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SECURITIES AND EXCHANGE COMMISSION Washington, DC
 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period
ended March 31, 2004 Commission file number
0-21018 TUFCO TECHNOLOGIES, INC. Delaware
    
    39-1723477(State of other jurisdiction
of incorporation of organization)
    
    (IRS Employer ID No.)
 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
    
    o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act). Yes
    
    o
    
    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 April 28, 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
March 31, 2004 and September 30, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three
months and six months ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 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 4. Submission of Matters to a Vote of Security Holders
    
    
    16Item 6. Exhibits and Reports on Form 8-K
    
    
    16SIGNATURES
    
    
    17Certification Pursuant to Rule 13a-14(a)Certification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350Certification Pursuant to 18 U.S.C. Section 1350
  2




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PART I. FINANCIAL INFORMATION 
 ITEM 1. Condensed Consolidated Financial Statements 
 TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS March 31,2004
    
    September 30,(Unaudited)
    
    2003*AssetsCURRENT ASSETS:Cash and cash equivalents
    
    $
    248,660
    
    
    $
    2,930,416Restricted cash
    
    
    750,096
    
    
    
    Accounts receivable, net
    
    
    12,011,975
    
    
    
    8,293,853Inventories
    
    
    7,014,702
    
    
    
    3,891,083Prepaid expenses and other current assets
    
    
    526,303
    
    
    
    388,319Deferred income taxes
    
    
    515,918
    
    
    
    515,918Total current assets
    
    
    21,067,654
    
    
    
    16,019,589PROPERTY, PLANT AND EQUIPMENT-Net
    
    
    15,489,682
    
    
    
    14,318,907GOODWILL
    
    
    7,211,575
    
    
    
    7,211,575OTHER ASSETS-Net
    
    
    410,949
    
    
    
    475,688TOTAL
    
    $
    44,179,860
    
    
    $
    38,025,759Liabilities and Stockholders EquityCURRENT LIABILITIES:Accounts payable
    
    $
    5,748,582
    
    
    $
    1,829,414Accrued payroll, vacation and payroll taxes
    
    
    904,693
    
    
    
    844,330Other current liabilities
    
    
    487,488
    
    
    
    531,681Income taxes payable
    
    
    752,543
    
    
    
    529,521Current portion of long-term debt
    
    
    2,171,554
    
    
    
    250,000Total current liabilities
    
    
    10,064,860
    
    
    
    3,984,946LONG-TERM DEBT-Less current portion
    
    
    
    
    
    
    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
    
    
    9,757,296
    
    
    
    9,183,109Treasury stock, 123,997 common shares, at cost
    
    
    (831,385
    )
    
    
    (831,385
    )Total stockholders equity
    
    
    34,061,605
    
    
    
    33,487,418TOTAL
    
    $
    44,179,860
    
    
    $
    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
    
    SIX MONTHS ENDEDMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003NET SALES
    
    $
    20,198,871
    
    
    $
    12,793,561
    
    
    $
    33,244,481
    
    
    $
    25,323,598COST OF SALES
    
    
    18,333,277
    
    
    
    11,241,804
    
    
    
    29,804,948
    
    
    
    22,283,889GROSS PROFIT
    
    
    1,865,594
    
    
    
    1,551,757
    
    
    
    3,439,533
    
    
    
    3,039,709OPERATING EXPENSES:Selling, general & administrative
    
    
    1,298,241
    
    
    
    1,248,554
    
    
    
    2,417,250
    
    
    
    2,248,605Employee severance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,284(Gain) loss on asset sales
    
    
    (1,681
    )
    
    
    (375
    )
    
    
    1,348
    
    
    
    31,256OPERATING INCOME
    
    
    569,034
    
    
    
    303,578
    
    
    
    1,020,935
    
    
    
    713,564OTHER INCOME (EXPENSE):Interest expense
    
    
    (14,022
    )
    
    
    (79,155
    )
    
    
    (28,907
    )
    
    
    (177,288
    )Interest income and other income
    
    
    7,871
    
    
    
    3,050
    
    
    
    7,494
    
    
    
    7,606INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    562,883
    
    
    
    227,473
    
    
    
    999,522
    
    
    
    543,882INCOME TAX EXPENSE
    
    
    241,086
    
    
    
    91,119
    
    
    
    425,335
    
    
    
