<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934)
For the transition period from __________ to ____________.
Commission File Number : 0-20967
UFP Technologies, Inc.
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(Exact Name of Company as Specified in Its Charter)
<TABLE>
<S> <C>
Delaware 04-2314970
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(State or Other Jurisdiction of Employer (I.R.S. Identification No.)
Incorporation or Organization)
172 East Main Street, Georgetown, Massachusetts - USA 01833-2107
- ----------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(978) 352-2200
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(Company's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of Each Class Name of Each Exchange on Which Registered
None None
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</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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
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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 if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock, $.01 par
value, held by non-affiliates of the registrant as of March 2, 1998 was
$6,710,412 based on the closing price of $4.00 on that date on the Nasdaq
National Market. As of March 2, 1998, 4,666,354 shares of the registrant's
Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement involving the election of
directors, which is expected to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated by reference in Part III of this
report.
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PART I
This report contains certain statements that are "forward-looking statements" as
that term is defined under the Private Securities Litigation Reform Act of 1995
(the "Act") and releases issued by the Securities and Exchange Commission. The
words "believe," "expect," "anticipate," "intend", "estimate" and other
expressions which are predictions of or indicate future events and trends and
which do not relate to historical matters identify forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors, which may cause the actual results, performance or achievements
of the Company to differ materially from anticipated future results, performance
or achievements expressed or implied by such forward-looking statements.
Examples of these risks, uncertainties, and other factors include, without
limitation, the following: (i) economic conditions that affect sales of the
products of the Company's packaging customers, (ii) actions by the Company's
competitors and the ability of the Company to respond to such actions, (iii) the
ability of the Company to obtain new customers and (iv) the ability of the
Company to execute favorable acquisitions. In addition to the foregoing, the
Company's actual future results could differ materially from those projected in
the forward-looking statements as a result of the risk factors set forth in the
Company's various filings with the Securities and Exchange Commission and
changes in general economic conditions, interest rates and the assumptions used
in making such forward-looking statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
ITEM 1. BUSINESS
UFP Technologies, Inc. (the "Company" or "UFPT") designs and manufactures
a broad range of high-performance cushion packaging and specialty foam products
and 100% recycled molded fiber packaging products for a variety of industrial
and consumer markets. The Company is a leading U.S. manufacturer of
custom-designed cushion foam packaging products and engineered specialty foam
and laminated products. Its Moulded Fibre Technology subsidiary's ("MFT")
products offer a functional and environmentally responsible alternative to
plastic-based packaging products in the high volume consumer packaging market.
The Company believes that MFT is the North American market leader in specialty,
interior protective packaging applications of molded fiber.
Effective January 1, 1997, the Company acquired substantially all of the
properties and net assets of Foam Cutting Engineers, Inc. ("FCE"). FCE is
engaged in the business of designing and manufacturing engineered foam plastics
for packaging and specialty applications, and is based in the Chicago suburb of
Addison, Illinois. This acquisition expands the Company's geographic reach of
its foam plastics business to the strategically important region of the Midwest.
In January 1997, the Company entered into a foreign licensing agreement
with United Kingdom based Rexam PLC, one of Europe's largest packaging
companies. The license expands the geographic reach of the Company's molded
fiber technology to the United Kingdom and Ire-
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land. In the Far East, its China based licensee, Starlite Holdings, completed
the installation of the Company's molded fiber equipment and commenced
operations in January, 1997.
The Company's high-performance cushion packaging products are made
primarily from polyethylene and polyurethane foams, and a wide range of sheet
plastics. These products are custom designed and fabricated or molded to provide
protection for fragile and valuable items, and are sold primarily to original
equipment and component manufacturers in the computer, electronics,
telecommunications, industrial, medical and pharmaceutical markets.
The Company's molded fiber products are made primarily from 100% recycled
paper, principally derived from waste newspaper. These products are custom
designed, engineered and molded into shapes for packaging high volume consumer
goods, including computer components, medical devices and other light
electronics.
In addition to packaging products, the Company fabricates and molds
specialty products made from cross-linked polyethylene foam and other materials.
The Company also laminates fabrics and other materials to cross-linked
polyethylene foams, polyurethane foams and other substrates. The Company's
specialty products include athletic and industrial safety belts, components for
medical diagnostic equipment and shock absorbing inserts used in athletic and
leisure footwear.
The Company was incorporated in Massachusetts under the name United
Packaging Corporation in 1963. The Company changed its name to United Foam
Plastics Corporation in 1973 and to UFP Technologies, Inc. in October 1993. In
November 1993, the Company reincorporated in Delaware. In December 1993, the
Company completed an initial public offering of its Common Stock and acquired
MFT. Unless the context otherwise requires, the term "Company" or "UFPT"
reflects the re-incorporation of UFP Technologies, Inc. and refers to UFP
Technologies, Inc. and its subsidiary, MFT. The Company's principal offices are
located at 172 East Main Street, Georgetown, Massachusetts 01833, and its
telephone number is (978) 352-2200.
Market Overview
Packaging Products. The interior cushion packaging market is characterized
by three primary segments: (1) custom fabricated or molded products for low
volume, high fragility products; (2) molded or die-cut products for high volume,
industrial and consumer goods; and (3) loose fill and commodity packaging
materials for products which do not require custom-designed packaging. Packaging
products are used to contain, display and/or protect their contents during
shipment, handling, storage, marketing and use. The Company serves both the low
volume, high fragility market and the high volume industrial and consumer market
with a range of product offerings but does not serve the lower-end loose fill
and commodity packaging market.
The low volume, high fragility market is generally characterized by annual
production volumes of less than 50,000 pieces. Typical goods in this market
include precision instruments, medical devices, sensitive electronic components
and other high value industrial products that are very sensitive to shock,
vibration and other damage that may occur during shipping and distribution. The
principal materials used to package these goods include polyethylene and
polyurethane foams,
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foam-in-place polyurethane and molded expanded polystyrene. Polyurethane foams
and polyethylene foams have high shock absorbency, high resiliency and vibration
damping characteristics.
The higher volume consumer packaging market is generally characterized by
annual production volumes in excess of 50,000 pieces. Typical goods in this
market include toys, light electronics, computers and computer peripherals,
stereo equipment and small appliances. These goods generally do not require as
high a level of shock and vibration protection as goods in the low volume, high
fragility market. The principal materials used to package these goods include
various molded, rigid and foamed plastics, such as expanded polystyrene foam
(EPS), vacuum-formed polystyrene (PS) and polyvinyl chloride (PVC), and
corrugated die-cut inserts, which generally are less protective and less
expensive than resilient foams. The Company believes that molded fiber is
increasingly being used as an alternative medium to these materials.
Specialty Products. Specialty applications of foam and other types of
plastics are numerous and diverse. Examples of uses of specialty foam products
include medical devices, toys, gaskets and carrying cases. Cross-linked
polyethylene foams have many of the same properties as traditional polyethylene
foams, including light weight, durability, resiliency and flexibility.
Cross-linked foams also have many advantages over traditional foams, including
the ability to be thermoformed (molded), availability in vibrant colors, a fine
cell structure providing improved esthetics and lower abrasiveness, and enhanced
resistance to chemicals and ultraviolet light. Certain grades of cross-linked
foams can be radiation sterilized and have been approved by the U.S. Food and
Drug Administration for open wound skin contact.
Cross-linked foam can also be combined with other materials to increase
product usages and market applications. For example, cross-linked foams can be
laminated to fabrics to produce light weight, flexible and durable insoles for
athletic and walking shoes, weight lifting and industrial safety belts, gun
holsters, backpacks, and other products for the leisure, athletic and retail
markets. The Company believes that, as a result of its many advantages,
cross-linked foam and cross-linked foam laminated products are increasingly
being used in a wide range of markets as substitutes for traditional rubber,
leather and other product material alternatives.
Regulatory Climate
The packaging industry has been subject to increasing user, industry, and
legislative pressure to develop environmentally responsible packaging
alternatives that reduce, reuse and recycle packaging materials. Government
authorities have enacted legislation relating to source reduction, specific
product bans, recycled content, recyclability requirements and "green marketing"
restrictions.
In order to provide packaging that complies with all regulations
regardless of a product's destination, manufacturers have begun to seek
packaging materials that meet both environmentally related demands and
performance specifications. Some packaging manufacturers have responded by:
reducing product volume and ultimate waste product disposal through
reengineering traditional packaging products; adopting new manufacturing
processes; participating in recovery and reuse systems for resilient materials
that are inherently reusable; creating programs to recycle packaging
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following its useful life; and developing materials that use a high percentage
of recycled content in their manufacture. The Company believes that
environmental sensitivity in the packaging industry will continue to increase,
and that a growing market exists for packaging products that address
environmental concerns.
Products
The Company's products include foam and plastic packaging products, molded
fiber packaging products and specialty foam products.
Foam and Plastic Packaging Products. The Company designs, manufactures and
markets a broad range of packaging products primarily using polyethylene,
polyurethane and cross-linked polyethylene foams and rigid plastics. These
products are custom designed and fabricated or molded to provide optimum
protection for less durable, higher value items, and are primarily sold to
original equipment and component manufacturers in the computer, electronics,
telecommunications, industrial, medical and pharmaceutical markets. Examples of
the Company's packaging products include end cap packs for computers, corner
blocks for telecommunications consoles, anti-static foam packs for printed
circuit boards, die-cut inserts for attache cases and plastic trays for medical
devices and components. Markets for these products are typically characterized
by lower to moderate volumes where performance, such as shock absorbency and
vibration damping, is valued.
