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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, 1999 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 : 001-12648
UFP TECHNOLOGIES, INC.
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(Exact Name of Company as Specified in Its Charter)
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
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(Address of Principal Executive Offices) (Zip Code)
(978) 352-2200
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(Company's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Share Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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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 February 22, 2000, was
$11,877,858 based on the closing price of $2.75 on that date on the Nasdaq
National Market. As of February 22, 2000, 4,319,221 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 at the registrant's 2000 annual meeting of stockholders, 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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UFPT 1999 10-K page 2
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 UFP Technologies, Inc. (the "Company" or "UFPT") 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 Item 7 of this report 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
The Company designs and manufactures a broad range of high-performance
cushion packaging, including 100% recycled molded fiber packaging products for a
variety of industrial and consumer markets. The Company also designs and
manufactures specialty foam products. The Company is a leading U.S. manufacturer
of custom-designed cushion foam packaging products and engineered specialty foam
and laminated products.
Effective January 14, 2000, the Company purchased all of the
outstanding common stock of Simco Industries, Inc. ("Simco"), located in
Roseville, Michigan. Simco is a full-service supplier of automotive trim
components using their proprietary Superformed-Registered Trademark- process. In
addition, they operate a pattern making and tooling facility also focused on the
automotive interior market. This acquisition provides the Company with a key
Detroit area location as well as advanced molding capabilities.
Effective November 30, 1998, the Company purchased substantially all of
the assets of Pacific Foam Technologies, Inc. ("Pacific Foam"), based in
Ventura, California. Pacific Foam is engaged in the business of designing and
manufacturing a line of specialty foam products for the health and beauty
industry. This acquisition provides the Company with a strategic west coast
presence as well as an attractive niche market.
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
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UFPT 1999 10-K page 3
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.
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. 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 door panels and other interior automotive components,
athletic and industrial safety belts, components for medical diagnostic
equipment, nail files and other beauty aids, 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
Moulded Fibre Technology, Inc. ("MFT"). In January 2000, the Company acquired
all of the outstanding common stock of Simco Industries, Inc. 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
subsidiaries, MFT and Simco. 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 sectors: (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
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UFPT 1999 10-K page 4
distribution. The principal materials used to package these goods include
polyethylene and polyurethane foams, 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 and molded fiber. 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 automotive interior components, 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 their many advantages,
cross-linked foam and cross-linked foam laminated products are 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 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 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
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UFPT 1999 10-K page 5
systems for resilient materials that are inherently reusable; creating programs
to recycle packaging following its useful life; and developing materials that
use a high percentage of recycled content in their manufacture.
PRODUCTS
The Company's products include foam, plastic, and fiber packaging
products, and specialty foam products.
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.
The markets for the Company's molded fiber packaging and vacuum-formed
trays 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. Raw materials used in vacuum-formed plastics include
polystyrene (PS) and polyvinyl chloride (PVC). These products compete with
expanded polystyrene (EPS) and manually assembled corrugated die-cut inserts.
Sales of these products have been to the computer, consumer electronics and
medical industries.
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.
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
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UFPT 1999 10-K page 6
well as the Company's ability to manufacture in clean room environments. The
Company's specialty products are sold primarily to customers in the automotive,
sporting goods, medical, beauty, leisure and footwear industries. These products
include components for automobiles and medical diagnostic equipment, abrasive
nail files and anti-fatigue mats, 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 United States 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 believes that its sales are somewhat seasonal, with
increased sales in the second half of the year.
With the addition of Pacific Foam, the Company now markets a line of
products to the health and beauty industry. These products are sold primarily
through distributors.
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 designated 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.
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UFPT 1999 10-K page 7
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
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.
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UFPT 1999 10-K page 8
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 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 and fiber 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.
Competition in the engineered specialty foam products industry is also
intense. 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, 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 may continue to make efforts to obtain patents, when available,
although 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 relating to its molded fiber
technology (including certain proprietary machine designs) and has patent
applications pending with respect to such technology in certain foreign
countries and international patent offices. The Company also has 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, or will not be challenged or circumvented by
others. The expiration dates for the Company's patents range from February 2003
through August 2014.
The Company has licensed 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
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UFPT 1999 10-K page 9
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 February 16, 2000, and February 28, 1999
totaled approximately $8.7 million and $3.9 million, respectively, for the
Packaging segment, and $4.5 million and $4.9 million respectively for the
Specialty segment. 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 February 19, 2000, the Company had a total of 660 full-time
employees in both the Specialty segment (20 in engineering, 286 in manufacturing
operations, 22 in marketing, sales and support services, and 31 in general and
administration) and in the Packaging segment (27 in engineering, 222 in
manufacturing, 25 in marketing, sales and support services, and 27 in general
and administration). These numbers include Simco Industries, Inc., which was
acquired on January 14, 2000; Simco's employees totaled 101. The Company is not
a party to any collective bargaining agreement. The Company considers its
employee relations to be good.
ITEM 2. PROPERTIES
The following table presents certain information relating to each of
the Company's properties:
Lease
Square Expiration
Location Feet Date Principal Use
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Georgetown, Massachusetts(5) 54,000 (owned Headquarters, fabrication, molding, test lab, clean-
by the room, and engineering for Specialty segment
Company)
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UFPT 1999 10-K page 10
Lease
Square Expiration
Location Feet Date Principal Use
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Decatur, Alabama(1 + 4) 47,250 12/31/01 Fabrication and engineering for Packaging segment
Pawcatuck, Connecticut 39,000 12/31/00 Fabrication and engineering for Packaging segment
Kissimmee, Florida(1 + 4) 49,400 12/31/01 Fabrication, molding, test lab, and engineering for
Packaging segment
Atlanta, Georgia 55,530 10/31/04 Fabrication, molding and engineering for Specialty segment
Haverhill, Massachusetts 38,372 2/28/03 Flame lamination for Specialty segment
Raritan, New Jersey 67,125 2/28/03 Fabrication, molding, test lab, clean-room, and engineering
for Packaging segment
Gilroy, California(2) 36,350 1/1/01 Molded fiber operations and engineering for Packaging segment
Scarborough, Maine 29,768 5/31/02 Molded fiber operations and engineering for Packaging segment
Clinton, Iowa 25,000 7/1/01 Molded fiber operations for Packaging segment
20,000 7/1/03
Addison, Illinois(3) 45,000 07/31/02 Fabrication and engineering for Packaging segment
Ventura, California 32,546 10/31/01 Fabrication and engineering for Specialty segment
(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.
(4) The Company has an option to extend the term of this lease for a period of
three years.
(5) Subject to mortgage (see Note 7 of the Notes to the Consolidated Financial
Statements).
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
None.
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UFPT 1999 10-K page 11
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,
1998 to December 31, 1999:
HIGH LOW
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FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter $ 4-1/4 $ 3-1/2
Second Quarter 4-5/8 4
Third Quarter 4-1/4 2-1/8
Fourth Quarter 3-5/8 2-3/8
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter $ 4-1/2 $ 3
Second Quarter 4-1/2 3-3/8
Third Quarter 3-15/16 3-3/16
Fourth Quarter 3-1/2 2-1/4
NUMBER OF STOCKHOLDERS
As of February 22, 2000, there were 133 holders of record of the
Company's Common Stock.
