UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||
SECURITIES EXCHANGE ACT OF 1934 | |||
|
| ||
For the fiscal year ended December 31, | |||
|
| ||
OR | |||
|
| ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE | ||
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-12648
UFP Technologies, Inc.
(Exact(Exact name of registrant as specified in its charter)
Delaware |
| 04-2314970 |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) |
|
|
|
|
|
172 East Main Street, Georgetown, | ||
Massachusetts |
| 01833-2107 |
(Address of principal executive offices) |
| (Zip Code) |
(978) 352-2200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Name of each exchange on which registered |
|
|
|
Preferred Share Purchase Rights | The NASDAQ Stock Market L.L.C. |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per shareNone
Preferred Share Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
| Yes o | No |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
| Yes o | No |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes | No o |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 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 this Form 10-K. x
|
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.smaller reporting company.
Large accelerated filer o. |
| Accelerated filer o. |
| Non-accelerated filer | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes o | No |
As of June 30, 2005,2008, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $8,730,656,$48,169,111, based on the closing price of $3.68$10.01 on that date as reported on the Nasdaq Capital Market.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of March 3, 2009, there were 5,784,982 shares of common stock, $0.01 par value per share, of the Registrant outstanding. |
| |
|
|
DOCUMENTS INCORPORATED BY REFERENCE
Document |
| Parts of this Form 10-K Into |
Portions of the registrant’s Proxy Statement |
| Part III |
This report contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 (the “Act”) and releases issued by the Securities and Exchange Commission. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.
Examples of these risks, uncertainties, and other factors include, without limitation, the following: (i) economic conditions that affect sales of the products of the Company’s packaging customers, (ii) actions by the Company’s competitors and the ability of the Company to respond to such actions, (iii) the ability of UFP Technologies, Inc. (the “Company” or “UFPT”) to obtain new customers, and (iv) the ability of the Company to fulfill its obligations on long-term contracts, and (v) the ability of the Company to execute and integrate 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 risk factors set forth elsewhere in this report and changes in general economic conditions, interest rates and the assumptions used in making such forward-looking statements. The Company’s forward-looking statements set forth in this report represent estimates and assumptions only as of the date that they are made. 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
BUSINESS
The Company’s principal executive offices are located at 172 East Main Street, Georgetown, Massachusetts 01833; telephone number 978-352-2200; corporate web sitewebsite www.ufpt.com. We make available through our website our annual report on Form 10-K, currentquarterly reports on Form 10-Q, andcurrent reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after we electronically file such material with, or furnish it to the Securities and Exchange Commission. The information found on our website is not part of this or any other report we file with or furnish to the SEC.
The Company designs and manufactures engineered packaging solutions utilizing molded fiber, vacuumformedvacuum-formed plastics, and molded and fabricated foam plastic products. The Company also designs and manufactures engineered component products using laminating, molding, and fabricating technologies. The Company serves a myriad of manufacturing sectors, but specifically targets opportunities in the automotive, computer and electronics, medical, aerospace and defense, industrial, and consumer markets.
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. 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,
12
packaging high volume consumer goods, including computer components, medical devices, other light electronics, scented candles, and health and beauty products.
In addition to packaging products, the Company fabricates and molds component 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 component products include automotive interior trim, athletic and industrial safety belts, components for medical diagnostic equipment and devices, abrasive nail files and other beauty aids, anti-fatigue mats, and shock absorbing inserts used in athletic and leisure footwear.
Unless the context otherwise requires, the term “Company” or “UFPT” refers to UFP Technologies, Inc. and its wholly-owned subsidiaries: Moulded Fibre Technology, Inc. (“MFT”), Simco Technologies, Inc. and Simco Automotive Trim, Inc. (collectively “Simco”), and United Development Company Limited (“UDT”), of which the Company owns 26.32%. Effective January 18, 2008, the term “Company” or “UFPT” also includes Stephenson & Lawyer, Inc.(“S&L”), the Company’s wholly-owned subsidiary, and Patterson Properties Corporation, S&L’s wholly-owned subsidiary, pursuant to a purchase and sale agreement that was executed on January 18, 2008.
The interior cushion packaging market is characterized by three primary sectors: (1) custom fabricated or molded products for low volume, high fragility products; (2) molded or die-cut products for high volume, industrial and consumer goods; and (3) loose fill and commodity packaging materials for products whichthat 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 materially serve the 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 shipment and distribution. The principal materials used to package these goods include polyethylene and polyurethane foams, foam-in-place polyurethane, and molded expanded polystyrene. Polyurethane foams and polyethylene foams have high shock absorbency, high resiliency, and vibration damping characteristics.
The higher volume consumer packaging market is generally characterized by annual production volumes in excess of 50,000 pieces. Typical goods in this market include toys, light electronics, computers and computer peripherals, stereo equipment, and small appliances. These goods 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 whichthat generally are less protective and less expensive than resilient foams and molded fiber. The Company believes that molded fiber is being used as an alternative medium to these materials.
23
Component Products applications of foam and other types of plastics are numerous and diverse. Examples include automotive interior components, medical devices, toys, gaskets, health and beauty products, 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 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 sterilizedradiation-sterilized and have been approved by the U.S. Food and Drug Administration for open wound skin contact.
Cross-linked foam can be combined with other materials to increase product applications and market applications. For example, cross-linked foams can be laminated to fabrics to produce light weight, flexible and durable insoles for athletic and walking shoes, weight lifting and industrial safety belts, gun holsters, backpacks, and other products for the leisure, athletic and retail markets. The Company believes that, as a result of their many advantages, cross-linked foam and cross-linked foam laminated products are being used in a wide range of markets as substitutes for traditional rubber, leather, and other product material alternatives.
The packaging industry has been subject to user, industry, and legislative pressure to develop environmentally responsible packaging alternatives that reduce, reuse, and recycle packaging materials. Government authorities have enacted legislation relating to source reduction, specific product bans, recycled content, recyclability requirements, and “green marketing” restrictions.
In order to provide packaging that complies with all regulations regardless of a product’s destination, manufacturers seek packaging materials that meet both environmentally related demands and performance specifications. Some packaging manufacturers have responded by:by reducing product volume and ultimate waste product disposal through reengineering traditional packaging products; adopting new manufacturing processes; participating in recovery and reuse systems for resilient materials that are inherently reusable; creating programs to recycle packaging following its useful life; and developing materials that use a high percentage of recycled content in their manufacture. Wherever feasible, the Company employs one or more of these techniques to create environmentally responsible packaging products.
The Company’s products include foam, plastic, and fiber packaging products, and component 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 designedcustom-designed and fabricated or molded to provide protection for less durable, higher value items, and are primarily sold to original equipment and component manufacturers. Examples of the Company’s packaging products include end-cap packs for computers, corner blocks for
4
telecommunications consoles, anti-static foam packs for printed circuit boards, die-cut
3
or routed inserts for attaché 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 physical package volume. The Company believes that its engineering expertise and breadth of product and manufacturing capabilities have enabled it to provide unique solutions to achieve these goals.
The markets for the Company’s molded fiber packaging and vacuum-formed trays are characterized by high volume production runs and require rapid manufacturing turnaround times. Raw materials used in the manufacture of molded fiber are primarily recycled newspaper, a variety of other grades of recycled paper and water. Raw materials used in vacuum-formed plastics include polystyrene (PS) and polyvinyl chloride (PVC). These products compete with expanded polystyrene (EPS) and manually assembled corrugated die-cut inserts.
The Company’s molded fiber products provide customers with packaging solutions that are more responsive to stringent environmental packaging regulations worldwide and meet the demands of environmentally-aware consumers while simultaneously meeting customer cost and performance objectives.
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, and the Company’s ability to manufacture in clean room environments. The Company’s component products are sold primarily to customers in the automotive, sporting goods, medical, beauty, leisure, and footwear industries. These products include automotive interior trim, partsathletic and industrial safety belts, components for automobilesmedical equipment and medical diagnostic equipment,devices, abrasive nail files and other beauty aids, anti-fatigue mats, and shock absorbing inserts used in athletic and leisure footwear.
The Company believes that it is one of the largest purchasers of cross-linked foam in the United States and as a result it has been able to establish important relationships with the relatively small number of suppliers of this product. Through its strong relationships with cross-linked foam suppliers, the Company believes that it is able to offer customers a wide range of cross-linked foam products.
The Company benefits from its ability to custom design its own proprietary manufacturing equipment in conjunction with its machinery suppliers. For example, the Company has custom designedcustom-designed its own lamination 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.
5
The Company markets and sells its packaging and specialtycomponent products in the United States principally through direct regional sales forces comprised of skilled engineers. The Company
4
also uses independent manufacturer representatives to sell its products. 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 markets a line of products to the health and beauty industry, primarily through distributors. The Company believes that its sales are somewhat seasonal, with increased sales in the second half of the year.and fourth quarters.
The top customer in the Company’s Component Products segment, Recticel Interiors North America, comprises 26%comprised 23% of that segment’s total sales and 15%13% of the Company’s total sales for the year ended December 31, 2005.2008. The top customer in the Packaging segment, Stephen Gould Corporation, comprised 11% of that segment’s total sales and 5% of the Company’s total sales for the year ended December 31, 2008. The loss of either Recticel or Stephen Gould Corp. as a customer wouldcould have a material adverse effect on the Company. No one customer accounted for more than 10% of the Packaging segment sales for the year ended December 31, 2005.
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 do not utilize cross-linked foam are fabricated by cutting shapes from blocks of foam using specialized cutting tools, routers, waterjets 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 addedvalue-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 and technical polyurethane foams, 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
6
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.
5
The Company’s engineering personnel continuallycontinuously explore design and manufacturing techniques as well as new innovative materials 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 generally compensated regardless of whether such projects result in commercial production contracts. Because the Company’s products tend to have relatively short life cycles, research and development is an integral part of the Company’s ongoing cost structure.
The packaging products industry is highly competitive. While there are several national companies that sell interior packaging, the Company’s primary competition to date for its packaging products has been from smaller independent regional manufacturing companies. These companies generally market their products in specific geographic areas from neighboring facilities. In addition, the Company’s foam and fiber packaging products compete against products made from alternative materials, including expanded polystyrene foams, die-cut corrugated, plastic peanuts, plastic bubbles, and foam-in-place urethane.
The component products industry is also highly competitive. The Company’s component products face competition primarily from smaller companies that typically concentrate on production of component products for specific industries. The Company expects that additional companies will enter the market as it expands. The Company believes that its access to a wide variety of materials, 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 component products market. The Company’s component 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 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.
The Company relies upon trade secret,secrets, patents, and trademarks to protect its technology and proprietary rights. 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 may continue to make efforts to obtain patents, when available, although there can be no assurance that any patent obtained will provide substantial protection or be of commercial benefit to the Company, or that its validity will be upheld if challenged.
The Company has threefour U.S. patents relating to its molded fiber technology (including certain proprietary machine designs), and has patents with respect to such technology in certain foreign countries. The Company also has a total of fourteenthirteen U.S. patents relating to technologies including foam and packaging, rubber mat, patterned nail file, and superforming process
6
technologies. There can be no assurance that any patent or patent application of the Company will provide significant
7
protection for the Company’s products and technology, or will not be challenged or circumvented by others. The expiration dates for the Company’s US patents range from 20112009 through 2024.2022.
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 support for environmentally responsible packaging and other products. 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.
The Company’s backlog, as of February 17, 200616, 2009, and February 18, 2005,17, 2008, totaled approximately $6.4$8.5 million and $6.6$10.7 million, respectively, for the Packaging segment, and $23.6$14.5 million and $9.4$26.2 million, respectively, for the Component Products segment. The backlog consists of purchase orders for which a delivery schedule within the next twelve months has been specified by customers. Orders included in the backlog may be canceled or rescheduled by customers without significant penalty. The backlog as of any particular date should not be relied upon as indicative of the Company’s revenues for any period.
As of February 8, 2006,January 31, 2009, the Company had a total of 533586 full-time employees (as compared to 501614 full-time employees as of February 11, 2005)8, 2008), with 297 full-time employees in the Component Products segment (13(26 in engineering, 223215 in manufacturing operations, 15 in marketing, sales and support services, and 27 in general and administration) and in the Packaging segment (10 in engineering, 201 in manufacturing, 25 in marketing, sales and support services, and 31 in general and administration) and 289 full-time employees in the Packaging segment (28 in engineering, 221 in manufacturing, 19 in marketing, sales and support services, and 21 in general and administration). The Company is not a party to any collective bargaining agreement. The Company considers its employee relations to be good.
ITEM 1A.
RISK FACTORS
You should carefully consider the risks described below and the other information in this report before deciding to invest in shares of our common stock. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline and you could lose all or part of your investment.
78
The recent worldwide financial turmoil and associated economic downturn has and is likely to continue to harm our business and prospects.
The recent worldwide financial turmoil and associated economic downturn has adversely affected, and is likely to continue to adversely affect, sales of our products, thereby harming our business and prospects. A slow-down or reduction in industrial output or a contraction of the United States economy may reduce the requirements for certain of our products or for certain end-user products into which our products are incorporated. These factors would likely result in decreased demand and increased pricing pressures on the sales of our products.
We depend on a small number of customers for a large percentage of our revenues. The loss of any single customer, or a reduction in sales to any such customer, or the decline in the financial condition of any such customer could have a material adverse effect on our business, financial condition, and results of operations.
A limited number of customers typically represent a significant percentage of our revenues in any given year. Our top ten customers based on revenues represented, in the aggregate,represent approximately 36% and 46% in 2004 and 2005, respectively,40% of our total revenues. For example, during 2005, we launched our new $95 millionrevenues in both 2008 and 2007. A single automotive program. This program accounted for approximately 26%31% and 30%, respectively, of our Component Products segment’ssegment sales and approximately 15%18% of our total sales in 2005. Based2008 and 2007. The program is scheduled to phase out beginning in 2011. It is uncertain at this time whether the phase-out will occur according to this schedule, or whether it will happen on our currenta more aggressive timeframe. It is also uncertain whether the next generation of automobiles in this program will require the same design of parts and, if so, whether we will be selected as the supplier. We expect sales forecasts, we expectfrom this program to account for significant portions of our overall salesdecline over the next 7three years. However, we cannot guarantee that we will realize the full potential value of this program. The program relies upon a contract that is terminable by customer for any reason, subject to a cancellation charge. If the customer’s needs decrease over the course of the contract, our estimated revenues from this contract may also decrease. Even if we generate revenue from the project, we cannot guarantee that the project will be profitable, particularly if revenues from the contract are less than expected. Our revenues are directly dependent on the ability of our customers to develop, market, and sell their products in a timely, cost-effective manner. The loss of a significant portion of our expected future sales to any of our large customers would have a material adverse effect on our business, financial condition, and financial results. Likewise, a material adverse change in the financial condition of any of these customers, for example, due to a loss of liquidity by such a customer due to the current financial downturn, could have a material adverse effect on our business, financial condition and financial results.
Our sales volume and profit margins could be negatively affected by volatile pricing and supply conditions for our raw materials.
During 2005, we were faced with significant raw material price increases and, in some cases, shortages dueability to high oil and natural gas prices, Asian demand for the same raw materials and the impact of Hurricanes Katrina and Rita on petrochemical plants along the Gulf Coast. The majority of raw materials used by the Company—polyurethane and polyethylene foams—utilize petroleum based resins in their production. Increases in raw material costs that we are not able to offset could have a significant negative effect on our sales volume and profitability. In most cases, we have been able to pass the cost increases through to our customers. As we raise our sales prices, we could lose sales volume if competitors are willing to offer our customers lower prices on similar products or if our customers change their packaging practices in response to our higher prices. If we lose sales volume, earnings could decline because of the loss of profitable sales and because our fixed costs might not decline as fast as revenues in the event of the loss of a largecollect accounts receivable from any such customer. In addition, pricing established in certain supply contracts could prevent us from immediately raising sales prices and therefore could result in a decline in profitability. We can offer no assurance that we will be able to fully offset the higher raw material costs.
Fluctuations in the supply of components and raw materials we use in manufacturing our products could cause production delays or reductions in the number of products we manufacture, which could materially adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of periodic shortages of raw materials. We purchase raw materials pursuant to purchase orders placed from time to time in the ordinary course of business. Failure or delay by such suppliers in supplying us necessary raw materials could
8
adversely affect our ability to manufacture and deliver products on a timely and competitive basis. For example, a key supplier of technical urethane foams has recently filed for protection under Chapter 11 of the US Bankruptcy Code. As of this point of time, there has been no interruption in the supply of such foams, but there can be no guarantee that such interruption will not occur in the near future.
While we believe that we may, in certain circumstances, secure alternative sources of these materials, we may incur substantial delays and significant expense in doing so, the quality and reliability of alternative sources may not be the same and our operating results may be materially adversely affected. Alternative suppliers might charge significantly higher prices for materials than we currently pay. Under such circumstances, the disruption to our business could have a material
9
adverse impact on our customer relationships, business, financial condition, and results of operations.
Reductions in the availability of energy supplies or an increase in energy costs may increase our operating costs.
We use electricity and natural gas at our manufacturing facilities and to operate our equipment. Over the past threeseveral years, prices for electricity and natural gas have fluctuated significantly. An outbreak or escalation of hostilities between the United States and any foreign power and, in particular, a prolonged armed conflict in the Middle East, or a natural disaster such as the recent hurricanes and related flooding in the oil producing region of the Gulf Coast of the United States, could result in a real or perceived shortage of petroleum and/or natural gas, which could result in an increase in the cost of electricity or energy generally.generally as well as an increase in the cost of our raw materials, of which many are petroleum-based. In addition, increased energy costs negatively impact our freight costs due to higher fuel prices. Future limitations on the availability or consumption of petroleum products and/or an increase in energy costs, particularly electricity for plant operations, could have a materiallymaterial adverse effect upon our business and results of operations.
Our Packaging segment may lose business if our customers shift their manufacturing offshore.
Historically, geography has played a large factor in the packaging business. Manufacturing and other companies shipping products typically buy packaging from companies that are relatively close to their manufacturing facilities to increase shipping efficiency and decrease costs. As many U.S. companies move their manufacturing operations overseas, particularly to the Far East, the associated packaging business often follows. We have lost customers in the past and may lose customers again in the future lose customers as a result of customers moving their manufacturing facilities offshore, and then hiring our competitors that operate packaging-production facilities that are perceived to be more territorially advantageous. As a result, our sales may suffer, which could have a materiallymaterial adverse effect upon our business and results of operations.
Failure to retain key personnel could impair our ability to execute our business strategy.
The continuing service of our executive officers and essential engineering, technical and management personnel, together with our ability to attract and retain such personnel, is an important factor in our continuing ability to execute our strategy. There is substantial competition to attract such employees, and the loss of any such key employees could have a material adverse effect on our business and operating results. The same could be true if we were to experience a high turnover rate among engineering and technical personnel and we were unable to replace them.
9
Members of our board of directors and management who also are our stockholders exert significant influence over us.
Based on information made available to us, we believe that our executive officers, directors and their affiliates collectively beneficially ownowned approximately 51%12.9% of our outstanding shares of common stock as of June 30, 2005.2008. As a result, those stockholders may, if acting together, control or exert substantial influence over actions requiring stockholders’ approval, including elections of our directors, amendments to our certificate of incorporation, mergers, sales of assets or other business acquisitions or dispositions.
If we do not generate sufficient cash flow from operations, we may be unable to service our debt obligations.10
We have established a credit facility with a commercial lender, under which approximately $14 million was outstanding as of December 31, 2005. If we are unable to generate sufficient cash flow from operations in the future, we may be unable to pay principal or interest on our borrowings when due and may be required to refinance all or a portion of our existing debt or to obtain additional financing. We cannot guarantee that we could obtain any additional financing on favorable terms, if at all.
We may pursue acquisitions or joint ventures that involve inherent risks, any of which may cause us to not to realize anticipated benefits.
Our business strategy includes the potential acquisition of businesses and entering into joint ventures and other business combinations that we expect will complement and expand our business. For example, on January 18, 2008, we acquired Stephenson & Lawyer, Inc., as discussed in Note 18 of the “Notes to Consolidated Financial Statements.” We may not be able to successfully identify suitable acquisition or joint venture opportunities or complete any particular acquisition, combination, joint venture or other transaction on acceptable terms. Our identification of suitable acquisition candidates and joint venture opportunities involves risks inherent in assessing the values, strengths, weaknesses, risks and profitability of these opportunities including their effects on our business, diversion of our management’s attention and risks associated with unanticipated problems or unforeseen liabilities. If we are successful in pursuing future acquisitions or joint ventures, we may be required to expend significant funds, incur additional debt, or issue additional securities, which may materially and adversely affect our results of operations and be dilutive to our stockholders. If we spend significant funds or incur additional debt, our ability to obtain financing for working capital or other purposes could decline and we may be more vulnerable to economic downturns and competitive pressures. In addition, we cannot guarantee that we will be able to finance additional acquisitions or that we will realize any anticipated benefits from acquisitions or joint ventures that we complete. Should we successfully acquire another business, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of our existing business. Our failure to identify suitable acquisition or joint venture opportunities may restrict our ability to grow our business.
As a public company, we need to comply with the reporting obligations of the Securities Exchange Act of 1934 and Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to comply with the reporting obligations of the Exchange Act and Section 404 of the Sarbanes-Oxley Act, or if we fail to achieve and maintain adequate internal controls over
10
financial reporting, our business, results of operations and financial condition, and investors’ confidence in us, could be materially and adversely affected.
As a public company, we are required to comply with the periodic reporting obligations of the Exchange Act, including preparing annual reports, quarterly reports and current reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits, and restrict our ability to access financing. In addition, we will be required under applicable law and regulations to integrate our systems of internal controls over financial reporting. We plan to evaluate our existing internal controls with respect to the standards adopted by the Public Company Accounting Oversight Board. During the course of our evaluation, we may identify areas requiring improvement with respect to our internal control over financial reporting, and we may be required to design enhanced processes and controls to address issues identified through this review.identified. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. If we fail to achieve and maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controlscontrol over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud.
11
Provisions of our corporate charter documents, Delaware law, and our stockholder rights plan may dissuade potential acquirers, prevent the replacement or removal of our current management and may thereby affect the price of our common stock.