The Company's engineering personnel collaborate directly with customers to
study and evaluate specific customer requirements. Based on the results of this
evaluation, packaging products are engineered to customer specifications using
various types and densities of materials with the goal of providing the desired
protection for the lowest cost and with the lowest package volume. The Company
believes that its engineering expertise and breadth of product and manufacturing
capabilities have enabled it to provide unique solutions to achieve these goals.
Molded Fiber Packaging Products. The Company's molded fiber products
provide customers with packaging solutions that are more responsive to
increasingly stringent environmental packaging regulations worldwide and meet
the rising demands of environmentally-aware consumers, while simultaneously
meeting customer cost and performance objectives.
Molded fiber packaging products serve markets traditionally served by
expanded polystyrene (EPS), vacuum formed polystyrene (PS) and polyvinyl
chloride (PVC), and manually assembled corrugated die-cut inserts. The Company
believes that molded fiber is currently one of the few environmentally
responsible alternatives to these materials in the high volume interior
packaging market.
The markets for the Company's molded fiber packaging are characterized by
high volume production runs and require rapid manufacturing turnaround times.
Raw materials used in the manufacture of molded fiber are primarily recycled
newspaper, a variety of other grades of recycled paper and water.
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The unique characteristics of molded fiber packaging can result in cost,
space, shipping, labor and inventory savings to the customer. The Company's
molded fiber products can be nested and, accordingly, provide significant
storage volume reductions over competing foam products, resulting in shipping
and inventory savings to the end user. Molded fiber has also experienced
increasing demand as a replacement for manually assembled corrugated die-cut
inserts, which are in disfavor due to ergonomic and worker safety concerns
caused by repetitive motion assembly operations. In addition, simplification of
packaging assembly lines, previously using corrugated die-cut inserts, through
the use of molded fiber packaging can result in significant labor savings to
manufacturers. Sales of the Company's molded fiber products have been to the
computer, consumer electronics and medical industries.
Specialty Foam Products. The Company specializes in engineered products
that use the Company's close tolerance manufacturing capabilities and its
expertise in various foam materials and lamination techniques, as well as the
Company's ability to manufacture in clean room environments. The Company's
specialty products are sold primarily to customers in the sporting goods,
medical, leisure and footwear industries. These products include components for
medical diagnostic equipment and shock absorbing inserts used in athletic and
leisure footwear.
The Company believes that it is one of the largest purchasers of
cross-linked foam in the U.S. and as a result it has been able to establish
important relationships with the relatively small number of suppliers of this
product. Through its strong relationships with cross-linked foam suppliers, the
Company believes that it is able to offer customers a wide range of cross-linked
foam products.
The Company also benefits from its ability to custom design its own
proprietary manufacturing equipment in conjunction with its machinery suppliers.
For example, the Company has custom designed its own flame lamination
manufacturing machines allowing the Company to achieve adhesive bonds between
cross-linked foam and fabric and other materials that do not easily combine.
These specialty laminates typically command higher prices than traditional foam
products.
Marketing and Sales
The Company markets and sells its packaging and specialty products in the
United States principally through direct regional sales forces comprised of
skilled engineers. The Company also uses independent manufacturer
representatives on a limited basis to sell its products in regions where it does
not have coverage. The Company's sales engineers collaborate with customers and
the Company's design and manufacturing experts to develop custom engineered
solutions on a cost-effective basis. The Company also markets its products
through attendance by in-house market specialists at trade shows and
expositions. The Company has been experiencing growing sales of its molded fiber
packaging products for computer peripherals and other consumer products. As a
result, the Company believes that its sales are somewhat seasonal, with
increased sales in the second half of the year.
Internationally, the Company is seeking to establish exclusive licensing
arrangements for the manufacture and distribution of its molded fiber product
line with foreign companies for desig-
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nated territories. The Company has entered into a license agreement with Hong
Kong-based Starlite Holdings, covering Guandong Province, mainland China and
Hong Kong, and United Kingdom-based Rexam PLC covering the United Kingdom and
Ireland. Under these arrangements the manufacturer must pay the Company a lump
sum royalty in exchange for the requisite equipment for production of molded
fiber products and, thereafter, a continuing royalty for the right to
manufacture and distribute molded fiber products in their respective
territories. Starlite completed installation of the Company's equipment and
commenced operations in January 1997. Rexam entered into its license agreement
with the Company and began production under that license in January 1997.
Manufacturing
The Company's manufacturing operations consist primarily of cutting,
molding, vacuum forming, laminating and assembly. For custom molded foam
products, the Company's skilled engineering personnel analyze specific customer
requirements to design and build prototype products to determine product
functionality. Upon customer approval, prototypes are converted to final designs
for commercial production runs.
Molded cross-linked foam products are produced in a thermoforming process
using heat, pressure, and precision metal tooling.
Cushion foam packaging products that are not cross-linked are fabricated
by cutting shapes from blocks of foam using specialized cutting tools, routers
and hot wire equipment and assembling these shapes into the final product using
a variety of foam welding or gluing techniques. Products can be used on a
stand-alone basis or bonded to another foam product or other material such as a
corrugated medium.
Laminated products are produced through a process whereby the foam medium
is heated to the melting point. The heated foam is then typically bonded to a
non-foam material through the application of mechanical pressure.
Molded fiber products are manufactured by vacuum forming a pulp of
recycled or virgin paper materials onto custom engineered molds. With the
application of vacuum and air, the molded parts are pressed and transferred to
an in-line conveyorized dryer, from which they exit ready for packing or
subsequent value added operations.
The Company does not manufacture any of the raw materials used in its
products. With the exception of certain grades of cross-linked foam, these raw
materials are available from multiple supply sources. Although the Company
relies upon a limited number of suppliers for cross-linked foam, the Company's
relationships with such suppliers are good, and the Company expects that these
suppliers will be able to meet the Company's requirements for cross-linked foam.
Any delay or interruption in the supply of raw materials could have a material
adverse effect on the Company's business.
Research and Development
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The Company's engineering personnel continually explore design and
manufacturing techniques to meet the unique demands and specifications of its
customers. In addition, the Company regularly undertakes customer-initiated
engineering feasibility studies for which the Company is compensated regardless
of whether such projects result in commercial production contracts. Because the
Company's products tend to have short life cycles, research and development is
an integral part of the Company's ongoing cost structure.
Competition
The packaging products industry is highly competitive. While there are
several national companies that sell interior packaging, the Company's primary
competition to date for its custom-designed cushion foam packaging products has
been from smaller independent regional manufacturing companies. These companies
generally market their products in specific geographic areas from neighboring
facilities. In addition, the Company's foam packaging products compete against
products made from alternative materials, including expanded polystyrene foams,
die-cut corrugated, plastic peanuts, plastic bubbles and foam-in-place urethane.
MFT has been instrumental in developing the molded fiber cushion packaging
market. However, the Company believes that its competitors, some of whom have
substantially greater resources than the Company, are developing and selling
competing molded fiber packaging products. Moreover, the Company's molded fiber
products face intense competition from other products, particularly those made
from molded plastic and corrugated mediums, that currently dominate the consumer
cushion packaging market and are manufactured by a wide range of companies.
Competition in the engineered specialty foam products industry is also
intensive. The Company's specialty foam products face competition primarily from
smaller companies that typically concentrate on production of specialty products
for specific industries. The Company expects that additional companies will
enter the market for engineered specialty foam products as the market expands.
The Company believes that its engineering expertise, its ability to combine
foams with other materials such as plastics and laminates and its ability to
manufacture products in a clean room environment will enable it to continue to
compete effectively in the engineered specialty foam products market. The
Company's specialty products also compete with products made from a wide range
of other materials, including rubber, leather and other foams.
The Company believes that its customers typically select vendors based
primarily on price, product performance, product reliability and customer
service. The Company believes that it is able to compete effectively with
respect to these factors in each of its targeted markets.
Patents and Other Proprietary Rights
The Company relies upon trade secret and patent protection to protect its
technology. The Company believes that the improvement of existing products,
reliance upon trade secrets and unpatented proprietary know-how and the
development of new products are generally as important as patent protection in
establishing and maintaining a competitive advantage. Nevertheless, the Company
has obtained patents and will continue to make efforts to obtain patents, when
available, al-
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though there can be no assurance that any patent obtained will provide
substantial protection or be of commercial benefit to the Company, or that its
validity will be upheld if challenged.
The Company has two U.S. patents and one U.S. patent application pending
relating to its molded fiber technology (including certain proprietary machine
designs) and has preserved foreign patent rights with respect to this patent and
patent application in certain foreign countries. The Company also has seven U.S.
patents relating to its foam and packaging technologies. There can be no
assurance that any of the Company's patent applications will be granted or that
any patent or patent application of the Company will provide significant
protection for the Company's products and technology. The expiration dates for
the Company's patents range from February 2003 through August 2014.