DIVIDENDS
The Company did not pay any dividends in 1999. 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 expected
expansion of its business and does not anticipate paying any cash dividends in
the foreseeable future.
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UFPT 1999 10-K page 12
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:(1) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Net sales $58,801 47,220 45,452 39,359 34,096
Gross profit 14,862 13,080 12,252 9,912 8,074
Operating income 3,279 3,174 2,934 2,094 1,095
Net income 1,693 1,647 1,309 1,262 888
Diluted earnings per share $ 0.35 0.34 0.27 0.26 0.19
Weighted average number of diluted
shares outstanding 4,896 4,830 4,863 4,874 4,734
DECEMBER 31
CONSOLIDATED BALANCE SHEET DATA:(1) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital $ 3,549 2,099 2,579 2,488 1,952
Total assets 31,867 29,949 25,195 22,900 20,795
Short-term debt and capital lease
obligations 6,011 5,060 3,525 2,455 3,257
Long-term debt and capital lease
obligations, excluding current portion 2,706 2,123 3,233 3,223 2,414
Total liabilities 15,659 14,053 11,062 10,170 9,356
Stockholders' equity $16,208 15,895 14,133 12,729 11,438
(1) See Note 17 of Notes to Consolidated Financial Statements for segment
information
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
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UFPT 1999 10-K page 13
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 elsewhere in this report 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:
Years Ended December 31
-----------------------
1999 1998 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.7 72.3 73.0
Gross profit 25.3 27.7 27.0
------ ------ ------
Selling, general and administrative expenses 19.7 21.0 20.5
Operating income 5.6 6.7 6.5
------ ------ ------
Total other expenses, net 0.8 0.8 1.4
Income before income taxes 4.8 5.9 5.1
------ ------ ------
Provision for income taxes 1.9 2.4 2.2
Net income 2.9 3.5 2.9
------ ------ ------
====== ====== ======
1999 COMPARED TO 1998:
The Company's net sales increased 24.5% to $58.8 million for the year
ended December 31, 1999 from $47.2 million in the same period last year. The
increase in sales is primarily attributable to the acquisition of Pacific Foam
on November 30, 1998. In addition, a smaller component of the increase is
attributable to the commencement of the Woodbridge automotive project in the
fourth quarter of 1999.
Gross profit as a percentage of sales decreased to 25.3% in the year
ended December 31, 1999, from 27.7% in 1998. The decrease is primarily
attributable to lower gross margins at Pacific Foam, as well as automotive
program start-up costs.
Selling, General & Administrative Expenses ("SG&A") increased 16.9% to
$11.6 million in 1999, from $9.9 million in 1998. As a percentage of sales, SG&A
decreased to 19.7% in 1999 from 21.0% in 1998. The increase in SG&A dollars is
primarily attributable to the impact of Pacific Foam. The decrease in SG&A as a
percentage of sales reflects the economies of scale accompanying operations
growth.
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 14
Interest expense increased approximately $194,000 to $641,000 in 1999,
from $447,000 in 1998 as a result of higher average borrowings primarily due to
financing of the Pacific Foam acquisition. In addition, interest expense
increased due to higher interest rates in 1999.
The Company's effective tax rate was 40.2% and 40.9% in 1999 and 1998
respectively.
1998 COMPARED TO 1997:
The Company's net sales increased 3.9% to $47.2 million for the year
ended December 31, 1998 from $45.5 million in the same period last year. The
increase in sales is primarily attributable to higher sales in protective
packaging, which was the beneficiary of several large projects during 1998. In
addition, a smaller component of the increase is attributable to the impact of
Pacific Foam, which was acquired on November 30, 1998. This increase partially
offsets a decrease in sales in the Specialty segment.
Gross profit as a percentage of sales improved to 27.7% in the year
ended December 31, 1998, from 27.0% in 1997. The improvement was primarily
related to intensive efforts by management to improve material efficiencies
during the year.
Selling, General and Administrative Expenses ("SG&A") increased 6.3% to
$9.9 million in 1998, from $9.3 million in 1997. As a percentage of sales, SG&A
increased to 21.0% from 20.5%. The increase in dollars and the increase in SG&A
as a percentage of sales were primarily due to the acquisition of Pacific Foam
on November 30, continued systems enhancements, and additions to the management
team.
Interest expense declined approximately $200,000 to $447,000 in 1998,
from $649,000 in 1997. Although the Company's outstanding debt at December 31,
1998 was higher than on the same date in 1997, the average debt outstanding
during the year ended December 31, 1998 was lower than in 1997. In addition, the
Company borrowed using a LIBOR based interest rate rather than the historically
used Prime based rate. As a result, average interest rates were lower in 1998
than in 1997.
The Company's effective tax rate was 40.9% and 43.2% in 1998 and 1997,
respectively.
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, 1999 and 1998, working capital was $3,549,000 and
$2,099,000, respectively. The increase in working capital is primarily
attributable to increases in inventories and accounts receivable. Cash provided
from operations was $1,258,000 and $4,261,000 for 1999 and 1998, respectively.
Net cash used in investing activities was $2,992,000 and was used primarily for
capital expenditures of $1,949,000 and the repurchase of capital stock of
$1,603,000. Capital purchases in 1999 consisted primarily of foam cutting
equipment in our Packaging plants and the set-up of the Woodbridge production
facility.
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 15
Including amounts due under the revolving credit facility and capital
lease obligations, the Company had total debt outstanding of $8,718,000 and
$7,184,000 at December 31, 1999 and 1998, respectively. The increase was
primarily attributable to the repurchase of capital stock of $1,603,000. The
Company has a $8,000,000 revolving bank line, of which $5,000,000 was
outstanding at December 31, 1999. Borrowings through the credit facility are
unsecured and bear interest at prime or LIBOR Plus 1.25%. In addition, the
Company has a $10,000,000 acquisition line of credit, of which $1,603,000 (for
the repurchase of capital stock) was outstanding as of December 31, 1999. At
December 31, 1999, the Company had capital lease obligations and other notes
payable of approximately $1,543,000 and $572,000, respectively. At December 31,
1999, the current portion of all debt, including the revolving bank loan, was
approximately $6,011,000. See Note 7 of Notes to the Consolidated Financial
Statements for further discussion of debt.
The Company acquired Simco Industries, Inc. on January 14, 2000, for
which additional borrowings of approximately $5,400,000 were made from the
$10,000,000 acquisition line of credit. The Company has no additional
significant capital commitments in 2000, but plans on adding additional
machinery to increase capacity or to enhance operating efficiencies in its
manufacturing plants. Additionally, the Company may consider the acquisition of
companies, technologies or products in 2000, 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 2000. However, there can be no
assurances that such financing will be available at favorable terms, if at all.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the potential for system and processing failure of
date-related data and the result of computer-controlled systems using two digits
rather than four to define the applicable year. For example, computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. Problems associated with the year 2000
may not become apparent until some time after January 2000.
The Company established a Year 2000 Compliance Committee (the "Committee)
which was comprised of members of senior management, finance, MIS, operations
and engineering. The committee's mandate was to design and implement a
Compliance Plan that minimizes the risk of material adverse impact to the
Company resulting from events triggered by the turn of the century.
