UFP Technologies - 10-Q quarterly report FY

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

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

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

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

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

             The Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, on December 3, 1999.  This SAB provided additional guidance on the accounting for revenue recognition, including both broad conceptual discussion as well as certain industry-specific guidance.  The Company adopted the guidance effective January 1, 2000.  Adoption of the new guidance did not have a material effect on its results of operations or financial position, and no restatement of its historical financial statements was required.             The Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, in March 2000.  The interpretation clarified how companies should apply APB Opinion No. 25, Accounting for Stock Issued to Employees. Currently, there are no awards granted by the Company that would result in an adjustment as a result of the interpretation.

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

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

             The Company  maintains a stock option plan to provide long-term rewards and incentives to the Company's key employees, officers, employee directors, consultants and advisors.  The plan provides for either non-qualified stock options or incentive stock options for the issuance of up to 1,550,000 shares of common stock.  The exercise price of the incentive stock options may not be less than the fair market value of the common stock on the date of grant, and the exercise price for non-qualified stock options shall be determined by the Stock Option Committee.  Options granted under the plan generally become exercisable with respect to 25% of the total number of shares subject to such options at the end of each 12-month period following the grant of the options.

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

             Through July 15, 1998, the Company maintained a stock option plan covering non-employee directors (the “1993 Director Plan”).  Effective July 15, 1998, with the formation of the 1998 Director Stock Option Incentive Plan (“1998 Director Plan”), the 1993 Director Plan was frozen.  The 1993 Director Plan provided for options for the issuance of up to 110,000 shares of common stock.  On July 1 of each year, each individual who at the time was serving as a non-employee director of the Company received an automatic grant of options to purchase 2,500 shares of common stock.  These options became exercisable in full six months after the date of grant and will expire ten years from the date of grant.  The exercise price was the fair market value of the common stock on the date of grant.  At June 30, 2001,  55,000 options were outstanding under the 1993 Director Plan.             Effective July 15, 1998, the Company adopted the 1998 Director Stock Option Incentive Plan (“1998 Director Plan”) for the benefit of non-employee directors of the Company.  The 1998 Director Plan provides for options for the issuance of up to 300,000 shares of common stock.  These options become exercisable in full six months after the date of grant and expire ten years from the date of grant.  In connection with the adoption of the 1998 Director Plan, the 1993 Director Plan was discontinued; however, the options outstanding under the 1993 Director Plan were not affected by the adoption of the new plan.  At June 30, 2001,  88,614 options were outstanding under the 1998 Director Plan.

             On April 18, 1998, the Company adopted the 1998 Stock Purchase Plan which provides that all employees of the Company – who work more than twenty hours per week and more than five months in any calendar year and who are employees on or before the applicable offering period – are eligible to participate.  The Stock Purchase Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986.  Under the Stock Purchase Plan participants may have up to 10% of their base salaries withheld during the six-month offering periods ending June 30 and December 31 for the purchase of the Company’s common stock at 85% of the lower of the market value of the common stock on the first or last day of the offering period.  The Stock Purchase Plan provides for the issuance of up to 150,000 shares of common stock.

             On February 23, 2001, the Company purchased 300,000 shares of the Company’s stock from Cramer, Berkowitz and Co. at $1.75 per share, for a total amount of $525,000.  The purchase was funded by the Company’s revolving line of credit.

             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: