UFP Technologies, Inc. Annual Report 2008

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FY2008 Annual Report · UFP Technologies, Inc.

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2008 ANNUAL REPORT

UFP Technologies, Inc. (NASDAQ:

UFPT) is a leading supplier of

custom-engineered packaging

solutions and component products.

We create a broad array of interior protective packaging solutions,

using molded and fabricated foam, vacuum-formed plastics,

and molded fiber. We also provide engineered component

solutions, using the latest laminating, molding, and fabricating

technologies. We market these solutions through our three

CONTENTS

President’s letter

Strength in diversity

Strength in innovation

Strength in our financial position

Strength in our strategy

Selected financial data

9 Management’s discussion

and analysis of financial

condition and results of operations

brands: United Foam, Molded Fiber, and Simco Automotive.

15 Financial statements

Our customers include leading companies in six target markets:

Automotive, Computers & Electronics, Medical, Aerospace &

Defense, Consumer, and Industrial. Learn more about us at

www.ufpt.com.

36 Stockholder information

Dear Fellow Shareholders,

For UFP Technologies, 2008 was another exciting and

A key piece of this acquisition was Stephenson & Lawyer’s

successful year. We achieved record profits of $5 million

well-equipped, 250,000-square-foot facility in Grand

on record sales of $110 million. We also made significant

Rapids, Michigan. We knew this facility could give us room

progress on our internal and external growth initiatives,

to grow, and the flexibility to combine other UFP business

while continuing to reduce expenses and improve

or facilities as conditions dictated. We took advantage

efficiencies across the company. In this letter, I will

of this flexibility in the second half of 2008 when, in

highlight some of our strategically significant

response to the auto industry downturn, we consolidated

accomplishments from the year, and explain why I believe

our Macomb, Michigan automotive operation into our new

UFP Technologies is uniquely positioned to succeed in

Grand Rapids facility. We estimate the savings associated

today’s challenging economic environment.

with this consolidation will exceed $1 million per year.

Overall, our innovative people, diverse customer base, solid

Over the coming year, we expect to generate even greater

financial condition, and proven strategy combine to put us in

synergies from this location. In March 2009, UFP

a very strong position within our industry. As the events

purchased certain assets of another Michigan company,

of 2008 show, we have the ability to invest in new growth

Foamade Industries. We anticipate consolidating their two

initiatives – such as capitalizing on acquisition opportunities –

Hillsdale facilities into the new Grand Rapids plant as well.

and also the ability to scale back our business in areas

The scale, capacity and resources of this location will

where customer demand is affected by this difficult economy.

enable us to respond quickly to a broad range of customer

Of our many growth initiatives in 2008, the acquisition

needs in a highly efficient manner.

of Stephenson & Lawyer, a longtime industry leader, was

During the year, we also launched our United Case

perhaps the most exciting. This acquisition brought us a

business, and earned a substantial contract from the U.S.

$12 million book of business, a seasoned management

Army and Marines. In collaboration with our partners

team with expertise in a strategically important product

Pelican Case and Armstrong Tool, we won a five-year, $6

line (technical urethane foams), and a Foamex Class-A

million contract for the General Mechanics Tool Kit (GMTK),

distributorship that greatly enhances our base of material

a mobile storage solution for tools used to service armored

solutions. With its reputation for quality and integrity,

and conventional vehicles. The contract is for an estimated

and strong commitment to customers and employees,

96,000 kits; our role is to provide a multicolor foam tray

Stephenson & Lawyer is an excellent cultural fit with our

system to secure and organize a wide range of items, and

company. All these factors helped to facilitate its successful

prevent foreign object damage from misplaced tools.

integration into UFP Technologies.

OPERATING INCOME

SALES

EARNINGS PER SHARE

4
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Our accomplishments in 2008 are testament to the

market segment. As market conditions change, our

overall effectiveness of our strategy. One key tenet is to

scalable business model allows us to adapt quickly –

leverage our size and breadth to maximize purchasing

reducing expenses where demand has dropped and

power, share best practices among plants, and cross-sell

reallocating resources to more profitable opportunities.

business opportunities. One example of effective cross-

selling came in 2008 when RIM Blackberry, a molded

fiber customer, began purchasing foam case inserts and

then adopted our vacuum-formed plastics solutions as

well. As this example shows, we strive to solve as many of

our customers’ problems as we can, then leverage those

successes into additional opportunities. Another strategic

tenet is marketing to our sweet spot – allocating resources

to high-growth market opportunities that offer the best fit

with our skills and product capabilities. In addition, we

actively seek strategic acquisitions, like Stephenson &

Lawyer, that expand our ability to solve our customers’

most important product and packaging challenges.