    224,428INCOME FROM CONTINUING OPERATIONS
    
    
    321,797
    
    
    
    136,354
    
    
    
    574,187
    
    
    
    319,454LOSS FROM DISCONTINUED OPERATIONS:Loss from operations of discontinued
segment, net of income taxes
    
    
    
    
    
    
    (146,506
    )
    
    
    
    
    
    
    (162,451
    )Loss from sale of discontinued
operations, net of income taxes of
$163,325
    
    
    
    
    
    
    (244,406
    )
    
    
    
    
    
    
    (244,406
    )NET INCOME (LOSS)
    
    $
    321,797
    
    
    $
    (254,558
    )
    
    $
    574,187
    
    
    $
    (87,403
    )BASIC EARNINGS (LOSS) PER SHARE:Income from continuing
operations
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.13
    
    
    $
    0.07Loss from operations of discontinued
segment
    
    
    
    
    
    $
    (0.04
    )
    
    
    
    
    
    $
    (0.04
    )Loss from sale of discontinued
operations
    
    
    
    
    
    $
    (0.05
    )
    
    
    
    
    
    $
    (0.05
    )Net Income (Loss)
    
    $
    0.07
    
    
    $
    (0.06
    )
    
    $
    0.13
    
    
    $
    (0.02
    )DILUTED EARNINGS (LOSS) PER SHARE:Income from continuing operations
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07Loss from operations of
discontinued segment
    
    
    
    
    
    $
    (0.03
    )
    
    
    
    
    
    $
    (0.04
    )Loss from sale of discontinued
operations
    
    
    
    
    
    $
    (0.05
    )
    
    
    
    
    
    $
    (0.05
    )Net Income (Loss)
    
    $
    0.07
    
    
    $
    (0.05
    )
    
    $
    0.12
    
    
    $
    (0.02
    )WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    4,582,344
    
    
    
    4,627,844
    
    
    
    4,582,344
    
    
    
    4,627,844Diluted
    
    
    4,604,783
    
    
    
    4,632,166
    
    
    
    4,597,317
    
    
    
    4,630,005
 See notes to condensed consolidated financial statements. 4




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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) SIX MONTHS ENDEDMarch 31,2004
    
    2003OPERATING ACTIVITIESIncome from continuing operations
    
    $
    574,187
    
    
    $
    319,454Noncash items in net income from continuing operationsDepreciation and amortization of property, plant and
equipment
    
    
    1,122,273
    
    
    
    1,288,217Amortization
    
    
    46,738
    
    
    
    221,177Loss on asset disposals-net
    
    
    1,348
    
    
    
    31,256Changes in operating working capital:Accounts receivable
    
    
    (3,718,122
    )
    
    
    269,893Inventories
    
    
    (3,123,619
    )
    
    
    193,634Prepaid expenses and other assets
    
    
    (119,983
    )
    
    
    (1,158,847
    )Accounts payable
    
    
    3,919,168
    
    
    
    (614,297
    )Accrued and other current liabilities
    
    
    16,170
    
    
    
    (192,231
    )Income taxes payable/receivable
    
    
    223,022
    
    
    
    113,006Net cash (used) provided by operating activities from
continuing operations
    
    
    (1,058,818
    )
    
    
    471,262INVESTING ACTIVITIESAdditions to property, plant and equipment
    
    
    (2,314,097
    )
    
    
    (1,757,426
    )Deposits made on lease of equipment
    
    
    
    
    
    
    (1,786,000
    )Proceeds from disposals of property, plant and equipment
    
    
    19,701
    
    
    
    67,260Increase in advances to stockholders
    
    
    
    
    
    
    (11,809
    )Net cash
used by investing activities from continuing operations
    
    
    (2,294,396
    )
    
    
    (3,487,975
    )FINANCING ACTIVITIESIssuance of short-term debt
    
    
    1,421,554
    
    
    
    Increase in restricted cash
    
    
    (750,096
    )
    
    
    Repayment of long-term debt
    
    
    
    
    
    
    (7,965,027
    )Issuance of long-term debt
    
    
    
    
    
    
    2,874,360Collections on stockholder notes receivable
    
    
    
    
    
    
    157,247Net cash
provided (used) by financing activities from continuing operations
    
    
    671,458
    
    
    
    (4,933,420
    )Net cash provided from discontinued operations:Proceeds from sale of discontinued operations (net of
transaction costs)
    
    
    
    
    
    
    11,740,052Net cash used by activities of discontinued operations
    
    
    
    
    
    
    (868,528
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    10,871,524NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (2,681,756
    )
    
    
    2,921,391CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    2,930,416
    
    
    
    251,346End of period
    
    $
    248,660
    
    
    $
    3,172,737
 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 six months ended March 31, 2004 and 2003
(Unaudited)  1.
    
