<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 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 of organization)
4800 Simonton Road, Dallas, Texas 75244
----------------------------------------
(Address of principal executive offices)
(972)789-1079
---------------------------------------
(Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each or the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 12, 2000
--------------------------------------- ------------------------------
Common Stock, par value $0.01 per share 4,571,128
<PAGE> 2
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 (Unaudited) and September 30, 1999 3
Condensed Consolidated Statements of Income for the three
months and nine months ended June 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II: OTHER INFORMATION 16
SIGNATURES 17
</TABLE>
2
<PAGE> 3
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 September 30,
Assets (Unaudited) 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 3,100,180 $ 692,002
Restricted cash .................................................................. 11,828 20,050
Accounts receivable, net ......................................................... 14,283,065 12,721,698
Inventories ...................................................................... 9,491,636 8,248,876
Prepaid expenses and other current assets ........................................ 1,633,486 763,972
Deferred income taxes ............................................................ 447,096 447,096
Income taxes receivable .......................................................... 22,027 --
------------ ------------
Total current assets ....................................................... 28,989,318 22,893,694
PROPERTY, PLANT AND EQUIPMENT-Net ................................................... 19,750,094 16,636,756
GOODWILL - Net ...................................................................... 17,501,200 17,948,930
OTHER ASSETS - Net .................................................................. 895,399 1,601,409
------------ ------------
TOTAL ............................................................................... $ 67,136,011 $ 59,080,789
============ ============
Liabilities and Stockholders' Equity
CURRENT LIABILITIES:
Current portion of long-term debt................................................. $ 1,778,349 $ 1,902,435
Accounts payable ................................................................. 9,496,422 3,764,026
Accrued payroll, vacation and payroll taxes ...................................... 628,266 1,537,041
Other current liabilities ........................................................ 1,238,518 1,580,744
Income taxes payable ............................................................. -- 175,001
------------ ------------
Total current liabilities .................................................. 13,141,555 8,959,247
LONG-TERM DEBT- Less current portion ................................................ 13,966,062 12,627,136
DEFERRED INCOME TAXES ............................................................... 2,248,871 2,248,871
STOCKHOLDERS' EQUITY
Voting Common Stock: $.01 par value; 9,000,000 shares authorized;
4,649,625 and 4,498,618 shares issued, respectively .......................... 46,496 44,986
Additional paid-in capital ....................................................... 24,760,852 23,973,017
Retained earnings ................................................................ 13,596,415 11,856,772
Treasury stock at cost, 78,497 voting common shares .............................. (534,045) (534,045)
Stock purchase plan notes ........................................................ (90,195) (95,195)
------------ ------------
Total stockholders' equity .................................................. 37,779,523 35,245,535
------------ ------------
TOTAL ............................................................................ $ 67,136,011 $ 59,080,789
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES ................................ $ 19,391,637 $ 19,415,717 $ 59,875,846 $ 56,275,511
COST OF SALES ............................ 17,354,066 15,922,718 50,767,197 47,007,109
------------ ------------ ------------ ------------
GROSS PROFIT ............................. 2,037,571 3,492,999 9,108,649 9,268,402
OPERATING EXPENSES:
Selling, general and administrative ...... 1,282,190 1,660,982 4,960,660 5,441,930
Amortization and other post-
acquisition expenses .................. 226,849 265,698 741,259 744,585
------------ ------------ ------------ ------------
OPERATING INCOME ......................... 528,532 1,566,319 3,406,730 3,081,887
OTHER INCOME (EXPENSE):
Interest expense ...................... (264,390) (289,784) (769,849) (851,776)
Interest and other income (expense) ... 8,869 7,325 (28,267) 19,452
Gains (loss) on asset sales ........... (35,222) 676,529 253,466 1,007,843
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ............... 237,789 1,960,389 2,862,080 3,257,406
INCOME TAX EXPENSE ....................... 151,371 714,277 1,122,437 1,207,143
------------ ------------ ------------ ------------
NET INCOME ............................... $ 86,418 $ 1,246,112 $ 1,739,643 $ 2,050,263
============ ============ ============ ============
EARNINGS PER SHARE:
Basic ................................ $ 0.02 $ 0.28 $ 0.39 $ 0.46