In times like these, competitive advantages matter

more than ever, and I believe we possess many. First, I

believe our people are the most talented and motivated

professionals in our industry. We demand a lot from them.

And, they respond every day with a passion to innovate,

meet customer needs, and drive our business forward.

I am very grateful for their creativity, dedication, and

commitment to excellence. And, I know our customers

share this appreciation.

Another great advantage is the diversity of our customers.

We serve more than 2,000 customers across six target

markets: Automotive, Computers & Electronics, Medical,

Aerospace & Defense, Consumer, and Industrial. As a

result, our success does not depend on any one particular

Our strong financial position is another significant

advantage. As I write this letter, we have roughly $8 million

in cash in the bank and an additional $13 million available

through our bank line of credit. This will enable us to take

advantage of future acquisition opportunities, as we seek to

acquire competitors with strong market positions, synergies

with our current business, and high-quality products.

With our innovative team, diverse range of products

and customers, strong financial condition, and proven

strategy, we are in a unique position to thrive during

this challenging period. To do so, we will continue to

bring in new talent, launch new initiatives to help grow

our company, and build on the many innovations that set

us apart from our competitors. From this foundation of

strength, UFP is moving forward with confidence. Your

management team is energized to take advantage of new

opportunities and position UFP Technologies for long-term

success. I look forward to the challenges of 2009 and

beyond, and I thank you for your support.

Sincerely,

R. Jeffrey Bailly

Chairman, CEO and President

STRENGTH IN

Our broad range of markets, products, and customers helps
us thrive in any economic environment.

UFP’s customers include leading companies in six target markets. As a result, we do not depend on any one

sector of the economy. Nor are we dependent on any particular material, product, or process. Our diverse

capabilities and extensive product line provide broad market opportunities – and make us the supplier of

choice for a variety of complex, high-value applications.

With our strong design, engineering, and conversion skills,

we can choose the technologies, material, and approach

that are best for any given application. And with in-house

capabilities that include everything from die cutting and

fabricating to laminating, molding and assembly, we

can control every step of the process ourselves. These

attributes give us a unique ability to solve a wide range

of foam packaging and component challenges.

Also, as North America’s leading provider of custom

molded fiber solutions, we expect to capitalize on

increasing demand for sustainable, environmentally

friendly packaging. Diverse materials, diverse markets,

diverse skills: these factors combine to position us for

success in the coming years.

STRENGTH IN

No matter how complex the application, our engineers have
the skills and experience to provide the optimal solution.

Over the past several years, UFP has focused its resources on targeting customers and markets that

demand the most sophisticated and innovative solutions. This has not only helped improve our gross

margins. It has also helped to separate us from competitors, create significant barriers to entry in the

markets we serve best, and solidify our reputation as one of North America’s premier suppliers of

custom-engineered packaging solutions and component products.

When it comes to meeting sophisticated product

and packaging challenges that demand the highest

levels of quality and precision, we believe we are

the partner of choice. We also excel at matching

the latest materials to customer needs and at

combining different materials in creative ways.

This commitment to innovation drives every

aspect of our business. Years ago, we pioneered

the process for converting recycled paper into

cost-effective interior packaging. From that time

until now, we have constantly worked to design

packaging and component solutions that are

stronger, lighter, simpler, and smarter. Across

the company, we take great pride in solving

customers’ most difficult problems – more quickly

and cost-effectively than any competitor.

STRENGTH IN OUR

As many competitors struggle, we have the resources to fund
strategic acquisitions and other growth initiatives.

In the current economy, cash is king and

credit is crucial. On both fronts, our

company is in a strong position. Year after

year, we have worked diligently to build

cash reserves and reduce debt. Today, with

$8 million in cash and $13 million in bank

availability, we have the resources to fund

internal growth initiatives, such as investing

in new technologies, developing new

products, and expanding our R&D efforts.

We are also in a great position to capitalize

on the strategic acquisition opportunities

that may present themselves in the coming

years. Today, our industry is fragmented.

