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SECURITIES AND EXCHANGE COMMISSION   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, 2004 Commission file number 0-21018 TUFCO TECHNOLOGIES, INC. Delaware
    
    39-1723477(State of other jurisdiction
    
    (IRS Employer ID No.)of incorporation of organization)
 PO BOX 23500 Green Bay, WI 54305   (920) 336-0054 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 whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act). Yes [   ]    No [X] Indicate the number of shares outstanding of each or the issuers classes of common stock, as of the latest practicable date. Class
    
    Outstanding as of August 3, 2004Common Stock, par value $0.01 per share
    
    4,582,344
 1




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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES Index  
 PageNumberPART I:FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of
June 30, 2004 and September 30, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three
months and nine months ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
nine months ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    15PART II:OTHER INFORMATION
    
    
    16Item 6. Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    17Credit AgreementCertification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to Section 906Certification Pursuant to Section 906
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. Condensed Consolidated Financial Statements 
 TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS June 30,2004
    
    September 30,(Unaudited)
    
    2003*AssetsCURRENT ASSETS:Cash and cash equivalents
    
    $
    268,500
    
    
    $
    2,930,416Accounts receivable, net
    
    
    10,104,195
    
    
    
    8,293,853Inventories
    
    
    9,165,857
    
    
    
    3,891,083Prepaid expenses and other current assets
    
    
    303,038
    
    
    
    388,319Deferred income taxes
    
    
    515,918
    
    
    
    515,918Total current assets
    
    
    20,357,508
    
    
    
    16,019,589PROPERTY, PLANT AND EQUIPMENT-Net
    
    
    16,196,223
    
    
    
    14,318,907GOODWILL
    
    
    7,211,575
    
    
    
    7,211,575OTHER ASSETS-Net
    
    
    388,124
    
    
    
    475,688TOTAL
    
    $
    44,153,430
    
    
    $
    38,025,759Liabilities and Stockholders EquityCURRENT LIABILITIES:Accounts payable
    
    $
    4,583,513
    
    
    $
    1,829,414Accrued payroll, vacation and payroll taxes
    
    
    646,075
    
    
    
    844,330Other current liabilities
    
    
    764,824
    
    
    
    531,681Income taxes payable
    
    
    971,099
    
    
    
    529,521Current portion of long-term debt
    
    
    1,250,000
    
    
    
    250,000Total current liabilities
    
    
    8,215,511
    
    
    
    3,984,946LONG-TERM DEBT-Less current portion
    
    
    1,500,000
    
    
    
    500,000DEFERRED INCOME TAXES
    
    
    53,395
    
    
    
    53,395STOCKHOLDERS EQUITY:Common Stock: $.01 par value: 9,000,000 shares authorized;
4,706,341 shares issued
    
    
    47,063
    
    
    
    47,063Additional paid-in capital
    
    
    25,088,631
    
    
    
    25,088,631Retained earnings
    
    
    10,080,215
    
    
    
    9,183,109Treasury stock, 123,997 common shares, at cost
    
    
    (831,385
    )
    
    
    (831,385
    )Total stockholders equity
    
    $
    34,384,524
    
    
    
    33,487,418TOTAL
    
    $
    44,153,430
    
    
    $
    38,025,759
 See notes to condensed consolidated financial statements.
*Condensed from audited financial statements. 3




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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 THREE MONTHS ENDED
    
    NINE MONTHS ENDEDJUNE 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003NET SALES
    
    $
    20,261,773
    
    
    $
    14,271,525
    
    
    $
    53,506,254
    
    
    $
    39,595,123COST OF SALES
    
    
    18,463,210
    
    
    
    11,918,246
    
    
    
    48,268,158
    
    
    
    34,202,135GROSS PROFIT
    
    
    1,798,563
    
    
    
    2,353,279
    
    
    
    5,238,096
    
    
    
    5,392,988OPERATING EXPENSES:Selling, general & administrative
    
    
    1,207,482
    
    
    
    1,398,079
    
    
    
    3,624,732
    
    
    
    3,646,684Employee severance costs
    
    
    
    
    
    
    163,587
    
    
    
    
    
    
    
    209,871Loss on sale of property, plant and
equipment
    
    
    1,870
    
    
    
    19,769
    
    
    
    3,218
    
    
    
    51,024OPERATING INCOME
    
    
    589,211
    
    
    
    771,844
    
    
    
    1,610,146
    
    
    
    1,485,409OTHER INCOME (EXPENSE):Interest expense
    
    
    (28,436
    )
    
    
    (10,703
    )
    
    
    (57,343
    )
    
    
    (187,991
    )Interest income and other income (expense)
    
    
    5,490
    
    
    
    (24,751
    )
    
    
    12,984
    
    
    
    (17,145
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    566,265
    
    
    
