<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, 2000. 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
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(Address of principal executive offices)
(972) 789-1079
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(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 14, 2000, was approximately $11,042,293. 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 14, 2000. 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 14, 2000 was 4,675,019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its Annual Meeting
of Stockholders to be held in 2001 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 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, adult hygiene components and polyethylene and paper dropcloths. The
Company has invested in equipment to perform thermal lamination to bond various
material substrates up to 120 inches wide, such as multiply 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.
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Contract Manufacturing Market Sector (continued)
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 and poly tablecovers, food and gift-wraps, flexible
packaging, adult hygiene components, and printed release liners. The cornerstone
of the Company's printing operation is its 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 processses 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 multiply, 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.
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.
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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 $12 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. Principle
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.
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 purchased 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
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Sales and Marketing - continued
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 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,
however, seasonal fluctuations are diminishing as the Company shifts its
emphasis to longer-term manufacturing agreements.
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. In fiscal 2000, two customers,
both Fortune 500 companies accounted for more than 10% of consolidated sales
each. A Paint Sundry customer accounted for 12%, and a Contract Manufacturing
customer accounted for 20% of fiscal 2000 net sales. 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 of products offered by Tufco on a national basis.
There is strong domestic competition and a modest amount of foreign competition
in the manufacturing 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
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PRODUCT DEVELOPMENT AND QUALITY CONTROL (CONTINUED)
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 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. In fiscal 2000, the Company achieved ISO
2002 certification for its Green Bay facility 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.
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 eventually
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 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, 2000, the Company had approximately 675 employees, of
whom 350 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.
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ITEM 2 - PROPERTIES
The Company's main production and distribution facilities for Contract
Manufacturing and specialty printing are located in Green Bay, Wisconsin. The
220,000 square foot facility (of which approximately 15,000 square feet are used
for offices) was built in stages from 1980 to 2000 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. In August
of fiscal 2000, the Company began a 55,000 square foot expansion of the Manning
facility. When complete in February 2001, the Company will close its St. Louis
Paint Sundry facility and consolidate those operations into the expanded Manning
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 in fiscal 2000 the Company reached an
agreement to sell this building for a nominal price.
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 will be vacated as the Manning
consolidation is complete.
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 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.
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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 1999:
Quarter ended December 31, 1998 $ 7.500 $4.125 $ 5.000
Quarter ended March 31, 1999 $ 6.375 $3.250 $ 6.000
Quarter ended June 30, 1999 $ 8.500 $5.500 $ 8.000
Quarter ended September 30, 1999 $ 8.250 $7.000 $ 7.500
Fiscal 2000:
Quarter ended December 31, 1999 $10.500 $7.000 $10.375
Quarter ended March 31, 2000 $12.000 $8.375 $ 9.500
Quarter ended June 30, 2000 $11.250 $8.625 $10.000
Quarter ended September 30, 2000 $10.250 $8.750 $10.125
</TABLE>
As of December 14, 2000, there were approximately 114 holders
of record of the Common Stock. On December 14, 2000, the last reported sale
price of the Common Stock as reported on the NASDAQ National Market was $7.44
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.
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ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
DATA)
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------------------
2000 1999 1998(1) 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................................. $ 78,952 $ 76,331 $ 76,973 $ 65,750 $ 68,374
Cost of sales ......................................... 68,041 63,225 65,903 53,835 56,042
-------- -------- -------- -------- --------
Gross profit .......................................... 10,911 13,106 11,070 11,915 12,332
Selling, general, and
administrative expenses .......................... 6,564 7,317 7,661 6,396 6,753
Amortization and other post-acquisition expenses ...... 1,150 1,010 1,025 706 724
Facility closing cost ................................. 831 -- -- -- --
Employee severance cost ............................... 660 -- 142 -- --
Property write-downs .................................. 74 -- 250 -- --
(Gain) loss on asset sales ............................ (327) (1,048) 37 (101) (5)
-------- -------- -------- -------- --------
Operating income ................................. 1,959 5,827 1,955 4,914 4,860
Interest expense ................................. (974) (1,086) (1,177) (889) (1,134)
Interest and other income ........................ 35 40 66 266 41
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary item ...................... 1,020 4,781 844 4,291 3,767
Income tax expense ............................... 493 1,803 452 1,638 1,507
-------- -------- -------- -------- --------
Income before extraordinary item ...................... 527 2,978 392 2,653 2,260
Extraordinary item-loss from early
repayment of debt, net of income
tax benefit of $32........................... -- -- 62 -- --
-------- -------- -------- -------- --------
Net income ....................................... $ 527 $ 2,978 $ 330 $ 2,653 $ 2,260
======== ======== ======== ======== ========
Earnings per share:
Income before extraordinary item
Basic .................................. $ .12 $ .67 $ .09 $ .61 $ .52
Diluted ................................ $ .11 $ .67 $ .09 $ .60 $ .51
Net income
Basic .................................. $ .12 $ .67 $ .07 $ .61 $ .52
Diluted ................................ $ .11 $ .67 $ .07 $ .60 $ .51
Weighted average common shares outstanding:
Basic .................................. 4,499 4,419 4,420 4,384 4,386
Diluted ................................ 4,622 4,475 4,518 4,448 4,438
OTHER DATA:
Depreciation and amortization(2) ...................... $ 3,535 $ 3,090 $ 2,605 $ 2,363 $ 2,279
Capital expenditures .................................. $ 7,073 $ 3,130 $ 2,629 $ 3,234 $ 2,371
BALANCE SHEET DATA: (AT SEPTEMBER 30)
Working capital ....................................... $ 11,952 $ 13,934 $ 12,630 $ 10,225 $ 10,553
Total assets .......................................... 62,133 59,081 58,767 49,045 50,038
Total-current and long-term debt ...................... 13,107 14,530 17,697 10,498 13,350
Stockholders' equity .................................. 36,579 35,246 32,250 31,368 28,719
</TABLE>
FOOTNOTES
(1) Includes Foremost Manufacturing Company since its acquisition in
November 1997.