The Committee defined three categories of internal elements that were
subject to risk; computer hardware and software, manufacturing equipment and
building equipment. Computer hardware and software included networking,
operating and application software being used by the Company as well as those
that were planned to be installed prior to the year 2000, and the hardware
platforms upon which they operate. Manufacturing equipment included machinery
and equipment, owned or leased, that is used by the Company in the process of
manufacturing inventory for resale.
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 16
Building equipment included all other devices that potentially have
microprocessing chips that were not included in computer hardware and software
and manufacturing equipment, including, but not limited to, fax machines,
security systems, heating/air conditioning, telephone and other communication
systems, copiers, sprinklers and elevators.
The approach for minimizing risk of noncompliance within each of these
elements included four distinct phases: Inventory, Assessment, Conversion and
Implementation. In the Inventory phase the Company identified the items within
each of the three previously defined elements. The Assessment phase included
identifying which of the items in the inventory were non-compliant. The items in
Inventory were assessed in an order of priority based upon the Committee's
opinion of their relative importance to the Company's operations.
In the Conversion phase the Company repaired or replaced those items that
were non-compliant. The Company substantially implemented new financial and
manufacturing software ("New Software"), throughout all of its plants, that is
Year 2000 compliant which resulted in compliance within the computer hardware
and software element. The Company did not identify a manufacturing machine that
was not Year 2000 compliant. In the Implementation phase, the Company put into
operation repaired or new devices that were Year 2000 compliant. On January 2,
2000, the Company tested all of its business critical computer hardware and
software, manufacturing equipment, and building equipment, and found all of them
to be functioning properly. Additionally, upon restarting operations, on January
3, 2000, no Year 2000 related failures were experienced.
Independent of its own internal elements, the Company is dependent upon
the customers who order its products and upon numerous third parties who supply
various items including materials, supplies, services, utilities and other items
the Company uses in the ordinary course of business. Included within these third
parties is a group of several key foam raw material suppliers that collectively
supply a significant portion of the Company's foam used in production. The
Company evaluated the compliance status of its customers and third party
suppliers. No business interruption was experienced as a result of a failure of
key suppliers to provide materials, services, or other items. Also, no
interruptions in orders from key customers were experienced.
The Company included the cost of the new software in its financial
statements for 1999 and in its plan for 2000. The software and hardware costs
have been and will be capitalized and depreciated in compliance with the
Company's capitalization policy. Although the decision to implement the New
Software resolved the Year 2000 problem for the majority of the Company's
computer applications, it was made for operating reasons and was/is considered
normal capital expenditures. As a result, the Company did not incur material
costs above and beyond the cost of implementing the New Software.
The Company is substantially compliant, but can give no assurance as to
the ongoing readiness of its key material and service providers. The Company
completed a Contingency Plan (the "Plan") that addresses the operating issues in
the event that any of its material or service providers fail to perform. In
addition, the Plan addresses operating considerations in the event that any of
the Company's internal elements fail to perform as expected. The Company can
give no assurance that the Plan will be effective.
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 17
OTHER
A significant portion of the Company's Packaging 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.
MARKET RISK
The following discussion of the Company's market risk includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
Market risk represents the risk of changes in value of a financial
instrument caused by fluctuations in interest rates, foreign exchange rates, and
equity prices. At December 31, 1999, the Company's cash and cash equivalents
consisted of bank accounts in U.S. dollars, and their valuation would not be
affected by market risk. The Company has two debt instruments where interest is
based upon the prime rate (and/or LIBOR) and, therefore, future operations could
be affected by interest rate changes; however, the Company believes that the
market risk of the debt is minimal.
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, 1999.
Effective May 21, 1999, the Company dismissed KPMG LLP as the
Registrant's independent accountants, and engaged Arthur Andersen LLP as its new
independent accountants.
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 18
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS PAGE
Index to Consolidated Financial Statements and Financial Statement
Schedules..........................................................................................F2
Independent Auditors' Report - 1999 ...............................................................F3
Independent Auditors' Reports - 1998 and 1997......................................................F4
Consolidated Balance Sheets as of December 31, 1999 and 1998.......................................F5
Consolidated Statements of Income for the years ended December 31,
1999, 1998, and 1997...............................................................................F6
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998, and 1997..................................................................F7
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997...............................................................................F8
Notes to Consolidated Financial Statements...................................................F9 - F25
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 19
(A) (2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts...................................................F26
(A) (3) EXHIBITS
Number Reference
------ ---------
2.01 Agreement and Plan of Reorganization among the Company, Moulded Fibre A-2.01**
Technology, Inc. and UFP Acquisition, Inc.
2.02 Agreement of Merger between Moulded Fibre Technology, Inc. and UFP C-2.02**
Acquisition, Inc.
2.03 Merger Agreement relating to the reincorporation of the Company in A-2.02
Delaware.
2.04 Asset Purchase Agreement relating to the purchase of FCE. I-2**
2.05 Asset Purchase Agreement relating to the purchase of the assets of O-2.05
Pacific Foam Technologies, Inc.
2.06 Stock Purchase Agreement dated January 14, 2000, relating to the P-2.01**
acquisition of the stock of Simco Industries, Inc. by the Company.
3.01 Certificate of Incorporation of the Company, as amended. F-3.01**
3.02 Bylaws of the Company. A-3.02**
4.01 Specimen Certificate for shares of the Company's Common Stock. A-4.01**
4.02 Description of Capital Stock (contained in the Certificate of A-4.02**
Incorporation of the Company, filed as Exhibit 3.01).
4.04 Rights Agreement (including the Certificate of J-4**
Designation and form of Rights Certificate
attached as Exhibits A and B, respectively,
thereto) between the Registrant and American Stock
Transfer & Trust Company, as Rights Agent, dated as
of January 13, 1999.
10.02 $1,000,000 Mortgage and Promissory Note issued by the Company in favor A-10.02**
of Gloucester Bank & Trust Company.
10.06 Alabama Leasehold Mortgage of United Development Company Limited to A-10.06**
First American Bank.
10.07 Guaranty of the Company in favor of First American A-10.07**
Bank for the benefit of United
Development Company Limited.
10.08 Agreement between the Company and William H. Shaw. A-10.08**
10.09 Agreement and Severance Agreement between the Company and Richard L. A-10.09**
Bailly.
10.18 Employee Stock Purchase Plan. A-10.18**
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 20
Number Reference
------ ---------
10.19 1993 Combined Stock Option Plan, as amended. K-4.5* **
10.20 1993 Nonemployee Director Stock Option Plan. B-4.5**
10.21 Facility Lease between the Company and United Development Company A-10.21**
Limited.
10.22 Facility Lease between the Company and Raritan Associates. A-10.22**
10.23 Facility Sublease between the Company and United Development Company A-10.23**
Limited.
10.25 Facility lease between the Company and Flanders Properties. A-10.25**
10.26 Amendment to facility lease between the Company and Flanders Properties. A-10.26**
10.27 Facility Lease between the Company and Dana Evans d/b/a Evans A-10.27**
Enterprises.
10.28 Facility Lease between Moulded Fibre Technology, Inc. and J.B. Brown & A-10.28**
Sons.
