10-Q

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

(Mark one)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

              For the quarterly period ended    SEPTEMBER 30, 2001   

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                For the transition period from ____ to ____

Commission File Number:  001-12648

UFP Technologies, Inc.

(Exact name of registrant as specified in its charter)

Delaware	04-2314970
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
172 East Main Street, Georgetown, Massachusetts 01833, USA
(Address of principal executive offices)  (Zip Code)

(978) 352-2200

(Registrant's telephone number, including area code)

(Former name, former address and former

fiscal year, if changed since last report)

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 ý    No o

4,227,400 shares of registrant's Common Stock, $.01 par value, were outstanding as of November 8, 2001.

UFP Technologies, Inc.

Index

PART I:          FINANCIAL INFORMATION

Item 1           Financial Statements

UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

	30-Sep-01			31-Dec-00
ASSETS	(Unaudited)			(Audited)
Current assets
Cash and cash equivalents	$	95,405		$	94,051
Accounts receivable	9,775,773			10,692,979
Inventories	5,852,768			6,779,950
Prepaid expenses and other current assets	2,420,985			945,998
Total current assets	18,144,931			18,512,978
Property, plant and equipment	27,700,513			25,917,992
Less accumulated depreciation and amortization	(15,619,493		)	(13,464,427		)
Net property, plant and equipment	12,081,020			12,453,565
Goodwill, net	6,398,330			6,724,907
Other assets	2,600,376			2,660,954
Total assets	39,224,657			40,352,404
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable	$	7,026,287		$	4,736,754
Current installments of long-term debt	1,466,681			1,057,150
Current installments of capital lease obligations	296,049			290,554
Accounts payable	3,440,286			4,439,577
Accrued expenses and payroll withholdings	3,361,433			3,849,817
Total current liabilities	15,590,736			14,373,852
Long-term debt, excluding current installments	7,046,560			7,174,311
Capital lease obligations, excluding current installments	175,289			415,156
Retirement and other liabilities	777,497			861,645
Total liabilities	23,590,082			22,824,964
Stockholders' equity:
Common stock	42,274			43,884
Additional paid-in capital	8,163,036			8,474,533
Retained earnings	7,429,265			9,009,023
Total stockholders' equity	15,634,575			17,527,440
Total liabilities and stockholders' equity	$	39,224,657		$	40,352,404

The accompanying notes are an integral part of these condensed consolidated financial statements.

UFP Technologies, Inc.

Consolidated Income Statements

(Unaudited)

	Three Months Ended				Nine Months Ended
	30-Sep-01			30-Sep-00	30-Sep-01		30-Sep-00
Net sales	$	13,935,119		18,898,192	46,382,132		56,597,686
Cost of sales	12,122,657			14,478,388	38,150,811		43,282,121
Gross profit	1,812,462			4,419,804	8,231,321		13,315,565
Selling, general and administrative expenses	3,303,729			3,687,342	10,345,956		11,013,074
Operating income (loss)	(1,491,267		)	732,462	(2,114,635	)	2,302,491
Interest expense	222,884			330,857	782,099		924,056
Other (income) / expense	-			718	(16,379	)	58,190
Income (loss) before income taxes	(1,714,151		)	400,887	(2,880,355	)	1,320,245
Income taxes	(771,371		)	180,751	(1,300,597	)	594,439
Net income (loss)	$	(942,780	)	220,136	(1,579,758	)	725,806
Basic net income (loss) per share	$	(0.22	)	0.05	(0.37	)	0.17
Diluted net income (loss) per share	$	(0.22	)	0.05	(0.37	)	0.17
Weighted average number of shares used in computation of per share data:
Basic	4,214,385			4,383,166	4,259,474		4,374,588
Diluted	4,214,385			4,394,021	4,259,766		4,390,478

The accompanying notes are an integral part of these condensed consolidated financial statements

UFP Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	30-Sep-01			30-Sep-00
Cash flows from operating activities:
Net income (loss)	$	(1,579,758	)	725,806
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	2,456,834			2,290,362
Stock issued in lieu of compensation	141,123			171,062
Loss on disposal of property, plant & equipment	-			58,189
Changes in operating assets and liabilities:
Receivables	917,206			54,758
Inventories	927,182			(267,005	)
Prepaid expenses and other current assets	(1,474,987		)	(7,740	)
Accounts payable	(999,291		)	(2,405,680	)
Accrued expenses and payroll withholdings	(488,384		)	(333,034	)
Retirement and other liabilities	(84,148		)	(91,849	)
Other assets	(381		)	(129,124	)
Net cash (used in) provided by operating activities	(184,604		)	65,745
Cash flows from investing activities:
Additions to property, plant and equipment	(1,739,521		)	(1,232,442	)
Payments from affiliated company	42,764			31,890
Acquisition of Simco Industries	-			(5,802,123	)
Proceeds from life insurance	-			154,861
Proceeds on sales of assets	-			23,000
Net cash used in investing activities	(1,696,757		)	(6,824,814	)
Cash flows from financing activities:
Net borrowings under notes payable	2,289,533			1,514,367
Principal repayments of long-term debt	(8,718,220		)	(48,494	)
Principal repayments of capital lease obligations	(234,372		)	(1,180,873	)
Proceeds from long-term borrowings	9,000,000			6,120,000
Net proceeds from sale of common stock	70,774			66,848
Capital stock repurchase	(525,000		)	-
Net cash provided by financing activities	1,882,715			6,471,848
Net change in cash and cash equivalents	1,354			(287,221	)
Cash and cash equivalents, at beginning of period	94,051			348,729
Cash and cash equivalents, at end of period	$	95,405		61,508

The accompanying notes are an integral part of these condensed consolidated financial statements.

NOTES

TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(1)       Basis of Presentation

        The interim consolidated financial statements of UFP Technologies, Inc. (the Company) presented herein, without audit, have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all the information and note disclosures required by generally accepted accounting principles.  These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2000, included in the Company's 2000 Annual Report on Form 10-K as provided to the Securities and Exchange Commission.

        The condensed consolidated balance sheet as of September 30, 2001, the consolidated income statements for the three and nine months ended September 30, 2001 and 2000, and the consolidated statements of cash flows for the nine months ended September 30, 2001 and 2000, are unaudited but, in the opinion of management, include all adjustments (consisting of normal, recurring adjustments) necessary for fair presentation of results for these interim periods.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

        The results of operations for the three and nine months ended September 30, 2001, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2001.

(2)       New Accounting Pronouncements

The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended by SFAS Nos. 137 and 138), effective January 1, 2001.  The statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value.  Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting.   Adoption of the statement did not have a material effect on the Company’s results of operations or financial position.

The Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.  This SAB provided additional guidance on the accounting for revenue recognition, including both broad conceptual discussion as well as certain industry-specific guidance.  The Company adopted the guidance effective January 1, 2000.  Adoption of the new guidance did not have a material effect on its results of operations or financial position, and no restatement of its historical financial statements was required.

The Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, in March 2000.  The interpretation clarified how companies should apply APB Opinion No. 25, Accounting for Stock Issued to Employees. Currently, there are no awards granted by the Company that would result in an adjustment as a result of the interpretation.

In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.  Under these new Standards, the FASB eliminated accounting for mergers and acquisitions for poolings of interests, eliminated amortization of goodwill and indefinite life intangible assets, and established new impairment measurement procedures for goodwill.  For calendar year reporting companies, the standards became effective for all acquisitions completed on or after June 30, 2001.  Changes in financial statement treatment for goodwill and intangible assets arising from mergers and acquisitions completed prior to June 30, 2001, become effective January 1, 2002.  The company is currently assessing the impact of implementing these standards.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board (APB) No. 30, Reporting the Results of Operations.  SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years.  The company is currently reviewing this statement to determine its effect on the company’s financial statements.

(3)       Inventory

        Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:

	09/30/01		12/31/00
Raw materials	$	3,590,886	$	4,242,874
Work-in-process	468,157		785,848
Finished goods	1,793,725		1,751,228
Total inventory	$	5,852,768	$	6,779,950

Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead.