(2) Includes depreciation and amortization of goodwill and organizational
expenses.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Management's discussion of the Company's 2000 fiscal year in comparison
to fiscal 1999, contains forward-looking statements regarding current
expectations, risks and uncertainties for 2001 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, 2000 ("current year" or "fiscal
2000"), in comparison to the fiscal year ended September 30, 1999 ("prior year"
or "fiscal 1999"), as well as the fiscal year ended September 30, 1998 ("fiscal
1998").
9
<PAGE> 11
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
---------------------------------------------- -----------------------------
1999 TO 1998 TO
2000 1999 1998 2000 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ................................... 100.0% 100.0% 100.0% 3% (1)%
Cost of sales ............................... 86.2 82.8 85.6 8 (4)
------------ ------------ ------------ ------------ ------------
Gross margin ....................... 13.8 17.2 14.4 (17) 18
Selling and administrative expenses ......... 8.3 9.6 9.9 (10) (4)
Amortization and post-acquisition expenses .. 1.5 1.3 1.4 14 (1)
Facility closing cost ....................... 1.0 -- -- -- --
Employee severance cost ..................... 0.8 -- 0.2 -- --
Property write-downs ........................ 0.1 -- 0.3 -- --
(Gain) loss on asset sales .................. (0.4) (1.4) 0.1 (69) --
------------ ------------ ------------ ------------ ------------
Operating income ................... 2.5 7.6 2.5 (66) 198
Interest expense ............................ (1.2) (1.4) (1.5) (10) (8)
Interest and other income ................... 0.0 0.0 .1 (13) (39)
------------ ------------ ------------ ------------ ------------
Income before income taxes
and extraordinary item .......... 1.3 6.3 1.1 (79) 466
Income tax expense .......................... 0.6 2.4 0.6 (73) 299
------------ ------------ ------------ ------------ ------------
Net income before extraordinary item ........ 0.7 3.9 0.5 (82) 660
Extraordinary item .......................... -- -- 0.1 -- --
------------ ------------ ------------ ------------ ------------
Net income .................................. 0.7% 3.9% 0.4% (82)% 660%
============ ============ ============ ============ ============
</TABLE>
The components of net sales and gross profit are summarized in the
table below:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
% of % of % of
Amount Total Amount Total Amount Total
-------- -------- -------- -------- -------- --------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Contract manufacturing and printing $ 34.2 43% $ 26.0 34% $ 19.2 25%
Business imaging paper products 25.9 33 24.9 33 32.5 42
Paint sundry products 18.8 24 21.0 27 18.0 24
Away-from-home products 0.0 -- 4.4 6 7.3 9
-------- -------- -------- -------- -------- --------
Net sales $ 78.9 100% $ 76.3 100% $ 77.0 100%
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Margin Margin Margin
Amount % Amount % Amount %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
Contract manufacturing and printing $ 7.1 21% $ 6.4 25% $ 2.2 11%
Business imaging paper products 2.9 11 3.5 14 5.0 15
Paint sundry products .9 5 2.8 13 3.2 18
Away-from-home products 0.0 -- 0.4 9 0.7 10
-------- -------- -------- -------- -------- --------
Gross profit $ 10.9 14% $ 13.1 17% $ 11.1 14%
======== ======== ======== ======== ======== ========
</TABLE>
10
<PAGE> 12
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999
NET SALES for fiscal 2000 increased $2.6 million or 3% primarily due to
increased sales of Contract Manufacturing and printing services, which increased
$8.2 million or 32% over the prior year. The increased contract manufacturing
sales were the result of two new service agreements with a Fortune 500 consumer
products company, under which the Company manufactured and packaged a household
cleaning product and a facial wipe. Sales under these two agreements began in
the first quarter of fiscal 2000, and ended abruptly in the second quarter of
fiscal 2000. Based on customer forecasts, Company management had expected sales
under the larger of these two agreements to continue through July of fiscal
2000, and the early termination had a negative impact on gross profit margins in
the Contract Manufacturing sector. In addition to these two agreements, the
Company also began converting paper products for a large manufacturer of
wide-format printers and copiers. Volumes under this agreement are based on
month-to-month purchase orders placed by the customer, and monthly sales can
vary widely. Sales of the Company's Business Imaging paper products increased
$1.0 million (4%) due to a combination of increased selling prices and a smaller
increase in unit volume. Raw material costs increased an average of 19% for the
sector, and the Company passed on a portion of those costs to its customers
resulting in an increase in net sales. However, due to the frequency with which
paper costs increased, and to agreements with customers under which the Company
must provide advance notice of sales price increases, the Company was unable to
pass through all cost increases on a timely basis resulting in diminished gross
profit margins. Sales in the Company's Paint Sundry sector declined $2.2 million
(10%) due primarily to lower sales to a major national paint retailer, as that
customer chose to purchase its products from Asian suppliers beginning in
October of 1999. Finally, no sales of Away-From-Home (AFH) products were
recorded in fiscal 2000, compared to sales of $4.4 million in fiscal 1999. The
Company discontinued marketing AFH products in June of fiscal 1999, and sold the
assets previously used to support that sector. The manufacturing resources
previously used to support production of AFH inventory were reallocated to
support new Contract Manufacturing agreements which were in start-up phase at
the end of fiscal 2000.
