FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

(Mark one)

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

              For the quarterly period ended    SEPTEMBER 30, 2001   

OR

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

                For the transition period from ____ to ____

Commission File Number:  001-12648

UFP Technologies, Inc.

(Exact name of registrant as specified in its charter)

(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.

Yesý    No o

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

UFP Technologies, Inc.

Index

PART I:          FINANCIAL INFORMATION

Item 1           Financial Statements

UFP Technologies, Inc.

Condensed Consolidated Balance Sheets

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

UFP Technologies, Inc.

Consolidated Income Statements

(Unaudited)

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

UFP Technologies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

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

NOTES

TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(1)       Basis of Presentation

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

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

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

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

(2)       New Accounting Pronouncements

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

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

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

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

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

(3)       Inventory

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

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

 (4)      Common Stock

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

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

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

Effective July 15, 1998, the Company adopted the 1998 Director Stock Option Incentive Plan (“1998 Director Plan”) for the benefit of non-employee directors of the Company.  The 1998 Director Plan provided for options for the issuance of up to 150,000 shares of common stock.  In July 2001, the Company amended the plan to provide an additional 25,000 options for the issuance of up to a total of 175,000 shares of common stock.  These options become exercisable in full six months after the date of grant and expire ten years from the date of grant.  In connection with the adoption of the 1998 Director Plan, the 1993 Director Plan was discontinued; however, the options outstanding under the 1993 Director Plan were not affected by the adoption of the new plan.  At September 30, 2001,  159,068 options were outstanding under the 1998 Director Plan.

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

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

(5)       Earnings Per Share

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

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

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

(6)       Segment Reporting

The Company is organized based on the nature of the products and services that it offers.  Under this structure, the Company produces products within two distinct segments: Protective Packaging and Specialty Applications.  Within the Protective Packaging segment, the Company primarily uses polyethylene and polyurethane foams, sheet plastics and pulp fiber to provide customers with cushion packaging for their products.  Within the Specialty applications segment, the Company primarily uses cross-linked polyethylene foam to provide customers in the automotive, athletic, leisure and health and beauty industries with engineered product for numerous purposes.

The accounting policies of the segments are the same as those described in Note 1 of the Company's annual report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission.  The Company evaluates the performance of its operating segment based on net income.

Inter-segment transactions are uncommon and not material.  Therefore, they have not been separately reflected in the financial table below.  The totals of the reportable segments’ revenues and net income agree with the Company’s comparable amount contained in the financial statements.  Revenues from customers outside of the United States are not material.  No one customer accounts for more than 10% of the Company’s consolidated revenues.

* * *

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

Sales

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

Gross Profit

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

Selling, General and Administrative Expenses

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

Other

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

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

Liquidity and Capital Resources

The Company funds its operating expenses, capital requirements, and growth plan through internally generated cash, bank credit facilities, and long-term capital leases.

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

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

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

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

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

Other

A significant portion of the Company's Packaging sales of molded fiber products are to manufacturers of computer peripherals and other consumer products.  As a result, the Company believes that its sales are somewhat seasonal, with increased sales in the second half of the year.  The Company does not believe that inflation has had a material impact on its results of operations in the last three years.

Quantitative and Qualitative Disclosure about Market Risk

The following discussion of the Company's market risk includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. Market risk represents the risk of changes in value of a financial instrument caused by fluctuations in interest rates, foreign exchange rates, and equity prices. At September 30, 2001, the Company's cash and cash equivalents consisted of bank accounts in U.S. dollars, and their valuation would not be affected by market risk. The Company has debt instruments where interest is based upon the prime rate and, therefore, future operations could be affected by interest rate changes; however, the Company believes that the market risk of the debt is minimal.

PART II - OTHER INFORMATION

UFP TECHNOLOGIES, INC.

Item 1   Legal Proceedings

No material litigation

Item 2   Changes in Securities

None

Item 3   Defaults Upon Senior Securities

None

Item 4   Submission of Matters to a Vote of Security Holders

None

Item 5   Other Information

None

Item 6   Exhibits and Reports on Forms 8-K

(a)       Exhibits:

(10.47) Amended 1998 Director Stock Option Incentive Plan

(b)       Reports on Form 8-K:

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

UFP TECHNOLOGIES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UFP TECHNOLOGIES, INC.

(Registrant)