As customers seek to lower costs and

reduce their number of vendors, the industry is ripe for consolidation. Many competitors are at

risk, especially those that focus on a single product line or industry, or lack the resources to stay

on the leading edge of innovation. Still, they may have a product, a customer, or a capability that

can benefit UFP. These are the kinds of strategic acquisitions we will pursue.

Our 2008 acquisition of Stephenson & Lawyer is a perfect example. With one transaction, we

acquired a complementary product line, a large and strategically located plant, a Foamex Class-A

distributorship, and a talented team that adds depth to our management ranks. These types of

acquisitions can contribute right away to the bottom line. With our strong financial position, we

are ready and able to take full advantage.

STRENGTH IN OUR

By following our core principles, we believe we are
positioned for continued success.

Over the past several years, we have executed our strategy with focus and discipline. Whether the

economy is robust or struggling, we believe the following tenets will help us succeed.

(cid:129) Leverage our size and breadth. Our size enables us to negotiate lower raw material prices and

maximize purchasing power. It also helps us attract better talent, capitalize on cross-selling

opportunities, and share best practices that constantly improve our skills.

(cid:129) Increase the value we bring to customers.

We aim to solve more of their problems,

provide additional products and services,

reduce response time, and improve every

aspect of their experience with us.

(cid:129) Market to our sweet spot. To attract

customers that can benefit most from working

with us, we allocate our marketing resources

to high-growth opportunities that offer the

best fit with our engineering, materials, and

fabrication expertise.

(cid:129) Position UFP for long-term growth. To do so, we will continue to develop our people, stay on the

cutting edge of new materials and processes, and pursue strategic acquisitions and partnerships

that benefit our business.

We believe these key tenets will help us continue to build our business – and respond decisively to

whatever challenges and opportunities the coming years present.

SELECTED FINANCIAL DATA

The following selected financial data for the five years ended December 31, 2008, is derived from the audited consolidated financial statements of the Company.

The consolidated financial statements for the 2004 fiscal year were audited by PricewaterhouseCoopers LLP. The data should be read in conjunction with the

consolidated financial statements and the related notes included in this report, and in conjunction with Item 7, “Management’s Discussion and Analysis of

Financial Condition and Results of Operations.”

SELECTED CONSOLIDATED FINANCIAL DATA

Consolidated statement of operations data:1, 2

Net sales

Gross profit

Operating income

Net income

Diluted earnings per share

Weighted average number of diluted shares outstanding

Years Ended December 31 (in thousands, except per share data)

2008

$ 110,032

28,563

8,425 3

5,116

0.82

6,263

2007

93,595

22,810

7,247

4,159

0.71

5,861

2006

93,749

19,237

5,054

2,515

0.45

5,571

2005

2004

83,962

14,601

2,171

659

0.14

5,261

68,624

13,971

2,144

871

0.17

4,995

As of December 31 (in thousands)

Consolidated balance sheet data:1, 2

2008

2007

2006

2005

2004

Working capital

Total assets

Short-term debt and capital lease obligations

Long-term debt and capital lease obligations, excluding current portion

Total liabilities

Stockholders’ equity

18,688

48,723

1,419

4,852

17,355

31,367

14,952

45,553

1,419

6,271

21,310

24,243

8,236

39,037

1,767

6,921

20,412

18,625

3,321

44,000

9,716

7,650

29,239

14,761

1,431

39,632

9,484

7,497

25,846

13,787

1 See Note 20 to the consolidated financial statement for segment information.

2 Amounts include the consolidation of United Development Company Limited, a 26.32%-owned real estate limited partnership.

See Note 1 to the consolidated financial statements.

3 Amount includes restructuring charges of $1.3 million.

MARKET PRICE
From July 8, 1996, until April 18, 2001, the Company’s Common Stock was listed on the NASDAQ National Market under the symbol “UFPT.” Since April 19,

2001, the Company’s Common Stock has been listed on the NASDAQ Capital Market. The following table sets forth the range of high and low quotations for the

Common Stock as reported by NASDAQ for the quarterly periods from January 1, 2007, to December 31, 2008:

Fiscal Year Ended December 31, 2007

First Quarter

Second Quarter

Third Quarter
Fourth Quarter

Fiscal Year Ended December 31, 2008

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

High

5.78

6.43

5.88
8.75

High

7.83

14.63

12.18

7.09

Low

4.41

4.56

4.45
5.03

Low

5.20

7.36

6.71

3.92

NUMBER OF STOCKHOLDERS
As of February 16, 2009, there were 90 holders of record of the Company’s Common Stock.

