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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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(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, 1998 or
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|_| 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.
----------------------
(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
- ----------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(978) 352-2200
--------------
(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
---- ----
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 |_|
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 12, 1999, was
$19,928,620 based on the closing price of $4.25 on that date on the Nasdaq
National Market. As of February 12, 1999, 4,689,087shares 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 1999 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.
-UFPT 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 the Company to obtain new customers and (iv) the ability of the
Company to execute favorable acquisitions. In addition to the foregoing, the
Company's actual future results could differ materially from those projected in
the forward-looking statements as a result of the risk factors set forth in the
Company's various filings with the Securities and Exchange Commission and
changes in general economic conditions, interest rates and the assumptions used
in making such forward-looking statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
ITEM 1. BUSINESS
UFP Technologies, Inc. (the "Company" or "UFPT") designs and manufactures
a broad range of high-performance cushion packaging, 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 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. Pacific Foam is based in Ventura, California. 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 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 cus-
-UFPT 10-K, page 3-
tom 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"). Unless the context otherwise requires,
the term "Company" or "UFPT" reflects the re-incorporation of UFP Technologies,
Inc. and refers to UFP Technologies, Inc. and its subsidiary, MFT. The Company's
principal offices are located at 172 East Main Street, Georgetown, Massachusetts
01833, and its telephone number is (978) 352-2200.
Market Overview
Packaging Products. The interior cushion packaging market is characterized
by three primary 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 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
-UFPT 10-K, page 4-
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 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.
-UFPT 10-K, page 5-
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 well as the Company's ability to
manufacture in clean room environments. The Company's specialty products are
sold primarily to customers in the sporting goods, medical, leisure and footwear
industries. These products include components for automobiles and medical
diagnostic equipment,
-UFPT 10-K, page 6-
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.
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
-UFPT 10-K, page 7-
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.
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
-UFPT 10-K, page 8-
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 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
-UFPT 10-K, page 9-
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 27, 1999, and February 28, 1998
totaled approximately $3.9 million in each year for the Packaging segment, and
$4.9 million and $3.6 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, 1999, the Company had 500 full-time employees,
including 40 in engineering, 370 in manufacturing operations, 40 in marketing,
sales and support services, and 50 in general and administration. The Company is
not a party to any collective bargaining agreement. The Company considers its
employee relations to be good.
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, 1998, 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, therefore, future operations could be affected by
interest rate changes; however, the Company believes that the market risk of the
debt is minimal.
-UFPT 10-K, page 10-
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
- -------- ---- ---- -------------
Georgetown, Massachusetts(5) 54,000 (owned Headquarters, fabrication, molding, test lab, clean-room,
by the and engineering for Specialty segment
Company)
Decatur, Alabama(1 + 4) 47,250 12/31/01 Fabrication and engineering for Packaging segment
Pawcatuck, Connecticut 39,000 12/31/99 Fabrication and engineering for Packaging segment
Kissimmee, Florida(1 + 4) 37,400 12/31/01 Fabrication, molding, test lab, and engineering for
Packaging segment
Atlanta, Georgia(2) 55,530 10/31/99 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 5/31/01 Molded fiber operations and engineering for Packaging
segment
Clinton, Iowa 45,000 7/1/01 Molded fiber operations for Packaging segment
Addison, Illinois(3) 30,000 2/28/00 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.
-UFPT 10-K, page 11-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Price
The Company's Common Stock, $.01 par value (the "Common Stock"), was
listed on the Nasdaq Small Cap Market under the symbol "UFPT" and on the Boston
Stock Exchange under the symbol "UFP" from December 17, 1993 to July 8, 1996.
Thereafter, the Company's Common Stock has been listed on the Nasdaq National
Market. The following table sets forth the range of high and low quotations for
the Common Stock as reported by Nasdaq for the quarterly periods from January 1,
1997 to December 31, 1998:
High Low
---- ---
Fiscal Year Ended December 31, 1997
First Quarter $6 $3-1/2
Second Quarter 5-1/4 3-1/2
Third Quarter 4-1/2 3-3/4
Fourth Quarter 4-9/16 3-1/4
Fiscal Year Ended December 31, 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
Number of Stockholders
As of February 19, 1999, there were 132 holders of record of the Company's
Common Stock.
Dividends
The Company did not pay any dividends in 1998. 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.
-UFPT 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) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net sales $47,220 45,452 39,359 34,096 31,907
Gross profit 13,080 12,252 9,912 8,074 6,560
Operating income (loss) 3,174 2,934 2,094 1,095 (1,295)
Net income (loss) 1,647 1,309 1,262 888 (2,514)
Diluted earnings (loss) per share $ 0.34 0.27 0.26 0.19 (0.55)
Weighted average number of shares outstanding 4,830 4,863 4,874 4,734 4,598
December 31
-----------
Consolidated balance sheet data:(1) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Working capital $ 2,099 2,579 2,488 1,952 1,444
Total assets 29,949 25,195 22,900 20,795 19,142
Short-term debt 5,060 3,525 2,455 3,257 2,766
Long-term debt, excluding current portion 2,123 3,233 3,223 2,414 1,603
Total liabilities 14,053 11,062 10,170 9,356 8,608
Stockholders' equity $15,895 14,133 12,729 11,438 10,534
(1) See Note 17 of Notes to Consolidated Financial Statements
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains certain statements that are "forward-looking
statements" as that term is defined under the Act and releases issued by the
Securities and Exchange Commission. The words "believe," "expect," "anticipate,"
"intend", "estimate" and other expressions which are predictions of or indicate
future events and trends and which do not relate to historical matters identify
forward-looking statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from anticipated
future results, performance or achievements expressed or implied by such
forward-looking statements.
