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 30,1998 or: [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------- -------- Commission File Number: 0-20967 UFP TECHNOLOGIES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-2314970 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 172 East Main Street, Georgetown, Massachusetts 01833 ----------------------------------------------------- (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 filings requirements for the past 90 days. Yes X No ----- ----- As of July 23, 1998, 4,677,354 shares of registrant's Common Stock, $.01 par value, were outstanding.
UFP TECHNOLOGIES, INC. INDEX <TABLE> <CAPTION> Page <S> <C> PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets June 30, 1998 and December 31, 1997............................... 1 Consolidated Statements of Operations Three Months and Six Months Ended June 30, 1998 and 1997............................................ 2 Consolidated Statements of Cash Flows Six Months Ended June 30, 1998 and 1997........................... 3 Notes to Consolidated Financial Statements........................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 5 PART II - OTHER INFORMATION............................................................ 8 SIGNATURES............................................................................. 9 </TABLE>
PART I: FINANCIAL INFORMATION Item 1. Financial Statements UFP TECHNOLOGIES, INC. Condensed Consolidated Balance Sheets <TABLE> <CAPTION> 30-Jun-98 31-Dec-97 ---------------- ---------------- ASSETS (Unaudited) <S> <C> <C> Current assets Cash and cash equivalents $ 880,316 $ 233,452 Receivables, net 6,406,889 6,413,251 Inventories 3,372,395 3,053,299 Prepaid expenses and other current assets 82,298 146,800 ---------------- ---------------- Total current assets 10,741,898 9,846,802 ---------------- ---------------- Property, plant and equipment 20,764,294 20,110,727 Less accumulated depreciation and amortization (9,743,911) (8,920,621) ---------------- ---------------- Net property, plant and equipment 11,020,383 11,190,106 ---------------- ---------------- Goodwill, net 2,455,366 2,539,367 Other assets 1,576,574 1,618,492 ---------------- ---------------- Total assets $ 25,794,221 $ 25,194,767 ----------------- ----------------- ----------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 2,500,000 $ 2,500,000 Current installments of long-term debt 53,721 111,888 Current installments of capital lease obligations 943,692 913,170 Accounts payable 1,806,786 1,540,377 Accrued expenses and payroll withholdings 2,268,534 2,202,817 ---------------- ---------------- Total current liabilities 7,572,733 7,268,252 Long-term debt, excluding current installments 600,038 624,641 Capital lease obligations, excluding current installments 2,144,992 2,608,768 Retirement liability 689,896 559,896 ---------------- ---------------- ---------------- ---------------- Total liabilities 11,007,659 11,061,557 ---------------- ---------------- Stockholders equity Preferred stock 0 0 Common stock 57,664 46,664 Additional paid-in capital 9,532,019 9,499,019 Retained earnings 5,196,879 4,587,527 ---------------- ---------------- Total stockholders equity 14,786,562 14,133,210 ---------------- ---------------- Total liabilities and stockholders' equity $ 25,794,221 $ 25,194,767 ----------------- ----------------- ----------------- ----------------- </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 1
UFP TECHNOLOGIES, INC. Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended 30-Jun-98 30-Jun-97 30-Jun-98 30-Jun-97 ------------ ----------- ----------- ----------- <S> <C> <C> <C> <C> Net sales $ 11,318,065 11,208,766 22,068,025 22,160,315 Cost of sales 8,169,212 8,170,061 16,074,464 16,395,827 ------------ ----------- ----------- ----------- Gross profit 3,148,853 3,038,705 5,993,561 5,764,488 Selling, general and administrative expenses 2,392,644 2,350,229 4,711,240 4,620,036 ------------ ----------- ----------- ----------- Operating income 756,209 688,476 1,282,321 1,144,452 Interest expense 134,839 174,154 278,884 310,688 Other (income) (2,494) 0 (35,914) 0 ------------ ----------- ----------- ----------- Income before income taxes 623,864 514,322 1,039,351 833,764 Income taxes 256,000 216,000 430,000 350,000 ------------ ----------- ----------- ----------- Net income $ 367,864 298,322 609,351 483,764 ------------ ----------- ----------- ----------- ------------ ----------- ----------- ----------- Basic net income per share $ 0.08 0.06 0.13 0.10 Diluted net income per share $ 0.08 0.06 0.13 0.10 Weighted average number of shares used in computation of per share data: Basic 4,677,354 4,653,024 4,671,854 4,641,359 Diluted 4,888,265 4,844,715 4,857,922 4,882,947 </TABLE> The accompanying notes are an integral part of these consolidated financial statements 2