The board of directors has the authority to issue up to 1,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges, and restrictions, including voting rights of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing flexibility in connection with possible financings, acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We have no present plans to issue shares of preferred stock. Further, certain provisions of our certificate of incorporation, and bylaws, and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving us.
We also have a stockholder rights plan which is designed to protect and maximizeenhance the value of our outstanding equity interests in the event of an unsolicited attempt to acquire us in a manner or on terms not approved by the board of directors and that would prevent stockholders from realizing the full value of their shares of our common stock. Its purposes are to deter those takeover attempts that the board believes are undesirable, to give the board more time to evaluate takeover proposals and consider alternatives, and to increase the board’s negotiating position to maximizeenhance value in the event of a takeover. The rights issued pursuant to the plan are not intended to prevent all takeovers of us.our company. However, the rights may have the effect of rendering more difficult or discouraging our acquisition. The rights may cause substantial dilution to a person or group that attempts to acquire us on terms or in a manner not approved by the board of directors, except pursuant to an offer conditioned upon the negation, purchase, or redemption of the rights with respect to which the condition is satisfied.
Additional provisions of our certificate of incorporation and by-lawsbylaws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting common
11
stock. These include provisions that classify our board of directors, limit the ability of stockholders to take action by written consent, call special meetings, remove a director for cause, amend the by-lawsbylaws, or approve a merger with another company. In addition, our bylaws set forth advance notice procedures for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
We are subject to the provisions of Section 203 of the Delaware General Corporation Law which prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, either alone or together with affiliates and associates, owns (or within the past three years did own) 15% or more of the corporation’s voting stock.
12
ITEM 2.
PROPERTIES
The following table presents certain information relating to each of the Company’s properties:
Location |
| Square |
| Lease |
| Principal Use |
Georgetown, Massachusetts(2) |
| 57,600 |
| (owned by the Company) |
| Headquarters, fabrication, molding, test lab, |
Grand Rapids, Michigan(2),(3) | 255,260 | (owned by the Company) | Fabrication and engineering for the Component Products segment | |||
Decatur, Alabama(1) |
| 47,250 |
| 12/31/ |
| Fabrication and engineering for the Packaging segment |
Decatur, Alabama |
| 14,000 |
|
|
| Warehousing and fabrication for the Packaging segment |
Kissimmee, Florida(1) |
| 49,400 |
| 12/31/ |
| Fabrication, molding, test lab, and engineering for the Packaging segment |
Miami, Florida | 7,000 | 11/30/09 | Warehousing and fabrication for the Packaging segment | |||
Haverhill, Massachusetts |
| 48,772 |
| 2/28/ |
| Flame lamination for the Component Products segment |
Raritan, New Jersey |
| 67,125 |
| 2/28/ |
| Fabrication, molding, test lab, clean-room, and engineering for the Packaging segment |
Clinton, Iowa |
|
|
| 12/31/14 |
| Molded fiber operations for the Packaging segment |
Clinton, Iowa |
| 62,000 |
| 2/28/15 |
| Molded fiber operations for the Packaging segment |
Addison, Illinois |
|
|
| 07/31/ |
| Fabrication and engineering for the Packaging segment |
Addison, Illinois | 15,000 | 06/30/10 | Fabrication and engineering for the Packaging segment | |||
Ventura, California |
| 48,300 |
| month-to-month |
| Fabrication and engineering for the Component Products segment |
Atlanta, Georgia |
| 47,000 |
| 04/30/11 |
| Fabrication and engineering for the Component Products segment |
|
|
|
|
|
|
|
El Paso, Texas |
|
|
|
|
| Warehousing and fabrication for the Packaging segment |
12
(1) United Development Company Limited, a Florida limited partnership and an affiliate of the Company and certain officers, directors and stockholders of the Company, is the lessor of these properties. United Development Company Limited was consolidated into the Company’s financial statements in 2003 (see Note 1 to the Consolidated Financial Statements).
(2) Subject to mortgage (see Note 8 to the Consolidated Financial Statements).
(3) Acquired as part of the Stephenson & Lawyer acquisition on January 18, 2008
ITEM 3.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
13
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS
None.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
From July 8, 1996, until April 18, 2001, the Company’s Common Stock was listed on the NasdaqNASDAQ National Market under the symbol “UFPT.” Since April 19, 2001, the Company’s Common Stock has been listed on the NasdaqNASDAQ Capital Market (formerly known as the Nasdaq Small Cap Market).Market. The following table sets forth the range of high and low quotations for the Common Stock as reported by NasdaqNASDAQ for the quarterly periods from January 1, 20042007, to December 31, 2005:2008:
Fiscal Year Ended December 31, 2004 |
| High |
| Low |
| |||||||||
Fiscal Year Ended December 31, 2007 |
| High |
| Low |
| |||||||||
First Quarter |
| $ | 2.35 |
| $ | 1.44 |
|
| $ | 5.78 |
| $ | 4.41 |
|
Second Quarter |
| 4.05 |
| 2.01 |
|
| 6.43 |
| 4.56 |
| ||||
Third Quarter |
| 3.60 |
| 2.50 |
|
| 5.88 |
| 4.45 |
| ||||
Fourth Quarter |
| 4.20 |
| 3.08 |
|
| 8.75 |
| 5.03 |
|
Fiscal Year Ended December 31, 2005 |
| High |
| Low |
| |||||||||
Fiscal Year Ended December 31, 2008 |
| High |
| Low |
| |||||||||
First Quarter |
| $ | 6.39 |
| $ | 3.11 |
|
| $ | 7.83 |
| $ | 5.20 |
|
Second Quarter |
| 5.88 |
| 2.94 |
|
| 14.63 |
| 7.36 |
| ||||
Third Quarter |
| 4.25 |
| 3.25 |
|
| 12.18 |
| 6.71 |
| ||||
Fourth Quarter |
| 3.65 |
| 2.17 |
|
| 7.09 |
| 3.92 |
|
As of February 28, 2006,16, 2009, there were 12090 holders of record of the Company’s Common Stock.
13Due to the fact that many of the shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total number of individual stockholders represented by these holders of record.
The Company did not pay any dividends in 2005,2008, 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 of its business, although it would consider paying cash dividends in the future. The Company’s ability to pay dividends is subject to approval by its principal lending institution.
14
The Company maintains threetwo active stock option plans to provide long-term rewards and incentives to the Company’s key employees, officers, employee directors, non-employee directors and advisors. The first plan (19931993 Employee Stock Option Plan)Plan provides for the issuance of up to 1,550,000 shares of the Company’s common stock.Common Stock. The second plan (19931993 Director Plan)Plan provided for the issuance of 110,000 shares of the Company’s common stockCommon Stock to non-employee directors; this plan was frozen with the inception of the 1998 Director Plan, which provides for the issuance of up to 725,000975,000 shares of the Company’s common stockCommon Stock to non-employee directors. Additional details of these plans are discussed in Note 1312 to the Consolidated Financial Statements.consolidated financial statements.
TheThrough June 2008, the Company also maintainsmaintained an Employee Stock Purchase Plan, which iswas intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986.
The Company also maintains a Stockthe 2003 Incentive Plan, (2003 Equity Incentive Plan) to providewhich provides the Company with the ability to offer equity-based incentives to present and future executives and other employees who are in a position to contribute to the long-term success and growth of the Company.
Each of these plans and their amendments havehas been approved by the Company’s stockholders.
Summary plan information as of December 31, 20052008, is as follows:
|
| Number of shares of |
| Weighted |
| Number of shares of |
|
| Number of |
| Weighted |
| Number of |
| ||
1993 Employee Plan |
| 829,075 |
| $ | 2.08 |
| 311,293 |
|
| 634,375 |
| $ | 2.36 |
| 322,293 |
|
1993 Director Plan |
| 40,000 |
| 4.77 |
| 0 |
|
| — |
| — |
| — |
| ||
1998 Director Plan |
| 506,471 |
| 2.27 |
| 218,529 |
|
| 338,808 |
| 4.11 |
| 334,890 |
| ||
Total Option Plans |
| 973,183 |
| $ | 2.97 |
| 657,183 |
| ||||||||
|
|
|
|
|
|
|
| |||||||||
1998 Employee Stock Purchase Plan |
| 0 |
| 0.00 |
| 122,820 |
|
| — |
| — |
| — |
| ||
2003 Equity Incentive Plan |
| 0 |
| 0.00 |
| 363,245 |
| |||||||||
Total |
| 1,375,546 |
| $ | 2.23 |
| 1,015,887 |
| ||||||||
2003 Incentive Plan |
| 352,000 |
| — |
| 461,321 |
| |||||||||
Total All Stock Plans |
| 1,325,183 |
| — |
| 1,118,504 |
|
14
(1) Will be issued upon exercise of outstanding options or vesting of stock unit awards.
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31, 2005,2008, is derived from the audited consolidated financial statements of the Company. The consolidated financial statements for the 2004 fiscal years 2004, 2003, and 2002year were audited by Pricewaterhouse CoopersPricewaterhouseCoopers LLP. The consolidated financial statements for fiscal year 2001 were audited by Arthur Andersen LLP (“Andersen”), which has ceased operations. The data should be read in conjunction with the consolidated financial statements and the related notes included in this report,
15
and in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Selected Consolidated Financial DataData:
|
| Years Ended December 31 |
| |||||||||
|
| (in thousands, except per share data) |
| |||||||||
Consolidated statement of operations |
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |
| (2) |
| (2) |
| (3)(2)(4) |
| (5)(4) |
| (6)(7)(4) |
| ||
Net sales |
| $ | 83,962 |
| 68,624 |
| 60,902 |
| 61,189 |
| 61,574 |
|
Gross profit |
| 14,601 |
| 13,971 |
| 10,724 |
| 12,105 |
| 10,925 |
| |
Operating income (loss) |
| 2,171 |
| 2,144 |
| (1,508 | ) | 466 |
| (3,741 | ) | |
Net income (loss) |
| 659 |
| 871 |
| (1,516 | ) | (234 | ) | (3,043 | ) | |
Diluted earnings (loss) per share |
| $ | 0.14 |
| 0.17 |
| (0.34 | ) | (0.05 | ) | (0.72 | ) |
Weighted average number of diluted shares outstanding |
| 5,261 |
| 4,995 |
| 4,490 |
| 4,343 |
| 4,245 |
|
|
| Years Ended December 31 |
| |||||||||
|
| (in thousands, except per share data) |
| |||||||||
Consolidated statement of operations data:(1),(2) |
| 2008 |
| 2007 |
| 2006 |
| 2005 |
| 2004 |
| |
Net sales |
| $ | 110,032 |
| 93,595 |
| 93,749 |
| 83,962 |
| 68,624 |
|
Gross profit |
| 28,563 |
| 22,810 |
| 19,237 |
| 14,601 |
| 13,971 |
| |
Operating income |
| 8,425 | (3) | 7,247 |
| 5,054 |
| 2,171 |
| 2,144 |
| |
Net income |
| 5,116 |
| 4,159 |
| 2,515 |
| 659 |
| 871 |
| |
Diluted earnings per share |
| 0.82 |
| 0.71 |
| 0.45 |
| 0.14 |
| 0.17 |
| |
Weighted average number of diluted shares outstanding |
| 6,263 |
| 5,861 |
| 5,571 |
| 5,261 |
| 4,995 |
| |
|
| Years Ended December 31 |
|
| As of December 31 |
| ||||||||||||||||||
|
| (in thousands) |
|
| (in thousands) |
| ||||||||||||||||||
Consolidated balance sheet data:(1) |
| 2005(2) |
| 2004(2) |
| 2003(2) |
| 2002 |
| 2001 |
| |||||||||||||
Consolidated balance sheet data:(1),(2) |
| 2008 |
| 2007 |
| 2006 |
| 2005 |
| 2004 |
| |||||||||||||
Working capital |
| $ | 3,321 |
| 1,431 |
| 1,209 |
| 1,540 |
| 977 |
|
| $ | 18,688 |
| 14,952 |
| 8,236 |
| 3,321 |
| 1,431 |
|
Total assets |
| 44,000 |
| 39,632 |
| 36,749 |
| 35,383 |
| 38,102 |
|
| 48,723 |
| 45,553 |
| 39,037 |
| 44,000 |
| 39,632 |
| ||
Short-term debt and capital lease obligations |
| 9,716 |
| 9,484 |
| 8,173 |
| 7,169 |
| 7,395 |
|
| 1,419 |
| 1,419 |
| 1,767 |
| 9,716 |
| 9,484 |
| ||
Long-term debt and capital lease obligations, excluding current portion |
| 7,650 |
| 7,497 |
| 8,119 |
| 6,851 |
| 6,827 |
|
| 4,852 |
| 6,271 |
| 6,921 |
| 7,650 |
| 7,497 |
| ||
Total liabilities |
| 29,239 |
| 25,846 |
| 24,058 |
| 21,332 |
| 23,948 |
|
| 17,355 |
| 21,310 |
| 20,412 |
| 29,239 |
| 25,846 |
| ||
Stockholders’ equity |
| $ | 14,761 |
| 13,787 |
| 12,691 |
| 14,050 |
| 14,154 |
|
| 31,367 |
| 24,243 |
| 18,625 |
| 14,761 |
| 13,787 |
|
(1) See Note 1920 to the Consolidated Financial Statementsconsolidated financial statements for segment information.
(2) Amounts include the consolidation of United Development Company Limited, a 26.32% owned-owned real estate limited partnership. See Note 1 to the Consolidated Financial Statements.consolidated financial statements.
(3) Amounts includeAmount includes restructuring charges of $1.4 million
(4)In years where the Company reported a net loss, basic and diluted earnings per share and weighted average shares outstanding are the same.
(5)Amounts include results of operations of the business of Excel Acquisition Group (acquired in January 2002) for the periods subsequent to its acquisition.$1.3 million.
15
(6)Amounts include results of operations of the E-cube product line (acquired in October 2001) for the periods subsequent to its acquisition.
(7)Amounts include restructuring charges of $1 million.
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 Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” and other expressions, which are predictions of or indicate future events and trends and whichthat do not relate to historical matters, identify forward-looking statements. The Company’s plans, described below, to execute a program which launched in the fourth quarter of 2004 for an automotive supplier that could be as large as $95 million is an example of a forward looking statement. 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.
The $95 million revenue value of the automotive contract is an estimate, based on the automotive supplier’s projected needs. The Company cannot guarantee that it will fully benefit from this contract, which is terminable by the automotive supplier for any reason, subject to a cancellation charge that includes, among others, a provision whereby the customer will reimburse the Company for its total capital investment less any depreciation taken. The Company’s revenues from this contract are directly dependent on the ability of the automotive supplier to develop, market, and sell its products in a timely, cost-effective manner. If the automotive supplier’s needs decrease over the course of the contract, the Company’s estimated revenues from this contract may also decrease. Even if the Company generates revenue from the project, the Company cannot guarantee that the project will be profitable, particularly if revenues from the contract are less than expected. Other examples16
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,customers; (ii) actions by the Company’s competitors and the ability of the Company to respond to such actions,actions; (iii) the ability of the Company to obtain new customerscustomers; and (iv) the ability of the Company to execute and integrate favorable acquisitions. In addition to the foregoing, the Company’s actual future results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth elsewhere in this report and changes in general economic conditions, interest rates and the assumptions used in making such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”). As a result of adoptingIn compliance with the provisions of FIN 46(R),46R, the Company has consolidated the financial statements of UDT as of December 31, 2003,for all periods presented, because –— when including related party ownership –— the Company effectively owns greater than 50% of UDT. Prior to December 31, 2003, this investment was accounted for under the equity
16
method at cost, plus the Company’s proportionate share of the limited partnership’s income, less any distributions received from the limited partnership.
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:
|
| 2005 |
| 2004 |
| 2003 |
|
| 2008 |
| 2007 |
| 2006 |
|
Net sales |
| 100.0 | % | 100.0 | % | 100.0 | % |
| 100.0 | % | 100.0 | % | 100.0 | % |
Cost of sales |
| 82.6 |
| 79.6 |
| 82.4 |
|
| 74.0 | % | 75.6 | % | 79.5 | % |
Gross profit |
| 17.4 |
| 20.4 |
| 17.6 |
|
| 26.0 | % | 24.4 | % | 20.5 | % |
Selling, general and administrative expenses |
| 14.8 |
| 17.7 |
| 17.8 |
|
| 17.1 | % | 16.7 | % | 15.1 | % |
Restructuring charge |
| 0 |
| (0.4 | ) | 2.3 |
|
| 1.2 | % | 0.0 | % | 0.0 | % |
Operating income (loss) |
| 2.6 |
| 3.1 |
| (2.5 | ) | |||||||
Operating income |
| 7.7 | % | 7.7 | % | 5.4 | % | |||||||
Total other expenses, net |
| 1.6 |
| 1.1 |
| 1.4 |
|
| 0.3 | % | 0.5 | % | 1.1 | % |
Income (loss) before income taxes |
| 1.0 |
| 2.0 |
| (3.9 | ) | |||||||
Expense (benefit) for income taxes |
| 0.2 |
| 0.7 |
| (1.4 | ) | |||||||
Net income (loss) |
| 0.8 |
| 1.3 |
| (2.5 | ) | |||||||
Income before income taxes |
| 7.4 | % | 7.2 | % | 4.3 | % | |||||||
Income tax expense |
| 2.8 | % | 2.8 | % | 1.6 | % | |||||||
Net income |
| 4.6 | % | 4.4 | % | 2.7 | % |
UFP Technologies is a leadingan innovative designer and manufacturercustom converter of interior protective packaging solutions using molded fiber, vacuumformedfoams, plastics, and molded and fabricated foam plasticfiber products. The Company also designs and manufactures engineered component solutions using laminating, molding and fabricating technologies. The Company serves a myriad of markets, but specifically targets opportunities in the automotive, computers and electronics, medical, aerospace and defense, industrial, and consumer markets.
During 2005On January 18, 2008, the Company absorbed costs associated with the launchacquired Stephenson & Lawyer, Inc. (“S&L”), a Grand Rapids, Michigan-based foam fabricator. Operating out of several new programs in its automotive operations in Michigan as well as in its large, estimated $95 million programa 255,000-square-foot manufacturing plant, S&L specializes in the Southeast that caused significant losses in its automotive business unit. These costs were in the formfabrication of higher than anticipated scrap rates and additional direct labor requirements that, combined, caused significant losses in this business unit. However, robust demand in the remaining markets that the Company serves generated sufficient profitstechnical urethane foams. In addition to more than absorb these losses. Particularly strong demand for product was in the military and medical markets. The high scrap rates and excessive direct labor improved dramatically by year-end and the Company expects better results in the automotive business unit in 2006.
During 2005, the Company was faced with significant raw material price increases and, in some cases, shortages duesignificantly adding to high oil and natural gas prices, Asian demand for the same raw materials and the impact of Hurricanes Katrina and Rita on petrochemical plants along the Gulf coast. The majority of raw materials used by the Company—polyurethane and polyethylene foams—utilize petroleum based resins in their production. In most cases, the Company has been able to pass the cost increases through to its customers. Although prices appear to have stabilized, pricing discussions with the Company’s customers are ongoing.real estate, S&L brings access to this family of foams, modern manufacturing capabilities, and a seasoned management team to the Company. The acquisition is an example of the
17
Company’s dual strategy of growing its top line organically through a focused marketing plan as well as through strategic acquisitions.
The Company reported record earnings for its fiscal year ended December 31, 2008, largely due to increased sales and stronger gross margins. However, it experienced a softening of sales in the fourth quarter of 2008. Sales to the automotive industry have weakened significantly as holiday shutdowns started earlier than normal and extended well into January 2009, largely attributable to very soft automotive sales in North America. Given the current condition of the automobile industry as well as the overall weak economy, the Company expects continued soft sales at least through the first quarter of 2009.
20052008 Compared to 20042007
The Company’s netNet sales increased 22.4%17.6% to $84.0$110.0 million in the year ended December 31, 2008, from $93.6 million in the same period of 2007. Without its newly acquired plant in Grand Rapids, Michigan (Component Products segment), sales increased 4% for the year ended December 31, 2008. Sales in the Component Products segment increased 13.1% to $60.8 million for the year ended December 31, 2005,2008, from $68.6$53.8 million in 2004. Component Productthe same period of 2007. The increase is primarily due to sales of $12.7 million from the newly acquired plant in Grand Rapids, partially offset by a decrease in sales to the automotive industry of approximately $5.9 million. The Company believes that sales to the automotive industry will continue to weaken in 2009. Sales in the Engineered Packaging segment increased 33.4%23.5% to $48.2$49.2 million for the year ended December 31, 2008, from $39.8 million in 2005 from $36.1 million in 2004.the same period of 2007. The increase in sales is primarilylargely due to an increase in sales from recently launched automotive programsof $3.9 million to a key electronics customer, as well as strong demand from customers in the medical and military markets. Packaging sales increased 10% to $35.7 million in 2005 from $32.5 million in 2004. The increase in sales is primarily due to growth in sales at the Company’s plant in El Paso, Texas, and stronger demand for case insert product. The Company continued to invest in the area of marketing and sales in 2005 and attributes a portion of the Company’s sales growth in 2005 to these investments.environmentally friendly molded fiber packaging.
Gross profit as a percentage of sales (“Gross Margin”) decreasedincreased to 17.4%26.0% in 20052008 from 20.4%24.4% in 2004.2007. The declineimprovement in gross margin is primarily attributable to the impactCompany-wide continued strategic pricing and manufacturing efficiency initiatives (material and labor as a percentage of high material scrap ratessales are down 1.2% and direct labor associated with new automotive contracts0.8%, respectively) partially offset by improvements fromlower gross margins in the fixed portion of labor and overhead measured against higher sales in both the Component Product and Packaging segments.Company’s automotive plants (Component Products segment).
Selling, General and Administrative Expenses (“SG&A”) increased 2.7%20.9% to $12.4$18.8 million for the year ended December 31, 20052008, from $12.1$15.6 million in 2004.2007. As a percentage of sales, SG&A was 14.8%17.1% and 17.6%16.7% in the years ended December 31, 20052008, and 2004,2007, respectively. The increase in SG&A dollarsspending is primarily attributable to continued investments madeincreased SG&A from the newly acquired plant in the areasGrand Rapids of marketing and salesapproximately $2.2 million (Component ProductProducts segment) as well as increased equity-based compensation of approximately $600,000 (Component Products and Packaging segments), increased corporate governance.