Examples of these risks, uncertainties, and other factors include, without
limitation, the following: (i) economic conditions that affect sales of the
products of the Company's packaging customers, (ii) actions by the Company's
competitors and the ability of the Company to respond to such actions, (iii) the
ability of the Company to obtain new customers and (iv) the ability of the
-UFPT 10-K, page 13-
Company to execute favorable acquisitions. In addition to the foregoing, the
Company's actual future results could differ materially from those projected in
the forward-looking statements as a result of the risk factors set forth in the
Company's various filings with the Securities and Exchange Commission and
changes in general economic conditions, interest rates and the assumptions used
in making such forward-looking statements. The Company undertakes no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
Results of Operations
The following table sets forth, for the years indicated, the percentage of
revenues represented by the items as shown in the Company's consolidated
statements of operations:
Years Ended December 31
-----------------------
1998 1997 1996
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 72.3 73.0 74.8
Gross profit 27.7 27.0 25.2
Selling, general and administrative expenses 21.0 20.5 19.9
Operating income 6.7 6.5 5.3
Total other deductions 0.8 1.4 1.1
Income before income taxes 5.9 5.1 4.2
Provision for income taxes 2.4 2.2 1.0
Net income from continuing operations 3.5 2.9 3.2
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. The Company expects that its
acquisition of Pacific Foam will augment its Specialty segment during 1999.
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 is 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 are primarily due to the acquisition of Pacific Foam on
November 30, continued systems enhancements, and additions to the management
team.
-UFPT 10-K, page 14-
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
is 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.
Net income increased to $1,647,000 from $1,309,000 in 1997.
1997 Compared to 1996:
The Company's net sales increased 15.5% to $45.5 million for the year
ended December 31, 1997 from $39.4 million in the same period last year. The
increase in sales was primarily attributable to the impact on sales of FCE
Industries which was acquired by the Company in January 1997, as well as
increased sales of the Company's molded fiber packaging product.
Cost of sales as a percentage of sales decreased to 73.0% for the year
ended December 31, 1997 from 74.8% in 1996. The improvement was primarily
attributable to improvements in margins on sales of molded fiber product as well
as an increase in molded fiber sales as a percentage of overall sales.
Selling, general, and administrative expenses ("SG&A") increased 19.2% to
$9.3 million in 1997 from $7.8 million in 1996. As a percentage of sales, SG&A
increased to 20.5% in 1997 from 19.9% in 1996. The increase in SG&A as a
percentage of sales was due to a one-time write-off of receivables associated
with a customer that filed for bankruptcy protection, additional expenses at FCE
Industries, and additions to the management team.
Interest expense increased 33.8% to $649,000 in 1997 from $485,000 in
1996. The increase was due to higher average borrowings associated with the
acquisition of FCE Industries, slightly offset by lower average interest rates.
The Company's effective tax rate was 43.2% and 24.3% in 1997 and 1996,
respectively. The increase in 1997 is primarily due to the impact on the
effective rate in 1996 of the reduction of the Company's valuation allowance for
deferred income taxes associated with the unrestricted remaining loss
carry-forwards. This reduction in the valuation allowance reflected the
Company's improved operating performance, which resulted in the likelihood that
the Company will be able to benefit from its deferred income taxes. See Note 9
of Notes to Consolidated Financial Statements.
Net income for 1997 increased to $1,309,000 from $1,262,000 in 1996.
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.
-UFPT 10-K, page 15-
As of December 31, 1998 and 1997, working capital was $2,099,000 and
$2,579,000, respectively. The decrease in working capital is primarily
attributable to the acquisition of Pacific Foam, which was financed through the
revolving line of credit. Cash provided from operations was $4,295,000 and
$3,090,000 for 1998 and 1997, respectively. Net cash used in investing
activities was $3,557,000 and was used primarily for capital expenditures of
$1,562,000 and the acquisition of Pacific Foam. Capital purchases in 1998
consisted primarily of foam cutting equipment in our Packaging and Specialty
plants and the installation and enhancement of molded fiber packaging equipment.
Including amounts due under the revolving credit facility, the Company had
a total debt outstanding of $7,184,000 and $6,758,000 at December 31, 1998 and
1997, respectively. The increase was primarily attributable to the acquisition
of Pacific Foam, which was partially offset by the required debt service on
long-term debt and capital leases. The Company has a $7,500,000 revolving bank
line, of which $4,150,000 was outstanding at December 31, 1998. Borrowings
through the credit facility are unsecured and bear interest at prime or LIBOR
Plus 1.75%. See Note 7 of Notes to the Consolidated Financial Statements.
The Company has no significant capital commitments in 1999, 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 1999 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 1999. However, there can
be no assurances that such financing will be available at favorable terms, if at
all.
Year 2000 Readiness
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.
The Company has established a Year 2000 Compliance Committee (the
"Committee") which is comprised of members of senior management, finance, MIS
operations and engineering. The Committee's mandate is 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. A full-time
Year 2000 Project Coordinator has been appointed and a comprehensive
corporate-wide Year 2000 Project plan has been developed.
The Committee has defined three categories of internal elements that are
subject to risk; computer hardware and software, manufacturing equipment and
facility equipment. Computer
-UFPT 10-K, page 16-
hardware and software includes networking, operating and application software
currently being used by the Company as well as those that are planned to be
installed prior to the year 2000 and the hardware platforms upon which they
operate. Manufacturing equipment includes machinery and equipment, owned or
leased, that is used by the Company in the process of manufacturing inventory
for resale. Facility equipment includes all other devices that potentially have
microprocessor 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 includes six phases; Inventory, Risk Assessment, Correction,
Validation, Implementation and Monitoring. In the Inventory phase the Company
identifies the items within each of the three previously defined elements. The
Company has completed a thorough inventory of computer hardware and software,
manufacturing equipment and facility systems and equipment at all plant
locations.