Diluted .............................. $ 0.02 $ 0.28 $ 0.38 $ 0.46
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic ................................ 4,567,093 4,420,121 4,472,657 4,418,438
Diluted .............................. 4,662,567 4,511,374 4,609,695 4,468,570
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income ................................................... $ 1,739,643 $ 2,050,263
Noncash items in net income:
Depreciation and amortization ............................. 2,642,178 2,106,288
Provision for bad debts ................................... 321,850 14,495
Gains on asset sales ...................................... (253,466) (1,007,843)
Changes in operating working capital:
Accounts receivable ....................................... (1,883,217) (1,894,539)
Inventories ............................................... (1,242,760) (587,373)
Prepaid expenses and other assets ......................... (356,613) (401,853)
Accounts payable .......................................... 5,732,396 1,545,646
Accrued and other current liabilities ..................... (1,251,001) 412,248
Income taxes payable ...................................... (197,028) 679,326
----------- -----------
Net cash from operations ..................................... 5,251,982 2,916,658
INVESTING ACTIVITIES
Additions to property, plant and equipment ................... (5,795,245) (1,847,875)
Proceeds from disposition of property, plant and equipment ... 807,820 454,551
(Decrease) increase in advances to shareholders .............. 126,214 (38,667)
Acquisition of Foremost Manufacturing, Inc. .................. -- (142,000)
Increase in restricted cash .................................. 8,222 20,328
Proceeds from sale of assets, net of transaction cost ........ -- 3,628,186
----------- -----------
Net cash from (used in)investing activities .................. (4,852,989) 2,074,523
FINANCING ACTIVITIES
Repayment of long-term debt .................................. -- (4,498,788)
Issuance of long-term debt ................................... 1,214,840 --
Decrease in stock purchase plan notes ........................ 5,000 5,000
Exercise of common stock options ............................. 789,345 11,741
----------- -----------
Net cash from (used in) financing activities ................. 2,009,185 (4,482,047)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 2,408,178 509,134
CASH AND CASH EQUIVALENTS:
Beginning of period ............................................ 692,002 1,006,110
----------- -----------
End of period .................................................. $ 3,100,180 $ 1,515,244
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and Rule 10-01 of Regulation S-X. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Some adjustments
involve estimates which may require revision in subsequent interim periods
or at year end. The unaudited financial statements and footnotes should be
read in conjunction with the Company's financial statements for the year
ended September 30, 1999 that are included in Form 10-K that was filed with
the Securities and Exchange Commission on December 22, 1999. Operating
results for the nine month period are not necessarily indicative of results
expected for the remainder of the year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---------- ----------
<S> <C> <C>
Raw materials ................ $5,139,826 $4,670,120
Finished goods ............... 4,351,810 3,578,756
---------- ----------
Total inventories ............ $9,491,636 $8,248,876
========== ==========
</TABLE>
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED).
3. SEGMENT INFORMATION
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 Away-From-Home products and services, and has ceased selling into
this market sector.
<TABLE>
<CAPTION>
THREE MONTHS ENDED CONTRACT BUSINESS PAINT AWAY-
JUNE 30, 2000 MANUFACTURING IMAGING SUNDRIES FROM-HOME INTERSECTOR CONSOLIDATED
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 7,902,847 $ 6,756,850 $ 4,731,940 $ -- $ -- $ 19,391,637
Gross Profit 1,207,600 747,836 82,135 -- -- 2,037,571
Operating Income (loss) 1,007,681 182,436 (446,859) -- (214,726) 528,532
Assets:
Inventories 782,362 4,523,638 4,185,636 -- -- 9,491,636
Property, plant and
equipment-net 9,735,789 6,823,836 602,574 -- 2,587,895 19,750,094
Accounts receivable
and other
(including goodwill) 37,894,281 37,894,281
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 10,518,151 $ 11,347,474 $ 4,788,210 $ -- $ 40,482,176 $ 67,136,011
============ ============ ============ ============ ============ ============
THREE MONTHS ENDED
JUNE 30, 1999
Net Sales $ 7,075,234 $ 5,897,672 $ 5,629,845 $ 812,966 $ -- $ 19,415,717
Gross Profit 1,668,309 857,783 887,562 79,345 -- 3,492,999
Operating Income (loss) 1,391,648 405,329 308,894 (207,053) (332,499) 1,566,319
Assets:
Inventories 953,449 3,674,643 3,343,369 -- -- 7,971,461
Property, plant and
equipment-net 6,279,826 7,329,976 892,881 -- 2,311,265 16,813,948
Accounts receivable
and other
(including goodwill) 34,187,224 34,187,224
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 7,233,275 $ 11,004,619 $ 4,236,250 $ -- $ 36,498,489 $ 58,972,633
============ ============ ============ ============ ============ ============
</TABLE>
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED).