    736,390
    
    
    
    1,565,787
    
    
    
    1,280,273INCOME TAX EXPENSE
    
    
    243,347
    
    
    
    308,787
    
    
    
    668,682
    
    
    
    533,216INCOME FROM CONTINUING OPERATIONS
    
    
    322,918
    
    
    
    427,603
    
    
    
    897,105
    
    
    
    747,057LOSS FROM DISCONTINUED OPERATIONS:Loss from operations of discontinued
segment, net of income taxes
    
    
    
    
    
    
    (57,975
    )
    
    
    
    
    
    
    (220,426
    )Loss from sale of discontinued
operations, net of income taxes of
$163,325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (244,406
    )NET INCOME
    
    $
    322,918
    
    
    $
    369,628
    
    
    $
    897,105
    
    
    $
    282,225BASIC EARNINGS (LOSS) PER SHARE:Income from continuing
operations
    
    $
    0.07
    
    
    $
    0.09
    
    
    $
    0.20
    
    
    $
    0.16Loss from operations of discontinued
segment
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.05
    )Loss from sale of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.05
    )Net Income
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.20
    
    
    $
    0.06DILUTED EARNINGS (LOSS) PER SHARE:Income from continuing operations
    
    $
    0.07
    
    
    $
    0.09
    
    
    $
    0.19
    
    
    $
    0.16Loss from operations of
discontinued segment
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.05
    )Loss from sale of discontinued
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.05
    )Net Income
    
    $
    0.07
    
    
    $
    0.08
    
    
    $
    0.19
    
    
    $
    0.06WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    4,582,344
    
    
    
    4,618,677
    
    
    
    4,582,344
    
    
    
    4,624,788Diluted
    
    
    4,618,659
    
    
    
    4,642,847
    
    
    
    4,604,431
    
    
    
    4,634,286
 See notes to condensed consolidated financial statements. 4




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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 NINE MONTHS ENDEDJune 30,2004
    
    2003OPERATING ACTIVITIESIncome from continuing operations
    
    $
    897,105
    
    
    $
    747,057Noncash items in net income from continuing operationsDepreciation and amortization of property, plant and
equipment
    
    
    1,725,021
    
    
    
    1,894,335Amortization
    
    
    69,756
    
    
    
    249,398Loss on sale of property, plant and equipment
    
    
    3,218
    
    
    
    51,024Changes in operating working capital:Accounts receivable
    
    
    (1,810,341
    )
    
    
    (368,963
    )Inventories
    
    
    (5,274,774
    )
    
    
    (684,508
    )Prepaid expenses and other assets
    
    
    103,089
    
    
    
    (529,373
    )Accounts payable
    
    
    2,754,099
    
    
    
    (1,244,685
    )Accrued and other current liabilities
    
    
    34,888
    
    
    
    (309,376
    )Income taxes payable
    
    
    441,578
    
    
    
    136,997Net cash used by operating activities from continuing
operations
    
    
    (1,056,361
    )
    
    
    (58,094
    )INVESTING ACTIVITIESAdditions to property, plant and equipment
    
    
    (3,625,256
    )
    
    
    (2,233,176
    )Proceeds from sale of property, plant and equipment
    
    
    19,701
    
    
    
    68,110Increase in advances to stockholders
    
    
    
    
    
    
    (13,854
    )Decrease in restricted cash
    
    
    
    
    
    
    100,000Net cash used by investing activities from
continuing operations
    
    
    (3,605,555
    )
    
    
    (2,078,920
    )FINANCING ACTIVITIESRepayment of long-term debt
    
    
    (750,000
    )
    
    
    (8,215,027
    )Increase/decrease of long-term debt
    
    
    2,750,000
    
    
    
    2,874,360Purchase of treasury stock
    
    
    
    
    
    
    (187,080
    )Collections on stockholder notes receivable
    
    
    
    
    
    
    157,246Net cash provided (used) by financing activities from
continuing operations
    
    
    2,000,000
    
    
    
    (5,370,501
    )Net cash provided from discontinued operations:Proceeds from sale of discontinued operations (net of
transaction costs)
    
    
    
    
    
    
    11,660,603Net cash used by activities of discontinued operations
    
    
    
    
    
    
    (840,283
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    10,820,320NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (2,661,916
    )
    
    
    3,312,805CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    2,930,416
    
    
    
    251,346End of period
    
    $
    268,500
    
    
    $
    3,564,151
 See notes to condensed
consolidated financial statements. 5




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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the three and nine months ended June 30, 2004 and 2003
 (Unaudited)
 1. Basis of Presentation The accompanying condensed consolidated financial statements have been
prepared by Tufco Technologies, Inc., (the Company) pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC)
and, in the opinion of the Company, include all adjustments necessary for
a fair statement of results for each period shown (unless otherwise noted
herein, all adjustments are of a normal recurring nature). Operating
results for the three-month and nine-month period ended June 30, 2004 are
not necessarily indicative of results expected for the remainder of the
year. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such SEC rules and regulations. The Company believes
that the disclosures made are adequate to prevent the financial
information given from being misleading. The Companys fiscal 2003 Annual
Report on Form 10-K contains a summary of significant accounting policies
and includes the consolidated financial statements and the notes to the
consolidated financial statements. The same accounting policies are
followed in the preparation of interim reports. The Companys condensed
consolidated balance sheet at September 30, 2003 was derived from the
audited consolidated balance sheet. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto for the fiscal year
ended September 30, 2003. Reclassification Certain amounts previously reported have been reclassified to conform to
the current presentation. Earnings Per Share Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share includes common
equivalent shares from dilutive stock options outstanding during the year,
the effect of which was 36,315 and 13,953 shares for the three months
ended June 30, 2004 and 2003, respectively. For the nine months ended
June 30, 2004 and 2003, the common equivalent shares from dilutive stock
options outstanding were 22,087 and 5,527 shares, respectively. During
the three months ended June 30, 2004 and 2003, options to purchase 137,750
shares and 310,333 shares, respectively, were excluded from the diluted
earnings per share computation as the effects of such options would have
been anti-dilutive. For the nine months ended June 30, 2004 and 2003,
options to purchase 242,139 shares and 428,489 shares, respectively, were
excluded from the diluted earnings per share computation as the effects of
such options would have been anti-dilutive. Stock Based Compensation Stock option grants to employees are accounted for by the intrinsic value
method under Accounting Principles Board (APB) Opinion No. 25 and
related
interpretations. SFAS No. 123, Accounting for Stock-Based Compensation,
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. The following table
illustrates the effect on income from continuing operations and related
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based compensation, for the three
months and nine months ended June 30, 2004 and 2003. 6




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Notes to condensed consolidated financial statements (unaudited)(continued) Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Income from continuing operations
as reported
    
    $
    322,918
    
    
    $
    427,603
    
    
    $
    897,105
    
    
    $
    747,057Deduct: Total stock-based employee
compensation expense determined
under fair value based method of
all awards, net of related tax
effects
    
    
    (20,022
    )
    
    
    (8,135
    )
    
    
    (108,672
    )
    
    
    (62,665
    )Pro forma income from continuing
operations
    
    $
    302,896
    
    
    $
    419,468
    
    
    $
    788,433
    
    
    $
    684,392Earnings per share:Basic  as reported
    
    $
    0.07
    
    
    $
    0.09
    
    
    $
    0.20
    
    
    $
    0.16Basic  pro forma
    
    $
    0.07
    
    
    $
    0.09
    
    
    $
    0.17
    
    
    $
    0.15Diluted  as reported
    
    $
    0.07
    
    
    $
    0.09
    
    
    $
    0.19
    
    
    $
    0.16Diluted  pro forma
    
    $
    0.07
    
    
    $
    0.09
    
    
    $
    0.17
    
    
    $
    0.15
 2. Inventories Inventories consist of the following: June 30,
    
    September 30,2004
    
    2003Raw materials
    
    $
    7,782,765
    
    
    $
    3,042,120Finished goods
    
    
    1,383,092
    
    
    
    848,963Total inventories
    
    $
    9,165,857
    
    
    $
    3,891,083
 3. Severance costs Severance costs were $0 and $163,587 for the three months ended June 30,
2004 and 2003, respectively. For the nine months ended June 30, 2004, the
severance costs were $0 compared to $209,871 during the nine months ended
June 30, 2003. Pursuant to authorization by the Board of Directors, the
Company formalized a plan in March 2003 to relocate the accounting and
information technology departments from the Dallas, TX location to the
Green Bay, WI corporate office. As a result, the Company provided
one-time termination benefits payable August 31, 2003 for employees in the
Dallas office. The liability for the termination benefits was recognized
ratably over the future service period as required by SFAS No. 146. In
compliance with SFAS 146, $163,587 of employee termination benefits
payable August 31, 2003 were recorded in the three months ended June 30,
2003 as employment severance costs in the consolidated statements of
operations. For the nine months ending June 30, 2003 severance costs also
included costs related to the elimination of several salary positions. 4. Discontinued operations On January 27, 2003, the Companys Board of Directors approved a plan to
dispose of the operations of the Paint Sundries segment. The Company sold
the assets and business of the Paint Sundries segment for approximately
$12.2 million in cash to Trimaco, LLC and its affiliate. The sale
included all Paint Sundries segment assets, including the stock of
Foremost Manufacturing Company and the Manning, South Carolina
manufacturing facility. Accordingly, the operating results of the Paint
Sundries segment have been reported separately from continuing operations
and
reported as a separate line item in the statement of operations. Interest
expense was not allocated to the discontinued segment. 7