The Risk Assessment phase includes identifying which of the items in the
inventory are noncompliant and estimating the effects of noncompliant system,
program and equipment failure. The Company has completed a comprehensive risk
assessment for all plant locations, which identifies noncompliant and
potentially noncompliant computer hardware and software, manufacturing equipment
and facility systems and equipment. All noncompliant items have been categorized
as either business critical or non-business critical. Business critical systems
and equipment are being addressed first and non-business critical systems and
equipment will be addressed as resources are available.
In the Correction phase, the Company repairs or replaces those items that
are noncompliant. The Company is in the process of implementing new financial
and manufacturing software ("New Software") throughout all of its plants that is
Year 2000 compliant and should result in substantial compliance within the
computer hardware and software element. At this time, the Company expects the
correction of business critical computer hardware and software to be completed
by September 30, 1999. The correction of business critical manufacturing
equipment and facility systems and equipment is expected to be completed by July
31, 1999.
In the Validation phase, the Company confirms that corrections have
resulted in bringing specific systems, programs or equipment into Year 2000
compliance. The validation of specific components will occur as each component
is corrected.
In the Implementation phase, the Company integrates validated systems,
programs and equipment into the business environment. The implementation of
specific components will be conducted as each component is validated. The
Company expects that validation and implementation of business critical
manufacturing equipment and facility systems will be completed by August 31,
1999 and that validation and implementation of business critical computer
hardware and software will be completed by October 29, 1999.
In the Monitoring phase, the Company closely observes the performance of
corrected, validated and implemented systems, programs and equipment. The
monitoring phase begins at imple-
-UFPT 10-K, page 17-
mentation and will continue beyond the New Year and as long as is necessary to
satisfy the Company that corrections have effectively dealt with Year 2000
concerns.
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 is in the process of surveying the compliance status of its key
customers and third party suppliers. However, the Company may not ever be able
to estimate the nature or extent of any potential adverse impact resulting from
the failure of third parties, such as its suppliers, service providers and
customers. As a result, although the Company does not currently anticipate that
it will experience any significant shipment delays from its major suppliers or
any major sales delays from its major customers due to Year 2000 issues, the
Company cannot provide any assurance that these third parties will not
experience Year 2000 problems or that any may have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company included the cost of the New Software in its financial plan
for 1999. The software and hardware costs have been and will continue to be
capitalized and depreciated in compliance with the Company's capitalization
policy. Although the decision to implement the New Software potentially resolves
the Year 2000 problem for the majority of the Company's computer applications,
it was made for operating reasons and is considered normal capital expenditures.
As a result, the Company does not expect to incur material costs above and
beyond the cost of implementing the New Software.
The Company expects to be substantially compliant by Year 2000, but can
give no assurance as to its readiness or the readiness of its key material and
service providers. As a result, the Company expects to complete a Contingency
Plan (the "Plan") by April 30, 1999, that will address the operating issues in
the event that any of its material or service providers fail to perform as a
result of the Year 2000 problem. In addition, the Plan will address 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.
To the extent that the Company does not identify or properly address any
material noncompliant systems or equipment operated by the Company or by third
parties, such as the Company's suppliers, service providers and customers, the
most reasonably likely worst case Year 2000 scenario is a systemic failure
beyond the control of the Company, such as a prolonged telecommunications or
electrical failure, or general disruption in the United States or global
activities that could result in a significant economic downturn. The Company
believes that the primary business risks, in the event of such failure or other
disruption, would include but not be limited to, loss of customers or orders,
increased operating costs, inability to obtain inventory on a timely basis,
disruptions in product shipments, or other business interruptions or a material
nature, as well as claims of mismanagement, misrepresentation, or breach of
contract, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition.
-UFPT 10-K, page 18-
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.
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, 1998.
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.
-UFPT 10-K, page 19-
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..............................................F-1
Independent Auditors' Report.....................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.....F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996................................F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997, and 1996..........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996................................F-6
Notes to Consolidated Financial Statements.......................F-7
(A)(2) Financial Statement Schedules
Independent Auditors' Report on Supplementary Information.......F-22
Schedule II - Valuation and Qualifying Accounts.................F-23
(A)(3) Exhibits
Number Reference
------ ---------
2.01 Agreement and Plan of Reorganization A-2.01**
among the Company, Moulded Fibre
Technology, Inc. and UFPAcquisition,
Inc.
2.02 Agreement of Merger between Moulded C-2.02**
Fibre Technology, Inc. and UFP
Acquisition, Inc.
2.03 Merger Agreement relating to the A-2.02
reincorporation of the Company in
Delaware.
2.04 Asset Purchase Agreement relating to I-2**
the purchase of FCE.
2.05 Asset Purchase Agreement relating to Filed herewith
the purchase of the assets of Pacific
Foam Technologies, Inc.
-UFPT 10-K, page 20-
Number Reference
------ ---------
3.01 Certificate of Incorporation of the F-3.01**
Company, as amended.
3.02 Bylaws of the Company. A-3.02**
4.01 Specimen Certificate for shares of A-4.01**
the Company's Common Stock.
4.02 Description of Capital Stock A-4.02**
(contained in the Certificate of
Incorporation of the Company, filed
as Exhibit 3.01).
4.04 Rights Agreement (including the J-4**
Certificate of 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 A-10.02**
Note issued by the Company in favor
of Gloucester Bank & Trust Company.
10.06 Alabama Leasehold Mortgage of United A-10.06**
Development Company Limited to First
American Bank.
