ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Forward Looking Statements
Management’s discussion of the Company’s fiscal 2014 results in comparison to fiscal 2013 contains forward-looking statements regarding current expectations, risks and uncertainties for future periods. The actual results could differ materially from those discussed herein due to a variety of factors such as the Company’s ability to increase sales, changes in customer demand for its products, non renewal or cancellation of production agreements by significant customers including two Contract Manufacturing customers it depends upon for a significant portion of its business, its ability to meet competitors’ prices on products to be sold under these production agreements, the effects of the economy in general, the Company’s inability to benefit from any general economic improvements, react to material increases in the cost of raw materials or competition in the Company’s product areas, the ability of management to successfully reduce operating expenses, the Company’s ability to increase sales and earnings as a result of new projects and services, the Company’s ability to successfully install new equipment on a timely basis and to improve productivity through equipment upgrades, the Company’s ability to continue to produce new products, the Company’s ability to comply with the financial covenants in its credit facility, the Company’s ability to extend or refinance its credit facility upon expiration on December 31, 2014, the Company’s ability to return to and sustain profitable operations, the Company’s ability to successfully attract new customers through its sales initiatives and strengthening its new business development efforts, the Company’s ability to improve the run rates for its products, and changes to regulations governing its operations or other factors beyond the Company’s control. Therefore, the financial data for the periods presented may not be indicative of the Company’s future financial condition or results of operations.
Further, all statements regarding the timing and the closing of the Offer and Merger transactions; the ability of Parent to complete the transactions considering the various closing conditions; and any assumptions underlying any of the foregoing, are forward looking statements. These intentions, expectations, or results may not be achieved in the future and various important factors could cause actual results or events to differ materially from the forward-looking statements that the Company makes, including uncertainties as to the timing of the Offer and Merger; uncertainties as to how many of the Company’s stockholders will tender their stock in the Offer; the possibility that competing offers may be made; the possibility that various closing conditions to the transactions may not be satisfied or waived, including that a governmental entity may prohibit or delay the consummation of the transaction; that Parent or Sub do not receive the proceeds of the financing; or that there is a material adverse change of the Company
.
General Information:
Tufco is a leader in providing diversified contract wet wipe converting and printing, as well as specialty printing and finishing services and business imaging products. The Company works closely with its customers to develop products or perform services, which meet or exceed the customers’ quality standards, and then uses 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 wide web flexographic printing, wet wipe converting, hot melt adhesive lamination, folding, integrated downstream packaging, quality and microbiological process management, and the manufacture and distribution of business imaging paper products.
The Company has manufacturing operations in Green Bay, WI, which is ISO certified, and Newton, NC. The Company’s corporate headquarters, including corporate support services, are located in Green Bay, WI.
On December 20, 2013, the Company entered into the Merger Agreement with Parent and Sub. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Sub commenced a tender offer (the “Offer”) to acquire all of the outstanding shares of common stock, par value $0.01 per share, of the Company (the “Shares”) at a price of $6.07 per Share, net to the seller in cash (the “Offer Price”). The Offer is currently scheduled to expire at 12:00 midnight, New York City time, at the end of the day on February 21, 2014.
Pursuant to the Merger Agreement, as soon as practicable after the consummation of the Offer, and upon the terms and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Sub will merge with and into the Company, with the Company surviving as a wholly-owned subsidiary of Parent, pursuant to the procedure provided for under Section 251(h) of the Delaware General Corporation Law without any additional approval of the Company’s stockholders (the “Merger”). Upon completion of the Merger, each Share outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than Shares that are held by Parent, Sub, the Company in treasury or stockholders perfecting their appraisal rights under the Delaware General Corporation Law) will be cancelled and converted into the right to receive (upon the proper surrender of the certificate representing such Share) the Offer Price in cash (without interest). In addition, each outstanding and unexercised option to purchase Shares then in effect (the “Options”), whether or not vested, will automatically be cancelled in exchange for the right to receive in cash the excess, if any, of the Offer Price over the exercise price of such Option immediately prior to the Effective Time. In the event that the exercise price of an Option is equal to or greater than the Offer Price, such Option shall be cancelled for no consideration.
9
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued
|
The Merger Agreement includes customary representations, warranties and covenants of the Company, Parent and Sub. The Company has agreed to operate its business in the ordinary course in accordance with past practices until the earlier of the termination of the Merger Agreement and the Effective Time, subject to customary exceptions. The Company has also agreed not to solicit or initiate discussions with third parties regarding other proposals to acquire the Company and to certain restrictions on its ability to respond to any such proposals. The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 to the Company’s current report on Form 8-K filed on December 27, 2013, and is incorporated herein by reference.
