Tufco"), and the Stockholders of Tufco. (1) (Exhibit 10.1)
10.2 Amended and Restated Consulting Agreement with Bradford
Investment Partners, L.P. (3) (Exhibit 10)
10.3 Loan Agreement, dated May 1, 1992, between the Village of
Ashwaubenon, Wisconsin, and the Company. (1) (Exhibit 10.11)
10.4 1992 Non-Qualified Stock Option Plan (1) (Exhibit 10.12)
10.5 Form of Employee Stock Purchase Agreement between the Company
and certain key employees of the Company. (1) (Exhibit 10.17)
10.6 1993 Non-Employee Director Stock Option Plan. (2) (Exhibit
10.19)
10.7 Amended Employment Agreement with Greg Wilemon, dated
September 18, 1995. (5) (Exhibit 10.11)
10.8 Lease Agreement, dated as of March 1, 1995, between Bero,
Garland, Gebhardt and McClure, a Wisconsin partnership, and
Tufco. (4) (Exhibit 10.13)
10.9 Stock Option Plan for Carl B. Francis dated April 21, 1995.
(4) (Exhibit 10.14)
10.10 Lease Agreement dated as of April 1, 1996, between Bero,
Garland, Gebhardt and McClure, a Wisconsin partnership, and
Tufco. (5) (Exhibit 10.15)
10.11 Separation Agreement dated October 1, 1996 between Carl B.
Francis and the Company. (5) (Exhibit 10.17)
10.12 Employment Agreement with Louis LeCalsey, III dated September
19, 1996. (5) (Exhibit 10.18)
10.13 Credit Agreement among Tufco L.P. as Borrower, the Company as
the Parent First Union National Bank as agent and the banks
named herein dated August 28, 1998. (6)
10.14 ISDA Master Agreement and Schedule to the Master Agreement
dated as of July 30, 1998 between First Union National Bank
and Tufco, L.P. (6)
10.15 First Amendment to Credit Agreement. (6)
21.1 Subsidiaries of the Company. (6)
27.1* Financial Data Schedule
</TABLE>
---------------
* Filed herewith
20
<PAGE> 43
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (Reg. No. 33-55828) (the "Registration
Statement") as filed with the Commission on December 16, 1992.
(2) Incorporated by reference to Amendment No. 1 to the
Registration Statement as filed with the Commission on
November 23, 1993.
(3) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1995.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended September 30, 1995.
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended September 30, 1997.
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K for the period ended September 30, 1998.
(c) See (a)(3) above for the list of exhibits required to be filed as part
of the Annual Report on Form 10-K.
21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 712,052
<SECURITIES> 0
<RECEIVABLES> 12,721,698
<ALLOWANCES> 0
<INVENTORY> 8,248,876
<CURRENT-ASSETS> 22,893,694
<PP&E> 16,636,756
<DEPRECIATION> 0
<TOTAL-ASSETS> 59,080,789
<CURRENT-LIABILITIES> 8,959,247
<BONDS> 0
0
0
<COMMON> 44,986
<OTHER-SE> 32,200,549
<TOTAL-LIABILITY-AND-EQUITY> 59,080,789
<SALES> 76,330,563
<TOTAL-REVENUES> 76,330,563
<CGS> 63,224,285
<TOTAL-COSTS> 63,224,285
<OTHER-EXPENSES> 8,327,193
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,085,511
<INCOME-PRETAX> 4,780,535
<INCOME-TAX> 1,802,216
<INCOME-CONTINUING> 2,978,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,978,319
<EPS-BASIC> .67
<EPS-DILUTED> .67
</TABLE>