10.07 Guaranty of the Company in favor of A-10.07**
First American Bank for the benefit
of United Development Company
Limited.
10.08 Agreement between the Company and A-10.08**
William H. Shaw.
10.09 Agreement and Severance Agreement A-10.09**
between the Company and Richard L.
Bailly.
10.18 Employee Stock Purchase Plan. A-10.18**
10.19 1993 Combined Stock Option Plan, as K-4.5* **
amended.
10.20 1993 Nonemployee Director Stock B-4.5**
Option Plan.
10.21 Facility Lease between the Company A-10.21**
and United Development Company
Limited.
10.22 Facility Lease between the Company A-10.22**
and Raritan Associates.
10.23 Facility Sublease between the Company A-10.23**
and United Development Company
Limited.
10.25 Facility lease between the Company A-10.25**
and Flanders Properties.
10.26 Amendment to facility lease between A-10.26**
the Company and Flanders Properties.
10.27 Facility Lease between the Company A-10.27**
and Dana Evans d/b/a Evans
Enterprises.
10.28 Facility Lease between Moulded Fibre A-10.28**
Technology, Inc. and J.B. Brown &
Sons.
10.29 Facility Lease between the Company G-10.29**
and Cole Taylor Bank, as Trustee
-UFPT 10-K, page 21-
Number Reference
------ ---------
10.30 Form of Indemnification Agreement for A-10.30**
directors and officers of the
Company.
10.32 Promissory Note of United Development A-10.32**
Company Limited in favor of the
Company.
10.33 Form of Representative's Warrant A-10.33**
Agreement.
10.34 Facility Lease between Moulded Fibre C-10.34**
Technology, Inc. and Lincoln Gilroy
II and Patrician Associates, Inc.
10.35 Facility Lease between the Company D-10.35**
and M.D. Hodges Enterprises, Inc.
10.36 Facility Lease between Moulded Fibre D-10.36**
Technology, Inc. and Dead River
Properties.
10.37 Facility Lease between the Company G-10.37**
and Clinton Area Development
Corporation.
10.38.7 First Amendment to Credit Agreement, F-10.38.7**
dated May 31, 1995, between the
Company and BayBank.
10.38.8 Amended and Restated Revolving Credit F-10.38.8**
Note, dated May 31, 1996, between the
Company and BayBank.
10.38.9 Amended and Restated Equipment Note, F-10.38.9**
dated May 31, 1996, between the
Company and BayBank.
10.38.10 Third Amendment, dated July 6, 1998, Filed herewith
to Credit Agreement, dated May 31,
1995, between the Company and
BankBoston.
10.39 Employment Agreement with R. Jeffrey H-10.37**
Bailly dated April 4, 1995.
10.40 1998 Director Stock Option Incentive L**
Plan
10.41 1998 Employee Stock Purchase Plan. M**
11.01 Statement re: Computation of Per C-21.01**
Share Earnings. Filed herewith
21.01 Subsidiaries of the Company. N-21.01**
23.01 Consent of KPMG Peat Marwick 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.
-UFPT 10-K, page 22-
D Incorporated by reference to the Company's Annual Report on
Form 10-K for its fiscal year ended December 31, 1994. The
number set forth herein is the number of the Exhibit in said
annual report.
E Incorporated by reference to the Company's Registration
Statement on Form S-8 (Registration No. 33-32248). The number
set forth herein is the number of the Exhibit in said
Registration Statement.
F Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended June 30, 1996. The number
set forth herein is the number of the Exhibit in said
quarterly report.
G Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995. The
number set forth herein is the number of the Exhibit in said
annual report.
H Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the three months ended June 30, 1995. The number
set forth herein is the number of the Exhibit in said
quarterly report.
I Incorporated by reference to the Company's report on 8-K dated
February 3, 1997. The number set forth herein is the number of
the Exhibit in said report.
J. Incorporated by reference to the Company's 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 to the Company's Annual Report
10K for the fiscal year ended December 31, 1996. The number
set forth herein is the number of the Exhibit in said
Annual Report.
* Management contract or compensatory plan or arrangement.
** 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, 1998.
-UFPT 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 30, 1999 by:
----------------------------
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
- --------- ----- ----
President, Chief Executive, March 30, 1999
- ------------------- Officer and Director ----------------
R. Jeffrey Bailly
Chairman of the Board of Directors March 30, 1999
- ------------------- ----------------
William H. Shaw
Chief Financial Officer, Vice President, March 30, 1999
- ------------------- Principal Accounting Officer ----------------
Ronald J. Lataille
Executive Vice President, Director March 30, 1999
- ------------------- ----------------
Richard L. Bailly
Director March 30, 1999
- ------------------- ----------------
William C. Curry
Director March 30, 1999
- ------------------- ----------------
Michael J. Ross
Director March 30, 1999
- ------------------- ----------------
Kenneth L. Gestal
Director March 30, 1999
- ------------------- ----------------
T. Gordon Roddick
Director March 30, 1999
- ------------------- ----------------
Peter R. Worrell
-UFPT 10-K, page 24-
UFP TECHNOLOGIES, INC.
Consolidated Financial Statements and Schedule
December 31, 1998 and 1997
With Independent Auditors' Report Thereon
UFP TECHNOLOGIES, INC.
Index to Consolidated Financial Statements and Financial Statement Schedule
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996 F-6
Notes to Consolidated Financial Statements F-7
Schedule
Independent Auditors' Report on Supplementary Information F-22
Schedule II - Valuation and Qualifying Accounts F-23
UFPT 10-K, page F-1
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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 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 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Boston, Massachusetts
February 25, 1999
UFPT 10-K, page F-2
UFP TECHNOLOGIES, INC.
