0001104659-06-053456.txt : 20060810 0001104659-06-053456.hdr.sgml : 20060810 20060810112526 ACCESSION NUMBER: 0001104659-06-053456 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060810 DATE AS OF CHANGE: 20060810 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12648 FILM NUMBER: 061020071 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-Q 1 a06-15399_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

(Mark one)

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

For the quarterly period ended JUNE 30, 2006

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 x; No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non–accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o; No x

5,073,613 shares of registrant’s Common Stock, $.01 par value, were outstanding as of July 31, 2006.

UFP Technologies, Inc.

Index

		Page

PART I - FINANCIAL INFORMATION		3

Item 1. Financial Statements		3

Condensed Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005		3

Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005		4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005		5

Notes to Interim Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion & Analysis of Financial Condition & Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures About Market Risk		19

Item 4. Controls and Procedures		19

PART II - OTHER INFORMATION		20

SIGNATURES / EXHIBIT INDEX		22

Exhibits		22

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

	30-Jun-06			31-Dec-05
	(unaudited)
Assets
Current assets:
Cash	$	132,053		$	265,352
Receivables less allowances of $543,802 and $565,141	13,550,622			15,299,748
Inventories net of reserves of $379,154 and $262,154	6,267,094			6,441,592
Prepaid expenses and other current assets	1,316,360			1,573,665
Total current assets	21,266,129			23,580,357
Property, plant and equipment	38,178,913			36,723,341
Less accumulated depreciation and amortization	(27,273,413		)	(25,750,620		)
Net property, plant and equipment	10,905,500			10,972,721
Goodwill	6,481,037			6,481,037
Other assets	3,139,475			2,965,901
Total assets	$	41,792,141		$	44,000,016
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable	$	3,349,505		$	7,990,521
Current installments of long-term debt	1,081,568			1,087,030
Current installments of capital lease obligations	682,439			638,875
Accounts payable	5,937,612			6,062,841
Accrued expenses and payroll withholdings	4,824,714			4,480,239
Total current liabilities	15,875,838			20,259,506
Long-term debt, excluding current installments	4,945,262			5,286,548
Capital lease obligations, excluding current installments	2,696,223			2,363,163
Minority interest	588,417			633,853
Retirement and other liabilities	695,780			695,780
Total liabilities	24,801,520			29,238,850
Commitments and contingencies
Stockholders’ equity:
Common stock, $.01 par value. Authorized 20,000,000 shares; issued and outstanding 5,072,226 shares at June 30, 2006 and 4,828,079 shares at December 31, 2005	50,722			48,281
Additional paid-in capital	9,919,331			8,966,472
Retained earnings	7,020,568			5,746,413
Total stockholders’ equity	16,990,621			14,761,166
Total liabilities and stockholders’ equity	$	41,792,141		$	44,000,016

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

UFP Technologies, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Six Months Ended
	30-Jun-06			30-Jun-05			30-Jun-06			30-Jun-05
Net sales	$	24,533,970		$	20,917,802		$	48,674,688		$	39,109,693
Cost of sales	19,244,669			16,791,479			38,506,561			31,360,406
Gross profit	5,289,301			4,126,323			10,168,127			7,749,287
Selling, general & administrative expenses	3,872,101			3,372,887			7,529,286			6,422,896
Operating income	1,417,200			753,436			2,638,841			1,326,391
Interest expense	276,024			249,651			539,260			465,894
Minority interest earnings	27,908			14,907			59,557			233,888
Other income	(15,037		)	(17,879		)	(15,037		)	(17,879		)
Income before income tax expense	1,128,305			506,757			2,055,061			644,488
Income tax expense	427,761			192,568			780,923			244,897
Net income	$	700,544		$	314,189		$	1,274,138		$	399,591
Net income per share:
Basic	$	0.14		$	0.07		$	0.26		$	0.08
Diluted	$	0.13		$	0.06		$	0.24		$	0.08
Weighted average common shares outstanding:
Basic	4,973,728			4,814,483			4,924,106			4,772,477
Diluted	5,567,672			5,235,524			5,415,171			5,214,874

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

UFP Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended
	30-Jun-06			30-Jun-05
Cash flows from operating activities:
Net income	$	1,274,138		$	399,591
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	1,545,189			1,372,924
Minority interest earnings	59,564			233,888
Equity in net income of unconsolidated affiliate	(15,038		)	(12,531		)
Stock issued in lieu of cash compensation	144,247			240,450
Share-based compensation	238,751			—
Deferred income taxes	460,820			244,897
Changes in operating assets and liabilities:
Receivables, net	1,845,693			(1,585,673		)
Inventories, net	260,715			(127,176		)
Prepaid expenses and other current assets	(219,638		)	(235,150		)
Accounts payable	513,870			1,206,663
Accrued restructuring charge, net of fixed asset write-offs	—			(36,433		)
Accrued expenses and payroll withholdings	344,425			(377,577		)
Retirement and other liabilities	(16,418		)	(40,000		)
Other assets	—			1,877
Net cash provided by operating activities	6,436,318			1,285,750
Cash flows from investing activities:
Additions to property, plant and equipment	(763,867		)	(1,693,190		)
Acquisition of assets of Stephens Packaging	(309,229		)	—
Payments from affiliated company	15,038			12,531
Net cash used in investing activities	(1,058,058		)	(1,680,659		)
Cash flows from financing activities:
Borrowings (payments) of notes payable	(4,641,016		)	355,038
Change in book overdrafts	(676,083		)	53,874
Principal repayments of long-term debt	(346,748		)	(514,389		)
Proceeds from exercise of stock options	364,414			—
Tax benefit from exercise of non-qualified stock options	168,391			—
Principal repayments of capital lease obligations	(1,674,081		)	(199,287		)
Proceeds from long-term capital lease obligations	1,359,000			731,388
Distribution to United Development Company partners	(105,000		)	(104,993		)
Net proceeds from sale of common stock	39,514			46,715
Net cash provided by (used in) financing activities	(5,511,609		)	368,346
Net (decrease) in cash	(133,349		)	(26,563		)
Cash at beginning of period	265,352			317,951
Cash at end of period	$	132,003		$	291,388
Significant non-cash transactions:
Property and equipment acquired under capital lease	$	691,705		$	—

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

NOTES TO INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The interim condensed 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 accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2005, included in the Company’s 2005 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

The condensed consolidated balance sheet as of June 30, 2006, the condensed consolidated statements of income for the three and six months ended June 30, 2006 and 2005, and the condensed consolidated statements of cash flows for the six months ended June 30, 2006 and 2005, 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 accounting principles generally accepted in the United States of America 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 six months ended June 30, 2006, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2006.

(2) Share-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee services. Under the provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. The Company elected to adopt the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the periods prior to January 1, 2006 presented in this Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation. Under this application, the Company is required to record compensation cost for all share-based payments granted after the date of adoption based on the grant date fair value estimated in accordance with the provisions of SFAS 123R and for the unvested portion of all share-based payments previously granted that remain outstanding which were based on the grant

date fair value estimated in accordance with the original provisions of SFAS 123. The Company expenses its share-based compensation on a straight line basis over the requisite service period for each award.