10.29 Facility Lease between the Company and Cole Taylor Bank, as G-10.29**
Trustee
10.30 Form of Indemnification Agreement for directors and officers of the A-10.30**
Company.
10.32 Promissory Note of United Development Company Limited in favor of the A-10.32**
Company.
10.33 Form of Representative's Warrant Agreement. A-10.33**
10.34 Facility Lease between Moulded Fibre Technology, Inc. and Lincoln C-10.34**
Gilroy II and Patrician Associates, Inc.
10.35 Facility Lease between the Company and M.D. Hodges Enterprises, Inc. D-10.35**
10.36 Facility Lease between Moulded Fibre Technology, Inc. and Dead River D-10.36**
Properties.
10.37 Facility Lease between the Company and Clinton Area Development G-10.37**
Corporation.
10.38.7 First Amendment to Credit Agreement, dated May 31, F-10.38.7**
1995, between the Company and BayBank.
10.38.8 Amended and Restated Revolving Credit Note, dated F-10.38.8**
May 31, 1996, between the Company and
BayBank.
10.38.9 Amended and Restated Equipment Note, dated May 31, F-10.38.9**
1996, between the Company and BayBank.
10.38.10 Third Amendment, dated July 6, 1998, to Credit 0-10.38.10
Agreement, dated May 31, 1995, between
the Company and BankBoston.
10.38.20 Loan Agreement, dated August 13, 1999, between the Filed herewith
Company and Citizens Bank of
Massachusetts
10.38.30 Supply Agreement, dated January 1, 1999, between Filed herewith
the Company and Woodbridge Foam
Corporation
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 21
Number Reference
------ ---------
10.39 Employment Agreement with R. Jeffrey Bailly dated April 4, 1995. H-10.37**
10.40 1998 Director Stock Option Incentive Plan L**
10.41 1998 Employee Stock Purchase Plan. M**
10.42 Stock Repurchase Agreement Filed herewith
21.01 Subsidiaries of the Company. N-21.01**
23.01 Consent of Arthur Andersen LLP Filed herewith
23.02 Consent of KPMG LLP. Filed herewith
27.01 Financial Data Schedule. Filed herewith
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.
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 22
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 report on Form
8-K dated January 28, 1999. The number set forth herein is
the number of the exhibit in said report.
K. Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the three months ended June 30, 1998. The
number set forth herein is the number of the exhibit in said
Quarterly Report.
L. Incorporated by reference to the Company's registration
statement on Form S-8 (registration No. 333-56741).
M. Incorporated by reference to the Company's Proxy Statement
relating to the Company's Annual Meeting of Stockholders on
June 5, 1998.
N. Incorporated by reference by the Company's Annual Report
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.
O. Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998. The
number set forth herein is the number of the Exhibit in said
annual report.
P. Incorporated by reference to the Company's report on Form
8-K dated January 31, 2000. The number set forth herein is
the number of the Exhibit in said report.
* Management contract or compensatory plan or arrangement.
** 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, 1999.
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 23
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 22, 2000 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 22, 2000
- --------------------------------
R. Jeffrey Bailly Officer and Director
/s/ WILLIAM H. SHAW Chairman of the Board of Directors March 22, 2000
- --------------------------------
William H. Shaw
/s/ RONALD J. LATAILLE Chief Financial Officer, Vice President, March 22, 2000
- --------------------------------
Ronald J. Lataille Principal Accounting Offer
/s/ RICHARD L. BAILLY Director March 22, 2000
- --------------------------------
Richard L. Bailly
/s/ WILLIAM C. CURRY Director March 22, 2000
- --------------------------------
William C. Curry
/s/ MICHAEL J. ROSS Director March 22, 2000
- --------------------------------
Michael J. Ross
/s/ KENNETH L. GESTAL Director March 22, 2000
- --------------------------------
Kenneth L. Gestal
/s/ T. GORDON RODDICK Director March 22, 2000
- --------------------------------
T. Gordon Roddick
/s/ PETER R. WORRELL Director March 22, 2000
- --------------------------------
Peter R. Worrell
- --------------------------------------------------------------------------------
UFPT 1999 10-K page 24
UFP TECHNOLOGIES, INC.
Consolidated Financial Statements and Schedule
December 31, 1999 and 1998
With Independent Auditors' Report Thereon
UFPT 1999 10-K page F1
UFP TECHNOLOGIES, INC.
Index to Consolidated Financial Statements and Financial Statement Schedule
PAGE
----
Independent Auditors' Reports F3 - F4
Consolidated Balance Sheets as of December 31, 1999 and 1998 F5
Consolidated Statements of Income for the years ended December 31, 1999, 1998
and 1997 F6
Consolidated Statements of Stockholders' Equity for the years ended
December 31,1999, 1998, and 1997 F7
Consolidated Statements of Cash Flows for the years ended December 31, F8
1999, 1998, and 1997
Notes to Consolidated Financial Statements F9 - F25
SCHEDULE
Schedule II - Valuation and Qualifying Accounts F26
UFPT 1999 10-K page F2
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, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for the year ended
December 31, 1999. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the schedule 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 consolidated financial position of
UFP Technologies, Inc. and subsidiary as of December 31, 1999, and the results
of their operations and their cash flows for the year ended December 31, 1999,
in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a)(2) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. The schedule 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.
Arthur Andersen LLP
Boston, Massachusetts
February 18, 2000
UFPT 1999 10-K page F3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
UFP Technologies, Inc.:
We have audited the consolidated balance sheet of UFP Technologies,
Inc. and subsidiary as of December 31, 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the two-year period ended December 31, 1998. 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, 1998, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Boston, Massachusetts
February 25, 1999
UFPT 1999 10-K page F4
UFP TECHNOLOGIES, INC.
Consolidated Balance Sheets
DECEMBER 31
----------------------------------
ASSETS 1999 1998
Current assets:
Cash and cash equivalents $ 348,729 512,356
Receivables, net 9,676,900 7,867,647
Inventories 5,191,890 4,091,770
Prepaid expenses 317,266 319,191
Deferred income taxes 220,676 369,000
------------ ------------
Total current assets 15,755,461 13,159,964
------------ ------------
Property, plant and equipment 21,650,486 20,025,618
Less accumulated depreciation and amortization (11,084,036) (9,086,763)
------------ ------------
Net property, plant and equipment 10,566,450 10,938,855
------------ ------------
Cash surrender value of officers' life insurance 293,579 218,027
Investment in and advances to affiliated partnership 214,745 218,524
Deferred income taxes 48,416 231,000
Goodwill, net 4,524,285 4,711,463
Other assets 464,427 471,009
------------ ------------
Total assets $ 31,867,363 29,948,842
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 5,000,000 4,150,000
Current installments of long-term debt 63,916 59,411
Current installments of capital lease obligations 947,429 851,042
Accounts payable 2,438,045 2,589,492
Accrued taxes and other expenses 3,757,412 3,410,929
------------ ------------
Total current liabilities 12,206,802 11,060,874
------------ ------------
Long-term debt, excluding current installments 2,111,076 568,678
Capital lease obligations, excluding current installments 595,232 1,554,647
Retirement and other liabilities 745,840 869,218
------------ ------------
Total liabilities 15,658,950 14,053,417
------------ ------------
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 value. Authorized 1,000,000 shares; no shares
issued or outstanding -- --
Common stock, $.01 value. Authorized 20,000,000; issued
and outstanding 4,294,632 shares in 1999 and 4,707,354 shares in 1998 42,946 47,074
Additional paid-in capital 8,237,558 9,613,859
Retained earnings 7,927,909 6,234,492
------------ ------------
Total stockholders' equity 16,208,413 15,895,425
------------ ------------
Total liabilities and stockholders' equity $ 31,867,363 29,948,842
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
UFPT 1999 10-K page F5
UFP TECHNOLOGIES, INC.