GROSS PROFIT declined $2.2 million (17%) and margins declined to 13.8%
in fiscal 2000 from 17.2% in the prior year. Several factors contributed to the
decline. The most significant decline occurred in the Paint Sundry sector where
gross profit was down $1.9 million and margins declined from 13% in the prior
year to 5% in fiscal 2000. As discussed earlier, the loss of a major customer
contributed heavily to the declining gross profit. In the fourth quarter of
fiscal 2000, management announced its intent to close its St. Louis facility and
consolidate all Paint Sundry operations into the Company's expanded Manning,
South Carolina plant. Management believes that this consolidation will provide
almost $1 million in annual cost savings when completed in March 2001, which
will help to increase gross profit respectively. Gross profit from the sale of
Business Imaging paper products declined $0.6 million (17%) due to the
aforementioned increases in raw material costs which were not entirely passed
through to customers. Management has planned price increases for December 2000
which should result in improved gross profit margins in the final three quarters
of fiscal 2001, assuming raw material cost stability. Finally, gross profit from
Contract Manufacturing services increased $0.7 million, though the gross profit
margin declined from 25% in fiscal 1999 to 21% in fiscal 2000. As noted earlier,
the Company's largest customer cancelled a major manufacturing agreement in the
second quarter of fiscal 2000, approximately five months ahead of the scheduled
termination date. The customer's internal production line was operational
earlier than planned, negating their need for Tufco's services. While the
Company had the right to impose financial penalties for the early termination,
management elected to waive those penalties in recognition of three new
manufacturing agreements which were under negotiation with this customer. The
Company was eventually awarded all three of the new production agreements, and
two of the three will enter commercial production in the second quarter of
fiscal 2001. The sudden decline in sales from the discontinued contract,
combined with the high costs for training and start-up which the Company
incurred for the three new agreements resulted in low gross profit margins in
the third and fourth quarters of fiscal 2000. Margins in the Contract
Manufacturing sector should improve in the second quarter of fiscal 2001 when
these agreements begin commercial operations. Until these agreements are
operational, management projects that gross profit margins will remain lower
than in fiscal 1999.
SELLING AND ADMINISTRATIVE EXPENSES for fiscal 2000 were down $0.8
million or 10%, principally due to costs eliminated from the discontinuance of
the AFH sales and marketing sector.
GOODWILL AMORTIZATION AND POST-ACQUISITION EXPENSES increased $0.1
million (14%) due to costs accrued relating to potential liability under an
indemnification agreement to Bradford Venture Partners, Ltd. a related party.
11
<PAGE> 13
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999 (CONTINUED)
FACILITY CLOSING EXPENSE is a one-time charge associated with the
closing of the Company's St. Louis distribution facility and the moving of the
related inventory, equipment and personnel to Manning.
SEVERANCE EXPENSE was $0.7 million in fiscal 2000, and relates to
payments due to a former executive of the Company pursuant to an employment
agreement with an acquired company.
GAINS ON ASSET SALES were $0.3 million in fiscal 2000 resulting from
the sale of certain under-utilized printing equipment in the Green Bay facility.
In the prior year, most of the $1.0 million gain was the result of the sale of
assets formerly used to support the AFH business sector.
NET INTEREST EXPENSE decreased $0.1 million due to lower average
borrowings during the current fiscal year.
INCOME TAXES were 48% of pre-tax earnings in fiscal 2000, compared to
38% for the prior year. The increased rate was the result of the impact that
certain non-deductible expenses, such as goodwill amortization, on the
relatively low level of pre-tax income.
BASIC AND DILUTED EARNINGS PER SHARE were 12 cents and 11 cents
respectively in fiscal 2000. Adjusted for the after tax effects of the plant
costing costs and executive severance, basic and diluted earnings per share
would have been 32 cents.
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 installed a new eight color flexographic printing press in
its Green Bay facility. The total value of the press exceeded $4 million, for
which the Company entered into a long term operating lease in December 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.
12
<PAGE> 14
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998 (CONTINUED)
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.
GAINS ON ASSET 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.
NET INTEREST EXPENSE decreased $0.1 million due to lower average
borrowings during the current fiscal year.
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.
13
<PAGE> 15
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 2000 (Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Net sales ................................... $ 20,701 $ 19,783 $ 19,392 $ 19,076
Gross profit ................................ 3,654 3,417 2,038 1,802
Operating expenses .......................... 1,822 2,082 1,545 3,503
Operating income (loss) ..................... 1,832 1,335 493 (1,701)
Income (loss) before income taxes ........... 1,550 1,075 237 (1,842)
Income tax expense (benefit) ................ 574 398 151 (630)
Net income (loss) ........................... 976 677 86 (1,212)
Earnings (loss) per share:
Basic .............................. .22 .15 .02 (.26)
Diluted ............................ .21 .15 .02 (.26)
</TABLE>
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 .......................... 1,940 1,988 1,250 2,101
Operating income ............................ 1,034 813 2,243 1,737
Income before income taxes .................. 781 516 1,960 1,524
Income tax expense (benefit) ................ 312 181 714 596
Net income .................................. 469 335 1,246 928
Earnings per share:
Basic .............................. .11 .08 .28 .21
Diluted ............................ .11 .08 .28 .21
</TABLE>
As noted in the fiscal 2000 full-year sales and gross profit
discussion, the Company's largest customer cancelled a major Contract
Manufacturing agreement 5 months ahead of its scheduled termination. This
cancellation, combined with high start-up costs incurred for three new
production agreements, resulted in lower sales and gross profit in the third and
fourth quarters of fiscal 2000. Additionally, the company accrued approximately
$1.5 million in total costs for executive severance and the closing of the St.