    Basis of PresentationThe 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 six-month period ended March 31, 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
which 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.ReclassificationCertain amounts previously reported have been reclassified to conform to
the current presentation.Earnings Per ShareBasic 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 22,439 and 2,627 shares for the three months ended
March 31, 2004 and 2003, respectively. For the six months ended March 31,
2004 and 2003, the common equivalent shares from dilutive stock options
outstanding were 14,973 and 1,313 shares, respectively. During the three
months ended March 31, 2004 and 2003, options to purchase 223,700 shares
and 473,733 shares, respectively, were excluded from the diluted earnings
per share computation as the effects of such options would have been
anti-dilutive. For the six months ended March 31, 2004 and 2003, options
to purchase 294,333 shares and 487,567 shares, respectively, were excluded
from the diluted earnings per share computation.Stock Based CompensationStock 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 six months ended March 31, 2004 and 2003. 6




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Notes to condensed consolidated financial statements(continued) Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Income from
continuing operations as reported
    
    $
    321,797
    
    
    $
    136,354
    
    
    $
    574,186
    
    
    $
    319,454Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method of
all awards, net of
related tax effects
    
    
    (68,628
    )
    
    
    (17,700
    )
    
    
    (88,650
    )
    
    
    (35,400
    )Pro forma income from
continuing operations
    
    $
    253,169
    
    
    $
    118,654
    
    
    $
    485,535
    
    
    $
    284,054Earnings per share:Basic  as reported
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.13
    
    
    $
    0.07Basic  pro forma
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    0.06Diluted  as reported
    
    $
    0.07
    
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.07Diluted  pro forma
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    0.06
  2.
    
    InventoriesInventories consist of the following: March 31,
    
    September 30,2004
    
    2003Raw materials
    
    $
    5,951,270
    
    
    $
    3,042,120Finished goods
    
    
    1,063,432
    
    
    
    848,963Total inventories
    
    $
    7,014,702
    
    
    $
    3,891,083
  3.
    
    Severance costsThere were no severance costs related to the three months ended March 31,
2004 or 2003. For the six months ended March 31, 2004, the severance cost
was $0 compared to $46,284 during the six months ended March 31, 2003.
The 2003 costs are related to the elimination of several salary positions.4.
    
    Discontinued operationsOn 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(continued) Operating results from discontinued operations were as follows: Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2003
    
    2003Net sales
    
    $
    3,818,979
    
    
    $
    9,708,068Loss before income tax
    
    
    (244,409
    )
    
    
    (271,963
    )Income tax benefit
    
    
    97,903
    
    
    
    109,512Loss from discontinued segment
    
    $
    (146,506
    )
    
    $
    (162,451
    )
  5.
    
    Comprehensive Income (loss)Comprehensive Income for the three months ended March 31, 2004 was
$321,797 compared to Comprehensive Loss of $(242,797) for the three months
ended March 31, 2003.Comprehensive Income for the six months ended March 31, 2004 was $574,186
compared to Comprehensive Loss $(63,318) for the six months ended
March 31, 2003.Components of Comprehensive Income are as follows: Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    321,797
    
    
    $
    (254,558
    )
    
    $
    574,186
    
    
    $
    (87,403
    )Other comprehensive
income, net of tax:Changes in fair value
of interest rate
swap contract
    
    
    0
    
    
    
    11,811
    
    
    
    0
    
    
    
    24,085Comprehensive income (loss)
    
    $
    321,797
    
    
    $
    (242,747
    )
    
    $
    574,186
    
    
    $
    (63,318
    )
  6.
    