 (4)      Common Stock

        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 non-qualified stock options or incentive stock options for the issuance of up to 1,550,000 shares of common stock.  The exercise price of the incentive stock options may not be less than the fair market value of the common stock on the date of grant, and the exercise price for non-qualified 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 options.

        At December 31, 2000,  731,944 options were outstanding under the Company's 1993 Employee Stock Option Plan ("1993 Plan").  The purpose of these options is to provide long-term rewards and incentives to the Company's key employees and officers.  Zero options were issued, zero options were exercised, and 24,000 options expired in the first nine months of 2001 under the 1993 Plan.  At September 30, 2001,  707,944 options were outstanding under the plan.

Through July 15, 1998, the Company maintained a stock option plan covering non-employee directors (the “1993 Director Plan”).  Effective July 15, 1998, with the formation of the 1998 Director Stock Option Incentive Plan (“1998 Director Plan”), the 1993 Director Plan was frozen.  The 1993 Director Plan provided for options for the issuance of up to 110,000 shares of common stock.  On July 1 of each year, each individual who at the time was serving as a non-employee director of the Company received an automatic grant of options to purchase 2,500 shares of common stock.  These options became exercisable in full six months after the date of grant and 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 September 30, 2001,  55,000 options were outstanding under the 1993 Director Plan.

Effective July 15, 1998, 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 provided for options for the issuance of up to 150,000 shares of common stock.  In July 2001, the Company amended the plan to provide an additional 25,000 options for the issuance of up to a total of 175,000 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 September 30, 2001,  159,068 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 up to 10% of their base salaries withheld during the six-month offering periods ending June 30 and December 31 for the purchase of the Company’s common stock at 85% of the lower of the market value of the common stock on the first or last day of the offering period.  The Stock Purchase Plan provides for the issuance of up to 150,000 shares of common stock.

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.

(5)       Earnings Per Share

        Basic earnings per share computations are based on the weighted average number of shares of common stock outstanding.  Diluted earnings per share is based upon the weighted average of common shares and dilutive common stock equivalent shares outstanding during each period.

        The weighted average number of shares used to compute diluted income per share consisted of the following:

	Three Months Ended		Nine Month Ended
	09/30/01	09/30/00	09/30/01	09/30/00
Weighted average common shares outstanding - basic	4,214,385	4,383,166	4,259,474	4,374,588
Weighted average common equivalent shares due to stock options	-	10,855	292	15,890
Weighted average common shares oustanding - diluted	4,214,385	4,394,021	4,259,766	4,390,478

        Diluted weighted average shares outstanding for the nine months ended September 30, 2000, exclude 558,732 options due to the fact that option prices were greater than the average market price of the common stock.  The Company incurred a loss for the three and nine months ended September 30, 2001.

(6)       Segment Reporting

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 of the Company's annual report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission.  The Company evaluates the performance of its operating segment based on net income.

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 and net income agree with the Company’s comparable amount contained in the 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.

		Three Months Ended 9/30/01																		Three Months Ended 9/30/00
		Specialty						Packaging						Total UFPT						Specialty					Packaging				Total UFPT
Net sales		$		7,425,635				$		6,509,484				$		13,935,119				$		9,820,245			$		9,077,947		$		18,898,192
Net (loss) income		(555,703				)		(387,077				)		(942,780				)		(44,484			)		264,620				220,136
	Nine Months Ended 9/30/01																		Nine Months Ended 9/30/00
	Specialty						Packaging						Total UFPT						Specialty					Packaging				Total UFPT
Net sales	$		24,032,468				$		22,349,664				$		46,382,132				$		30,965,219			$		25,632,467		$		56,597,686
Net (loss) income	(1,001,859				)		(577,899				)		(1,579,758				)		151,723					574,083				725,806

* * *

Item 2    Management's Discussion and Analysis of Financial Condition and Results of Operations

Sales

Net sales for the three-month period ended September 30, 2001, were $13.9 million or 26.3% below sales of $18.9 million in the same period last year.  Sales for the nine-month period ended September 30, 2001, were $46.4 million or 18.1% below sales of $56.6 million in the same period last year.  The overall decline in sales is primarily related to a decline in sales within the Company’s specialty products group, which was negatively impacted by the loss of a large customer that developed an alternative in-house solution to the Company's products, and a decline in sales within the Company’s packaging segment due to an economic slowdown, particularly in the computer and electronics industry.