Louis distribution operation. These costs are reflected in the operating
expenses in the fourth quarter of fiscal 2000.
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.
These gains are reflected in the operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations increased $4.9 million to $6.9 million in
fiscal 2000. Cash generated from net income adjusted for non-cash expenses and
gains was $4.0 million compared to $5.7 million in the prior year. Offsetting
this decline, accounts receivable grew at a slower rate than in the prior year
due to more timely payments
14
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
from the Company's largest customer, resulting in a $2.2 million improvement in
cash flow. Additionally, accounts payable increased $3.2 million due to payments
due on customer owned equipment associated with the new production agreements,
which were in start-up phase, and to the timing of payment due dates relative to
the last day of the fiscal year. The Company has an arrangement with its largest
customer whereby the Company purchases and installs the customer's production
equipment, and is later reimbursed by the customer, and the balance of these
payments due on the last day of fiscal 2000 was $1.0 million.
Cash used in investing activities totaled $6.1 million in fiscal 2000
resulting from costs incurred to expand the Company's Green Bay production
facility and to purchase and install production equipment. These expenditures
were partially offset by proceeds from the sale of under-utilized production
equipment.
Cash used in financing activities totaled $0.6 million resulting from
the repayment of long-term debt offset by cash received from the exercise of
stock options.
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, as amended in fiscal 2000, the
Company has $ 5.1 million of term debt at September 30, 2000, repayable in equal
quarterly payments maturing in August 2005 and up to $12.0 million under a
revolving credit agreement through June 2002. 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 12, 2000, the Company had approximately $12.1
million in total borrowings outstanding under this agreement, with $4.7 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, 2000, and any budgeted capital expenditures.
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, 2000, 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 first quarter of fiscal 2000, the Company entered into a
lease to own and operate a Windmoeller and Hoelscher eight color flexographic
printing press. The lease is 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 $0.6
million at December 12, 2000. Management believes that this allowance is
adequate to provide for losses inherent in its accounts receivable.
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 2000 as rising paper costs had a
negative impact on the Company's profit. 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 eventually passing these fluctuations in raw
material prices to its customers through increases or decreases in the selling
price of the Company's products, although the timing of selling price increases
may lag behind cost increases. Prior to these periods, the impact of inflation
has been minimal on the Company's inventory and net income.
15
<PAGE> 17
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" will be effective for the Company's year beginning October 1, 2000;
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.
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, 2000, 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 $61,000 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 reviewed the 40-year history of
interest rates and 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, 2000.
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, 2000. 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 Appendix to this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
16
<PAGE> 18
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 61 President and Chief Executive Officer
Gregory L. Wilemon 40 Chief Financial Officer, Chief Operating
Officer and Secretary/Treasurer
Robert J. Simon(1)(2)(3) 42 Chairman of the Board of Directors
Samuel J. Bero(1)(3) 65 Director
C. Hamilton Davison, Jr.(3) 41 Director
William J. Malooly(2) 58 Director
Seymour S. Preston III(2) 67 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 23-year career with Scott in various leadership positions. Mr.
LeCalsey serves as a director for TriMark, Inc., as well as a member of the
Advisory group for Bradford Equities Fund LLC.
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, having started at the firm in
1984. 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., TriMark, Inc., Mexican Accent, Inc., Overseas
Equity Investors Ltd., Overseas Private Investors Ltd., and Overseas Callander
Fund, Ltd. and several other privately held companies.
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. Mr. Bero has over 33 years of experience in the
converting industry.
17
<PAGE> 19
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES (CONTINUED)
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 served as a director and member of the audit committee
of Valley Resources (AMEX:VR) until 2000 when the company was sold to Southern
Union (NYSE:SUG). 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. Mr. Malooly retired from
Bank One in September 1999 and is currently engaged in consulting and investing.
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 Interim President 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.
18
<PAGE> 20
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, 2000.
(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.(4) (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 Lease Agreement dated as of April 1, 1996, between
Bero, Garland, Gebhardt and McClure, a Wisconsin
partnership, and Tufco.(5) (Exhibit 10.15)
10.10 Employment Agreement with Louis LeCalsey, III dated
September 19, 1996.(5) (Exhibit 10.18)
10.11 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)
10.12 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)
10.13 First Amendment to Credit Agreement.(6)
10.14 Second Amendment to Credit Agreement.(7)
21.1 Subsidiaries of the Company.(6)
27.1* Financial Data Schedule
99.1* Employee Stock Purchase Agreement executed by Greg
Wilemon in favor of the Company dated September 30,
2000. (Exhibit 99.1)
* Filed herewith
(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.
19
<PAGE> 21
(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.
(7) Incorporated by reference to the Company's Annual Report of Form
10-Q for the period ended June 30, 2000.
(c) See (a)(3) above for the list of exhibits required to be filed as part
of the Annual Report on Form 10-K.
20
<PAGE> 22
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, 2000.