The Company has expanded the geographic reach of its molded fiber products
by licensing its molded fiber patents and technology on an exclusive basis to
Rexam in the United Kingdom and Starlite in China, covering the manufacture and
sale of molded fiber products in the United Kingdom, Ireland, China and certain
other Asian countries. See "Marketing and Sales."
Environmental Considerations
In addition to offering molded fiber packaging products made from recycled
paper, derived primarily from post consumer newspaper waste, the Company
actively promotes its philosophy of reducing product volume and resulting
post-user product waste. The Company designs products to provide optimum
performance with minimum material. In addition, the Company actively
participates in a recovery and reuse program for certain of its plastic
packaging products. The Company is aware of public opposition to environmentally
incompatible packaging and other products and that future government action may
impose restrictions affecting the industry in which the Company operates. There
can be no assurance that any such action will not adversely impact the Company's
products and business.
Backlog
The Company's backlog as of March 2, 1998, and March 1, 1997 totaled
approximately $8.4 million and $8.3 million, respectively. The backlog consists
of purchase orders for which a delivery schedule within the next twelve months
has been specified by customers. Orders included in the backlog may be canceled
or rescheduled by customers without significant penalty. The backlog as of any
particular date should not be relied upon as indicative of the Company's
revenues for any period.
Employees
As of March 2, 1998, the Company had 415 full-time employees, including 22
in engineering, 324 in manufacturing operations, 38 in marketing, sales and
support services, and 31 in general and administration. The Company is not a
party to any collective bargaining agreement. The Company considers its employee
relations to be good.
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ITEM 2. PROPERTIES
The following table presents certain information relating to each of the
Company's properties:
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<CAPTION>
Square Lease
Location Feet Expiration Date Principal Use
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Georgetown, Massachusetts 54,000 (owned by the Headquarters, fabrication, molding, test lab,
company) clean-room, and engineering
Decatur, Alabama(1) 36,000 12/31/98 Fabrication and engineering
Pawcatuck, Connecticut 39,000 12/31/99 Fabrication and engineering
Kissimmee, Florida(1) 37,240 12/31/98 Fabrication, molding, test lab, and
engineering
Atlanta, Georgia(2) 55,530 10/31/99 Fabrication, molding and engineering
Haverhill, Massachusetts 38,372 2/28/03 Flame lamination
Raritan, New Jersey 67,125 2/28/03 Fabrication, molding, test lab, clean-room,
and engineering
Gilroy, California(2) 36,350 1/1/01 Molded fiber operations and engineering
Scarborough, Maine 24,625 5/31/01 Molded fiber operations and engineering
Clinton, Iowa 45,000 7/1/01 Molded fiber operations
Addison, Illinois(3) 30,000 2/28/00 Fabrication and engineering
West Chicago, Illinois 2.76 acres (owned by the Undeveloped land
company)
</TABLE>
(1) United Development Company Limited, a Florida limited partnership and an
affiliate of certain officers, directors and stockholders of the Company,
is the lessor of these properties.
(2) The Company has an option to extend the term of this lease for a period of
five years.
(3) The Company has two options to extend the term of this lease for periods
of two years.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Price
The Company's Common Stock, $.01 par value (the "Common Stock"), was
listed on the Nasdaq Small Cap Market under the symbol "UFPT" and on the Boston
Stock Exchange under the symbol "UFP" from December 17, 1993 to July 8, 1996.
Thereafter, the Company's Common Stock has been listed on the Nasdaq National
Market. The following table sets forth the range of high and low quotations for
the Common Stock as reported by Nasdaq for the quarterly periods from January 1,
1996 to December 31, 1997:
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<CAPTION>
High Low
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Fiscal Year Ended December 31, 1997
First Quarter 6 3-1/2
Second Quarter 5-1/4 3-1/2
Third Quarter 4-1/2 3-3/4
Fourth Quarter 4-9/16 3-1/4
Fiscal Year Ended December 31, 1996
First Quarter 4-1/2 2-7/8
Second Quarter 6-3/4 3-1/8
Third Quarter 6-1/8 4
Fourth Quarter 6-1/4 4-1/2
</TABLE>
Number of Stockholders
As of March 2, 1998, there were 133 holders of record of the Company's
Common Stock.
Dividends
The Company did not pay any dividends in 1997. Although prior to becoming
a public company in December 1993, the Company had from time to time paid cash
dividends on its capital stock, the Company presently intends to retain all of
its earnings to provide funds for the operation and expansion of its business
and does not anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands except per share data)
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1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales $45,452 $39,359 $34,096 $31,907 $30,503
Cost of sales 33,200 29,447 26,022 25,347 23,634
------- ------- ------- ------- -------
Gross profit 12,252 9,912 8,074 6,560 6,969
Selling, general and administrative expenses 9,318 7,818 6,979 7,855 6,008
------- ------- ------- ------- -------
Operating income (loss) 2,934 2,094 1,095 (1,295) 861
Other deductions
Interest expense 649 485 438 339 316
Equity in net income of unconsolidated (15) (20) (18) (18) (22)
affiliates and partnership
Other, net (4) (39) 19 853 168
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Total other deductions 630 426 439 1,174 462
Income (loss) before income taxes and 2,304 1,668 656 (2,469) 399
discontinued operations
Income tax expense (benefit) 995 406 (232) 45 300
------- ------- ------- ------- -------
Income (loss) from continuing operations 1,309 1,262 888 (2,514) 99
------- ------- ------- ------- -------
Loss from discontinued operations(1) -- -- -- -- 298
------- ------- ------- ------- -------
Net income (loss) 1,309 1,262 888 (2,514) (199)
------- ------- ------- ------- -------
Diluted earnings (loss) per share
Continuing operations 0.27 0.26 0.19 (0.55) 0.04
Discontinued operations -- -- -- -- (0.11)
------- ------- ------- ------- -------
Net income (loss) per share 0.27 0.26 0.19 (0.55) (0.07)
======= ======= ======= ======= =======
Weighted average number of shares outstanding 4,863 4,874 4,734 4,598 2,470
<CAPTION>
December 31
--------------------------------------------------
1997 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital 2,579 2,488 1,952 1,444 3,095
Total assets 25,195 22,900 20,795 19,142 20,247
Short-term debt 2,612 2,455 3,257 2,766 857
Long-term debt, excluding current portion 3,233 3,223 2,414 1,603 1,913
Stockholders' equity 14,133 12,729 11,438 10,534 12,223
</TABLE>
(1) Loss from discontinued operations is attributable to losses from the
operations of Re-Source America, Inc., net of applicable taxes, in which
the Company held a 45% interest. On September 30, 1993, this investment
was written down to zero and its interest was distributed as a dividend to
the Company's Stockholders.
(2) Reflects the completion of the Company's initial public offering and the
acquisition of MFT.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains certain statements that are "forward-looking
statements" as that term is defined under the Act and releases issued by
the Securities and Exchange Commission. The words "believe," "expect,"
"anticipate," "intend", "estimate" and other expressions which are
predictions of or indicate future events and trends and which do not
relate to historical matters identify forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results, performance or
achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements.
Examples of these risks, uncertainties, and other factors include, without
limitation, the following: (i) economic conditions that affect sales of
the products of the Company's packaging customers, (ii) actions by the
Company's competitors and the ability of the Company to respond to such
actions, (iii) the ability of the Company to obtain new customers and (iv)
the ability of the Company to execute favorable acquisitions. In addition
to the foregoing, the Company's actual future results could differ
materially from those projected in the forward-looking statements as a
result of the risk factors set forth in the Company's various filings with
the Securities and Exchange Commission and changes in general economic
conditions, interest rates and the assumptions used in making such
forward-looking statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a
result of new information, future events or otherwise.
Results of Operations
The following table sets forth, for the years indicated, the percentage of
revenues represented by the items as shown in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0 100.0 100.0
Cost of sales 73.0 74.8 76.3
Gross profit 27.0 25.2 23.7
Selling, general and administrative
expenses 20.5 19.9 20.5
Operating income 6.5 5.3 3.2
Total other deductions 1.4 1.1 1.3
Income before income taxes 5.1 4.2 1.9
Provision (benefit) for income taxes 2.2 1.0 (0.7)
Net income from continuing
operations 2.9 3.2 2.6
</TABLE>
-14-
<PAGE>
1997 Compared to 1996:
The Company's net sales increased 15.5% to $45.5 million for the year
ended December 31, 1997 from $39.4 million in the same period last year.
The increase in sales was primarily attributable to the impact on sales of
FCE Industries which was acquired by the Company in January 1997, as well
as increased sales of the Company's molded fiber packaging product.
Cost of sales as a percentage of sales decreased to 73.0% for the year
ended December 31, 1997 from 74.8% in 1996. The improvement was primarily
attributable to improvements in margins on sales of molded fiber product
as well as an increase in molded fiber sales as a percentage of overall
sales.
Selling, general, and administrative expenses ("SG&A") increased 19.2% to
$9.3 million in 1997 from $7.8 million in 1996. As a percentage of sales,
SG&A increased to 20.5% in 1997 from 19.9% in 1996. The increase in SG&A
as a percentage of sales was due to a one-time write-off of receivables
associated with a customer that filed for bankruptcy protection,
additional expenses at FCE Industries, and additions to the management
team.