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Notes to condensed consolidated financial statements
(unaudited)(continued) Operating results from discontinued operations were as follows: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2003Net sales
    
    $
    (9,331
    )
    
    $
    9,698,737Loss before income tax
    
    
    (99,841
    )
    
    
    (371,804
    )Income tax benefit
    
    
    41,866
    
    
    
    151,378Loss from discontinued segment
    
    $
    (57,975
    )
    
    $
    (220,426
    )
 5. Comprehensive Income (loss) Comprehensive Income for the three months ended June 30, 2004 was $322,918
compared to Comprehensive Income of $385,767 for the three months ended
June 30, 2003. Comprehensive Income for the nine months ended June 30, 2004 was $897,105
compared to Comprehensive Income of $322,449 for the nine months
ended June 30, 2003. Components of Comprehensive Income are as follows: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    322,918
    
    
    $
    369,628
    
    
    $
    897,105
    
    
    $
    282,225Other comprehensive
income, net of tax:Changes in fair value
of interest rate
swap contract
    
    
    0
    
    
    
    (411
    )
    
    
    0
    
    
    
    23,286Reclassification adjustment
to interest rate swap
contract
    
    
    0
    
    
    
    16,550
    
    
    
    0
    
    
    
    16,938Comprehensive income
    
    $
    322,918
    
    
    $
    385,767
    
    
    $
    897,105
    
    
    $
    322,449
 6. Segment Information The Company manufactures and distributes business forms, custom
paper-based non-woven products, and provides contract manufacturing,
specialty printing and related services on these types of products. In the
second quarter of fiscal 2003, the Company sold its Paint Sundries
segment, and presented the financial information related to this segment
as discontinued operations. Prior period amounts have been restated,
including the corporate and other information to reflect the sale of this
business. The Company separates its current operations and prepares
information for management use by the market segments aligned with the
Companys products and services. Such market information is summarized
below. The Contract Manufacturing segment provides services to large
national consumer products companies while the Business Imaging segment
manufactures and distributes printed and unprinted business imaging paper
products for a variety of business needs. 8




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Notes to condensed consolidated financial statements
(unaudited)(continued) Three Months Ended
    
    Contract
    
    Business
    
    CorporateJune 30, 2004
    
    Manufacturing
    
    Imaging
    
    and Other
    
    ConsolidatedNet sales
    
    $
    14,436,680
    
    
    $
    5,825,341
    
    
    $
    (248
    )
    
    $
    20,261,773Gross profit
    
    
    1,223,970
    
    
    
    574,840
    
    
    
    (248
    )
    
    
    1,798,563Operating income (loss)
    
    
    491,881
    
    
    
    300,927
    
    
    
    (203,597
    )
    
    
    589,211Depreciation and
amortization expense
    
    
    324,978
    
    
    
    125,794
    
    
    
    174,994
    
    
    
    625,766Capital expenditures
    
    
    1,298,425
    
    
    
    12,734
    
    
    
    
    
    
    
    1,311,159Assets:Inventories
    
    
    7,038,028
    
    
    
    2,127,829
    
    
    
    
    
    
    
    9,165,857Property, plant and
equipment-net
    
    
    12,686,291
    
    
    
    2,834,720
    
    
    
    675,212
    
    
    
    16,196,223Accounts receivable
and other
(including goodwill)
    
    
    11,493,025
    
    
    
    5,866,021
    
    
    
    1,432,304
    
    
    
    18,791,350Total assets
    
    $
    31,217,344
    
    
    $
    10,828,570
    
    
    $
    2,107,516
    
    
    $
    44,153,430
 Three Months Ended
    
    Contract
    
    Business
    
    CorporateJune 30, 2003
    
    Manufacturing
    
    Imaging
    
    and Other
    
    ConsolidatedNet sales
    
    $
    8,333,294
    
    
    $
    5,938,231
    
    
    $
    
    
    
    $
    14,271,525Gross profit
    
    
    1,604,543
    
    
    
    748,736
    
    
    
    
    
    
    
    2,353,279Employee Severance
    
    
    
    
    
    
    
    
    
    
    163,587
    
    
    
    163,587Operating income (loss)
    
    
    1,167,977
    
    
    
    313,061
    
    
    
    (709,194
    )
    
    
    771,844Depreciation and
amortization expense
    
    
    244,236
    
    
    
    129,927
    
    
    
    260,176
    
    
    
    634,339Capital expenditures
    
    
    438,084
    
    
    
    7,096
    
    
    
    30,570
    
    
    
    475,750Assets:Inventories
    
    
    1,851,489
    
    
    