    Segment InformationThe 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(continued) Three Months Ended
    
    Contract
    
    Business
    
    CorporateMarch 31, 2004
    
    Manufacturing
    
    Imaging
    
    and Other
    
    ConsolidatedNet sales
    
    $
    14,151,617
    
    
    $
    6,047,254
    
    
    $
    
    
    
    $
    20,198,871Gross profit
    
    
    1,180,098
    
    
    
    685,496
    
    
    
    
    
    
    
    1,865,594Operating income (loss)
    
    
    552,293
    
    
    
    303,334
    
    
    
    (286,593
    )
    
    
    569,034Depreciation and
amortization expense
    
    
    277,989
    
    
    
    129,029
    
    
    
    181,838
    
    
    
    588,856Capital expenditures
    
    
    1,489,726
    
    
    
    14,355
    
    
    
    
    
    
    
    1,504,081Assets:Inventories
    
    
    4,787,451
    
    
    
    2,227,251
    
    
    
    
    
    
    
    7,014,702Property, plant and
equipment-net
    
    
    11,703,318
    
    
    
    2,959,153
    
    
    
    827,211
    
    
    
    15,489,682Accounts receivable
and other
(including goodwill)
    
    
    13,211,453
    
    
    
    6,070,322
    
    
    
    2,393,701
    
    
    
    21,675,476Total assets
    
    $
    29,702,222
    
    
    $
    11,256,726
    
    
    $
    3,220,912
    
    
    $
    44,179,860
 Three Months Ended
    
    Contract
    
    Business
    
    CorporateMarch 31, 2003
    
    Manufacturing
    
    Imaging
    
    and Other
    
    ConsolidatedNet sales
    
    $
    6,824,030
    
    
    $
    5,969,531
    
    
    $
    
    
    
    $
    12,793,561Gross profit
    
    
    825,541
    
    
    
    726,216
    
    
    
    
    
    
    
    1,551,757Operating income (loss)
    
    
    490,018
    
    
    
    330,636
    
    
    
    (517,076
    )
    
    
    303,578Depreciation and
amortization expense
    
    
    255,744
    
    
    
    129,502
    
    
    
    455,788
    
    
    
    841,034Capital expenditures
    
    
    1,459,779
    
    
    
    102,951
    
    
    
    11,829
    
    
    
    1,574,559Assets:Inventories
    
    
    1,251,417
    
    
    
    2,118,898
    
    
    
    
    
    
    
    3,370,315Property, plant and
equipment-net
    
    
    10,088,810
    
    
    
    3,388,627
    
    
    
    1,570,758
    
    
    
    15,048,195Accounts receivable
and other
(including goodwill)
    
    
    6,869,217
    
    
    
    6,170,167
    
    
    
    8,200,048
    
    
    
    21,239,432Total assets
    
    $
    18,209,444
    
    
    $
    11,677,692
    
    
    $
    9,770,806
    
    
    $
    39,657,942
 9




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Notes to condensed consolidated financial statements(continued) Six Months Ended
    
    Contract
    
    Business
    
    CorporateMarch 31, 2004
    
    Manufacturing
    
    Imaging
    
    and Other
    
    ConsolidatedNet sales
    
    $
    21,133,812
    
    
    $
    12,110,669
    
    
    $
    
    
    
    $
    33,244,481Gross profit
    
    
    2,007,201
    
    
    
    1,432,333
    
    
    
    
    
    
    
    3,439,533Operating income (loss)
    
    
    933,711
    
    
    
    732,446
    
    
    
    (645,222
    )
    
    
    1,020,935Depreciation and
amortization expense
    
    
    538,566
    
    
    
    258,556
    
    
    
    371,889
    
    
    
    1,169,011Capital expenditures
    
    
    2,231,138
    
    
    
    82,959
    
    
    
    
    
    
    
    2,314,097
 Six Months Ended
    
    Contract
    
    Business
    
    CorporateMarch 31, 2003
    
    Manufacturing
    
    Imaging
    
    and Other
    
    ConsolidatedNet sales
    
    $
    13,490,789
    
    
    $
    11,832,809
    
    
    $
    
    
    
    $
    25,323,598Gross profit
    
    
    1,603,428
    
    
    
    1,436,281
    
    
    
    
    
    
    
    3,039,709Operating income (loss)
    
    
    891,051
    
    
    
    671,512
    
    
    
    (848,999
    )
    
    
    713,564Depreciation and
amortization expense
    
    
    529,583
    
    
    
    257,494
    
    
    
    722,317
    
    
    
    1,509,394Capital expenditures
    
    
    3,482,204
    
    
    