The provisions of SFAS 123R apply to share-based payments made through several plans, which are described below. The compensation cost that has been charged against income for those plans is as follows:

	Three Months Ended				Six Months Ended
	30-Jun-06		30-Jun-05		30-Jun-06		30-Jun-05
Cost of sales	$	—	$	—	$	—	$	—
Selling, general & administrative expense	206,370		—		238,751		—
Total share-based compensation expense	$	206,370	$	—	$	238,751	$	—

The Company has recorded compensation expense of $114,950 during the three- and six-month periods ended June 30, 2006 for options granted during the period. All options were associated with Director options. The compensation expense was determined as the intrinsic fair market value of the options, using a lattice-based option valuation model with the assumptions noted as follows:

Expected volatility: 92.7%

Expected dividends: None

Risk-free interest rate: 5.0% to 5.1%

Exercise price: Closing price on date of grant

Imputed life: 8.0 years (output in lattice-based model)

The Company did not recognize compensation expense for employee stock options for the three-and six-month periods ended June 30, 2005, when the exercise price of the employee stock option equaled the market price of the underlying stock on the grant date.

The total income tax benefit recognized in the income statement for share-based compensation arrangements was approximately $78,000 and $91,000 for the three- and six-month periods ended June 30, 2006 respectively.

The following table illustrates the effects on net income and earnings per share for the three and six months ended June 30, 2005 as if the Company had applied the fair value recognition provisions of SFAS 123 to share-based employee awards:

	Three Months Ended		Six Months Ended
	30-Jun-05		30-Jun-05
Net income as reported	$	314,189	$	399,591
Pro forma net income	192,212		252,714
Basic net income per share as reported	0.07		0.08
Pro forma basic net income per share	0.04		0.05
Diluted net income per share as reported	0.06		0.08
Pro forma diluted net income per share	$	0.04	$	0.05

The fair value of each option grant for options granted prior to January 1, 2006 is estimated on the date of grant, using the Black Scholes option pricing model with the following assumptions:

		Three- and six-month period
		Ended 6/30/05
Expected term		6.8 years
Volatility		89.2%
Risk free interest rate		4.0%
Dividend yield		0%

Employee Stock Option Plan

The Company’s 1993 Employee Stock Option Plan (“Employee Stock Option Plan”), which is stockholder approved, provides long-term rewards and incentives in the form of stock options to the Company’s key employees, officers, employee directors, consultants, and advisors. The Company believes that such awards better align the interests of its employees with those of its stockholders. 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. These options expire over five- to ten-year periods. Options granted under the plan generally become exercisable with respect to 25% of the total number of shares subject to such options at the end of each 12-month period following the grant of the options, except for options granted to officers, which may vest on an accelerated schedule. At December 31, 2005, there were 829,075 options outstanding under the Company’s 1993 Employee Stock Option Plan (“1993 Plan”). During the first six months of 2006, no options were granted, 23,500 options were exercised, and no options were canceled under the 1993 Plan. At June 30, 2006, there were 805,575 options outstanding under the Plan. Should stock options be issued under the Employee Stock Option Plan in the future, the Company will record compensation expense based upon the intrinsic fair market value of the stock options, using a lattice-based option valuation model.

Equity Incentive Plan

In June 2003, the Company formally adopted the 2003 Equity Incentive Plan (the “Plan”). The Plan is intended to benefit the Company by offering equity-based incentives to certain of the Company’s executives and employees, thereby giving them a permanent stake in the growth and long-term success of the Company and encouraging the continuance of their involvement with the Company’s businesses. The Company believes that such awards better align the interests of its executives and employees with those of its stockholders. Two types of awards may be granted to participants under the Plan: restricted shares or other stock awards. Restricted shares are shares of common stock awarded subject to restrictions and to possible forfeiture upon the occurrence of specified events. Other stock awards are awards that are denominated or payable in, valued in whole or in part by reference to or otherwise based on or related to shares of common stock. Such awards may include, without limitation, unrestricted stock, nonqualified options, performance shares, or stock appreciation rights. The Company determines the form, terms, and conditions, if any, of any awards made under the Plan. The maximum number of shares of common stock, in the aggregate, that may be delivered in payment or in respect of stock issued under the Plan is 500,000 shares. Through June 30, 2006, 191,166 shares of common stock have been issued under this Plan, none of which have been restricted. 54,411 shares were issued during the six-month period ended June 30, 2006. On April 26, 2006, the Company’s

Compensation Committee approved the issuance of 25,000 shares of unrestricted common stock to the Company’s President and Chief Executive Officer. The shares will be issued on January 1, 2007, based upon the closing price of the Company’s stock on December 31, 2006. Based upon the provisions of SFAS 123R, the Company has recorded compensation expense of $41,750 associated with the granting of these shares during the six-month period ended June 30, 2006.

On June 8, 2006, the Company’s Board of Directors approved the granting of Stock Unit Awards (“SUAs”) to the Company’s key executives, effective July 1, 2006, with additional SUAs to be potentially issued effective July 1, 2007, subject to the achievement of certain financial performance objectives. The SUAs represent a promise to issue shares of the Company’s common stock at a future date as per the following table:

Condition	# of Shares	Grant Date	Vesting
None	48,000	July 1, 2006	1/3 per year, commencing July 1, 2007
Subject to achievement of performance objectives	zero to 96,000	July 1, 2007	1/3 per year, commencing July 1, 2008

Based upon the provisions of SFAS 123R, the Company has recorded compensation expense of $20,000 in the three- and six-month periods ended June 30, 2006, associated with the SUAs.

Stock Purchase 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 95% of the market value of the common stock on the last day of the offering period. The 1998 Stock Purchase Plan provides for the issuance of up to 400,000 shares of common stock. Through June 30, 2006, there were 296,941 shares issued under this Plan.

Director Plans

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 the date of the 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. During the first six months of 2006, no options were granted, 10,000 options were exercised, and 10,000 options expired under the 1993 Director Plan. At June 30, 2006, there were 20,000 options 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 425,000 shares of common stock. On June 2, 2004, the Company amended the Plan to increase the allowable amount to 725,000 shares. These options become exercisable in full at 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 frozen; however, the options outstanding under the 1993 Director Plan were not affected by the adoption of the new plan. During the first six months of 2006, 19,877 options were granted, 138,963 options were exercised, and no options were cancelled under the 1998 Director Plan. On June 8, 2006, the Company’s Board of Directors approved the granting of 30,000 stock options to its Directors effective July 1, 2006. At June 30, 2006, there were 387,385 options outstanding under the 1998 Director Plan.

The following is a summary of stock option activity under all plans:

	Shares Under Options		Weighted Average Exercise Price
Outstanding December 31, 2003	1,136,170		$	1.88
Granted	214,167		2.74
Exercised	(118,800	)	2.04
Cancelled or expired	(56,000	)	3.08
Outstanding December 31, 2004	1,175,537		$	1.97
Granted	305,759		3.08
Exercised	(86,875	)	1.51
Cancelled or expired	(18,875	)	3.20
Outstanding December 31, 2005	1,375,546		$	2.23
Granted	19,877		6.15
Exercised	(172,463	)	2.21
Cancelled or expired	(10,000	)	6.13
Outstanding June 30, 2006	1,212,960		$	2.26

There were 1,093,335 exercisable options as of June 30, 2006.