<TABLE>
<CAPTION>
NINE MONTHS ENDED CONTRACT BUSINESS PAINT AWAY-
JUNE 30, 2000 MANUFACTURING IMAGING SUNDRIES FROM-HOME INTERSECTOR CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 26,677,063 $ 19,288,971 $ 13,909,812 $ -- $ -- $ 59,875,846
Gross Profit 5,699,359 2,237,923 1,171,367 -- -- 9,108,649
Operating Income (loss) 4,456,242 902,346 (585,665) -- (1,366,193) 3,406,730
Assets:
Inventories 782,362 4,523,638 4,185,636 -- -- 9,491,636
Property, plant and
equipment-net 9,735,789 6,823,836 602,574 -- 2,587,895 19,750,094
Accounts receivable
and other
(including goodwill) 37,894,281 37,894,281
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 10,518,151 $ 11,347,474 $ 4,788,210 $ -- $ 40,482,176 $ 67,136,011
============ ============ ============ ============ ============ ============
NINE MONTHS ENDED
JUNE 30, 1999
Net Sales $ 17,451,565 $ 18,596,237 $ 15,730,076 $ 4,497,633 $ -- $ 56,275,511
Gross Profit 3,533,406 3,074,687 2,220,590 439,719 -- 9,268,402
Operating Income (loss) 2,938,050 1,538,930 296,780 (287,556) (1,404,317) 3,081,887
Assets:
Inventories 953,449 3,674,643 3,343,369 -- -- 7,971,461
Property, plant and
equipment-net 6,279,826 7,329,976 892,881 -- 2,311,265 16,813,948
Accounts receivable
and other
(including goodwill) 34,187,224 34,187,224
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 7,233,275 $ 11,004,619 $ 4,236,250 $ -- $ 36,498,489 $ 58,972,633
============ ============ ============ ============ ============ ============
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL INFORMATION:
Tufco Technologies, Inc. has locations in Green Bay, WI, Dallas, TX,
Newton, NC, Manning, SC and St. Louis, MO.
The Company, through its wholly owned subsidiaries, 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.