    132,805
    
    
    
    (71,583
    )
    
    
    3,543,426
   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 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 folding, packaging, coating,
slitting and rewinding, sheeting, 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
    
    Period-to-Period
    
    Six Months Ended
    
    Period-to-PeriodMarch 31,
    
    Change
    
    March 31,
    
    Change2004
    
    2003
    
    $
    
    %
    
    2004
    
    2003
    
    $
    
    %Net Sales
    
    $
    20,199
    
    
    $
    12,794
    
    
    
    7,405
    
    
    
    58
    
    
    $
    33,244
    
    
    $
    25,324
    
    
    
    7,920
    
    
    
    31Gross Profit
    
    
    1,866
    
    
    
    1,552
    
    
    
    314
    
    
    
    20
    
    
    
    3,440
    
    
    
    3,040
    
    
    
    400
    
    
    
    139.2
    %
    
    
    12.1
    %
    
    
    
    
    
    
    
    
    
    
    10.3
    %
    
    
    12.0
    %Operating Expenses
    
    
    1,297
    
    
    
    1,248
    
    
    
    49
    
    
    
    4
    
    
    
    2,419
    
    
    
    2,326
    
    
    
    93
    
    
    
    46.4
    %
    
    
    9.8
    %
    
    
    
    
    
    
    
    
    
    
    7.3
    %
    
    
    9.2
    %Operating Income
    
    
    569
    
    
    
    304
    
    
    
    265
    
    
    
    87
    
    
    
    1,021
    
    
    
    714
    
    
    
    307
    
    
    
    432.8
    %
    
    
    2.4
    %
    
    
    
    
    
    
    
    
    
    
    3.1
    %
    
    
    2.8
    %Interest Expense
    
    
    14
    
    
    
    79
    
    
    
    (65
    )
    
    
    -82
    
    
    
    29
    
    
    
    177
    
    
    
    (148
    )
    
    
    -840.1
    %
    
    
    0.6
    %
    
    
    
    
    
    
    
    
    
    
    0.1
    %
    
    
    0.7
    %Income from
Continuing Operations
Before Income Taxes
    
    
    563
    
    
    
    227
    
    
    
    336
    
    
    
    148
    
    
    
    1,000
    
    
    
    544
    
    
    
    456
    
    
    
    842.8
    %
    
    
    1.8
    %
    
    
    
    
    
    
    
    
    
    
    3.0
    %
    
    
    2.1
    %Income Tax Expense
    
    
    241
    
    
    
    91
    
    
    
    150
    
    
    
    165
    
    
    
    425
    
    
    
    224
    
    
    
    201
    
    
    
    90l.2
    %
    
    
    0.7
    %
    
    
    
    
    
    
    
    
    
    
    1.3
    %
    
    
    0.9
    %Income from Continuing
Operations
    
    
    322
    
    
    
    136
    
    
    
    186
    
    
    
    137
    
    
    
    574
    
    
    
    319
    
    
    
    255
    
    
    
    801.6
    %
    
    
    1.1
    %
    
    
    
    
    
    
    
    
    
    
    1.7
    %
    
    
    1.3
    %Loss from Discontinued
Operations, Net of Tax
    
    
    
    
    
    
    (391
    )
    
    
    391
    
    
    
    -100
    
    
    
    
    
    
    
    (407
    )
    
    
    407
    
    
    
    -100
    
    
    
    -3.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -1.6
    %Net Income (Loss)
    
    $
    322
    
    
    $
    (255
    )
    
    
    577
    
    
    
    -226
    
    
    
    574
    
    
    
    (87
    )
    
    
    661
    
    
    
    -7601.6
    %
    
    
    -2.0
    %
    
    
    
    
    
    
    
    
    
    
    1.7
    %
    
    
    -0.3
    %
 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 EndedMarch 31,2004
    
    2003
    
    Period-to-Period Change% of
    
    
    
    
    
    % ofAmount
    
    Total
    
    Amount
    
    Total
    
    $
    
    %Net salesContract manufacturing and printing
    
    $
    14,152
    
    
    
    70
    %
    
    $
    6,824
    
    
    
    53
    %
    
    $
    7,328
    
    
    
    107
    %Business imaging paper products
    
    
    6,047
    
    
    
    30
    
    
    
    5,970
    
    
    
    47
    
    
    
    77
    
    
    