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, 2000
------------------------------------ and Director (Principal Executive
Louis LeCalsey, III Officer)
/s/ Robert J. Simon Chairman of the Board December 15, 2000
------------------------------------
Robert J. Simon
/s/ Gregory L. Wilemon Chief Financial Officer, Chief December 15, 2000
------------------------------------ Operating Officer and Secretary
Gregory L. Wilemon (Principal Financial and
Accounting Officer)
/s/ Samuel J. Bero Director December 15, 2000
------------------------------------
Samuel J. Bero
/s/ C. Hamilton Davison Jr. Director December 15, 2000
------------------------------------
C. Hamilton Davison, Jr.
/s/ William J. Malooly Director December 15, 2000
------------------------------------
William J. Malooly
/s/ Seymour S. Preston, III Director December 15, 2000
------------------------------------
Seymour S. Preston, III
</TABLE>
<PAGE> 23
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS - ITEM 8 OF FORM 10-K
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT..........................................................................................F-2
FINANCIAL STATEMENTS AND NOTES:
Consolidated Balance Sheets as of September 30, 2000 and 1999......................................................F-3
Consolidated Statements of Income
for the Years Ended September 30, 2000, 1999 and 1998...........................................................F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended September 30, 2000, 1999 and 1998...........................................................F-5
Consolidated Statements of Cash Flows
for the Years Ended September 30, 2000, 1999 and 1998...........................................................F-6
Notes to Consolidated Financial Statements.........................................................................F-7
</TABLE>
F-1
<PAGE> 24
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 (the "Company") as of September 30, 2000 and
1999, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended September 30,
2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
December 1, 2000
F-2
<PAGE> 25
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
2000 1999
<S> <C> <C>
CURRENT ASSETS (Note 7):
Cash and cash equivalents $ 930,388 $ 692,002
Restricted cash (Note 9) 31,717 20,050
Accounts receivable - net (Note 3) 12,697,187 12,721,698
Inventories (Note 4) 7,912,482 8,248,876
Prepaid expenses and other current assets 740,383 763,972
Income taxes receivable 560,444
Deferred income taxes (Note 8) 796,174 447,096
------------ ------------
Total current assets 23,668,775 22,893,694
PROPERTY, PLANT AND EQUIPMENT - Net (Notes 5 and 7) 20,182,838 16,636,756
GOODWILL - Net (Notes 1 and 2) 17,341,724 17,948,930
OTHER ASSETS - Net (Note 6) 939,811 1,601,409
------------ ------------
TOTAL $ 62,133,148 $ 59,080,789
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 7) $ 1,771,432 $ 1,902,435
Accounts payable 6,964,711 3,764,026
Accrued payroll, vacation and payroll taxes 1,544,867 1,537,041
Other current liabilities 1,435,450 1,580,744
Income taxes payable 175,001
------------ ------------
Total current liabilities 11,716,460 8,959,247
LONG-TERM DEBT - Less current portion (Note 7) 11,335,704 12,627,136
DEFERRED INCOME TAXES (Note 8) 2,502,223 2,248,871
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Note 11):
Voting common stock; $.01 par value; 9,000,000 shares authorized;
4,675,019 and 4,498,618 shares issued, respectively 46,750 44,986
Additional paid-in capital 24,879,246 23,973,017
Retained earnings (Note 7) 12,383,489 11,856,772
Treasury stock at cost, 78,497 voting common shares (534,045) (534,045)
Stockholder notes receivable (196,679) (95,195)
------------ ------------
Total stockholders' equity 36,578,761 35,245,535
------------ ------------
TOTAL $ 62,133,148 $ 59,080,789
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 26
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
NET SALES $ 78,952,268 $ 76,330,563 $ 76,972,776
COST OF SALES 68,041,438 63,224,285 65,902,280
------------ ------------ ------------
GROSS PROFIT 10,910,830 13,106,278 11,070,496
OPERATING EXPENSES:
Selling, general and administrative (Note 10) 6,564,378 7,317,325 7,661,463
Amortization and other postacquisition expenses 1,149,697 1,009,868 1,024,620
Facility closing costs (Note 14) 831,305
Employee severance costs 659,950 142,030
Property write-downs 74,000 250,000
(Gain) loss on asset sales (Note 5) (327,331) (1,047,591) 36,925
------------ ------------ ------------
Total 8,951,999 7,279,602 9,115,038
------------ ------------ ------------
OPERATING INCOME 1,958,831 5,826,676 1,955,458
OTHER INCOME (EXPENSE):
Interest expense (973,583) (1,085,511) (1,176,623)
Interest and other income 34,894 39,370 65,096
------------ ------------ ------------
Total (938,689) (1,046,141) (1,111,527)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 1,020,142 4,780,535 843,931
INCOME TAX EXPENSE (Note 8) 493,425 1,802,216 451,790
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 526,717 2,978,319 392,141
EXTRAORDINARY ITEM - Loss from early
repayment of debt, net of income tax
benefit of $32,059 (Note 7) 62,231
------------ ------------ ------------
NET INCOME $ 526,717 $ 2,978,319 $ 329,910
============ ============ ============
EARNINGS PER SHARE:
Income before extraordinary item:
Basic $ .12 $ .67 $ .09
============ ============ ============
Diluted $ .11 $ .67 $ .09
============ ============ ============
Net income:
Basic $ .12 $ .67 $ .07
============ ============ ============
Diluted $ .11 $ .67 $ .07
============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic 4,499,391 4,418,859 4,419,763
============ ============ ============
Diluted 4,622,318 4,474,802 4,517,849
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 27
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------------
VOTING NONVOTING ADDITIONAL
-------------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