Consolidated Statements of Income
YEARS ENDED DECEMBER 31
------------------------------------------------------
1999 1998 1997
Net sales $ 58,801,063 47,220,174 45,452,232
Cost of sales 43,939,268 34,140,005 33,200,304
------------ ------------ ------------
Gross profit 14,861,795 13,080,169 12,251,928
Selling, general and administrative expenses 11,582,430 9,905,996 9,318,080
------------ ------------ ------------
Operating income 3,279,365 3,174,173 2,933,848
------------ ------------ ------------
Other income (expense):
Interest expense (640,763) (447,282) (649,269)
Equity in net income of unconsolidated
partnerships 22,013 20,904 15,227
Other, net 169,130 40,170 4,500
------------ ------------ ------------
Total other expense (449,620) (386,208) (629,542)
------------ ------------ ------------
Income before income tax
provision 2,829,745 2,787,965 2,304,306
Income tax provision 1,136,328 1,141,000 995,000
------------ ------------ ------------
Net income $ 1,693,417 1,646,965 1,309,306
============ ============ ============
Net income per share:
Basic $ 0.35 0.35 0.28
============ ============ ============
Diluted $ 0.35 0.34 0.27
============ ============ ============
Weighted average common shares:
Basic 4,808,640 4,682,210 4,655,586
============ ============ ============
Diluted 4,895,935 4,830,236 4,863,110
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
UFPT 1999 10-K page F6
UFP TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Common Stock Additional Total
------------------------------ paid-in Retained stockholders'
Shares Amount capital earnings equity
------------ ------------ ------------ ------------ ------------
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
Sale of common stock through incentive
stock option plan 30,000 300 70,950 -- 71,250
Stock issued in lieu of compensation 11,000 110 43,890 -- 44,000
Net income -- -- -- 1,646,965 1,646,965
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 4,707,354 $ 47,074 $ 9,613,859 $ 6,234,492 $ 15,895,425
------------ ------------ ------------ ------------ ------------
Sale of common stock through incentive
stock option plan 85,345 853 34,846 -- 35,699
Employee Stock Purchase Plan 28,985 290 78,151 -- 78,441
Stock retirement (18,052) (181) (77,387) -- (77,568)
Stock issued in lieu of compensation 61,000 610 185,514 -- 186,124
Stock repurchased (570,000) (5,700) (1,597,425) -- (1,603,125)
Net income -- -- -- 1,693,417 1,693,417
============ ============ ============ ============ ============
Balance at December 31, 1999 4,294,632 $ 42,946 $ 8,237,558 $ 7,927,909 $ 16,208,413
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
UFPT 1999 10-K page F7
UFP TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31
-----------------------
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $ 1,693,417 1,646,965 1,309,306
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,299,673 1,899,915 1,801,758
Equity in net income of unconsolidated affiliate and partnership (22,013) (20,904) (15,227)
Gain (loss) on disposal of property, plant and equipment (169,130) (40,170) 39,269
Stock issued in lieu of compensation 186,124 44,000 33,750
Deferred income taxes 330,908 156,000 410,000
Changes in operating assets and liabilities net of effects from
acquisition:
Receivables, net (1,809,253) (584,334) (135,336)
Inventories (1,100,120) (60,601) (172,738)
Prepaid expenses 1,925 (196,339) 212,148
Accounts payable (151,447) 308,615 (785,771)
Accrued taxes and other expenses 346,483 976,495 332,385
Retirement and other liabilities (164,498) 165,172 60,000
Cash surrender value of officers'life insurance (75,552) 134,550 (27,416)
Increase in other assets (108,640) (168,618) (23,352)
----------- ----------- -----------
Net cash provided by operating activities 1,257,877 4,260,746 3,038,776
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,948,968) (1,562,135) (2,436,224)
Acquisition of operating assets, less cash acquired -- (2,293,506) (1,512,879)
Capital stock repurchase (1,603,125) -- --
Payments received on advances to affiliated company 25,792 42,744 1,750
Proceeds from disposal of property, plant and equipment 534,350 290,170 4,500
----------- ----------- -----------
Net cash used in investing activities (2,991,951) (3,522,727) (3,942,853)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings under notes payable 850,000 713,413 1,100,000
Proceeds from long-term borrowings 1,603,125 -- --
Proceeds from long-term capital leases -- -- 967,000
Proceeds from sale of common stock 36,572 71,250 60,662
Principal repayment of long-term debt (56,222) (359,077) (422,551)
Principal repayment of obligations under capital leases (863,028) (884,701) (711,113)
----------- ----------- -----------
Net cash (used in) provided by financing activities 1,570,447 (459,115) 993,998
----------- ----------- -----------
Net change in cash and cash equivalents (163,627) 278,904 89,921
Cash and cash equivalents at beginning of year 512,356 233,452 143,531
----------- ----------- -----------
Cash and cash equivalents at end of year $ 348,729 512,356 233,452
=========== =========== ===========
UFPT 1999 10-K page F8
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UFP Technologies, Inc. designs and manufactures a broad range of
packaging and specialty foam products for a variety of industrial and
consumer markets.
(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) INVENTORIES
Inventories which include material, labor, and manufacturing
overhead are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(c) 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:
Leasehold improvements Estimated useful life or remaining lease
term, whichever is shorter
Buildings and improvements 31.5 years
Equipment 8-10 years
Furniture and fixtures 5 -7 years
(d) 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
UFPT 1999 10-K page F9
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(e) SALES
Product sales are recorded at the time of shipment and when
persuasive evidence of an arrangement exists, the seller's price
to the buyer is fixed or determinable and collectabillity is
reasonably assured. If a loss is anticipated on any contract,
provision for the entire loss is made immediately. The Securities
and Exchange Commission released Staff Accounting Bulletin (SAB)
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, on December
3, 1999. This SAB provides additional guidance on the accounting
for revenue recognition, including both broad conceptual
discussions as well as certain industry-specific guidance. The
guidance is effective for the first quarter of fiscal 2000, and
would be adopted by recording the effect of any prior revenue
transaction affected as a "cumulative effect of a change in
accounting principle" as of January 3, 2000. The Company does not
expect this new guidance to have a material effect on the
Company's results of operations or financial position.
(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) INTANGIBLE ASSETS
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and APB Opinion No.
17, INTANGIBLE ASSETS, the Company reviews long-lived assets and
all intangible assets (including goodwill) for impairment whenever
events or changes in circumstances indicate the carrying amount of
such assets may not be recoverable. Recoverability of these assets
is determined by comparing the forecasted undiscounted net cash
flows of the operation to which the assets relate, to the carrying
amount including associated intangible assets of such operation.