Interest expense increased 33.8% to $649,000 in 1997 from $485,000 in
1996. The increase was due to higher average borrowings associated with
the acquisition of FCE Industries, slightly offset by lower average
interest rates.
The Company's effective tax rate was 43.2% and 24.3% in 1997 and 1996,
respectively. The increase in 1997 is primarily due to the impact on the
effective rate in 1996 of the realization of net operating loss
carry-forwards and the reduction of the Company's valuation allowance for
deferred income taxes associated with the unrestricted remaining loss
carry-forwards. This reduction in the valuation allowance reflected the
Company's improved operating performance, which resulted in the likelihood
that the Company will be able to benefit from its deferred income taxes.
See Note 9 to the Company's Consolidated Financial Statements.
1996 Compared to 1995:
The Company's net sales increased 15.4% to $39.4 million in 1996 from
$34.1 million in 1995. The increase in net sales was primarily
attributable to increased sales volume of the Company's molded fiber
packaging products.
Cost of sales as a percentage of net sales decreased to 74.8% in 1996 from
76.3% in 1995. The improvement in the cost of sales margin was primarily
attributable to increased sales of molded fiber products as a percentage
of total net sales and manufacturing efficiency improvements associated
with the Company's molded fiber products.
Selling, general and administrative dollar expenses increased $0.8 million
or 11.4% from the prior year to $7.8 million but decreased as a percentage
of net sales to 19.9% in 1996
-15-
<PAGE>
from 20.5% of net sales in 1995. The dollar increase was primarily
attributable to increased commissions associated with higher sales levels.
Interest expense increased 10.7% to $485,000 in 1996 from $438,000 in
1995. The increase was primarily attributable to an increase in the
Company's long-term capital lease obligations.
The income tax expense was $406,000 in 1996, compared to a benefit of
$232,000 in 1995. Both of these periods were positively affected by the
realization of net operating loss carry-forwards and the reduction of the
Company's valuation allowance for deferred income taxes associated with
the unrestricted remaining loss carry-forwards. See Note 9 to the
Company's Consolidated Financial Statements.
Liquidity and Capital Resources
The Company funds its operating expenses, capital requirements and growth
plan through internally generated cash, bank credit facilities and
long-term capital leases.
As of December 31, 1997 and 1996, working capital was $2,579,000 and
$2,488,000, respectively. Cash provided by operations was $3,090,000 and
$2,968,000 in 1997 and 1996, respectively. The slight increase was
primarily attributable to increased earnings and depreciation and
amortization. Net cash used in investing activities included approximately
$968,000 in new equipment associated with the Company's molded fiber
product and $2.4 million of capital expenditures primarily to purchase
additional equipment to support the growth of the Company's Moulded Fibre
division.
Including amounts due under its revolving credit facility, the Company had
total debt outstanding of $6,758,000 and $5,679,000 at December 31, 1997
and 1996, respectively. The increase was primarily attributable to the
financing of both the acquisition of FCE Industries in January 1997 and
new machinery and equipment partially off-set by debt retirements during
the year. The Company has a $5,000,000 revolving bank line of credit of
which $2,500,000 was outstanding at December 31, 1997. Borrowings through
the credit facility are unsecured, and bear interest at prime or LIBOR
Plus 1.75%. See Note 7 to the Company's Consolidated Financial Statements.
The Company has no significant capital commitments in 1998, but plans on
adding additional machinery to increase capacity to manufacture molded
fiber product as well as plans to enhance its information technology
requiring both hardware and software purchases. Additionally, the Company
may consider the acquisition of corporations, technologies or products in
1998 which are complementary to its business. The Company believes that
its existing resources, including its revolving loan facility, together
with cash generated from operations and funds expected to be available to
it through any necessary equipment financing and additional bank
borrowings, will be sufficient to fund its cash flow requirements through
at least the end of 1998. However, there can be no assurances that such
financing will be available at favorable terms, if at all.
-16-
<PAGE>
Asian Crisis
Some of the Company's customers derive substantial revenue from
sales of their products in Asia. These customers have indicated they are
experiencing reduced sales of their products due to the Asian crisis and
that their order levels for the Company's products may diminish. Although
the Company believes anticipated sales to other customers and in other
markets will offset any slowdown that may occur as a result of the Asian
crisis, there can be no assurance that this will be the case.
Year 2000 Data Conversion
The Company is in the process of implementing comprehensive computer
systems which are prepared for the year 2000. The implementation schedule
anticipates a complete conversion prior to January 1, 2000. The Company
presently believes that, with the conversion to new software, the year
2000 problem will not pose a significant operational problem to the
Company. However, there can be no assurance that the systems of other
parties upon which the Company's businesses also rely, including but not
limited to the Company's customers and suppliers, will be converted on a
timely basis. The Company's business, financial condition, or results of
operations could be materially adversely affected by the failure of its
systems or those of other parties to operate or properly manage dates
beyond 1999.
Other
A significant portion of the Company's sales of molded fiber
products are to manufacturers of computer peripherals and other consumer
products. As a result, the Company believes that its sales are somewhat
seasonal, with increased sales in the second half of the year. The Company
does not believe that inflation has had a material impact on its results
of operations in the last three years.
-17-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements and Supplementary Data of the
Company are listed under Part IV, Item 14, in this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on accounting principles or practices or
financial statement disclosure between the Company and its accountants during
the fiscal year ended December 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of its fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of its fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of its fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of its fiscal year.
-18-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(A) (1) Financial Statements Page
<S> <C>
Index to Consolidated Financial Statements and Financial
Statement Schedules...............................................F-1
Independent Auditors' Report......................................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996......F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996, and 1995.................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996, and 1995...........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995.................................F-6
Notes to Consolidated Financial Statements........................F-7
(A) (2) Financial Statement Schedules
Independent Auditors' Report on Supplementary Information........F-20
Schedule II - Valuation and Qualifying Accounts..................F-21
</TABLE>
(A) (3) Exhibits
<TABLE>
<CAPTION>
Number Reference
------ ---------
<C> <S> <C>
2.01 Agreement and Plan of Reorganization among the A-2.01**
Company, Moulded Fibre Technology, Inc. and
UFPAcquisition, Inc.
2.02 Agreement of Merger between Moulded Fibre C-2.02**
Technology, Inc. and UFP Acquisition, Inc.
2.03 Merger Agreement relating to the A-2.02
reincorporation of the Company in Delaware.
2.04 Asset Purchase Agreement relating to the I-2**
purchase of FCE.
3.01 Certificate of Incorporation of the Company, as F-3.01**
amended.
3.02 Bylaws of the Company. A-3.02**
4.01 Specimen Certificate for shares of the A-4.01**
Company's Common Stock.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Number Reference
------ ---------
<C> <S> <C>
4.02 Description of Capital Stock (contained in the A-4.02**
Certificate of Incorporation of the Company,
filed as Exhibit 3.01).
4.03 Form of Common Stock Purchase Warrant issued to A-1.02**
the underwriters in connection with the initial
public offering of the Company.
10.01 $300,000 Construction Mortgage Loan Agreement A-10.01**
between the Company and Gloucester Bank & Trust
Company.
10.02 $1,000,000 Mortgage and Promissory Note issued by A-10.02**
the Company in favor of Gloucester Bank & Trust
Company.
10.03 Loan and Security Agreement between the Company D-10.03**
and The First National Bank of Boston.
10.03A Extension of Loan and Security Agreement
between the Company and The First National Bank A-10.03A**
of Boston.
10.04 Loan Agreement, Mortgage and Security Agreement A-10.04**
between United Development Company Limited and
Osceola County Industrial Development Authority.
10.05 Guaranty and Indemnification Agreement of A-10.05**
Richard L. Bailly, William H. Shaw and the
Company in favor of Barnett Bank & Trust
Company, N.A. for the benefit of United
Development Company Limited.
10.06 Alabama Leasehold Mortgage of United A-10.06**
Development Company Limited to First American
Bank.
10.07 Guaranty of the Company in favor of First A-10.07**
American Bank for the benefit of United
Development Company Limited.
10.08 Agreement between the Company and William H. A-10.08**
Shaw.
10.09 Agreement and Severance Agreement between the A-10.09**
Company and Richard L. Bailly.
10.12 Noncompetition Agreement between the Company and A-10.12**
David L. Friedman (contained in Exhibit 2.01).
10.13 Noncompetition Agreement between the Company A-10.13**
and Roger J. Baker.
10.16 Form of Warrant to Purchase Common Stock issued A-10.16**
to former stockholders of Moulded Fibre Technology,
Inc. (contained in Exhibit 2.01).
10.17 1982 Incentive Stock Option Plan. A-10.17**
10.18 Employee Stock Purchase Plan. A-10.18**
10.19 1993 Combined Stock Option Plan, as amended. E-4.4**
10.20 1993 Nonemployee Director Stock Option Plan. B-4.5**
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Number Reference
------ ---------
<C> <S> <C>
10.21 Facility Lease between the Company and United A-10.21**
Development Company Limited.
10.22 Facility Lease between the Company and Raritan A-10.22**
Associates.
10.23 Facility Sublease between the Company and A-10.23**
United Development Company Limited.
10.25 Facility lease between the Company and Flanders A-10.25**
Properties.