The Company normally operates at lower operating levels during the first
and second quarters of its fiscal year which ends September 30. This occurs
because of the seasonal demand for certain printed products displaying a
holiday theme as well as products which are used by customers in
conjunction with end-of-year activities. These products are normally
shipped during the Company's third and fourth fiscal quarters. Demand for
its Paint Sundry products is generally lower during the first and second
fiscal quarters as cold weather restricts the amount of new construction
and remodeling projects that require the Company's products.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
RESULTS OF OPERATIONS:
CONDENSED OPERATING DATA, PERCENTAGES OF NET SALES AND YEAR-TO-YEAR CHANGES IN
THESE ITEMS ARE AS FOLLOWS: ($000s)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, Period-to-Period June 30, Period-to-Period
--------------------- Change ------------------- Change
2000 1999 $ % 2000 1999 $ %
------- ------- ------ --- ------- ------- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $19,392 $19,416 (24) 0 $59,876 $56,276 3,600 6
Gross Profit 2,038 3,493 (1,455) (42) 9,109 9,268 (159) (2)
10.5% 18.0% 15.2% 16.5%
Operating Expenses 1,509 1,927 (418) (22) 5,702 6,186 (484) (8)
7.8% 9.9% 9.5% 11.0%
Operating Income 529 1,566 (1,037) (66) 3,407 3,082 325 11
2.7% 8.1% 5.7% 5.5%
Interest Expense 264 290 (26) (9) 770 852 (82) (10)
1.4% 1.5% 1.3% 1.5%
Net Income $ 86 $ 1,246 (1,160) (93) 1,740 2,050 (310) (15)
0.4% 6.4% 2.9% 3.6%
</TABLE>
Analysis of net sales and gross profit, percentages of total net sales, and
year-to-year changes in the Company's primary market sectors are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------------------------
2000 1999
------------------- -------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Contract manufacturing and printing $ 7,903 41% $ 7,075 37% 828 12
Business imaging paper products 6,757 35 5,898 30 859 15
Paint sundry products 4,732 24 5,630 29 (898) (16)
Away-from-home products -- -- 813 4 (813) (100)
------- ------- ------- ------- ------- -------
Net sales $19,392 100% $19,416 100% (24) 0
======= ======= ======= ======= ======= =======
<CAPTION>
Margin Margin Period-to-Period Change
Amount % Amount % $ %
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Contract manufacturing and printing $ 1,208 15% $ 1,668 24% (460) (28)
Business imaging paper products 748 11 858 15 (110) (13)
Paint sundry products 82 2 888 16 (806) (91)
Away-from-home products -- -- 79 10 (79) (100)
------- ------- ------- ------- ------- -------
Gross profit $ 2,038 11% $ 3,493 18% (1,455) (42)
======= ======= ======= ======= ======= =======
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
--------------------------------------------
2000 1999
------------------- -------------------
% of % of Period-to-Period Change
Amount Total Amount Total $ %
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Sales
Contract manufacturing and printing $26,677 45% $17,452 31% 9,225 53
Business imaging paper products 19,289 32 18,596 33 693 4
Paint sundry products 13,910 23 15,730 28 (1,820) (12)
Away-from-home products -- -- 4,498 8 (4,498) (100)
------- ------- ------- ------- ------ ------
Net sales $59,876 100% $56,276 100% 3,600 6
======= ======= ======= ======= ====== ======
<CAPTION>
Margin Margin Period-to-Period Change
Amount % Amount % $ %
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
Contract manufacturing and printing $ 5,700 21% $ 3,533 20% 2,167 61
Business imaging paper products 2,238 12 3,074 17 (836) (27)
Paint sundry products 1,171 8 2,221 14 (1,050) (47)
Away-from-home products -- -- 440 10 (440) (100)
------- ------- ------- ------- ------ ------
Gross profit $ 9,109 15% $ 9,268 16% (159) (2)
======= ======= ======= ======= ====== ======
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
NET SALES:
Net sales for the three month period were flat compared to the same period of
fiscal 1999. For the nine months ended June 30, 2000 sales increased $3.6
million or (6%). In June of fiscal 1999, the Company discontinued its line of
Away-From-Home (AFH) products, and sales of these products totaled $0.8 million
and $4.5 million for the respective three and nine months periods of fiscal
1999. Adjusting for this fact, sales of the Company's remaining core products
and services increased $0.8 million (4%) and $8.1 million (16%) for the three
and nine month periods.
Growth in the Company's Contract Manufacturing sector had been the driving
factor in the Company's overall sales and income growth through six months of
fiscal 2000. However, sales in this critical strategic sector were only $7.9
million for the third quarter of fiscal 2000, down from an average of $9.4
million for the first two quarters of the year, and this decline contributed to
the sharp decline in profit for the quarter. As disclosed by management in the
Company's June 30, 2000 review of operations, the Company's largest customer
elected to terminate a major production agreement in March 2000, approximately
four months prior to the scheduled termination. Sales of services under this
agreement had averaged $1.4 million per month through the first six months of
2000. The Company elected not to impose early termination penalties on this
customer in recognition of five new production agreements which the customer had
awarded Tufco. These agreements are scheduled to begin operation in the summer
and fall of 2000. As a result of these decisions, sales growth in the Contract
Manufacturing sector slowed to 12% for the third quarter, versus growth of 81%
for the first six months. While management is optimistic that the new agreements
will ultimately result in a renewal of the strong growth in this vital strategic
sector, the very nature of installing, starting-up and qualifying five new
production lines results in difficulty in forecasting sales for the fourth
quarter of fiscal 2000. Delays in equipment delivery, or customer-mandated
delays in product delivery schedules could result in lower sales for the next
three to six months. However, current projections which the customer has
provided for fiscal 2001 would ultimately result in strong sales growth for
Tufco.