If the operation is determined to be unable to recover the
carrying amount of its assets, then intangible assets are written
down first, followed by the other long-lived assets of the
operation, to fair value. Fair value is determined based on
discounted cash flows or appraised values, depending upon the
nature of the assets.
Goodwill is being amortized on a straight-line basis over a
20-year period. Accumulated amortization was $1,258,699 and
$972,799 as of December 31, 1999 and 1998, respectively.
UFPT 1999 10-K page F10
(h) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(i) COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted the provisions
of SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which established
standards for reporting and display of comprehensive income and
its components. Comprehensive income is the total of net income
and all other non-owner changes in stockholders' equity.
Comprehensive income equaled net income for all periods presented.
(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 consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(k) SEGMENTS AND RELATED INFORMATION
In the fourth quarter of 1998, the Company adopted the provisions
of SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. The statement establishes standards for the
way that public business enterprises report information and
operating segments in annual financial statements and requires
reporting of selected information in interim financial reports.
(l) START-UP ACTIVITIES
During 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, REPORTING ON THE
COSTS OF START-UP ACTIVITIES. This statement requires a change in
the method of accounting for start-up costs on major projects to
expense these costs as incurred. Prior to this accounting change,
these costs could be capitalized. The impact of this accounting
change did not have a material effect on the Company's results of
operations or financial position.
(m) RECENT ACCOUNT PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 137,
Accounting For Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS No. 133, in
July 1999. SFAS No. 133 is now effective for all fiscal quarters
of all fiscal years beginning after June 15, 2000; earlier
adoption is allowed. The statement requires companies to record
derivatives on the balance sheet as assets or
UFPT 1999 10-K page F11
liabilities, measured at fair value. Gains or losses resulting
from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it
qualifies for hedge accounting. The Company currently expects
that, due to its limited use of derivative instruments, the
adoption of SFAS No. 133 will not have a material effect on the
Company's results of operations or financial position.
(n) RECLASSIFICATIONS
Certain prior year account balances have been reclassified to
conform to the 1999 presentation.
(2) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
Years Ended December 31
-----------------------
1999 1998 1997
---- ---- ----
Interest $623,855 512,190 541,270
-------- ------- -------
Income taxes $964,985 643,261 700,230
-------- ------- -------
During 1998, the Company renegotiated the terms of a facility lease which
was leased from a limited partnership in which the Company and one of its
officers are shareholders. This lease was previously treated as a capital
lease. Based on the terms of the new lease agreement, the lease is no
longer a capital lease. Consequently, the Company wrote off the related
building and improvements and associated capital lease obligation of
$247,834. This transaction resulted in an immaterial gain.
(3) RECEIVABLES
December 31
-------------------------------
1999 1998
---- ----
Accounts receivable - trade $ 9,615,088 8,031,561
Employee advances and other receivables 427,620 93,951
------------ ------------
10,042,708 8,125,512
Less allowance for doubtful receivables (365,808) (257,865)
------------ ------------
$ 9,676,900 7,867,647
============ ============
UFPT 1999 10-K page F12
(4) INVENTORIES
Inventories consist of the following:
December 31
--------------------------
1999 1998
---- ----
Raw materials $3,296,702 2,634,482
Work in process 469,875 504,489
Finished goods 1,425,313 952,799
---------- ----------
$5,191,890 4,091,770
========== ==========
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31
----------------------------
1999 1998
---- ----
Land $ 85,319 85,319
Buildings and improvements 1,920,842 1,913,242
Leasehold improvements 1,451,999 1,268,551
Equipment 16,283,270 14,857,508
Furniture and fixtures 1,606,314 1,303,616
Construction in progress - equipment 302,742 597,382
----------- -----------
$21,650,486 20,025,618
=========== ===========
(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
$22,013, $18,410, and $19,937 in 1999, 1998 and 1997, respectively.
On December 31, 1998, United Development Company Limited executed and
delivered to the Company a term note in the amount of $99,750 to evidence
advances received from the Company. This note accrues interest at 9.75%
and is repayable in monthly installments of $2,107.
(7) INDEBTEDNESS
On August 13, 1999, the Company entered into a new banking arrangement.
At December 31, 1999, the Company may borrow up to $8,000,000 under a
revolving line of credit at the bank's prime lending rate (8.5% at
December 31, 1999) or LIBOR plus 1.25% (6.8991% at December 31, 1999).
Amounts borrowed under this arrangement are due on demand and are
unsecured. At December 31, 1999 and 1998, borrowings under this
arrangement were
UFPT 1999 10-K page F13
$5,000,000 and $4,150,000, respectively. The Company also may borrow up
to $10,000,000 under an "Acquisition" line of credit, with interest based
on the bank's prime lending rate of 8.5% or LIBOR plus 1.25% (see
Footnote 20 for further discussion of credit lines). Amounts under this
arrangement are payable on demand and are unsecured. At December 31,
1999, the Company had borrowings under this arrangement of $1,603,000.
Long-term debt consists of the following:
December 31
------------------------------------------
1999 1998
---- ----
8.76% mortgage note payable in monthly installments of
$8,759 including interest, maturing in 2007; secured by
real estate $ 571,867 628,089
Note payable - acquisition 1,603,125 -
------------------- --------------------
Total long-term debt 2,174,992 628,089
Less current installments 63,916 59,411
------------------- --------------------
Long-term debt, excluding current installments $ 2,111,076 568,678
=================== ====================
Aggregate maturities of long-term debt are as follows:
Year ending December 31:
2000 $ 63,916
2001 466,699
2002 470,000
2003 475,000
Thereafter 699,377
-------------------
$ 2,174,992
===================
(8) ACCRUED TAXES AND OTHER EXPENSES
Accrued taxes and other expenses consist of the following:
December 31
-----------------------------------------
1999 1998
---- ----
Compensation $ 877,028 981,901
Benefits 612,949 723,018
Federal and state income tax 351,458 466,846
Paid time off 347,290 234,490
Workers Compensation 146,047 135,000
Other 1,422,640 869,674
------------------- -------------------
$ 3,757,412 3,410,929
=================== ===================
UFPT 1999 10-K page F14
(9) INCOME TAXES
The Company's income tax provision for the years ended December 31, 1999,
1998 and 1997 consists of:
Years ended December 31
-------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Current:
Federal $ 587,000 830,000 454,000
State 218,000 155,000 131,000
-------------------- -------------------- --------------------
805,000 985,000 585,000
-------------------- -------------------- --------------------
Deferred:
Federal 327,000 145,000 360,000
State 4,000 11,000 50,000
-------------------- -------------------- --------------------
331,000 156,000 410,000
-------------------- -------------------- --------------------
Total income tax provision $ 1,136,000 1,141,000 995,000
==================== ==================== ====================
At December 31, 1999, the Company has net operating loss carryforwards
for income tax purposes of approximately $2,044,000 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.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
December 31
--------------------------------------------
1999 1998
---- ----
Deferred tax assets related to:
Reserves not currently deductible 212,000 298,758
Compensation programs 9,000 71,196
Retirement liability 262,000 260,356
Net operating loss carryforwards 695,000 822,418
Other 58,000 33,704
-------------------- --------------------
1,236,000 1,486,432
-------------------- --------------------
Deferred tax liabilities related to:
Excess of book over tax basis of fixed assets 543,000 756,384
Investee tax loss in excess of book losses 121,000 130,048
Capital leases 303,000 -
-------------------- --------------------
967,000 886,432
-------------------- --------------------
Net deferred tax assets $ 269,000 $ 600,000
==================== ====================
The amount recorded as net deferred tax assets as of December 31, 1999
and 1998 represents the amount of tax benefits of existing deductible
temporary differences or
UFPT 1999 10-K page F15
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 $269,000
at December 31, 1999 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 $2,334,000,
$2,710,000, and $2,123,000 for the years ended December 31, 1999, 1998
and 1997, respectively. Management reviews the recoverability of deferred
tax assets during each reporting period.