Consolidated Balance Sheets
December 31
----------------------------
1998 1997
Assets
Current assets:
Cash and cash equivalents $ 512,356 233,452
Receivables, net (note 3) 7,867,647 6,413,251
Inventories (note 4) 4,091,770 3,053,299
Prepaid expenses 319,191 83,800
Deferred income taxes (note 9) 369,000 63,000
------------ ----------
Total current assets 13,159,964 9,846,802
------------ ----------
Property, plant and equipment (notes 5, 7 and 14) 20,025,618 20,110,727
Less accumulated depreciation and amortization (9,086,763) (8,920,621)
------------ ----------
Net property, plant and equipment 10,938,855 11,190,106
------------ ----------
Cash surrender value of officers' life insurance, net of loans of
$13,595 in 1997 218,027 352,577
Investment in and advances to affiliated partnership (note 6) 218,524 240,364
Deferred income taxes (note 9) 231,000 693,000
Goodwill, net (note 1) 4,711,463 2,539,367
Other assets 471,009 332,551
------------ ----------
Total assets $ 29,948,842 25,194,767
============ ==========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable (note 7) $ 4,150,000 2,500,000
Current installments of long-term debt (note 7) 59,411 111,888
Current installments of capital lease obligations (note 14) 851,042 913,170
Accounts payable 2,589,492 1,540,377
Accrued taxes and other expenses (note 8) 3,410,929 2,202,817
------------ ----------
Total current liabilities 11,060,874 7,268,252
------------ ----------
Long-term debt, excluding current installments (note 7) 568,678 624,641
Capital lease obligations, excluding current installments (note 14) 1,554,647 2,608,768
Retirement liability and other liabilities (note 13) 869,218 559,896
------------ ----------
Total liabilities 14,053,417 11,061,557
------------ ----------
Commitments and contingencies (note 14)
Stockholders' equity (notes 11 and 12)
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 4,707,354 shares in 1998 and 4,666,354 shares in 1997 47,074 46,664
Additional paid-in capital 9,613,859 9,499,019
Retained earnings 6,234,492 4,587,527
------------ ----------
Total stockholders' equity 15,895,425 14,133,210
------------ ----------
Total liabilities and stockholders' equity $ 29,948,842 25,194,767
============ ==========
See accompanying notes to consolidated financial statements.
UFPT 10-K, page F-3
UFP TECHNOLOGIES, INC.
Consolidated Statements of Income
Years ended December 31
--------------------------------------------
1998 1997 1996
Net sales $ 47,220,174 45,452,232 39,359,066
Cost of sales 34,140,005 33,200,304 29,446,979
------------ ---------- ----------
Gross profit 13,080,169 12,251,928 9,912,087
Selling, general and administrative expenses 9,905,996 9,318,080 7,818,451
------------ ---------- ----------
Operating income 3,174,173 2,933,848 2,093,636
------------ ---------- ----------
Other income (deductions):
Interest expense (447,282) (649,269) (484,958)
Equity in net income of unconsolidated partnerships (note 6) 20,904 15,227 19,937
Other, net 40,170 4,500 39,842
------------ ---------- ----------
Total other deductions (386,208) (629,542) (425,179)
------------ ---------- ----------
Income before income tax expense 2,787,965 2,304,306 1,668,457
Income tax expense (note 9) 1,141,000 995,000 406,000
------------ ---------- ----------
Net income $ 1,646,965 1,309,306 1,262,457
============ ========== ==========
Net income per share (note 10):
Basic $ 0.35 0.28 0.27
============ ========== ==========
Diluted $ 0.34 0.27 0.26
============ ========== ==========
Weighted average common shares (note 10):
Basic 4,682,210 4,655,586 4,634,098
============ ========== ==========
Diluted 4,830,236 4,863,110 4,874,125
============ ========== ==========
See accompanying notes to consolidated financial statements.
UFPT 10-K, page F-4
UFP TECHNOLOGIES, INC.
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
Common Stock Additional Total
----------------------- paid-in Retained stockholders'
Shares Amount capital earnings equity
--------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 4,626,854 $ 46,269 $ 9,376,227 $ 2,015,764 $11,438,260
Sale of common stock through incentive stock option plan 5,000 50 11,850 -- 11,900
Stock issued in lieu of compensation 5,000 50 16,825 -- 16,875
Net income -- -- -- 1,262,457 1,262,457
--------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 4,636,854 46,369 9,404,902 3,278,221 12,729,492
Sale of common stock through incentive stock option plan 22,500 225 60,437 -- 60,662
Stock issued in lieu of compensation 7,000 70 33,680 -- 33,750
Net income -- -- -- 1,309,306 1,309,306
--------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 4,666,354 46,664 9,499,019 4,587,527 14,133,210
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
========= =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
UFPT 10-K, page F-5
UFP TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
Years ended December 31
-----------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 1,646,965 1,309,306 1,262,457
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,899,915 1,801,758 1,498,123
Equity in net income of unconsolidated affiliate and partnership (20,904) (15,227) (19,937)
Gain (loss) on disposal of property, plant and equipment (40,170) 39,269 --
Stock issued in lieu of compensation 44,000 33,750 16,875
Deferred income taxes 156,000 410,000 131,000
Changes in operating assets and liabilities net of effects from
acquisition:
Receivables, net (584,334) (135,336) (657,661)
Inventories (60,601) (172,738) (152,874)
Prepaid expenses (196,339) 212,148 83,534
Accounts payables 308,615 (785,771) 400,223
Accrued taxes and other expenses 976,495 332,385 346,530
Retirement liability and other liabilities 165,172 60,000 60,000
----------- ----------- -----------
Net cash provided by operating activities 4,294,814 3,089,544 2,968,270
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,562,135) (2,436,224) (3,376,146)
Acquisition of operating assets, less cash acquired (2,293,506) (1,512,879) --
(Increase) decrease in cash surrender value of officers'life insurance 134,550 (27,416) 18,829
Increase in other assets (168,618) (23,352) (32,182)
Payments received on advances to affiliated company 42,744 1,750 21,000
Proceeds from disposal of property, plant and equipment 290,170 4,500 --
----------- ----------- -----------
Net cash used in investing activities (3,556,795) (3,993,621) (3,368,499)
----------- ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under notes payable 713,413 1,100,000 (1,375,000)
Proceeds from long-term borrowings -- -- --
Proceeds from long-term capital leases -- 967,000 1,941,000
Proceeds from sale of common stock 71,250 60,662 11,900
Principal repayment of long-term debt (359,077) (422,551) (186,207)
Principal repayment of obligations under capital leases (884,701) (711,113) (372,423)
----------- ----------- -----------
Net cash (used in) provided by financing activities (459,115) 993,998 19,270
----------- ----------- -----------
Net change in cash and cash equivalents 278,904 89,921 (380,959)
Cash and cash equivalents at beginning of year 233,452 143,531 524,490
----------- ----------- -----------
Cash and cash equivalents at end of year $ 512,356 233,452 143,531
=========== =========== ===========
See accompanying notes to consolidated financial statements.