    2,396,968
    
    
    
    
    
    
    
    4,248,457Property, plant and
equipment-net
    
    
    10,250,102
    
    
    
    3,265,798
    
    
    
    1,367,137
    
    
    
    14,883,037Accounts receivable
and other
(including goodwill)
    
    
    7,573,769
    
    
    
    6,031,091
    
    
    
    6,100,778
    
    
    
    19,705,638Total assets
    
    $
    19,675,360
    
    
    $
    11,693,857
    
    
    $
    7,497,915
    
    
    $
    38,837,132
 9




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##### Table of Contents



Notes to condensed consolidated financial statements (unaudited)(continued) Nine Months Ended
    
    Contract
    
    Business
    
    CorporateJune 30, 2004
    
    Manufacturing
    
    Imaging
    
    and Other
    
    ConsolidatedNet sales
    
    $
    35,570,492
    
    
    $
    17,936,010
    
    
    $
    (248
    )
    
    $
    53,506,254Gross profit
    
    
    3,231,171
    
    
    
    2,007,173
    
    
    
    (248
    )
    
    
    5,238,096Operating income (loss)
    
    
    1,425,592
    
    
    
    1,033,373
    
    
    
    (848,519
    )
    
    
    1,610,146Depreciation and
amortization expense
    
    
    863,544
    
    
    
    384,350
    
    
    
    546,883
    
    
    
    1,794,777Capital expenditures
    
    
    3,529,563
    
    
    
    95,693
    
    
    
    
    
    
    
    3,625,256
 Nine Months Ended
    
    Contract
    
    Business
    
    CorporateJune 30, 2003
    
    Manufacturing
    
    Imaging
    
    and Other
    
    ConsolidatedNet sales
    
    $
    21,824,083
    
    
    $
    17,771,040
    
    
    $
    
    
    
    $
    39,595,123Gross profit
    
    
    3,207,971
    
    
    
    2,185,017
    
    
    
    
    
    
    
    5,392,988Employee Severance
    
    
    
    
    
    
    
    
    
    
    209,871
    
    
    
    209,871Operating income (loss)
    
    
    2,059,028
    
    
    
    984,573
    
    
    
    (1,558,192
    )
    
    
    1,485,409Depreciation and
amortization expense
    
    
    773,819
    
    
    
    387,421
    
    
    
    982,493
    
    
    
    2,143,733Capital expenditures
    
    
    2,134,288
    
    
    
    139,901
    
    
    
    (41,013
    )
    
    
    2,233,176
 10




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations General Information: The ISO certified Company has manufacturing operations in Green Bay, WI and
Newton, NC. The Companys corporate headquarters, including corporate support
services, are located in Green Bay, WI. Tufco performs contract manufacturing and specialty printing services and
manufactures and distributes business imaging paper products. The Companys
strategy is to provide services and 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 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 liquid blending, folding,
packaging, coating, slitting and rewinding, sheeting and multi-color wide web
flexographic printing and laminating. 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
    
    
    
    Nine Months EndedJune 30,
    
    Period-to-Period
Change
    
    June 30,
    
    Period-to-Period
Change2004
    
    2003
    
    $
    
    %
    
    2004
    
    2003
    
    $
    
    %Net Sales
    
    $
    20,262
    
    
    $
    14,272
    
    
    
    5,990
    
    
    
    42
    
    
    $
    53,506
    
    
    $
    39,595
    
    
    
    13,911
    
    
    
    35Gross Profit
    
    
    1,798
    
    
    
    2,353
    
    
    
    (555
    )
    
    
    (24
    )
    
    
    5,238
    
    
    
    5,393
    
    
    
    (155
    )
    
    
    (3
    )8.9
    %
    
    
    16.5
    %
    
    
    
    
    
    
    
    
    
    
    9.8
    %
    
    
    13.6
    %Operating Expenses
    
    
    1,209
    
    
    
    1,581
    
    
    
    (372
    )
    
    
    (24
    )
    
    
    3,628
    
    
    
    3,908
    
    
    
    (280
    )
    
    
    (7
    )6.0
    %
    
    
    11.1
    %
    
    
    
    
    
    
    
    
    
    
    6.8
    %
    
    
    9.9
    %Operating Income
    
    
    589
    
    
    
    772
    
    
    
    (183
    )
    
    
    (24
    )
    
    
    1,610
    
    
    
    1,485
    
    
    
    125
    
    
    
    (8
    )2.9
    %
    
    
    5.4
    %
    
    
    
    
    
    
    
    
    
    
    3.0
    %
    
    
    3.8
    %Interest Expense
    
    
    28
    
    
    
    11
    
    
    
    17
    
    
    
    155
    
    
    
    57
    
    
    
    188
    
    
    