The Company recorded a restructuring charge of approximately $1.3 million during the year ended December 31, 2008, associated with the consolidation of its Macomb Township, Michigan, automotive operations into its newly acquired plant in Grand Rapids, Michigan. The $1.3 million charge is for the costs associated with vacating the Macomb Township premises, severance, relocation and compliancestay-bonuses for its employees, equipment moving and hook-up costs, (Component Product and Packaging segments)training and incremental SG&A withinother start-up costs. As of December 31, 2008, the automotive business unit (Component Product segment).move was completed and all significant costs had been incurred.
18
Interest expense increaseddecreased to $1,041,000approximately $334,000 for the year ended December 31, 2005,2008, from approximately $714,000$479,000 in 2004.2007. The increasedecrease in interest expense is primarily attributable to higherlower average interest rates as well as higher average debt balances in the Company’s revolving credit facility due to sales growth.borrowings.
The Company recorded income tax expense as a percentage of 24%pre-tax income of 36.9% and 35.9%38.3% for the years ended December 31, 20052008, and 2004,2007, respectively. The low effective tax rate for 2005 reflects research and development tax credits taken on the Company’s tax returns. The Company has deferred tax assets on its books associated with net operating losses generated in previous years. The Company has considered both positive and negative available evidence in its determination that the deferred tax assets will be realized, and has not recorded a tax valuation allowance at December 31, 2005.2008. The Company will continue to assess the realizability of deferred tax assets created by recording tax benefits on operating losses and, where appropriate, record a valuation allowance against these assets. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term, if estimates of future taxable income during the carryforward period are reduced.
The Company’s net sales increased 12.7%decreased slightly to $68.6$93.6 million for the year ended December 31, 2004,2007, from $60.9$93.7 million in 2003.2006. While 2007 sales were virtually the same as sales in 2006, there was a shift in product mix. Sales in the Component Product sales increased 15.5% to $36.1 million in 2004 from $31.3 million in 2003. The increase in sales is primarilyProducts segment decreased approximately 4.2%, largely due to strong demand from customersshrinking sales to the automotive market. The Company attributes the reduction in automotive sales to the medical and military marketsend of certain programs in its Michigan plant, as well as prototype salesthe maturing of its large southeast automotive program. Sales to the automotive industry declined by approximately $1.9 million. The decline was largely offset by an approximately 4.8% increase in the automotive
18
industry associated with the Company’s large program that launched late in the fourth quarter of 2004.Engineered Packaging sales increased 9.6%segment sales. The Company attributes this increase primarily to $32.5approximately $1.3 million in 2004 from $29.6 million in 2003. The increase inincreased sales is primarily due to growth in sales at the Company’s new plant in El Paso, Texas, and stronger demand forof case insert product. The Company has invested in the area of marketing and sales in recent years and attributes a portion of the Company’s sales growth in 2004products to these investments.key accounts.
Gross profit as a percentage of sales (“Gross Margin”) increased to 20.4%24.4% in 20042007 from 17.6%20.5% in 2003.2006. The improvement in gross margin is primarily attributable to the fixed portion of labor and overhead measured against higher salesmanufacturing efficiency initiatives, particularly in both the Component Product and Packaging segments. In addition, the Company’s molded fiber division (Packagingautomotive operations (Component Products segment) operated at higher. The Company estimates that these initiatives in the automotive operations improved gross margins due to a more efficient operating structure resulting from the plant consolidations in recent years.by approximately 2.0%.
Selling, General and Administrative Expenses (“SG&A”) increased 11.8%9.7% to $12.1$15.6 million for the year ended December 31, 20042007, from $10.8$14.2 million in 2003.2006. As a percentage of sales, SG&A was 17.6%16.7% and 17.8%15.1% in the years ended December 31, 20042007, and 2003,2006, respectively. The increase in SG&A dollarsspending is primarily attributable to investments made inincreased sales resources of approximately $700,000 (across both business segments) as well as equity-based compensation resulting from the areasimplementation of marketing and salesSFAS No. 123R (Component ProductProducts and Packaging segments), increased corporate governance and compliance costs (Component Product and Packaging segments) and incremental SG&A associated with the Company’s new automotive program (Component Product segment). of approximately $250,000.
Interest expense decreased to approximately $714,000$479,000 for the year ended December 31, 2004,2007, from approximately $784,000$964,000 in 2003.2006. The declinedecrease in interest expense is primarily attributable to lower average borrowings partially offset by the impact of higher interest rates primarily due to better Company performance.rates.
The Company recorded income tax expense as a percentage of 36%pre-tax income of 38.3% and 37.3% for the yearyears ended December 31, 2004. It recorded2007, and 2006, respectively. The higher effective tax rate for 2007 reflects a netreduction in the amount of eligible research and development tax benefit of 36% of its pre-tax loss in 2003. The tax benefit recorded in 2003 reflects primarilycredits expected to be taken on the expected utilization of a net operating loss generated during the year in future federalCompany’s 2007 tax returns. The Company has deferred tax assets on its books associated with net operating losses generated in previous years. The Company has considered both
19
positive and negative available evidence in its determination that the deferred tax assetassets will be realized, and has not recorded a tax valuation allowance at December 31, 2004.2007. The Company expects to utilize a significant amount of its federal net operating losses when it prepares its 2007 tax returns. The Company will continue to assess the realizability of deferred tax assets created by recording tax benefits on operating losses and, where appropriate, record a valuation allowance against these assets. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term, if estimates of future taxable income during the carryforward period are reduced.
Goodwill
Amortization of Goodwill and certain indefinite lived intangible assets ceased with the adoption of SFAS No. 142, effective January 1, 2002.
Restructuring
On October 22, 2003, the Company’s Board of Directors approved a formal plan of restructure in response to continued losses in the Company’s molded fiber plant in Visalia, California. Accordingly, the Company recorded restructuring charges of $1,405,000 consisting of asset impairments of $640,000, severance of $40,000, and future lease commitments of $725,000, in the fourth quarter of 2003. No balance remains on the balance sheet as of December 31, 2005.
19
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, 20052008, and 2004,2007, working capital was $3,321,000approximately $18,688,000 and $1,431,000,$14,952,000, respectively. The increase in working capital is primarily attributable to higher accounts receivablean increase in receivables and inventory of approximately $3.5$959,000 and $2.3 million, respectively, due largely to the acquisition of Stephenson & Lawyer, Inc. in January 2008 and a decrease in accounts payable of approximately $2.4 million due to strong fourth quarter sales and higher inventory balancesthe timing of approximately $1.2 million,year-end check runs, partially offset by higher accounts payable balancesa decrease in cash of approximately $2.4 million.$2.3 million due to the Company’s acquisition of Stephenson & Lawyer. Cash provided from operations was $1,008,000approximately $7.3 million and $1,434,000 for 2005$10.1 million in 2008 and 2004,2007, respectively. The primary reason for the decrease in cash generated from operations in 20052008 is higher receivables duea decrease in accounts payable of approximately $2.1 million during the fiscal year ended December 31, 2008, compared to an increase in accounts payable of approximately $500,000 during fiscal 2007. This change was caused by the Company’s large sales growth.difference in the timing of check runs at the end of each respective year. Net cash used in investing activities in 20052008 was approximately $1.1$7.8 million and was used primarily for the acquisition of Stephenson & Lawyer, Inc. of approximately $5.2 million and the acquisition of new manufacturing equipment.equipment of approximately $2.8 million.
On February 28, 2003, the Company obtained a new credit facility, which has beenwas amended effective March 24, 2004, June 28, 2004, and November 21, 2005, to reflect, among other things, changes to certain financial covenants. The amended facility iswas comprised of: (i) a revolving credit facility of $17 million that is collateralized by the Company’s accounts receivable and inventory;million; (ii) a term loan of $3.7 million with a 7-yearseven-year straight-line amortization that is collateralized by the Company’s property, plant and equipment (excluding UDT’s property, plant and equipment);amortization; and (iii) a term loan of $2.3 million with a 15-year straight-line amortizationamortization. The amended credit facility called for interest of Prime or LIBOR plus a margin that isranges from 1.0% to 1.5%, depending upon Company performance. The loans were collateralized by a mortgagefirst priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts. All borrowings at December 31, 2008, had interest computed at Prime or LIBOR plus 1.0%. Under the amended credit facility, the Company was subject to certain financial covenants, including maximum capital expenditures and minimum fixed-charge coverage. As of December 31, 2008, the Company was in compliance with all of these covenants. At December 31, 2008, the interest rate on these facilities ranged from 1.5% to 3.25%.
On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA. The facility is comprised of: (i) a revolving credit facility of $17 million; (ii) a term loan of $2.1 million with a seven-year straight-line amortization; (iii) a term loan of $1.8 million with a 20-year straight-line amortization; and (iv) a term loan of $4.0 million with a 20-year straight-line amortization. Extensions of credit under the revolving credit facility are subject to available collateral based in part upon accounts receivable and inventory levels. Therefore, the entire $17 million may not be available to the
20
Company. For example, as of December 31, 2005, based upon revolving credit facility borrowings outstanding of $8.0 million and collateral levels, the Company had availability of $6.5 million of additional credit under this facility. The amount of availability can fluctuate significantly. The amended credit facility calls for interest of Prime or LIBOR plus a margin that ranges from 1%1.0% to 1.5%, depending or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. In both cases the applicable margin is dependent upon Company performance. All borrowings at December 31, 2005 had interest computed at Prime or LIBOR plus 1.25%.The loans are collateralized by a first priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan. Under the amended credit facility, the Company is subject to certaina minimum fixed-charge coverage financial covenants including maximum capital expenditures and minimum fixed charge coverage. As of December 31, 2005, the Company was in compliance with all of these covenants.covenant. The Company’s new $17 million revolving credit facility as amended, is due February 28, 2009;November 30, 2013; the $3.7 million term loan and the $2.3 million mortgageloans are all due November 21, 2011. At December 31, 2005, the interest rate on these facilities ranged from 5.5% to 7.25%.January 29, 2016.
As a result of the consolidation of United Development Company Limited,UDT, a mortgage note collateralized by the Alabama and Florida facilities, dated September 4, 2002, originally for $470,313, iswas included within long-term debt in the December 31, 2006 consolidated financial statements. On May 22, 2007, this note was refinanced. The remaining principal balance of $388,356 on the old note was paid in full. The new note is secured by the Florida facility and has a principal balance of $786,000. The note calls for fifty principal180 monthly payments of $3,406 and one payment of $300,013 due on December 4, 2006.$7,147. The note bears interest at LIBOR plus 2.75%, adjusted monthly. At December 31, 2005, the outstanding balance was $404,459. At December 31, 2005, the interest rate wasis fixed at approximately 7.1%7.2%. PaymentsThe additional funds of approximately $400,000 were used to fund building improvements in the Florida facility. The outstanding balance on this note are funded through rent payments that the Company makes on its Alabama and Florida facilities. The Companyat December 31, 2008, is not subject to any financial covenants under this mortgage note.$737,289.
20
In addition to the above credit facilities, the Company hashad capital lease debt of $3.0 million$1,612,665 as of December 31, 2005.2008. These loansleases are secured by specific manufacturing equipment used by the Company and have remaining lives ranging from one to six years and bear interest at rates ranging from 6%7% to 10%8%. Subsequent to December 31, 2008, the Company paid off these obligations in full.
The Company has no significant capital commitments in 2006,2009, but plans on adding capacity to enhance operating efficiencies in its manufacturing plants. The Company may consider the acquisition of companies, technologies, or products in 2006, which2009 that are complementary to its business. The Company believes that its existing resources, including its revolving loancredit 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 2006.2009. However, there can be no assurances that such financing will be available at favorable terms, if at all.
The following table summarizes the Company’s contractual obligations at December 31, 2005,2008, as adjusted for January 2009 refinancing activity, as well as the January 2009 payoff of the capital lease obligations, and the effect such obligations are expected to have on its cash flow in future periods:
Payments |
| Operating |
| Capital |
| Term |
| Mortgage |
| UDT |
| Debt |
| Supplemental Retirement |
| Total |
| ||||||||
| |||||||||||||||||||||||||
2006 |
| 1,633,102 |
| 638,976 |
| 526,571 |
| 156,000 |
| 404,459 |
| 582,207 |
| 152,000 |
| $ | 4,093,315 |
| |||||||
2007 |
| 1,575,872 |
| 642,821 |
| 526,571 |
| 156,000 |
| — |
| 465,532 |
| 147,000 |
| $ | 3,513,796 |
| |||||||
2008 |
| 614,506 |
| 578,093 |
| 526,571 |
| 156,000 |
| — |
| 377,726 |
| 147,000 |
| $ | 2,399,896 |
| |||||||
2009 |
| 405,915 |
| 517,349 |
| 526,571 |
| 156,000 |
| — |
| 294,327 |
| 144,000 |
| $ | 2,044,162 |
| |||||||
2010 & thereafter |
| 1,626,249 |
| 624,799 |
| 1,535,835 |
| 1,703,000 |
| — |
| 700,447 |
| 105,780 |
| $ | 6,296,110 |
| |||||||
|
| $ | 5,855,644 |
| $ | 3,002,038 |
| $ | 3,642,119 |
| $ | 2,327,000 |
| $ | 404,459 |
| $ | 2,420,239 |
| $ | 695,780 |
| $ | 18,347,279 |
|
Payments on the United Development Company Limited note are funded through rent payments made by the Company on the Company’s Alabama and Florida facilities.
Payments |
| Operating |
| Grand |
| Term |
| Massa- |
| UDT |
| Debt |
| Supple- |
| Total |
| ||||||||
2009 |
| $ | 1,445,505 |
| $ | 166,667 |
| $ | 308,211 |
| $ | 97,608 |
| $ | 33,896 |
| $ | 392,689 |
| $ | 95,600 |
| $ | 2,540,176 |
|
2010 |
| 1,197,619 |
| 200,000 |
| 288,360 |
| 92,300 |
| 36,417 |
| 472,847 |
| 101,000 |
| 2,388,543 |
| ||||||||
2011 |
| 922,757 |
| 200,000 |
| 288,360 |
| 92,300 |
| 39,120 |
| 435,295 |
| 80,000 |
| 2,057,832 |
| ||||||||
2012 |
| 860,075 |
| 200,000 |
| 288,360 |
| 92,300 |
| 41,725 |
| 397,781 |
| 80,000 |
| 1,960,241 |
| ||||||||
2013 and thereafter |
| 850,033 |
| 3,233,333 |
| 889,114 |
| 1,484,492 |
| 586,131 |
| 997,693 |
| 280,800 |
| 8,321,596 |
| ||||||||
|
| $ | 5,275,989 |
| $ | 4,000,000 |
| $ | 2,062,405 |
| $ | 1,859,000 |
| $ | 737,289 |
| $ | 2,696,305 |
| $ | 637,400 |
| $ | 17,268,388 |
|
The Company requires cash to pay its operating expenses, purchase capital equipment and to service the obligations listed above. The Company’s principal sources of funds are its operations and its
21
revolving credit facility. Although the Company generated cash from operations in the year ended December 31, 2005,2008, it cannot guarantee that its operations will generate cash in future periods.
The Company does not believe that inflation has had a material impact on its results of operations in the last three years.
The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, restructuring andcharges, contingencies, and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including current and
21
anticipated worldwide economic conditions, both in general and specifically in relation to the packaging industry, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
The Company has reviewed these policies with its Audit Committee.
Revenue Recognition
The Company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is reasonably assured of collecting.collection. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Determination of these criteria, in some cases, requires management’s judgments. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue for any reporting period could be adversely affected.
Long-Lived Assets and Intangible Assets
The Company reviews long-livedIntangible assets include patents and allother intangible assets. Intangible assets with an indefinite life are not amortized. Intangible assets with a definite life are amortized on a straight-line basis, with estimated useful lives ranging from eight to 14 years. Indefinite-lived intangible assets are tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Intangible assets with a definite life are tested for impairment whenever events or changes in circumstances indicate the carrying amount of such assetsthat their value may not be recoverable. Goodwill is reviewed at least annually for impairment. Beginning in 2005, the Company changed its annual goodwill impairment testing date from the second quarter to the fourth quarter of its fiscal year. The Company believes this new accounting method is preferable, since more complete and accurate information to assess goodwill for impairment is available in the fourth quarter, including actual financial performance to date and information relative to the carrying value of assets. There is no financial impact as of the year ended December 31, 2005, or on any prior periods, as a result of this change in accounting method. Recoverability of long-lived assets and definite lived intangible assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then long-lived assets are written down to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. Recoverability of goodwill is determined under a two-step process as described in SFAS 142. The fair value of reporting units determined under step one is also based on a discounted cash flow model. At December 31, 2005, no impairment has been identified. Forecasted cash flows are based upon numerous assumptions used by management, such as revenue growth, margins and asset management. For purposes of this analysis, the Company reviews its internal forecasts and external data. The external data consist of data available from customer and competitor commentary, and industry forecasts of future revenue growth.
The estimates of expected cash flows require the Company to make significant judgments regarding future periods that are subject to some factors outside of the Company’s control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.reduced.
22
Goodwill
Goodwill is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. At December 31, 2008 the Company redefined its reporting units to include its Component Products segment, Packaging segment (excluding its Molded Fiber operation), and its Molded Fiber operation as separate reporting units for goodwill impairment testing. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company completed its annual goodwill impairment test as of December 31, 2008, and determined that no goodwill was impaired.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. These allowances for doubtful accounts are determined by reviewing specific accounts that the Company has deemed are at risk of being uncollectible and other credit risks associated with groups of customers. If the financial condition of the Company’s customers were to deteriorate or economic conditions were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required with a resulting charge to results of operations.
Inventory
The Company provides reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. The Company fully reserves for inventories deemed obsolete. The Company performs periodic reviews of all inventory items to identify excess inventories on-handon hand by comparing on-hand balances to anticipated usage using recent historical activity, as well as anticipated or forecasted demand, based upon sales and marketing inputs through its planning systems. If estimates of demand diminish or actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required with a resulting charge to operations.
Deferred Income Taxes
The Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. Should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
23
The following discussion of the Company’s market risk includes “forward-looking statements” that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements.
Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates, and equity prices. At December 31, 2005,2008, the Company’s cash and cash equivalents consisted of bank accounts in U.S. dollars, and their valuation would not be affected by market risk. The Company has four debt instruments where interest is based upon either the primePrime rate (and/or LIBOR)LIBOR and, therefore, future operations could be affected by interest rate changes; however, the Company believes that the market risk of the debt is minimal.
23
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements and Supplementary Data of the Company are listed under Part IV, Item 15, in this Report.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
As previously disclosed on a Form 8-K filed by the Company on July 8, 2005, the Audit Committee of the Board of Directors of the Company, effective on July 5, 2005, dismissed PricewaterhouseCoopers, L.L.P. (“PwC”) as the Company’s independent registered public accounting firm. The reports issued by PwC on the Company’s financial statements as of December 31, 2003 and December 31, 2004, and for the years ended December 31, 2003 and December 31, 2004, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principle. During the years ended December 31, 2003 and December 31, 2004, and through July 5, 2005: (i) there were no disagreements with PwC on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to PwC’s satisfaction, would have caused them to make reference thereto in their report of the Company’s financial statements for such years; and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
Effective as of July 5, 2005 the Company engaged Carlin, Charron & Rosen LLP (“CCR”) to serve as the Company’s independent public accountants for the fiscal year ended December 31, 2005. During the years ended December 31, 2003 and December 31, 2004, and through July 5, 2005, the Company did not consult with CCR with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or any other matters, including disagreements or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
The Audit Committee of the Company has approved the engagement of CCR.
ITEM
9A9A.. CONTROLS AND PROCEDURES
As(a) The Company carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report,report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness ofconcluded that the Company’s disclosure controls and procedures (asare effective.
(b) The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in SECExchange Act Rule 13a-15 or 15d-15), which have been designed to ensure that information required to be disclosed13a-15(f). The management conducted an assessment of the Company’s internal control over financial reporting as of December 31, 2008, based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on the assessment, the management concluded that, as of December 31, 2008, the Company’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
24
(c) There was no change in the reportsCompany’s internal control over financial reporting that it filesoccurred during the Company’s most recently completed fiscal quarter that has materially affected, or submits underis reasonably likely to materially affect, the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and are operating in an effective manner. Based upon that evaluation, they concluded that the disclosure controls and procedures were effective.Company’s internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
24
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 AND RELATED STOCKHOLDER MATTERS
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.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 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.