10.26 Amendment to facility lease between the Company A-10.26**
and Flanders Properties.
10.27 Facility Lease between the Company and Dana A-10.27**
Evans d/b/a Evans Enterprises.
10.28 Facility Lease between Moulded Fibre A-10.28**
Technology, Inc. and J.B. Brown & Sons.
10.29 Facility Lease between the Company and Cole G-10.29**
Taylor Bank, as Trustee
10.30 Form of Indemnification Agreement for directors A-10.30**
and officers of the Company.
10.32 Promissory Note of United Development Company A-10.32**
Limited in favor of the Company.
10.33 Form of Representative's Warrant Agreement. A-10.33**
10.34 Facility Lease between Moulded Fibre C-10.34**
Technology, Inc. and Lincoln Gilroy II and
Patrician Associates, Inc.
10.35 Facility Lease between the Company and M.D. D-10.35**
Hodges Enterprises, Inc.
10.36 Facility Lease between Moulded Fibre D-10.36**
Technology, Inc. and Dead River Properties.
10.37 Facility Lease between the Company and Clinton G-10.37**
Area Development Corporation.
10.38.7 First Amendment to Credit Agreement, dated May
31, 1995, between the Company and BayBank. F-10.38.7**
10.38.8 Amended and Restated Revolving Credit Note,
dated May 31, 1996, between the Company and F-10.38.8**
BayBank.
10.38.9 Amended and Restated Equipment Note, dated May
31, 1996, between the Company and BayBank. F-10.38.9**
10.38.10 Second Amendment to Credit Agreement J-10**
10.39 Employment Agreement with R. Jeffrey Bailly H-10.37**
dated April 4, 1995
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
Number Reference
------ ---------
<C> <S> <C>
11.01 Statement re: Computation of Per Share Filed herewith
Earnings (included in financial statements)
21.01 Subsidiaries of the Company. K-21.01**
23.01 Consent of KPMG Peat Marwick LLP. Filed herewith
27.01 Financial Data Schedule. Filed herewith
27.02 Financial Data Schedule. Filed herewith.
27.03 Financial Data Schedule. Filed herewith.
</TABLE>
A Incorporated by reference to the Company's registration statement
on Form S-1 (Registration No. 33-70912). The number set forth
herein is the number of the Exhibit in said registration
statement.
B Incorporated by reference to the Company's Registration Statement
on Form S-8 (Registration No. 33-76440). The number set forth
herein is the number of the Exhibit in said registration
statement.
C Incorporated by reference to the Company's Annual Report on Form
10-K for its fiscal year ended December 31, 1993. The number set
forth herein is the number of the Exhibit in said annual report.
D Incorporated by reference to the Company's Annual Report on Form
10-K for its fiscal year ended December 31, 1994. The number set
forth herein is the number of the Exhibit in said annual report.
E Incorporated by reference to the Company's Registration Statement
on Form S-8 (Registration No. 33-32248). The number set forth
herein is the number of the Exhibit in said Registration
Statement.
F Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended June 30, 1996. The number set
forth herein is the number of the Exhibit in said quarterly
report.
G Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995. The number set
forth herein is the number of the Exhibit in said annual report.
H Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended June 30, 1995. The number set
forth herein is the number of the Exhibit in said quarterly
report.
I Incorporated by reference to the Company's report on 8-K dated
February 3, 1997. The number set forth herein is the number of the
Exhibit in said report.
J Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended September 30, 1997. The
number set forth herein is the number of the exhibit in said
Quarterly Report.
K Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996. The number set
forth herein is the number of the exhibit in said Annual Report.
* Management contract or compensatory plan or arrangement.
-22-
<PAGE>
** In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents previously
filed with the Securities and Exchange Commission, which documents
are hereby incorporated by reference.
(B) Reports On Form 8-K
The Company did not file any current reports on Form 8-K during the
quarter ended December 31, 1997.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
UFP TECHNOLOGIES, INC.
Date: March 23, 1998 By: /s/ R. Jeffrey Bailly
-------------------------------
R. Jeffrey Bailly, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ R. Jeffrey Bailly President, Chief Executive, March 30, 1998
- ---------------------------- Officer and Director
R. Jeffrey Bailly
/s/ William H. Shaw Chairman of the Board of March 30, 1998
- ---------------------------- Directors
William H. Shaw
/s/ Ron Lataille Chief Financial Officer, Vice March 30, 1998
- ---------------------------- President, Principal Accounting
Ron Lataille Officer
/s/ Richard L. Bailly Executive Vice President, March 30, 1998
- ---------------------------- Director
Richard L. Bailly
/s/ William C. Curry Director March 30, 1998
- ----------------------------
William C. Curry
/s/ David L. Friedman Director March 30, 1998
- ----------------------------
David L. Friedman
/s/ Kenneth L. Gestal Director March 30, 1998
- ----------------------------
Kenneth L. Gestal
/s/ T. Gordon Roddick Director March 30, 1998
- ----------------------------
T. Gordon Roddick
/s/ Peter R. Worrell Director March 30, 1998
- ----------------------------
Peter R. Worrell
-24-
<PAGE>
UFP TECHNOLOGIES, INC.
Consolidated Financial Statements and Schedule
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
UFP TECHNOLOGIES, INC.
Index to Consolidated Financial Statements and Financial Statement Schedule
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Schedule
Independent Auditors' Report on Supplementary Information F-20
Schedule II - Valuation and Qualifying Accounts F-21
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
UFP Technologies, Inc.:
We have audited the consolidated balance sheets of UFP Technologies, Inc. and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of UFP Technologies,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Boston, Massachusetts
February 12, 1998
F-2
<PAGE>
UFP TECHNOLOGIES, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
--------------------------
Assets 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 233,452 143,531
Receivables, net (note 3) 6,413,251 5,602,202
Inventories (note 4) 3,053,299 2,585,560
Prepaid expenses 83,800 239,093
Deferred income taxes (note 9) 63,000 365,000
------------ -----------
Total current assets 9,846,802 8,935,386
------------ -----------
Property, plant and equipment (notes 5, 7 and 14) 20,110,727 17,201,709
Less accumulated depreciation and amortization (8,920,621) (7,486,126)
------------ -----------
Net property, plant and equipment 11,190,106 9,715,583
------------ -----------
Cash surrender value of officers' life insurance, net of loans
of $13,595 in 1997 and 1996 352,577 325,161
Investment in and advances to affiliated partnership (note 6) 240,364 226,887
Deferred income taxes (note 9) 693,000 801,000
Goodwill, net (note 1) 2,539,367 2,577,491
Other assets 332,551 318,370
------------ -----------
Total assets $ 25,194,767 22,899,878
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (note 7) $ 2,500,000 1,400,000
Current installments of long-term debt (note 7) 111,888 394,825
Current installments of capital lease obligations (note 14) 913,170 660,192
Accounts payable 1,540,377 2,215,030
Accrued expenses and payroll withholdings (note 8) 2,202,817 1,776,926
------------ -----------
Total current liabilities 7,268,252 6,446,973
Long-term debt, excluding current installments (note 7) 624,641 764,256
Capital lease obligations, excluding current installments (note 14) 2,608,768 2,459,261
Retirement liability (note 13) 559,896 499,896
------------ -----------
Total liabilities 11,061,557 10,170,386
------------ -----------
Commitments and contingencies (note 14)
Stockholders' equity (notes 11 and 12):
Preferred stock, $.01 par value. Authorized
1,000,000 shares; no shares issued or outstanding -- --
Common stock, $.01 par value. Authorized
20,000,000; issued and outstanding 4,666,354 shares
in 1997 and 4,636,854 shares in 1996 46,664 46,369
Additional paid-in capital 9,499,019 9,404,902
Retained earnings 4,587,527 3,278,221
------------ -----------
Total stockholders' equity 14,133,210 12,729,492
------------ -----------
Total liabilities and stockholders' equity $ 25,194,767 22,899,878
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
UFP TECHNOLOGIES, INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 45,452,232 39,359,066 34,096,235
Cost of sales 33,200,304 29,446,979 26,022,457
------------ ----------- -----------
Gross profit 12,251,928 9,912,087 8,073,778
Selling, general and administrative expenses 9,318,080 7,818,451 6,979,165
------------ ----------- -----------
Operating income 2,933,848 2,093,636 1,094,613
------------ ----------- -----------
Other income (deductions):
Interest expense (649,269) (484,958) (437,978)
Equity in net income of unconsolidated
affiliated partnership (note 6) 15,227 19,937 17,541
Other, net 4,500 39,842 (18,719)
------------ ----------- -----------
Total other deductions (629,542) (425,179) (439,156)
------------ ----------- -----------
Income before income tax expense (benefit) 2,304,306 1,668,457 655,457
Income tax expense (benefit) (note 9) 995,000 406,000 (232,244)
------------ ----------- -----------
Net income $ 1,309,306 1,262,457 887,701
============ =========== ===========
Per share data (note 10):
Basic net income per share $ 0.28 0.27 0.19
============ =========== ===========
Diluted net income per share $ 0.27 0.26 0.19
============ =========== ===========
Weighted average number of shares used in computation of per
share data (note 10):
Basic 4,655,586 4,634,098 4,625,151
============ =========== ===========
Diluted 4,863,110 4,874,125 4,734,247
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
UFP TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common stock Additional Total
---------------- paid-in Retained stockholders'
Shares Amount capital earnings equity
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 4,621,854 $46,219 $9,360,027 $1,128,063 $10,534,309
Stock issued in lieu of compensation 5,000 50 16,200 -- 16,250
Net income -- -- -- 887,701 887,701
--------- ------- ---------- ---------- -----------
Balance at December 31, 1995 4,626,854 46,269 9,376,227 2,015,764 11,438,260
Sale of common stock through
incentive stock option plan 5,000 50 11,850 -- 11,900
Stock issued in lieu of compensation 5,000 50 16,825 -- 16,875
Net income -- -- -- 1,262,457 1,262,457