    (131
    )
    
    
    (70
    )0.1
    %
    
    
    0.1
    %
    
    
    
    
    
    
    
    
    
    
    0.1
    %
    
    
    0.5
    %Income from
Continuing Operations
Before Income Taxes
    
    
    566
    
    
    
    736
    
    
    
    (170
    )
    
    
    (23
    )
    
    
    1,566
    
    
    
    1,280
    
    
    
    286
    
    
    
    222.8
    %
    
    
    5.2
    %
    
    
    
    
    
    
    
    
    
    
    2.9
    %
    
    
    3.2
    %Income Tax Expense
    
    
    243
    
    
    
    308
    
    
    
    (65
    )
    
    
    (21
    )
    
    
    669
    
    
    
    533
    
    
    
    136
    
    
    
    261.2
    %
    
    
    2.2
    %
    
    
    
    
    
    
    
    
    
    
    1.3
    %
    
    
    1.3
    %Income from Continuing
Operations
    
    
    323
    
    
    
    428
    
    
    
    (105
    )
    
    
    (25
    )
    
    
    897
    
    
    
    747
    
    
    
    150
    
    
    
    201.6
    %
    
    
    3.0
    %
    
    
    
    
    
    
    
    
    
    
    1.7
    %
    
    
    1.9
    %Loss from Discontinued
Operations, Net of Tax
    
    
    
    
    
    
    (58
    )
    
    
    58
    
    
    
    (100
    )
    
    
    
    
    
    
    (465
    )
    
    
    465
    
    
    
    (100
    )
    
    
    
    (0.4
    %)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1.2
    %)Net Income (Loss)
    
    $
    323
    
    
    $
    370
    
    
    
    (47
    )
    
    
    (13
    )
    
    
    897
    
    
    
    282
    
    
    
    615
    
    
    
    2181.6
    %
    
    
    2.6
    %
    
    
    
    
    
    
    
    
    
    
    1.7
    %
    
    
    0.7
    %
 11




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations Continued The components of net sales and gross profit are summarized in the table below
(dollars in thousands) Three Months EndedJune 30,2004
    
    2003% of
    
    
    
    
    
    % of
    
    Period-to-Period ChangeAmount
    
    Total
    
    Amount
    
    Total
    
    $
    
    %Net salesContract manufacturing and printing
    
    $
    14,437
    
    
    
    71
    %
    
    $
    8,333
    
    
    
    58
    %
    
    $
    6,104
    
    
    
    73
    %Business imaging paper products
    
    
    5,825
    
    
    
    29
    
    
    
    5,939
    
    
    
    42
    
    
    
    (114
    )
    
    
    (2
    )Net sales
    
    $
    20,262
    
    
    
    100
    %
    
    $
    14,272
    
    
    
    100
    %
    
    $
    5,990
    
    
    
    42
    %
 2004
    
    2003Margin
    
    
    
    
    
    Margin
    
    Period-to-Period ChangeAmount
    
    %
    
    Amount
    
    %
    
    $
    
    %Gross profit (loss)Contract manufacturing and printing
    
    $
    1,224
    
    
    
    8
    %
    
    $
    1,604
    
    
    
    19
    %
    
    $
    (380
    )
    
    
    (24
    %)Business imaging paper products
    
    
    575
    
    
    
    10
    
    
    
    749
    
    
    
    13
    
    
    
    (174
    )
    
    
    (23
    )Gross profit
    
    $
    1,799
    
    
    
    9
    %
    
    $
    2,353
    
    
    
    16
    %
    
    $
    (554
    )
    
    
    (24
    %)
 Nine Months EndedJune 30,2004
    
    2003% of
    
    
    
    
    
    % of
    
    Period-to-Period ChangeAmount
    
    Total
    
    Amount
    
    Total
    
    $
    
    %Net salesContract manufacturing and printing
    
    $
    35,570
    
    
    
    66
    %
    
    $
    21,824
    
    
    
    55
    %
    
    $
    13,746
    
    
    
    63
    %Business imaging paper products
    
    
    17,936
    
    
    
    34
    
    
    
    17,771
    
    
    
    45
    
    
    
    165
    
    
    
    1Net sales
    
    $
    53,506
    
    
    
    100
    %
    
    $
    39,595
    
    
    
    100
    %
    
    $
    13,911
    
    
    
    35
    %
 2004
    
    2003Margin
    
    
    
    
    
    Margin
    
    Period-to-Period ChangeAmount
    
    %
    
    Amount
    
    %
    
    $
    
    %Gross profit (loss)Contract manufacturing and printing
    
    $
    3,231
    
    
    
    9
    %
    
    $
    3,208
    
    
    
    15
    %
    
    $
    23
    
    
    
    1
    %Business imaging paper products
    
    
    2,007
    
    
    