25
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| Page | ||||
(a) (1) | |||||
| Financial Statements |
| |||
| |||||
| Index to Consolidated Financial Statements and Financial Statement Schedules |
| |||
| |||||
|
| ||||
| |||||
| |||||
| Consolidated Balance Sheets as of December 31, |
|
| ||
| |||||
|
|
| |||
| |||||
|
|
| |||
| |||||
|
|
| |||
| |||||
|
|
| |||
| |||||
|
| ||||
|
|
|
| ||
|
|
| |||
(a) (3) | Exhibits | |||||
|
|
| Number |
|
|
| Reference | |
| ||||||
| 2.01 |
| Agreement and Plan of Reorganization among the Company, Moulded Fibre Technology, Inc. and UFP Acquisition, Inc. |
| A-2.01** | |
|
|
|
|
|
| |
2.02 | Agreement of Merger between Moulded Fibre Technology, Inc. and UFP Acquisition, Inc. | B-2.02** | ||||
| 2.03 |
| Merger Agreement relating to the reincorporation of the Company in Delaware. |
| A-2.02** | |
|
|
|
|
|
| |
|
|
|
| |||
| ||||||
| 2.04 |
| Asset Purchase Agreement relating to the purchase of Foam Cutting Engineers, Inc. |
|
| |
|
|
|
|
|
| |
| 2.05 |
| Asset Purchase Agreement relating to the purchase of the assets of Pacific Foam Technologies, Inc. |
|
| |
|
|
|
|
|
| |
| 2.06 |
| Stock Purchase Agreement dated January 14, 2000, relating to the acquisition of the stock of Simco Industries, Inc. |
|
| |
|
|
|
|
|
| |
| 3.01 |
| Certificate of Incorporation of the Company, as amended. |
| F-3.01** | |
|
|
|
|
|
| |
| 3.02 |
|
|
|
| |
|
|
|
|
|
| |
3.03 | Amended and Restated Bylaws of the Company. | II-3.03** | ||||
| 4.01 |
| Specimen Certificate for shares of the Company’s Common Stock. |
| A-4.01** | |
|
|
|
|
|
| |
| 4.02 |
| Description of Capital Stock (contained in the Certificate of Incorporation of the Company, filed as Exhibit 3.01). |
| F-3.01** |
26
| Number |
|
|
| Reference | |
|
|
| ||||
|
|
|
|
|
| |
|
| 4.03 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.01 |
| Agreement between the Company and William H. Shaw. |
| A-10.08*, ** |
|
|
|
|
|
| |
|
| 10.02 |
| Agreement and Severance Agreement between the Company and Richard L. Bailly. |
| A-10.09*, ** |
|
|
|
|
|
| |
|
| 10.03 |
| Employee Stock Purchase Plan. |
| A-10.18** |
|
|
|
|
|
| |
|
| 10.04 |
| 1993 Combined Stock Option Plan, as amended. |
|
|
|
|
|
|
|
| |
|
| 10.05 |
| 1993 Non-employee Director Stock Option Plan. |
|
|
|
|
|
|
|
| |
|
| 10.06 |
| Facility Lease between the Company and Raritan Associates. |
| A-10.22** |
|
|
|
|
|
| |
|
|
|
| |||
|
| |||||
|
|
| ||||
|
| Facility Lease between the Company and Dana Evans d/b/a Evans Enterprises. |
| A-10.27** | ||
|
|
|
|
|
| |
|
| 10.08 |
| Form of Indemnification Agreement for directors and officers of the Company. |
| A-10.30** |
|
|
|
|
|
| |
|
| 10.09 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.10 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.11 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.12 |
| Facility Lease between |
|
|
|
|
|
|
|
| |
|
| 10.13 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.14 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.15 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.16 |
| Amended |
|
|
|
|
|
|
|
| |
|
| 10.17 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.18 |
| Facility Lease between |
|
|
|
|
|
|
|
| |
|
| 10.19 |
|
|
|
|
10.20 | Facility lease between the Company and Clinton Base Company LLC | G-10.34** | ||||
10.21 | Second Amendment to the Credit Agreement between the Company and Fleet Capital Corporation | T-10.35** |
27
| Number |
|
|
| Reference | |
|
|
| ||||
|
|
|
|
|
| |
|
|
|
| |||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
|
| ||||
|
| Third Amendment to the Credit and Security Agreement between the Company and Bank of America |
|
| ||
|
|
|
|
|
| |
|
| 10.23 |
|
|
|
|
|
|
|
|
|
| |
|
| 10.24 |
|
| W-10.40*,** | |
10.25 | Executive Non-qualified Excess Plan | X-10.41*,** | ||||
10.26 | UFP Technologies, Inc. 2003 Incentive Plan, as amended | Y-10.26, EE*,** | ||||
10.27 | Promissory note of United Development Company Limited in favor of Bank of America, N.A. dated May 22, 2007 | Y-10.27 | ||||
10.28 | Employment Agreement with R. Jeffrey Bailly dated October 8, 2007 | Z-10.28*,** | ||||
10.29 | Agreement and Plan of Merger dated as of January 14, 2008, among UFP Technologies, Inc., S&L Acquisition Corp., and Stephenson & Lawyer, Inc. | AA-10.29** | ||||
10.30 | Form of 2008 Stock Unit Award Agreement under 2003 Incentive Plan | CC-10.30*,** | ||||
10.42 | Amended facility lease between the Company and Rothbart Realty Co. | CC-10.42** | ||||
10.43 | Amended facility lease between the Company and Rothbart Realty Co. | CC-10.43** | ||||
10.44 | Amended facility lease between the Company and Quadrate Development, LLC | CC-10.44** | ||||
10.45 | Amended facility lease between the Company and Kessler Industries, Inc. | CC-10.45** | ||||
10.46 | Amended facility lease between the Company and Raritan Johnson Associates, LLC | CC-10.46** | ||||
10.47 | Amended facility lease between the Company and Ward Hill Realty Associates, LLC | CC-10.47** | ||||
10.48 | Form of Stock Unit Award Agreement by and between UFP Technologies, Inc. and R. Jeffrey Bailly. | FF-10.48*,** | ||||
10.49 | Third Amendment to Iowa facility lease, signed as of August 20, 2008, between Moulded Fibre Technology, Inc.(Tenant) and Clinton Base Company, LLC (Landlord). | GG-10.49** | ||||
10.50 | Form of 2009 Stock Unit Award Agreement. | HH-10.50*,** | ||||
10.51 | Amended and restated Credit and Security Agreement between the Company and Bank of America, N.A, dated January 27, 2009. |
| Filed herewith | |||
|
|
|
|
|
| |
|
| 14.00 |
|
|
|
|
|
|
|
|
|
| |
| 21.01 | Subsidiaries of the Company. | Filed herewith | |||
23.01 |
| Consent of |
| Filed herewith | ||
|
|
|
|
|
| |
|
|
|
| |||
| ||||||
| 31.01 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Filed herewith | |
|
|
|
|
|
| |
| 31.02 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Filed herewith |
28
Number | Reference | |||||
|
|
|
|
|
| |
| 32.01 |
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Filed herewith |
28
A. |
| Incorporated by reference to the Company’s Registration Statement on Form S-1 (Registration |
|
|
|
B. |
| |
|
| 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. |
|
|
|
C. | 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. | |
D. |
| Incorporated by reference to the Company’s Annual Report on Form 10-K for |
|
|
|
E. |
|
|
|
|
|
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 Quarterly Report on Form 10-Q for the three months ended March 31, 2004. The number set forth herein is the number of the exhibit in said Quarterly Report. |
H | Incorporated by reference to the Company’s report on Form 8-K dated January 13, 1999. The number set forth herein is the number of the Exhibit in said Report. | |
I. | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 1998. The number set forth herein is the number of the Exhibit in said Quarterly Report. | |
J. | 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. | |
K. | 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. | |
|
|
|
|
| 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. |
|
|
|
|
| Incorporated by reference to the Company’s |
|
| |
|
| |
|
| |
|
| |
|
|
|
N. |
| |
|
| Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, |
|
| |
|
| |
|
|
29
|
| |
|
| |
|
| Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The number set forth herein is the number of the Exhibit in said Annual Report. |
|
|
|
|
| |
|
| |
|
| Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2002. The number set forth herein is the number of the Exhibit in said Quarterly Report. |
|
|
|
|
| Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, |
|
|
|
|
| |
|
| Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2003. The number set forth herein is the number of the Exhibit in said Annual Report. |
|
|
|
|
| Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. The number set forth is the number of the exhibit in said Annual Report. |
|
|
|
|
| |
|
| Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2004. The number set forth herein is the number of the exhibit in said Quarterly Report. |
|
|
|
|
| Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, |
V. | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2006. The number set forth herein is the number of the exhibit in said quarterly report. | |
W. | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2006. The number set forth herein is the number of the exhibit in said quarterly report. | |
X. | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2006. The number set forth herein is the number of the exhibit in said Quarterly Report. | |
Y. | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2007. The number set forth herein is the number of the exhibit in said Quarterly Report. | |
Z. | Incorporated by reference to the Company’s Current Report on Form 8-K filed October 12, 2007. The number set forth herein is the number of the Exhibit in said Report. | |
AA. | Incorporated by reference to the Company’s Current Report on Form 8-K filed January 18, 2008. The number set forth herein is the number of the Exhibit in said Report. | |
BB. | Incorporated by reference to Appendix C to the Company’s Proxy Statement relating to the Company’s Annual Meeting of Stockholders on June 6, 2007. | |
CC. | Incorporated by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. The number set forth herein is the number of the exhibit in said Annual Report. |
*Management contract or compensatory plan or arrangement.
**In accordance with Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference.30
DD. | Incorporated by reference to Appendix A to the Company’s Proxy Statement relating to the Company’s Annual Meeting of Stockholders on June 4, 2008. | |
EE. | Incorporated by reference to Appendix B to the Company’s Proxy Statement relating to the Company’s Annual Meeting of Stockholders on June 4, 2008. | |
FF. | Incorporated by reference to the Company’s Current Report on Form 8-K filed June 10, 2008. The number set forth herein is the number of the exhibit in said Report. | |
GG | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2008. The number set forth herein is the number of the exhibit in said Quarterly Report. | |
HH. | Incorporated by reference to the Company’s Current Report on Form 8-K filed March 2, 2009. The number set forth herein is the number of the Exhibit in said Report. | |
II. | Incorporated by reference to the Company’s Current Report on Form 8-K filed March 24, 2009. The number set forth herein is the number of the Exhibit in said Report. |
* | Management contract or compensatory plan or arrangement. | |
** | In accordance with Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference. |
The SEC allows the Company to incorporate by reference certain information into this annual report on Form 10-K. This means that the Company can disclose important information by reference to other documents the Company has filed separately with the SEC. These documents contain important information about the Company and its financial condition. The Company has incorporated by reference into this annual report the information indicated above. This information is considered to
30
be a part of this annual report, except for any information that is superseded by information that is filed at a later date.
You may read and copy any of the documents incorporated by reference in this annual report at the following locations of the SEC by using the Company’s file number, 001-12648:
Public Reference Room |
| Midwest Regional Office |
| Northeast Regional Office |
450 Fifth Street, NW |
| Citicorp Center |
| 233 Broadway |
Room 1024 |
| 500 West Madison Street, # 1400 |
| New York, NY 10279 |
Washington, DC 20549 |
| Chicago, IL 60661 |
|
|
You may also obtain copies of this information by mail from the Public Reference Room of the SEC, 450 Fifth Street, NW, Room 1024, Washington, DC 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains a World Wide Web site that contains reports, proxy statements and other information about issuers, including the Company, that file electronically with the SEC. The address of that site is http://www.sec.gov.
Documents incorporated by reference are also available from the Company without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference in this annual report. You can obtain these documents by requesting them by telephone or in writing from the Company at 172 East Main Street, Georgetown, MA 01833, (978) 352-2200.
31
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.
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.
32
UFP TECHNOLOGIES, INC.
Consolidated Financial Statements and Financial Statement Schedule
As of December 31, And for the Years Ended December 31, 2008, 2007, and 2006
With
F-1
UFP TECHNOLOGIES, INC.
Index to Consolidated Financial Statements and Financial Statement Schedule
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders UFP Technologies, Inc. Georgetown, MA
We have audited the accompanying consolidated balance
We conducted our
In our opinion, the
|
/s/ CCR LLP | ||
Westborough, Massachusetts | ||
March 18, 2009 |
UFP TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETSREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
| December 31 |
| ||||
|
| 2008 |
| 2007 |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 6,729,370 |
| $ | 9,060,347 |
|
Receivables, net |
| 12,754,875 |
| 11,795,468 |
| ||
Inventories, net |
| 8,152,746 |
| 5,876,626 |
| ||
Prepaid expenses |
| 516,388 |
| 821,250 |
| ||
Deferred income taxes |
| 1,488,575 |
| 1,021,320 |
| ||
Total current assets |
| 29,641,954 |
| 28,575,011 |
| ||
Property, plant and equipment |
| 40,666,779 |
| 38,269,142 |
| ||
Less accumulated depreciation and amortization |
| (28,912,455 | ) | (28,777,323 | ) | ||
Net property, plant and equipment |
| 11,754,324 |
| 9,491,819 |
| ||
Cash surrender value of officers’ life insurance |
| 187,830 |
| 172,536 |
| ||
Deferred income taxes |
| — |
| 188,650 |
| ||
Goodwill |
| 6,481,037 |
| 6,481,037 |
| ||
Other assets |
| 657,516 |
| 643,721 |
| ||
Total assets |
| $ | 48,722,661 |
| $ | 45,552,774 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current installments of long-term debt |
| $ | 716,697 |
| $ | 714,256 |
|
Current installments of capital lease obligations |
| 702,765 |
| 704,408 |
| ||
Accounts payable |
| 3,304,194 |
| 5,694,152 |
| ||
Accrued taxes and other expenses |
| 6,230,001 |
| 6,510,216 |
| ||
Total current liabilities |
| 10,953,657 |
| 13,623,032 |
| ||
Long-term debt, excluding current installments |
| 3,941,996 |
| 4,658,464 |
| ||
Capital lease obligations, excluding current installments |
| 909,900 |
| 1,612,664 |
| ||
Minority interest (Note 7) |
| 523,003 |
| 583,533 |
| ||
Deferred income taxes |
| 113,073 |
| — |
| ||
Retirement and other liabilities |
| 913,644 |
| 832,141 |
| ||
Total liabilities |
| 17,355,273 |
| 21,309,834 |
| ||
Commitments and contingencies (Note 15) |
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Preferred stock, $.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding |
| — |
| — |
| ||
Common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 5,666,703 shares in 2008 and 5,375,381 shares in 2007 |
| 56,667 |
| 53,754 |
| ||
Additional paid-in capital |
| 13,774,334 |
| 11,768,799 |
| ||
Retained earnings |
| 17,536,387 |
| 12,420,387 |
| ||
Total stockholders’ equity |
| 31,367,388 |
| 24,242,940 |
| ||
Total liabilities and stockholders’ equity |
| $ | 48,722,661 |
| $ | 45,552,774 |
|
To the BoardThe accompanying notes are an integral part of Directors and Shareholders of UFP Technologies, Inc.:
In our opinion, the consolidated balance sheet as of December 31, 2004 and the related consolidated statement of operations, of stockholders’ equity, and of cash flowsfor each of two years in the period ended December 31, 2004 listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of UFP Technologies, Inc. and its subsidiaries at December 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules for each of the two years in the period ended December 31, 2004 listed in the index appearing under Item 15(a)(2), present fairly, in all material respects, the information set forth therein when read in conjunction with the relatedthese consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2005
F-4
UFP TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETSSTATEMENTS OF OPERATIONS
|
| December 31 |
| ||||
|
| 2005 |
| 2004 |
| ||
Assets |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash |
| $ | 265,352 |
| $ | 317,951 |
|
Receivables, net |
| 15,299,748 |
| 11,818,906 |
| ||
Inventories |
| 6,441,592 |
| 5,236,232 |
| ||
Prepaid expenses |
| 791,677 |
| 710,694 |
| ||
Deferred income taxes |
| 781,988 |
| 481,047 |
| ||
Total current assets |
| 23,580,357 |
| 18,564,830 |
| ||
Property, plant and equipment |
| 36,723,341 |
| 34,663,332 |
| ||
Less accumulated depreciation and amortization |
| (25,750,620 | ) | (23,278,982 | ) | ||
Net property, plant and equipment |
| 10,972,721 |
| 11,384,350 |
| ||
Cash surrender value of officers life insurance |
| 140,135 |
| 125,926 |
| ||
Deferred income taxes |
| 2,494,251 |
| 2,697,293 |
| ||
Goodwill |
| 6,481,037 |
| 6,481,037 |
| ||
Other assets |
| 331,515 |
| 378,768 |
| ||
Total assets |
| $ | 44,000,016 |
| $ | 39,632,204 |
|
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Notes payable |
| $ | 7,990,521 |
| $ | 7,923,470 |
|
Current installments of long-term debt |
| 1,087,030 |
| 1,158,672 |
| ||
Current installments of capital lease obligations |
| 638,875 |
| 401,469 |
| ||
Accounts payable |
| 6,062,841 |
| 3,665,722 |
| ||
Accrued restructuring charge |
| — |
| 36,433 |
| ||
Accrued taxes and other expenses |
| 4,480,239 |
| 3,948,454 |
| ||
Total current liabilities |
| 20,259,506 |
| 17,134,220 |
| ||
Long-term debt, excluding current installments |
| 5,286,548 |
| 5,850,352 |
| ||
Capital lease obligations, excluding current installments |
| 2,363,163 |
| 1,646,723 |
| ||
Minority interest (Note 7) |
| 633,853 |
| 433,809 |
| ||
Retirement and other liabilities |
| 695,780 |
| 780,504 |
| ||
Total liabilities |
| 29,238,850 |
| 25,845,608 |
| ||
Commitments and contingencies (Note 16) |
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Preferred stock, $.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding |
| — |
| — |
| ||
Common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 4,828,079 shares in 2005 and 4,678,566 shares in 2004 |
| 48,281 |
| 46,786 |
| ||
Additional paid-in capital |
| 8,966,472 |
| 8,652,488 |
| ||
Retained earnings |
| 5,746,413 |
| 5,087,322 |
| ||
Total stockholders’ equity |
| 14,761,166 |
| 13,786,596 |
| ||
Total liabilities and stockholders‘ equity |
| $ | 44,000,016 |
| $ | 39,632,204 |
|
|
| Years Ended December 31 |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
Net sales |
| $ | 110,031,601 |
| $ | 93,595,140 |
| $ | 93,749,239 |
|
Cost of sales |
| 81,468,539 |
| 70,784,986 |
| 74,511,940 |
| |||
Gross profit |
| 28,563,062 |
| 22,810,154 |
| 19,237,299 |
| |||
Selling, general and administrative expenses |
| 18,822,965 |
| 15,562,800 |
| 14,183,117 |
| |||
Restructuring charge |
| 1,315,366 |
| — |
| — |
| |||
Operating income |
| 8,424,731 |
| 7,247,354 |
| 5,054,182 |
| |||
Other income (expense): |
|
|
|
|
|
|
| |||
Interest expense |
| (334,293 | ) | (479,171 | ) | (963,982 | ) | |||
Equity in net income of unconsolidated partnership |
| 7,218 |
| 15,038 |
| 15,037 |
| |||
Minority interest earnings |
| (44,465 | ) | (72,370 | ) | (87,298 | ) | |||
Other, net |
| 57,457 |
| 32,500 |
| (9,705 | ) | |||
Total other expense |
| (314,083 | ) | (504,003 | ) | (1,045,948 | ) | |||
Income before income tax provision |
| 8,110,648 |
| 6,743,351 |
| 4,008,234 |
| |||
Income tax expense |
| 2,994,648 |
| 2,584,250 |
| 1,493,361 |
| |||
Net income |
| $ | 5,116,000 |
| $ | 4,159,101 |
| $ | 2,514,873 |
|
Net income per share: |
|
|
|
|
|
|
| |||
Basic |
| $ | 0.92 |
| $ | 0.78 |
| $ | 0.50 |
|
Diluted |
| $ | 0.82 |
| $ | 0.71 |
| $ | 0.45 |
|
Weighted average common shares: |
|
|
|
|
|
|
| |||
Basic |
| 5,549,830 |
| 5,306,948 |
| 5,022,532 |
| |||
Diluted |
| 6,262,666 |
| 5,861,420 |
| 5,571,068 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
UFP TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSSTOCKHOLDERS’ EQUITY
|
| Years ended December 31 |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Net sales |
| $ | 83,962,457 |
| $ | 68,624,098 |
| $ | 60,902,180 |
|
Cost of sales |
| 69,361,157 |
| 54,652,677 |
| 50,178,084 |
| |||
Gross profit |
| 14,601,300 |
| 13,971,421 |
| 10,724,096 |
| |||
Selling, general and administrative expenses |
| 12,430,515 |
| 12,107,012 |
| 10,827,528 |
| |||
Restructuring charge |
| — |
| (280,000 | ) | 1,405,000 |
| |||
Operating income (loss) |
| 2,170,785 |
| 2,144,409 |
| (1,508,432 | ) | |||
Other income (expense): |
|
|
|
|
|
|
| |||
Interest expense |
| (1,041,714 | ) | (713,651 | ) | (783,672 | ) | |||
Equity in net income of unconsolidated partnership |
| 12,531 |
| 12,532 |
| 27,156 |
| |||
Minority interest earnings |
| (305,037 | ) | (83,358 | ) | (91,104 | ) | |||
Other, net |
| 30,734 |
| — |
| 1,000 |
| |||
Total other expense |
| (1,303,486 | ) | (784,477 | ) | (846,620 | ) | |||
Income (loss) before income tax provision |
| 867,299 |
| 1,359,932 |
| (2,355,052 | ) | |||
Income tax expense (benefit) |
| 208,208 |
| 488,671 |
| (839,323 | ) | |||
Net income (loss) |
| $ | 659,091 |
| $ | 871,261 |
| $ | (1,515,729 | ) |
Net income (loss) per share: |
|
|
|
|
|
|
| |||
Basic |
| $ | 0.14 |
| $ | 0.19 |
| $ | (0.34 | ) |
Diluted |
| $ | 0.13 |
| $ | 0.17 |
| $ | (0.34 | ) |
Weighted average common shares: |
|
|
|
|
|
|
| |||
Basic |
| 4,798,008 |
| 4,616,983 |
| 4,489,984 |
| |||
Diluted |
| 5,260,569 |
| 4,994,611 |
| 4,489,984 |
|
Years Ended December 31, 2008, 2007, and 2006
|
| Common Stock |
| Additional |
| Retained |
| Total |
| ||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Equity |
| ||||
Balance at December 31, 2005 |
| 4,828,079 |
| $ | 48,281 |
| $ | 8,966,472 |
| $ | 5,746,413 |
| $ | 14,761,166 |
|
Employee Stock Purchase Plan |
| 21,148 |
| 211 |
| 47,111 |
| — |
| 47,322 |
| ||||
Stock issued in lieu of compensation |
| 54,411 |
| 544 |
| 143,703 |
| — |
| 144,247 |
| ||||
Share-based compensation |
| — |
| — |
| 459,340 |
| — |
| 459,340 |
| ||||
Exercise of stock options, net of shares presented for exercise |
| 253,126 |
| 2,532 |
| 518,189 |
| — |
| 520,721 |
| ||||
Windfall tax benefits |
| — |
| — |
| 176,867 |
| — |
| 176,867 |
| ||||
Net income |
| — |
| — |
| — |
| 2,514,873 |
| 2,514,873 |
| ||||
Balance at December 31, 2006 |
| 5,156,764 |
| $ | 51,568 |
| $ | 10,311,682 |
| $ | 8,261,286 |
| $ | 18,624,536 |
|
Employee Stock Purchase Plan |
| 4,721 |
| 47 |
| 23,848 |
| — |
| 23,895 |
| ||||
Stock issued in lieu of compensation |
| 55,189 |
| 552 |
| 255,524 |
| — |
| 256,076 |
| ||||
Share-based compensation |
| 41,000 |
| 410 |
| 691,614 |
| — |
| 692,024 |
| ||||
Exercise of stock options, net of shares presented for exercise |
| 117,707 |
| 1,177 |
| 271,037 |
| — |
| 272,214 |
| ||||
Windfall tax benefits |