UFPT 10-K, page F-6
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the accounts and
results of operations of UFP Technologies, Inc. and its wholly owned
subsidiary, Moulded Fibre Technology, Inc. (MFT). All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) Nature of Operations
UFP Technologies, Inc. designs and manufactures a broad range of
packaging and specialty foam products for a variety of industrial
and consumer markets.
(c) Inventories
Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(d) Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated and
amortized using the straight-line method over the estimated useful
lives of the assets for financial statement purposes and accelerated
methods for income tax purposes.
Estimated useful lives of property, plant and equipment are as
follows:
Leasehold improvements Life of the lease
Buildings and improvements 31.5 years
Equipment 8-10 years
Furniture and fixtures 5 - 7 years
(e) Income Taxes
The Company's income taxes are accounted for under the asset and
liability method of accounting. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss
and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
UFPT 10-K, page F-7
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(f) Investments in Realty Partnerships
The Company has invested in two realty limited partnerships,
Lakeshore Estates Associates and United Development Company Limited.
These investments are stated at cost, plus or minus the Company's
proportionate share of the limited partnerships' income or losses,
less any distributions received from the limited partnerships. The
Company has recognized its share of Lakeshore Estates Associates'
losses only to the extent of its original investment in, and
advances to, this partnership.
(g) Goodwill
Goodwill is being amortized on a straight-line basis over a 20-year
period. Accumulated amortization was $972,799 and $795,280 as of
December 31, 1998 and 1997, respectively. In 1996, a charge in lieu
of taxes of $954,990 was allocated to reduce goodwill.
The Company assesses the recoverability of its intangible assets by
determining whether the amortization of the balance over its
remaining life can be recovered through projected future results.
Goodwill impairment is measured based on projected undiscounted cash
flows over the asset's remaining life.
(h) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(i) 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.
(j) Reclassifications
Certain prior year account balances have been reclassified to
conform to the 1998 presentation.
UFPT 10-K, page F-8
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(2) Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows:
Years ended December 31
-----------------------
1998 1997 1996
---- ---- ----
Interest $ 512,190 541,270 484,958
========== =========== ===========
Income taxes $ 643,261 700,230 82,662
========== =========== ===========
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.
(3) Receivables
Receivables consist of the following:
December 31
--------------------------
1998 1997
---- ----
Accounts receivable - trade $ 8,031,561 6,510,517
Employee advances and other receivables 93,951 99,070
----------- ---------
8,125,512 6,609,587
Less allowance for doubtful receivables (257,865) (196,336)
----------- ---------
$ 7,867,647 6,413,251
=========== =========
(4) Inventories
Inventories consist of the following:
December 31
-----------------------------
1998 1997
---- ----
Raw materials $2,634,482 1,933,740
Work in process 504,489 395,592
Finished goods 952,799 723,967
---------- ---------
$4,091,770 3,053,299
========== =========
UFPT 10-K, page F-9
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(5) Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31
-------------------------
1998 1997
---- ----
Land $ 85,319 315,319
Buildings and improvements 1,913,242 2,940,091
Leasehold improvements 1,268,551 1,008,155
Equipment 14,857,508 13,478,014
Furniture and fixtures 1,303,616 1,036,753
Construction in progress - equipment 597,382 1,332,395
----------- -----------
$20,025,618 20,110,727
=========== ===========
(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
$18,410, $19,937, and $17,541 in 1998, 1997 and 1996, 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
At December 31, 1998, the Company may borrow up to $7,500,000 under a
revolving line of credit at the bank's prime lending rate (7.75% at
December 31, 1998) or LIBOR plus 1.75% (6.8991% at December 31, 1998).
Amounts borrowed under this arrangement are due on demand and are
unsecured. At December 31, 1998 and 1997, borrowings under this
arrangement were $4,150,000 and $2,500,000, respectively.