    11
    
    
    
    2,185
    
    
    
    12
    
    
    
    (178
    )
    
    
    (8
    )Gross profit
    
    $
    5,238
    
    
    
    10
    %
    
    $
    5,393
    
    
    
    14
    %
    
    $
    (155
    )
    
    
    (3
    %)
 12




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations-Continued Net Sales: Consolidated net sales increased $6.0 million (42%) to $20.3 million in the
third quarter of fiscal 2004, when compared to the same period last year. This
is due to an increase of $6.1 million or 73% in the Contract Manufacturing
segment and a decrease of $0.1 million or 2% in the Business Imaging segment. In Contract Manufacturing, some customers furnish raw materials and others
request the Company to purchase raw materials and pass the cost through the
sales price. In the third quarter of 2004, more customers requested that the
Company purchase raw materials and, in comparison to the third quarter of 2003,
this resulted in an increase of $6.4 million in revenue. For the nine months ended June 30, 2004, sales increased $13.9 million of which
$12.8 million represented a pass through of material costs as described above. Gross Profit: Gross profit decreased $0.6 million (24%) for the third quarter of fiscal 2004
when compared to the third quarter of fiscal 2003. The Contract Manufacturing
segment decreased $0.4 million due to higher costs associated with the start-up
of new projects. Gross profit declined $0.2 million in Business Imaging
primarily due to competitive pricing pressures. For the nine months ended June 30, 2004, gross profit decreased $0.2 million.
The majority of this decrease fell within the Business Imaging segment with
Contract Manufacturing showing a slight increase when comparing the two
periods. The decrease in the gross margin percentage for Contract Manufacturing for both
the three months and nine months is attributable to the increased amount of
material pass through included in sales. Operating Expenses: Operating expenses decreased $0.4 million or 24% for the third quarter of 2004
compared to the third quarter of 2003 and decreased $0.3 million or 7% for the
first nine months of fiscal 2004 compared to the prior period. The majority of
this decrease relates to employee severance costs of $0.2 million incurred in
2003 as discussed in the Notes to the Condensed Consolidated Financial
Statements, $81,000 of Equipment Depreciation, $55,000 in Legal and Audit Fees,
and $79,000 of Employee-Related costs. Interest Expense and Other Income (Expense)-net: Interest expense increased $17,000 to $28,000 for the third quarter compared to
last year as a result of the Company borrowing from its revolving credit line
to fund its working capital needs and decreased $0.1 million in comparing the
nine months, due to lower average debt outstanding. Effective with the sale of
the Paint Sundries segment on March 31, 2003, the Company repaid approximately
$5.4 million of outstanding debt on which interest was being paid. Net Income and Income from Continuing Operations: The Company reported net income of $0.3 million (per share: $0.07 basic and
diluted) for the third quarter of fiscal 2004, versus net income of $0.4
million (per share: $0.08 basic and diluted) for the same period one year ago.
Income from continuing operations was $0.3 million (per share: $0.07 basic and
diluted) for the third quarter of 2004 compared to $0.4 million (per share:
$0.09 basic and diluted) for 2003. For the nine months ended June 30, 2004, net income was $0.9 million (per
share: $0.20 basic and $0.19 diluted) compared to net income of $0.3 million
(per share: $0.06 basic and diluted) for the first nine months of fiscal 2003.
Income from continuing operations was $0.9 million (per share: $0.20 basic and
$0.19 diluted) for the first nine months of 2004 compared to $0.7 million (per
share: $0.16 basic and diluted). 13