<S> <C> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 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 stockholder notes receivable
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 stockholder notes receivable
Net income
----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 1999 4,498,618 44,986 -- -- 23,973,017
Exercise of employee stock options 176,401 1,764 906,229
Repayment of stockholder notes receivable
Net income
----------- ----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 2000 4,675,019 $ 46,750 -- $ -- $24,879,246
=========== =========== =========== =========== ===========
<CAPTION>
STOCKHOLDER TOTAL
RETAINED TREASURY NOTES STOCKHOLDERS'
EARNINGS STOCK RECEIVABLE EQUITY
<S> <C> <C> <C> <C>
BALANCES AT OCTOBER 1, 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 stockholder notes receivable 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 stockholder notes receivable 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
Exercise of employee stock options (106,484) 801,509
Repayment of stockholder notes receivable 5,000 5,000
Net income 526,717 526,717
----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 2000 $12,383,489 $ (534,045) $ (196,679) $36,578,761
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 28
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 526,717 $ 2,978,319 $ 329,910
Noncash items in net income:
Depreciation and amortization of property, plant and equipment 2,928,108 2,473,370 2,057,458
Amortization of goodwill and other assets 607,206 617,069 547,322
Deferred income taxes (95,726) 512,800 127,975
Increase in allowance for doubtful accounts 321,900 121,270 36,957
(Gain) loss on asset sales (327,331) (1,047,591) 36,925
Property write-downs 153,350 250,000
Changes in operating working capital:
Accounts receivable (313,857) (2,491,228) (1,641,425)
Inventories 311,055 (864,788) 424,124
Prepaid expenses and other assets 477,231 (453,678) (60,076)
Accounts payable 3,200,685 (795,315) 541,150
Accrued and other current liabilities (137,468) 807,030 372,939
Income taxes payable/receivable (735,445) 110,634 (626,841)
----------- ----------- ------------
Net cash from operations 6,916,425 1,967,892 2,396,418
----------- ----------- -----------
INVESTING ACTIVITIES:
Acquisition of Foremost - net of cash acquired (142,000) (5,985,019)
Additions to property, plant and equipment (7,072,967) (3,129,687) (2,628,927)
Deposits (made on) applied to purchases of equipment 144,853 (1,068,286)
Advances to directors and former owners (16,581) (45,513) (22,221)
Collection of advances to directors and former owners 140,750
Proceeds from asset sales, net of transaction costs 898,352 4,040,363 26,103
(Increase) decrease in restricted cash (11,667) 278 39,800
----------- ----------- -----------
Net cash from (used in) investing activities (6,062,113) 868,294 (9,638,550)
----------- ----------- ------------
FINANCING ACTIVITIES:
Issuance of long-term debt 8,797,280
Repayment of long-term debt (1,422,435) (3,167,035) (1,599,030)
Proceeds from issuance of common stock 801,509 11,741 172,405
Purchase of treasury stock (184,674)
Repayment of stockholder notes receivable 5,000 5,000 314,857
----------- ----------- -----------
Net cash from (used in) financing activities (615,926) (3,150,294) 7,500,838
----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 238,386 (314,108) 258,706
CASH AND CASH EQUIVALENTS:
Beginning of year 692,002 1,006,110 747,404
----------- ----------- -----------
End of year $ 930,388 $ 692,002 $ 1,006,110
=========== =========== ===========
</TABLE>
SUPPLEMENTAL INFORMATION (Note 13)
See notes to consolidated financial statements.
F-6
<PAGE> 29
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
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 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
$3,276,953 and $2,669,747 at September 30, 2000 and 1999, respectively.
Management continues to review the carrying values of goodwill for
recoverability using estimated future cash flows of related operations.
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.
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.
F-7
<PAGE> 30
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. Diluted earnings per share
includes common equivalent shares from dilutive stock options outstanding
during the year, the effect of which was 122,927, 55,943 and 98,086 shares
in fiscal 2000, 1999 and 1998, respectively.
RECLASSIFICATIONS of certain 1998 and 1999 amounts have been made to
conform to the 2000 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> 31
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 4,520,000
==============
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowances for doubtful accounts of
$661,530 and $339,630 at September 30, 2000 and 1999, respectively.
Amounts due from two customers represent 49% and 45% of total accounts
receivable at September 30, 2000 and 1999, respectively. Accounts
receivable at September 30, 2000 and 1999, include $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>
2000 1999
<S> <C> <C>
Raw materials $ 4,485,263 $ 4,670,120
Finished goods 3,427,219 3,578,756
------------ ------------
Total inventories $ 7,912,482 $ 8,248,876
============ ============
</TABLE>
F-9
<PAGE> 32
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30 consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Land and land improvements $ 517,928 $ 517,928
Buildings 8,232,844 6,942,036
Leasehold improvements 1,555,615 1,433,497
Machinery and equipment 18,790,803 17,357,747
Computer equipment and software 4,607,865 4,052,167
Furniture and fixtures 885,334 690,748
Vehicles 78,280 97,255
------------- -------------
34,668,669 31,091,378
Less accumulated depreciation and amortization 16,833,108 14,678,060
------------- -------------
Net depreciated value 17,835,561 16,413,318
Construction in progress 2,347,277 223,438
------------- -------------