UFPT 10-K, page F-10
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Long-term debt consists of the following:
December 31
------------------
1998 1997
---- ----
8.76% mortgage note payable in monthly
installments of $8,759 including interest,
maturing in 2007; secured by real estate $628,089 678,196
Note payable - other -- 58,333
-------- -------
Total long-term debt 628,089 736,529
Less current installments 59,411 111,888
-------- -------
Long-term debt, excluding current
installments $568,678 624,641
======== =======
Aggregate maturities of long-term debt are as follows:
Year ending December 31:
1999 $ 59,411
2000 60,728
2001 65,898
2002 71,510
Thereafter 370,542
--------
$628,089
========
(8) Accrued Taxes and Other Expenses
Accrued taxes and other expenses consist of the following:
December 31
-------------------------
1998 1997
---- ----
Compensation $ 981,901 903,462
Benefits 723,018 512,438
Federal and state income tax 466,846 98,868
Paid time off 234,490 95,006
Workers Compensation 135,000 35,000
Other 869,674 558,043
---------- ---------
$3,410,929 2,202,817
========== =========
UFPT 10-K, page F-11
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(9) Income Taxes
Total income tax expense for the years ended December 31, 1998, 1997 and
1996 was allocated as follows:
1998 1997 1996
---- ---- ----
Income tax expense from operations $1,141,000 995,000 406,000
========== ========= ========
Goodwill, for initial recognition of
acquired tax benefits that previously
were included in the valuation
allowance $ -- -- (954,990)
========== ========= ========
Income tax expense (benefit)
consists of: Years ended December 31
----------------------------------
1998 1997 1996
---- ---- ----
Current:
Federal $ 830,000 454,000 170,000
State 155,000 131,000 105,000
---------- --------- --------
985,000 585,000 275,000
---------- --------- --------
Deferred:
Federal 145,000 360,000 136,000
State 11,000 50,000 (5,000)
---------- --------- --------
156,000 410,000 131,000
---------- --------- --------
$1,141,000 995,000 406,000
========== ========= ========
At December 31, 1998, the Company has net operating loss carryforwards for
income tax purposes of approximately $2,300,000 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.
UFPT 10-K, page F-12
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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
-----------------------
1998 1997
---- ----
Deferred tax assets related to:
Receivables $ 108,303 $ 82,461
Inventories 190,455 107,364
Compensation programs 71,196 39,903
Capital leases --
Retirement liability 260,356 235,156
Net operating loss carryforwards 822,418 925,247
Other 33,704 --
---------- ----------
1,486,432 1,390,131
---------- ----------
Deferred tax liabilities related to:
Excess of book over tax basis of fixed assets 756,384 510,307
Investee tax loss in excess of book losses 130,048 123,824
---------- ----------
886,432 634,131
---------- ----------
Net deferred tax assets $ 600,000 $ 756,000
========== ==========
The amount recorded as net deferred tax assets as of December 31, 1998 and
1997 represents the amount of tax benefits of existing deductible
temporary differences or carryforwards that are more likely than not to be
realized through the generation of sufficient future taxable income within
the carryforward period. The Company believes that the net deferred tax
asset of $600,000 at December 31, 1998 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
$2,710,000, $2,123,000, and $1,859,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Management reviews the recoverability
of deferred tax assets during each reporting period.
Actual tax expense for the years presented differs from "expected" tax
expense (benefit) for those years, computed by applying the U.S. federal
corporate rate of 34% to income before income tax expense as follows:
Years ended December 31
------------------------
1998 1997 1996
---- ---- ----
Computed "expected" tax rate 34.0% 34.0% 34.0%
Increase (decrease) in income taxes resulting from:
State taxes, net of federal tax benefit 3.9 4.2 4.0
Officers' life insurance 0.5 1.0 0.5
Amortization of goodwill 1.9 2.3 4.2
Change in the beginning of the year balance of the
valuation allowance for deferred tax assets, net of
$954,990 allocated to goodwill in 1996 -- -- (18.4)
Other 0.6 1.7 --
---- ---- ----
40.9% 43.2% 24.3%
---- ---- ----
UFPT 10-K, page F-13
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(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
-----------------------
1998 1997 1996
---- ---- ----
Weighted average common shares
outstanding during the year 4,682,210 4,655,586 4,634,098
Weighted average common equivalent
shares due to stock options and employee
stock purchase plan 148,026 207,524 240,027
--------- --------- ---------
4,830,236 4,863,110 4,874,125
========= ========= =========
(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, 1998, 745,000 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, 1998, 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, 1998, 9,800 options were outstanding under the 1998 Director
Plan.
UFPT 10-K, page F-14
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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.
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.
Accordingly, no compensation cost has been recognized in connection with
these plans.
Since the Company accounts for its stock option plans under APB 25,
certain pro forma information regarding net income and net income per
share is required by Financial Accounting Standards Board Statement No.
123, Accounting for Stock-Based Compensation ("SFAS 123"), as if the
Company had accounted for its stock option plans under the fair value
approach of SFAS 123. For purposes of the pro forma disclosures, the
estimated fair value of the stock plans is amortized to expense over the
related vesting period of the options.
The Company's pro forma information is as follows:
Years ended December 31
---------------------------------------
1998 1997 1996
----------- ----------- -----------
Net income as reported $ 1,646,965 $ 1,309,306 $ 1,262,457
Pro forma net income 1,322,286 1,016,768 1,120,964
Basic net income per share as 0.35 0.28 0.27
reported
Pro forma basic net income per 0.28 0.22 0.24
share
Diluted net income per share as 0.34 0.27 0.26
reported
Pro forma diluted net income per 0.27 0.21 0.23
share
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 1998, 1997 and
1996, respectively: no dividend yield for each year; expected volatility
of 86%, 61%, and 62%; risk-free interest rates of 4.7%, 6.16%, and 6.13%;
and expected lives of 5.59, 4.6 and 4.6 years.