UFP TECHNOLOGIES, INC. Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Six Months Ended 30-Jun-98 30-Jun-97 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net income $ 609,351 $ 483,764 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 907,292 839,455 Equity in net income (loss) of unconsolidated affiliate and partnership (17,984) 8,590 Deferred income taxes 523 0 Stock issued in lieu of compensation 44,000 33,750 Changes in operating assets and liabilities: Receivables, net 6,362 (70,960) Inventories (319,096) (596,582) Prepaid expenses and other current assets 64,502 130,216 Accounts payable 266,409 (134,496) Accrued expenses and payroll withholdings 65,717 52,082 Retirement liability 130,000 30,000 ----------- ----------- Net cash provided by operating activities 1,757,076 775,819 Cash flows from investing activities: Additions to property, plant and equipment (653,567) (541,550) Acquisition of Foam Cutting Engineers, net of cash acquired 0 (1,512,879) Change in other assets 59,379 3,161 ----------- ----------- Net cash used in investing activities (594,188) (2,051,268) Cash flows from financing activities: Net borrowings under notes payable 0 2,000,000 Principal repayments of long-term debt (82,770) (91,046) Principal repayments of capital lease obligations (433,254) (355,018) Net proceeds from sale of common stock 0 39,412 ----------- ----------- Net cash provided by financing activities (516,024) 1,593,348 ----------- ----------- Net change in cash and cash equivalents 646,864 317,899 Cash and cash equivalents, at beginning of period 233,452 143,531 ----------- ----------- Cash and cash equivalents, at end of period 880,316 461,430 ----------- ----------- ----------- ----------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
UFP TECHNOLOGIES, INC. 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, 1997, included in the Company's 1997 Annual Report on Form 10-K as provided to the Securities and Exchange Commission. The condensed consolidated balance sheet as of June 30, 1998, the consolidated statements of operations for the three and six months ended June 30, 1998 and 1997, and the consolidated statements of cash flows for the six months ended June 30, 1998 and 1997, 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 results of operations for the six months ended June 30, 1998, are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 1998. (2) Inventory Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following: <TABLE> <CAPTION> 30-Jun-98 31-Dec-97 ----------- ----------- <S> <C> <C> Raw materials $ 2,137,666 $ 1,933,740 Work-in-process 448,460 395,592 Finished goods 786,269 723,967 ----------- ----------- Total Inventory 3,372,395 3,053,299 ----------- ----------- ----------- ----------- </TABLE> Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. (3) Common Stock At December 31, 1997, 697,500 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, officers, employees, directors, consultants and advisors. There were 95,000 options issued and zero options exercised in the first six months of 1998 under the 1993 Plan, and zero options expired. At June 30, 1998, 792,500 options were outstanding under the plan. 4
At December 31, 1997, 40,000 options were outstanding under the Company's 1993 Non-Employee Director Plan ("1993 Director's Plan"). There were 2,500 options issued and no options were exercised or expired in the first six months of 1998. At June 30, 1998, 42,500 options were outstanding under the 1993 Director's Plan. (4) Earnings per share The Company has adopted the provisions of the Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with a calculation of basic and diluted earnings per share. Basic earnings per share is computed 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. All earnings per share amounts for all periods have been restated to conform to SFAS No. 128 requirements. The weighted average number of shares used to compute diluted income per share consisted of the following: <TABLE> <CAPTION> Three Months Ended Six Months Ended 30-Jun-98 30-Jun-97 30-Jun-98 30-Jun-97 --------- --------- --------- --------- <S> <C> <C> <C> <C> Weighted average common shares outstanding 4,677,354 4,653,024 4,671,854 4,641,359 Weighted average common equivalent shares due to stock options 210,911 191,691 186,068 241,588 --------- --------- --------- --------- 4,888,265 4,844,715 4,857,922 4,882,947 --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Sales Net sales for the three month period ended June 30, 1998 were $11.3 million or 1% above sales of $11.2 million in the same period last year. Sales for the six month period ended June 30, 1998 decreased slightly from $22.2 million a year ago to $22.1 million. Both sales patterns primarily reflect general volume increases offset by volume slowdowns at two large electronics customers affected by the Asian crisis. Gross Profit Gross Profit as a percentage of sales improved in both the three and six month periods ended June 30, 1998 from 27.1% and 26.0% to 27.8% and 27.2%, respectively. The improvements are primarily 5
attributable to continued business mix improvements and favorable overhead absorption in certain plants. Selling General and Administrative Expenses Selling, General and Administrative expenses ("SG&A") for the three month period ended June 30, 1998 were $2,393,000 or 1.8% higher than SG&A of $2,350,000 in the same period a year ago. SG&A for the six month period was $4,711,000 or 2.0% higher than SG&A of $4,620,000 last year. Both increases are primarily attributable to additions to the management team as well as to the implementation of new information software systems. Other Interest expense for the three month periods ended June 30, 1998 and 1997 were $135,000 and $174,000, respectively. Interest for the six month periods ended June 30, 1998 and 1997 were $279,000 and $311,000, respectively. The decline in both periods is primarily attributable to lower average borrowings. The Company's effective tax rate for the three and six month periods ended June 30, 1998 was 41% and 41.4% respectively, compared to 42% in both periods a year ago. 