Gross Profit

Gross profit as a percentage of sales (gross margin) decreased in the three- and nine-month periods ended September 30, 2001, over the respective periods last year.  Gross margins for the three-month periods ended September 30, 2001 and 2000, were 13.0% and 23.4%, respectively.  Gross margins for the nine-month periods ended September 30, 2001 and 2000, were 17.8% and 23.5%, respectively.  The declines in gross margin are primarily attributable to fixed expenses in cost-of-sales measured against lower sales in both the specialty and packaging segments and, with respect to year-to-date gross margins, costs incurred during the first quarter in consolidating and moving the Company’s  plants in Detroit and California.

Selling, General and Administrative Expenses

Selling, General and Administrative expenses ("SG&A") were $3.3 million, or 23.7% of sales, for the three-month period ended September 30, 2001, compared to $3.7 million, or 19.5% of sales, in the same period a year ago.  SG&A expenses were $10.3 million, or 22.3% of sales for the nine-month period ended September 30, 2001, compared to $11.0 million or 19.5% in the same period last year.  The increases in SG&A as a percentage of sales are primarily attributable to the decline in sales.  The decreases in SG&A dollars are primarily attributable to efforts to cut costs within the Company.

Other

Interest expense for the three-month period ended September 30, 2001, decreased to $223,000 from $331,000 in the comparable period last year. Interest expense for the nine-month period ended September 30, 2001, decreased to $782,000 from $924,000 last year.  The decreases are primarily due to lower interest rates.

The Company's effective tax rate for the three and nine months ended September 30, 2001, was approximately 45% compared to the same percentage in the respective periods last year.

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.

At September 30, 2001 and December 31, 2000, the Company's working capital was approximately $ 2.6 million and $4.1 million, respectively.  The decrease in working capital is primarily a result of higher short-term borrowings as well as the first quarter stock repurchase of $525,000.

Net cash used in operations was approximately $185,000 in the nine-month period ended September 30, 2001, compared to $66,000 generated from operations in the same period last year.  The primary reason for the Company being a net cash user is that operating losses increased during the period.  Cash used in investing activities during the nine-month period ended September 30, 2001, was $1.7 million, which was almost exclusively additions to property, plant and equipment.  The majority of the capital expenditures was for manufacturing equipment as well as leasehold improvements during the first quarter associated with two plant moves.  Net cash provided by financing activities for the nine-month period ended September 30, 2001, was approximately $1.9 million compared to approximately $6.5 million in the same period last year. The primary reason for the decrease is the financing of the acquisition of Simco in the first quarter of 2000.

While the Company does not have any significant capital commitments, it intends to continue to invest in capital equipment to support its operations.  The Company is also engaged in discussions with certain parties regarding potential strategic acquisitions, but presently does not have any material agreements to enter into any such acquisitions.  The Company intends to fund any such acquisitions with working capital and bank financing.

In June, 2001, the Company secured a new credit facility with its lead bank. Included in the facility is a $10 million revolving line of credit, of which approximately $7 million was outstanding at September 30, 2001. Also included is a $4 million acquisition line-of-credit of which no amounts were outstanding at September 30, 2001.  These facilities are secured by a first lien on the Company’s assets. The Company has two additional loans.  The first is a $6.5 million term loan with a five-year, straight-line principal amortization, which is secured by the Company’s machinery and equipment.  The second is a $2.5 million five-year loan with a 15-year mortgage style amortization, which is secured by the Company’s real estate in Georgetown, Massachusetts.  All facilities bear interest at LIBOR plus a variable spread that ranges from 1.25% to 2.5%, or prime plus a variable spread that ranges from 0% to 0.25%. Under the terms of these arrangements, the Company is required to comply with various covenants, including the maintenance of specified financial ratios, as defined.  At September 30, 2001, the Company was in compliance with these covenants.  At September 30, 2001, the Company had capital lease obligations of approximately $471,000.  At September 30, 2001, the current portion of all debt, including the revolving bank loan, was approximately $8.8 million.