| — |
| — |
| 215,094 |
| — |
| 215,094 |
| ||||
Net income |
| — |
| — |
| — |
| 4,159,101 |
| 4,159,101 |
| ||||
Balance at December 31, 2007 |
| 5,375,381 |
| $ | 53,754 |
| $ | 11,768,799 |
| $ | 12,420,387 |
| $ | 24,242,940 |
|
Employee Stock Purchase Plan |
| 2,817 |
| 28 |
| 20,535 |
| — |
| 20,563 |
| ||||
Stock issued in lieu of compensation |
| 55,644 |
| 556 |
| 343,324 |
| — |
| 343,880 |
| ||||
Share-based compensation |
| 93,680 |
| 937 |
| 1,304,852 |
| — |
| 1,305,789 |
| ||||
Exercise of stock options |
| 139,181 |
| 1,392 |
| 331,634 |
| — |
| 333,026 |
| ||||
Net share settlement of restricted stock units |
| — |
| — |
| (206,044 | ) | — |
| (206,044 | ) | ||||
Windfall tax benefits |
| — |
| — |
| 211,234 |
| — |
| 211,234 |
| ||||
Net income |
| — |
| — |
| — |
| 5,116,000 |
| 5,116,000 |
| ||||
Balance at December 31, 2008 |
| 5,666,703 |
| $ | 56,667 |
| $ | 13,774,334 |
| $ | 17,536,387 |
| $ | 31,367,388 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
UFP TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS
Years ended December 31, 2005, 2004, and 2003
|
|
|
|
|
| Additional |
|
|
| Total |
| ||||
|
| Common Stock |
| Paid-in |
| Retained |
| Stockholders’ |
| ||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Equity |
| ||||
Balance at December 31, 2002 |
| 4,365,689 |
| $ | 43,657 |
| $ | 8,274,979 |
| $ | 5,731,790 |
| $ | 14,050,426 |
|
Employee Stock Purchase Plan |
| 53,128 |
| 531 |
| 47,416 |
| — |
| 47,947 |
| ||||
Stock issued in lieu of compensation |
| 100,849 |
| 1,009 |
| 107,542 |
| — |
| 108,551 |
| ||||
Net loss |
| — |
| — |
| — |
| (1,515,729 | ) | (1,515,729 | ) | ||||
Balance at December 31, 2003 |
| 4,519,666 |
| $ | 45,197 |
| $ | 8,429,937 |
| $ | 4,216,061 |
| $ | 12,691,195 |
|
Employee Stock Purchase Plan |
| 38,229 |
| 382 |
| 46,733 |
| — |
| 47,115 |
| ||||
Stock issued in lieu of compensation |
| 71,283 |
| 713 |
| 136,037 |
| — |
| 136,750 |
| ||||
Exercise of stock options, net of shares presented for exercise |
| 49,388 |
| 494 |
| 2,122 |
| — |
| 2,616 |
| ||||
Tax benefit relating to non-qualified stock option exercise |
| — |
| — |
| 37,659 |
| — |
| 37,659 |
| ||||
Net income |
| — |
| — |
| — |
| 871,261 |
| 871,261 |
| ||||
Balance at December 31, 2004 |
| 4,678,566 |
| $ | 46,786 |
| $ | 8,652,488 |
| $ | 5,087,322 |
| $ | 13,786,596 |
|
Employee Stock Purchase Plan |
| 16,931 |
| 169 |
| 48,416 |
| — |
| 48,585 |
| ||||
Stock issued in lieu of compensation |
| 65,472 |
| 655 |
| 239,795 |
| — |
| 240,450 |
| ||||
Exercise of stock options, net of shares presented for exercise |
| 67,110 |
| 671 |
| 25,773 |
| — |
| 26,444 |
| ||||
Net income |
| — |
| — |
| — |
| 659,091 |
| 659,091 |
| ||||
Balance at December 31, 2005 |
| 4,828,079 |
| $ | 48,281 |
| $ | 8,966,472 |
| $ | 5,746,413 |
| $ | 14,761,166 |
|
|
| Years Ended December 31 |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net income |
| $ | 5,116,000 |
| $ | 4,159,101 |
| $ | 2,514,873 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 2,976,550 |
| 2,815,021 |
| 3,059,701 |
| |||
Restructuring charge—leasehold improvement write-off |
| 170,000 |
| — |
| — |
| |||
Equity in net income of unconsolidated affiliate and partnership |
| (7,218 | ) | (15,038 | ) | (15,037 | ) | |||
Minority interest |
| 44,465 |
| 72,370 |
| 87,298 |
| |||
(Gain) or loss on disposal of property, plant and equipment |
| (57,457 | ) | (32,500 | ) | 9,705 |
| |||
Share-based compensation |
| 1,305,789 |
| 692,024 |
| 459,340 |
| |||
Stock issued in lieu of compensation |
| 343,880 |
| 256,076 |
| 144,247 |
| |||
Deferred income taxes |
| 16,469 |
| 1,209,664 |
| 856,605 |
| |||
Changes in operating assets and liabilities, net of effects from acquisition: |
|
|
|
|
|
|
| |||
Receivables, net |
| 777,392 |
| (166,829 | ) | 3,767,676 |
| |||
Inventories, net |
| (434,506 | ) | 53,051 |
| 598,132 |
| |||
Prepaid expenses |
| 350,013 |
| (54,783 | ) | 25,210 |
| |||
Accounts payable |
| (2,776,715 | ) | 1,073,753 |
| (1,479,406 | ) | |||
Accrued taxes and other expenses |
| (937,577 | ) | 760,267 |
| 1,269,710 |
| |||
Retirement and other liabilities |
| (119,173 | ) | 94,560 |
| 41,801 |
| |||
Other assets |
| (82,867 | ) | (213,376 | ) | (61,105 | ) | |||
Net cash provided by operating activities |
| 6,685,045 |
| 10,703,361 |
| 11,278,750 |
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Additions to property, plant and equipment |
| (2,763,250 | ) | (2,100,584 | ) | (1,515,533 | ) | |||
Cash surrender value of officers’ life insurance |
| (15,294 | ) | (14,701 | ) | (17,700 | ) | |||
Acquisition of Stephenson & Lawyer net of cash acquired |
| (5,181,066 | ) | — |
| — |
| |||
Payments received on affiliated partnership |
| 7,218 |
| 15,038 |
| 15,038 |
| |||
Proceeds from sale of property, plant and equipment |
| 101,020 |
| 32,500 |
| 30,000 |
| |||
Acquisition of assets of Stephen Packaging Corp. |
| — |
| — |
| (309,229 | ) | |||
Net cash used in investing activities |
| (7,851,372 | ) | (2,067,747 | ) | (1,797,424 | ) | |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Net borrowings (payments) under notes payable |
| — |
| — |
| (7,990,521 | ) | |||
Proceeds from long-term borrowings |
| — |
| 786,000 |
| — |
| |||
Distribution to United Development Company Partners (minority interest) |
| (104,995 | ) | (104,994 | ) | (104,994 | ) | |||
Tax benefit from exercise of non-qualified stock options |
| 211,234 |
| 215,094 |
| 176,867 |
| |||
Proceeds from sale of common stock |
| 20,563 |
| 23,895 |
| 47,322 |
| |||
Proceeds from the exercise of stock options |
| 333,026 |
| 272,214 |
| 520,701 |
| |||
Principal repayment of long-term debt |
| (714,027 | ) | (1,095,607 | ) | (691,251 | ) | |||
Principal repayment of obligations under capital leases |
| (704,407 | ) | (688,991 | ) | (2,046,680 | ) | |||
Proceeds from refinancing capital leases |
| — |
| — |
| 1,359,000 |
| |||
Cash settlements of restricted stock units |
| (206,044 | ) | — |
| — |
| |||
Net cash used in financing activities |
| (1,164,650 | ) | (592,389 | ) | (8,729,556 | ) | |||
Net change in cash |
| (2,330,977 | ) | 8,043,225 |
| 751,770 |
| |||
Cash and cash equivalents at beginning of year |
| 9,060,347 |
| 1,017,122 |
| 265,352 |
| |||
Cash and cash equivalents at end of year |
| $ | 6,729,370 |
| $ | 9,060,347 |
| $ | 1,017,122 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
UFP TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| Years ended December 31 |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net income (loss) |
| $ | 659,091 |
| $ | 871,261 |
| $ | (1,515,729 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 2,936,691 |
| 2,493,300 |
| 2,706,392 |
| |||
Equity in net income of unconsolidated affiliate and partnership |
| (12,531 | ) | (12,532 | ) | (27,156 | ) | |||
Minority interest |
| 305,037 |
| 83,358 |
| 91,104 |
| |||
Restructuring charges |
| — |
| (280,000 | ) | 1,405,000 |
| |||
Stock issued in lieu of compensation |
| 240,450 |
| 136,750 |
| 108,551 |
| |||
Deferred income taxes |
| (97,899 | ) | 304,097 |
| (818,794 | ) | |||
Changes in operating assets and liabilities, net of effects from acquisition: |
|
|
|
|
|
|
| |||
Receivables, net |
| (3,480,842 | ) | (2,679,592 | ) | (597,042 | ) | |||
Inventories |
| (1,205,360 | ) | (823,626 | ) | 250,940 |
| |||
Prepaid expenses |
| (80,983 | ) | (216,944 | ) | 8,685 |
| |||
Refundable income tax |
| — |
| 419,658 |
| (39,283 | ) | |||
Accounts payable |
| 1,335,525 |
| 733,176 |
| 36,273 |
| |||
Accrued taxes and other expenses |
| 495,352 |
| 444,181 |
| (807,162 | ) | |||
Retirement and other liabilities |
| (84,724 | ) | (76,188 | ) | (43,620 | ) | |||
Cash surrender value of officers’ life insurance |
| (14,209 | ) | (8,056 | ) | (17,571 | ) | |||
Other assets |
| 12,801 |
| 44,744 |
| 8,411 |
| |||
Net cash provided by operating activities |
| 1,008,399 |
| 1,433,587 |
| 748,999 |
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Additions to property, plant and equipment |
| (1,109,995 | ) | (2,141,700 | ) | (1,240,349 | ) | |||
Payments received on affiliated partnership |
| 12,531 |
| 12,532 |
| 17,518 |
| |||
Proceeds from surrender of officers life insurance |
| — |
| — |
| 124,335 |
| |||
Consolidation of United Development Company, net of cash |
| — |
| — |
| 200,447 |
| |||
Net cash used in investing activities |
| (1,097,464 | ) | (2,129,168 | ) | (898,049 | ) | |||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||
Net borrowings under notes payable |
| 67,051 |
| 1,185,758 |
| 536,205 |
| |||
Change in book overdrafts |
| 1,061,594 |
| 300,049 |
| 62 |
| |||
Proceeds from long-term borrowings |
| 731,388 |
| 768,612 |
| 7,500,000 |
| |||
Distribution to United Development Company Partners |
| (104,993 | ) | (104,982 | ) | — |
| |||
Proceeds from sale of common stock |
| 75,029 |
| 49,731 |
| 47,947 |
| |||
Principal repayment of long-term debt |
| (1,366,834 | ) | (1,030,682 | ) | (7,396,249 | ) | |||
Principal repayment of obligations under capital leases |
| (426,769 | ) | (465,091 | ) | (254,601 | ) | |||
Net cash provided by financing activities |
| 36,466 |
| 703,395 |
| 433,364 |
| |||
Net change in cash |
| (52,599 | ) | 7,814 |
| 284,314 |
| |||
Cash at beginning of year |
| 317,951 |
| 310,137 |
| 25,823 |
| |||
Cash at end of year |
| $ | 265,352 |
| $ | 317,951 |
| $ | 310,137 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
UFP TECHNOLOGIES, INC.
December 31, 20052008 and 20042007
UFP Technologies, Inc. ("(“the Company"Company”) designsis an innovative designer and manufactures a broad rangecustom converter of packagingfoams, plastics and specialty foamnatural fiber products for a variety ofprincipally serving the automotive, computer and electronics, medical, aerospace and defense, consumer and industrial and consumer markets. The Company was incorporated in the State of Delaware in 1993.
(a)Principles of Consolidation
The consolidated financial statements include the accounts and results of operations of UFP Technologies, Inc., its wholly ownedwholly-owned subsidiaries, Moulded Fibre Technology, Inc. (MFT), Simco Automotive Trim, Inc., and Simco Automotive Technology.Technologies, Inc. The consolidated financial statements also include the accounts and results of operations of Stephenson & Lawyer, Inc. and its wholly-owned subsidiary, Patterson Properties Corporation, from January 1, 2008, through December 31, 2008. The Company also consolidates United Development Company Limited, of which the Company owns 26.32% (see Note 7). All significant inter-company balances and transactions have been eliminated in consolidation.
(b)Accounts Receivable
The Company periodically reviews the collectibilitycollectability of its accounts receivable. Provisions are established for accounts that are potentially uncollectible. Determining adequate reserves for accounts receivable requires management’s judgment. Conditions impacting the realizability of the Company’s receivables could cause actual asset write-offs to be materially different than the reserved balances as of December 31, 2005.2008.
(c) Inventories
Inventories
Inventories whichthat include material, labor, and manufacturing overhead are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.
The Company periodically reviews the realizability of its inventory. Provisions are established for potential obsolescence. Determining adequate reserves for inventory obsolescence requires management’s judgment. Conditions impacting the realizability of the Company’s inventory could cause actual asset write-offs to be materially different than the reserve balances as of December 31, 2005.2008.
(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(for financial statement purposespurposes) and accelerated methods for(for income tax purposes.purposes). Certain manufacturing machines that are dedicated to a specific program–program—where total units to be produced over the life of the program are estimable–estimable—are depreciated using the modified units of production method for financial statement purposes.
F-9F-8
Estimated useful lives of property, plant, and equipment are as follows:
Shorter of estimated useful life | |||
Leasehold improvements |
|
| |
Buildings and improvements |
| 31.5 years | |
Equipment |
| 8-10 years | |
Furniture and fixtures |
|
|
Property, plant, and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis.
(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 basis and operating loss and tax credit carry-forwards.carryforwards. Deferred tax expense (benefit) results from the net change during the year in deferred tax assets and liabilities. 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.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the implementation of Interpretation No. 48, the Company recognized no increase in the liability for unrecognized tax benefits. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense.
(f) Revenue Recognition
The Company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive evidence of an arrangement exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is reasonably assured of collecting.collection. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Determination of these criteria, in some cases, requirerequires management’s judgments. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue for any reporting period could be adversely affected.
(g) Investments in Realty Partnership
The Company has invested in Lakeshore Estates Associates, a realty limited partnership. The Lakeshore Estates investment is stated at cost, plus or minus the Company’s proportionate share of the limited partnerships’partnership’s income or losses, less any distributions received from the limited partnership. The Company has recognized its share of Lakeshore Estates Associates’ losses only to the extent of its original investment in, and advances to,
F-9
this partnership. The Company's book value inCompany’s carrying amount for this investment is zero at December 31, 20052008, and 2004,2007, respectively.
(h) Impairment of Long-Lived Assets
Goodwill
The Company reviews long-lived assets and all intangible assets
Goodwill is tested for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Goodwill is reviewed at least annually, for impairment. Recoverability of long-lived assets and definite lived intangible assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then long-lived assets are written down to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. Recoverability of goodwill is determined under a two-step process as described in SFAS 142. The fair value of reporting units determined under step one is also based on a discounted cash flow
F-10
model. At December 31, 2005, no impairment has been identified. Forecasted cash flows are based upon numerous assumptions used by management, such as revenue growth, margins and asset management. For purposes of this analysis, the Company reviews its internal forecasts and external data. The external data consist of data available from customer and competitor commentary, and industry forecasts of future revenue growth.
The estimates of expected cash flows require the Company to make significant judgments regarding future periods that are subject to some factors outside of the Company’s control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.
(i) Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangible assets are assessed for impairment on at least an annual basis. Beginning in 2005, the Company changed its annual goodwill impairment testing date from the second quarter to the fourth quarter of its fiscal year. The Company believes this new accounting method is preferable, since more complete and accurate information to assess goodwill for impairment is available in the fourth quarter, including actual financial performance to date and information relative to the carrying value of assets. There is no financial impact as of the year ended December 31, 2005, or on any prior periods, as a result of this change in accounting method. Goodwill of a reporting unit will also be tested for impairment between annual tests if a triggeringan event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. At December 31, 2008 the Company redefined its reporting units to include its Component Products segment, Packaging segment (excluding its Molded Fiber operation), and its Molded Fiber operation as defined by SFAS No. 142, that could potentially reduceseparate reporting units for goodwill impairment testing. An impairment loss generally would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit belowunit. The Company completed its carrying value.annual goodwill impairment test as of December 31, 2008, and determined that no goodwill was impaired.
Definite-lived(i)Intangible Assets
Intangible assets include patents and other intangible assets. Intangible assets such as patents,with an indefinite life are not amortized. Intangible assets with a definite life are amortized over theiron a straight-line basis, with estimated useful lives generally periods ranging from eight to fourteen14 years. The Company continually evaluatesIndefinite-lived intangible assets are tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the reasonableness of the useful lives of these assets.carrying amount may be impaired. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate that their value may be reduced.
(j) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2008, and 2007, cash equivalents primarily consist of a money market account that is readily converted into cash. The Company utilizes zero balancezero-balance disbursement accounts to manage its funds. These accounts reflect negative cash balances asAs such, outstanding checks clear the banking system. In accordance with accounting principles generally accepted in the United States of America, the negative cash book balances at the end of a period are reclassified to accounts payable. At December 31, 20052008, and 2004,2007, the amounts reclassified were approximately $2.5$1.6 million and $1.4$2.2 million, respectively,respectively.
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(l) Segments and Related Information
The Company has adopted the provisions of SFAS No. 131, Disclosures“Disclosures About Segments of an Enterprise and Related Information,,” which established standards for the way that public business enterprises report information and operating segments in annual financial
F-11F-10
annual financial statements and requires reporting of selected information in interim financial reports (see Note 19)20).
(m) Recent Accounting Pronouncements Not Yet Effective
OnIn December 16, 2004,2007, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (“No. 141R, “Business Combinations,” which changes how business acquisitions are accounted for. SFAS 123(R)”), whichNo. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. SFAS No. 141R is effective for the Company for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires the recognition of a revisionnoncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 amends the consolidation procedures of certain aspects of ARB No. 51 for consistency with the requirements of SFAS No. 123. SFAS 123(R) supersedes APB Opinion No. 25, Accounting141R. This statement requires changes in the parent’s ownership interest of consolidated subsidiaries to be accounted for Stock Issued to Employees (“APB 25”)as equity transactions. This statement also includes expanded disclosure requirements regarding the interests of the parent and amendsits noncontrolling interest. The Company is currently evaluating the future impacts and disclosures of this standard.
In March 2008, the FASB issued SFAS No. 95, Statement of Cash Flows. Generally,161, “Disclosures about Derivative Instruments and Hedging Activities,” which changes the approach indisclosure requirements for derivative instruments and hedging activities. SFAS 123(R) is similar to the approach described inNo. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro formaNo. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement’s disclosure is no longer an alternative. SFAS 123(R) must be adopted inrequirements are effective for fiscal years and interim periods beginning after JuneNovember 15, 2005.2008. The Company adopted SFAS 123(R) onis currently evaluating the future impacts and disclosures of this standard.
(n)Share-Based Compensation
Effective January 1, 2006, the commencement of its first quarter of fiscal 2006. The company believes the effect will be comparable to the pro forma effect as shown in Note 1. (n) Stock Compensation (below).
The Company adopted the “modified prospective” transition method inprovisions of SFAS No. 123R “Share-Based Payment,” which awards that are granted, modified, or settled after the date of adoption should be measured and accountedestablishes accounting for in accordance with SFAS 123(R). Unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123, except that amounts must be recognized in the income statement.
As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using the intrinsic value method in accordance with APB 25 and, as such, generally recognizes no compensation costequity instruments exchanged for employee stock options. Accordingly,services. Under the adoptionprovisions of SFAS 123(R)’s fair value method will have a significant impact on the Company’s results of operations, although it will have no impact on the Company’s overall financial position.
In March 2005, the SEC issued Staff Accounting Bulletin 107 (SAB 107) to assist preparers by simplifying some of the implementation challenges of SFAS 123(R). In particular, SAB 107 provides supplemental implementation guidance on SFAS 123(R), including guidance on valuation methods, classification of compensation expense, inventory capitalization ofNo. 123R, share-based compensation cost income tax effects, disclosures in Management’s Discussion of an Analysis and several other issues. The Company will applyis measured at the principles of SAB 107 in conjunction with its adoption of SFAS 123(R).
In December 2004,grant date, based on the FASB issued Financial Accounting Standards No. 151, “Inventory Costs” (“SFAS 151”). SFAS 151 clarifies the accounting for inventory when there are abnormal amounts of idle facility expense, freight, handling costs, and wasted materials. Under existing GAAP, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be “so abnormal” as to require treatment as current period charges rather than recorded as adjustments to thecalculated fair value of the inventory. SFAS 151 requires that those items beaward, and is recognized as current-period charges regardless of whether they meetan expense over the criterion of “so abnormal.” In addition, SFAS 151 requires that allocation of fixed production overheads toemployee’s requisite service period (generally the costs
F-12F-11
of conversion be based on the normal capacityvesting period of the production facilities. equity grant). The Company expenses its share-based compensation on a straight-line basis over the requisite service period for each award.
