-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G9792W7KIAUZCpAjtI1g+mQB1RdHl+OCGnG4mADz/86MVROYDJ/c280pL7SjF4MJ QLc7mAjb5kknRosXpdwsRQ== 0000912057-01-008196.txt : 20010327 0000912057-01-008196.hdr.sgml : 20010327 ACCESSION NUMBER: 0000912057-01-008196 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UFP TECHNOLOGIES INC CENTRAL INDEX KEY: 0000914156 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS FOAM PRODUCTS [3086] IRS NUMBER: 042314970 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12648 FILM NUMBER: 1578876 BUSINESS ADDRESS: STREET 1: 172 EAST MAIN ST CITY: GEORGETOWN STATE: MA ZIP: 01833 BUSINESS PHONE: 5083522200 MAIL ADDRESS: STREET 1: 172 EAST MAIN ST CITY: GEORGETOWN STATE: MA ZIP: 02135 10-K 1 a2042896z10-k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For fiscal year ended DECEMBER 31, 2000 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to ____________. Commission File Number : 001-12648 UFP TECHNOLOGIES, INC. (Exact Name of Company as Specified in Its Charter) DELAWARE 04-2314970 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 172 EAST MAIN STREET, GEORGETOWN, MASSACHUSETTS - USA 01833-2107 - ----------------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (978) 352-2200 (Company's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Preferred Share Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No____ Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. [ ] The aggregate market value of the registrant's Common Stock, $.01 par value, held by non-affiliates of the registrant as of March 19, 2001, was $3,984,225 based on the closing price of $1.75 on that date on the Nasdaq National Market. As of March 19, 2001, 4,192,733 shares of the registrant's Common Stock, $.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement involving the election of directors at the registrant's 2001 annual meeting of stockholders, which is expected to be filed within 120 days after the end of the registrant's fiscal year, are incorporated by reference in Part III of this report. PART I This report contains certain statements that are "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995 (the "Act") and releases issued by the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "intend", "estimate" and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Examples of these risks, uncertainties, and other factors include, without limitation, the following: (i) economic conditions that affect sales of the products of the Company's packaging customers, (ii) actions by the Company's competitors and the ability of the Company to respond to such actions, (iii) the ability of UFP Technologies, Inc. (the "Company" or "UFPT") to obtain new customers and (iv) the ability of the Company to execute favorable acquisitions. In addition to the foregoing, the Company's actual future results could differ materially from those projected in the forward-looking statements as a result of 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. ITEM 1. BUSINESS The Company designs and manufactures a broad range of high-performance cushion packaging, including 100% recycled molded fiber packaging products for a variety of industrial and consumer markets. The Company also designs and manufactures specialty foam products. The Company is a leading U.S. manufacturer of custom-designed cushion foam packaging products and engineered specialty foam and laminated products. Effective January 14, 2000, the Company purchased all of the outstanding common stock of Simco Industries, Inc. ("Simco"), located in Roseville, Michigan. Simco is a full-service supplier of automotive trim components using its patented Superformed(R) process. This acquisition provides the Company with a key QS 9000 Detroit area location to service its automotive customers as well as advanced molding capabilities. Effective November 30, 1998, the Company purchased substantially all of the assets of Pacific Foam Technologies, Inc. ("Pacific Foam"), based in Ventura, California. Pacific Foam designs and manufactures a line of specialty foam products for the health and beauty industry. This acquisition provides the Company with a strategic west coast presence as well as an attractive niche market. Effective January 1, 1997, the Company acquired substantially all of the properties and net assets of Foam Cutting Engineers, Inc. ("FCE"). FCE is engaged in the business of designing and manufacturing engineered foam plastics for packaging and specialty applications, and is based in the Chicago suburb of Addison, Illinois. This acquisition expands the Company's geographic reach of its foam plastics business to the strategically important region of the Midwest. The Company's high-performance cushion packaging products are made primarily from polyethylene and polyurethane foams, and a wide range of sheet plastics. These products are custom designed and fabricated or molded to provide protection for fragile and valuable items, and are sold primarily to original equipment and component manufacturers in the computer, electronics, telecommunications, industrial, medical and pharmaceutical markets. Molded fiber products are made primarily from 100% recycled paper, principally derived from waste newspaper. These products are custom designed, engineered and molded into shapes for packaging high volume consumer goods, including computer components, medical devices and other light electronics. In addition to packaging products, the Company fabricates and molds specialty products made from cross-linked polyethylene foam and other materials. The Company also laminates fabrics and other materials to cross-linked polyethylene foams, polyurethane foams and other substrates. The Company's specialty products include door panels and other interior automotive components, athletic and industrial safety belts, components for medical diagnostic equipment, nail files and other beauty aids, and shock absorbing inserts used in athletic and leisure footwear. The Company was incorporated in Massachusetts under the name United Packaging Corporation in 1963. The Company changed its name to United Foam Plastics Corporation in 1973 and to UFP Technologies, Inc. in October 1993. In November 1993, the Company reincorporated in Delaware. In December 1993, the Company completed an initial public offering of its Common Stock and acquired Moulded Fibre Technology, Inc. ("MFT"). Unless the context otherwise requires, the term "Company" or "UFPT" reflects the re-incorporation of UFP Technologies, Inc. and refers to UFP Technologies, Inc. and its subsidiaries, MFT and Simco. The Company's principal offices are located at 172 East Main Street, Georgetown, Massachusetts 01833, and its telephone number is (978) 352-2200. MARKET OVERVIEW PACKAGING PRODUCTS. The interior cushion packaging market is characterized by three primary sectors: (1) custom fabricated or molded products for low volume, high fragility products; (2) molded or die-cut products for high volume, industrial and consumer goods; and (3) loose fill and commodity packaging materials for products which do not require custom-designed packaging. Packaging products are used to contain, display and/or protect their contents during shipment, handling, storage, marketing and use. The Company serves both the low volume, high fragility market and the high volume industrial and consumer market with a range of product offerings but does not serve the loose fill and commodity packaging market. The low volume, high fragility market is generally characterized by annual production volumes of less than 50,000 pieces. Typical goods in this market include precision instruments, medical devices, sensitive electronic components and other high value industrial products that are very sensitive to shock, vibration and other damage that may occur during shipping and distribution. The principal materials used to package these goods include polyethylene and polyurethane foams, foam-in-place polyurethane and molded expanded polystyrene. Polyurethane foams and polyethylene foams have high shock absorbency, high resiliency and vibration damping characteristics. The higher volume consumer packaging market is generally characterized by annual production volumes in excess of 50,000 pieces. Typical goods in this market include toys, light electronics, computers and computer peripherals, stereo equipment and small appliances. These goods generally do not require as high a level of shock and vibration protection as goods in the low volume, high fragility market. The principal materials used to package these goods include various molded, rigid and foamed plastics, such as expanded polystyrene foam (EPS), vacuum-formed polystyrene (PS) and polyvinyl chloride (PVC), and corrugated die-cut inserts, which generally are less protective and less expensive than resilient foams and molded fiber. The Company believes that molded fiber is increasingly being used as an alternative medium to these materials. SPECIALTY PRODUCTS. Specialty applications of foam and other types of plastics are numerous and diverse. Examples of uses of specialty foam products include automotive interior components, medical devices, toys, gaskets and carrying cases. Cross-linked polyethylene foams have many of the same properties as traditional polyethylene foams, including light weight, durability, resiliency and flexibility. Cross-linked foams also have many advantages over traditional foams, including the ability to be thermoformed (molded), availability in vibrant colors, a fine cell structure providing improved esthetics and lower abrasiveness, and enhanced resistance to chemicals and ultraviolet light. Certain grades of cross-linked foams can be radiation sterilized and have been approved by the U.S. Food and Drug Administration for open wound skin contact. Cross-linked foam can also be combined with other materials to increase product usages and market applications. For example, cross-linked foams can be laminated to fabrics to produce light weight, flexible and durable insoles for athletic and walking shoes, weight lifting and industrial safety belts, gun holsters, backpacks, and other products for the leisure, athletic and retail markets. The Company believes that, as a result of their many advantages, cross-linked foam and cross-linked foam laminated products are being used in a wide range of markets as substitutes for traditional rubber, leather and other product material alternatives. REGULATORY CLIMATE The packaging industry has been subject to user, industry, and legislative pressure to develop environmentally responsible packaging alternatives that reduce, reuse and recycle packaging materials. Government authorities have enacted legislation relating to source reduction, specific product bans, recycled content, recyclability requirements and "green marketing" restrictions. In order to provide packaging that complies with all regulations regardless of a product's destination, manufacturers seek packaging materials that meet both environmentally related demands and performance specifications. Some packaging manufacturers have responded by: reducing product volume and ultimate waste product disposal through reengineering traditional packaging products; adopting new manufacturing processes; participating in recovery and reuse systems for resilient materials that are inherently reusable; creating programs to recycle packaging following its useful life; and developing materials that use a high percentage of recycled content in their manufacture. PRODUCTS The Company's products include foam, plastic, and fiber packaging products, and specialty foam products. PACKAGING PRODUCTS The Company designs, manufactures and markets a broad range of packaging products primarily using polyethylene, polyurethane and cross-linked polyethylene foams and rigid plastics. These products are custom designed and fabricated or molded to provide protection for less durable, higher value items, and are primarily sold to original equipment and component manufacturers in the computer, electronics, telecommunications, industrial, medical and pharmaceutical markets. Examples of the Company's packaging products include end-cap packs for computers, corner blocks for telecommunications consoles, anti-static foam packs for printed circuit boards, die-cut inserts for attache cases and plastic trays for medical devices and components. Markets for these products are typically characterized by lower to moderate volumes where performance, such as shock absorbency and vibration damping, is valued. The Company's engineering personnel collaborate directly with customers to study and evaluate specific customer requirements. Based on the results of this evaluation, packaging products are engineered to customer specifications using various types and densities of materials with the goal of providing the desired protection for the lowest cost and with the lowest package volume. The Company believes that its engineering expertise and breadth of product and manufacturing capabilities have enabled it to provide unique solutions to achieve these goals. The markets for the Company's molded fiber packaging and vacuum-formed trays are characterized by high volume production runs and require rapid manufacturing turnaround times. Raw materials used in the manufacture of molded fiber are primarily recycled newspaper, a variety of other grades of recycled paper and water. Raw materials used in vacuum-formed plastics include polystyrene (PS) and polyvinyl chloride (PVC). These products compete with expanded polystyrene (EPS) and manually assembled corrugated die-cut inserts. Sales of these products have been to the computer, consumer electronics and medical industries. The Company's molded fiber products provide customers with packaging solutions that are more responsive to stringent environmental packaging regulations worldwide and meet the rising demands of environmentally-aware consumers, while simultaneously meeting customer cost and performance objectives. SPECIALTY FOAM PRODUCTS The Company specializes in engineered products that use the Company's close tolerance manufacturing capabilities and its expertise in various foam materials and lamination techniques, as well as the Company's ability to manufacture in clean room environments. The Company's specialty products are sold primarily to customers in the automotive, sporting goods, medical, beauty, leisure and footwear industries. These products include components for automobiles and medical diagnostic equipment, abrasive nail files and anti-fatigue mats, and shock absorbing inserts used in athletic and leisure footwear. The Company believes that it is one of the largest purchasers of cross-linked foam in the United States and as a result it has been able to establish important relationships with the relatively small number of suppliers of this product. Through its strong relationships with cross-linked foam suppliers, the Company believes that it is able to offer customers a wide range of cross-linked foam products. The Company also benefits from its ability to custom design its own proprietary manufacturing equipment in conjunction with its machinery suppliers. For example, the Company has custom designed its own flame lamination manufacturing machines allowing the Company to achieve adhesive bonds between cross-linked foam and fabric and other materials that do not easily combine. These specialty laminates typically command higher prices than traditional foam products. MARKETING AND SALES The Company markets and sells its packaging and specialty products in the United States principally through direct regional sales forces comprised of skilled engineers. The Company also uses independent manufacturer representatives on a limited basis to sell its products in regions where it does not have coverage. The Company's sales engineers collaborate with customers and the Company's design and manufacturing experts to develop custom engineered solutions on a cost-effective basis. The Company also markets its products through attendance by in-house market specialists at trade shows and expositions. The Company believes that its sales are somewhat seasonal, with increased sales in the second half of the year. With the addition of Pacific Foam, the Company now markets a line of products to the health and beauty industry. These products are sold primarily through distributors. Internationally, the Company is seeking to establish exclusive licensing arrangements for the manufacture and distribution of its molded fiber product line with foreign companies for designated territories. The Company has entered into a license agreement with Hong Kong-based Starlite Holdings, covering Guandong Province, mainland China and Hong Kong, and United Kingdom-based Rexam PLC covering the United Kingdom and Ireland. Under these arrangements the manufacturer must pay the Company a lump sum royalty in exchange for the requisite equipment for production of molded fiber products and, thereafter, a continuing royalty for the right to manufacture and distribute molded fiber products in their respective territories. Starlite completed installation of the Company's equipment and commenced operations in January 1997. Rexam entered into its license agreement with the Company and began production under that license in January 1997. MANUFACTURING The Company's manufacturing operations consist primarily of cutting, molding, vacuum forming, laminating and assembly. For custom molded foam products, the Company's skilled engineering personnel analyze specific customer requirements to design and build prototype