The Company believes that its existing resources, including its revolving loan facility and acquisition line of credit, together with cash expected to be 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 next twelve months.  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.

Quantitative and Qualitative Disclosure about 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 September 30, 2001, 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 debt instruments where interest is based upon the prime rate and, therefore, future operations could be affected by interest rate changes; however, the Company believes that the market risk of the debt is minimal.

PART II - OTHER INFORMATION

UFP TECHNOLOGIES, INC.

Item 1   Legal Proceedings

No material litigation

Item 2   Changes in Securities

None

Item 3   Defaults Upon Senior Securities

None

Item 4   Submission of Matters to a Vote of Security Holders

None

Item 5   Other Information

None

Item 6   Exhibits and Reports on Forms 8-K

(a)       Exhibits:

(10.47) Amended 1998 Director Stock Option Incentive Plan

(b)       Reports on Form 8-K:

The Company did not file a Current Report on Form 8-K during the quarter ended September 30, 2001.

UFP TECHNOLOGIES, INC.

SIGNATURES

Pursuant to the requirements 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.

(Registrant)

/s/   November 13, 2001	/s/  R. Jeffrey Bailly
Date	R. Jeffrey Bailly President, Chief Executive Officer and Director
/s/    November 13, 2001	/s/  Ronald J. Lataille
Date	Ronald J. Lataille Vice President, Chief Financial Officer & Treasurer

EX-10.47

                                                                                                                   &# 160;                      EXHIBIT : A

UFP TECHNOLOGIES, INC.

1998 DIRECTOR STOCK OPTION INCENTIVE PLAN

(AS AMENDED AS OF JULY 2, 2001)

1.  Statement of Purpose. This 1998 Non-employee Director Stock Option Plan (the "Plan") intended to promote the interests of UFP Technologies, Inc., a Delaware corporation (the "Company") by offering non-employee members of the Board of Directors of the Company (individually a "Non-employee Director" and collectively "Non-employee Directors") the opportunity to participate in a special stock option program designed to provide them with significant incentives to remain in the service of the Company.

2.  Administration.  The Plan shall be administered by the Board of Directors of the Company or by any committee of the Board of Directors, including the Compensation Committee (the "Committee").  The Committee shall have full and plenary authority to interpret the terms and provisions of the Plan.

3.  Eligibility. Non-employee Directors of the Company shall be eligible to receive grants of non-statutory options under this Plan (individually an "Option" and collectively "Options") pursuant to the provisions of Section 5 hereof.

4.  Stock Subject to Plan. The stock issuable under this Plan shall be shares of the Company's Common Stock, par value $.01 per share (the Common Stock). Such shares may be made available from authorized but unissued shares of Common Stock or shares of Common Stock reacquired by the Company. The aggregate number of shares of Common Stock issuable upon exercise of Options under this Plan shall not exceed 175,000 shares, subject to adjustment from time to time in accordance with Section 9 hereof.

5.  Granting of Options.

a.  Automatic Granting of Options.

(i)  Commencing July 1, 1999, and continuing in effect on July 1, in each subsequent calendar year, each individual who is at the time serving as a Non-employee Director shall receive an automatic grant of an Option to purchase 2,500 shares of Common Stock (subject to adjustment as provided in Section 10 hereof).  Each Option granted pursuant to this Section 5(a)(herein referred to individually as an "Automatic Option" or collectively as "Automatic Options") shall be for a term of ten (10) years.  Each Option shall become exercisable for any or all of the shares covered by such Option on the later of the date on which this Plan is ratified by the shareholders of the Company or on the date of automatic grant pursuant to this Section 5(a).  The Automatic Option shall thereafter remain so exercisable until the expiration or sooner termination of the Option term.  The foregoing automatic grant dates under this Section 5(a) are herein referred to individually as an "Automatic Grant Date" and collectively as "Automatic Grant Dates".