The provisions of SFAS 151 shall be effectiveNo. 123R apply to share-based payments made through several plans, which are described below. The compensation cost that has been charged against income for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier applicationthose plans is permitted for inventory costs incurred during fiscal years beginning after the date SFAS 151 was issued. The adoption of SFAS 151 is not expected to have a material impact on the Company’s financial position or results of operations.as follows:
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and requires the retrospective application to prior periods financial statements for changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The retrospective application of the change would be limited to the direct effects of the change, and indirect effects would be recognized in the period of the accounting change. The Company adopted this standard on January 1, 2006, and does not believe that it will have a material impact on the consolidated financial statements.
|
| Year Ended December 31 |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
Cost of sales |
| $ | — |
| $ | — |
| $ | — |
|
Selling, general and administrative expense |
| 1,305,789 |
| 692,024 |
| 439,340 |
| |||
Total share-based compensation expense |
| $ | 1,305,789 |
| $ | 692,024 |
| $ | 439,340 |
|
(n) Stock Compensation
The Company applies Accounting Principles Board Opinion No. 25, Accountingcompensation expense for Stock Issued to Employees (“APB 25”) and related Interpretations in accounting for its stock option and employee stock purchase plans. As a result, no compensation cost has been recognized in connection with these plans.
Sinceoptions granted during 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”),three-year period ended December 31, 2008, was determined as if the Company had accounted for its stock option plans under theintrinsic fair value approach of SFAS 123. For purposes of the pro forma disclosures, the estimated fairmarket value of the stock plans is fully amortized overoptions, using a lattice-based option valuation model with the related vesting period of the options.assumptions noted as follows:
|
| Year Ended December 31 |
| ||||
|
| 2008 |
| 2007 |
| 2006 |
|
Expected volatility |
| 88.0% |
| 76.7% to 89.3% |
| 92.7% to 96.7% |
|
Expected dividends |
| None |
| None |
| None |
|
Risk-free interest rate |
| 4.0% |
| 3.4% to 5.0% |
| 4.7% to 5.1% |
|
Exercise price |
| Closing price on date of grant |
| Closing price on date of grant |
| Closing price on date of grant |
|
Imputed life |
| 7.9 years (output in lattice-based model) |
| 4.1 to 7.9 years (output in lattice-based model) |
| 4.0 to 8.0 years (output in lattice-based model) |
|
The fair value of each optionweighted average grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants made in 2005, 2004, and 2003, respectively: no dividend yield for each year; expected volatility of 84.4%, 102.8%, and 110%, risk-free interest rates of 4.08%, 3.72% and 3.22%, and expected lives of 6.8, 5.7, and 5.8 years.
The weighted-average fair value of options granted during 2005, 2004,2008, 2007, and 20032006 was $2.39, $2.34,$2.87, $2.38, and $0.98,$2.51, respectively.
The Company’s pro forma information is as follows:
|
| Years Ended December 31 |
| |||||
|
| 2005 |
| 2004 |
| 2003 |
| |
Net income (loss) as reported |
| $ | 659,091 |
| 871,261 |
| (1,515,729 | ) |
Total stock based compensation expense determined under fair value based method for all awards net of tax related effects |
| $ | (553,109 | ) | (519,084 | ) | (380,033 | ) |
Pro forma net income (loss) |
| $ | 105,982 |
| 352,177 |
| (1,895,762 | ) |
Basic net income (loss) per share as reported |
| 0.14 |
| 0.19 |
| (0.34 | ) | |
Pro forma basic net income (loss) per share |
| 0.02 |
| 0.08 |
| (0.42 | ) | |
Diluted net income (loss) per share as reported |
| 0.13 |
| 0.17 |
| (0.34 | ) | |
Pro forma diluted net income (loss) per share |
| $ | 0.02 |
| 0.07 |
| (0.42 | ) |
F-13
The effect of applying SFAS 123 as shown abovetotal income tax benefit recognized in the pro forma disclosures is not representativestatement of operations for share-based compensation arrangements was approximately $458,000, $223,000, and $149,000 for the pro forma effect on net income (loss) in future years.years ended December 31, 2008, 2007, and 2006, respectively.
(o) Deferred Rent
The Company accounts for escalating rental payments on the straight linestraight-line basis over the term of the lease.
(p)Shipping and Handling Costs
Costs incurred related to shipping and handling are included in cost of sales. Amounts charged to customers pertaining to these costs are included as revenue.
F-12
(q)Research and Development
On a routine basis, the Company incurs costs related to research and development activity. These costs are expensed as incurred. Approximately $1.4 million and $1.3 million were expensed in the years ended December 31, 2008, and 2007, respectively.
(r)Fair Value of Financial Instruments
Cash and cash equivalents, accounts receivable, inventories, prepaid expenses, 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. The carrying amount of the Company’s long-term debt and obligations under capital leases approximates fair value as the interest rate on the debt approximates the Company’s current incremental borrowing rate.
(s)Fair Value
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework in generally accepted accounting principles for measuring fair value and expands disclosures about fair value measurements. This standard only applies when other standards require or permit the fair value measurement of assets and liabilities. It does not increase the use of fair value measurement. The Company adopted SFAS No. 157 in the first quarter of 2008, except as it relates to nonrecurring fair value measurements of nonfinancial assets and liabilities for which the standard is effective for fiscal years beginning after November 15, 2008.
The major categories of non financial assets and liabilities that have not been measured and disclosed using SFAS No. 157 fair value guidance include goodwill and intangible assets and property, plant and equipment if subject to a periodic impairment test, as well as the assets and liabilities acquired in the Stephenson & Lawyer, Inc. acquisition (Note 18).
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115,” which permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items, for which the fair value option has been elected, in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 in 2008 did not have an impact on the Company’s results of operations or financial position, as the Company has not elected the fair value option for any of its eligible financial assets or liabilities.
Cash paid for interest and income taxes is as follows:
|
| Years ended December 31 |
|
| Years Ended December 31 |
| ||||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
|
| 2008 |
| 2007 |
| 2006 |
| ||||||
Interest |
| $ | 1,022,314 |
| $ | 697,651 |
| $ | 764,772 |
|
| $ | 355,221 |
| $ | 486,826 |
| $ | 1,001,382 |
|
Income taxes (refunds) – net |
| $ | 81,019 |
| $ | (340,599 | ) | $ | 18,754 |
| ||||||||||
Income taxes, net of refunds |
| $ | 3,817,383 |
| $ | 322,824 |
| $ | 368,975 |
|
F-13
Significant non-cash transactions:
|
| Years ended December 31 |
|
| Years Ended December 31 |
| ||||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
|
| 2008 |
| 2007 |
| 2006 |
| ||||||
Property and equipment acquired under capital lease |
| $ | 1,380,615 |
| $ | 229,540 |
| $ | 1,397,869 |
|
| $ | — |
| $ | — |
| $ | 691,705 |
|
Tax benefit resulting from the exercise of non-qualified stock options |
| 0 |
| 37,659 |
| 0 |
| |||||||||||||
Shares presented for stock option exercises |
| (104,750 | ) | (239,747 | ) | 0 |
|
| — |
| — |
| (15,500 | ) | ||||||
Total non-cash transactions |
| $ | 1,275,865 |
| $ | 27,452 |
| $ | 1,397,869 |
|
Receivables consist of the following:
|
| December 31 |
| ||||
|
| 2005 |
| 2004 |
| ||
Accounts receivable - trade |
| $ | 16,007,326 |
| $ | 12,328,734 |
|
Other receivables (reserves) |
| (142,407 | ) | 33,489 |
| ||
|
| 15,864,919 |
| 12,362,223 |
| ||
Less allowance for doubtful receivables |
| (565,171 | ) | (543,317 | ) | ||
|
| $ | 15,299,748 |
| $ | 11,818,906 |
|
F-14
|
| December 31 |
| ||||
|
| 2008 |
| 2007 |
| ||
Accounts receivable—trade |
| $ | 13,141,912 |
| $ | 12,102,599 |
|
Less allowance for doubtful receivables |
| (387,037 | ) | (307,131 | ) | ||
|
| $ | 12,754,875 |
| $ | 11,795,468 |
|
Inventories consist of the following:
|
| December 31 |
| ||||
|
| 2008 |
| 2007 |
| ||
Raw materials |
| $ | 5,352,926 |
| $ | 3,681,262 |
|
Work in process |
| 324,782 |
| 340,134 |
| ||
Finished goods |
| 3,115,285 |
| 2,150,635 |
| ||
Less: reserve for obsolescence |
| (640,247 | ) | (295,405 | ) | ||
|
| $ | 8,152,746 |
| $ | 5,876,626 |
|
The Company completed its annual impairment test of goodwill in the fourth quarter of 2005,2008, and determined that no goodwill was impaired.
At December 31, 20052008, and December 31, 2004,2007, the carrying value of the Company's patentsCompany’s definite-lived intangible assets was $192,055$175,841 and $226,507,$244,913, respectively, net of accumulated amortization.amortization, and is included in the accompanying balance sheets. Amortization expense related to intangible assets was $69,072, $69,072, and $56,632 for the years ended December 31, 2008, 2007, and 2006, respectively. Future patent amortizationsamortization for years ended December 31 will be approximately:
2006 |
| 34,000 |
| |||||
2007 |
| 34,000 |
| |||||
2008 |
| 34,000 |
| |||||
2009 |
| 34,000 |
|
| 69,000 |
| ||
2010 |
| 34,000 |
|
| 69,000 |
| ||
2011 |
| 37,841 |
| |||||
2012 |
| — |
| |||||
2013 |
| — |
| |||||
Thereafter |
| 22,055 |
|
| — |
| ||
Total: |
| $ | 192,055 |
|
| $ | 175,841 |
|
Inventories consist of the following:F-14
|
| December 31 |
| ||||
|
| 2005 |
| 2004 |
| ||
Raw materials |
| $ | 4,225,505 |
| $ | 3,180,349 |
|
Work in process |
| 370,106 |
| 532,108 |
| ||
Finished goods |
| 1,845,981 |
| 1,523,775 |
| ||
|
| $ | 6,441,592 |
| $ | 5,236,232 |
|
Property, plant, and equipment consist of the following:
|
| December 31 |
| ||||
|
| 2005 |
| 2004 |
| ||
Land |
| $ | 409,119 |
| $ | 409,119 |
|
Buildings and improvements |
| 4,079,714 |
| 3,809,533 |
| ||
Leasehold improvements |
| 1,946,122 |
| 1,905,057 |
| ||
Equipment |
| 27,389,836 |
| 25,193,403 |
| ||
Furniture and fixtures |
| 2,447,820 |
| 2,158,810 |
| ||
Construction in progress - equipment/buildings |
| 450,630 |
| 1,187,410 |
| ||
|
| $ | 36,723,241 |
| $ | 34,663,332 |
|
F-15
|
| December 31 |
| ||||
|
| 2008 |
| 2007 |
| ||
Land |
| $ | 470,872 |
| $ | 409,119 |
|
Buildings and improvements |
| 6,496,542 |
| 4,947,111 |
| ||
Leasehold improvements |
| 1,570,906 |
| 1,849,216 |
| ||
Equipment |
| 28,873,836 |
| 28,601,575 |
| ||
Furniture and fixtures |
| 2,288,428 |
| 2,055,184 |
| ||
Construction in progress—equipment/buildings |
| 966,195 |
| 406,937 |
| ||
|
| $ | 40,666,779 |
| $ | 38,269,142 |
|
Depreciation and amortization expense for the years ended December 31, 2005, 2004,2008, 2007 and 20032006 was $2,902,329, $2,460,048,$2,907,478, $2,745,948, and $2,636,526,$3,003,070, respectively.
The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited ("UDT"(“UDT”). In compliance with FIN 46(R), "Consolidation46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"” the Company has consolidated the financial statements of UDT as of December 31, 2003. Prior to December 31, 2003, this investment was accounted for under the equity method 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
Included in the limited partnership’s net income was approximately $25,000 and $35,000 in 2002 and 2001, respectively. As a result of consolidating UDT, both total assets and total liabilities ofDecember 31 consolidated balance sheets are the Company increased by $1,088,000. following amounts related to UDT:
|
| December 31 |
| ||||
|
| 2008 |
| 2007 |
| ||
Cash |
| $ | 148,746 |
| $ | 165,361 |
|
Net property, plant and equipment |
| 1,311,273 |
| 1,408,264 |
| ||
Accrued expenses |
| 12,900 |
| 12,900 |
| ||
Current and long-term debt |
| 737,289 |
| 768,744 |
| ||
There was no impact on net income.
As a component of consolidating UDT'sUDT’s assets, the Company included $255,202$148,746 in cash.cash at December 31, 2008. Although this cash balance is not legally restricted, the Company does not use this cash in its operations.
On February 28, 2003, the Company obtained a new credit facility, which has beenwas amended effective March 24, 2004, June 28, 2004, and November 21, 2005, to reflect, among other things,
F-15
changes to certain financial covenants. The amended facility iswas comprised of: (i) a revolving credit facility of $17 million that is collateralized by the Company's accounts receivable and inventory;million; (ii) a term loan of $3.7 million with a 7-yearseven-year straight-line amortization that is collateralized by the Company’s property, plant and equipment (excluding UDT's property, plant and equipment);amortization; and (iii) a term loan of $2.3 million with a 15-year straight-line amortizationamortization. The amended credit facility called for interest of Prime or LIBOR plus a margin that isranges from 1.0% to 1.5%, depending upon Company performance. The loans were collateralized by a mortgagefirst priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts. All borrowings at December 31, 2008, had interest computed at Prime or LIBOR plus 1.0%. Under the amended credit facility, the Company was subject to certain financial covenants, including maximum capital expenditures and minimum fixed-charge coverage. As of December 31, 2008, the Company was in compliance with all of these covenants. At December 31, 2008, the interest rate on these facilities ranged from 1.5% to 3.25%.
On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA. The facility is comprised of: (i) a revolving credit facility of $17 million; (ii) a term loan of $2.1 million with a seven-year straight-line amortization; (iii) a term loan of $1.8 million with a 20-year straight-line amortization; and (iv) a term loan of $4.0 million with a 20-year straight-line amortization. Extensions of credit under the revolving credit facility are subject to available collateral based in part upon accounts receivable and inventory levels. Therefore, the entire $17 million may not be available to the Company. For example, as of December 31, 2005, based upon revolving credit facility borrowings outstanding of $8.0 million and collateral levels, the Company had availability of $6.5 million of additional credit under this facility. The amount of availability can fluctuate significantly. The amended credit facility calls for interest of Prime or LIBOR plus a margin that ranges from 1%1.0% to 1.5%, depending or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. In both cases the applicable margin is dependent upon Company operating performance. All borrowings at December 31, 2005 had interest computed at Prime or LIBOR plus 1.25%.The loans are collateralized by a first priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan. Under the amended credit facility, the Company is subject to certaina minimum fixed-charge coverage financial covenants including maximum capital expenditures and minimum fixed charge coverage. As of December 31, 2005, the Company was in compliance with all of these covenants.covenant. The Company’s new $17 million revolving credit facility as amended, is due February 28, 2009;November 30, 2013; the $3.7 million term loan and the $2.3 million mortgageloans are all due November 21, 2011. At December 31, 2005, the interest rate on these facilities ranged from 5.5% to 7.25%.January 29, 2016.
As a result of the consolidation of United Development Company Limited,UDT, a mortgage note collateralized by the Alabama and Florida facilities, dated September 4, 2002, originally for $470,313, was included within long-term debt in the December 31, 2006 consolidated financial statements. On May 22, 2007, this note was refinanced. The remaining principal balance of $388,356 on the old note was paid in full. The new note is secured by the Florida facility and has a principal balance of $786,000. The note calls for 180 monthly payments of $7,147. The interest rate is fixed at approximately 7.2%. The additional funds of approximately $400,000 were used to fund building improvements in the Florida facility. The outstanding balance on this note at December 31, 2008, is $737,289.
In addition to the above credit facilities, the Company has capital lease debt of $1,612,665 as of December 31, 2008. These leases are secured by specific manufacturing equipment used by the Company and have remaining lives ranging from one to six years and bear interest at rates ranging from 7% to 8%. Subsequent to December 31, 2008, the Company paid off these lease obligations in full.
F-16
$470,313 is included within long-term debt in the Consolidated Financial Statements. The note calls for fifty principal payments of $3,406 and one payment of $300,013 due on December 4, 2006. The note bears interest at LIBOR plus 2.75%, adjusted monthly. At December 31, 2005, the outstanding balance was $404,459. At December 31, 2005, the interest rate was approximately 7.1%. Payments on this note are funded through rent payments that the Company makes on its Alabama and Florida facilities. The Company is not subject to any financial covenants under this mortgage note.
Long-term debt consists of the following:
|
| December 31 |
|
| December 31 |
| ||||||||
|
| 2005 |
| 2004 |
|
| 2008 |
| 2007 |
| ||||
Mortgage note |
| $ | 2,327,000 |
| $ | 2,164,000 |
|
| $ | 1,859,000 |
| $ | 2,015,000 |
|
Notes payable - term loans |
| 3,642,119 |
| 4,424,612 |
| |||||||||
Notes payable, term loans |
| 2,062,405 |
| 2,588,976 |
| |||||||||
United Development Company mortgage |
| 404,459 |
| 420,412 |
|
| 737,288 |
| 768,744 |
| ||||
Total long-term debt |
| 6,373,578 |
| 7,009,024 |
|
| 4,658,693 |
| 5,372,720 |
| ||||
Less current installments |
| 1,087,030 |
| 1,158,672 |
|
| 716,697 |
| 714,256 |
| ||||
Long-term debt, excluding current installments |
| $ | 5,286,548 |
| $ | 5,850,352 |
|
| $ | 3,941,996 |
| $ | 4,658,464 |
|
Aggregate maturities of long-term debt are as follows:
Year ending December 31: |
|
|
| |
2006 |
| $ | 1,087,030 |
|
2007 |
| 682,571 |
| |
2008 |
| 682,571 |
| |
2009 |
| 682,571 |
| |
2010 and thereafter |
| 3,238,835 |
| |
|
| $ | 6,373,578 |
|
Year ending December 31: |
|
|
| |
2009 |
| 716,697 |
| |
2010 |
| 718,985 |
| |
2011 |
| 721,691 |
| |
2012 |
| 677,098 |
| |
2013 and thereafter |
| 1,824,222 |
| |
|
| $ | 4,658,693 |
|
Accrued taxes and other expenses consist of the following:
|
| December 31 |
|
| December 31 |
| ||||||||
|
| 2005 |
| 2004 |
|
| 2008 |
| 2007 |
| ||||
Compensation |
| $ | 1,179,024 |
| $ | 1,300,138 |
|
| $ | 2,215,874 |
| $ | 2,165,994 |
|
Benefits |
| 846,091 |
| 684,799 |
| |||||||||
Benefits / self-insurance reserve |
| 901,580 |
| 973,405 |
| |||||||||
Paid time off |
| 466,946 |
| 436,067 |
|
| 688,315 |
| 545,426 |
| ||||
Commissions payable |
| 370,432 |
| 275,783 |
| |||||||||
Plant consolidation |
| 316,000 |
| — |
| |||||||||
Income taxes payable (overpayment) |
| (573,953 | ) | 507,986 |
| |||||||||
Unrecognized tax benefits |
| 560,000 |
| 560,000 |
| |||||||||
Other |
| 1,988,178 |
| 1,527,450 |
|
| 1,751,753 |
| 1,481,622 |
| ||||
|
| $ | 4,480,239 |
| $ | 3,948,454 |
|
| $ | 6,230,001 |
| $ | 6,510,216 |
|
On October 22, 2003, theThe Company’s Board of Directors approved a formal plan of restructure in response to continued losses in the Company’s Packaging plant in Visalia, California. To that effect the Company recorded restructuring charges, in the fourth quarter
F-17
of 2003, of $1,405,000, consisting of asset impairments of $640,000, severance of $40,000, and future lease commitments of $725,000. Of this amount, no balance remains on the balance sheet as of December 31, 2005. During the third quarter of 2004, the Company executed a termination agreement for the lease for its Visalia, California property for a lump-sum payment of approximately $100,000. As a result, the Company reversed $280,000 of previously recorded restructuring reserve.
The Company's income tax (benefit) provision for the years ended December 31, 2005, 2004,2008, 2007 and 20032006 consists of approximately:the following:
|
| Years ended December 31 |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | — |
| $ | 76,000 |
| $ | (51,000 | ) |
State |
| 122,000 |
| 108,000 |
| 31,000 |
| |||
|
| 122,000 |
| 184,000 |
| (20,000 | ) | |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| 131,000 |
| 174,000 |
| (798,000 | ) | |||
State |
| (45,000 | ) | 131,000 |
| (21,000 | ) | |||
|
| 86,000 |
| 305,000 |
| (819,000 | ) | |||
Total income tax provision (benefit) |
| $ | 208,000 |
| $ | 489,000 |
| $ | (839,000 | ) |
F-17
|
| Years Ended December 31 |
| |||||||
|
| 2008 |
| 2007 |
| 2006 |
| |||
Current: |
|
|
|
|
|
|
| |||
Federal |
| $ | 2,270,000 |
| $ | 983,000 |
| $ | 160,000 |
|
State |
| 709,000 |
| 391,000 |
| 300,000 |
| |||
|
| 2,979,000 |
| 1,374,000 |
| 460,000 |
| |||
Deferred: |
|
|
|
|
|
|
| |||
Federal |
| 41,000 |
| 1,147,000 |
| 1,061,000 |
| |||
State |
| (25,000 | ) | 63,000 |
| (28,000 | ) | |||
|
| 16,000 |
| 1,210,000 |
| 1,033,000 |
| |||
Total income tax provision |
| $ | 2,995,000 |
| $ | 2,584,000 |
| $ | 1,493,000 |
|
At December 31, 2005,2008, the Company has net operating loss carry-forwardscarryforwards for federal income tax purposes of approximately $9,226,000$2,488,000, and for state income tax purposes of approximately $2,420,000,$500,000, which are available to offset future taxable income and expire during the federal tax years ending December 31, 20082019 through 2024.
The future benefit of the federal net operating loss carry-forwards acquired from MFT and Simcocarryforwards will be limited to $600,000approximately $300,000 per year in accordance with Section 382 of the Internal Revenue Code. As of December 31, 2005, net operating loss carry-forwards acquired from MFT and Simco for federal income tax purposes totaled $1,742,000 and $5,142,000, respectively.