During the six months ended June 30, 2006, the total intrinsic value of all options exercised (i.e., the difference between the market price and the price paid by the employees to exercise the options) was $973,588, and the total amount of cash received from the exercise of these options was $380,777.

The following is a summary of information relating to stock options outstanding and exercisable by price range as of June 30, 2006:

		Options Outstanding			Options Exercisable
Range of exercise prices	Outstanding as of 6/30/06	Weighted average remaining contractual life	Weighted average exercise price		Exercisable as of 6/30/06	Weighted average exercise price
$0.00 - $0.99	73,700	4.0	$	0.81	73,700	$	0.81
$1.00 - $1.99	433,968	5.0	1.25		416,718	1.25
$2.00 - $2.99	349,684	6.5	2.50		349,684	2.50
$3.00 - $3.99	318,231	6.0	3.36		215,856	3.34
$4.00 - $4.99	17,500	1.4	4.18		17,500	4.18
$5.00 - $5.99	—	—	—		—	—
$6.00 - $6.99	19,877	9.9	6.15		19,877	6.15
	1,212,960	5.7	$	2.26	1,093,335	$	2.17

The total grant date fair value of stock options that vested during the six months ended June 30, 2006 was approximately $573,000 with a weighted average remaining contractual term of approximately 5 years.

The following summarizes the future share-based compensation expense the Company will record as equity securities vest:

	Options		Common Stock	Restricted Stock Units	Total
2006	$	56,368	41,750	120,164	$	218,282
2007	$	92,468	0	240,328	$	332,796
2008	$	75,968	0	240,328	$	316,296
2009	$	17,679	0	192,458	$	210,137
2010	$	—	—	72,294	72,294
	$	242,483	41,750	865,572	$	1,149,805

(3) Inventories

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

	30-Jun-06			31-Dec-05
Raw materials	$	4,360,234		$	4,487,659
Work-in-process	337,418			370,106
Finished goods	1,948,596			1,845,981
Reserves	$	(379,154	)	$	(262,154	)
Total inventory	$	6,267,094		$	6,441,592

(4) 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		Six Months Ended
	30-Jun-06	30-Jun-05	30-Jun-06	30-Jun-05
Weighted average common shares outstanding, basic	4,973,728	4,814,483	4,924,106	4,772,477
Weighted average common equivalent shares due to stock options	593,944	421,041	491,065	442,397
Weighted average common shares outstanding, diluted	5,567,672	5,235,524	5,415,171	5,214,874

(5) 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: Engineered Packaging and Component Products. Within the Engineered Packaging segment, the Company primarily uses polyethylene and polyurethane foams, sheet plastics, and pulp fiber to provide customers with cushion packaging for their products. Within the Component Products applications segment, the Company primarily uses cross-linked polyethylene foam to provide customers in the automotive, athletic, leisure and health and beauty industries with engineered product for numerous purposes.

The accounting policies of the segments are the same as those described in Note 1 of the Company’s annual report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission. The Company evaluates the performance of its operating segments 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 interim financial statements. Revenues from customers outside of the United States are not material. One customer in the Component Products group comprised 18% of the Company’s consolidated revenues during the six-month period ended June 30, 2006. All of the Company’s assets are located in the United States.

	Three Months Ended 6/30/06						Three Months Ended 6/30/05
	Engineered Packaging		Component Products		Total UFPT		Engineered Packaging		Component Products		Total UFPT
Net sales	$	9,602,933	$	14,931,037	$	24,533,970	$	8,501,782	$	12,416,020	$	20,917,802
Net income	201,977		498,567		700,544		258,193		55,996		314,189

	Six Months Ended 6/30/06						Six Months Ended 6/30/05
	Engineered Packaging		Component Products		Total UFPT		Engineered Packaging		Component Products			Total UFPT
Net sales	$	18,856,585	$	29,818,103	$	48,674,688	$	17,457,149	$	21,652,544		$	39,109,693
Net income	387,157		886,981		1,274,138		625,974		(226,383		)	399,591

(6) Indebtedness

As a component of consolidating UDT’s assets, the Company included $120,141 in cash. Although this cash balance is not legally restricted, the Company does not use this cash in its operations.

On February 28, 2003, the Company obtained a credit facility, which has been amended effective March 24, 2004, June 28, 2004, and November 21, 2005, to reflect, among other things, changes to certain financial covenants. The amended facility is comprised of: (i) a revolving credit facility of $17 million that is collateralized by the Company’s accounts receivable and inventory; (ii) a term loan of $3.7 million with a 7-year straight-line amortization that is collateralized by the Company’s property, plant and equipment (excluding UDT’s property, plant and equipment); and (iii) a term loan of $2.3 million with a 15-year straight-line amortization that is collateralized by a mortgage on the Company’s real estate located in Georgetown, Massachusetts. Extensions of credit under the revolving credit facility are subject to available collateral based upon accounts receivable and inventory levels. Therefore, the entire $17 million may not be available to the Company. For example, as of June 30, 2006, based upon revolving credit facility borrowings outstanding of $3.3 million and collateral levels, the Company had availability of $11.1 million of additional credit under this facility. The amount of availability can fluctuate significantly. The amended credit facility calls for interest of Prime or LIBOR plus a margin that ranges from 1% to 1.5%, depending upon Company operating performance. All borrowings at June 30, 2006 had interest computed at Prime or LIBOR plus 1.0%. Under the amended credit facility, the Company is subject to certain financial covenants including maximum capital expenditures and minimum fixed charge coverage. As of June 30, 2006, the Company was in compliance with all of these covenants. The Company’s $17 million revolving credit facility, as amended, is due February 28, 2009; the $3.7 million term loan and the $2.3 million mortgage are due November 21, 2011. At June 30, 2006, the interest rate on these facilities ranged from 5.7% to 8.3%.

As a result of the consolidation of United Development Company Limited, a mortgage note collateralized by the Alabama and Florida facilities, dated September 4, 2002, originally for $470,313 is included within long-term debt in the Consolidated Financial Statements. The note calls for fifty principal payments of $3,406 and one payment of $300,013 due on December 4, 2006. The note bears interest at LIBOR plus 2.75%, adjusted monthly. At June 30, 2006, the outstanding balance was $398,997 and the interest rate was approximately 8.0%. Payments on this note are funded through rent payments that the Company makes on its Alabama and Florida facilities. The Company is not subject to any financial covenants under this mortgage note.

The Company also had capital lease obligations of approximately $3.4 million at June 30, 2006. At June 30, 2006, the current portion of all debt including the revolving bank loan, term loans and capital lease obligations was approximately $5.1 million.

On June 30, 2006, the Company entered into two new capital lease agreements, which were used to consolidate existing leases. The first is a $1,069,000 lease with a five-year term and the second is a $290,000 lease with a three-year term. Interest rates on these facilities are fixed at approximately 7.7%.