Sales of Business Imaging products and services increased $0.9 million (15%) for
the quarter and offset a slight decline in sales from the first six months,
resulting in a year-to-date growth of $0.7 million or 4%. The primary reason for
the increase is continuing growth under a paper converting arrangement for a
large manufacturer of document printers. Sales of Paint Sundry products declined
$0.9 million (-16%) for the quarter and are down $1.8 million (-12%) for the
year-to-date. The loss of one major account resulted in the majority of the
decline in sales, as this customer elected to purchase its goods from overseas
competitors.
GROSS PROFIT:
Gross profit declined $1.5 million (42%) for the quarter, offsetting all of the
increase from the first six months of fiscal 2000. The primary driver behind the
decline was the sudden termination of the large production agreement discussed
earlier. Management has built an infrastructure to support growth in the
Contract Manufacturing sector which includes investment in manufacturing floor
space and equipment as well as significant increases in production employees and
support personnel. Despite the sudden unexpected drop in sales due to the early
termination of its largest production agreement, management elected to keep its
operating structure and related costs intact due to the summer and fall start-up
of the new production agreements. While this decision resulted in lower gross
profit for the third quarter, it was necessary to facilitate training,
installation and testing of equipment and eventual start-up of the new
production lines. In addition to these costs, the cost of base paper continued
to increase, resulting in higher material costs for the Business Imaging Sector.
Paper prices appear to be stabilizing and management has planned corresponding
increases in the selling prices of its products to compensate for the cost
increases. Paint Sundry margins dropped precipitously, owing to the sharp
decline in sales for the quarter. In recognition of the need to reduce operating
costs in this sector, as well as provide
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
GROSS PROFIT-CONTINUED:
improved customer service, on August 9, 2000 the Company announced plans to
consolidate all of its Paint Sundry operations into its Manning, South Carolina
facility, a transition which should save over $0.6 million in operating costs
annually due to the closing of Tufco's St. Louis facility. Management is
currently compiling estimates for the one-time costs of this transition plan,
but based on preliminary estimates, the savings in the first year will exceed
the cost of the move. The consolidation should be completed during the first
calendar quarter of 2001. With the consolidation of Paint Sundry operations and
the start-up of new Contract Manufacturing production lines, management
continues to be optimistic that Company margins and gross profit will eventually
return to the trend of improvement experienced in the first six months of fiscal
2000.
OPERATING EXPENSES:
Operating expenses declined $0.4 million for the quarter and are down $0.5
million for the nine month period, compared to the respective periods of fiscal
1999. The decline was primarily the result of the elimination of sales and
administrative costs associated with the marketing of the discontinued
Away-From-Home product line.
OPERATING INCOME:
Operating income declined $1.0 million (66%) for the quarter due to the decline
in gross profit from Contract Manufacturing and Paint Sundry sales and services,
offset by lower operating expenses. For the nine-month period, increased gross
profit from Contract manufacturing during the first six months offset the
declines in the third quarter, resulting in a $0.3 million (11%) increase in
operating profit for the nine-month period.
INTEREST EXPENSE:
Interest expense declined $26,000 (9%) and $82,000 (10%) for the three and nine
month periods due to lower average borrowings.