Due to the fact that many of the shares are held by brokers and other institutions on behalf of stockholders, the Company is unable to estimate the total

number of individual stockholders represented by these holders of record.

DIVIDENDS
The Company did not pay any dividends in 2008, although prior to becoming a public company in December 1993, the Company had from time to time paid

cash dividends on its capital stock. The Company presently intends to retain all of its earnings to provide funds for the operation of its business, although it

would consider paying cash dividends in the future. The Company’s ability to pay dividends is subject to approval by its principal lending institution.

STOCK PLANS
The Company maintains two active stock option plans to provide long-term rewards and incentives to the Company’s key employees, officers, employee

directors, non-employee directors and advisors. The 1993 Employee Stock Option Plan provides for the issuance of up to 1,550,000 shares of the Company’s

Common Stock. The 1993 Director Plan provided for the issuance of 110,000 shares of the Company’s Common Stock to non-employee directors; this plan

was frozen with the inception of the 1998 Director Plan, which provides for the issuance of up to 975,000 shares of the Company’s Common Stock to non-

employee directors. Additional details of these plans are discussed in Note 12 to the consolidated financial statements.

Through June 2008, the Company also maintained an Employee Stock Purchase Plan, which was intended to qualify as an “employee stock purchase plan”

under Section 423 of the Internal Revenue Code of 1986.

The Company also maintains the 2003 Incentive Plan, which provides the Company with the ability to offer equity-based incentives to present and future

executives and other employees who are in a position to contribute to the long-term success and growth of the Company.

Each of these plans and their amendments has been approved by the Company’s stockholders.

Summary plan information as of December 31, 2008, is as follows:

Number of shares of
UFPT common stock
to be issued1

Weighted average
exercise price of
outstanding options

1993 Employee Plan

1993 Director Plan

1998 Director Plan

Total Option Plans

1998 Employee Stock Purchase Plan

2003 Equity Incentive Plan

Total All Stock Plans

634,375

—

338,808

973,183

—

352,000

1,325,183

2.36

—

4.11

2.97

—

1 Will be issued upon exercise of outstanding options or vesting of stock unit awards.

Number of shares of
UFPT common stock
remaining available
for future issuance

322,293

—

334,890

657,183

—

461,321

1,118,504

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of

1995 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 that do not relate to historical matters, identify forward-looking statements.

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.

Examples of these risks, uncertainties and other factors include, without limitation, the following: (i) economic conditions that affect sales of the products of the

Company’s customers; (ii) actions by the Company’s competitors and the ability of the Company to respond to such actions; (iii) the ability of the Company to

obtain new customers; and (iv) the ability of the Company to execute and integrate favorable acquisitions. 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. 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.

INVESTMENT IN AND ADVANCES TO AFFILIATED PARTNER SHIP
The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”). In compliance with the provisions of

FIN 46R, the Company has consolidated the financial statements of UDT for all periods presented, because—when including related party ownership—the Company

effectively owns greater than 50% of UDT.

RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, the percentage of revenues represented by the items as shown in the Company’s consolidated statements

of operations:

Net sales

Cost of sales

Gross profit

Selling, general and administrative expenses

Restructuring charge

Operating income

Total other expenses, net

Income before income taxes

Income tax expense

Net income

2008

2007

2006

100.0%

74.0

26.0

17.1

1.2

7.7

0.3

7.4

2.8

75.6

24.4

16.7

0.0

7.7

0.5

7.2

2.8

79.5

20.5

15.1

0.0

5.4

1.1

4.3

1.6

4.6%

4.4%

2.7%

OVERVIEW
UFP Technologies is an innovative designer and custom converter of foams, plastics, and fiber products. 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.

On January 18, 2008, the Company acquired Stephenson & Lawyer, Inc. (“S&L”), a Grand Rapids, Michigan-based foam fabricator. Operating out of a

255,000-square-foot manufacturing plant, S&L specializes in the fabrication of technical urethane foams. In addition to significantly adding to the

Company’s real estate, S&L brings access to this family of foams, modern manufacturing capabilities, and a seasoned management team to the Company.

The acquisition is an example of the Company’s dual strategy of growing its top line organically through a focused marketing plan as well as through

strategic acquisitions.