--------- ------- ---------- ---------- -----------
Balance at December 31, 1996 4,636,854 46,369 9,404,902 3,278,221 12,729,492
Sale of common stock through
incentive stock option plan 22,500 225 60,437 -- 60,662
Stock issued in lieu of compensation 7,000 70 33,680 -- 33,750
Net income -- -- -- 1,309,306 1,309,306
--------- ------- ---------- ---------- -----------
Balance at December 31, 1997 4,666,354 $46,664 $9,499,019 $4,587,527 $14,133,210
========= ======= ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
UFP TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,309,306 1,262,457 887,701
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,801,758 1,498,123 1,241,550
Equity in net income of unconsolidated
affiliate and partnership (15,227) (19,937) (17,541)
Loss on disposal of property, plant and equipment 39,269 -- 1,304
Stock issued in lieu of compensation 33,750 16,875 16,250
Deferred income taxes 410,000 131,000 (291,600)
Changes in operating assets and liabilities:
Receivables, net (135,336) (657,661) (372,745)
Inventories (172,738) (152,874) 11,084
Prepaid expenses 212,148 83,534 (43,874)
Accounts payable (785,771) 400,223 (435,621)
Accrued expenses and payroll withholdings 332,385 346,530 19,061
Retirement liability 60,000 60,000 60,000
----------- ---------- ----------
Net cash provided by operating activities 3,089,544 2,968,270 1,075,569
----------- ---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (2,436,224) (3,376,146) (2,415,334)
Acquisition of Foam Cutting Engineers, less cash acquired (1,512,879) -- --
(Increase) decrease in cash surrender value of officers' life insurance (27,416) 18,829 218,453
Increase in other assets (23,352) (32,182) (83,153)
Payments received on advances to affiliated company 1,750 21,000 21,000
Proceeds from disposal of property, plant and equipment 4,500 -- --
----------- ---------- ----------
Net cash used in investing activities (3,993,621) (3,368,499) (2,259,034)
----------- ---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) under notes payable 1,100,000 (1,375,000) 210,600
Proceeds from long-term borrowings -- -- 400,000
Proceeds from long-term capital leases 967,000 1,941,000 1,000,000
Proceeds from sale of common stock 60,662 11,900 --
Principal repayments of long-term debt (422,551) (186,207) (119,422)
Principal repayments of obligations under capital leases (711,113) (372,423) (189,448)
----------- ---------- ----------
Net cash provided by financing activities 993,998 19,270 1,301,730
----------- ---------- ----------
Net change in cash and cash equivalents 89,921 (380,959) 118,265
Cash and cash equivalents at beginning of year 143,531 524,490 406,225
----------- ---------- ----------
Cash and cash equivalents at end of year $ 233,452 143,531 524,490
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts and
results of operations of UFP Technologies, Inc. and its wholly
owned subsidiary, Moulded Fibre Technology, Inc. (MFT). All
significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Nature of Operations
UFP Technologies, Inc. designs and manufactures a broad range of
packaging and specialty foam products for a variety of industrial
and consumer markets.
(c) Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated
and amortized using the straight-line method over the estimated
useful lives of the assets for financial statement purposes and
accelerated methods for income tax purposes.
Estimated useful lives of property, plant and equipment are as
follows:
<TABLE>
<S> <C>
Leasehold improvements Life of the lease
Buildings and improvements 31.5 years
Equipment 8-10 years
Furniture and fixtures 5-7 years
</TABLE>
(e) Income Taxes
The Company's income taxes are accounted for under the asset and
liability method of accounting. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
F-7
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(1), Continued
(f) Investments in Realty Partnerships
The Company has invested in two realty limited partnerships,
Lakeshore Estates Associates and United Development Company
Limited. These investments are stated at cost, plus or minus the
Company's proportionate share of the limited partnerships' income
or losses, less any distributions received from the limited
partnerships. The Company has recognized its share of Lakeshore
Estates Associates' losses only to the extent of its original
investment in, and advances to, this partnership.
(g) Goodwill
The goodwill recorded in connection with the acquisition of MFT is
being amortized on a straight-line basis over a 20-year period.
Accumulated amortization was $788,104 and $636,364 as of December
31, 1997 and 1996, respectively. In 1996 and 1995, a charge in
lieu of taxes of $954,990 and $75,400, respectively, was allocated
to reduce goodwill.
The goodwill recorded in connection with the acquisition of the
net assets of Foam Cutting Engineers, Inc. ("FCE") is being
amortized over a 20-year period. Accumulated amortization was
$7,176 as of December 31, 1997.
The Company assesses the recoverability of its intangible assets
by determining whether the amortization of the balance over its
remaining life can be recovered through projected future results.
Goodwill impairment is measured based on projected undiscounted
cash flows over the asset's remaining life.
(h) Net Income Per Share
In December 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128, Earnings Per Share ("SFAS
128"). All previously reported earnings per share have been
restated to reflect the provisions of SFAS 128.
(i) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(j) Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-8
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(1), Continued
(k) Recent Accounting Pronouncements
The Financial Accounting Standards Board recently issued
Statements of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, and No. 131, Disclosure about Segments of an
Enterprise and Related Information. The Company is evaluating the
impact of these statements and will adopt them in 1998.
(2) Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest $541,270 484,958 439,508
======== ======= =======
Income taxes $700,230 82,662 49,432
======== ======= =======
</TABLE>
(3) Receivables
Receivables consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Accounts receivable - trade $6,596,836 5,766,299
Employee advances 12,751 255
---------- ---------
6,609,587 5,766,554
Less allowance for doubtful receivables 196,336 164,352
---------- ---------
$6,413,251 5,602,202
========== =========
</TABLE>
(4) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Raw materials $1,933,740 1,850,238
Work in process 395,592 190,553
Finished goods 723,967 544,769
---------- ---------
$3,053,299 2,585,560
========== =========
</TABLE>
F-9
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Land $ 315,319 85,319
Buildings and improvements 2,940,091 2,933,949
Leasehold improvements 1,008,155 943,162
Equipment 13,478,014 10,814,648
Furniture and fixtures 1,036,753 1,045,493
Construction in progress - equipment 1,332,395 1,379,138
----------- ----------
$20,110,727 17,201,709
=========== ==========
</TABLE>
(6) Investment in and Advances to Affiliated Partnership
The Company has an ownership interest in a realty limited partnership,
United Development Company Limited. This investment is stated at cost,
plus the Company's proportionate share of the limited partnership's
income, less any distributions received from the limited partnership. The
Company's proportionate share of the limited partnership's net income was
$15,227, $19,937, and $17,541 in 1997, 1996 and 1995, respectively.
On September 30, 1993, United Development Company Limited executed and
delivered to the Company a term note in the amount of $210,000 to
evidence advances received from the Company. This note accrues interest
at the prime rate plus 2% (10.5% at December 31, 1997). The note is
repayable in monthly installments of $1,750 plus interest.
(7) Indebtedness
At December 31, 1997, the Company may borrow up to $5,000,000 under a
revolving line of credit at the bank's prime lending rate (8.5% at
December 31, 1997) or LIBOR plus 1.75%. Amounts borrowed under this
arrangement are due on demand and are unsecured. At December 31, 1997 and
1996, borrowings under this arrangement were $2,500,000 and $1,400,000,
respectively.
F-10
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(7), Continued
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
8.76% mortgage note payable in monthly installments
of $8,759 including interest, maturing in 2007;
secured by real estate $678,196 723,736
Mortgage note payable -- 222,030
Note payable in monthly installments of $9,722 plus
interest at the bank's prime lending rate (8.5%
at December 31, 1997), maturing in 1998; secured by
equipment 58,333 175,000
Note payable -- 38,315
-------- ---------
Total long-term debt 736,529 1,159,081
Less current installments 111,888 394,825
-------- ---------
Long-term debt, excluding current installments $624,641 764,256
======== =========
</TABLE>
Aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $111,888
1999 55,962
2000 60,728
2001 65,899
2002 71,510
Thereafter 370,542
--------
$736,529
========
</TABLE>
(8) Accrued Expenses and Payroll Withholdings
Accrued expenses and payroll withholdings consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Compensation $ 903,462 704,412
Benefits 512,438 568,856
Other 786,917 503,658
---------- ---------
$2,202,817 1,776,926
========== =========
</TABLE>
F-11
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(9) Income Taxes
Total income tax expense (benefit) for the years ended December 31, 1997,
1996 and 1995 was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income from operations $995,000 406,000 (232,244)
======== ======== ========
Goodwill, for initial recognition of acquired
tax benefits that previously were included
in the valuation allowance $ -- (954,990) (75,400)
======== ======== ========
Income tax expense (benefit) consists of:
<CAPTION>
Years ended December 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $454,000 170,000 18,556
State 131,000 105,000 40,800
-------- -------- --------
585,000 275,000 59,356
-------- -------- --------
Deferred:
Federal 360,000 136,000 (291,600)
State 50,000 (5,000) --
-------- -------- --------
410,000 131,000 (291,600)
-------- -------- --------
$995,000 406,000 (232,244)
======== ======== ========
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards
for income tax purposes of approximately $2,600,000 which are available
to offset future taxable income and expire during the years ending
December 31, 2006 through 2009.