NET INCOME AND EARNINGS PER SHARE:
Net income declined $1.2 million for the quarter due primarily due to the
decrease in operating income. Additionally, the Company had recognized a $0.7
million pre-tax gain on the sale of assets in fiscal 1999 associated with the
discontinuance of the Away-From-Home product line. Net income for the nine month
period declined $0.3 million (15%). Adjusted for the one-time gain from the sale
of Away-From-Home assets in fiscal 1999, core net income increased $0.1 million
or 7% for the nine month period. Earnings per share declined to $0.02 (basic and
diluted) from $0.28 (basic and diluted) for the quarter and $0.39(basic) and
$0.38 (diluted) compared to $0.46 (basic and diluted) for the nine month period
versus one year ago. Adjusted for the one-time gain, earnings per share for
fiscal 1999 were $0.36 (basic and diluted).
As discussed earlier, Company profitability in the fourth quarter of fiscal 2000
will depend largely on the timing of the start-up of new production agreements
with the Company's largest customer. Any delays in the projected start dates
will negatively impact short-term profitability. Given the current projected
start-up schedule for these projects, management forecasts that earnings for the
fourth quarter will fall short of earnings for the same period of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES:
For the nine-months ended June 30, 2000, the Company generated $5.3 million in
cash from
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS --CONTINUED
LIQUIDITY AND CAPITAL RESOURCES -CONTINUED:
operations. Net income after adjustment for non-cash items was $4.5 million
compared to $3.2 million in the prior year. Accounts payable increased $5.7
million, offsetting increases in accounts receivable ($1.9 million), inventories
($1.2 million) and other assets ($0.4 million) as well as a decrease in net
income taxes payable ($0.2 million). The increase in inventories resulted from
additional purchases of raw materials for the Business Imaging sector in advance
of announced price increases, and the addition to accounts receivable resulted
from advances made for production equipment for the new production agreements
totaling $2.4 million at June 30, 2000, for which the Company will be reimbursed
by the customer. Finally, the decline in other liabilities was the result of
lower bonus accruals as well as the timing of bi-weekly payrolls.
Net cash used in investing activities totaled $4.9 million and was comprised of
additions to property, plant and equipment ($5.8 million) offset by proceeds
from the disposition of older printing equipment. The majority of the cost of
the additions was attributable to a plant expansion at the Company's Green Bay
facility which was necessary to facilitate two of the new converting agreements.
Net cash from financing activities totaled $2.0 million and was the result of
increased borrowings as of June 30, 2000 ($1.2 million) and of cash received
from the exercise of stock options from former employees and directors ($0.8
million).
On July 10, 2000, the Company signed an amendment to its existing credit
agreement which provided for an additional $3.0 million available under its
revolving line of credit. The amendment also changed the formulas for
calculating certain financial covenants under the Company's credit agreement
with its lenders.
As of August 3, 2000, the Company had approximately $5.0 million available under
its revolving credit line.
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.
FORWARD LOOKING STATEMENTS:
Management's discussion of the Company's 2000 quarterly periods in comparison to
1999, contains forward-looking statements regarding current expectations, risks
and uncertainties for future periods. The actual results could differ materially
from those discussed here. As well as those factors discussed in this report,
other factors that could cause or contribute to such differences include, among
other items, cancellation of production agreements by significant customers,
material increases in the cost of base paper stock, competition in the Company's
product areas, or an inability of management to successfully reduce operating
expenses in relation to net sales without damaging the long-term direction of
the Company. Therefore, the condensed financial data for the periods presented
may not be indicative of the Company's future financial condition or results of
operations.
ITEM 3. 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 for its fiscal year ended September 30, 1999). At
June 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
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK-CONTINUED:
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
June 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
June 30, 2000.
Other Relevant Market Risks-The Company does not own any marketable
securities, and management has not identified any other relevant market risks.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.16 Second Amendment to Credit Agreement
B. Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUFCO TECHNOLOGIES, INC.
Date: August 12, 2000 /s/ Louis LeCalsey, III
-----------------------------------------
Louis LeCalsey, III
President/Chief Executive Officer
Date: August 12, 2000 /s/ Greg Wilemon
------------------------------------------
Greg Wilemon
Chief Financial Officer/Chief Operating Officer,
Secretary, Treasurer and Vice President - Finance
17
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.16 Second Amendment to Credit Agreement
27.1 Financial Data Schedule
</TABLE>