Property, plant and equipment - net $ 20,182,838 $ 16,636,756
============= =============
</TABLE>
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>
2000 1999
<S> <C> <C>
Loan origination and other fees $ 424,323 $ 372,281
Less accumulated amortization 231,344 110,110
------------ ------------
Subtotal 192,979 262,171
Note receivable bearing interest at 7% to 10%, due in
variable monthly installments through 2005 55,601 10,495
Prepaid rent on leased equipment 362,440
Deposits on equipment to be acquired and other 127,391 1,024,253
Advances to certain directors and former owners 172,005 296,174
Maintenance contract 21,079
Cash value of life insurance 8,316 8,316
------------ ------------
Other assets - net $ 939,811 $ 1,601,409
============ ============
</TABLE>
F-10
<PAGE> 33
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt at September 30 consists of the following:
2000 1999
<S> <C> <C>
Note payable to bank, collateralized by substantially all assets of the
Company, bearing a variable interest of 7.93% and 6.74% at September 30,
2000 and 1999, respectively, fixed at 7.12% under an interest rate swap
arrangement discussed below, installments are due quarterly at $380,358,
with final payment due on August 1, 2005 $ 5,107,136 $ 6,628,568
Notes payable to bank, under a revolving line-of-credit agreement (not
to exceed maximum borrowings of $12 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 8.08% and 6.99% at September 30, 2000 and 1999, respectively),
payable quarterly, due on June 1, 2002 6,500,000 6,020,000
Variable rate (5.75% and 3.95% at September 30, 2000 and 1999,
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 1,500,000 1,750,000
Capital lease obligation, payable in monthly installments
through 2000 131,003
------------- -------------
Total 13,107,136 14,529,571
Less current portion 1,771,432 1,902,435
------------- -------------
Long-term debt - less current portion $ 11,335,704 $ 12,627,136
============= =============
Long-term debt - less current portion matures as follows:
2002 $ 8,271,432
2003 1,771,432
2004 792,840
2005 250,000
2006 250,000
-------------
Total $ 11,335,704
=============
</TABLE>
In connection with term debt, the Company paid $94,000 in 1998 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 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
F-11
<PAGE> 34
swap agreement is estimated to be a net receivable position of $61,000 and
$45,000 at September 30, 2000 and 1999, 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>
2000 1999
<S> <C> <C>
Current deferred tax asset:
Valuation allowances for accounts receivable and inventories,
not currently deductible $ 569,298 $ 227,068
Inventory costs capitalized for tax purposes 28,399 29,064
Vacation and severance accruals, not currently deductible 64,711 64,711
Other accruals, not currently deductible 65,659 60,640
Other 68,107 65,613
------------- -------------
Total 796,174 447,096
Noncurrent deferred tax liability:
Accelerated tax depreciation on property and equipment (1,753,675) (1,571,859)
Accelerated tax amortization of goodwill (868,640) (734,206)
Other 120,092 57,194
------------- -------------
Total (2,502,223) (2,248,871)
------------- -------------
Net deferred tax liability $ (1,706,049) $ (1,801,775)
============= =============
</TABLE>
F-12
<PAGE> 35
The resulting components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Current tax expense:
Federal $ 561,766 $ 1,213,557 $ 301,474
State 27,385 75,859 22,341
----------- ------------ -----------
Total 589,151 1,289,416 323,815
Deferred tax expense (benefit):
Federal (89,599) 480,011 119,210
State (6,127) 32,789 8,765
----------- ------------ -----------
Total (95,726) 512,800 127,975
----------- ------------ -----------
Income tax expense $ 493,425 $ 1,802,216 $ 451,790
=========== ============ ===========
</TABLE>
Income tax expense varies from the amount determined by applying the
applicable statutory income tax rates to pretax income as follows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Federal income taxes computed at statutory rates $ 346,850 $ 1,625,382 $ 286,937
State income taxes, net of federal tax benefit 14,030 71,708 20,530
Certain goodwill amortization and other
nondeductibles 161,329 157,641 114,182
Other (28,784) (52,515) 30,141
------------ ------------- ------------
Income tax expense $ 493,425 $ 1,802,216 $ 451,790
============ ============ ============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases 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 2000, 1999 and
1998.
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 $31,717 and $20,050 at September 30, 2000 and 1999,
respectively. The Company has a standby letter of credit with its bank for
the payment of the future lease obligations.
F-13
<PAGE> 36
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, 2000, are as
follows:
<TABLE>
<S> <C>
2001 $ 1,560,117
2002 2,253,035
2003 853,581
2004 505,549
2005 470,681
------------
Total $ 5,642,963
============
</TABLE>
Net rental expense for all operating leases totaled $1,675,915, $1,270,833
and $1,123,912 for fiscal 2000, 1999 and 1998, 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 $105,067 and $0 as of September 30, 2000 and
1999, 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 $644,933 and $750,000 available at
September 30, 2000 and 1999, respectively.
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
$201,131, $268,657 and $209,215 for fiscal 2000, 1999 and 1998,
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. At
September 30, 2000, the Company has authorized and unissued 2,000,000
shares of $.01 par value nonvoting common stock and 1,000,000 shares of
$.01 par value preferred stock.
STOCK COMPENSATION ARRANGEMENTS - The Non-Qualified Stock Option Plan
currently reserves 650,000 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
2000, 1999 and 1998, options to purchase 200,000, 70,000 and 86,000
shares, respectively, of voting common stock were granted.