F-18
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are approximately as follows:
|
| December 31 |
|
| December 31 |
| ||||||||
|
| 2005 |
| 2004 |
|
| 2008 |
| 2007 |
| ||||
Deferred tax assets related to: |
|
|
|
|
|
|
|
|
|
| ||||
Reserves not currently deductible |
| $ | 27,000 |
| $ | 82,000 |
| |||||||
Research and development credits |
| 544,000 |
| 246,000 |
| |||||||||
Equity-based compensation |
| $ | 387,000 |
| $ | 244,000 |
| |||||||
Compensation programs |
| 124,000 |
| 163,000 |
|
| 497,000 |
| 278,000 |
| ||||
Retirement liability |
| 263,000 |
| 292,000 |
|
| 184,000 |
| 190,000 |
| ||||
Net operating loss carryforwards |
| 3,265,000 |
| 3,704,000 |
|
| 866,000 |
| 979,000 |
| ||||
Other |
| 73,000 |
| 53,000 |
| |||||||||
|
| 4,296,000 |
| 4,540,000 |
| |||||||||
Inventory capitalization |
| 246,000 |
| 66,000 |
| |||||||||
Reserves |
| 412,000 |
| 243,000 |
| |||||||||
Total deferred tax assets |
| 2,592,000 |
| 2,000,000 |
| |||||||||
Deferred tax liabilities related to: |
|
|
|
|
|
|
|
|
|
| ||||
Excess of book over tax basis of fixed assets |
| 925,000 |
| 1,190,000 |
|
| 417,000 |
| 339,000 |
| ||||
Investee tax loss in excess of book losses |
| 89,000 |
| 55,000 |
| |||||||||
Capital leases |
| 6,000 |
| 117,000 |
| |||||||||
|
| 1,020,000 |
| 1,362,000 |
| |||||||||
Goodwill |
| 499,000 |
| 434,000 |
| |||||||||
Inventory method change |
| 295,000 |
| — |
| |||||||||
Other |
| 5,000 |
| 17,000 |
| |||||||||
Total deferred tax liabilities |
| 1,216,000 |
| 790,000 |
| |||||||||
Net deferred tax assets |
| $ | 3,276,000 |
| $ | 3,178,000 |
|
| $ | 1,376,000 |
| $ | 1,210,000 |
|
The amount recorded as net deferred tax assets as of December 31, 20052008 and 20042007 represents the amount of tax benefits of existing deductible temporary differences or carry-forwardscarryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carry-forwardcarryforward period. The Company believes that the net deferred tax asset of $3,276,000$1,376,000 at December 31, 20052008, is more likely than not to be realized in the carry-forwardcarryforward period. This balance includes the tax benefit associated with the acquisition of the common
F-18
stock of Stephenson & Lawyer, Inc., as discussed in Note 18. Management reviews the recoverability of deferred tax assets during each reporting period.
The actual tax provision for the years presented differs from the “expected” tax provision for those years, computed by applying the U.S. federal corporate rate of 34% to income before income tax expense as follows:
|
| Years ended December 31 |
|
| Years Ended December 31 |
| ||||||||
|
| 2005 |
| 2004 |
| 2003 |
|
| 2008 |
| 2007 |
| 2006 |
|
Computed "expected" tax rate |
| 34.0 | % | 34.0 | % | 34.0 | % | |||||||
Computed “expected” tax rate |
| 34.0 | % | 34.0 | % | 34.0 | % | |||||||
Increase (decrease) in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefit |
| 5.9 |
| 10.4 |
| (0.7 | ) |
| 5.6 |
| 4.5 |
| 4.6 |
|
Officers' life insurance |
| 1.4 |
| 0.4 |
| (0.2 | ) | |||||||
Officers’ life insurance |
| 0.0 |
| 0.0 |
| 0.1 |
| |||||||
Meals and entertainment |
| 3.0 |
| 2.2 |
| (0.3 | ) |
| 0.2 |
| 0.3 |
| 0.3 |
|
R&D credits |
| (20.3 | ) | (9.9 | ) | 3.5 |
|
| (1.2 | ) | (1.1 | ) | (2.7 | ) |
Domestic production deduction |
| (2.1 | ) | 0.0 |
| 0.0 |
| |||||||
Non-deductible ISO stock option expense |
| 0.4 |
| 0.5 |
| 1.0 |
| |||||||
Other |
| 0.0 |
| (1.2 | ) | (0.7 | ) |
| 0.0 |
| 0.1 |
| 0.0 |
|
Effective tax rate |
| 24.0 | % | 35.9 | % | 35.6 | % |
| 36.9 | % | 38.3 | % | 37.3 | % |
The impact onCompany files income tax returns in the Company'sU.S. federal jurisdiction and various state jurisdictions. The Company has not been audited by the Internal Revenue Service since 2001 or by any states in connection with income taxes, with the exception of returns filed in Michigan (which have been audited through 2004) and income tax returns filed in Massachusetts for 2005 and 2006 (which are currently being audited). The tax returns for the years 2004 through 2006, and certain items carried forward from earlier years and utilized in those returns, remain open to examination by the IRS and various state jurisdictions.
FIN 48 prescribes the recognition, measurement, and disclosure standards for uncertainties in income tax positions. A reconciliation of the beginning and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:
|
| Federal and State Tax |
| ||||
|
| 2008 |
| 2007 |
| ||
Gross UTB balance at beginning of fiscal year |
| $ | 560,000 |
| $ | 235,000 |
|
Additions based on tax positions related to the current year |
| — |
| — |
| ||
Additions for tax positions of prior years |
| — |
| 325,000 |
| ||
Reductions for tax positions of prior years |
| — |
| — |
| ||
Settlements |
| — |
| — |
| ||
Reductions due to lapse of applicable statute of limitations |
| — |
| — |
| ||
Gross UTB balance at December 31 |
| $ | 560,000 |
| $ | 560,000 |
|
Net UTB impacting the effective tax rate at December 31 |
| $ | 560,000 |
| $ | 560,000 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate from researchas of December 31, 2008, and development credits is higher than usual due to true-up adjustments.2007 are $560,000 for each year.
F-19
At December 31, 2008, and 2007, accrued interest and penalties on a gross basis were $115,000 for each year.
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 both basic and diluted income per share consisted of the following:
|
| Years ended December 31 |
| ||||
|
| 2005 |
| 2004 |
| 2003 |
|
Basic weighted average common shares outstanding during the year |
| 4,798,008 |
| 4,616,983 |
| 4,489,984 |
|
Weighted average common equivalent shares due to stock options |
| 462,561 |
| 377,628 |
| 0 |
|
Diluted weighted average common shares outstanding during the year |
| 5,260,569 |
| 4,994,611 |
| 4,489,984 |
|
Potential common shares of 93,047 were not included in the computation of diluted weighted average common shares outstanding for year ended December 31, 2003, because their inclusion would have been anti-dilutive. As a result, there are no differences between basic and diluted weighted average common shares outstanding for the year ended December 31, 2003.
|
| Years Ended December 31 |
| ||||
|
| 2008 |
| 2007 |
| 2006 |
|
Basic weighted average common shares outstanding during the year |
| 5,549,830 |
| 5,306,948 |
| 5,022,532 |
|
Weighted average common equivalent shares due to stock options |
| 712,836 |
| 554,472 |
| 548,536 |
|
Diluted weighted average common shares outstanding during the year |
| 6,262,666 |
| 5,861,420 |
| 5,571,068 |
|
The Company maintains a stock option plan to provideCompany’s 1993 Employee Stock Option Plan (“Employee Stock Option Plan”), which is stockholder approved, provides long-term rewards and incentives in the form of stock options to the Company’s key employees, officers, employee directors, consultants and advisors. The plan provides for either nonqualifiednon-qualified stock options or incentive stock options for the issuance of up to 1,550,000 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 nonqualifiednon-qualified stock options shall be determined by the Stock OptionCompensation Committee. These options expire over five- to ten-year periods.
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.options, except for options granted to officers, which may vest on a different schedule. At December 31, 2005,2008, there were 829,075634,375 options outstanding under the plan. TheseEmployee Stock Option Plan. Should stock options are not transferable except by will or domestic relations order.
Through July 15, 1998,be issued under the Employee Stock Option Plan in the future, the Company maintained a stock option plan covering non-employee directors (the “1993 Director Plan”). Effective July 15, 1998, withwill record compensation expense based upon the formation of the 1998 Director Stock Option Incentive Plan (“1998 Director Plan”), the 1993 Director Plan was frozen. The 1993 Director Plan provided for options for the issuance of up to 110,000 shares of common stock. On July 1 of each year, each individual who at the time was serving as a non-employee director of the Company received an automatic grant of options to purchase 2,500 shares of common stock. These options became exercisable in full six months after the date of grant and expire ten years from the date of grant. The exercise price was theintrinsic fair market value of the common stock on the date of grant. At December 31, 2005, there were 40,000 options, outstanding under the 1993 Director Plan.using a lattice-based option valuation model.
F-20
Effective July 15, 1998, the Company adopted the 1998 Director Stock Option
On April 18, 1998, the Company adopted the 1998 Stock Purchase Plan which provides that all employees of the Company who work more than twenty hours per week and more than five months in any calendar year and who are employees on or before the applicable offering period are eligible to participate. The 1998 Stock Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986. Under the Stock Purchase Plan, participants may have withheld up to 10% of their base salaries during the six month offering periods ending June 30 and December 31 for the purchase of the Company’s common stock at 85% of the lower of the market value of the common stock on the first or last day of the offering period. The 1998 Stock Purchase Plan provides for the issuance of up to 400,000 shares of common stock. To date, 277,180 shares have been issued.
In June 2003, the Company formally adopted the 2003 Equity Incentive Plan (the “Plan”). The Plan iswas originally intended to benefit the Company by offering equity-based incentives to certain of the Company’s executives and employees, thereby giving them a permanent stake in the growth and long-term success of the Company and encouraging the continuance of their involvement with the Company’s businesses. The Plan was amended effective June 4, 2008, to permit certain performance-based cash awards to be made under the Plan. The amendment
F-20
also added appropriate language so as to enable grants of stock-based awards under the Plan to continue to be eligible for exclusion from the $1,000,000 limitation on deductibility under Section 162(m) of the Internal Revenue Code (the “Code”). On February 21, 2008, the Board of Directors also changed the name of the Plan from the “2003 Equity Incentive Plan” to the “2003 Incentive Plan,” in part to reflect the amendment described above.
Two types of equity awards may be granted to participants under the Plan: restricted shares or other stock awards. Restricted shares are shares of common stock awarded subject to restrictions and to possible forfeiture upon the occurrence of specified events. Other stock awards are awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, shares of common stock. Such awards may include without limitation,Restricted Stock Unit Awards (“RSUs”), unrestricted or restricted stock, nonqualified options, performance shares, or stock appreciation rights. The Company determines the form, terms, and conditions, if any, of any awards made under the Plan. The maximum number of shares of common stock, in the aggregate, that may be delivered in payment or in respect of stock issued under the Plan is 500,0001,250,000 shares. To date 136,755
Through December 31, 2008, 436,679 shares of common stock have been issued.issued under the 2003 Incentive Plan, none of which have been restricted; an additional 352,000 shares are being reserved for outstanding grants of RSUs and other share-based compensation that are subject to various performance and time-vesting contingencies.
On April 18, 1998, the Company adopted the 1998 Stock Purchase Plan (the “Stock Purchase Plan”), which provided that all employees of the Company (who worked more than 20 hours per week and more than five months in any calendar year, and who were employees on or before the applicable offering period) were eligible to participate. The Stock Purchase Plan was intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986. Under the Stock Purchase Plan, participants could have had up to 10% of their base salaries withheld for the purchase of the Company’s Common Stock at 95% of the market value of the common stock on the last day of the offering period. The offering periods were from January 1 through June 30 and from July 1 through December 31 of each calendar year. The 1998 Stock Purchase Plan provides for the issuance of up to 400,000 shares of common stock. Through December 31, 2008, there were 305,866 shares issued under this plan. The Company no longer offers the plan to employees, and plans to dissolve the Stock Purchase Plan.
Through July 15, 1998, the Company maintained a stock option plan covering non-employee directors (the “1993 Director Plan”). Effective July 15, 1998, with the formation of the 1998 Director Stock Option Incentive Plan (the “1998 Director Plan”), the 1993 Director Plan was frozen. The 1993 Director Plan provided for options for the issuance of up to 110,000 shares of common stock. On July 1 of each year, each individual who at the time was serving as a non-employee director of the Company received an automatic grant of options to purchase 2,500 shares of common stock. These options became exercisable in full on the date of the grant and expire 10 years from the date of grant. The exercise price was the fair market value
F-21
of the common stock on the date of grant. At December 31, 2008, there were no options outstanding under the 1993 Director Plan.
Effective July 15, 1998, the Company adopted the 1998 Director Plan for the benefit of non-employee directors of the Company. The 1998 Director Plan provided for options for the issuance of up to 425,000 shares of common stock. On June 2, 2004, the Company amended the 1998 Director Plan to increase the allowable amount to 725,000 shares. On June 4, 2008, the Company further amended the Director Plan to increase the allowable amount to 975,000 shares. These options become exercisable in full at the date of grant and expire 10 years from the date of grant. In connection with the adoption of the 1998 Director Plan, the 1993 Director Plan was frozen; however, the options outstanding under the 1993 Director Plan were not affected by the adoption of the new plan. At December 31, 2008, there were 338,808 options outstanding under the 1998 Director Plan.
The following is a summary of stock option activity under all plans:
|
| Shares Under |
| Weighted Average |
|
| Shares Under |
| Weighted |
| Aggregate Intrinsic |
| |||
Outstanding at December 31, 2002 |
| 1,086,489 |
| $ | 2.54 |
| |||||||||
Outstanding December 31, 2005 |
| 1,375,546 |
| $ | 2.23 |
|
|
| |||||||
Granted |
| 380,125 |
| 1.15 |
|
| 64,877 |
| 5.86 |
|
|
| |||
Exercised |
| — |
| — |
|
| (255,614 | ) | 2.10 |
|
|
| |||
Cancelled or expired |
| (330,444 | ) | 3.21 |
|
| (28,750 | ) | 4.45 |
|
|
| |||
Outstanding December 31, 2003 |
| 1,136,170 |
| $ | 1.88 |
| |||||||||
Outstanding December 31, 2006 |
| 1,156,059 |
| $ | 2.40 |
|
|
| |||||||
Granted |
| 214,167 |
| 2.74 |
|
| 65,456 |
| 5.35 |
|
|
| |||
Exercised |
| (118,800 | ) | 2.04 |
|
| (117,707 | ) | 2.31 |
|
|
| |||
Cancelled or expired |
| (56,000 | ) | 3.08 |
|
| — |
| — |
|
|
| |||
Outstanding December 31, 2004 |
| 1,175,537 |
| $ | 1.97 |
| |||||||||
Outstanding December 31, 2007 |
| 1,103,808 |
| $ | 2.59 |
|
|
| |||||||
Granted |
| 305,759 |
| 3.08 |
|
| 41,769 |
| 10.90 |
|
|
| |||
Exercised |
| (86,875 | ) | 1.51 |
|
| (139,181 | ) | 2.39 |
|
|
| |||
Cancelled or expired |
| (18,875 | ) | 3.20 |
|
| (33,213 | ) | 2.68 |
|
|
| |||
Outstanding December 31, 2005 |
| 1,375,546 |
| $ | 2.23 |
| |||||||||
Outstanding December 31, 2008 |
| 973,183 |
| $ | 2.97 |
| $ | 2,536,931 |
| ||||||
Exercisable at December 31, 2008 |
| 935,308 |
| $ | 2.90 |
| $ | 2,498,662 |
| ||||||
Vested and expected to vest at December 31, 2008 |
| 973,183 |
| $ | 2.97 |
| $ | 2,536,931 |
|
There were 1,191,546 exercisable options as of December 31, 2005.F-22
The following is a summary of information relating to stock options outstanding and exercisable by price range as of December 31, 2005:2008:
|
| Options Outstanding |
| Options Exercisable |
|
| Options Outstanding |
| Options Exercisable |
| ||||||||||||||||
Range of |
| Outstanding |
| Weighted average |
| Weighted |
| Exercisable as |
| Weighted |
|
| Outstanding |
| Weighted average |
| Weighted |
| Exercisable as |
| Weighted |
| ||||
$0.00 - $0.99 |
| 81,575 |
| 4.1 |
| $ | 0.81 |
| 81,575 |
| $ | 0.81 |
|
| 50,000 |
| 3.1 |
| $ | 0.81 |
| 50,000 |
| $ | 0.81 |
|
$1.00 - $1.99 |
| 525,431 |
| 5.5 |
| 1.26 |
| 471,681 |
| 1.27 |
|
| 231,911 |
| 4.1 |
| 1.15 |
| 231,911 |
| 1.15 |
| ||||
$2.00 - $2.99 |
| 365,414 |
| 6.1 |
| 2.51 |
| 365,414 |
| 2.51 |
|
| 333,148 |
| 4.2 |
| 2.49 |
| 333,148 |
| 2.49 |
| ||||
$3.00 - $3.99 |
| 365,626 |
| 6.4 |
| 3.37 |
| 235,376 |
| 3.35 |
|
| 203,985 |
| 3.8 |
| 3.29 |
| 184,860 |
| 3.28 |
| ||||
$4.00 - $4.99 |
| 25,000 |
| 2.0 |
| 4.19 |
| 25,000 |
| 4.19 |
|
| 5,000 |
| 3.0 |
| 4.94 |
| 2,500 |
| 4.94 |
| ||||
$5.00 - $5.99 |
| — |
| — |
| — |
| — |
| — |
|
| 59,456 |
| 7.3 |
| 5.14 |
| 50,706 |
| 5.13 |
| ||||
$6.00 - $6.99 |
| 12,500 |
| 0.5 |
| 6.13 |
| 12,500 |
| 6.13 |
|
| 47,914 |
| 6.7 |
| 6.18 |
| 40,414 |
| 6.11 |
| ||||
$10.00 - $10.99 |
| 27,500 |
| 9.5 |
| 10.14 |
| 27,500 |
| 10.14 |
| |||||||||||||||
$12.00 - $12.99 |
| 14,269 |
| 9.4 |
| 12.37 |
| 14,269 |
| 12.37 |
| |||||||||||||||
|
| 1,375,546 |
| 5.7 |
| $ | 2.23 |
| 1,191,546 |
| $ | 2.14 |
|
| 973,183 |
| 4.6 |
| $ | 2.97 |
| 935,308 |
| $ | 2.90 |
|
During the years ended December 31, 2008, 2007, and 2006, the total intrinsic value of all options exercised (i.e., the difference between the market price and the price paid by the employees to exercise the options) was $929,281, $357,426, and $883,417, respectively, and the total amount of consideration received from the exercise of these options was $333,026, $272,214, and $520,701, respectively.
During the years ended December 31, 2008, 2007, and 2006, the Company recognized compensation expense related to stock options granted to directors and employees of $221,324, $211,050, and $235,382, respectively.
On February 8, 2008, the Company’s Compensation Committee approved the issuance of 25,000 shares of unrestricted common stock to the Company’s Chairman, Chief Executive Officer, and President under the 2003 Equity Incentive Plan. The shares were issued on December 31, 2008. Based upon the provisions of SFAS No. 123R, the Company has recorded compensation expense of $154,500 for the year ended December 31, 2008, based on the grant date price of $6.18 at February 8, 2008.
Beginning in 2006, RSUs have been granted under the 2003 Equity Incentive Plan to the executive officers of the Company. The stock unit awards are subject to various time-based vesting requirements, and certain portions of these awards are subject to performance criteria of the Company. Compensation expense on these awards is recorded based on the fair value of the award at the date of grant, which is equal to the Company’s stock price, and is charged to expense ratably during the service period. Upon vesting, RSUs are generally net-share settled to cover the required withholding tax, and the remaining amount is converted into an equivalent number of common shares. No compensation expense is taken on awards that do
F-23
not become vested, and the amount of compensation expense recorded is adjusted based on management’s determination of the probability that these awards will become vested. The following table summarizes information about stock unit award activity during the three-year period ended December 31, 2008:
|
| Restricted |
| Weighted Average |
| |
Outstanding at December 31, 2005 |
| — |
| $ | — |
|
Awarded |
| 144,000 |
| 6.15 |
| |
Shares distributed |
| — |
| — |
| |
Forfeited / Cancelled |
| — |
| — |
| |
Outstanding at December 31, 2006 |
| 144,000 |
| $ | 6.15 |
|
Awarded |
| 144,000 |
| 4.91 |
| |
Shares distributed |
| (16,000 | ) | 6.15 |
| |
Forfeited / Cancelled |
| — |
| — |
| |
Outstanding at December 31, 2007 |
| 272,000 |
| $ | 5.49 |
|
Awarded |
| 144,000 |
| 6.35 |
| |
Shares distributed |
| (43,680 | ) | 5.82 |
| |
Shares exchanged for cash |
| (20,320 | ) | 3.82 |
| |
Forfeited / Cancelled |
| — |
| — |
| |
Outstanding at December 31, 2008 |
| 352,000 |
| $ | 5.79 |
|
The Company recorded $929,965, $364,977, and $223,957 in compensation expense related to these RSUs during the years ended December 31, 2008, 2007, and 2006, respectively. The total fair value of RSUs that vested during 2008 and 2007, at vest date, was $659,100 and $83,040, respectively. No RSUs vested during 2006.
The following summarizes the future share-based compensation expense the Company will record as the equity securities granted through December 31, 2008, vest:
|
| Options |
| Common |
| Restricted |
| Total |
| ||||
2009 |
| $ | 42,403 |
| $ | — |
| $ | 560,325 |
| $ | 602,728 |
|
2010 |
| 22,682 |
| — |
| 330,620 |
| 353,302 |
| ||||
2011 |
| 11,082 |
| — |
| 164,678 |
| 175,760 |
| ||||
2012 |
| — |
| — |
| 17,884 |
| 17,884 |
| ||||
Total |
| $ | 76,167 |
| $ | — |
| $ | 1,073,507 |
| $ | 1,149,674 |
|
On January 13, 1999,March 18, 2009, the Company declared a dividend of one preferred share purchase right ( a(a “Right”) for each outstanding share of common stock, par value $0.01 per share on
F-22
February 5, 1999 March 20, 2009, to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Share”), of the Company, at a price of $30.00$25.00 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The rights expire on March 19, 2019.