Results of Operations:
Condensed operating data, percentages of net sales and period-to-period changes in these items are as follows (dollars in thousands):
|
Three Months Ended
December 31,
|
|
|
Period-to-Period
Change
|
|
|
2013
|
|
|
2012
|
|
|
$
|
|
|
%
|
|
Net Sales
|
$
|
22,029
|
|
|
$
|
28,348
|
|
|
$
|
(6,319
|
)
|
|
|
(22
|
)%
|
Gross Profit
|
|
1,608
|
|
|
|
2,493
|
|
|
|
(885
|
)
|
|
|
(35
|
)%
|
|
|
7.3
|
%
|
|
|
8.8
|
%
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
1,676
|
|
|
|
1,262
|
|
|
|
414
|
|
|
|
33
|
%
|
|
|
7.6
|
%
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
(68
|
)
|
|
|
1,231
|
|
|
|
(1,299
|
)
|
|
|
NM
|
|
|
|
(0.3
|
)%
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
Interest and Other-Net
|
|
21
|
|
|
|
51
|
|
|
|
(30
|
)
|
|
|
(59
|
)%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
(Loss) Income Before Income Taxes
|
|
(89
|
)
|
|
|
1,180
|
|
|
|
(1,269
|
)
|
|
|
NM
|
|
|
|
(0.4
|
)%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
Income Tax (Benefit) Expense
|
|
(37
|
)
|
|
|
440
|
|
|
|
(477
|
)
|
|
|
NM
|
|
|
|
(0.2
|
)%
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
$
|
(52
|
)
|
|
$
|
740
|
|
|
|
(792
|
)
|
|
|
NM
|
|
|
|
(0.2
|
)%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
Basic and Diluted (Loss) Income per Share
|
$
|
(0.01
|
)
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
10
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued
|
|
Three Months Ended
December 31,
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Period-to-Period
Change
|
|
|
Amount
|
|
|
% of
Total
|
|
|
Amount
|
|
|
% of
Total
|
|
|
$
|
|
|
%
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Manufacturing
|
$
|
16,946
|
|
|
77
|
%
|
|
$
|
22,272
|
|
|
|
79
|
%
|
|
$
|
(5,326
|
)
|
|
(24
|
)%
|
Business Imaging
|
|
5,083
|
|
|
23
|
%
|
|
|
6,076
|
|
|
|
21
|
%
|
|
|
(993
|
)
|
|
(16
|
)%
|
Net Sales
|
$
|
22,029
|
|
|
100
|
%
|
|
$
|
28,348
|
|
|
|
100
|
%
|
|
$
|
(6,319
|
)
|
|
(22
|
)%
|
|
2013
|
|
|
2012
|
|
|
Period-to-Period
Change
|
|
|
Amount
|
|
|
Margin
%
|
|
|
Amount
|
|
|
Margin
%
|
|
|
$
|
|
|
%
|
|
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Manufacturing
|
$
|
1,173
|
|
|
7
|
%
|
|
$
|
2,107
|
|
|
|
9
|
%
|
|
$
|
(934
|
)
|
|
(44
|
)%
|
Business Imaging
|
|
435
|
|
|
9
|
%
|
|
|
386
|
|
|
|
6
|
%
|
|
|
49
|
|
|
13
|
%
|
Gross Profit
|
$
|
1,608
|
|
|
7
|
%
|
|
$
|
2,493
|
|
|
|
9
|
%
|
|
$
|
(885
|
)
|
|
(35
|
)%
|
NM = Not Meaningful
Net Sales
:
Consolidated net sales decreased $6.3 million (22%) to $22.0 million in the first quarter of fiscal 2014, when compared to the same period last year. This was due to a decrease of $5.3 million (24%) in the Contract Manufacturing segment and a decrease of $1.0 million (16%) in the Business Imaging segment.
The Company depends on two Contract Manufacturing customers for a significant portion of its business. One customer accounted for 11% of the Company’s total net sales in the first quarter of fiscal 2014 compared to 8% for the same period in fiscal 2013. The other significant customer accounted for 40% of the Company’s total net sales in the first quarter of fiscal 2014 compared to 47% for the same period in fiscal 2013. The contracts with each customer expired in 2013 and the Company continues to operate under individual purchase orders, while also seeking to negotiate a longer term arrangement with one such customer. Any such longer term arrangement would not have minimum purchase requirements.
Gross Profit
:
Consolidated gross profit decreased $885,000 for the first quarter of fiscal 2014 when compared to the first quarter of fiscal 2013. This was primarily due to a decrease of $934,000 in the Contract Manufacturing segment and a slight increase of $49,000 in the Business Imaging segment.
The Company saw decreased profitability in the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013 primarily due to decreased sales. Additionally, the Company reduced borrowings under its credit facility by $749,000 during the first quarter of fiscal 2014.
Operating Expenses
:
Selling, general and administrative expenses increased $414,000 (33%) for the first quarter of fiscal 2014 when compared to the same period in fiscal 2013 primarily due to increased non-operating administrative expenses resulting from Tufco’s pending transaction with Griffin Holdings, LLC.