products to determine product functionality. Upon customer approval, prototypes are converted to final designs for commercial production runs. Molded cross-linked foam products are produced in a thermoforming process using heat, pressure, and precision metal tooling. Cushion foam packaging products that are not cross-linked are fabricated by cutting shapes from blocks of foam using specialized cutting tools, routers and hot wire equipment and assembling these shapes into the final product using a variety of foam welding or gluing techniques. Products can be used on a stand-alone basis or bonded to another foam product or other material such as a corrugated medium. Laminated products are produced through a process whereby the foam medium is heated to the melting point. The heated foam is then typically bonded to a non-foam material through the application of mechanical pressure. Molded fiber products are manufactured by vacuum forming a pulp of recycled or virgin paper materials onto custom engineered molds. With the application of vacuum and air, the molded parts are pressed and transferred to an in-line conveyorized dryer, from which they exit ready for packing or subsequent value added operations. The Company does not manufacture any of the raw materials used in its products. With the exception of certain grades of cross-linked foam, these raw materials are available from multiple supply sources. Although the Company relies upon a limited number of suppliers for cross-linked foam, the Company's relationships with such suppliers are good, and the Company expects that these suppliers will be able to meet the Company's requirements for cross-linked foam. Any delay or interruption in the supply of raw materials could have a material adverse effect on the Company's business. RESEARCH AND DEVELOPMENT The Company's engineering personnel continually explore design and manufacturing techniques to meet the unique demands and specifications of its customers. In addition, the Company regularly undertakes customer-initiated engineering feasibility studies for which the Company is compensated regardless of whether such projects result in commercial production contracts. Because the Company's products tend to have short life cycles, research and development is an integral part of the Company's ongoing cost structure. COMPETITION The packaging products industry is highly competitive. While there are several national companies that sell interior packaging, the Company's primary competition to date for its packaging products has been from smaller independent regional manufacturing companies. These companies generally market their products in specific geographic areas from neighboring facilities. In addition, the Company's foam and fiber packaging products compete against products made from alternative materials, including expanded polystyrene foams, die-cut corrugated, plastic peanuts, plastic bubbles and foam-in-place urethane. Competition in the engineered specialty foam products industry is also intense. The Company's specialty foam products face competition primarily from smaller companies that typically concentrate on production of specialty products for specific industries. The Company expects that additional companies will enter the market for engineered specialty foam products as the market expands. The Company believes that its engineering expertise, its ability to combine foams with other materials such as plastics and laminates, and its ability to manufacture products in a clean room environment will enable it to continue to compete effectively in the engineered specialty foam products market. The Company's specialty products also compete with products made from a wide range of other materials, including rubber, leather and other foams. The Company believes that its customers typically select vendors based primarily on price, product performance, product reliability and customer service. The Company believes that it is able to compete effectively with respect to these factors in each of its targeted markets. PATENTS AND OTHER PROPRIETARY RIGHTS The Company relies upon trade secret and patent protection to protect its technology. The Company believes that the improvement of existing products, reliance upon trade secrets, unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. Nevertheless, the Company has obtained patents and may continue to make efforts to obtain patents, when available, although there can be no assurance that any patent obtained will provide substantial protection or be of commercial benefit to the Company, or that its validity will be upheld if challenged. The Company has two U.S. patents relating to its molded fiber technology (including certain proprietary machine designs) and has patent applications pending with respect to such technology in certain foreign countries and international patent offices. The Company also has U.S. patents relating to its foam and packaging technologies (four), rubber mat technologies, patterned nail file technologies, and superforming processes (two). There can be no assurance that any of the Company's patent applications will be granted, or that any patent or patent application of the Company will provide significant protection for the Company's products and technology, or will not be challenged or circumvented by others. The expiration dates for the Company's patents range from February 2003 through October 2017. The Company has licensed its molded fiber patents and technology on an exclusive basis to Rexam in the United Kingdom and Starlite in China, covering the manufacture and sale of molded fiber products in the United Kingdom, Ireland, China and certain other Asian countries. See "Marketing and Sales." ENVIRONMENTAL CONSIDERATIONS In addition to offering molded fiber packaging products made from recycled paper derived primarily from post-consumer newspaper waste, the Company actively promotes its philosophy of reducing product volume and resulting post-user product waste. The Company designs products to provide optimum performance with minimum material. In addition, the Company actively participates in a recovery and reuse program for certain of its plastic packaging products. The Company is aware of public opposition to environmentally incompatible packaging, and other products and that future government action may impose restrictions affecting the industry in which the Company operates. There can be no assurance that any such action will not adversely impact the Company's products and business. BACKLOG The Company's backlog as of February 16, 2001, and February 16, 2000 totaled approximately $7.4 million and $8.7 million, respectively, for the Packaging segment, and $5.9 million and $4.5 million respectively for the Specialty segment. The backlog consists of purchase orders for which a delivery schedule within the next twelve months has been specified by customers. Orders included in the backlog may be canceled or rescheduled by customers without significant penalty. The backlog as of any particular date should not be relied upon as indicative of the Company's revenues for any period. EMPLOYEES As of February 23, 2001, the Company had a total of 609 full-time employees in both the Specialty segment (18 in engineering, 229 in manufacturing operations, 19 in marketing, sales and support services, and 30 in general and administration) and in the Packaging segment (23 in engineering, 235 in manufacturing, 26 in marketing, sales and support services, and 29 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 2. PROPERTIES The following table presents certain information relating to each of the Company's properties:
- --------------------------------------------------------------------------------------------------------------------------- LEASE SQUARE EXPIRATION LOCATION FEET DATE PRINCIPAL USE - --------------------------------------------------------------------------------------------------------------------------- Georgetown, Massachusetts(5) 54,000 (owned Headquarters, fabrication, molding, test lab, clean-room, by the and engineering for Specialty segment Company) - --------------------------------------------------------------------------------------------------------------------------- Memphis, Tennessee 11,225 8/1/03 Warehousing for Packaging segment - ---------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- Decatur, Alabama(1 + 4) 47,250 12/31/01 Fabrication and engineering for Packaging segment - --------------------------------------------------------------------------------------------------------------------------- Pawcatuck, Connecticut 39,000 12/31/01 Fabrication and engineering for Packaging segment - --------------------------------------------------------------------------------------------------------------------------- Kissimmee, Florida(1 + 4) 49,400 12/31/01 Fabrication, molding, test lab, and engineering for Packaging segment - --------------------------------------------------------------------------------------------------------------------------- Atlanta, Georgia 55,530 10/31/04 Fabrication, molding and engineering for Specialty segment - --------------------------------------------------------------------------------------------------------------------------- Haverhill, Massachusetts 48,772 2/28/03 Flame lamination for Specialty segment - --------------------------------------------------------------------------------------------------------------------------- Raritan, New Jersey 72,125 2/28/03 Fabrication, molding, test lab, clean-room, and engineering for Packaging segment - --------------------------------------------------------------------------------------------------------------------------- Visalia, California 37,632 1/1/07 Molded fiber operations and engineering for Packaging segment - --------------------------------------------------------------------------------------------------------------------------- Scarborough, Maine 29,768 5/31/01 Molded fiber operations and engineering for Packaging segment - --------------------------------------------------------------------------------------------------------------------------- Clinton, Iowa(2) 62,000 9/1/06 Molded fiber operations for Packaging segment - --------------------------------------------------------------------------------------------------------------------------- Addison, Illinois(3) 45,000 07/31/02 Fabrication and engineering for Packaging segment - --------------------------------------------------------------------------------------------------------------------------- Ventura, California 32,546 10/31/01 Fabrication and engineering for Specialty segment - --------------------------------------------------------------------------------------------------------------------------- Macomb Township, Michigan(4) 70,703 12/31/07 Fabrication and engineering for Specialty segment - ---------------------------------------------------------------------------------------------------------------------------
1 United Development Company Limited, a Florida limited partnership and an affiliate of certain officers, directors and stockholders of the Company, is the lessor of these properties. 2 The Company has an option to extend the term of this lease for a period of five years. 3 The Company has two options to extend the term of this lease for periods of two years. 4 The Company has an option to extend the term of this lease for a period of three years. 5 Subject to mortgage (see Note 7 of the Notes to the Consolidated Financial Statements). ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE TO SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET PRICE The Company's Common Stock, $.01 par value (the "Common Stock"), was listed on the Nasdaq Small Cap Market under the symbol "UFPT" and on the Boston Stock Exchange under the symbol "UFP" from December 17, 1993 to July 8, 1996. Thereafter, the Company's Common Stock has been listed on the Nasdaq National Market. The following table sets forth the range of high and low quotations for the Common Stock as reported by Nasdaq for the quarterly periods from January 1, 1999 to December 31, 2000:
HIGH LOW ---- ---- FISCAL YEAR ENDED DECEMBER 31, 1999 First Quarter $ 4-1/2 $ 3 Second Quarter 4-1/2 3-3/8 Third Quarter 3-15/16 3-3/16 Fourth Quarter 3-1/2 2-1/4 FISCAL YEAR ENDED DECEMBER 31, 2000 First Quarter $ 3-5/8 $ 2-1/4 Second Quarter 3-1/2 2-3/8 Third Quarter 3 1-3/4 Fourth Quarter 2-1/4 1-1/4
NUMBER OF STOCKHOLDERS As of February 23, 2001, there were 127 holders of record of the Company's Common Stock. DIVIDENDS The Company did not pay any dividends in 2000. 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 and does not anticipate paying any cash dividends in the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31 ---------------------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA:(1) 2000 1999 1998 1997 1996 ------ ---- ---- ---- ---- Net sales $ 74,492 58,801 47,220 45,452 39,359 Gross profit 17,621 14,862 13,080 12,252 9,912 Operating income 3,385 3,279 3,174 2,934 2,094 Net income 1,081 1,693 1,647 1,309 1,262 Diluted earnings per share $ 0.25 0.35 0.34 0.27 0.26 Weighted average number of diluted shares 4,386 4,896 4,830 4,863 4,874 outstanding
DECEMBER 31 ----------- CONSOLIDATED BALANCE SHEET DATA:(1) 2000 1999 1998 1997 1996 ------ ---- ---- ---- ---- Working capital $ 4,139 3,549 2,099 2,579 2,488 Total assets 40,352 31,867 29,949 25,195 22,900 Short-term debt and capital lease 6,084 6,011 5,060 3,525 2,455 obligations Long-term debt and capital lease obligations, 7,589 2,706 2,123 3,233 3,223 excluding current portion Total liabilities 22,825 15,659 14,053 11,062 10,170 Stockholders' equity $ 17,527 16,208 15,895 14,133 12,729
(1) See Note 17 of Notes to Consolidated Financial Statements for segment information ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains certain statements that are "forward-looking statements" as that term is defined under the Act and releases issued by the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "intend", "estimate" and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Examples of these risks, uncertainties, and other factors include, without limitation, the following: (i) economic conditions that affect sales of the products of the Company's packaging customers, (ii) actions by the Company's competitors and the ability of the Company to respond to such actions, (iii) the ability of the Company to obtain new customers and (iv) the ability of the Company to execute favorable acquisitions. In addition to the foregoing, the Company's actual future results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth elsewhere in this report and changes in general economic conditions, interest rates and the assumptions used in making such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. For example, the Company's largest customer in the specialty foam products segment informed the Company that it no longer required the Company's products because the customer could satisfy its need internally. This customer accounts for approximately $5.5 million in annual revenues. The Company cannot guarantee that it will find alternative sources for that lost revenue in fiscal 2001. In planning for expected reduced demand in this segment during 2001, the Company has taken steps to reduce its expense levels. Despite these efforts, the Company believes its net income will be adversely affected. RESULTS OF OPERATIONS The following table sets forth, for the years indicated, the percentage of revenues represented by the items as shown in the Company's consolidated statements of operations:
YEARS ENDED DECEMBER 31 ----------------------- 2000 1999 1998 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of sales 76.3 74.7 72.3 ----- ----- ----- Gross margin 23.7 25.3 27.7 Selling, general and administrative expenses 19.1 19.7 21.0 ----- ----- ----- Operating income 4.6 5.6 6.7 Total other expenses, net 1.9 0.8 0.8 ----- ----- ----- Income before income taxes 2.7 4.8 5.9 Provision for income taxes 1.2 1.9 2.4 ----- ----- ----- Net income 1.5 2.9 3.5 ===== ===== =====