F-24
The Company has aprovides discretionary supplemental retirement planbenefits for certain retired officers, which will provide an annual benefit to these individuals for various terms following separation from employment. The Company recorded an expense of approximately $42,000, $58,000,$27,000, $4,000, and $100,000$111,000 for the years ended December 31, 2005, 2004,2008, 2007, and 2003, respectively, in accordance with this plan, which includes both current costs and prior service costs for these individuals.2006, respectively. The present value of the supplemental retirement obligation has been calculated using an 8.5% discount rate. ProjectedTotal projected future cash payments for the years ending December 31, 20062009 through 20092012 are approximately $152,000, $147,000, $147,000, $144,000,$96,000, $101,000, $80,000, and $80,000, respectively, and approximately $106,000$280,000 thereafter.
(a) Leases –— The Company has non-cancelable operating leases for certain facilities that expire through 2011.2015. Certain of the leases contain escalation clauses whichthat require payments of additional rent, as well as increases in related operating costs. The Company also leases various equipment under capital leases whichthat expire through 2011.
Included in property, plant and equipment are the following amounts held under capital lease:
|
| December 31 |
| ||||
|
| 2005 |
| 2004 |
| ||
Equipment |
| $ | 3,188,398 |
| $ | 3,071,028 |
|
Less accumulated amortization |
| (680,831 | ) | (523,208 | ) | ||
|
| $ | 2,507,567 |
| $ | 2,547,820 |
|
F-23
|
| December 31 |
| ||||
|
| 2008 |
| 2007 |
| ||
Equipment |
| $ | 4,261,592 |
| $ | 4,261,592 |
|
Less accumulated depreciation |
| (2,996,045 | ) | (2,213,238 | ) | ||
|
| $ | 1,265,547 |
| $ | 2,048,354 |
|
Future minimum lease payments under noncancelable operating leases and the present value of future minimum lease payments under capital leases as of December 31, 2005,2008, are as follows:
Years ending December 31: |
| Capital |
| Operating |
| |||||||||
2006 |
| 788,056 |
| 1,633,102 |
| |||||||||
2007 |
| 765,203 |
| 1,575,872 |
| |||||||||
2008 |
| 724,765 |
| 614,506 |
| |||||||||
Years Ending December 31: |
| Capital |
| Operating |
| |||||||||
2009 |
| 586,217 |
| 405,915 |
|
| $ | 798,979 |
| $ | 1,445,505 |
| ||
2010 |
| 717,916 |
| 1,197,619 |
| |||||||||
2011 |
| 244,251 |
| 922,757 |
| |||||||||
2012 |
| — |
| 860,075 |
| |||||||||
Thereafter |
| 667,100 |
| 1,626,249 |
|
| — |
| 850,033 |
| ||||
Total minimum lease payments |
| $ | 3,531,341 |
| $ | 5,855,644 |
|
| $ | 1,761,146 |
| $ | 5,275,989 |
|
Less amount representing interest |
| 529,303 |
|
|
|
| 148,481 |
|
|
| ||||
Present value of future minimum lease payments |
| 3,002,038 |
|
|
|
| 1,612,665 |
|
|
| ||||
Less current installments of obligations under capital leases |
| 638,875 |
|
|
|
| 702,765 |
|
|
| ||||
Obligations under capital lease, excluding current installments |
| $ | 2,363,163 |
|
|
|
| $ | 909,900 |
|
|
|
(1) On January 30, 2009, these leases were paid in full.
F-25
Rent expense amounted to approximately $2,230,000, $2,153,000,$2,214,000, $2,464,000, and $2,126,000$2,375,000 in 2005, 2004,2008, 2007, and 2003,2006, respectively. Approximately $244,000, $244,000, and $244,000 in 2005, 2004 and 2003, respectively, was paid to United Development Company Limited ("UDT"), a real estate company of which the Company owns 26.32%, that owns the Decatur, Alabama, and Kissimmee, Florida, facilities. The 2005 rent expense incurred from "UDT" has been eliminated in consolidation.
In connection with the eight-year automotive program, the Company has purchased a new forming line for approximately $1.7 million in 2003, and a second similar forming line for approximately $1.9 million in 2004.
(b) Legal –— The Company is a defendant in various administrative proceedings that are being handled in the ordinary course of business. In the opinion of management of the Company, these suits and claims should not result in final judgments or settlements that, in the aggregate, would have a material adverse effect on the Company’s financial condition or results of operations.
The Company maintains a profit-sharing plan for eligible employees. Contributions to the Plan are made in the form of matching contributions to employee 401k deferrals as well as discretionary amounts determined by the Board of Directors, and amounted to approximately $451,000, $459,000,$703,000, $646,000, and $345,000$604,000, respectively, in 2005, 2004,2008, 2007, and 2003, respectively.2006.
F-24The Company has a partially self-insured health insurance program that covers all eligible participating employees. The maximum liability is limited by a stop loss of $100,000 per insured person, along with an aggregate stop loss determined by the number of participants.
During 2006, the Company established an Executive, Non-qualified “Excess” Plan (“the Plan”), which is a deferred compensation plan available to certain executives. The Plan permits participants to defer receipt of part of their current compensation to a later date as part of their personal retirement or financial planning. Participants have an unsecured contractual commitment by the Company to pay amounts due under the Plan. There is currently no security mechanism to ensure that the Company will pay these obligations in the future.
The compensation withheld from Plan participants, together with investment income on the Plan, is reflected as a deferred compensation obligation to participants, and is classified within accrued liabilities in the accompanying balance sheets. At December 31, 2008, the balance of the deferred compensation liability totaled approximately $368,000. The related assets, which are held in the form of a Company-owned, variable life insurance policy that names the Company as the beneficiary, are reported within other assets in the accompanying balance sheets, and are accounted for based on the underlying cash surrender values of the policies, and totaled approximately $362,000 as of December 31, 2008.
Financial instruments recorded at fair value in the balance sheets, or disclosed at fair value in the footnotes, are categorized below based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by SFAS No.157 and directly related to the amount of subjectivity associated with inputs to fair valuation of these assets and liabilities are as follows:
Level 1
Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. The assets valued and carried by the
F-26
Company using Level 1 inputs are our money market accounts and certificates of deposit. There are no liabilities valued and carried using Level 1 inputs.
Level 2
Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life. No assets or liabilities are currently valued based on Level 2 inputs.
Level 3
Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. These assets and liabilities are excluded from the initial adoption of SFAS No. 157.
Financial instruments that currently require disclosure under SFAS No. 157 consist of money market funds and certificates of deposit, which are both considered cash equivalents. Assets and liabilities measured at fair value on a recurring basis are categorized by the levels discussed above, and in the table below:
Cash Equivalents |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||
Money market funds |
| $ | 6,010,000 |
| $ | — |
| $ | — |
| $ | 6,010,000 |
| |
Certificates of deposit |
| $ | 200,000 |
| $ | — |
| $ | — |
| $ | 200,000 |
| |
Total |
| $ | 6,210,000 |
| $ | — |
| $ | — |
| $ | 6,210,000 |
| |
StatementOn January 18, 2008, the Company acquired 100% of Financial Accounting Standards No. 107, Disclosures About Fair Valuethe common stock of Financial Instruments, definesStephenson & Lawyer, Inc. (“S&L”), a Grand Rapids, Michigan-based foam fabricator, and its wholly-owned subsidiary, Patterson Properties Corporation. S&L was consolidated into the fair valueCompany’s financial statements effective as of financial instrumentsJanuary 1, 2008. S&L specializes in the fabrication of technical urethane foams, and brings to the Company access to this family of foams, modern manufacturing capabilities, and a seasoned management team. Including a purchase price of $7,225,000 plus transaction costs, the total acquisition cost was $7,325,000. The acquisition cost was allocated as the amount at which the instrument could be exchanged in a transaction between willing parties.follows:
Cash and cash equivalents |
| $ | 2,144,000 |
|
Accounts receivable |
| 1,737,000 |
| |
Inventories |
| 1,842,000 |
| |
Prepaids |
| 45,000 |
| |
Deferred tax assets |
| 182,000 |
| |
Property, plant and equipment |
| 2,620,000 |
| |
Current liabilities |
| (1,045,000 | ) | |
Other liabilities |
| (200,000 | ) | |
Purchase price |
| $ | 7,325,000 |
|
Cash and cash equivalents acquired |
| (2,144,000 | ) | |
Purchase price net of cash acquired |
| $ | 5,181,000 |
|
Cash and cash equivalents, accounts receivable, inventories, prepaid expenses, notes payable
F-27
The following table contains an unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2007, as if the S&L acquisition had occurred on January 1, 2007. No pro forma adjustments have been made to bank, accounts payable, and accrued expenses and payroll withholdings are stated at carrying amounts that approximate fair value becausethe comparative condensed consolidated statement of operation for the year ended December 31, 2008, since the S&L acquisition was effective as of the short maturitybeginning of those instruments.that year:
|
| Years Ended December 31 |
| ||||
|
| 2008 |
| 2007 |
| ||
|
|
|
| Unaudited |
| ||
Sales |
| $ | 110,031,601 |
| $ | 107,050,787 |
|
Operating income |
| 8,424,731 |
| 6,621,853 |
| ||
Net income |
| 5,116,000 |
| 3,804,315 |
| ||
Earnings per share: |
|
|
|
|
| ||
Basic |
| $ | 0.92 |
| $ | 0.72 |
|
Diluted |
| 0.82 |
| 0.65 |
|
Long-term debt
The above pro forma information is presented for illustrative purposes only and capital lease obligations are subject to interest rates currently offered tomay not be indicative of the Company; therefore,results of operations that would have actually occurred had the historical carrying amount approximates fair value.S&L acquisition occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.
On August 5, 2008, the Company committed to move forward with a plan to close its Macomb Township, Michigan, automotive plant and consolidate operations into its newly acquired 250,000-square-foot building in Grand Rapids, Michigan. Through December 31, 2008, the Company incurred restructuring charges of approximately $1.3 million in one-time, pre-tax expenses and committed to invest approximately $650,000 in building improvements in the Grand Rapids facility over a six-month transitional period. The Company expects annual cost savings of approximately $1.2 million as a result of the plant consolidation.
F-28
Through the year ended December 31, 2008, the Company has incurred the following expenses:
|
| Total cost |
| Cost incurred in |
| Cash |
| Non-cash item |
| Ending accrual |
| |||||
Macomb Township building improvement write-off |
| $ | 170,000 |
| $ | 170,000 |
| $ | — |
| $ | (170,000 | ) | $ | — |
|
Macomb Township building restoration |
| 50,000 |
| 56,000 |
| (56,000 | ) | — |
| — |
| |||||
Earned severance |
| 400,000 |
| 327,000 |
| (211,000 | ) | — |
| 116,000 |
| |||||
Moving and training |
| 780,000 |
| 762,000 |
| (562,000 | ) | — |
| 200,000 |
| |||||
Total |
| $ | 1,400,000 |
| $ | 1,315,000 |
| $ | (829,000 | ) | $ | (170,000 | ) | $ | 316,000 |
|
Through December 31, 2008, the Company has also funded $650,000 in related capitalized building improvements in the Grand Rapids facility.
The Company has adopted SFAS No. 131, Disclosures about“Disclosures About Segments of an Enterprise and Related Information.Information.”
The Company is organized based on the nature of the products and services that it offers. Under this structure, the Company produces products within two distinct segments;segments: Packaging and Component Products. Within the Packaging segment, the Company primarily uses polyethylene and polyurethane foams, sheet plastics, and pulp fiber to provide customers with cushion packaging for their products. Within the Component Products applications segment, the Company primarily uses cross-linked polyethylene foam to provide customers in the automotive, athletic, leisure and health and beauty industries with engineered product for numerous purposes.
The accounting policies of the segments are the same as those described in Note 1. Income taxes and interest expense have been allocated based on operating results and total assets employed in each segment.
Inter-segment transactions are uncommon and not material. Therefore, they have not been separately reflected in the financial table below. The totals of the reportable segments’ revenues, net profits, and assets agree with the Company’s comparable amountconsolidated amounts contained in the audited financial statements. Revenues from customers outside of the United States are not material.
The top customer in the Company'sCompany’s Component Products segment comprises 26%23% of that segment'ssegment’s total sales and 15%13% of the Company’s total sales for the year ended December 31, 2005. No one2008. The top customer accounted for more than 10%in the Company’s Packaging segment comprises 11% of that segment’s total sales and 5% of the Packaging segmentCompany’s total sales for the year ended December 31, 2005.
2008. The results for the Packaging segment include the resultsoperations of United Development Company Limited.
F-25F-29
Financial statement information by reportable segment is as follows:
2005 |
| Component |
| Packaging |
| Total |
| ||||||||||||
2008 |
| Component |
| Packaging |
| Total |
| ||||||||||||
Sales |
| $ | 48,218,839 |
| 35,743,618 |
| $ | 83,962,457 |
|
| $ | 60,847,533 |
| $ | 49,184,068 |
| $ | 110,031,601 |
|
Operating income (loss) |
| (601,839 | ) | 2,772,624 |
| 2,170,785 |
| ||||||||||||
Operating income |
| 3,076,360 |
| 5,348,371 |
| 8,424,731 |
| ||||||||||||
Total assets |
| 25,460,467 |
| 18,539,549 |
| 44,000,016 |
|
| 22,098,941 |
| 26,623,720 |
| 48,722,661 |
| |||||
Depreciation / amortization |
| 1,645,010 |
| 1,291,681 |
| 2,936,691 |
| ||||||||||||
Depreciation / Amortization |
| 1,820,239 |
| 1,156,311 |
| 2,976,550 |
| ||||||||||||
Capital expenditures |
| 35,485 |
| 1,074,510 |
| 1,109,995 |
|
| 1,053,622 |
| 1,709,628 |
| 2,763,250 |
| |||||
Interest expense |
| 582,266 |
| 459,448 |
| 1,041,714 |
|
| 139,586 |
| 194,707 |
| 334,293 |
| |||||
Goodwill |
| 4,463,246 |
| 2,017,791 |
| 6,481,037 |
|
| 4,463,246 |
| 2,017,791 |
| 6,481,037 |
|
2004 |
| Component |
| Packaging |
| Total |
| ||||||||||||
2007 |
| Component |
| Packaging |
| Total |
| ||||||||||||
Sales |
| $ | 36,135,175 |
| 32,488,923 |
| $ | 68,624,098 |
|
| $ | 53,782,483 |
| $ | 39,812,657 |
| $ | 93,595,140 |
|
Operating income |
| 967,616 |
| 1,176,793 |
| 2,144,409 |
|
| 4,767,544 |
| 2,479,810 |
| 7,247,354 |
| |||||
Total assets |
| 21,921,263 |
| 17,710,941 |
| 39,632,204 |
|
| 18,665,208 |
| 26,887,566 |
| 45,552,774 |
| |||||
Depreciation / amortization |
| 1,111,537 |
| 1,381,763 |
| 2,493,300 |
| ||||||||||||
Depreciation / Amortization |
| 1,875,488 |
| 939,533 |
| 2,815,021 |
| ||||||||||||
Capital expenditures |
| 1,343,254 |
| 828,446 |
| 2,171,700 |
|
| 309,600 |
| 1,790,984 |
| 2,100,584 |
| |||||
Interest expense |
| 375,822 |
| 337,829 |
| 713,651 |
|
| 174,171 |
| 305,000 |
| 479,171 |
| |||||
Goodwill |
| 4,463,246 |
| 2,017,791 |
| 6,481,037 |
|
| 4,463,246 |
| 2,017,791 |
| 6,481,037 |
|
2003 |
| Component |
| Packaging |
| Total |
| |||||||||||||
2006 |
| Component |
| Packaging |
| Total |
| |||||||||||||
Sales |
| $ | 31,264,862 |
| $ | 29,637,318 |
| $ | 60,902,180 |
|
| $ | 55,757,985 |
| $ | 37,991,254 |
| $ | 93,749,239 |
|
Operating loss |
| (451,112 | ) | (1,057,320 | ) | (1,508,432 | ) | |||||||||||||
Operating income |
| 2,833,743 |
| 2,220,439 |
| 5,054,182 |
| |||||||||||||
Total assets |
| 18,939,567 |
| 17,809,505 |
| 36,749,072 |
|
| 21,131,060 |
| 17,905,952 |
| 39,037,012 |
| ||||||
Depreciation / amortization |
| 1,077,602 |
| 1,628,790 |
| 2,706,392 |
| |||||||||||||
Depreciation / Amortization |
| 1,933,949 |
| 1,125,753 |
| 3,059,702 |
| |||||||||||||
Capital expenditures |
| 750,280 |
| 490,069 |
| 1,240,349 |
|
| 911,032 |
| 604,501 |
| 1,515,533 |
| ||||||
Interest expense |
| 381,832 |
| 401,840 |
| 783,672 |
|
| 493,534 |
| 470,448 |
| 963,982 |
| ||||||
Goodwill |
| 4,463,246 |
| 2,017,791 |
| 6,481,037 |
|
| 4,463,246 |
| 2,017,791 |
| 6,481,037 |
|
F-26F-30
|
| Q1 |
| Q2 |
| Q3 |
| Q4 |
|
| Q1 |
| Q2 |
| Q3 |
| Q4 |
| |||||||||
Year ended 12/31/2004 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Year Ended December 31, 2008 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Net sales |
| $ | 15,934,254 |
| $ | 16,827,393 |
| $ | 17,657,812 |
| $ | 18,204,639 |
|
| $ | 28,008,036 |
| $ | 28,456,090 |
| $ | 27,501,379 |
| $ | 26,066,096 |
| |
Gross profit |
| 3,242,182 |
| 3,661,094 |
| 3,217,685 |
| 3,850,460 |
|
| 6,888,126 |
| 7,627,616 |
| 7,410,354 |
| 6,636,966 |
| |||||||||
Net income |
| 53,963 |
| 216,292 |
| 190,473 |
| 410,533 |
|
| 1,148,141 |
| 1,574,222 |
| 1,247,285 |
| 1,146,352 |
| |||||||||
Basic net income per share |
| 0.01 |
| 0.05 |
| 0.04 |
| 0.09 |
|
| 0.21 |
| 0.29 |
| 0.22 |
| 0.20 |
| |||||||||
Diluted net income per share |
| 0.01 |
| 0.04 |
| 0.04 |
| 0.08 |
|
| 0.19 |
| 0.25 |
| 0.20 |
| 0.19 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Year ended 12/31/2005 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Year Ended December 31, 2007 |
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Net sales |
| $ | 18,191,891 |
| $ | 20,917,802 |
| $ | 21,649,267 |
| $ | 23,203,497 |
|
| $ | 22,012,636 |
| $ | 23,180,140 |
| $ | 22,937,289 |
| $ | 25,465,075 |
| |
Gross profit |
| 3,622,964 |
| 4,126,323 |
| 3,087,184 |
| 3,764,829 |
|
| 4,599,482 |
| 5,784,955 |
| 5,302,277 |
| 7,123,440 |
| |||||||||
Net income |
| 85,402 |
| 314,189 |
| (148,531 | ) | 408,031 |
|
| 521,420 |
| 976,967 |
| 883,279 |
| 1,777,435 |
| |||||||||
Basic net income per share |
| 0.02 |
| 0.07 |
| (0.03 | ) | 0.08 |
|
| 0.10 |
| 0.18 |
| 0.17 |
| 0.33 |
| |||||||||
Diluted net income per share |
| 0.02 |
| 0.06 |
| (0.03 | ) | 0.08 |
|
| 0.09 |
| 0.17 |
| 0.15 |
| 0.30 |
|
On March 12, 2009, the Company purchased certain assets (inventory and equipment) of the Hillsdale, Michigan, operations of Foamade Industries, Inc. The Company anticipates that the integration of these assets will be completed within six months, including potentially moving them to the Company’s facility in Grand Rapids, Michigan. We have not completed our analysis of the acquisition date fair value of total consideration transferred compared to the acquisition date fair value of the assets and liabilities acquired in this transaction.
F-27F-31
UFP TECHNOLOGIES, INC.
Consolidated Financial Statement Schedule
Valuation and Qualifying Accounts
Years ended December 31, 2005, 2004,2008, 2007, and 20032006
Accounts receivable, allowance for doubtful accounts:
|
| 2005 |
| 2004 |
| 2003 |
|
| 2008 |
| 2007 |
| 2006 |
| ||||||
Balance at beginning of year |
| $ | 543,317 |
| $ | 475,625 |
| $ | 575,406 |
|
| $ | 307,131 |
| $ | 340,977 |
| $ | 565,171 |
|
Provision charged to expense |
| 85,140 |
| 165,284 |
| (121,795 | ) | |||||||||||||
Write-offs and recoveries |
| (63,286 | ) | (97,592 | ) | 22,014 |
| |||||||||||||
Provision (Recoveries) credited to expense |
| 64,320 |
| 58,025 |
| (36,292 | ) | |||||||||||||
(Write-offs) and recoveries |
| 15,586 |
| (91,871 | ) | (187,902 | ) | |||||||||||||
Balance at end of year |
| $ | 565,171 |
| $ | 543,317 |
| $ | 475,625 |
|
| $ | 387,037 |
| $ | 307,131 |
| $ | 340,977 |
|
Inventory allowance for obsolescence:
|
| 2005 |
| 2004 |
| 2003 |
|
| 2008 |
| 2007 |
| 2006 |
| ||||||
Balance at beginning of year |
| $ | 304,273 |
| $ | 270,289 |
| $ | 317,479 |
|
| $ | 295,405 |
| $ | 240,820 |
| $ | 262,154 |
|
Provision charged to expense |
| 177,440 |
| 175,929 |
| 174,500 |
| |||||||||||||
Provision |
| 344,842 |
| 243,141 |
| 300,673 |
| |||||||||||||
Write-offs |
| (219,559 | ) | (141,945 | ) | (221,690 | ) |
| — |
| (188,556 | ) | (322,007 | ) | ||||||
Balance at end of year |
| $ | 262,154 |
| $ | 304,273 |
| $ | 270,289 |
|
| $ | 640,247 |
| $ | 295,405 |
| $ | 240,820 |
|
* * *
F-28F-32