Interest Expense and Other Income (Expense) net
:
Interest expense and other income decreased $30,000 to $21,000 (59%) for the first quarter of fiscal 2014 compared to the same period in fiscal 2013 due to lower average debt outstanding and lower interest rates on borrowings.
Income Tax (Benefit)Expense
:
Income tax benefit for the first quarter of fiscal 2014 was $(37,000), calculated based on the estimated effective tax rate for fiscal 2014, compared to income tax expense of $440,000 for the same period of fiscal 2013.
11
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued
|
Net (Loss) Income
:
The Company reported a net loss of $(52,000) [per share: $(0.01) basic and diluted] for the first quarter of fiscal 2014, versus net income of $740,000 [per share: $0.17 basic and diluted] for the same period in fiscal 2013.
Liquidity and Capital Resources:
Cash flows provided by operations were $1.1 million through the first three months of fiscal 2014, compared to $3.5 million for the same period last year. Accounts receivable decreased $0.7 million and inventories increased $0.1 million offset by an increase in accounts payable of $0.3 million for the first three months of fiscal 2014. Depreciation was $0.7 million for the first three months of fiscal 2014 and 2013.
Net cash used in investing activities was $184,000 for the first three months of fiscal 2014, related to capital expenditures to support ongoing operational needs.
Net cash used in financing activities was $820,000 for the first three months of fiscal 2014. This consisted of $749,000 paid on the Company’s revolving credit line and $71,000 used for principal payments on a note related to the purchase of equipment made in June, 2010.
The Company’s primary need for capital resources is to finance inventories, accounts receivable and capital expenditures. As of December 31, 2013, cash recorded on the balance sheet was $134,516.
The Company amended its credit agreement effective December 20, 2013 to extend its maturity date to December 31, 2014 and modified the required level of after tax net income under its financial covenant in fiscal year 2014. However, there can be no assurances that the Company will be able to extend or refinance its credit facility upon expiration or maintain such a specified minimum level of after tax net income in such year. The credit agreement also includes a minimum tangible net worth covenant. The amount available for borrowing under the revolving line of credit facility is $10.5 million subject to borrowing base limitations as defined in the agreement. The Company’s revolving line of credit is classified as a current liability on the accompanying balance sheets because provisions in the credit agreement include deposit account requirements and a material adverse effect covenant which is subjective in nature. It is also the Company’s policy to classify borrowings under the revolving line of credit as current based on how it manages working capital. Borrowings under the credit facility bear interest at a rate equal to LIBOR plus 2.50%. The Company is required to pay a non-usage fee of .50% per annum on the unused portion of the facility. The Commercial Security Agreement grants to the lender a security interest in all of the accounts and inventory of Tufco, L.P., a subsidiary of the Company.
As of February 7, 2014, the Company had approximately $9.9 million available and $0.6 million outstanding under its revolving credit line pursuant to its credit agreement.
Management believes that the Company’s operating cash flow, together with amounts available under its credit agreement, are adequate to service the Company’s current obligations as of December 31, 2013, assuming the Company is able to extend or refinance its credit agreement upon expiration.
The Company intends to retain earnings to finance future operations and expansion and does not expect to pay any dividends within the foreseeable future.
As previously disclosed on December 20, 2013, the Company entered into the Merger Agreement. Because the aggregate price paid for the Company under the Merger Agreement was below the book value of the assets, goodwill was reviewed for impairment and an estimate was made to write down the entire $7,211,575 balance as of September 30, 2013. It is anticipated that the transaction contemplated by the Merger Agreement will close during the first calendar quarter of 2014, however there can be no assurance that such transaction will be consummated.
12
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Continued
|
The Merger Agreement includes customary termination provisions for both the Company and Parent and provides that, in connection with the termination of the Merger Agreement, under certain circumstances, the Company must pay Parent a termination fee of $1,500,000, including due to termination of the Merger Agreement by the Company to accept a superior acquisition proposal or termination of the Merger Agreement by Parent due to an intentional breach of the Merger Agreement by the Company. If the Parent terminates the Merger Agreement due to an unintentional breach of the Merger Agreement by the Company, the termination fee the Company will be required to pay the Parent will be $750,000. If the Merger Agreement is terminated due to an intentional breach of the Merger Agreement by Parent, Parent will be required to pay the Company a termination fee equal to $1,500,000. If the Company terminates the Merger Agreement in connection with a failure of the financing to be available to Parent or Sub or in connection with an unintentional breach of the Merger Agreement by Parent or Sub, Parent will be required to pay the Company a termination fee equal to $750,000.
Off Balance Sheet Arrangements:
The Company has no Off Balance Sheet Arrangements (as defined in Item 303(a)(4) of Regulation S-K).
13