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations-Continued Liquidity and Capital Resources: The Company used $1.1 million in cash from continuing operations through the
first nine months of fiscal 2004, compared to a use of cash from continuing
operations of $0.1 million for the same period last year. Increases in
inventories ($5.3 million) and increases in accounts payable ($2.8 million)
primarily represented materials purchased for new projects. More customers are
requesting the Company purchase materials rather than supplying them. Cash was
reduced by an increase of accounts receivable ($1.8 million) resulting from the
increased revenues. During the third quarter, the Company announced it had entered into a
definitive agreement to sell its thermal bond laminator for $475,000. In
connection with such agreement, the Company received a $95,000 non-refundable
deposit. The Company expects the sale will be completed in early fiscal 2005.
Consistent with accounting principles for revenue recognition, the Company will
account for and report a gain of approximately $400,000 (which includes the
non-refundable deposit) from this sale when it is completed early in fiscal
2005. Net cash used in investing activities was $3.6 million for the first nine
months of fiscal 2004. On December 4, 2003 the Company announced it had signed
significant contracts with new and existing customers for both printing and
contract manufacturing. To satisfy the manufacturing requirements of the new
contracts, the Company is undertaking a capital
equipment expansion program aggregating approximately $3.6 million for fiscal
2004. Through the first nine months, $3.2 million of this amount has been
expended. Included in this expansion program is doubling the capacity for wet
wipes production, a new flat pack folder, and a rebuild of an existing quarter
folder. The Company anticipates that the costs for such expansion program will
be funded by cash from operations and bank borrowings. Net cash provided by financing activities was $2.0 million for the first nine
months of fiscal 2004 as a result of the Company borrowing from its revolving
credit line to fund a portion of its increased working capital needs.
On May 6, 2004, the Company redeemed $0.8 million of outstanding Industrial
Development Revenue Bonds. There was no net cash provided or used by discontinued operations for the nine
months ended June 30, 2004. For 2003, discontinued operations provided $10.8
million in cash. The Companys prior credit facility expired June 1, 2004. The Company replaced
this facility with a new unsecured, $10 million facility. This transaction was
completed in May 2004 and is effective through May 2007. As of June 30, 2004, the Company had approximately $7.3 million available under
its revolving credit line. According to the terms of its credit facility with
its lender, the Company is required to maintain certain financial and
operational covenants. As of June 30, 2004, the Company was in compliance with
all of its debt covenants under the credit facility. The Company intends to retain earnings to finance future operations and
expansion and does
not expect to pay any dividends within the foreseeable future. Stock Repurchase Plan: In March 2003, the Companys Board of Directors approved the purchase by the
Company of up to 100,000 of its shares of common stock given that the cash and
debt position would enable these purchases without impairment to the Companys
capital. The purchase plan began in April 2003, and expired in December, 2003.
A total of 45,500 shares were purchased under the plan at an average share
price of $6.53 per share. Critical Accounting Policies: The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America which require the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
condensed consolidated financial statements and revenues 14




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations-Continued and expenses during the periods reported. Actual results could differ from
those estimates. Information with respect to the Companys critical accounting
policies which
the Company believes could have the most significant effect on the Companys
reported
results and require subjective or complex judgments by management is contained
on pages 20-21 in Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operations, of the Companys Annual Report on Form
10-K filed with the Securities and Exchange Commission for the fiscal year ended September 30, 2003. The Company
has not made any changes in estimates or assumptions that have had a
significant effect on the reported amounts. Off Balance Sheet Arrangements: The Company has no Off Balance Sheet Arrangements (as defined in Item 303(a)(4)
of Regulation S-K) Forward Looking Statements: Managements discussion and analysis of financial condition and results of
operations, including managements discussion of the Companys 2004 quarterly
period in comparison to fiscal 2003, contains forward-looking statements
regarding current expectations, risks and uncertainties for fiscal 2004 and
beyond. 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, the general
economic and business conditions affecting the contract manufacturing,
specialty printing services, imaging paper products, 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. 
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Information with respect to the Companys exposure to interest rate risk,
foreign currency risk, commodity price risk and other relevant market risks is
contained on page 22 in Item 7A, Quantitative and Qualitative Disclosures about
Market Risk, of the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended September 30,
2003. Management believes that as of June 30, 2004, there has been no material
change to this information. 
 ITEM 4. Controls and Procedures The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in its reports filed pursuant
to the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commissions rules and forms, and that such information is accumulated
and communicated to the Companys management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible
controls and procedures. The Company carried out an evaluation, under the supervision and with the
participation of its management, including its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Companys disclosure controls and procedures. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act) were effective as of the end
of the Companys fiscal quarter ended June 30, 2004. 15




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations-Continued There have been no changes in the Companys internal control over financial
reporting during
the third fiscal quarter ended June 30, 2004 that have materially affected, or
are reasonably likely to materially affect the Companys internal control over
financial reporting. 
 PART II. OTHER INFORMATION 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)      EXHIBITS. 10.1
    
    CREDIT AGREEMENTCredit Agreement dated as of May 20, 2004 among TUFCO, L.P.,
TUFCO TECHNOLOGIES, INC., each of the banks or other lending
institutions which is or which may from time to time become a
signatory hereto or any successor or assignee thereof and BANK
ONE, NA.31.1
    
    Certification pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 193431.2
    
    Certification pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act of 1934.32.1
    
    Certification furnished pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    Certification furnished Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 (b)     Reports on Form 8-K. The Company filed a Current Report on Form 8-K on April 30, 2004
discussing the Companys second fiscal quarter results and a Current
Report on Form 8-K on June 30, 2004 announcing the sale of the
Companys thermal bond laminator. 16




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##### Table of Contents



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 13, 2004
    
    /s/ Louis LeCalsey, IIILouis LeCalsey, IIIPresident and Chief Executive OfficerDate: August 13, 2004
    
    /s/ Michael B. WheelerMichael B. WheelerVice President and Chief Financial Officer
 17