The future benefit of the net operating loss carryforwards in any year is
limited to $302,000 under the provisions of the Tax Reform Act of 1986,
which imposes an annual limitation on the amount that can offset taxable
income due to the change in ownership of MFT.
F-12
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(9), Continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets related to:
Receivables $ 82,461 65,741
Inventories 107,364 62,805
Compensation programs 39,903 20,030
Capital leases -- 123,749
Retirement liability 235,156 199,958
Net operating loss carryforwards 925,247 1,022,206
Alternative minimum tax credits -- 114,000
Other -- 8,500
---------- ---------
1,390,131 1,616,989
Deferred tax liabilities related to:
Excess of book over tax basis of fixed assets 510,307 326,947
Investee tax loss in excess of book losses 123,824 124,042
---------- ---------
634,131 450,989
---------- ---------
Net deferred tax assets $ 756,000 1,166,000
========== =========
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1996 and 1995 was a decrease of $1,529,508 and $612,535,
respectively.
The amount recorded as net deferred tax assets as of December 31, 1997
and 1996 represents the amount of tax benefits of existing deductible
temporary differences or carryforwards that are more likely than not to
be realized through the generation of sufficient future taxable income
within the carryforward period. The Company believes that the net
deferred tax asset of $756,000 at December 31, 1997 will more likely than
not be realized in the carryforward period. The Company's U.S. taxable
income before application of net operating loss carryforwards was
approximately $2,123,000, $1,859,000 and $609,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. Management reviews the
recoverability of deferred tax assets during each reporting period.
F-13
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(9), Continued
Actual tax expense (benefit) for the years presented differs from
"expected" tax expense (benefit) for those years, computed by applying
the U.S. federal corporate rate of 34% to income before income tax
expense (benefit) as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax rate 34.0% 34.0% 34.0%
Increase (decrease) in income
taxes resulting from:
State taxes, net of federal tax benefit 4.2 4.0 4.2
Officers' life insurance 1.0 .5 2.0
Amortization of goodwill 2.3 4.2 11.4
Change in the beginning of the year balance of the valuation
allowance for deferred tax assets, net of $954,990 and $75,400
allocated to goodwill in 1996 and 1995,
respectively -- (18.4) (88.2)
Other 1.7 -- 1.2
---- ---- ----
43.2% 24.3% (35.4)%
==== ==== ====
</TABLE>
(10) Net Income Per Share
Basic income per share is based upon the weighted average common shares
outstanding during each year. Diluted income per share is based upon the
weighted average of common shares and dilutive common stock equivalent
shares outstanding during each year. The weighted average number of
shares used to compute diluted income per share consisted of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares
outstanding during the year 4,655,586 4,634,098 4,625,151
Weighted average common equivalent
shares due to stock options 207,524 240,027 109,096
--------- --------- ---------
4,863,110 4,874,125 4,734,247
========= ========= =========
</TABLE>
F-14
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(11) Stock Option Plans
The Company maintains a stock option plan to provide long-term rewards
and incentives to the Company's key employees, officers, employee
directors, consultants and advisors. The plan provides for either
nonqualified stock options or incentive stock options for the issuance of
up to 1,050,000 shares of common stock. The exercise price of the
incentive stock options may not be less than the fair market value of the
common stock on the date of grant, and the exercise price for
nonqualified stock options shall be determined by the Stock Option
Committee. Options granted under the plan generally become exercisable
with respect to 25% of the total number of shares subject to such options
at the end of each 12-month period following the grant of the option. At
December 31, 1997, 697,500 options were outstanding under the plan.
The Company also maintains a stock option plan (the "Director Plan")
covering nonemployee directors. The Director Plan provides for options
for the issuance of up to 110,000 shares of common stock. On July 1 of
each year, each individual who at the time is serving as a nonemployee
director of the Company will receive an automatic grant of options to
purchase 2,500 shares of common stock. These options become exercisable
in full six months after the date of grant and expire ten years from the
date of grant. The exercise price is the fair market value of the common
stock on the date of grant. At December 31, 1997, 40,000 options were
outstanding under the Director Plan.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized in connection with these plans.
Since the Company accounts for its stock option plans under APB 25,
certain pro forma information regarding net income and net income per
share is required by Financial Accounting Standards Board Statement No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), as if the
Company had accounted for its stock option plans under the fair value
approach of SFAS 123. For purposes of the pro forma disclosures, the
estimated fair value of the stock plans is amortized to expense over the
related vesting period of the options. The Company's pro forma
information is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1997 1996 1995
<S> <C> <C> <C>
Net income as reported $ 1,309,306 1,262,457 887,701
=========== ========= =======
Pro forma net income $ 1,016,768 1,120,964 779,217
=========== ========= =======
Basic net income per share as reported $ 0.28 0.27 0.19
=========== ========== ========
Pro forma basic net income per share $ 0.22 0.24 0.17
=========== ========== ========
Diluted net income per share as reported $ 0.27 0.26 0.19
=========== ========== ========
Pro forma diluted net income per share $ 0.21 0.23 0.16
=========== ========== ========
</TABLE>
The effect of applying SFAS 123 as shown above in the pro forma
disclosures is not representative of the pro forma effect on net income
in future years because it does not take into consideration pro forma
compensation expenses related to stock options granted prior to 1995.
F-15
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(11), Continued
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants issued in 1997, 1996 and
1995, respectively: no dividend yield for each year; expected volatility
of 61%, 62%, and 68%; risk-free interest rates of 6.16%, 6.13%, and
5.38%; and expected lives of 4.6, 4.6 and 8.9 years.
The following is a summary of stock option activity under both plans:
<TABLE>
<CAPTION>
Shares Weighted Average
Under Options Exercise Price
------------- --------------
<S> <C> <C>
Outstanding at December 31, 1994 498,000 $ 3.86
Granted 230,000 2.83
Canceled or expired (37,000) 5.35
-------
Outstanding at December 31, 1995 691,000 3.44
Granted 68,000 3.82
Exercised (5,000) 2.38
Canceled or expired (21,250) 5.35
-------
Outstanding at December 31, 1996 732,750 3.43
Granted 76,500 4.43
Exercised (22,500) 2.69
Canceled or expired (49,250) 3.87
-------
Outstanding at December 31, 1997 737,500 3.52
=======
</TABLE>
The weighted-average fair value of options granted during 1997, 1996 and
1995 was $1.92, $2.16 and $1.93, respectively. As of December 31, 1997,
409,125 of the outstanding options were exercisable.
F-16
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(11), Continued
The following is a summary of information relating to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------
Number Weighted- Weighted Number Weighted-
Outstanding Average Average Exercisable Average
Range of at December Remaining Exercise at December Exercise
Exercise Prices 31, 1997 Contractual Life Price 31, 1997 Price
--------------- -------- ---------------- ----- -------- -----
<S> <C> <C> <C> <C> <C>
$2 - 3 308,000 2.5 years $ 2.18 207,750 $ 2.18
3 - 4 201,000 3.2 3.32 79,375 3.27
4 - 5 58,000 5.3 4.59 375 4.75
5 - 6 158,000 2.2 5.50 118,500 5.50
6 - 7 12,500 8.5 6.13 3,125 6.13
------- -------
737,500 409,125
======= =======
</TABLE>
(12) Stockholders' Equity
In connection with the acquisition of MFT, the Company issued warrants to
purchase up to 165,904 shares of the Company's common stock. The warrants
are exercisable at a price of $6.60 per share and expire on December 16,
1998.
(13) Supplemental Retirement Plan
The Company has a supplemental retirement plan for two of its key
officers which will provide an annual benefit to these individuals over a
12-year period following separation from employment. The Company recorded
an expense of $60,000 in 1997, 1996 and 1995, in accordance with this
plan, which includes both current costs and prior service costs for these
individuals. The present value of the supplemental retirement obligation
has been calculated using an 8% discount rate.
(14) Leases
The Company acquired a facility in 1988 under a capital lease arrangement
that extends through 2000. Lease payments are made to a limited
partnership in which the Company and two of its officers are
shareholders.
The Company has noncancelable operating leases for its other facilities
that expire through 2003. Certain of the leases contain escalation
clauses which require payments of additional rent to the extent of
increases in related operating costs. The Company also leases various
equipment under capital leases which expire through 2001.