2000 COMPARED TO 1999: The Company's net sales increased 26.7% to $74.5 million for the year ended December 31, 2000. Specialty segment sales increased 54.4% to $39.3 million, primarily due to the acquisition of Simco in January 2000. Packaging segment sales increased 5.5% to $35.2 million, primarily due to growth in plastic thermoformed packaging as well as tool control programs. Gross profit as a percentage of sales decreased to 23.7% for the year ended December 31, 2000, from 25.3% in 1999. The decrease is due in part to lower gross margins at Simco. Simco's gross margins were dilutive mainly because of a large unprofitable job that was phased out in the third quarter of 2000. Selling, General and Administrative Expenses ("SG&A") increased 22.4% to $14.2 million in the year ended December 31, 2000, from $11.6 million in 1999. As a percentage of sales, SG&A decreased to 19.1% in 2000 from 19.7% in 1999. The increase in SG&A dollars is primarily attributable to SG&A at Simco. The decrease in SG&A as a percentage of sales reflects the economies of scale accompanying operations growth. Interest increased to $1,221,000 in 2000, from $641,000 in 1999, as a result of higher average borrowings due to the financing of the acquisition of Simco as well as rising interest rates. The Company's effective tax rate increased to 46.0% in 2000, from 40.2% in 1999, primarily as a result of non-deductible goodwill amortization at Simco. 1999 COMPARED TO 1998: The Company's net sales increased 24.5% to $58.8 million for the year ended December 31, 1999 from $47.2 million in the same period last year. The increase in sales is primarily attributable to the acquisition of Pacific Foam on November 30, 1998. In addition, a smaller component of the increase is attributable to the commencement of the Woodbridge automotive project in the fourth quarter of 1999. Gross profit as a percentage of sales decreased to 25.3% in the year ended December 31, 1999, from 27.7% in 1998. The decrease is primarily attributable to lower gross margins at Pacific Foam, as well as automotive program start-up costs. Selling, General & Administrative Expenses ("SG&A") increased 16.9% to $11.6 million in 1999, from $9.9 million in 1998. As a percentage of sales, SG&A decreased to 19.7% in 1999, from 21.0% in 1998. The increase in SG&A dollars is primarily attributable to the impact of Pacific Foam. The decrease in SG&A as a percentage of sales reflects the economies of scale accompanying operations growth. Interest expense increased approximately $194,000 to $641,000 in 1999, from $447,000 in 1998 as a result of higher average borrowings primarily due to financing of the Pacific Foam acquisition. In addition, interest expense increased due to higher interest rates in 1999. The Company's effective tax rate was 40.2% and 40.9% in 1999 and 1998 respectively. LIQUIDITY AND CAPITAL RESOURCES The Company funds its operating expenses, capital requirements and growth plan through internally generated cash, bank credit facilities and long-term capital leases. As of December 31, 2000 and 1999, working capital was $4,139,000 and $3,549,000, respectively. The increase in working capital is primarily attributable to increases in accounts receivable. Cash provided from operations was $3,554,000 and $1,258,000 for 2000 and 1999, respectively. Net cash used in investing activities in 2000 was $8,172,000 and was used primarily for the acquisition of Simco of $5,802,000 and capital expenditures of $2,437,000. Including amounts due under the revolving credit facility and capital lease obligations, the Company had total debt outstanding of $13,674,000 and $8,718,000 at December 31, 2000 and 1999, respectively. The increase was primarily attributable to the acquisition of Simco. The Company has a $8,000,000 revolving bank line, of which $4,737,000 was outstanding at December 31, 2000. Borrowings through the credit facility are unsecured and bear interest at prime or LIBOR Plus, a margin that can vary from 1.25% to 2.0%. In addition, the Company has a $10,000,000 acquisition line of credit, of which $7,723,000 was outstanding as of December 31, 2000. At December 31, 2000, the Company had capital lease obligations and other notes payable of approximately $706,000 and $508,000, respectively. At December 31, 2000, the current portion of all debt, including the revolving bank loan, was approximately $5,794,000. See Note 7 of Notes to the Consolidated Financial Statements for further discussion of debt. On February 23, 2001, the Company purchased 300,000 shares of the Company's stock from Cramer, Berkowitz and Co. at $1.75 per share, for a total amount of $525,000. The purchase was funded by the Company's revolving line of credit. The Company has no additional significant capital commitments in 2001, but plans on adding additional machinery to increase capacity or to enhance operating efficiencies in its manufacturing plants. Additionally, the Company may consider the acquisition of companies, technologies or products in 2001, which are complementary to its business. The Company believes that its existing resources, including its revolving loan facility, together with cash generated from operations and funds expected to be available to it through any necessary equipment financing and additional bank borrowings, will be sufficient to fund its cash flow requirements through at least the end of 2001. However, there can be no assurances that such financing will be available at favorable terms, if at all. OTHER A significant portion of the Company's Packaging sales of molded fiber products are to manufacturers of computer peripherals and other consumer products. As a result, the Company believes that its sales are somewhat seasonal, with increased sales in the second half of the year. The Company does not believe that inflation has had a material impact on its results of operations in the last three years. MARKET RISK The following discussion of the Company's market risk includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates, and equity prices. At December 31, 2000, the Company's cash and cash equivalents consisted of bank accounts in U.S. dollars, and their valuation would not be affected by market risk. The Company has two debt instruments where interest is based upon the prime rate (and/or LIBOR) and, therefore, future operations could be affected by interest rate changes; however, the Company believes that the market risk of the debt is minimal. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated Financial Statements and Supplementary Data of the Company are listed under Part IV, Item 14, in this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Board of Directors has appointed Arthur Andersen LLP, independent accountants, to audit the consolidated financial statements of the Company for the year ending December 31, 2001. The Company is advised that no member of Arthur Andersen LLP has any direct financial interest or material indirect financial interest in the Company since the date of its engagement, May 21, 1999, or has had any connection with the Company in the capacity of promoter, underwriter, voting trustee, director, officer or employee since such date. KPMG Peat Marwick LLP ("KPMG") served as the independent auditors of the Company for the fiscal year ended December 31, 1998. During the past fiscal year and through and including March 31, 1999, there have been no disagreements between the Company and KPMG on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of KPMG, would have caused it to make reference to the subject matter of the disagreements in connection with its report. Further, the audit reports of KPMG on the financial statements as of and for the years ended December 31, 1998, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. The Company requested that KPMG furnish a letter addressed to the SEC stating that it agreed with the above statements relating to KPMG. A copy of such letter dated May 27, 1999, was filed as Exhibit 16 to the Company's Report on Form 8-K, dated May 27, 1999. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 is hereby incorporated by reference to the Company's definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is hereby incorporated by reference to the Company's definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is hereby incorporated by reference to the Company's definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is hereby incorporated by reference to the Company's definitive proxy statement to be filed by the Company within 120 days after the close of its fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE ---- (A) (1) FINANCIAL STATEMENTS Index to Consolidated Financial Statements and Financial Statement Schedules..........................................................................................F2 Independent Auditors' Report - 2000 and 1999.......................................................F3 Independent Auditors' Report - 1998................................................................F4 Consolidated Balance Sheets as of December 31, 2000 and 1999.......................................F5 Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998...............................................................................F6 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998..................................................................F7 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998...............................................................................F8 Notes to Consolidated Financial Statements...................................................F9 - F24 (A) (2) FINANCIAL STATEMENT SCHEDULES Schedule II - Valuation and Qualifying Accounts...................................................F25 (A) (3) EXHIBITS
NUMBER REFERENCE ------ --------- 2.01 Agreement and Plan of Reorganization among the Company, Moulded Fibre A-2.01** Technology, Inc. and UFP Acquisition, Inc. 2.02 Agreement of Merger between Moulded Fibre Technology, Inc. and UFP C-2.02** Acquisition, Inc. 2.03 Merger Agreement relating to the reincorporation of the Company in A-2.02 Delaware. 2.04 Asset Purchase Agreement relating to the purchase of FCE. I-2** 2.05 Asset Purchase Agreement relating to the purchase of the assets of O-2.05 Pacific Foam Technologies, Inc. 2.06 Stock Purchase Agreement dated January 14, 2000, relating to the P-2.01** acquisition of the stock of Simco Industries, Inc. by the Company. 3.01 Certificate of Incorporation of the Company, as amended. F-3.01** 3.02 Bylaws of the Company. A-3.02** 4.01 Specimen Certificate for shares of the Company's Common Stock. A-4.01**
NUMBER REFERENCE ------ --------- 4.02 Description of Capital Stock (contained in the Certificate of A-4.02** Incorporation of the Company, filed as Exhibit 3.01). 4.04 Rights Agreement (including the Certificate of Designation and form of Rights Certificate J-4** attached as Exhibits A and B, respectively, thereto) between the Registrant and American Stock Transfer & Trust Company, as Rights Agent, dated as of January 13, 1999. 10.02 $1,000,000 Mortgage and Promissory Note issued by the Company in favor A-10.02** of Gloucester Bank & Trust Company. 10.06 Alabama Leasehold Mortgage of United Development Company Limited to A-10.06** First American Bank. 10.07 Guaranty of the Company in favor of First American Bank for the benefit A-10.07** of United Development Company Limited. 10.08 Agreement between the Company and William H. Shaw. A-10.08** 10.09 Agreement and Severance Agreement between the Company and Richard L. A-10.09** Bailly. 10.18 Employee Stock Purchase Plan. A-10.18** 10.19 1993 Combined Stock Option Plan, as amended. K-4.5* ** 10.20 1993 Nonemployee Director Stock Option Plan. B-4.5** 10.21 Facility Lease between the Company and United Development Company A-10.21** Limited. 10.22 Facility Lease between the Company and Raritan Associates. A-10.22** 10.23 Facility Sublease between the Company and United Development Company A-10.23** Limited. 10.25 Facility lease between the Company and Flanders Properties. A-10.25** 10.26 Amendment to facility lease between the Company and Flanders Properties. A-10.26** 10.27 Facility Lease between the Company and Dana Evans d/b/a Evans A-10.27** Enterprises. 10.28 Facility Lease between Moulded Fibre Technology, Inc. and J.B. Brown & A-10.28** Sons. 10.29 Facility Lease between the Company and Cole Taylor Bank, as G-10.29** Trustee 10.30 Form of Indemnification Agreement for directors and officers of the A-10.30** Company. 10.32 Promissory Note of United Development Company Limited in favor of the A-10.32** Company. 10.33 Form of Representative's Warrant Agreement. A-10.33**
NUMBER REFERENCE ------ --------- 10.34 Facility Lease between Moulded Fibre Technology, Inc. and Lincoln C-10.34** Gilroy II and Patrician Associates, Inc. 10.35 Facility Lease between the Company and M.D. Hodges Enterprises, Inc. D-10.35** 10.36 Facility Lease between Moulded Fibre Technology, Inc. and Dead River D-10.36** Properties. 10.37 Facility Lease between the Company and Clinton Area Development G-10.37** Corporation. 10.38.7 First Amendment to Credit Agreement, dated May 31, 1995, between the F-10.38.7** Company and BayBank. 10.38.8 Amended and Restated Revolving Credit Note, dated May 31, 1996, between F-10.38.8** the Company and BayBank. 10.38.9 Amended and Restated Equipment Note, dated May 31, 1996, between the F-10.38.9** Company and BayBank. 10.38.10 Third Amendment, dated July 6, 1998, to Credit Agreement, dated O-10.38.10 May 31, 1995, between the Company and BankBoston. 10.38.20 Loan Agreement, dated August 13, 1999, between the Company and Citizens Q-1038.20 Bank of Massachusetts 10.38.30 Supply Agreement, dated January 1, 1999, between the Company and Q-1038.30 Woodbridge Foam Corporation 10.39 Employment Agreement with R. Jeffrey Bailly dated April 4, 1995. H-10.37** 10.40 1998 Director Stock Option Incentive Plan L** 10.41 1998 Employee Stock Purchase Plan. M** 10.42 Stock Repurchase Agreement, dated December 17, 1999 Q-10.42 10.43 Facility Lease between the Company and Quadrate Development, LLC Filed herewith 10.44 Stock Repurchase Agreement dated February 20, 2001 Filed herewith 21.01 Subsidiaries of the Company. N-21.01** 23.01 Consent of Arthur Andersen LLP Filed herewith 23.02 Consent of KPMG LLP Filed herewith
A Incorporated by reference to the Company's registration statement on Form S-1 (Registration No. 33-70912). The number set forth herein is the number of the Exhibit in said registration statement. B Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-76440). The number set forth herein is the number of the Exhibit in said registration statement. C Incorporated by reference to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1993. The number set forth herein is the number of the Exhibit in said annual report. D Incorporated by reference to the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 1994. The number set forth herein is the number of the Exhibit in said annual report. E Incorporated by reference to the Company's Registration Statement on Form S-8 (Registration No. 33-32248). The number set forth herein is the number of the Exhibit in said Registration Statement. F Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 1996. The number set forth herein is the number of the Exhibit in said quarterly report. G Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. The number set forth herein is the number of the Exhibit in said annual report. H Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 1995. The number set forth herein is the number of the Exhibit in said quarterly report. I Incorporated by reference to the Company's report on 8-K dated February 3, 1997. The number set forth herein is the number of the Exhibit in said report. J. Incorporated by reference to the Company's report on Form 8-K dated January 28, 1999. The number set forth herein is the number of the exhibit in said report. K. Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 1998. The number set forth herein is the number of the exhibit in said Quarterly Report. L. Incorporated by reference to the Company's registration statement on Form S-8 (registration No. 333-56741). M. Incorporated by reference to the Company's Proxy Statement relating to the Company's Annual Meeting of Stockholders on June 5, 1998. N. Incorporated by reference by the Company's Annual Report 10-K for the fiscal year ended December 31, 1996. The number set forth herein is the number of the exhibit in said Annual Report. O. Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. The number set forth herein is the number of the Exhibit in said annual report. P. Incorporated by reference to the Company's report on Form 8-K dated January 31, 2000. The number set forth herein is the number of the Exhibit in said report. Q. Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The number set forth herein is the number of the Exhibit in said annual report. * Management contract or compensatory plan or arrangement. ** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference. (B) REPORTS ON FORM 8-K The Company did not file any current reports on Form 8-K during the quarter ended December 31, 2000. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UFP TECHNOLOGIES, INC. Date: MARCH 26, 2001 by: /s/ R. JEFFREY BAILLY -------------- -------------------------------- R. Jeffrey Bailly, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ R. Jeffrey Bailly President, Chief Executive, March 26, 2001 - ------------------------------------------ Officer and Director -------------- R. Jeffrey Bailly /s/ William H. Shaw Chairman of the Board of Directors March 26, 2001 - ------------------------------------------ -------------- William H. Shaw /s/ Ronald J. Lataille Chief Financial Officer, Vice President, March 26, 2001 - ------------------------------------------ Principal Accounting Officer -------------- Ronald J. Lataille /s/ Richard L. Bailly Director March 26, 2001 - ------------------------------------------ -------------- Richard L. Bailly /s/ William C. Curry Director March 26, 2001 - ------------------------------------------ -------------- William C. Curry /s/ Michael J. Ross Director March 26, 2001 - ------------------------------------------ -------------- Michael J. Ross /s/ Kenneth L. Gestal Director March 26, 2001 - ------------------------------------------ -------------- Kenneth L. Gestal /s/ Peter R. Worrell Director March 26, 2001 - ------------------------------------------ -------------- Peter R. Worrell
UFP TECHNOLOGIES, INC. Consolidated Financial Statements and Schedule December 31, 2000 and 1999 With Independent Auditors' Report Thereon F-1 UFP TECHNOLOGIES, INC. Index to Consolidated Financial Statements and Financial Statement Schedule
PAGE ---- Independent Auditors' Reports F3 - F4 Consolidated Balance Sheets as of December 31, 2000 and 1999 F5 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 F6 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998 F7 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 F8 Notes to Consolidated Financial Statements F9 - F24 SCHEDULE Schedule II - Valuation and Qualifying Accounts F25