The Company has book overdrafts of approximately $1,831,000 and $2,507,000 at June 30, 2006 and December 31, 2005 respectively. The Company classifies book overdrafts within Accounts Payable on its Consolidated Balance Sheets.

The Company believes that its existing resources, including its revolving line of credit facility together with cash expected to be generated from operations and funds expected to be available to it through any necessary equipment financing, will be sufficient to fund its cash flow requirements through at least the next twelve months. However, there can be no assurances that the Company will be able to obtain such financing, or that such financing will be available at favorable terms, if at all.

(7) Investment in Affiliated Partnership

The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”). In accordance with the provisions of FIN 46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” the Company has consolidated the financial statements of UDT beginning at December 31, 2003, because it has determined that UDT is a variable interest entity (“VIE”) pursuant to Paragraph 5.a of FIN 46R, and the Company is the primary beneficiary. Prior to December 31, 2003, this investment was accounted for under the equity method at cost, plus the Company’s proportionate share of the limited partnership’s income, less any distributions received from the limited partnership. As a result of consolidating UDT, total assets and total liabilities and equity of the Company increased by $1,006,000 and $1,088,000 as of June 30, 2006 and December 31, 2005, respectively.

(8) Acquisition

On April 28, 2006, the Company acquired substantially all of the assets of Stephen Packaging Corporation, a fabricator of custom foam packaging solutions in Miami, Florida. The purchase price was approximately $309,000.

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements:

This report contains certain statements that are “forward-looking statements” as that term is defined under the Securities Exchange Act of 1934, as amended (the “Act”) and releases issued by the Securities and Exchange Commission. The words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. The Company’s plans, described below, to execute a Southeast automotive program which launched in the fourth quarter of 2004 for an automotive supplier that could be as large as $95 million is an example of a forward looking statement. Forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of the Company to

differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements.

The $95 million revenue value of the automotive contract is an estimate, based on the automotive supplier’s projected needs. The Company cannot guarantee that it will fully benefit from this contract, which is terminable by the automotive supplier for any reason, subject to a cancellation charge that includes, among others, a provision whereby the customer will reimburse the Company for its total capital investment less any depreciation taken. The Company’s revenues from this contract are directly dependent on the ability of the automotive supplier to develop, market, and sell its products in a timely, cost-effective manner. If the automotive supplier’s needs decrease over the course of the contract, the Company’s estimated revenues from this contract may also decrease. Even if the Company generates revenue from the project, the Company cannot guarantee that the project will be profitable, particularly if revenues from the contract are less than expected. Manufacturing companies often take advantage of lower volume summer months to shut down production to service machinery and tools. This is even more common in the automotive industry where many companies, like this supplier, historically have shut down their operations for a portion of the month of July. The Company expects this practice to continue. To the extent our customers choose to shut down their operations, for these or other reasons, our quarterly operating results could fluctuate and be materially, adversely affected. Other examples of these risks, uncertainties, and other factors include, without limitation, the following: the ability of the Company to integrate Stephen Packaging Corporation in a timely, cost-effective manner without material loss of customers, risks associated with the identification of suitable acquisition candidates and the successful, efficient execution and integration of such acquisitions, the ability of the Company to achieve positive results due to competition, decisions by customers to cancel or defer orders for its products that previously had been accepted, recent increases and possible further increases in the cost of the Company’s raw materials and energy that the Company may not be able to pass through to its customers, other economic conditions that affect sales of the products of the Company’s packaging customers, the ability of the Company to obtain new customers, evolving customer requirements, difficulties associated with the roll out of new products, the costs of compliance with Sarbanes-Oxley related requirements and general economic and industry conditions and other factors. 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. All of the forward-looking statements are qualified in their entirety by reference to the risk factors and other disclaimers described in the Company’s filings with the Securities and Exchange Commission, in particular its most recent Annual Report on Form 10-K. 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.

Overview:

UFP Technologies is a leading designer and manufacturer of interior protective packaging solutions using molded fiber, vacuumformed plastics and molded and fabricated foam plastic products. The Company also designs and manufactures engineered component solutions using laminating, molding and fabricating technologies. The Company serves a myriad of markets, but specifically targets opportunities in the automotive, computers and electronics, medical, aerospace and defense, industrial, and consumer markets.

During 2005 the Company absorbed costs associated with the launch of several new programs in its automotive operations in Michigan as well as in its large, estimated $95 million program in the Southeast that caused significant losses in its automotive business unit. These costs were in the form of

higher than anticipated scrap rates and additional direct labor requirements that, combined, caused significant losses in this business unit. However, robust demand in the remaining markets that the Company serves generated sufficient profits to more than absorb these losses. Particularly strong demand for product was in the military and medical markets. The high scrap rates and excessive direct labor improved dramatically by year-end and throughout the six-month period ended June 30, 2006. Accordingly, operating results within the automotive business unit were materially better in the first half of 2006.

During 2005, the Company was faced with significant raw material price increases and, in some cases, shortages due to high oil and natural gas prices, Asian demand for the same raw materials and the impact of Hurricanes Katrina and Rita on petrochemical plants along the Gulf coast. The majority of raw materials used by the Company—polyurethane and polyethylene foams—utilize petroleum based resins in their production. In most cases, the Company has been able to pass the cost increases through to its customers. Although prices appear to have stabilized, pricing discussions with the Company’s customers are ongoing.

Sales:

Net sales for the three-month period ended June 30, 2006 were $24.5 million or 17.3% above sales of $20.9 million in the same period last year. Net sales for the six-month period ended June 30, 2006 were $48.7 million or 24.4% above net sales of $39.1 million in the same period last year. The increase in sales for the three- and six-month periods ended June 30, 2006 is primarily a result of increased sales volume from the new automotive contract in the southeast (Component Products segment) and increased sales to the Aerospace and Defense and Medical markets (Component Products segment).

Gross Profit:

Gross profit as a percentage of sales (gross margin) increased to 21.6% and 20.9% for the three- and six-month periods ended June 30, 2006, from 19.7% and 19.8% in the same respective periods last year. The improvement in gross margin for both the three- and six-month periods ended June 30, 2006 is primarily due to the fixed portion of labor and overhead measured against higher sales (principally in the Component Products segment). The improvement in gross margin for the six-month period ended June 30, 2006 was partially offset by the absence in the current year of a gain recorded in the first quarter of 2005 on the settlement of an insurance claim, which resulted in a net gain of approximately $229,000 on a consolidated basis.