F-17
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(14), Continued
Included in property, plant and equipment are the following amounts held
under capital lease:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Buildings and improvements $ 1,026,850 1,026,850
Equipment 3,757,410 2,646,800
Furniture -- 29,680
----------- ---------
4,784,260 3,703,330
Less accumulated amortization (1,182,931) (866,912)
----------- ---------
$ 3,601,329 2,836,418
=========== =========
</TABLE>
Future minimum lease payments under noncancelable operating leases and
the present value of future minimum lease payments under capital leases
as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------ ------
<S> <C> <C>
Year ending December 31:
1998 $ 1,164,277 1,256,913
1999 1,334,547 1,028,071
2000 1,091,858 718,961
2001 414,969 524,026
2002 -- 477,043
Thereafter -- 128,707
----------- ---------
Total minimum lease payments 4,005,651 4,133,721
==========
Less amount representing interest 483,713
-----------
Present value of future minimum lease payments 3,521,938
Less current installments of obligations under capital leases 913,170
-----------
Obligations under capital lease, excluding
current installments $ 2,608,768
===========
</TABLE>
Rent expense amounted to approximately $1,215,000, $956,000 and $813,000
in 1997, 1996 and 1995, respectively. Approximately $90,000 of total rent
expense was paid in 1997, 1996 and 1995 to a limited partnership that
owns the Decatur, Alabama, facility. The Company has guaranteed a
mortgage loan on this property. The amount outstanding on this loan was
approximately $95,000 at December 31, 1997. The Company and two of its
officers have interests in this limited partnership.
(15) Profit-Sharing Plan
The Company maintains a noncontributory profit-sharing plan for eligible
employees. Contributions to the Plan are made at the discretion of the
board of directors and amounted to $455,000, $350,000 and $255,000 in
1997, 1996 and 1995, respectively.
F-18
<PAGE>
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements - (Continued)
(16) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments, defines the fair value of financial
instruments as the amount at which the instrument could be exchanged in a
transaction between willing parties.
Cash and cash equivalents, accounts receivable, inventories, prepaid
expenses, notes payable to bank, accounts payable, and accrued expenses
and payroll withholdings are stated at carrying amounts that approximate
fair value because of the short maturity of those instruments.
Long-term debt and capital lease obligations are subject to interest
rates currently offered to the Company; therefore, the historical
carrying amount approximates fair value.
(17) Acquisition
On January 1, 1997, the Company acquired all of the assets and certain
liabilities of Foam Cutting Engineers, Inc. ("FCE") for approximately
$1,500,000. FCE is a designer and manufacturer of engineered foam
plastics for packaging and specialty applications. The acquisition was
accounted for as a purchase and was financed through the Company's
revolving line of credit. The results of FCE's operations were included
in the accompanying consolidated financial statements since the date of
acquisition. The cost of the acquisition was allocated on the basis of
the estimated fair market value of the assets acquired and the
liabilities assumed. This allocation resulted in goodwill of
approximately $107,000 which is being amortized over 20 years.
The following unaudited pro forma results of operations for 1996 give
effect to the acquisition as if the transaction had occurred at the
beginning of 1996. Such pro forma information reflects certain
adjustments including amortization of goodwill, interest expense and
income tax expense. This pro forma information does not necessarily
reflect the results of operations that would have occurred had the
acquisition taken place at the beginning of 1996 and is not necessarily
indicative of results that may be obtained in the future.
<TABLE>
<CAPTION>
(Unaudited)
-----------
<S> <C>
Pro forma total revenue $ 43,289,258
============
Pro forma net income $ 1,405,494
============
Pro forma basic net income per share $ 0.30
============
Pro forma diluted net income per share $ 0.29
============
</TABLE>
F-19
<PAGE>
Independent Auditors' Report on Supplementary Information
The Board of Directors and Stockholders
UFP Technologies, Inc.:
We have audited and reported separately herein on the consolidated financial
statements of UFP Technologies, Inc. and subsidiary as of December 31, 1997 and
1996 and for each of the years in the three-year period ended December 31, 1997.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements of UFP Technologies, Inc. and subsidiary taken
as a whole. The supplementary information included in Schedule II is presented
for purposes of additional analysis and is not a required part of the basic
consolidated financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
Boston, Massachusetts
February 12, 1998
F-20
<PAGE>
Schedule II
UFP TECHNOLOGIES, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1997, 1996 and 1995
Accounts receivable, allowance for doubtful accounts
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 164,352 200,936 256,194
Provision charged to expense 226,720 (27,605) 49,500
Deductions - write-offs (194,736) (8,979) (104,758)
--------- -------- --------
Balance at end of year $ 196,336 164,352 200,936
========= ======== ========
</TABLE>
F-21
<PAGE>
[LETTERHEAD]
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
UFP Technologies, Inc. :
We consent to incorporation by reference in the registration statements
(No. 333-2248 and No. 33-76440) on Form S-8 of UFP Technologies, Inc. of
our report dated February 12, 1998, relating to the consolidated balance
sheets of UFP Technologies, Inc. and subsidiary as of December 31, 1997 and
1996, and the related statements of income, stockholders' equity, and cash
flows and the related schedule for each of the years in the three-year
period ended December 31, 1997, and the related schedule, which report
appears in the December 31, 1997 annual report on Form 10-K of UFP
Technologies, Inc.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000914156
<NAME> UFP TECHNOLOGIES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 233
<SECURITIES> 0
<RECEIVABLES> 6,610
<ALLOWANCES> 196
<INVENTORY> 3,053
<CURRENT-ASSETS> 9,847
<PP&E> 20,111
<DEPRECIATION> 8,921
<TOTAL-ASSETS> 25,195
<CURRENT-LIABILITIES> 7,268
<BONDS> 0
0
0
<COMMON> 47
<OTHER-SE> 14,087
<TOTAL-LIABILITY-AND-EQUITY> 25,195
<SALES> 45,452
<TOTAL-REVENUES> 45,452
<CGS> 33,200
<TOTAL-COSTS> 42,518
<OTHER-EXPENSES> (20)
<LOSS-PROVISION> 228
<INTEREST-EXPENSE> 649
<INCOME-PRETAX> 2,304
<INCOME-TAX> 995
<INCOME-CONTINUING> 1,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,309
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.27
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000914156
<NAME> UFP TECHNOLOGIES
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 APR-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996
<CASH> 524 144 383 446
<SECURITIES> 0 0 0 0
<RECEIVABLES> 5,145 5,767 5,508 5,480
<ALLOWANCES> 201 164 216 219
<INVENTORY> 2,433 2,586 2,597 2,656
<CURRENT-ASSETS> 8,453 8,935 8,807 8,829
<PP&E> 13,826 17,202 14,714 15,175
<DEPRECIATION> 6,204 7,486 6,486 6,794
<TOTAL-ASSETS> 20,795 22,900 21,704 21,838
<CURRENT-LIABILITIES> 6,502 6,447 7,387 6,598
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 46 46 46 46
<OTHER-SE> 11,392 14,076 11,529 11,793
<TOTAL-LIABILITY-AND-EQUITY> 20,795 22,900 21,704 21,838
<SALES> 34,096 39,359 8,693 10,084
<TOTAL-REVENUES> 34,096 39,359 8,693 10,084
<CGS> 26,022 29,447 6,649 7,605
<TOTAL-COSTS> 33,002 37,265 8,367 9,591
<OTHER-EXPENSES> (1) (59) 0 0
<LOSS-PROVISION> 69 (28) 9 44
<INTEREST-EXPENSE> 438 485 114 106
<INCOME-PRETAX> 655 1,668 212 387
<INCOME-TAX> (232) 406 75 152
<INCOME-CONTINUING> 888 1,262 137 235
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 888 1,262 137 235
<EPS-PRIMARY> 0.19 0.27 0.03 0.05
<EPS-DILUTED> 0.19 0.26 0.03 0.05
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000914156
<NAME> UFP TECHNOLOGIES
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1996 JAN-01-1997 APR-01-1997 JUL-01-1997
<PERIOD-END> SEP-30-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 604 453 461 432
<SECURITIES> 0 0 0 0
<RECEIVABLES> 6,040 6,848 6,573 6,750
<ALLOWANCES> 272 205 224 263
<INVENTORY> 2,511 3,121 3,477 3,658
<CURRENT-ASSETS> 9,267 10,844 10,818 10,996
<PP&E> 15,760 18,169 18,456 19,101
<DEPRECIATION> 7,140 7,877 8,283 8,699
<TOTAL-ASSETS> 22,455 25,461 25,310 25,659
<CURRENT-LIABILITIES> 7,065 8,914 8,636 8,772
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 46 46 47 47
<OTHER-SE> 12,095 12,900 13,239 13,642
<TOTAL-LIABILITY-AND-EQUITY> 22,455 25,461 25,310 25,659
<SALES> 10,095 10,952 11,209 11,440
<TOTAL-REVENUES> 10,095 10,952 11,209 11,440
<CGS> 7,459 8,226 8,170 8,267
<TOTAL-COSTS> 9,456 10,496 10,520 10,620
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 16 14 19 44
<INTEREST-EXPENSE> 136 136 174 171
<INCOME-PRETAX> 503 319 514 649
<INCOME-TAX> 201 134 216 268
<INCOME-CONTINUING> 302 185 298 381
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 302 185 298 381
<EPS-PRIMARY> 0.07 0.04 0.06 0.08
<EPS-DILUTED> 0.06 0.04 0.06 0.08
</TABLE>