Actual tax provision for the years presented differs from "expected" tax
provision for those years, computed by applying the U.S. federal
corporate rate of 34% to income before income tax expense as follows:
Years ended December 31
------------------------------------
1999 1998 1997
---- ---- ----
Computed "expected" tax rate 34.0% 34.0% 34.0%
Increase (decrease) in income taxes resulting from:
State taxes, net of federal tax benefit 5.2 3.9 4.2
Officers' life insurance 0.5 0.5 1.0
Amortization of goodwill 1.9 1.9 2.3
Other (1.4) 0.6 1.7
---------- ---------- ----------
Effective tax rate 40.2% 40.9% 43.2%
========== ========== ==========
(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:
Years ended December 31
-----------------------
1999 1998 1997
---- ---- ----
Weighted average common shares outstanding during
the year 4,808,640 4,682,210 4,655,586
Weighted average common equivalent shares due to
stock options and employee stock purchase plan 87,295 148,026 207,524
----------------- ----------------- -----------------
4,895,935 4,830,236 4,863,110
================= ================= =================
Diluted weighted average shares outstanding for 1999, 1998, and 1997,
exclude 316,517, 490,820, and 415,623 respectively, due to the fact that
the option prices were greater than the average market price of the
common stock.
UFPT 1999 10-K page F16
(11) STOCK OPTION AND EMPLOYEE STOCK PURCHASE 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, 1999, 549,194 options were outstanding under the plan.
Through July 15, 1998, the Company maintained a stock option plan
covering nonemployee directors (the "1993 Director Plan"). Effective July
15, 1998, with the formation of the 1998 Director Stock Option Incentive
Plan ("1998 Director Plan"), the 1993 Director Plan was frozen. The 1993
Director Plan provided 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 was serving as a nonemployee director of the Company received an
automatic grant of options to purchase 2,500 shares of common stock.
These options became exercisable in full six months after the date of
grant and will expire ten years from the date of grant. The exercise
price was the fair market value of the common stock on the date of grant.
At December 31, 1999, 55,000 options were outstanding under the 1993
Director Plan.
Effective July 15, 1998, subject to shareholder approval, the Company
adopted the 1998 Director Stock Option Incentive Plan ("1998 Director
Plan") for the benefit of non-employee directors of the Company. The 1998
Director Plan provides for options for the issuance of up to 300,000
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. In connection with the adoption of the 1998 Director Plan, the
1993 Director Plan was discontinued; however, the options outstanding
under the 1993 Director Plan were not affected by the adoption of the new
plan. At December 31, 1999, 48,200 options were outstanding under the
1998 Director Plan.
On April 18, 1998, the Company adopted the 1998 Stock Purchase Plan which
provides that all employees of the Company who work more than twenty
hours per week and more than five months in any calendar year and who are
employees on or before the applicable offering period are eligible to
participate. The Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue
Code of 1986. Under the Stock Purchase Plan participants may have
withheld up to 10% of their base salaries during the six month offering
periods ending June 30 and December 31 for the purchase of the Company's
common stock at 85% of the lower of the market value of the common stock
on the first or last day of the offering period. The Stock Purchase Plan
provides for the issuance of up to 150,000 shares of common stock.
UFPT 1999 10-K page F17
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 and employee stock
purchase plans. As a result, 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:
Years ended December 31
------------------------------------------------------------
1999 1998 1997
---- ---- ----
Net income as reported $ 1,693,417 $ 1,646,965 $ 1,309,306
Pro forma net income 1,338,621 1,322,286 1,016,768
Basic net income per share as reported 0.35 0.35 0.28
Pro forma basic net income per share 0.28 0.28 0.22
Diluted net income per share as reported 0.35 0.34 0.27
Pro forma diluted net income per share 0.27 0.27 0.21
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.
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 1999, 1998 and
1997, respectively: no dividend yield for each year; expected volatility
of 86%, 86% and 61%; risk-free interest rates of 6.7%, 4.7% and 6.16%;
and expected lives of 5.28, 5.59 and 4.6 years.
UFPT 1999 10-K page F18
The following is a summary of stock option activity under all plans:
Shares Weighted Average
Under Options Exercise Price
------------- ---------------
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
Granted 157,300 3.74
Exercised (30,000) 2.38
Canceled or expired (25,000) 4.28
------------------------
Outstanding at December 31, 1998 839,800 $ 3.52
Granted 182,844 3.69
Exercised (150,250) 2.16
Canceled or expired (220,000) 4.74
------------------------
Outstanding at December 31, 1999 652,394 $ 3.45
========================
The weighted-average fair value of options granted during 1999, 1998 and
1997 was $2.98, $2.70 and $1.92, respectively. As of December 31, 1999,
408,811 of the outstanding options were exercisable.
The following is a summary of information relating to stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
Number Weighted Number Weighted
Range of outstanding at average Weighted exercisable at average
exercise December 31, remaining average December 31, exercise
prices 1999 contractual life exercise price 1999 price
------------ ------------------ ----------------- ----------------- ----------------- --------------
$ 2-3 123,000 5.3 years $ 2.32 93,000 $ 2.12
3-4 411,450 4.7 years $ 3.45 250,700 $ 3.41
4-5 105,444 6.6 years $ 4.46 52,611 $ 4.40
5-6 0 0 years 0 0 0
6-7 12,500 6.5 years $ 6.13 12,500 $ 6.13
------------ -----------
652,394 5.1 years $ 3.45 408,811 $ 3.33
============ ===========
(12) STOCKHOLDERS' EQUITY
On January 13, 1999, the Company declared a dividend of one preferred
share purchase right ( a "Right") for each outstanding share of common
stock, par value $0.01 per share on February 5, 1999 to the stockholders
of record on that date. Each Right entitles the
UFPT 1999 10-K page F19
registered holder to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock, par value $0.01
per share (the "Preferred Share"), of the Company, at a price of $30.00
per one one-thousandth of a Preferred Share subject to adjustment and the
terms of the Rights Agreement.
On December 16, 1998, the Company's Board of Directors authorized the
Company to repurchase up to 1,000,000 shares of its common stock at
management's discretion either in the open market or in privately
negotiated transactions. The repurchased stock is expected to be used for
general corporate purposes, including the issuance of shares in
connection with employee benefit plans. As of December 31, 1999, 570,000
shares have been repurchased for $1,603,125 and retired.
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
were exercisable at a price of $6.60 per share and expired on December
16, 1998.
(13) SUPPLEMENTAL RETIREMENT PLAN
The Company has a supplemental retirement plan for one of its key
officers and a retired officer 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 1999, 1998, and
1997 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 8.5%
discount rate.