    1Net sales
    
    $
    20,199
    
    
    
    100
    %
    
    $
    12,794
    
    
    
    100
    %
    
    $
    7,405
    
    
    
    58
    %2004
    
    2003
    
    Period-to-Period ChangeMargin
    
    
    
    
    
    MarginAmount
    
    %
    
    Amount
    
    %
    
    $
    
    %Gross profit (loss)Contract manufacturing and printing
    
    $
    1,180
    
    
    
    8
    %
    
    $
    826
    
    
    
    12
    %
    
    $
    354
    
    
    
    43
    %Business imaging paper products
    
    
    685
    
    
    
    11
    
    
    
    726
    
    
    
    12
    
    
    
    (41
    )
    
    
    (6
    )Gross profit
    
    $
    1,865
    
    
    
    9
    %
    
    $
    1,552
    
    
    
    12
    %
    
    $
    313
    
    
    
    20
    %Six Months EndedMarch 31,2004
    
    2003
    
    Period-to-Period Change% of
    
    
    
    
    
    % ofAmount
    
    Total
    
    Amount
    
    Total
    
    $
    
    %Net salesContract manufacturing and printing
    
    $
    21,134
    
    
    
    64
    %
    
    $
    13,491
    
    
    
    53
    %
    
    $
    7,643
    
    
    
    57
    %Business imaging paper products
    
    
    12,110
    
    
    
    36
    
    
    
    11,833
    
    
    
    47
    
    
    
    277
    
    
    
    2Net sales
    
    $
    33,244
    
    
    
    100
    %
    
    $
    25,324
    
    
    
    100
    %
    
    $
    7,920
    
    
    
    31
    %2004
    
    2003
    
    Period-to-Period ChangeMargin
    
    
    
    
    
    MarginAmount
    
    %
    
    Amount
    
    %
    
    $
    
    %Gross profit (loss)Contract manufacturing and printing
    
    $
    2,007
    
    
    
    9
    %
    
    $
    1,604
    
    
    
    12
    %
    
    $
    403
    
    
    
    25
    %Business imaging paper products
    
    
    1,432
    
    
    
    12
    
    
    
    1,436
    
    
    
    12
    
    
    
    (4
    )
    
    
    Gross profit
    
    $
    3,439
    
    
    
    10
    %
    
    $
    3,040
    
    
    
    12
    %
    
    $
    399
    
    
    