F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders UFP Technologies, Inc.: We have audited the accompanying consolidated balance sheets of UFP Technologies, Inc., a Delaware corporation, and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of UFP Technologies, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Boston, Massachusetts February 9, 2001 F-3 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders UFP Technologies, Inc.: We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows of UFP Technologies, Inc. and subsidiary for the year ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of UFP Technologies, Inc and subsidiary for the year ended December 31, 1998, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the 1998 consolidated financial statements taken as a whole. The schedule listed in Item 14(a)(2) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, the information with respect to the year ended December 31, 1998 is fairly stated in all material respects in relation to the basic 1998 consolidated financial statements taken as a whole. KPMG LLP Boston, Massachusetts February 25, 1999 F-4 UFP TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ----------------------------- 2000 1999 ASSETS Current assets: Cash and cash equivalents $ 94,051 348,729 Receivables, net 10,692,979 9,676,900 Inventories 6,779,950 5,191,890 Prepaid expenses 371,998 317,266 Deferred income taxes 574,000 220,676 ------------ ---------- Total current assets 18,512,978 15,755,461 ------------ ---------- Property, plant and equipment 25,917,992 21,650,486 Less accumulated depreciation and amortization (13,464,427) (11,084,036) ------------ ---------- Net property, plant and equipment 12,453,565 10,566,450 ------------ ---------- Cash surrender value of officers' life insurance 191,819 293,579 Investment in and advances to affiliated partnership 200,194 214,745 Deferred income taxes 1,635,219 48,416 Goodwill, net 6,724,907 4,524,285 Other assets 633,722 464,427 ------------ ---------- Total assets $ 40,352,404 31,867,363 ============ ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 4,736,754 5,000,000 Current installments of long-term debt 1,057,150 63,916 Current installments of capital lease obligations 290,554 947,429 Accounts payable 4,439,577 2,438,045 Accrued taxes and other expenses 3,849,817 3,757,412 ------------ ---------- Total current liabilities 14,373,852 12,206,802 ------------ ---------- Long-term debt, excluding current installments 7,174,311 2,111,076 Capital lease obligations, excluding current installments 415,156 595,232 Retirement and other liabilities 861,645 745,840 ------------ ---------- Total liabilities 22,824,964 15,658,950 ------------ ---------- Commitments and contingencies Stockholders' equity Preferred stock, $.01 value. Authorized 1,000,000 shares; no shares issued or outstanding -- -- Common stock, $.01 value. Authorized 20,000,000; issued and outstanding 4,388,370 shares in 2000 and 4,294,632 shares in 1999 43,884 42,946 Additional paid-in capital 8,474,533 8,237,558 Retained earnings 9,009,023 7,927,909 ------------ ---------- Total stockholders' equity 17,527,440 16,208,413 ------------ ---------- Total liabilities and stockholders' equity $ 40,352,404 31,867,363 ============ ==========
The accompanying notes are an integral part of these consolidated financial statements. F-5 UFP TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31 -------------------------------------------- 2000 1999 1998 Net sales $ 74,491,669 58,801,063 47,220,174 Cost of sales 56,870,392 43,939,268 34,140,005 ------------ ---------- ---------- Gross profit 17,621,277 14,861,795 13,080,169 Selling, general and administrative expenses 14,236,234 11,582,430 9,905,996 ------------ ---------- ---------- Operating income 3,385,043 3,279,365 3,174,173 ------------ ---------- ---------- Other income (expense): Interest expense (1,220,697) (640,763) (447,282) Equity in net income of unconsolidated partnerships 29,518 22,013 20,904 Other, net (191,799) 169,130 40,170 ------------ ---------- ---------- Total other expense (1,382,978) (449,620) (386,208) ------------ ---------- ---------- Income before income tax provision 2,002,065 2,829,745 2,787,965 Income tax provision 920,951 1,136,328 1,141,000 ------------ ---------- ---------- Net income $ 1,081,114 1,693,417 1,646,965 ============ ========== ========== Net income per share: Basic $ 0.25 0.35 0.35 ============ ========== ========== Diluted $ 0.25 0.35 0.34 ============ ========== ========== Weighted average common shares: Basic 4,374,271 4,808,640 4,682,210 ============ ========== ========== Diluted 4,386,441 4,895,935 4,830,236 ============ ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 UFP TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
COMMON STOCK ADDITIONAL TOTAL ------------------------- PAID-IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY --------- ------------ ------------ ------------ -------------- Balance at December 31, 1997 4,666,354 $ 46,664 $ 9,499,019 $ 4,587,527 $ 14,133,210 Sale of common stock through incentive stock option plan 30,000 300 70,950 -- 71,250 Stock issued in lieu of compensation 11,000 110 43,890 -- 44,000 Net income -- -- -- 1,646,965 1,646,965 --------- ------------ ------------ ------------ ------------ Balance at December 31, 1998 4,707,354 $ 47,074 $ 9,613,859 $ 6,234,492 $ 15,895,425 --------- ------------ ------------ ------------ ------------ Sale of common stock through incentive stock option plan 85,345 853 34,846 -- 35,699 Employee Stock Purchase Plan 28,985 290 78,151 -- 78,441 Stock retirement (18,052) (181) (77,387) -- (77,568) Stock issued in lieu of compensation 61,000 610 185,514 -- 186,124 Stock repurchased (570,000) (5,700) (1,597,425) -- (1,603,125) Net income -- -- -- 1,693,417 1,693,417 --------- ------------ ------------ ------------ ------------ Balance at December 31, 1999 4,294,632 $ 42,946 $ 8,237,558 $ 7,927,909 $ 16,208,413 ========= ============ ============ ============ ============ Employee Stock Purchase Plan 33,288 333 66,518 -- 66,851 Stock issued in lieu of compensation 60,500 605 170,457 -- 171,062 Net income -- -- -- 1,081,114 1,081,114 --------- ------------ ------------ ------------ ------------ Balance at December 31, 2000 4,388,420 $ 43,884 $ 8,474,533 $ 9,009,023 $ 17,527,440 ========= ============ ============ ============ ============
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 ----------------------- 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income $ 1,081,114 1,693,417 1,646,965 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,080,927 2,299,673 1,899,915 Equity in net income of unconsolidated affiliate and partnership (29,518) (22,013) (20,904) (Gain) loss on disposal of property, plant and equipment 191,799 (169,130) (40,170) Stock issued in lieu of compensation 171,062 186,124 44,000 Deferred income taxes -- 330,908 156,000 Changes in operating assets and liabilities, net of effects from acquisition: Receivables, net 2,064,391 (1,809,253) (584,334) Inventories 47,302 (1,100,120) (60,601) Prepaid expenses 4,727 1,925 (196,339) Accounts payable (1,606,556) (151,447) 308,615 Accrued taxes and other expenses (1,507,621) 346,483 976,495 Retirement and other liabilities 8,850 (164,498) 165,172 Cash surrender value of officers' life insurance 127,565 (75,552) 134,550 Increase in other assets (80,259) (108,640) (168,618) ---------- ---------- ---------- Net cash provided by operating activities 3,553,783 1,257,877 4,260,746 ---------- ---------- ---------- Cash flows from investing activities: Additions to property, plant and equipment (2,436,927) (1,948,968) (1,562,135) Acquisition of operating assets, less cash acquired (5,802,123) -- (2,293,506) Payments received on advances to affiliated partnership 44,069 25,792 42,744 Proceeds from disposal of property, plant and equipment 23,000 534,350 290,170 ---------- ---------- ---------- Net cash used in investing activities (8,171,981) (1,388,826) (3,522,727) ---------- ---------- ---------- Cash flows from financing activities: Net borrowings under notes payable (263,246) 850,000 713,413 Proceeds from long-term borrowings 6,120,000 1,603,125 -- Capital stock repurchase -- (1,603,125) -- Proceeds from sale of common stock 66,851 36,572 71,250 Principal repayment of long-term debt (63,531) (56,222) (359,077) Principal repayment of obligations under capital leases (1,496,554) (863,028) (884,701) ----------- ---------- ---------- Net cash (used in) provided by financing activities 4,363,520 (32,678) (459,115) ----------- ---------- ---------- Net change in cash and cash equivalents (254,678) (163,627) 278,904 Cash and cash equivalents at beginning of year 348,729 512,356 233,452 ----------- ---------- ---------- Cash and cash equivalents at end of year $ 94,051 348,729 512,356 =========== ========== ==========
See accompanying notes to consolidated financial statements. F-8 UFP TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 AND 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES UFP Technologies, Inc. designs and manufactures a broad range of packaging and specialty foam products for a variety of industrial and consumer markets. (a) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts and results of operations of UFP Technologies, Inc. and its wholly owned subsidiaries, Moulded Fibre Technology, Inc. (MFT), Simco Automotive Trim, and Simco Automotive Technology. All significant intercompany balances and transactions have been eliminated in consolidation. (b) INVENTORIES Inventories which include material, labor, and manufacturing overhead are valued at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. (c) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and depreciated and amortized using the straight-line method over the estimated useful lives of the assets for financial statement purposes and accelerated methods for income tax purposes. Estimated useful lives of property, plant and equipment are as follows: Leasehold improvements Estimated useful life or remaining lease term, whichever is shorter Buildings and improvements 31.5 years Equipment 8-10 years Furniture and fixtures 5 - 7 years (d) INCOME TAXES The Company's income taxes are accounted for under the asset and liability method of accounting. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax expense (benefit) results from the net change during the year in deferred tax assets F-9 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. (e) SALES Product sales are recorded at the time of shipment and when persuasive evidence of an arrangement exists, performance of seller's obligation is complete, seller's price to the buyer is fixed or determinable, and collectabillity is reasonably assured. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. The Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS, on December 3, 1999. This SAB provides additional guidance on the accounting for revenue recognition, including both broad conceptual discussions as well as certain industry-specific guidance. The guidance is effective for the first quarter of fiscal 2000, and is required to be adopted by recording the effect of any prior revenue transaction affected as a "cumulative effect of a change in accounting principle" as of January 1, 2000. This new guidance did not have a material effect on the Company's results of operations or financial position for Fiscal 2000. (f) INVESTMENTS IN REALTY PARTNERSHIPS The Company has invested in two realty limited partnerships, Lakeshore Estates Associates and United Development Company Limited. These investments are stated at cost, plus or minus the Company's proportionate share of the limited partnerships' income or losses, less any distributions received from the limited partnerships. The Company has recognized its share of Lakeshore Estates Associates' losses only to the extent of its original investment in, and advances to, this partnership. (g) INTANGIBLE ASSETS In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and APB Opinion No. 17, INTANGIBLE ASSETS, the Company reviews long-lived assets and all intangible assets (including goodwill) for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate, to the carrying amount including associated intangible assets of such operation. If the operation is determined to be unable to recover the carrying amount of its assets, then intangible assets are written down first, followed by the other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets. At December 31, 2000, no impairment has been identified. F-10 Goodwill is being amortized on a straight-line basis over a 20-year period. Accumulated amortization was $1,809,409 and $1,258,699 as of December 31, 2000 and 1999, respectively. (h) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (i) COMPREHENSIVE INCOME The Company has adopted the provisions of SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which established standards for reporting and display of comprehensive income and its components. Comprehensive income is the total of net income and all other non-owner changes in stockholders' equity. Comprehensive income equaled net income for all periods presented. (j) USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) SEGMENTS AND RELATED INFORMATION The Company has adopted the provisions of SFAS No. 131, 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 statements and requires reporting of selected information in interim financial reports. (l) RECENT ACCOUNT PRONOUNCEMENTS SFAS No. 133, as amended by SFAS No. 137 and No. 138, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier adoption allowed. The statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Accounting for gains or losses resulting from changes in the values of a derivative depends on whether it qualifies for hedge accounting. The effect of the adoption of SFAS No. 133 as of January 1, 2001, will not be material. F-11 (m) RECLASSIFICATIONS Certain prior year account balances have been reclassified to conform to the 2000 presentation. (2) SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes is as follows:
YEARS ENDED DECEMBER 31 ----------------------- 2000 1999 1998 ---- ---- ---- Interest $ 1,267,282 623,855 512,190 =========== ========== ========== Income taxes $ 926,759 964,985 643,261 =========== ========== ==========
During 1998, the Company renegotiated the terms of a facility lease which was leased from a limited partnership in which the Company and one of its officers are partners. This lease was previously treated as a capital lease. Based on the terms of the new lease agreement, the lease is no longer a capital lease. Consequently, the Company wrote off the related building and improvements and associated capital lease obligation of $247,834 (see Note 14). (3) RECEIVABLES Receivables consist of the following:
DECEMBER 31 ------------------------------ 2000 1999 ---- ---- Accounts receivable - trade $ 11,086,155 9,615,088 Employee advances and other receivables 19,275 427,620 ------------ ---------- 11,105,430 10,042,708 Less allowance for doubtful receivables (412,451) (365,808) ------------ ---------- $ 10,692,979 9,676,900 ============ ==========
(4) INVENTORIES Inventories consist of the following:
DECEMBER 31 ------------------------------ 2000 1999 ---- ---- Raw materials $ 4,242,874 3,296,702 Work in process 785,848 469,875 Finished goods 1,751,228 1,425,313 ------------ ---------- $ 6,779,950 5,191,890 ============ ==========
F-12 (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31 ------------------------------ 2000 1999 ---- ---- Land $ 85,319 85,319 Buildings and improvements 1,951,262 1,920,842 Leasehold improvements 1,889,922 1,451,999 Equipment 19,522,054 16,283,270 Furniture and fixtures 2,047,986 1,606,314 Construction in progress - equipment 421,449 302,742 ------------ ---------- $25,917,992 21,650,486 ============ ==========
(6) INVESTMENT IN AND ADVANCES TO AFFILIATED PARTNERSHIP The Company has an ownership interest in a realty limited partnership, United Development Company Limited. This investment is 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 the limited partnership's net income was $22,000, $22,013, and $18,410 in 2000, 1999, and 1998, respectively. On December 31, 1998, United Development Company Limited executed and delivered to the Company a term note in the amount of $99,750 to evidence advances received from the Company. This note accrues interest at 9.75% and is repayable in monthly installments of $2,107. (7) INDEBTEDNESS On August 13, 1999, the Company entered into a new banking arrangement. At December 31, 2000, the Company may borrow up to $8,000,000 under a revolving line of credit at the bank's prime lending rate (9.5% at December 31, 2000) or LIBOR plus 1.5%. Amounts borrowed under this arrangement are due on demand and are unsecured. At December 31, 2000 and 1999, borrowings under this arrangement were $4,736,754 and $5,000,000, respectively. The Company also may borrow up to $10,000,000 under an "Acquisition" line of credit, with interest based on the bank's prime lending rate of 9.5% or LIBOR plus 1.5%. Amounts under this arrangement are payable over five to seven years, and are unsecured. At December 31, 2000, the Company had borrowings under this arrangement of $7,723,125. Under the terms of the new banking agreement, the Company is required to comply with a number of affirmative and negative covenants. Among other things, the Company must satisfy certain financial covenants and ratios, including debt service and leverage ratios. As of December 31, 2000, the Company is in compliance with these covenants. F-13 Long-term debt consists of the following:
DECEMBER 31 ------------------------------ 2000 1999 ---- ---- 9.32% mortgage note payable in monthly installments of $9,133 including interest, maturing in 2007; secured by real estate $ 508,336 571,867 Note payable - acquisition 7,723,125 1,603,125 ------------ ---------- Total long-term debt 8,231,461 2,174,992 Less current installments 1,057,150 63,916 ------------ ---------- Long-term debt, excluding current installments $ 7,174,311 2,111,076 ============ ==========
Aggregate maturities of long-term debt are as follows: Year ending December 31: 2001 $ 1,057,150 2002 1,263,400 2003 1,269,400 2004 1,276,000 Thereafter 3,365,511 ------------ $ 8,231,461 ============ (8) ACCRUED TAXES AND OTHER EXPENSES Accrued taxes and other expenses consist of the following:
DECEMBER 31 ------------------------------ 2000 1999 ---- ---- Compensation $ 954,017 877,028 Benefits 710,175 612,949 Federal and state income tax 5,537 351,458 Paid time off 401,289 347,290 Workers Compensation 146,047 146,047 Other 1,632,752 1,422,640 ----------- ---------- $ 3,849,817 3,757,412 =========== ==========
F-14 (9) INCOME TAXES The Company's income tax provision for the years ended December 31, 2000, 1999, and 1998 consists of:
YEARS ENDED DECEMBER 31 2000 1999 1998 ---- ---- ---- Current: Federal $ 394,000 587,000 830,000 State 160,000 218,000 155,000 --------- --------- --------- 554,000 805,000 985,000 --------- --------- --------- Deferred: Federal 362,000 327,000 145,000 State 5,000 4,000 11,000 --------- --------- --------- 367,000 331,000 156,000 --------- --------- --------- Total income tax provision $ 921,000 1,136,000 1,141,000 --------- --------- ---------
At December 31, 2000, the Company has net operating loss carryforwards for income tax purposes of approximately $6,884,000, which are available to offset future taxable income and expire during the years ending December 31, 2006 through 2019. The future benefit of the net operating loss carryforwards in any year is limited to $600,000 under the provisions of the Tax Reform Act of 1986, which imposes an annual limitation on the amount that can offset taxable income due to the change in ownership of MFT and Simco. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31 2000 1999 ---- ---- Deferred tax assets related to: Reserves not currently deductible 430,000 212,000 Compensation programs 144,000 9,000 Retirement liability 307,000 262,000 Net operating loss carryforwards 2,341,000 695,000 Other 222,000 58,000 ---------- ---------- 3,444,000 1,236,000 ---------- ---------- Deferred tax liabilities related to: Excess of book over tax basis of fixed assets 631,000 543,000 Investee tax loss in excess of book losses 105,000 121,000 Capital leases 499,000 303,000 ---------- ---------- 1,235,000 967,000 ---------- ---------- Net deferred tax assets $2,209,000 $ 269,000 ========== ==========
F-15 The amount recorded as net deferred tax assets as of December 31, 2000 and 1999 represents the amount of tax benefits of existing deductible temporary differences or carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carryforward period. The Company believes that the net deferred tax asset of $2,209,000 at December 31, 2000, is more likely than not to be realized in the carryforward period. The Company's U.S. taxable income before application of net operating loss carryforwards was approximately $1,850,000, $2,334,000, and $2,710,000 for the years ended December 31, 2000, 1999, and 1998, respectively. Management reviews the recoverability of deferred tax assets during each reporting period. Actual tax provision for the years presented differs from "expected" tax provision for those years, computed by applying the U.S. federal corporate rate of 34% to income before income tax expense as follows:
YEARS ENDED DECEMBER 31 ------------------------ 2000 1999 1998 ---- ---- ---- Computed "expected" tax rate 34.0% 34.0% 34.0% Increase (decrease) in income taxes resulting from: State taxes, net of federal tax benefit 5.4 5.2 3.9 Officers' life insurance 0.2 0.5 0.5 Amortization of goodwill 7.1 1.9 1.9 Other (0.7) (1.4) 0.6 ---- ---- ---- Effective tax rate 46.0% 40.2% 40.9% ==== ==== ====
(10) NET INCOME PER SHARE Basic income per share is based upon the weighted average common shares outstanding during each year. Diluted income per share is based upon the weighted average of common shares and dilutive common stock equivalent shares outstanding during each year. The weighted average number of shares used to compute diluted income per share consisted of the following:
YEARS ENDED DECEMBER 31 ----------------------- 2000 1999 1998 ---- ---- ---- Weighted average common shares outstanding during the year 4,374,271 4,808,640 4,682,210 Weighted average common equivalent shares due to stock options 12,170 87,295 148,026 --------- --------- --------- 4,386,441 4,895,935 4,830,236 ========= ========= =========
F-16 Diluted weighted average shares outstanding for 2000, 1999, and 1998, exclude 595,082, 316,517, and 490,820, respectively, due to the fact that the option prices were greater than the average market price of the common stock. (11) STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS The Company maintains a stock option plan to provide long-term rewards and incentives to the Company's key employees, officers, employee directors, consultants and advisors. The plan provides for either nonqualified stock options or incentive stock options for the issuance of up to 1,550,000 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 nonqualified stock options shall be determined by the Stock Option Committee. Options granted under the plan generally become exercisable with respect to 25% of the total number of shares subject to such options at the end of each 12-month period following the grant of the option. At December 31, 2000, 621,944 options were outstanding under the plan. Through July 15, 1998, the Company maintained a stock option plan covering nonemployee directors (the "1993 Director Plan"). Effective July 15, 1998, with the formation of the 1998 Director Stock Option Incentive Plan ("1998 Director Plan"), the 1993 Director Plan was frozen. The 1993 Director Plan provided for options for the issuance of up to 110,000 shares of common stock. On July 1 of each year, each individual who at the time was serving as a nonemployee director of the Company received an automatic grant of options to purchase 2,500 shares of common stock. These options became exercisable in full six months after the date of grant and will expire ten years from the date of grant. The exercise price was the fair market value of the common stock on the date of grant. At December 31, 2000, 55,000 options were outstanding under the 1993 Director Plan. Effective July 15, 1998, subject to shareholder approval, the Company adopted the 1998 Director Stock Option Incentive Plan ("1998 Director Plan") for the benefit of non-employee directors of the Company. The 1998 Director Plan provides for options for the issuance of up to 300,000 shares of common stock. These options become exercisable in full six months after the date of grant and expire ten years from the date of grant. In connection with the adoption of the 1998 Director Plan, the 1993 Director Plan was discontinued; however, the options outstanding under the 1993 Director Plan were not affected by the adoption of the new plan. At December 31, 2000, 88,614 options were outstanding under the 1998 Director Plan. On April 18, 1998, the Company adopted the 1998 Stock Purchase Plan which provides that all employees of the Company who work more than twenty hours per week and more than five months in any calendar year and who are employees on or before the applicable offering period are eligible to participate. The Stock Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986. Under the Stock Purchase Plan participants may have withheld up to 10% of their base salaries during the six month offering periods ending June 30 and December 31 for the F-17 purchase of the Company's common stock at 85% of the lower of the market value of the common stock on the first or last day of the offering period. The Stock Purchase Plan provides for the issuance of up to 150,000 shares of common stock. The Company applies Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related Interpretations in accounting for its stock option and employee stock purchase plans. As a result, no compensation cost has been recognized in connection with these plans. Since the Company accounts for its stock option plans under APB 25, certain pro forma information regarding net income and net income per share is required by Financial Accounting Standards Board Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("SFAS 123"), as if the Company had accounted for its stock option plans under the fair value approach of SFAS 123. For purposes of the pro forma disclosures, the estimated fair value of the stock plans is amortized to expense over the related vesting period of the options. The Company's pro forma information is as follows:
YEARS ENDED DECEMBER 31 ------------------------------------------- 2000 1999 1998 ---- ---- ---- Net income as reported $ 1,081,114 $ 1,693,417 $ 1,646,965 Pro forma net income 767,047 1,338,621 1,322,286 Basic net income per share as reported 0.25 0.35 0.35 Pro forma basic net income per share 0.18 0.28 0.28 Diluted net income per share as reported 0.25 0.35 0.34 Pro forma diluted net income per share 0.17 0.27 0.27
The effect of applying SFAS 123 as shown above in the pro forma disclosures is not representative of the pro forma effect on net income in future years because it does not take into consideration pro forma compensation expenses related to stock options granted prior to 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants issued in 2000, 1999, and 1998, respectively: no dividend yield for each year; expected volatility of 92%, 86%, and 86%; risk-free interest rates of 5.1%, 6.7%, and 4.7%; and expected lives of 5.44, 5.28, and 5.59 years. F-18 The following is a summary of stock option activity under all plans:
SHARES WEIGHTED AVERAGE UNDER OPTIONS EXERCISE PRICE Outstanding at December 31, 1997 737,500 $ 3.52 Granted 157,300 3.74 Exercised (30,000) 2.38 Canceled or expired (25,000) 4.28 Outstanding at December 31, 1998 839,800 $ 3.52 Granted 182,844 3.69 Exercised (150,250) 2.16 Canceled or expired (220,000) 4.74 Outstanding at December 31, 1999 652,394 $ 3.45 Granted 152,914 2.62 Exercised 0 0 Canceled or expired (39,750) 3.25 Outstanding at December 31, 2000 765,558 $ 3.30
The weighted-average fair value of options granted during 2000, 1999, and 1998 was $1.99, $2.72, and $2.70, respectively. As of December 31, 2000, 507,836 of the outstanding options were exercisable. The following is a summary of information relating to stock options outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------ ------------------------------------- RANGE OF WEIGHTED AVERAGE NUMBER EXERCISE NUMBER OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE PRICES AT DECEMBER 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE --------- -------------------- ----------------- ---------------- ----------------- ---------------- $ 2-3 220,914 5.3 years $ 2.36 120,914 $ 2.26 3-4 406,700 4.1 years $ 3.38 281,700 $ 3.38 4-5 125,444 5.0 years $ 4.39 92,722 $ 4.35 6-7 12,500 5.5 years $ 6.13 12,500 $ 6.13 ------- ------- 765,558 4.6 years $ 3.30 507,836 $ 3.36 ======= =======
F-19 (12) STOCKHOLDERS' EQUITY On January 13, 1999, the Company declared a dividend of one preferred share purchase right ( a "Right") for each outstanding share of common stock, par value $0.01 per share on February 5, 1999 to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the "Preferred Share"), of the Company, at a price of $30.00 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. On December 16, 1998, the Company's Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock at management's discretion either in the open market or in privately negotiated transactions. The repurchased stock is expected to be used for general corporate purposes, including the issuance of shares in connection with employee benefit plans. During 1999, 570,000 shares were repurchased for $1,603,125 and retired. (13) SUPPLEMENTAL RETIREMENT PLAN The Company has a supplemental retirement plan for one of its key officers and a retired officer which will provide an annual benefit to these individuals over a 12-year period following separation from employment. The Company recorded an expense of $60,000 in 1999 and 1998 in accordance with this plan, which includes both current costs and prior service costs for these individuals. No expense was recorded in 2000. The present value of the supplemental retirement obligation has been calculated using an 8.5% discount rate. (14) LEASES During 1998, the Company renegotiated the terms of a facility lease which was leased from a limited partnership in which the Company and one of its officers are shareholders. This lease was previously treated as a capital lease. Based on the terms of the new lease agreement, the lease is no longer a capital lease. Consequently, the Company wrote off the related building and improvements and associated capital lease obligation of $247,834. The Company has noncancelable operating leases for its other facilities that expire through 2004. Certain of the leases contain escalation clauses which require payments of additional rent to the extent of increases in related operating costs. The Company also leases various equipment under capital leases which expire through 2002 F-20 Included in property, plant and equipment are the following amounts held under capital lease:
DECEMBER 31 ----------------------- 2000 1999 ---- ---- Buildings and improvements $ -- -- Equipment 778,558 3,726,320 ----------- --------- 778,558 3,726,320 Less accumulated amortization (169,632) (1,133,010) ----------- --------- $ 608,926 2,593,310 =========== =========
Future minimum lease payments under noncancelable operating leases and the present value of future minimum lease payments under capital leases as of December 31, 2000, are as follows:
CAPITAL OPERATING YEAR ENDING DECEMBER 31: LEASES LEASES ------- --------- 2001 328,167 2,037,957 2002 279,856 1,505,759 2003 86,456 1,034,083 2004 72,046 920,260 Beyond -- 1,922,123 --------- Total minimum lease payments 766,525 7,420,182 ========= Less amount representing interest 60,815 --------- Present value of future minimum lease payments 705,710 Less current installments of obligations under capital leases (290,554) --------- Obligations under capital lease, excluding current installments $ 415,156 =========
Rent expense amounted to approximately $2,069,000, $1,604,000, and $1,270,000 in 2000, 1999, and 1998, respectively. Approximately $270,000 of total rent expense was paid in 2000, and $250,000 and $220,000 in 1999 and 1998, respectively, to a limited partnership that owns the Decatur, Alabama, and Kissimmee, Florida, facilities. The Company and one of its officers have interests in this limited partnership. (15) PROFIT SHARING PLAN The Company maintains a noncontributory profit-sharing plan for eligible employees. Contributions to the Plan are made at the discretion of the board of directors and amounted to approximately $650,000, $550,000, and $500,000 in 2000, 1999, and 1998, respectively. F-21 (16) FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair value of financial instruments as the amount at which the instrument could be exchanged in a transaction between willing parties. Cash and cash equivalents, accounts receivable, inventories, prepaid expenses, notes payable to bank, accounts payable, and accrued expenses and payroll withholdings are stated at carrying amounts that approximate fair value because of the short maturity of those instruments. Long-term debt and capital lease obligations are subject to interest rates currently offered to the Company; therefore, the historical carrying amount approximates fair value. (17) SEGMENT DATA The Company has adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. The Company is organized based on the nature of the products and services that it offers. Under this structure, the Company produces products within two distinct segments; Protective Packaging and Specialty Applications. Within the Protective Packaging segment, the Company primarily uses polyethylene and polyurethane foams, sheet plastics and pulp fiber to provide customers with cushion packaging for their products. Within the Specialty applications segment, the Company primarily uses cross-linked polyethylene foam to provide customers in the automotive, athletic, leisure and health and beauty industries with engineered -product for numerous purposes. The accounting policies of the segments are the same as those described in note 1. Income taxes and interest expense have been allocated based on operating results and total assets employed in each segment. Inter-segment transactions are uncommon and not material. Therefore, they have not been separately reflected in the financial table below. The totals of the reportable segments' revenues, net profits and assets agree with the Company's comparable amount contained in the audited financial statements. Revenues from customers outside of the United States are not material. No one customer accounts for more than 10% of the Company's consolidated revenues. F-22 Financial statement information by reportable segment is as follows:
2000 ------------------------------------------- SPECIALTY PACKAGING TOTAL --------- --------- ----- Sales $39,304,097 35,187,572 74,491,669 Operating income 987,222 2,397,821 3,385,043 Total assets 19,690,414 20,661,990 40,352,404 Depreciation / amortization 1,242,050 1,838,877 3,080,927 Capital expenditures 1,376,203 1,060,724 2,436,927
1999 ------------------------------------------- SPECIALTY PACKAGING TOTAL --------- --------- ----- Sales $24,990,324 33,810,829 58,801,153 Operating income 251,015 3,028,350 3,279,365 Total assets 12,504,282 19,363,081 31,867,363 Depreciation / amortization 565,634 1,734,039 2,299,673 Capital expenditures 1,123,477 824,991 1,948,468
1998 ------------------------------------------- SPECIALTY PACKAGING TOTAL --------- --------- ----- Sales $14,218,460 33,001,714 47,220,174 Operating income 643,557 2,530,616 3,174,173 Total assets 10,415,991 19,532,851 29,948,842 Depreciation / amortization 304,482 1,595,433 1,899,915 Capital expenditures 251,395 1,310,740 1,562,135
F-23 (18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Q1 Q2 Q3 Q4 ------------ ----------- ----------- ----------- Year ended 12/31/99 Net sales $13,476,067 $14,897,287 $14,439,589 $15,991,120 Gross profit 3,426,235 3,694,106 3,519,537 4,221,919 Net income 290,875 441,316 300,461 660,765 Basic net income per share 0.06 0.09 0.06 0.14 Diluted net income per share 0.06 0.09 0.06 0.14 Year ended 12/31/2000 Net sales $18,283,629 $19,415,865 $18,898,192 $17,893,983 Gross profit 4,302,982 4,592,804 4,419,804 4,305,712 Net income 217,922 287,775 220,136 355,308 Basic net income per share 0.05 0.07 0.05 0.08 Diluted net income per share 0.05 0.07 0.05 0.08
(19) ACQUISITION On January 14, 2000, the Company acquired all of the outstanding common stock of Simco Industries Inc. for approximately $5.8 million. Simco Industries Inc. is a full service supplier of automotive trim components. In addition, they operate a tool manufacturing facility. The results of Simco Industries Inc. have been included in the Company's consolidated financial statements since the acquisition on January 14, 2000. The cost of the acquisition was allocated based on the estimated fair market value of the assets acquired and the liabilities assumed. This allocation resulted in a goodwill valuation of approximately $2,750,000, which is being amortized on a straight line basis over twenty years. On November 30, 1998, the Company acquired substantially all of the assets and certain liabilities of Pacific Foam, Inc. for approximately $3,500,000. Pacific Foam, Inc. is a designer and manufacturer of specialty foam products for the health and beauty industry. The acquisition was accounted for as a purchase and was financed through the Company's revolving line of credit. The results of Pacific Foam, Inc. have been included in the Company's consolidated financial statements for the month of December of 1998. The cost of the acquisition was allocated based on the estimated fair market value of the assets acquired and the liabilities assumed. The allocation resulted in a goodwill valuation of approximately $2,300,000, which is being amortized on a straight line basis over 20 years. Pro forma amounts for the Simco acquisition are not included, as the effect is not material to the Company's consolidated financial statements. F-24 Schedule II UFP TECHNOLOGIES, INC. Valuation and Qualifying Accounts Years ended December 31, 2000, 1999, and 1998 Accounts receivable, allowance for doubtful accounts:
2000 1999 1998 ---- ---- ---- Balance at beginning of year $ 365,808 $ 257,865 $ 196,336 Simco Automotive acquisition 240,000 0 0 Provision charged to expense 102,203 135,522 119,574 Deductions - write-offs (295,560) (27,579) (58,045) --------- --------- --------- Balance at end of year 412,451 365,808 257,865 ========= ========= =========
* * * * F-25 EX-10.43 2 a2042896zex-10_43.txt EXHIBIT 10.43 EXHIBIT 10.43 BUSINESS PROPERTY LEASE 1. THIS LEASE made this 23RD day of AUGUST 2000, by and between QUADRATE DEVELOPMENT, L.L.C., a Michigan Limited Liability Company 15801 23 Mile Road Macomb Township, MI 48042 hereinafter designated as the Landlord, and UFP TECHNOLOGIES, INC., a Delaware corporation 172 East Main Street Georgetown, MA 01833-2107 hereinafter designated as the Tenant. 2. DESCRIPTION. The Landlord, in consideration of the rents to be paid and the covenants and agreements to be performed by the Tenant, does hereby lease unto the Tenant the following described premises situated in the Township of Macomb, County of Macomb, State of Michigan to wit: Premises known as 51362 Quadrate Drive, consisting of an industrial building situated thereon containing approximately 70,703 square feet and land on Lots 6 and 7 and the south 65 feet of Lot 8, Quadrate Corporate Park Subdivision depicted on the attached "Exhibit A," subject to encumbrances, easements, covenants and restrictions of record, together with Landlord's build-out improvements as set forth below, hereinafter designated the "leased premises." 3. TERM / RENT. For the term of seven (7) years from and after the commencement date (hereinafter defined) fully to be completed and ended, the Tenant yielding and paying during the continuance of this Lease unto the Landlord for the rent of the leased premises for said term, the sum of Three Million One Hundred Forty Two Thousand Seven Hundred Forty Eight and 28/100 Dollars ($3,142,748.28) in lawful money of the United States payable in monthly installments in advance, upon the first (1st) day of each and every month as follows: $37,413.67 per month for eighty-four (84) months The foregoing amounts do not include additional rent for Landlords payments and costs for taxes, insurance and maintenance. Landlord hereby acknowledges receipt of the first month's rent, including taxes and insurance pro-rated in accordance with Paragraphs 5(a) and 7(b) herein, respectively. The Tenant hereby hires the said premises for the said term as above mentioned and covenants well and truly to pay, or cause to be paid unto the Landlord at the dates and times mentioned, the rent above reserved. Tenant also agrees to pay when due all additional rent and all sums to be paid by Tenant as provided herein. 1/13 4. LATE FEE / INTEREST. If Tenant fails to pay any rent or additional rent by its due date, and such failure continues for ten (10) days, Tenant shall pay to Landlord for each such late payment a late fee of two percent (2%) of the amount of the late payment. If the Tenant shall default in any payment or expenditure other than rent required to be paid or expended by the Tenant under the terms hereof, the Landlord may, at his option make such payment or expenditure on Tenant's account following written notice to Tenant and Tenant's failure to cure within ten (10) days after Tenant's receipt of such notice, in which event the amount thereof shall be due and payable as additional rent to the Landlord by the Tenant on the next ensuing rent payment due date together with interest at twelve (12%) per annum from the date of such payment or expenditure by the Landlord, and on Tenant's default of such payment the Landlord shall have the same remedies as on default in payment of rent. 5. TAXES. (a) For purposes of this Lease, the "Base Year Taxes" are equal to $60,097.55 (which is computed at the rate of $ .85 per square foot). In consideration for Landlord's payment of all of the real property taxes, including those designated as the "Macomb Intermediate School District Summer Tax Statement" and the "Winter Taxes" (or any other designations as may be adopted by the taxing authority from time to time), which are assessed or charged against the leased premises, Tenant shall pay additional rent in consecutive monthly installments, each equal to one-twelfth (1/12) of the Base Year Taxes, on or before the day rent is due commencing on the commencement date and continuing thereafter for the term of this Lease and any extensions thereof, together with increases, if any, in accordance with Paragraph 5(b) herein. Provided, however, Tenant shall be entitled to apply for an abatement of real property taxes in accordance with the applicable statutes and ordinances, and in the event such abatement is duly granted by the appropriate governmental authorities the Base Year Taxes and Tenant's additional rent pursuant to this Paragraph 5(a) shall be reduced in accordance with such abatement ("Adjusted Base Year Taxes") and any subsequent increases in real property taxes for purposes of Paragraph 5(b) shall be based on the Adjusted Base Year Taxes. In no event shall Tenant's obligation for additional rent for real property taxes be less than the amount of the Base Year Taxes or Adjusted Base Year Taxes in accordance with this Paragraph 5(a). Provided, however, the Adjusted Base Years Taxes and any increases thereof shall be paid by Tenant directly to the appropriate taxing authorities if so required pursuant to the granting of such property tax abatement, in which event the Tenant shall pay such taxes on or before the date that any penalties or interest attaches and shall promptly provide Landlord with a copy of the paid tax receipts therefor. (b) Tenant shall pay to Landlord as additional rent any increase(s) in the real property taxes over the Base Year Taxes. Tenant shall pay such increase(s) in consecutive monthly installments, each equal to one-twelfth (1/12) of such tax increase, on or before the day rent is due commencing within thirty (30) days after written notice to Tenant from Landlord of the tax increase and continuing thereafter for the term of this Lease and any extensions thereof. In the event of such increase, Landlord shall provide Tenant with a copy of the tax bill(s) from the taxing authority(ies) showing the increase. Tenant shall have the right to contest such tax increase by initiating appropriate proceedings in the name of the Landlord, if necessary, provided all expenses incurred by reason thereof shall be paid by Tenant, and further provided that such contest shall not operate to suspend or delay Tenant's obligation to pay real property taxes to Landlord in accordance with this Section 5. (c) If at any time during the term of this Lease the method of taxation prevailing at the commencement of the lease term shall be altered so that any new or modified tax, assessment, levy, imposition or charge, or any part thereof, shall be measured by or based in whole or in part upon the Lease or leased premises, or the rent, additional rent or other 2/13 income therefrom, other than Federal or State income, intangibles, or single business tax, and shall be imposed upon the Landlord, then such taxes, assessments, levies, impositions or charges or the parts thereof (hereinafter "Altered Tax"), to the extent that they are so measured or based, shall be deemed to be included within the term "real property taxes" for the purposes of this Section 5, and Tenant shall pay additional rent for any increases in real property taxes resulting from the imposition of the Altered Tax in accordance with Paragraph 5(b). (d) Tenant shall pay directly to the taxing authority and before any penalty or interest attaches, all personal property taxes levied or assessed against the personal property of Tenant located upon the leased premises, and shall, upon written request, furnish to Landlord copies of the paid receipts therefor. 6. GENERAL OR SPECIAL ASSESSMENTS. Tenant agrees to pay to any public authority or appropriate agency thereof, as promptly as the same becomes due and payable, all general or special assessments and taxes for repairs or maintenance of any public or private service or improvement on, abutting or benefiting the leased premises, levied, assessed, imposed or made a lien, at any or all times during the term hereof, against the leased premises and any building, structure, fixture, or improvements now or hereafter located thereon, or the contents thereof, or arising with respect to the occupancy, use or possession of the leased premises, including all interest, penalties, collection charges, and other charges which may accrue thereon; provided, however, that with respect to any such lien or charge for which payment is permitted in installments extending beyond the term of this Lease, Tenant shall not be required to pay any installments extending beyond the term of this Lease or extensions thereof. Tenant shall not be responsible for payment of any assessments that were due and payable prior to execution of this Lease. Landlord represents that, as of the date hereof, Landlord is not aware of general or special assessments against the leased premises. 7. INSURANCE. (a) During the term of this Lease and any extensions hereof, the Landlord shall keep insured the building and improvements on the leased premises against loss or damage by fire, vandalism, malicious mischief, and against such other risks of a similar or dissimilar nature, as shall be insurable under present or future forms of fire and extended coverage policies which are standard for use in the State of Michigan in amounts not less than 100% of the actual replacement value of the building and improvements. Landlord shall pay the premium(s) for such insurance policy(ies). All proceeds of the insurance policies shall be paid directly to Landlord. (b) For purposes of this Lease the "Base Year Insurance Premium" is equal to $7,070.30 (which is computed at the rate of $0.10/square foot). In consideration for Landlord's cost of securing the insurance policy(ies) described in Paragraph 7(a), Tenant shall pay to Landlord additional rent in consecutive monthly installments, each equal to one twelfth (1/12) of the Base Year Insurance Premium, on or before the day rent is due commencing on the commencement date and continuing thereafter for the term of this Lease and any extensions hereof, together with increases, if any, in accordance with Paragraph 7(c) herein. In no event shall Tenant's obligation for additional rent for the cost of such insurance policy(ies) be less than the Base Year Insurance Premium in accordance with this Paragraph 7(b). (c) Tenant shall pay to Landlord as additional rent any increase in the cost of the insurance described in Paragraph 7(a) over the Base Year Insurance Premium. Tenant shall pay such additional rent in consecutive monthly installments, each equal to one twelfth (1/12) of such increase(s), on or before the day rent is due commencing within thirty (30) days after written notice to Tenant from Landlord of the insurance cost increase and continuing thereafter for the term of this Lease and any extensions thereof. 3/13 (d) Tenant shall be responsible for obtaining and paying for insurance on the contents of the building, including but not limited to any of Tenant's equipment, trade fixtures or other property. 8. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive any and all rights of recovery against the other, or against the officers, employees, agents and representatives of the other, for loss of or damage to its property or property of others under its control, if such loss or damage is covered at the time of such loss or damage, by any insurance policy(ies) required to be in force at the time of such loss or damage, but only to the extent of the limits of such policy(ies). Upon obtaining the policy(ies) of insurance described herein, the parties shall give notice to the insurance carrier or carriers of the foregoing mutual waiver of subrogation. 9. MAINTENANCE. Tenant covenants and agrees to keep and maintain at its own expense the leased premises and every part thereof, excluding the roof and four outer walls, but specifically including, without limitation, all doors, window frames and glass, all electrical, mechanical and plumbing systems, sidewalks, landscaped, parking and paved areas in good appearance, condition and repair, except for reasonable use and wear, and in compliance with the Declaration of Easements, Covenants and Restrictions for Quadrate Corporate Park Subdivision (hereinafter "Declaration"), a copy of which is attached hereto as "Exhibit B." Tenant shall be in sole possession and control of all sidewalks, parking areas and pavement on the leased premises and agrees to keep and maintain same in a safe, secure, clean and sanitary condition, including without limitation the removal of snow and ice accumulations. 10. PLACE OF PAYMENT. All payments of rent and other sums to be made to the Landlord shall be made at Landlord's address as indicated above or at such place as the Landlord may designate in writing from time to time. 11. ASSIGNMENT / SUBLETTING. The Tenant covenants not to assign or transfer this Lease or hypothecate or mortgage the same or sublet the leased premises, or any part thereof, without the written consent of the Landlord, which consent shall not be unreasonably withheld. Any assignment, transfer, hypothecation, mortgage or subletting without said written consent shall give the Landlord the right to terminate this Lease and to reenter and repossess the leased premises. No assignment or subletting shall relieve Tenant of the covenants and agreements herein. 12. BANKRUPTCY and INSOLVENCY. The Tenant agrees that if the estate created hereby shall be taken in execution, or by other process of law, or if the Tenant shall be declared bankrupt or insolvent, according to law, or any receiver be appointed for the business and property of the Tenant, or if any assignment be made of the Tenant's property for the benefit of creditors, then and in such event this Lease may be canceled at the option of the Landlord. 