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.

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.

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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

Index

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PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.
*Condensed from audited financial statements.

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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

See notes to condensed consolidated financial statements.

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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

See notes to condensed consolidated financial statements.

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TUFCO TECHNOLOGIES, INC. AND SUBSIDIARIES

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.

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Notes to condensed consolidated financial statements (unaudited)—(continued)

2. Inventories

     Inventories consist of the following:

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.

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Notes to condensed consolidated financial statements (unaudited)—(continued)

Operating results from discontinued operations were as follows:

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:

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.

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Notes to condensed consolidated financial statements (unaudited)—(continued)

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     Notes to condensed consolidated financial statements (unaudited)—(continued)

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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):

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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)

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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).

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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

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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.

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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.

     (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.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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