(ii)  Should an Optionee cease to be a member of the Board of Directors of the Company for any reason other than death or permanent disability, such Optionee's Automatic Options may be exercised (to the extent they were exercisable on the date of such termination) by the Optionee or, if he or she is not living, by his or her heirs, legatees or legal representative, as the case may be, during their specified term but not later than three (3) months after the date of such termination.

(iii)  Should an Optionee cease to be a member of the Board of Directors of the Company because of death or permanent disability (as that term is defined in Section 22(e)(3) of the Code, as now in effect or as subsequently amended), such Automatic Options may be exercised in full, by the Optionee or, if he or she is not living, by his or her heirs, legatees or legal representatives, as the case may be, during their specified term but not later than one (1) year after the date of death or permanent disability.

b.  Options in Lieu of Director Fees.

(i)  Each Non-Employee Director may elect to receive any or all of his or her annual director fees or fees for serving as a member of any committee of the Board of Directors earned during the second half of 1998 and each subsequent calendar year in the form of Non-Qualified Stock Options under this Section 5(b).  Each Option granted pursuant to this Section 4(b) is herein referred to individually as an "Elective Option" or collectively as "Elective Options".  Each such election must be irrevocable, and made in writing and filed with the Secretary of the Company by June 30, 1998 (for fees earned in the second half of 1998) and (for fees earned in subsequent calendar years) by December 31 of each year for fees to be received in the following calendar year.

(ii)  A Non-Employee Director may file a new election each calendar year applicable to fees earned in the immediately succeeding calendar year.  If no new election or revocation of a prior election is received by December 31 of any calendar year, the election, if any in effect for such calendar year shall continue in effect for the immediately succeeding calendar year.  If a director does not elect to receive his or her fees in the form of Non-Qualified Stock Options, the fees otherwise due such director shall be paid in accordance with the normal payment dates of director fees, as the same may be amended from time to time by the Company.

(iii)  The number of common shares covered by each Elective Option granted in any year under this Section 5(b) shall be determined based on an independent appraisal for such year of the intrinsic value of options granted hereunder and the amount of fees covered by the director's election for such year.  The number of common shares covered by options granted in 1998 and 1999 (as determined under this procedure) shall be the number of whole shares equal to (A) the product of three (3) times the amount of fees which the director has elected under subsection (i) to receive in the form of Elective Options, divided by (B) One Hundred percent (100%)  of the fair market value of one common share on the grant date.  Any fraction of a share shall be disregarded, and the remaining amount of the fees corresponding to such option shall be paid in cash.

(iv)  Each Elective Option due a director under this Section 5(b) shall be issued as of the date of the Annual Meeting of Stockholders of the Company held in the calendar year during which the corresponding fees otherwise due the director would have been paid and at a purchase price equal to One Hundred percent (100%) of the fair market value of the common shares covered by such option on the grant date, provided, however, that with respect to fees earned during the second half of 1998, the date of grant shall be July 15, 1998.  Each Elective Option shall have a term of ten (10) years and shall become exercisable for any or all of the shares covered by such Elective Option on the later of the date on which this plan is ratified by the shareholders of the Company or on the date of grant pursuant to this Section 5(b).  The Elective Option shall thereafter remain so exercisable until the expiration or sooner termination of the Option term.  The foregoing elective grant dates under this Section 5(b) are herein referred to individually as an "Elective Grant Date" and collectively as "Elective Grant Dates".

(v)  Each Elective Option shall remain in effect for the remainder of the option term following the termination of the Optionee's service on the Board of Directors of the Company.  In the event of the death or permanent disability (as that term is defined in Section 22(e)(3) of the Code, as now in effect or as subsequently amended) of the Optionee, such Elective Options may be exercised in full, by the Optionee or, if he or she is not living, by his or her heirs, legatees or legal representatives, as the case may be, during their specified term.

c.  Discretionary Granting of Options.