Selling, General and Administrative Expenses:

Selling, general and administrative (“SG&A”) expenses were $3.9 million or 15.8% of net sales for the three-month period ended June 30, 2006, compared to $3.4 million or 16.1% of net sales in the same period last year. SG&A expenses for the three-month period ended June 30, 2006 increased 14.8% over the same period in 2005. Selling, general and administrative (“SG&A”) expenses were $7.5 million or 15.5% of net sales for the six-month period ended June 30, 2006, compared to $6.4 million or 16.4% of net sales in the same period last year. SG&A expenses for the six-month period ended June 30, 2006 increased 17.2% over the same period in 2005. The decline in SG&A as a percentage of sales for the three- and six-month periods ended June 30, 2006 is primarily due to higher sales measured against principally fixed G&A costs. The increase in SG&A expenses is primarily due to increased expenses associated with the new automotive program in the southeast, increased sales and marketing expenses including higher sales commissions, and increased public company compliance

expenses. SG&A expense includes approximately $239,000 of share-based compensation expense for the six-month period ended June 30, 2006, recorded in accordance with the provisions of FAS 123R.

Other Expenses:

Minority interest earnings were approximately $28,000 and $60,000 for the three- and six-month periods ended June 30, 2006, compared to approximately $15,000 and $234,000 in the same respective periods last year. The decrease in minority interest earnings for the six-month period ended June 30, 2006 is primarily due to a gain recorded on the books of United Development Company Limited (“UDT”) during the first quarter of 2005 for the settlement of an insurance claim associated with property damage sustained in the Company’s Kissimmee, Florida manufacturing plant from Hurricane Charley in August, 2004. Because the Company owns 26% of UDT, the remaining 74% of the gain recorded is eliminated through minority interest.

Interest expense for the three-month period ended June 30, 2006 increased to approximately $276,000 from $250,000 in the same period last year. Interest expense for the six-month period ended June 30, 2006 increased to approximately $539,000 from $466,000 in the same period last year. The increase in interest expense for both periods is primarily due to rising interest rates, partially offset by declining debt.

The Company recorded a tax expense of approximately 38% of pre-tax income for the three- and six-month periods ended June 30, 2006 and 2005.

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 June 30, 2006 and December 31, 2005, the Company’s working capital was approximately $5.4 million and $3.3 million, respectively. As a component of consolidating UDT’s assets, the Company included $120,000 in cash at June 30, 2006. Although this cash balance is not legally restricted, the Company does not use this cash in its operations.

Net cash provided by operations for the six-month periods ended June 30, 2006 and 2005 was approximately $6.4 million and $1.3 million, respectively. The increase in cash provided by operations was primarily attributable to increased earnings, decreases in accounts receivable and inventory, and increased accrued expenses partially offset by decreases in accounts payable. Cash used in investing activities during the six-month period ended June 30, 2006 was approximately $1.1 million, which primarily was the result of additions to property, plant and equipment. These capital expenditures were primarily related to the additions of manufacturing equipment.

Therefore, the entire $17 million may not be available to the Company. For example, as of June 30, 2006, based upon revolving credit facility borrowings outstanding of $3.3 million and collateral levels, the Company had availability of $11.1 million of additional credit under this facility. The amount of availability can fluctuate significantly. The amended credit facility calls for interest of Prime or LIBOR plus a margin that ranges from 1% to 1.5%, depending upon Company operating performance. All borrowings at June 30, 2006 had interest computed at Prime or LIBOR plus 1.0%. Under the amended credit facility, the Company is subject to certain financial covenants including maximum capital expenditures and minimum fixed charge coverage. As of June 30, 2006, the Company was in compliance with all of these covenants. The Company’s $17 million revolving credit facility, as amended, is due February 28, 2009; the $3.7 million term loan and the $2.3 million mortgage are due November 21, 2011. At June 30, 2006, the interest rate on these facilities ranged from 5.7% to 8.3%.

Commitments, Contractual Obligations, and Off-balance Sheet Arrangements:

The following table summarizes the Company’s commitments, contractual obligations, and off-balance sheet arrangements at June 30, 2006, and the effect such obligations are expected to have on its liquidity and cash flow in future periods:

Payments due in:	Operating Leases		Capital Leases		Term Loans		Mortgages		Debt Interest		Supplemental Retirement Plan		Total
2006	846,394		317,313		263,285		476,997		307,440		63,625		$	2,275,054
2007	1,579,285		703,267		526,571		156,000		521,315		155,750		$	3,642,188
2008	614,506		714,553		526,571		156,000		424,787		157,250		$	2,593,667
2009	405,915		715,343		526,571		156,000		326,675		154,250		$	2,284,754
2010 & thereafter	1,626,249		928,186		1,535,835		1,703,000		776,259		164,905		$	6,734,434
	$	5,072,349	$	3,378,662	$	3,378,833	$	2,647,997	$	2,356,476	$	695,780	$	17,530,097

Payments on the United Development Company Limited mortgage note are funded through rent payments made by the Company on the Company’s Alabama and Florida facilities.

The Company requires cash to pay its operating expenses, purchase capital equipment, and to service the obligations listed above. The Company’s principal sources of funds are its operations and its revolving credit facility. Although the Company generated cash from operations in the year ended December 31, 2005 and through the first six months of 2006, it cannot guarantee that its operations will generate cash in future periods.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 June 30, 2006, 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 several debt instruments where interest is based upon either the prime rate 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 4: CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15 or 15d-15), which have been designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and

Exchange Commission’s rules and forms. Based upon that evaluation, they concluded that the disclosure controls and procedures were effective.

Since the last evaluation of the Company’s internal controls over financial reporting, the Company has made no change in those internal controls that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II: OTHER INFORMATION

ITEM 1A: RISK FACTORS

Information regarding risk factors appears in Part I — Item 2 of this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under “Forward-Looking Statements” and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 in Part I — Item 1A under “Risk Factors” and in Part II — Item 7 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Except for the risk factor below, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 .

We depend on a small number of customers for a large percentage of our revenues. The loss of any single customer, or a reduction in sales to any such customer, could have a material adverse effect on our business, financial condition, and results of operations.

A limited number of customers typically represent a significant percentage of our revenues in any give year. Our top ten customers based on revenues represented, in the aggregate, approximately 36%, 46%, and 46% in 2004, 2005, and the first six months of 2006, respectively, of our total revenues. For example, during the fourth quarter of 2004, we launched our new $95 million automotive program. This program accounted for approximately 26% and 30% of our Component Products segment sales and approximately 15% and 18% of our total sales in 2005 and the first six months of 2006, respectively. Based on our current sales forecasts, we expect this program to account for significant portions of our overall sales over the next 6 years. However, we cannot guarantee that we will realize the full potential value of this program. The program relies upon a contract that is terminable by the customer for any reason, subject to a cancellation charge. If the customer’s needs decrease over the course of the contract, our estimated revenues from this contract may also decrease. Even if we generate revenue from the project, we cannot guarantee that the project will be profitable, particularly if revenues from the contract are less than expected. Moreover, automotive suppliers like this customer often take advantage of lower volume in the summer to shut down production to service machinery and tools, typically during a portion of the month of July. The Company expects this practice to continue. This could cause our quarterly operating results to fluctuate and have a material adverse effect on our business and financial results. Our revenues are directly depending on the ability of our customers to develop, market, and sell their products in a timely, cost-effective manner. The loss of a significant portion of our expected future sales to any of our large customers would, and a material adverse change in the financial condition of these customers could, have a material adverse effect on our business, financial condition and financial results.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of stockholders of the Company was held on June 8, 2006, at which the stockholders voted on whether to elect three directors to the Company’s board of directors for terms of office of three years or until the 2009 annual meeting of stockholders. Votes to adopt the proposal to elect the following directors were cast as follows:

R. Jeffrey Bailly	4,220,285 shares voting for and 38,372 withheld
David B. Gould	4,220,285 shares voting for and 38,372 withheld
Marc Kozin	4,254,057 shares voting for and 4,600 withheld

ITEM 6: EXHIBITS

The following exhibits are included herein:

Exhibit No.			Description

10.40			Form of Stock Unit Award Agreement under 2003 Equity Incentive Plan

31.1			Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer

31.2			Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer

32			Certification pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.

REGISTRANT

	August 10, 2006		/s/ R. Jeffrey Bailly
	Date		R. Jeffrey Bailly
			President, Chief Executive
			Officer and Director

	August 10, 2006		/s/ Ronald J. Lataille
	Date		Ronald J. Lataille
			Vice President,
			Chief Financial Officer & Treasurer

EXHIBIT INDEX

Exhibit No.			Description

10.40			Form of Stock Unit Award Agreement under 2003 Equity Incentive Plan

31.1			Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer

31.2			Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer

32			Certification pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-10.40 2 a06-15399_1ex10d40.htm EX-10

Exhibit 10.40

STOCK UNIT AWARD AGREEMENT

(Granted under the UFP Technologies, Inc. 2003 Equity Incentive Plan)

This Stock Unit Award Agreement is entered into as of the day of , 20 by and between UFP Technologies, Inc. (hereinafter the “Company”) and (the “Awardee”). Capitalized terms used but not defined herein shall have the meanings assigned to them in the Company’s 2003 Equity Incentive Plan (the “Plan”). Stock Unit Awards (SUA’s represent the Company’s unfunded and unsecured promise to issue shares of Common Stock at a future date, subject to the terms of this Award Agreement, including, without limitation, the performance objectives set forth in Schedule A hereto, and the Plan. Awardee has no rights under the SUAs other than the rights of a general unsecured creditor of the Company.

1. Grant of Stock Unit Awards; Performance Objectives; Vesting.

(a) The Company, in the exercise of its sole discretion pursuant to the Plan, does hereby award to the Awardee the number of SUAs set forth on Schedule A hereto upon the terms and subject to the conditions hereinafter contained. The SUA’s shall consist of a Threshold Award, a Target Award and an Exceptional Award. The Threshold Award shall not be subject to Performance Objectives (as defined below). The Target Award and the Exceptional Awards are each awarded subject to attainment during the Performance Cycle described on Schedule A of the Performance Objectives set forth on Schedule A .

(b) Subject to attainment of any applicable Performance Objectives, payment with respect to vested SUA’s shall be made entirely in the form of shares of Common Stock of the Company on each respective vesting date as set forth on Schedule A.

(c) As soon as possible after the end of the Performance Cycle, the Committee will certify in writing whether and to what extent the Performance Objectives have been met for the Performance Cycle. The date of the Committee’s certification pursuant to this subsection (c) shall hereinafter be referred to as the “Certification Date”. The Company will notify the Awardee of the Committee’s certification following the Certification Date (such notice, the “Determination Notice”). The Determination Notice shall specify (i) the Performance Objective, as derived from the Company’s audited financial statements; and (ii) the extent, if any, to which the Performance Objectives were satisfied with respect to the Target Award and the Exceptional Award.

2. Change in Control.

(a) Notwithstanding the vesting schedule set forth in Schedule A: if there is a Change in Control of the Company (as defined below) at any time, and the provisions of Section 4 hereof shall have been satisfied immediately prior to the effective date of such Change in Control, then any SUA’s representing the Threshold Award which are not already vested shall become vested in full immediately prior to the effective date of such Change in Control, subject, however, to the provisions of Section 21 of this Award Agreement.

(b) Notwithstanding the vesting schedule set forth in Schedule A: if there is a Change in Control of the Company (as defined below) following the end of the Performance Cycle, and the provisions of Section 4 hereof shall have been satisfied immediately prior to the effective date of such Change in Control, then subject to attainment during the Performance Cycle described on Schedule A of the Performance Objectives set forth on Schedule A, and subject to the provisions of Section 21 of this Award Agreement, any SUA’s representing the Target Award and the Exceptional Award, which are not already vested shall become vested in full immediately prior to the effective date of such Change in Control.

(c) For the purpose of this Agreement, a “Change in Control” shall mean (i) the consummation of a reorganization, merger or consolidation or sale or disposition of all or substantially all of the assets of the Company (a “Business Combination”), unless, in each case following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners of the Common Stock of the Company immediately before the consummation of such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of the transaction owns the Company or all or substantially all of the assets of the Company either directly or indirectly through one or more subsidiaries); and (B) no person or group (as defined in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) of the Company or the corporation resulting from the Business Combination) beneficially owns, directly or indirectly, more than 50% of the then outstanding shares of the common stock of the corporation resulting from the Business Combination; (ii) Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors of the Company, provided, however, that any individual’s becoming a director after the date of this Agreement whose election, or nomination for election by the stockholders of the Company, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though the individual were a member of the Incumbent Board, but excluding, for this purpose, any individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) any person (as defined in Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934) shall become at any time or in any manner the beneficial owner of capital stock of the Company representing more than 50% of the voting power of the Company.

3. Termination. Unless terminated earlier under Section 4, 5 or 6 below, an Awardee’s rights under this Award Agreement with respect to the SUAs issued under this Award Agreement shall terminate at the time such SUAs are converted into shares of Common Stock.

4. Termination of Awardee’s Continuous Status as an Employee. Except as otherwise specified in Section 5 and 6 below, in the event of termination of Awardee’s Continuous Status as an employee of the Company, Awardee’s rights under this Award

Agreement in any unvested SUAs shall terminate. For purposes of this Award Agreement, an Awardee’s Continuous Status as an employee shall mean the absence of any interruption or termination of service as an employee. Continuous Status as an employee shall not be considered interrupted in the case of sick leave or leave of absence for which Continuous Status is not considered interrupted as determined by the Company in its sole discretion.

5. Disability of Awardee. Notwithstanding the provisions of Section 4 above, in the event of termination of Awardee’s Continuous Status as an employee as a result of disability (within the meaning of Section 409A of the Internal Revenue Code, and hereinafter referred to as “Disability”), the SUAs which would have vested during the twelve (12) months following the date of such termination, set out in Schedule A, shall become vested as of the date of such termination, subject, however, to the provisions of Section 21 of this Award Agreement. If Awardee’s Disability originally required him or her to take a short-term disability leave which was later converted into long-term disability, then for the purposes of the preceding sentence the date on which Awardee ceased performing services shall be deemed to be the date of commencement of the short-term disability leave. The Awardee’s rights in any unvested SUAs that remain unvested after the application of this Section 5 shall terminate at the time Awardee ceases to be in Continuous Status as an employee.