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, 1998 and December 31, 1997 the Company's working capital was approximately $3,402,000 and $2,579,000, respectively. The increase in working capital was primarily attributable to an increase in cash and inventory of approximately $647,000 and $319,000, respectively. During the six month periods ended June 30, 1998 and 1997, operating activities of the Company provided approximately $1,757,000 and $776,000 in cash, respectively. The increase was primarily attributable to improved profits of $126,000, a smaller increase in inventory of approximately $277,000 and a change in accounts payable deviation of approximately $401,000. Net cash used in investing activities during the six month periods ending June 30, 1998 and 1997, was approximately $594,000 and $2,051,000, respectively. The primary use of funds for investing activities in the current six month period was to purchase fixed assets. The decline in usage of cash for investing activities from 1997 to 1998 primarily reflects the impact in 1997 of the acquisition of Foam Cutting Engineers, Inc. Net cash used in financing activities for the six month period ended June 30, 1998 was approximately $516,000 compared to cash provided by financing activities of approximately $1,593,000 in 1997. The change reflects differences in net borrowing activity between the two periods primarily as a result of the prior year acquisition of Foam Cutting Engineers, Inc. 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 6
agreements to enter into any such acquisitions. The Company intends to fund any such acquisitions with working capital and bank financing. There can be no assurances that such financing would be available on favorable terms, if at all. The Company has a $7,500,000 revolving bank loan facility, of which $2,500,000 was outstanding at June 30, 1998. This facility expires on June 30, 1999. Borrowings through this credit facility are unsecured, and bear interest at LIBOR plus 1.75% or prime. In addition, at June 30, 1998, the Company had capitalized equipment lease debt and other notes payable of approximately $3,089,000 and $654,000, respectively. At June 30, 1998 the current portion of all debt obligations was $3,264,000. The Company believes that its existing resources, including its revolving loan facility, together with cash generated from operations and funds expected to be available to it through any necessary equipment financing and additional bank borrowings, will be sufficient to fund its cash flow requirements through at least the end of 1998. However, there can be no assurances that such financing will be available at favorable terms, if at all. Year 2000 Data Conversion The Company is in the process of implementing comprehensive computer systems which are prepared for the year 2000. The implementation schedule anticipates a complete conversion prior to January 1, 2000. The Company presently believes that, with the conversion to new software, the year 2000 problem will not pose a significant operational problem to the Company. However, there can be no assurance that the systems of other parties upon which the Company's businesses also rely, including but not limited to the Company's customers and suppliers, will be converted on a timely basis. The Company's business, financial condition, or results of operations could be materially adversely affected by the failure of its systems or those of other parties to operate or properly manage dates beyond 1999. * * * * * 7
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. The Company held its Annual Meeting of Stockholders on June 3, 1998. There were two proposals before the stockholders at the Annual Meeting. First, the stockholders elected the members of the Board of Directors of the Company. The votes for such matter were as follows: <TABLE> <CAPTION> Nominee For Withheld ------- --- -------- <S> <C> <C> William H. Shaw 3,739,855 3,500 Richard L. Bailly 3,739,855 3,500 R. Jeffrey Bailly 3,739,810 3,545 William C. Curry 3,739,855 3,500 T. Gordon Roddick 3,739,855 3,500 Kenneth L. Gestal 3,739,855 3,500 Peter R. Worrell 3,739,855 3,500 </TABLE> There were no abstentions nor broker nonvotes in connection with the election of Directors. Second, the stockholders approved the adoption of the Company's 1998 Employee Stock Purchase Plan by a vote of 3,718,368 for and 16,545 against. There were 8,442 abstentions and no broker nonvotes for the proposal. Item 5 Other Information: None Item 6 Exhibits and Reports on Form 8-K. (a) Exhibits furnished: (4.5) 1998 Director Stock Option Incentive Plan (incorporated herein by reference to the Company's Registration Statement of Form S-8 Registration No. 333-56741) (10.19) 1993 Combined Stock Option Plan, as amended. (27) Financial Data Schedule (b) Reports on Form 8-K: The Company did not file a report on Form 8-K for the reporting period. 8
UFP TECHNOLOGIES, INC. AND SUBSIDIARY 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) August 10, 1998 /s/ R. Jeffrey Bailly - --------------- ------------------------------------------------ Date R. Jeffrey Bailly President, Chief Executive Officer and Director August 10, 1998 /s/ Ronald J Lataille - --------------- ------------------------------------------------ Date Ronald J. Lataille Vice President, Chief Financial Officer 9