(i)  In addition to the Automatic Options and Elective Options, the Committee may grant non-qualified options to Non-Employee Directors from time to time in the discretion of the Committee subject to the provisions of this Section 5(c) and the other provisions of this Plan.  Each Option granted pursuant to this Section 5(c) is herein referred to individually as a "Discretionary Option" or collectively as "Discretionary Options". The grant of a Discretionary Option pursuant to this Section 5(c) shall be evidenced by a written Non–Qualified Stock Option Agreement, executed by the Company and the Non-Employee Director, stating the number of shares of Common Stock subject to such Option evidenced thereby and in such form and with such restrictions and subject to such conditions as the Committee may from time to time determine, which need not be the same for each grant or for each participant.

(ii)  Each Discretionary Option shall be for a term of not more than ten years.  Each Discretionary Option shall become exercisable in such installments as may be determined from time to time by the Committee but not earlier than the date on which this Plan is ratified by the shareholders of the Company.  In addition, subject to such shareholders ratification, the Committee may, in its discretion (i) accelerate the exercisability of such option subject to such terms as the Committee deems necessary and appropriate to effectuate the purpose of the Plan; or (ii) at any time prior to the expiration or termination of any Option previously granted, extend the term of any such option for such period as the Committee in its discretion shall determine.  In no event, however, shall the aggregate option period with respect to any option, including the original term of the option and any extensions thereof, exceed ten years.  Subject to the foregoing, all or any part of the shares to which the right to purchase has accrued may be purchased at the time of such accrual or at any time or times thereafter during the option period.

(d)  The Non-employee Directors receiving Options are herein referred to individually as an "Optionee" and collectively as "Optionees."  Options granted under this Plan are not intended to be treated as incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

(e)  In the event that an Option expires or is terminated or canceled unexercised as to any shares of Common Stock, the shares subject to the Option, or portion thereof not so exercised, shall be available for subsequent grants of Automatic Options, Elective Options or Discretionary Options under this Plan.

(f)  Should the total number of shares of Common Stock at the time available under this Plan not be sufficient for the automatic or elective grants to be made at that particular time, the available shares shall be allocated proportionately among all Automatic and Elective Option grants to be made at that time.

6.  Exercise Price. The exercise price of a Discretionary Option shall be determined by the Committee in its discretion, and may be greater than, but not less than the fair market value, at the time the option is granted, of the shares of Common Stock subject to the option.  The exercise price of an Automatic Option or an Elective Option shall be 100% of the fair market value of Common Stock as of the applicable Automatic Grant Date or Elective Grant Date.  Such fair market value shall be deemed to be the last trading price of the Common Stock on the trading day next preceding the date of the grant of the option except that if the Common Stock is then listed on any national exchange, fair market value shall be the mean between the high and low sales price on the trading day next preceding the date of grant of the option.  If shares of the Common Stock shall not have been traded on any national exchange or interdealer quotation system for more than 10 days immediately preceding the date of grant of such option or if deemed appropriate by the Committee for any other reason, the fair market value of shares of Common Stock shall be determined by the Committee in such manner as it may deem appropriate.  In no event shall the exercise price of any share of Common Stock be less than its par value.

7.   Exercise of Option.

a.  A Discretionary Option may be exercised in such manner as may be provided in the applicable Non-Qualified Stock Option Agreement referred to in Section 5(c)(i) hereof.  An Automatic Option or an Elective Option may be exercised by giving written notice to the Company, attention of the Secretary, specifying the number of shares to be purchased, accompanied by the full purchase price for the shares to be purchased either in cash, or its equivalent, or by tendering previously owned shares of the Common Stock of the Company, or by a combination of these methods.  Payment may also be made by delivery (including delivery by facsimile transmission) to the Company or its designated agent of an executed irrevocable option exercise form together with irrevocable instructions to a broker-dealer to sell a sufficient portion of the shares and deliver the sale proceeds directly to the Company to pay for the exercise price, or by any other means which the Committee, in its discretion, determines to be consistent with the Plan’s purpose and applicable law.  For the purpose of this Section 7, the per share value of the Common Stock of the Company shall be the fair market value determined in accordance with Section 6 hereof, except using the trading day next preceding the date of exercise.  Any Optionee holding two or more options that are partially or wholly exercisable at the same time may exercise said options (to the extent they are then exercisable) in any order the Optionee chooses, regardless of the order in which said options were granted.