    13
    % 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 $7.4 million (58%) to $20.2 million in the
second quarter of fiscal 2004, when compared to the same period last year.
This is due to an increase of $7.3 million or 107% in the Contract
Manufacturing segment and an increase of $0.1 million or 1% in the Business
Imaging segment. Two factors contributed to this increase. In Contract Manufacturing, some
customers furnish raw materials and others request the Company to purchase raw
materials and pass the cost through in the sales price. In the second quarter
of 2004, more customers requested that the Company purchase raw materials and,
in comparison to the second quarter of 2003, this resulted in an increase of
$6.3 million in revenue. The remainder of the increase was a $1.1 million
increase in toll revenue in Contract Manufacturing as new projects came on line
during the quarter. Tolls are revenues which do not include a pass through of
material costs. For the six months ended March 31, 2004, sales increased $7.9 million of which
$7.4 million occurred in the second quarter as described above. Gross Profit: Gross profit increased $314,000 (20%) for the second quarter of fiscal 2004
when compared to the second quarter of fiscal 2003. The Contract Manufacturing
segment increased $400,000 due to the higher toll revenue. This was offset by
an increase in indirect salaries and wages primarily due to start-up and
training costs associated with the Companys new dry/wet converting lines.
Gross profit declined $41,000 in Business Imaging primarily due to competitive
pricing pressures. For the six months ended March 31, 2004, gross profit increased $400,000
representing primarily the second quarter increase in contract manufacturing.
Business Imaging was relatively flat when comparing the two periods. Operating Expenses: Operating expenses increased $49,000 for the second quarter of 2004 compared to
the second quarter of 2003 and increased $93,000 for the first six months of
fiscal 2004 compared to the year ago period, an increase of 4% for each period.
Increases in legal and audit expenses, bad debt expense primarily due to a
Business Imaging customers bankruptcy, and employee benefits were offset by a
reduction in administrative salaries and equipment depreciation. Interest Expense and Other Income (Expense)-net: Interest expense decreased $65,000 to $14,000 for the second quarter compared
to last year and decreased $148,000 in comparing the six months, due to
decreased borrowings. 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 second quarter of fiscal 2004, versus a net loss of $0.3
million [per share: ($0.06) basic and ($0.05) 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 second quarter of 2004 compared to $0.1 million (per
share: $0.03 basic and diluted) for 2003. For the six months ended March 31, 2004, net income was $0.6 million (per
share: $0.13 basic and $0.12 diluted) compared to a net loss of $0.1 million
(per share: $0.02 basic and diluted) for the first six months of fiscal 2003.
Income from continuing operations was $0.6 million (per share: $0.13 basic and
$0.12 diluted) for the first six months of 2004 compared to $0.3 million (per
share: $0.07 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 six months of fiscal 2004, compared to generating cash flow from
continuing operations of $0.5 million for the same period last year. Increases
in inventories ($3.1 million) primarily represented materials purchased for new
projects. As explained in Net Sales above, more customers are requesting the
Company to purchase materials rather than supplying them. Cash was reduced by
an increase of accounts receivable ($3.7 million) resulting from the increased
revenues. Net cash used in investing activities was $2.3 million for the first six 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 six months, $2.3 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 such amounts will be funded by cash from
operations and bank borrowings. Net cash provided by financing activities was $0.7 million for the first six
months of fiscal 2004 as a result of the Company borrowing from its revolving
credit line to fund its increased working capital needs. During the quarter,
the Company placed funds of $.8 million with the Trustee for redemption of
outstanding Industrial Development Bonds scheduled to occur on May 6, 2004. There was no net cash provided or used by discontinued operations for the six
months ended March 31, 2004. For 2003, discontinued operations provided $10.9
million in cash. As of March 31, 2004, the Company had approximately $4.6 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 March 31, 2004, the Company was in compliance with
all of its debt covenants under the credit facility. The Companys current credit facility expires June 1, 2004. The Company is in
the process of replacing this facility with a new unsecured, $10 million
facility. It is anticipated this transaction will be completed in May 2004. 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 share 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. Critical Accounting Policies: The condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles 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 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 14




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsContinued 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 March 31, 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 March 31, 2004. There have been no changes in the Companys internal control over financial
reporting during the second fiscal quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect the
Companys internal control over financial reporting. 15




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following summarizes the Annual Meeting highlights:  (a)
    
    The Annual Meeting of Shareholders of the Company was held on
March 9, 2004.(b)
    
    See the response to Item 4 (c) below.(c)
    
    At the Annual Meeting, shareholders elected the following
individuals to the Board of Directors for one-year terms: Director
    
    For
    
    WithheldRobert J. Simon
    
    
    4,491,687
    
    
    
    8,869Samuel J. Bero
    
    
    4,491,512
    
    
    
    9,044C. Hamilton Davison, Jr.
    
    
    4,487,897
    
    
    
    12,659Louis LeCalsey, III
    
    
    4,491,697
    
    
    
    8,859William J. Malooly
    
    
    4,487,912
    
    
    
    12,644Seymour S. Preston, III
    
    
    4,486,012
    
    
    
    14,544
  The shareholders ratified the selection of Deloitte & Touche LLP as
independent auditors for the Company for the fiscal year ending
September 30, 2004. The results at the voting for the ratification of
Deloitte & Touche LLP are as follows: For
    
    Against
    
    Abstain4,487,456
    
    
    12,100
    
    
    
    1,000
  The shareholders approved the 2004 Non-Employee Director Stock Option
Plan. The results at the voting for the approval of the 2004
Non-Employee Director Stock Option Plan are as follows: For
    
    Against
    
    Abstain
    
    Broker Non-Vote3,340,160
    
    
    86,335
    
    
    
    765
    
    
    
    1,073,296
  (d)
    
    Not applicable. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    EXHIBITS.  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 onForm 8-K.The Company filed Current Report on Form 8-K on February 13, 2004
regarding the Companys first fiscal quarter. 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: May 14, 2004
    
    /s/ Louis LeCalsey, III
Louis LeCalsey, IIIPresident and Chief Executive OfficerDate: May 14, 2004
    
    /s/ Michael B. Wheeler

Michael B. WheelerVice President and Chief Financial Officer
 17