13. RIGHT TO MORTGAGE. The Landlord reserves the right to subject and subordinate this Lease at all times to the lien of any mortgage or mortgages now or hereafter placed upon the Landlord's 4/13 interest in the leased premises and on the land and building thereon or upon any buildings or improvements hereafter placed upon the land. Tenant covenants and agrees to execute and deliver upon demand such further instrument or instruments subordinating this Lease to the lien of any such mortgage or mortgages as shall be desired by the Landlord and any mortgagees or proposed mortgagees (provided that such mortgagee(s) agree in writing to not disturb Tenant's right of possession hereunder so long as Tenant is not in default under this Lease), and Tenant hereby irrevocably appoints the Landlord the attorney-in-fact of the Tenant to execute and deliver any such instrument or instruments for and in the name of the Tenant in the event Tenant fails or refuses to do so. 14. USE and OCCUPANCY. It is understood and agreed between the parties hereto that during the continuance of this Lease the leased premises may be used and occupied for office and light manufacturing uses and for no other purpose or purposes without the written consent of the Landlord, and that the Tenant will not use the leased premises for any purpose in violation of any law, municipal ordinance or regulation, or the Declaration, and that upon any such violation the Landlord may at his option terminate this Lease forthwith and reenter and repossess the leased premises. 15. FIRE or OTHER CASUALTIES. It is understood and agreed that if the leased premises are damaged or destroyed in whole or in part by fire or other casualty during the term hereof, the Landlord will repair and restore the same to good tenantable condition within 180 days after such fire or other casualty, and that the rent herein provided for shall abate entirely in case the entire premises are untenantable and pro-rata for the portion rendered untenantable, in case a part only is untenantable, until the same shall be restored to a tenantable condition; provided, however, that if the Tenant shall fail to adjust his own insurance or to remove his damaged goods, wares, equipment or property within a reasonable time, and as a result thereof the repairing and restoration is delayed, there shall be no abatement of rental during the period of such resulting delay, and provided further that there shall be no abatement of rental if such fire or other cause damaging or destroying the leased premises resulted from the negligence or willful act of the Tenant, his agents, employees or invitees, and provided further that if the Tenant shall use any part of the leased premises for storage during the period of repair a reasonable charge shall be made therefor against the Tenant, and provided further that in case the building is destroyed to the extent of more than one-half (1/2) of the value thereof, and/or Landlord shall be unable to restore the leased premises to a tenantable condition within 180 days (plus the period of time for any delay caused by the Tenant), either the Tenant (except in the case when the damage or destruction was caused by an unlawful act of the Tenant) or the Landlord shall have the option to terminate this lease upon 30 days written notice to the other. 16. LANDLORD'S OBLIGATION TO REPAIR. The Landlord after receiving written notice from Tenant and having reasonable opportunity thereafter to obtain the necessary workmen therefor agrees to keep in good order and repair the roof and the four outer walls of the leased premises and any warranted items as expressly set forth herein, but not the doors, or windows or any of the appliances or appurtenances of said doors or windows or any attachment thereof or attachments to the building or leased premises used in connection therewith. Landlord warrants the repair of the HVAC system for a period of two (2) years from the commencement date. 17. TENANT TO INDEMNIFY / LIABILITY INSURANCE. The Tenant agrees to indemnify, defend and hold harmless the Landlord from any liability for damages to any person or property in, on or about the leased premises and expenses (including attorney's fees) arising from the operation of Tenant's business 5/13 on the premises or from acts or omissions of Tenant or Tenant's employees, agents, licensees, invitees or contractors; and Tenant will procure and keep in effect during the term hereof public liability and property damage insurance for the benefit of the Landlord in the sum of One Million and 00/100 Dollars ($1,000,000.00) for damages resulting to one person, One Million and 00/100 Dollars ($1,000,000.00) for property damage resulting from any one occurrence, Two Million and 00/100 Dollars ($2,000,000.00) for damages resulting from one casualty, and contractual liability insurance covering Tenant's indemnity obligations. Tenant shall deliver to the Landlord certificates of insurance indicated that the above described insurance is in effect, and upon Tenant's failure so to do the Landlord may at his option obtain such insurance and the cost thereof shall be paid by Tenant as additional rent on or before the next rent payment due date following written notice from Landlord, and upon default in payment Tenant shall pay interest thereon at the rate of twelve percent (12%) per annum from the date the payment was due; but the election on the part of Landlord not to obtain such insurance shall not release the Tenant of his obligations and liability under this Paragraph 17. 18. TENANT'S OBLIGATION TO REPAIR / ALTERATIONS, ADDITIONS AND IMPROVEMENTS. Except as provided in Paragraph 16 hereof, the Tenant further covenants and agrees that he will, at his own expense, during the continuation of this Lease, keep the leased premises and every part thereof and at the expiration of the term yield and deliver up the same in as good repair and in a like condition as when taken, reasonable use and wear thereof excepted. The Tenant shall not make any alterations, additions or improvements to the leased premises without the Landlord's written consent, which consent shall not be unreasonably withheld, and all alterations, additions or improvements made by either of the parties hereto upon the leased premises, except movable office furniture and trade fixtures put in at the expense of the Tenant, shall be the property of the Landlord, and shall remain upon and be surrendered with the leased premises at the termination of this Lease, without molestation or injury. 19. EMINENT DOMAIN. If the whole or any substantial part of the leased premises is taken by any public authority under the power of eminent domain, then the term of this Lease shall cease on the part so taken from the day possession of that part shall have been so taken and the rent shall be paid up to that day, and from that day the monthly rental payments shall be reduced pro-rata for the portion so taken. If, however, the portion of the leased premises so taken shall materially interfere with the use by the Tenant of the remainder of the leased premises, Tenant shall have the right to terminate this Lease by written notice to the Landlord within sixty (60) days after possession shall have been so taken. All damages awarded for such taking shall belong to and be the property of the Landlord whether such damages shall be awarded as compensation for diminution in value to the leasehold or the fee of the leased premises, provided, however, that the Tenant may file its own claim and Landlord shall not be entitled to any portion of the award made to the Tenant for loss of business or moving expenses. 20. RESERVATION. The Landlord reserves the right of free access at all times to the roof of the leased premises and reserves the right to rent said roof for the placement of aerials. The Tenant shall not erect on the roof any structures for storage or any aerial, or use the roof for any purpose without the written consent of the Landlord. 21. CARE OF PREMISES. The Tenant shall not perform any acts or carry on any practices which may injure the building, be a nuisance or menace to occupiers of contiguous properties owned by Landlord or violate any provision of the Declaration and shall keep the premises under 6/13 his control (including sidewalks, streets and parking areas) clean and free from rubbish, dirt and debris at all times. It is further agreed that in the event the Tenant shall not comply with this paragraph, the Landlord may, following the tenth (10th) day after written notice to Tenant, enter upon the premises and have such rubbish, dirt, debris, nuisance, menace or violating condition removed, in which event the Tenant agrees to pay all reasonable charges therefor. Said charges shall be paid to the Landlord on or before the next rent payment due date following Landlord's presentment of the bill(s) therefor. 22. TENANT'S COMPLIANCE WITH LAWS AND REGULATIONS. Tenant shall at his own expense and under penalty of forfeiture and damages promptly comply with all laws, orders, regulations or ordinances of all municipal, County and State authorities affecting the leased premises and the cleanliness, safety, occupation and use of same. If at any time after Tenant has taken occupancy of the leased premises, repairs, additions or alterations to the leased premises or any of its systems or components, whether structural or non-structural, shall be required by statute, ordinance, regulation, or order of any governmental authority or court of appropriate jurisdiction, or insurance carrier providing the insurance required by this Lease, by reason of the operation of Tenant's business, it shall be the obligation of the Tenant to make such repairs, additions or alterations at his own expense. 23. CONDITION OF PREMISES. The Tenant acknowledges that he has examined the leased premises prior to the making of this Lease and knows the condition thereof, and that no representations as to the condition or state of repairs thereof have been made by the Landlord, or his agent, which are not herein expressed, and the Tenant hereby accepts the leased premises in their present condition, subject to Landlord's obligation to make the improvements described in Paragraph 36 herein. Landlord warrants that as of the commencement date all improvements, except those installed by Tenant, are in compliance with all applicable laws, orders, regulations and ordinances affecting the use of the leased premises. 24. HAZARDOUS WASTE INDEMNIFICATION. (a) Landlord represents that it has no knowledge of the presence of any hazardous or toxic substances on the leased premises. Landlord shall indemnify, defend and hold harmless the Tenant from and against all liability and expense, including defense costs and attorney fees, arising from or caused by the presence or removal of hazardous or toxic substances that existed on the leased premises prior to Tenant's occupancy. (b) Tenant covenants and agrees not to receive, treat, store, or dispose on any part of the leased premises any hazardous or toxic substances, whether liquid, solid or gaseous, except if done in compliance with all applicable laws, and if any such substances are generated (including those in compliance with applicable laws) as a result of Tenant's operations, Tenant shall promptly have such substances removed in a safe and proper manner and in compliance with all applicable laws, and Tenant shall indemnify, defend and hold harmless the Landlord from all liability and expense, including defense costs and attorney fees, arising from or caused by the presence or removal of such hazardous or toxic substances. 25. ADJOINING PREMISES / DISRUPTION OF UTILITIES. The Landlord shall not be responsible or liable to the Tenant for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying contiguous or other lots or premises owned by Landlord or for any loss or damage resulting to the Tenant or his property from bursting, stoppage, failure or leakage of water, gas, sewer, electrical or other utilities or services. 7/13 26. RE-RENTING. The Tenant hereby agrees that for a period commencing ninety (90) days prior to the termination of this Lease, the Landlord may show the leased premises to prospective tenants, and sixty (60) days prior to the termination of this lease, may display in and about the leased premises and in the windows thereof, the usual and ordinary "FOR RENT" signs. 27. HOLDING OVER. It is hereby agreed that in the event of the Tenant holding over after the termination of this Lease, thereafter the tenancy shall be from month to month in the absence of a written agreement to the contrary. 28. GAS, WATER, HEAT, ELECTRICITY. The Tenant shall pay all charges made against the leased premises for gas, water, heat and electricity during the term of this Lease and any extensions thereof, as the same shall become due. 29. SIGN / ADVERTISING DISPLAYS. Tenant shall be permitted to install at Tenant's expense one ground mounted sign in front of the building on the leased premises provided it has been approved in writing by Landlord. Landlord shall control the character and size thereof. No other signs or advertising shall be displayed and no awning shall be installed or used on the exterior of the building unless approved in writing by the Landlord. 30. ACCESS TO PREMISES. The Landlord shall have the right to enter upon the leased premises at all reasonable hours, but after forty-eight (48) hours prior written notice, for the purpose of inspecting the same. If the Landlord deems any repairs necessary he may demand that the Tenant make the same and if the Tenant refuses or neglects forthwith to commence such repairs after having had reasonable opportunity to obtain the necessary workmen therefor and complete the same with reasonable dispatch the Landlord may make or cause to be made such repairs and Landlord shall not be responsible to the Tenant for any loss or damage that may accrue to Tenant's stock or business by reason thereof. If the Landlord makes or causes to be made such repairs, the Tenant agrees that he will pay to the Landlord the costs thereof on or before the next rent payment due date following Landlord's presentment of the bill(s) therefor. 31. QUIET ENJOYMENT. The Landlord covenants that the Tenant, on payment of the rent installments and performing all of the covenants herein, shall and may peacefully and quietly have, hold and enjoy the leased premises for the lease term. 32. DEFAULT. In the event any rent shall be due and unpaid and Tenant fails to pay such rent within ten (10) days after written notice from Landlord, or if default be made in any of the covenants herein contained and Tenant fails to cure the same to Landlord's satisfaction within thirty (30) days after written notice from Landlord, or if the leased premises shall be abandoned or vacated then it shall be lawful for the Landlord, his attorney, heirs, representatives and assigns, to re-enter into and re-possess the leased 8/13 premises and to remove and put out the Tenant and each and every occupant of the leased premises, with or without terminating this Lease at the sole discretion of Landlord. In the event Landlord recovers possession of the leased premises as a result of Tenant's default and does not elect to terminate this Lease, Landlord shall have the right from time to time to make such repairs and alterations to the leased premises as shall be determined necessary by Landlord and shall have the right to re-let the same upon such terms and conditions as Landlord in its sole discretion deems advisable without interference by Tenant; and upon such re-letting, all rentals received by Landlord shall be applied as follows: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord and to damages suffered by Landlord by reason of Tenant's breach of this Lease; second, to the payment of any costs and expenses of such re-letting, including commissions and attorneys fees and costs of repairs and alterations; third, to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by the Landlord, and applied to payment of future rent as the same shall become due and damages as shall accrue or may be suffered thereafter by Landlord by reason of Tenant's breach of this Lease. If such rentals received from such re-letting during any month be less than the sum of rentals payable for that month plus other amounts due from Tenant under this Lease, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and be paid monthly. No such re-entry or taking possession of the leased premises by Landlord shall be construed as an election on Landlord's part to terminate this Lease, unless a written notice of such intention be given to Tenant, or unless the termination hereof be declared by a court of competent jurisdiction. Notwithstanding any such re-letting without termination, Landlord may at any time thereafter elect to terminate this Lease for any previous breach and retain all rent received. In the event Landlord obtains possession of the leased premises by re-entry, summary proceedings, or otherwise, the Tenant hereby agrees to pay Landlord the expense (including attorney's fees) incurred in obtaining possession of the leased premises and collecting rents and other obligations from Tenant, all expenses and commissions which may be paid in and about the re-letting of the leased premises and all other damages to which Landlord shall be entitled under this Lease or by law. 33. WAIVER / INVALID PROVISIONS. No default in the payment of rent or any other amount required to be paid under the terms of the Lease, or the failure of Landlord to enforce any provisions of this Lease upon any default by Tenant shall be construed as creating a custom of deferring payment or as in any way modifying the terms and conditions of this Lease, or as a waiver of Landlord's right to exercise any right, remedy or privilege given to the Landlord by law or under the terms and conditions of this Lease. Landlord may not be deemed to have waived any of Landlord's rights, remedies or privileges, except to the extent that such waiver shall have been reduced to writing and signed by the Landlord, and such waiver shall be limited to the terms of such writing. One or more waivers by Landlord of any breach of covenant or condition shall not be construed as a waiver of a further breach of the same covenant or condition. The parties declare that time is of the essence with respect to the covenants under this Lease. If any terms or provisions of this Lease or the application thereof to any person or circumstance shall to any extent be declared by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Lease shall not be affected thereby, and each of the remaining terms and conditions of this Lease shall be valid and enforceable in accordance with their terms to the fullest extent permitted by law. 34. ACCORD AND SATISFACTION. No payment by Tenant or acceptance by Landlord of an amount less than the amount and other sums that shall become due and payable under this Lease shall be deemed to be other than on account of the earliest rent and/or other amounts due. 35. REMEDIES NOT EXCLUSIVE. 