UFPT 10-K, page F-15
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
The following is a summary of stock option activity under all plans:
Shares Weighted Average
Under Options Exercise Price
------------- --------------
Outstanding at December 31, 1995 691,000 $ 3.44
Granted 68,000 3.82
Exercised (5,000) 2.38
Canceled or expired (21,250) 5.35
-------
Outstanding at December 31, 1996 732,750 3.43
Granted 76,500 4.43
Exercised (22,500) 2.69
Canceled or expired (49,250) 3.87
-------
Outstanding at December 31, 1997 737,500 3.52
Granted 127,300 3.74
Exercised (30,000) 2.38
Canceled or expired (25,000) 4.28
-------
Outstanding at December 31, 1998 809,800 3.52
=======
The weighted-average fair value of options granted during 1998, 1997, 1996
and 1995 was $2.70, $1.92, $2.16 and $1.93, respectively. As of December
31, 1998, 581,500 of the outstanding options were exercisable.
The following is a summary of information relating to stock options
outstanding at December 31, 1998:
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 1998 contractual life exercise price 1998 price
- -------- -------------- ---------------- -------------- -------------- -------
$ 2-3 278,000 1.5 years $ 2.16 254,750 $ 2.16
3-4 293,300 3.1 3.43 142,000 3.33
4-5 78,000 5.1 4.51 24,250 4.42
5-6 148,000 1.2 5.50 148,000 5.50
6-7 12,500 7.5 6.13 12,500 6.13
------- -------
809,800 581,500
======= =======
(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 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.
UFPT 10-K, page F-16
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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.
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 1998, 1997, and 1996 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 insignificant gain.
The Company has noncancelable operating leases for its other facilities
that expire through 2003. Certain of the leases contain escalation clauses
which require payments of additional rent to the extent of increases in
related operating costs. The Company also leases various equipment under
capital leases which expire through 2001.
UFPT 10-K, page F-17
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Included in property, plant and equipment are the following amounts held
under capital lease:
December 31
--------------------------
1998 1997
---- ----
Buildings and improvements -- 1,026,850
Equipment 3,759,937 3,757,410
---------- ----------
3,759,937 4,784,260
Less accumulated amortization (800,737) (1,182,931)
---------- ----------
2,959,200 3,601,329
========== ==========
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum lease payments under capital leases as of
December 31, 1998, are as follows:
Capital Operating
Year ending December 31: Leases Leases
---------- ---------
1999 $1,219,518 1,400,629
2000 1,026,829 1,091,519
2001 419,940 930,799
2002 3,483 512,912
2003 -- 128,707
---------- ---------
Total minimum lease payments 2,669,770 4,064,566
=========
Less amount representing interest 264,081
----------
Present value of future minimum lease
payments 2,405,689
Less current installments of obligations under
capital leases 851,042
----------
Obligations under capital lease, excluding
current installments $1,554,647
==========
Rent expense amounted to approximately $1,270,000, $1,215,000, and
$956,000 in 1998, 1997, and 1996, respectively. Approximately $220,000 of
total rent expense was paid in 1998, 1997, and 1996 to a limited
partnership that owns the Decatur, Alabama facility. 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 $500,000, $455,000, and $350,000 in
1998, 1997 and 1996, respectively.
UFPT 10-K, page F-18
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(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 10-K, page F-19
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Financial statement information by reportable segment is as follows:
1998
----------------------------------------
Specialty Packaging Total
--------- --------- -----
Sales $14,218,460 33,001,714 47,220,174
Interest expense 137,933 309,349 447,282
Depreciation / amortization 304,482 1,595,423 1,899,915
Other income -- (61,074) (61,074)
Income tax 207,306 933,694 1,141,000
Net income 298,318 1,348,647 1,646,965
Total assets 10,415,991 19,532,851 29,948,842
1997
----------------------------------------
Specialty Packaging Total
--------- --------- -----
Sales $14,464,677 30,987,555 45,452,232
Interest expense 182,587 466,682 649,269
Depreciation / amortization 313,747 1,488,011 1,801,758
Other income -- (19,726) (19,726)
Income tax 258,222 736,778 995,000
Net income 339,514 969,792 1,309,306
Total assets 5,530,092 19,664,675 25,194,767
1996
----------------------------------------
Specialty Packaging Total
--------- --------- -----
Sales $15,641,670 23,717,396 39,359,066
Interest expense 160,875 324,083 484,958
Depreciation / amortization 276,464 1,221,659 1,498,123
Other income -- (59,778) (59,778)
Income tax 495,770 (89,770) 406,000
Net income 665,283 597,174 1,262,457
Total assets 5,704,298 17,195,580 22,899,878
(18) 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.
UFPT 10-K, page F-20
UFP TECHNOLOGIES, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
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 acquistion was allocated on the basis of the estimated fair market
value of the asssets 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 had the acquisitions taken place as described and is
not necessarily indicative of results that may be obtained in the future.
1998 1997 1996
----------- ----------- -----------
Pro forma total revenue $54,178,794 51,841,753 43,289,258
Pro forma net income $ 1,692,000 1,404,000 1,405,494
Pro forma basic net income per share $ 0.36 0.30 0.30
Pro forma diluted net income per share $ 0.35 0.29 0.29
UFPT 10-K, page F-21
Independent Auditors' Report on Supplementary Information
The Board of Directors and Stockholders
UFP Technologies, Inc.:
Under date of February 25, 1999, we reported on the consolidated balance
sheets of UFP Technologies, Inc. and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1998, which are included in the Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Boston, Massachusetts
February 25, 1999
UFPT 10-K, page F-22
Schedule II
UFP TECHNOLOGIES, INC.
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
Accounts receivable, allowance for doubtful accounts:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 196,336 $ 164,352 $ 200,936
Provision charged to expense 119,574 226,720 (27,605)
Deductions - write-offs (58,045) (194,736) (8,979)
--------- --------- ---------
Balance at end of year 257,865 196,336 164,352
========= ========= =========
* * * * *
UFPT 10-K, page F-23