(14) LEASES
During 1998, the Company renegotiated the terms of a facility lease which
was leased from a limited partnership in which the Company and one of its
officers are shareholders. This lease was previously treated as a capital
lease. Based on the terms of the new lease agreement, the lease is no
longer a capital lease. Consequently, the Company wrote off the related
building and improvements and associated capital lease obligation of
$247,834. This transaction resulted in an immaterial gain.
The Company has noncancelable operating leases for its other facilities
that expire through 2004 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 2002
UFPT 1999 10-K page F20
Included in property, plant and equipment are the following amounts held
under capital lease:
December 31
--------------------------------------
1999 1998
---- ----
Buildings and improvements $ - -
Equipment 3,726,320 3,759,937
----------------- -----------------
3,726,320 3,759,937
Less accumulated amortization (1,133,010) (800,737)
----------------- -----------------
$ 2,593,310 2,959,200
================= =================
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum lease payments under capital leases as of
December 31, 1999, are as follows:
Year ending December 31: Capital Leases Operating Leases
----------------- -----------------
2000 1,021,867 1,524,052
2001 441,716 1,287,314
2002 193,400 724,786
2003 - 260,379
2004 - 148,083
-----------------
Total minimum lease payments 1,656,983 3,944,614
=================
Less amount representing interest 114,322
-----------------
Present value of future minimum lease payments 1,542,661
Less current installments of obligations under capital leases 947,429
-----------------
Obligations under capital lease, excluding current installments $ 595,232
=================
Rent expense amounted to approximately $1,604,000, $1,270,000, and
$1,215,000 in 1999, 1998, and 1997, respectively. Approximately $250,000
of total rent expense was paid in 1999, and $220,000 in 1998 and 1997 to
a limited partnership that owns the Decatur, Alabama, and Kissimmee,
Florida, facilities. The Company and one 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 $550,000, $500,000 and $455,000 in
1999, 1998 and 1997, respectively.
UFPT 1999 10-K page F21
(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) SEGMENT DATA
The Company has adopted Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information.
The Company is organized based on the nature of the products and services
that it offers. Under this structure, the Company produces products
within two distinct segments; Protective Packaging and Specialty
Applications. Within the Protective Packaging segment, the Company
primarily uses polyethylene and polyurethane foams, sheet plastics and
pulp fiber to provide customers with cushion packaging for their
products. Within the Specialty applications segment, the Company
primarily uses cross-linked polyethylene foam to provide customers in the
automotive, athletic, leisure and health and beauty industries with
engineered -product for numerous purposes.
The accounting policies of the segments are the same as those described
in note 1. Income taxes and interest expense have been allocated based on
operating results and total assets employed in each segment.
Inter-segment transactions are uncommon and not material. Therefore, they
have not been separately reflected in the financial table below. The
totals of the reportable segments' revenues, net profits and assets agree
with the Company's comparable amount contained in the audited financial
statements. Revenues from customers outside of the United States are not
material. No one customer accounts for more than 10% of the Company's
consolidated revenues.
UFPT 1999 10-K page F22
Financial statement information by reportable segment is as follows:
1999
---------------------------------------------------------
Specialty Packaging Total
--------- --------- -----
Sales $ 25,462,398 33,338,665 58,801,063
Operating income 251,015 3,028,350 3,279,365
Total assets 12,504,282 19,363,081 31,867,363
Depreciation / amortization 565,634 1,734,039 2,299,673
Capital expenditures 1,123,477 824,991 1,948,468
1998
---------------------------------------------------------
Specialty Packaging Total
--------- --------- -----
Sales $ 14,218,460 33,001,714 47,220,174
Operating income 643,557 2,530,616 3,174,173
Total assets 10,415,991 19,532,851 29,948,842
Depreciation / amortization 304,482 1,595,433 1,899,915
Capital expenditures 251,395 1,310,740 1,562,135
1997
---------------------------------------------------------
Specialty Packaging Total
--------- --------- -----
Sales $ 14,464,677 30,987,555 45,452,232
Operating income 780,323 2,153,525 2,933,848
Total assets 5,530,092 19,664,675 25,194,767
Depreciation / amortization 313,747 1,488,011 1,801,758
Capital expenditures 405,224 2,031,000 2,436,224
UFPT 1999 10-K page F23
(18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Q1 Q2 Q3 Q4
----------------- ---------------- ----------------- -----------------
Year ended 12/31/98
Net sales $ 10,749,960 $ 11,318,065 $ 12,661,734 $ 12,490,415
Gross profit 2,844,708 3,148,853 3,518,041 3,568,567
Net income 241,487 367,864 492,226 545,388
Basic net income per share 0.05 0.08 0.10 0.12
Diluted net income per share 0.05 0.08 0.10 0.11
Year ended 12/31/99
Net sales $ 13,476,067 $ 14,897,287 $ 14,439,589 $ 15,991,120
Gross profit 3,426,235 3,694,106 3,519,537 4,221,919
Net income 290,875 441,316 300,461 660,765
Basic net income per share 0.06 0.09 0.06 0.14
Diluted net income per share 0.06 0.09 0.06 0.14
(19) ACQUISITION
On November 30, 1998, the Company acquired substantially all of the
assets and certain liabilities of Pacific Foam, Inc. for approximately
$3,500,000. Pacific Foam, Inc. is a designer and manufacturer of
specialty foam products for the health and beauty industry. The
acquisition was accounted for as a purchase and was financed through the
Company's revolving line of credit. The results of Pacific Foam, Inc.
have been included in the Company's consolidated financial statements for
the month of December of 1998. The cost of the acquisition was allocated
based on the estimated fair market value of the assets acquired and the
liabilities assumed. The allocation resulted in a goodwill valuation of
approximately $2,300,000, which is being amortized on a straight line
basis over 20 years.
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 give effect to
the acquisitions as if the FCE acquisition occurred on January 1, 1996
and the Pacific Foam acquisition occurred on January 1, 1997. 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
UFPT 1999 10-K page F24
had the acquisitions taken place as described and is not necessarily
indicative of results that may be obtained in the future.
1998 1997
---- ----
Pro forma total revenue $ 54,178,794 51,841,753
Pro forma net income $ 1,692,000 1,404,000
Pro forma basic net income per share $ 0.36 0.30
Pro forma diluted net income per share $ 0.35 0.29
(20) SUBSEQUENT EVENTS
On January 14, 2000, the company acquired all of the outstanding common
stock of Simco Industries, Inc., located in Roseville, Michigan. The
transaction was financed primarily by utilizing the company's
"acquisition" line of credit. Simco is a full service supplier of
automotive trim components. In addition, they operate an automotive
pattern making and tooling facility. Simco's 1999 sales were
approximately $13 million.
UFPT 1999 10-K page F25
Schedule II
UFP TECHNOLOGIES, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
Accounts receivable, allowance for doubtful accounts:
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 257,865 $ 196,336 $ 164,352
Provision charged to expense 135,522 119,574 226,720
Deductions - write-offs (27,579) (58,045) (194,736)
------------ ------------ ------------
Balance at end of year 365,808 257,865 196,336
============ ============ ============
* * * *
UFPT 1999 10-K page F26