b.  In connection with the exercise of options granted under the Plan, the Company may make loans to the Optionees as the Committee, in its discretion, may determine.  Such loans shall be subject to the following terms and conditions and such other terms and conditions as the Committee shall determine not inconsistent with the Plan.  Such loans shall bear interest at such rates as the Committee shall determine from time to time, which rates may be below then current market rates or may be made without interest.  In no event may any such loan exceed the fair market value, at the date of exercise, of the shares covered by the Option, or portion thereof, exercised by the Optionee.  No loan shall have an initial term exceeding two years, but any such loan may be renewable at the discretion of the Committee.  When a loan shall have been made, shares of the Common Stock having a fair market value at least equal to 150 percent of the principal amount of the loan shall be pledged by the Optionee to the Company as security for payment of the unpaid balance of the loan.

c.  At the time of exercise of any Option, the Company may, if it shall determine it necessary or desirable for any reason, require the Optionee (or his heirs, legatees or legal representative, as the case may be) as a condition upon the exercise thereof, to deliver to the Company a written representation of present intention to purchase the shares for investment and not for distribution. In the event such representation is required to be delivered, an appropriate legend may be placed upon each certificate delivered to the Optionee (or his or her heirs, legatees or legal representative, as the case may be) upon his or her exercise of part or all of the Option and a stop transfer order may be placed with the transfer agent.  Each Option shall also be subject to the requirement that, if at any time the Company determines, in its discretion, that the listing, registration or qualification of the shares subject to the Option upon any securities exchange or under any state or federal law or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of or in connection with the issue or purchase of shares thereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

8.  Non-Transferability. Except as otherwise provided in an Optionee’s option agreement, or as otherwise permitted by the Committee in its discretion, Options shall not be assignable or transferable by the Optionee otherwise than by will or by the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by the Code, or Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the rules thereunder. Subject to the foregoing, during the lifetime of the Optionee, Options shall be exercisable only by the Optionee.

9.  Adjustments. The number of shares subject to this Plan and to Options granted under this Plan shall be adjusted as follows: (a) in the event that the number of outstanding shares of Common Stock is changed by any stock dividend, stock split or combination of shares, the number of shares subject to this Plan and to Options granted hereunder shall be proportionately adjusted; (b) in the event of any merger, consolidation or reorganization of the Company with any other corporation or corporations, there shall be substituted, on an equitable basis for each share of Common Stock then subject to this Plan, whether or not at the time subject to outstanding Options, the number and kind of shares of stock or other securities to which the holders of shares of Common Stock will be entitled pursuant to the transaction; and (c) in the event of any other relevant change in the capitalization of the Company, an equitable adjustment shall be made in the number of shares of Common Stock then subject to this Plan, whether or not then subject to outstanding Options. In the event of any such adjustment the exercise price per share shall be proportionately adjusted.

10.  Amendment or Discontinuance of Plan. This Plan may from time to time be amended or discontinued by action of the Board of Directors or by the stockholders of the Company; provided that no such amendment or discontinuance shall change or impair any Options previously granted without the consent of the Optionee.

11.  No Impairment of Rights. Nothing in this Plan or any Automatic Grant or Elective Grant made pursuant to this Plan shall be construed or interpreted so as to affect adversely or otherwise impair the Company's right to remove any Optionee from service on the Board of Directors of the Company at any time in accordance with the provisions of the Company's By-laws and applicable law.

12.  Effective Date. This Plan was adopted and authorized by the Board of Directors of the Company on June 3, 1998 and became effective on July 15, 1998. The Plan was amended on February 24, 1999, and on July 2, 2001.