9/13 It is agreed that each and every of the rights, remedies and benefits provided by this Lease shall be cumulative, and shall not be exclusive of any other of said rights, remedies and benefits, or of any other rights, remedies and benefits allowed by law. 36. CONSTRUCTION OF BUILD-OUT IMPROVEMENTS. Landlord agrees to construct the build-out improvements described on the Specifications for Build-Out of Building at 51362 Quadrate Drive, Macomb Twp., Michigan, on Lots 6 and 7 and the south 65 feet of Lot 8, Quadrate Corporate Park Subdivision, attached hereto as "Exhibit C", in accordance with the floor plans by T n A Designs, sheets A1 and A1.1, as drawn by Timothy A. C. Hader, dated 8/13/00, and to complete such improvements on or before the 90th day after the date of execution of this Lease. Costs for those improvements are included in the lease rate. All other improvements that are not specifically described on Exhibit C shall be at Tenant's expense and the cost thereof shall be due and payable not later than the last business day before the date on which Tenant takes occupancy of the leased premises, unless otherwise agreed in a written change order made and executed by the parties in connection with such other improvements. It is agreed that Tenant's payment for such other improvements is a condition precedent to Tenant's right to take occupancy (either full or partial) of the leased premises. 37. COMMENCEMENT DATE. As used in this lease, the words "commencement date" mean the date on which the leased premises (either in whole or in part) are first occupied (as hereinafter defined) by Tenant or the 90th day after the date of execution of this Lease, whichever date is earlier. The term "occupied" is defined to include any use of or entry upon the leased premises by Tenant or Tenant's agents, employees or contractors, after Landlord has completed the build-out improvements described on Exhibit C, for the purpose of installing or moving-in Tenant's fixtures, furniture or equipment. If the commencement date is not the first day of any calendar month, the term of this Lease shall be extended by the number of days from and including the commencement date to and including the last day of such month (hereinafter "partial first month"), and Tenant shall pay to Landlord within five (5) days after the commencement date, as rent for the partial first month, the monthly rent amount, including all additional rent for taxes and insurance, prorated on the basis of the number of days in the partial first month. A walk-through by representatives of Landlord and Tenant shall be conducted within seven (7) days after the completion of the build-out improvements for the purpose of verifying that the build-out improvements have been duly completed. Punch list items not preventing the Tenant from taking occupancy of the leased premises may be completed by Landlord within sixty (60) days after the Tenant takes occupancy of the leased premises. 38. DELAY OF POSSESSION. It is agreed that if the Tenant shall be unable to enter into and occupy the leased premises at the time above provided, by reason of the leased premises not being ready for occupancy, as a result of any cause or reason whatsoever, the Landlord shall not be liable in damages to the Tenant therefor, but during the period the Tenant shall be unable to occupy the leased premises as hereinbefore provided, the rental therefor shall be abated. The leased premises shall be deemed ready for occupancy when a temporary certificate of occupancy has been issued by the Township of Macomb. 39. NOTICES. Whenever under this Lease a provision is made for notice of any kind, and unless the provision requires a specific manner of notice or service, it shall be deemed sufficient notice and service thereof if such notice is in writing and delivered in person or by registered or certified mail with postage prepaid, and if to Tenant, to the leased premises and a copy to the Chief Financial Officer of Tenant at 172 East Main Street, 10/13 Georgetown, MA 01833-2107, or if to Landlord, at the address of the Landlord indicated above, or such other address as the respective party may, from time to time hereafter, specify by notice given to the other party in accordance with this paragraph. 40. WORDS OF GENDER OR NUMBER. It is agreed that in this Lease, unless the context clearly indicates the contrary, the word "he" is synonymous with the words "she", "it" and "they," the word "his" is synonymous with the words "her," "its" and "their", singular words include the plural and plural words include the singular. 41. TITLES. The descriptive titles of paragraphs herein are for reference only and any construction of this Lease shall be made without regard thereto. 42. ENTIRE AGREEMENT. This Lease supersedes any and all prior or contemporaneous understandings, agreements and negotiations and constitutes the entire agreement between the parties hereto, and no oral representations or statements shall be considered a part hereof. No amendment of this Lease shall be effective unless it is in writing and signed by both of the parties. 43. BINDING EFFECT. The covenants, conditions and agreements made and entered into by the parties hereto are declared binding on their respective heirs, successors, representatives and assigns. 44. GOVERNING LAW. The provisions of this Lease shall be governed by and construed in accordance with the laws of the State of Michigan. 45. SECURITY PROVISIONS. The Landlord herewith acknowledges the receipt of the sum of Thirty Seven Thousand Four Hundred Thirteen and 67/00 Dollars ( $37,413.67 ), which he is to retain as security for the faithful performance of all of the covenants, conditions and agreements of this Lease, but in no event shall the Landlord be obligated to apply the same upon rents or other charges in arrears or upon damages for the Tenant's failure to perform the said covenants, conditions and agreements. The Landlord may so apply the security at his option; and the Landlord's right to the possession of the leased premises for non-payment of rent or for any other reason shall not in any event be affected by reason of the fact that the Landlord holds this security. The Landlord shall not be obligated to keep the said security as a separate fund, but may mix the said security with his own funds. In the event the Landlord repossesses the leased premises because of the Tenant's default or because of the Tenant's failure to carry out the covenants, conditions and agreements of this Lease, the Landlord may apply the said security upon all rents and other charges accrued and all damages suffered to the date of said repossession and may retain the said security to apply upon additional rents and damages as shall accrue or as may be suffered thereafter in accordance with the terms of this Lease. The said sum, if not so applied shall be returned to the Tenant within sixty (60) days after Tenant has vacated the leased 11/13 premises and delivered possession thereof to the Landlord in accordance with the covenants, conditions and agreements of this Lease. 46. OPTION TO RENEW. Tenant shall have two options to renew this Lease, each for an additional three year term, provided that: (1) at the time Tenant exercises the option, the Lease is in force and Tenant is not then in default of any of the terms or conditions of this Lease, and (2) Tenant gives Landlord written notice of its election to exercise the option not later than one hundred eighty (180) days prior to the expiration of the term preceding the option term. Each of the three year option terms shall be on the same terms and conditions of this Lease, except that the monthly base rent, exclusive of additional rent for taxes, insurance premiums and maintenance, shall be as follows: FIRST THREE-YEAR OPTION TERM Year 1 - $6.40 N.N.N. ($37,708.27/ month) Year 2 - $6.55 N.N.N. ($38,592.05/ month) Year 3 - $6.70 N.N.N. ($39,475.84/ month) SECOND THREE-YEAR OPTION TERM Year 1 - $6.70 N.N.N. ($39,475.84/ month) Year 2 - $6.85 N.N.N. ($40,359.63/ month) Year 3 - $7.00 N.N.N. ($41,243.42/ month) No additional charges for build-out costs. IN WITNESS WHEREOF, the parties have hereunto set their hands the day and year first above written. WITNESSED BY: LANDLORD: QUADRATE DEVELOPMENT, L.L.C., /s/ GERALYN M. GRIEBE By: /s/ L. ROBERT D'AGOSTINI (L.S.) - --------------------- ------------------------------- L. Robert D'Agostini /s/ JULIA DAVIS Its: Member - --------------------- TENANT: UFP TECHNOLOGIES, INC. /s/ CARLA JARVIS By: /s/ RONALD J. LATAILLE (L.S.) - --------------------- ------------------------------- Its: Chief Financial Officer /s/ SUSAN MOOD - --------------------- ACKNOWLEDGEMENTS STATE OF MICHIGAN ) ) SS. COUNTY OF MACOMB ) 12/13 On this 25TH day of AUGUST 2000 before me, a Notary Public in and for said County, appeared L. ROBERT D'AGOSTINI, to me personally known, who being by me sworn, did say that he is member of QUADRATE DEVELOPMENT, L.L.C., a Michigan limited liability company named in and which executed the within instrument, that he is duly authorized by said company to sign the instrument on behalf of the company, and that he acknowledges said instrument to be the free act and deed of said company. /s/ JUDITH ANN WEINGARTZ ------------------------------------ Notary Public Notary Public Macomb Co. MI My commission expires July 31, 2003 STATE OF MASSACHUSETTS ) ) SS. COUNTY OF ESSEX ) On this 23RD day of AUGUST 2000, before me, a Notary Public in and for said County, appeared RON LATAILLE, to me personally known, who being by me sworn, did say that he/she is CFO of UFP TECHNOLOGIES, INC., a Delaware corporation named in and which executed the within instrument, that he/she is duly authorized by said corporation to sign the instrument on behalf of the corporation, and that he acknowledges said instrument to be the free act and deed of said corporation. /s/ JOAN F. YOUNG ------------------------------------ Notary Public Essex County, Massachusetts. My Commission Expires 1/24/03 LEASE UFP-Simco 13/13 EX-10.44 3 a2042896zex-10_44.txt EXHIBIT 10.44 EXHIBIT 10.44 UFP TECHNOLOGIES 172 East Main Street Georgetown, MA 01833 tel. 978-352-2200 / fax 978-352-5616 February 20, 2001 Mr. Jeffrey L. Berkowitz Cramer, Berkowitz Partners, L.P. 40 Fulton Street, 24th Floor New York, NY 10038 RE: Agreement Letter to Purchase 300,000 Shares of UFPT Stock Dear Mr. Berkowitz: The purpose of this letter is to set forth our agreement with respect to the purchase by UFP Technologies, Inc. ("UFP") of 300,000 shares of the common stock (the "Common Stock") of UFP from the persons listed on Schedule A hereto (the "Sellers"). 1. Subject to the approval of UFP's Board of Directors, UFP hereby agrees to purchase 300,000 shares of Common Stock (the "Stock") from the Sellers pursuant to the terms hereof at a price equal to the lesser of (a) $1.75 per share and (b) the closing price of UFP stock as reported on the NASDAQ National Market on Tuesday, February 20, 2001. Upon notice of satisfaction of the conditions set forth in this Section 1, the Sellers shall deliver promptly to UFP certificates representing the Stock, endorsed in blank and in proper form for transfer (the "Certificates"). Upon receipt of the Certificates, UFP shall wire the purchase price for the Stock in accordance with your written instructions. 2. The Sellers hereby represent and warrant that: (i) the Sellers own, hold and have good and marketable title to all the Stock, free and clear of any and all liens, pledges and encumbrances of any kind, (ii) the Sellers have beneficially owned the Stock for more than two years prior to the date of this Agreement, (iii) the Sellers are authorized to enter into this Agreement and the transactions contemplated hereby and (iv) the Sellers' execution of this Agreement and performance of the Sellers' obligations under this Agreement will not violate, breach or conflict with any agreements or court orders to which the Sellers are subject. 3. The Sellers hereby further acknowledge: (i) that the Sellers approached UFP and proposed that UFP repurchase the Stock; (ii) that UFP from time to time considers strategic alliances, joint ventures and acquisitions, as well as share buy-back, going-private and change-of-control transactions; and (iii) that there may be material, nonpublic information regarding UFP that has not been disclosed to the Sellers and that could dramatically increase or decrease the value of the Stock, such as information concerning transactions like those described above or other matters, such as product introductions, new customers or changes in the competitive landscape. UFP Technologies, Inc. - Cramer, Berkowitz Partners, L.P. Agreement Letter to Purchase 300,000 Shares of UFPT Stock February 20, 2001, page 2 - -------------------------------------------------------------------------------- 4. The Sellers, on their behalf and on behalf of each of their affiliates, hereby release and forever discharge UFP, and each of UFP's respective past, present and future representatives, affiliates, stockholders, directors, officers, controlling persons, subsidiaries, successors and assigns (individually, a "Releasee" and collectively, "Releasees") from any and all claims, demands, proceedings, causes of action, orders, obligations, contracts, agreements, debts and liabilities whatsoever, whether known or unknown, suspected or unsuspected, both at law and in equity and which the Sellers or any of the Sellers' respective affiliates now have, have ever had or may hereafter have against the respective Releases arising by virtue of the sale of Stock hereunder. 5. This Agreement constitutes the entire agreement between the parties. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the parties. No waiver by any party of any default, misrepresentation or breach of warranty or a covenant hereunder, whether intentional or not, shall be effective unless in writing and signed by a person duly authorized to waive the interests of such party. No such waiver shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. This Agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, regardless of the laws that might otherwise govern under applicable conflicts of laws thereof. If the agreement set forth herein is acceptable to you, please sign below where indicated. Sincerely, UFP TECHNOLOGIES, INC. By: /s/ R. Jeffrey Bailly --------------------- R. Jeffrey Bailly, President & CEO Accepted and Agreed: CRAMER, BERKOWITZ PARTNERS, L.P. By: /s/ Jeffrey L. Berkowitz -------------------------------- Jeffrey L. Berkowitz BERKOWITZ CAPITAL & CO., L.L.C. By: /s/ Jeffrey L. Berkowitz -------------------------------- Jeffrey L. Berkowitz J.L. BERKOWITZ & CO., L.L.C. By: /s/ Jeffrey L. Berkowitz -------------------------------- Jeffrey L. Berkowitz UFP Technologies, Inc. - Cramer, Berkowitz Partners, L.P. Agreement Letter to Purchase 300,000 Shares of UFPT Stock February 20, 2001, page 3 - -------------------------------------------------------------------------------- SCHEDULE A Cramer, Berkowitz Partners, L.P. Berkowitz Capital & Co., L.L.C. J.L. Berkowitz & Co., L.L.C. EX-23.01 4 a2042896zex-23_01.txt EXHIBIT 23.01 EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As Independent Public Accountants, we hereby consent to the incorporation by reference of our report dated February 9, 2001, included in this Form 10K, into registration statements previously filed by UFP Technologies, Inc. on, respectively, Form S-8, File No. 33-32248; Form S-8, File No. 333-56741; Form S-8, File No. 33-76440; and Form S-8, File No. 333-39946. /s/ ARTHUR ANDERSEN LLP - ------------------------------------ Boston, Massachusetts March 22, 2001 EX-23.02 5 a2042896zex-23_02.txt EXHIBIT 23.02 EXHIBIT 23.02 ACCOUNTANTS' CONSENT The Board of Directors UFP Technologies, Inc. We consent to the inclusion in Form 10-K of UFP Technologies, Inc. of our report dated February 25, 1999, with respect to the consolidated statements of income, stockholders' equity, and cash flows for the year ended, and the related schedule, which report appears in the Form 10-K of UFP Technologies, Inc. dated March 26, 2001. /S/ KPMG LLP - ------------------------------------ Boston, Massachusetts March 26, 2001 -----END PRIVACY-ENHANCED MESSAGE-----