6. Death of Awardee. Notwithstanding the provisions of Section 4 above, in the event of the death of Awardee:

(a) If the Awardee is, at the time of death, in Continuous Status as an employee, the SUAs which would have vested during the twelve (12) months following the date of death of Awardee, set out in Schedule A, shall become vested as of the date of death.

(b) The Awardee’s rights in any unvested SUAs that remain after the application of Section 6(a) shall terminate at the time of the Awardee’s death.

7. Value of Unvested SUAs. In consideration of the award of these SUAs, Awardee agrees that upon and following termination of Awardee’s Continuous Status as an employee for any reason (whether or not in breach of applicable laws), and regardless of whether Awardee is terminated with or without cause, notice, or pre-termination procedure or whether Awardee asserts or prevails on a claim that Awardee’s employment was terminable only for cause or only with notice or pre-termination procedure, any unvested SUAs under this Award Agreement shall be deemed to have a value of zero dollars ($0.00).

8. Conversion of SUAs to shares of Common Stock; Responsibility for Taxes.

(a) Provided Awardee has satisfied the requirements of Section 8(b) below, and subject to the provisions of Section 21 below, on the vesting of any SUAs, such vested SUAs shall be converted into an equivalent number of shares of Common Stock that will be distributed to Awardee or, in the event of Awardee’s death, to Awardee’s legal representative, as soon as practicable. The distribution to the Awardee, or in the case of the Awardee’s death, to the Awardee’s legal representative, of shares of Common Stock in respect of the vested SUAs shall be evidenced by a stock certificate, appropriate entry on the books of the Company or of a duly

authorized transfer agent of the Company, or other appropriate means as determined by the Company.

(b) Regardless of any action the Company takes with respect to any or all income tax (including federal, state and local taxes), social security, payroll tax or other tax-related withholding (“Tax Related Items”), Awardee acknowledges that the ultimate liability for all Tax Related Items legally due by Awardee is and remains Awardee’s responsibility and that the Company (i) makes no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the SUAs, including the grant of the SUAs, the vesting of SUAs, the conversion of the SUAs into shares of Common Stock, the subsequent sale of any shares of Common Stock acquired at vesting and the receipt of any dividends; and (ii) does not commit to structure the terms of the grant or any aspect of the SUAs to reduce or eliminate the Awardee’s liability for Tax Related Items. Prior to the issuance of shares of Common Stock upon vesting of SUAs as provided in Section 8(a) above, Awardee shall pay, or make adequate arrangements satisfactory to the Company (in its sole discretion) to satisfy all withholding obligations of the Company. In this regard, Awardee authorizes the Company to withhold all applicable Tax Related Items legally payable by Awardee from Awardee’s wages or other cash compensation payable to Awardee by the Company. Alternatively, or in addition, if permissible under applicable law, the Company may, in its sole discretion, (i) sell or arrange for the sale of shares of Common Stock to be issued on the vesting of SUAs to satisfy the withholding obligation, and/or (ii) withhold in shares of Common Stock, provided that the Company shall withhold only the amount of shares necessary to satisfy the minimum withholding amount. Awardee shall pay to the Company any amount of Tax Related Items that the Company may be required to withhold as a result of Awardee’s receipt of SUAs, the vesting of SUAs, or the conversion of vested SUAs to shares of Common Stock that cannot be satisfied by the means previously described. Except where applicable legal or regulatory provisions prohibit, the standard process for the payment of an Awardee’s Tax Related Items shall be for the Company to withhold in shares of Common Stock only to the amount of shares necessary to satisfy the minimum withholding amount. The Company may refuse to deliver shares of Common Stock to Awardee if Awardee fails to comply with Awardee’s obligation in connection with the Tax Related Items as described herein.

(c) In lieu of issuing fractional shares of Common Stock, on the vesting of a fraction of a SUA, the Company shall round the shares to the nearest whole share and any such share which represents a fraction of a SUA will be included in a subsequent vest date.

(d) Until the distribution to Awardee of the shares of Common Stock in respect to the vested SUAs is evidenced by a stock certificate, appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company, or other appropriate means, Awardee shall have no right to vote or receive dividends or any other rights as a shareholder with respect to such shares of Common Stock, notwithstanding the vesting of SUAs. Subject to the provisions of Section 21 below, the Company shall cause such distribution to Awardee to occur promptly upon the vesting of SUAs. No adjustment will be made for a dividend or other right for which the record date is prior to the date Awardee is recorded as the owner of the shares of Common Stock, except as provided in Section 8 of the Plan.

(e) By accepting the Award of SUAs evidenced by this Award Agreement, Awardee agrees not to sell any of the shares of Common Stock received on account of vested SUAs at a time when applicable laws or Company policies prohibit a sale. This restriction shall apply so long as Awardee is an Employee, Consultant or outside director of the Company or a Subsidiary of the Company.

9. Non-Transferability of SUAs. Awardee’s right in the SUAs awarded under this Award Agreement and any interest therein may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner, other than by will or by the laws of descent or distribution, prior to the distribution of the shares of Common Stock in respect of such SUAs. SUAs shall not be subject to execution, attachment or other process.

10. Acknowledgment of Nature of Plan and SUAs. In accepting the Award, Awardee acknowledges that:

(a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time, as provided in the Plan;

(b) the Award of SUAs is voluntary and occasional and does not create any contractual or other right to receive future awards of SUAs, or benefits in lieu of SUAs even if SUAs have been awarded repeatedly in the past;

(d) Awardee’s participation in the Plan is voluntary;

(e) the future value of the underlying shares of Common Stock is unknown and cannot be predicted with certainty;

(f) if Awardee receives shares of Common Stock, the value of such shares of Common Stock acquired on vesting of SUAs may increase or decrease in value;

(g) notwithstanding any terms or conditions of the Plan to the contrary and consistent with Section 4 and Section 7 above, in the event of involuntary termination of Awardee’s employment (whether or not in breach of applicable laws), Awardee’s right to receive SUAs and vest under the Plan, if any, will terminate effective as of the date that Awardee is no longer actively employed and will not be extended by any notice period mandated under applicable law; furthermore, in the event of involuntary termination of employment (whether or not in breach of applicable laws), Awardee’s right to receive shares of Common Stock pursuant to the SUAs after termination of employment, if any, will be measured by the date of termination of Awardee’s active employment and will not be extended by any notice period mandated under applicable law. The Committee shall have the exclusive discretion to determine when Awardee is no longer actively employed for purposes of the award of SUAs; and

(h) Awardee acknowledges and agrees that, regardless of whether Awardee is terminated with or without cause, notice or pre-termination procedure or whether Awardee asserts or prevails on a claim that Awardee’s employment was terminable only for cause or only with notice or pre-termination procedure, Awardee has no right to, and will not bring any legal claim or action for, (a) any damages for any portion of the SUAs that have been vested and converted into Common Shares, or (b) termination of any unvested SUAs under this Award Agreement.