F-14
<PAGE> 37
The Non-Employee Director Stock Option Plan for nonemployee members of the
board of directors reserves 200,000 shares of common stock for grants
through March 2004 and provides that the purchase price be fair market
value at the date of grant. Options are exercisable immediately and for a
period of 10 years. During fiscal 2000, 1999 and 1998, options to purchase
15,000, 8,000 and 12,000 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
---------------------------------- -----------------------------
2000 1999 1998 2000 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 445,306 412,441 364,127 $6.63 $6.69 $ 6.01
Granted 215,000 78,000 98,000 8.91 6.92 9.62
Exercised (176,401) (2,525) (37,396) 5.15 4.65 6.50
Terminated (7,100) (42,610) (12,290) 8.55 7.41 10.07
-------- -------- --------
Options outstanding, end of year 476,805 445,306 412,441 8.20 6.63 6.69
======== ======= ========
Options exercisable, end of year 281,138 311,639 261,332 7.74 6.14 5.89
======== ======== ========
Reserved for future options at September 30, 2000 373,195
========
</TABLE>
The following table summarizes additional information about stock options
outstanding and exercisable at September 30, 2000:
<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 - 7.00 174,405 2.5 years $6.78 153,738 $6.75
7.00 - 10.00 302,400 4.4 years 8.98 127,400 8.94
------- -------
4.50 - 10.00 476,805 3.7 years 8.18 281,138 7.74
======= =======
</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
2000, 1999 and 1998 are presented below. Because the SFAS No. 123 method
F-15
<PAGE> 38
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>
2000 1999 1998
<S> <C> <C> <C>
Net income:
As reported $526,717 $ 2,978,319 $329,910
Pro forma 248,235 2,807,000 129,000
Basic earnings per share:
As reported .12 .67 .07
Pro forma .06 .63 .03
Diluted earnings per share:
As reported .11 .67 .07
Pro forma .05 .63 .03
</TABLE>
In the pro forma calculations, the weighted average fair value of options
granted during 2000, 1999 and 1998 was estimated at $3.55, $3.18 and $4.40
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 2000, 1999 and
1998: risk-free interest rates of 5% for all years; dividend yield of 0.0%
for all years; expected lives of four to five years; and expected
volatility of 50% for all years, 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.
In 2000, the Company received notes from various employees to facilitate
the exercise of employee stock options. The notes receivable with recourse
bear interest at 8.5% interest payable annually. All notes receivable
outstanding at September 30, 2000, are due to be repaid in 2001. The
outstanding balances of $196,679 and $95,195 at September 30, 2000 and
1999, 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 $357,353,
$251,161 and $236,440 for fiscal 2000, 1999 and 1998, respectively.
F-16
<PAGE> 39
13. SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Interest paid $ 965,823 $ 1,125,346 $ 1,098,538
=========== =========== ===========
Income taxes paid $ 1,324,596 $ 1,178,782 $ 927,431
=========== =========== ===========
Noncash investing and financing activities:
Issuance of common stock - Foremost acquisition $ $ -- $ 250,000
=========== =========== ===========
Conversion of nonvoting to voting common stock $ $ 7,099 $ --
=========== =========== ===========
Purchase of treasury stock by reduction in
stockholder notes receivable $ -- $ -- $ 160,962
=========== =========== ===========
</TABLE>
14. MAJOR CUSTOMER AND SEGMENT INFORMATION
In fiscal 2000, the Company had two significant customers that accounted
for approximately 20% and 12% of total sales. In fiscal 1999, each
accounted for approximately 10% of total sales. Both customers are Fortune
500 companies, one of which was 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.
<TABLE>
<CAPTION>
CONTRACT BUSINESS PAINT AWAY
FISCAL 2000 MANUFACTURING IMAGING SUNDRIES FROM HOME INTERSECTOR CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales $34,242,390 $25,899,580 $18,810,298 $ $ -- $78,952,268
Gross profit 7,136,712 2,923,252 850,866 10,910,830
Operating income (loss) 5,795,483 1,229,916 (2,237,357) (2,829,211) 1,958,831
Assets:
Inventories 884,335 3,764,341 3,263,806 7,912,482
Property, plant and
equipment - net 9,917,431 6,526,344 827,470 2,911,593 20,182,838
Accounts receivable
and other (including
goodwill) 34,037,828 34,037,828
----------- ----------- ----------- -------- ----------- -----------
Total assets $10,801,766 $10,290,685 $ 4,091,276 $ $36,949,421 $62,133,148
=========== =========== =========== ======== =========== ===========
</TABLE>
F-17
<PAGE> 40
<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) 5,636,946 1,272,918 195,474 429,979 $(1,708,641) 5,826,676
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>
In fiscal 2000, the Company announced its intent and began to consolidate
the Paint Sundries operations in Manning, South Carolina, and has accrued
at September 30, 2000, the estimated asset write-downs and other costs of
approximately $831,000 to close its St. Louis facility and move the
related inventory, equipment and personnel to Manning.
******
F-18
<PAGE> 41
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. (4) (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 Lease Agreement dated as of April 1, 1996, between
Bero, Garland, Gebhardt and McClure, a Wisconsin
partnership, and Tufco. (3) (Exhibit 10.15)
10.10 Employment Agreement with Louis LeCalsey, III dated
September 19, 1996. (5) (Exhibit 10.18)
10.11 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. (4)
10.12 ISDA Master Agreement and Schedule to the Master
Agreement dated as of July 30, 1998 between First
Union National Bank and Tufco, L.P. (5)
10.13 First Amendment to Credit Agreement. (5)
10.14 Second Amendment to Credit Agreement. (6)
21.1 Subsidiaries of the Company. (5)
27.1* Financial Data Schedule
99.1* Employee Stock Purchase Agreement executed by Greg
Wilemon in favor of the company dated September 30,
2000. (Exhibit 99.1)
</TABLE>
* Filed herewith
(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.
(3) Incorporated by reference to the Company's Annual Report on Form
10-K for the period ended September 30, 1995.
(4) Incorporated by reference to the Company's Annual Report on Form
10-K for the period ended September 30, 1997.
(5) Incorporated by reference to the Company's Annual Report on Form
10-K for the period ended September 30, 1998.
(6) Incorporated by reference to the Company's Annual Report of Form
10-Q for the period ended June 30, 2000.
