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