11. No Employment Right. Awardee acknowledges that neither the fact of this Award of SUAs nor any provision of this Award Agreement or the Plan or the policies adopted pursuant to the Plan shall confer upon Awardee any right with respect to employment or continuation of current employment with the Company, or to employment that is not terminable at will. Awardee further acknowledges and agrees that neither the Plan nor this Award of SUAs makes Awardee’s employment with the Company for any minimum or fixed period, and that such employment is subject to the mutual consent of Awardee and the Company, and subject to any written employment agreement that may be in effect from time to time between the Company and the Awardee, may be terminated by either Awardee or the Company at any time, for any reason or no reason, with or without cause or notice or any kind of pre- or post-termination warning, discipline or procedure.

12. Administration. The authority to manage and control the operation and administration of this Award Agreement shall be vested in the Committee (as such term is defined in Section 2 of the Plan), and the Committee shall have all powers and discretion with respect to this Award Agreement as it has with respect to the Plan. Any interpretation of the Award Agreement by the Committee and any decision made by the Committee with respect to the Award Agreement shall be final and binding on all parties.

13. Plan Governs. Notwithstanding anything in this Award Agreement to the contrary, the terms of this Award Agreement shall be subject to the terms of the Plan, and this Award Agreement is subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan.

14. Notices. Any written notices provided for in this Award Agreement which are sent by mail shall be deemed received three business days after mailing, but not later than the date of actual receipt. Notices shall be directed, if to Awardee, at the Awardee’s address indicated by the Company’s records and, if to the Company, at the Company’s principal executive office.

15. Electronic Delivery. The Company may, in its sole discretion, decide to deliver any documents related to SUAs awarded under the Plan or future SUAs that may be awarded under the Plan by electronic means or request Awardee’s consent to participate in the Plan by electronic means. Awardee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

16. Acknowledgment. By Awardee’s acceptance as evidenced below, Awardee acknowledges that Awardee has received and has read, understood and accepted all the terms, conditions and restrictions of this Award Agreement and the Plan. Awardee understands and

agrees that this Award Agreement is subject to all the terms, conditions, and restrictions stated in this Award Agreement and the Plan, as the latter may be amended from time to time in the Company’s sole discretion. The Awardee further acknowledges that he or she must accept this Award Agreement in the manner prescribed by the Company no later than thirty (30) days following the date set forth above.

17. Board Approval. These SUAs have been awarded pursuant to the Plan and accordingly this Award of SUAs is subject to approval by the Board of Directors or an authorized committee of the Board of Directors. If this Award of SUAs has not already been approved, the Company agrees to submit this Award for approval as soon as practical. If such approval is not obtained, this award is null and void.

18. Governing Law. This Award Agreement shall be governed by the laws of the State of Delaware, without regard to Delaware laws that might cause other law to govern under applicable principles of conflicts of law.

19. Severability. If one or more of the provisions of this Award Agreement shall be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provisions which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Award Agreement to be construed so as to foster the intent of this Award Agreement and the Plan.

20. Complete Award Agreement and Amendment. This Award Agreement and the Plan constitute the entire agreement between Awardee and the Company regarding SUAs. Any prior agreements, commitments or negotiations concerning these SUAs are superseded. This Award Agreement may be amended only by written agreement of Awardee and the Company, without consent of any other person. Awardee agrees not to rely on any oral information regarding this Award of SUAs or any written materials not identified in this Section 20.

21. Section 409A of the Internal Revenue Code. This Award Agreement is intended to be in compliance with the provisions of Section 409A of the Internal Revenue Code to the extent applicable, and any interpretive guidance issued thereunder. If: (a) the Awardee is a “specified employee”, as such term is defined in Prop. Reg. Section 1.409A-1(i); and (b) there occurs a separation of service (within the meaning of Section 409A of the Internal Revenue Code) of the Awardee, for any reason, including, without limitation, due to a Change in Control pursuant to Section 2(b) above or a Disability pursuant to Section 5 above, then any shares of Common Stock that would otherwise have been distributable to the Awardee upon such separation of service, or within 6 months thereafter, shall instead be distributable on the earlier to occur of (i) the date which is six (6) months following such separation of service, or (ii) the date of death of the Awardee. Notwithstanding anything set forth in this Agreement to the contrary, in the event the issuance of Common Stock to the Awardee as a result of the vesting of SUA’s would conflict with the provisions of said Section 409A or any interpretive guidance issued thereunder, as the same may be amended, then such issuance shall be deferred or otherwise modified to the extent

deemed necessary by the Company so as to remain in compliance with Section 409A and any interpretive guidance issued thereunder.

[remainder of page intentionally left blank]

EXECUTED the day and year first above written.

	UFP TECHNOLOGIES, INC.


	By:

AWARDEE’S ACCEPTANCE:

I have read and fully understood this Award Agreement and, as referenced in Section 16 above, I accept and agree to be bound by all of the terms, conditions and restrictions contained in this Award Agreement and the other documents referenced in it.

SCHEDULE A

The SUA’s issuable under this Agreement shall consist of a Threshold Award, a Target Performance Award and an Exceptional Performance Award, each in the amounts set forth below, each such award issuable in increments on the vesting dates set forth below.

The Performance Objective established by the Committee with respect to the Target Performance Award and Exceptional Performance Award is .

Performance

Number of
Shares of
Common

Vesting

Objective

Cycle

Stock

(date)

a. Threshold Award

No Performance Requirement

N/A

b. Target Performance Award

(in addition to (a) above)

c. Exceptional Performance Award

(in addition to (a) and (b) above)

EX-31.1 3 a06-15399_1ex31d1.htm EX-31

EXHIBIT 31.1

CERTIFICATIONS

I, R. Jeffrey Bailly, certify that:

1. I have reviewed this quarterly report on Form 10-Q of UFP Technologies, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [omitted] for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. [Omitted];

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	August 10, 2006	/s/ R. Jeffrey Bailly
		R. Jeffrey Bailly
		Chief Executive Officer

EX-31.2 4 a06-15399_1ex31d2.htm EX-31

EXHIBIT 31.2

I, Ronald J. Lataille, certify that:

1. I have reviewed this quarterly report on Form 10-Q of UFP Technologies, Inc.;

b. [Omitted];

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 10, 2006		/s/ Ronald J. Lataille
		Ronald J. Lataille
		Chief Financial Officer

EX-32 5 a06-15399_1ex32.htm EX-32

EXHIBIT 32

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

I, R. Jeffrey Bailly, President and Chief Executive Officer of UFP Technologies, Inc., a Delaware corporation (the “Company”), do hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) that, to the best of my knowledge and belief:

(1) The Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Form 10-Q fairly presents, in all materials respects, the financial condition and results of operations of the Company.

Date: August 10, 2006		/s/ R. Jeffrey Bailly
		R. Jeffrey Bailly,
		President and Chief Executive Officer

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

I, Ronald J. Lataille, Chief Financial Officer of UFP Technologies, Inc., a Delaware corporation (the “Company”), do hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) that, to the best of my knowledge and belief:

(2) The information contained in the Form 10-Q fairly presents, in all materials respects, the financial condition and results of operations of the Company.

Date: August 10, 2006		/s/ Ronald J. Lataille
		Ronald J. Lataille,
		Chief Financial Officer

A signed original of these written statements required by Section 906 has been provided to UFP Technologies, Inc. and will be retained by UFP Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.