The Company reported record earnings for its fiscal year ended December 31, 2008, largely due to increased sales and stronger gross margins. However, it

experienced a softening of sales in the fourth quarter of 2008. Sales to the automotive industry have weakened significantly as holiday shutdowns started

earlier than normal and extended well into January 2009, largely attributable to very soft automotive sales in North America. Given the current condition of

the automobile industry as well as the overall weak economy, the Company expects continued soft sales at least through the first quarter of 2009.

2008 COMPARED TO 2007
Net sales increased 17.6% to $110.0 million in the year ended December 31, 2008, from $93.6 million in the same period of 2007. Without its newly

acquired plant in Grand Rapids, Michigan (Component Products segment), sales increased 4% for the year ended December 31, 2008. Sales in the

Component Products segment increased 13.1% to $60.8 million for the year ended December 31, 2008, from $53.8 million in the same period of 2007.

The increase is primarily due to sales of $12.7 million from the newly acquired plant in Grand Rapids, partially offset by a decrease in sales to the automotive

industry of approximately $5.9 million. The Company believes that sales to the automotive industry will continue to weaken in 2009. Sales in the Engineered

Packaging segment increased 23.5% to $49.2 million for the year ended December 31, 2008, from $39.8 million in the same period of 2007. The increase

in sales is largely due to an increase in sales of $3.9 million to a key electronics customer, as well as increased demand for environmentally friendly molded

fiber packaging.

Gross profit as a percentage of sales (“Gross Margin”) increased to 26.0% in 2008 from 24.4% in 2007. The improvement in gross margin is primarily

attributable to Company-wide continued strategic pricing and manufacturing efficiency initiatives (material and labor as a percentage of sales are down 1.2%

and 0.8%, respectively) partially offset by lower gross margins in the Company’s automotive plants (Component Products segment).

Selling, General and Administrative Expenses (“SG&A”) increased 20.9% to $18.8 million for the year ended December 31, 2008, from $15.6 million in

2007. As a percentage of sales, SG&A was 17.1% and 16.7% in the years ended December 31, 2008, and 2007, respectively. The increase in SG&A

spending is primarily attributable to increased SG&A from the newly acquired plant in Grand Rapids of approximately $2.2 million (Component Products

segment) as well as increased equity-based compensation of approximately $600,000 (Component Products and Packaging segments).

The Company recorded a restructuring charge of approximately $1.3 million during the year ended December 31, 2008, associated with the consolidation of

its Macomb Township, Michigan, automotive operations into its newly acquired plant in Grand Rapids, Michigan. The $1.3 million charge is for the costs

associated with vacating the Macomb Township premises, severance, relocation and stay-bonuses for its employees, equipment moving and hook-up costs,

and training and other start-up costs. As of December 31, 2008, the move was completed and all significant costs had been incurred.

Interest expense decreased to approximately $334,000 for the year ended December 31, 2008, from $479,000 in 2007. The decrease in interest expense is

primarily attributable to lower average borrowings.

The Company recorded income tax expense as a percentage of pre-tax income of 36.9% and 38.3% for the years ended December 31, 2008, and 2007,

respectively. The Company has deferred tax assets on its books associated with net operating losses generated in previous years. The Company has

considered both positive and negative available evidence in its determination that the deferred tax assets will be realized, and has not recorded a tax valuation

allowance at December 31, 2008. The Company will continue to assess the realizability of deferred tax assets created by recording tax benefits on operating

losses and, where appropriate, record a valuation allowance against these assets. The amount of the net deferred tax asset considered realizable, however,

could be reduced in the near term, if estimates of future taxable income during the carryforward period are reduced.

2007 COMPARED TO 2006
The Company’s net sales decreased slightly to $93.6 million for the year ended December 31, 2007, from $93.7 million in 2006. While 2007 sales were

virtually the same as sales in 2006, there was a shift in product mix. Sales in the Component Products segment decreased approximately 4.2%, largely due

to shrinking sales to the automotive market. The Company attributes the reduction in automotive sales to the end of certain programs in its Michigan plant,

as well as the maturing of its large southeast automotive program. Sales to the automotive industry declined by approximately $1.9 million. The decline was

largely offset by an approximately 4.8% increase in Engineered Packaging segment sales. The Company attributes this increase primarily to approximately

$1.3 million in increased sales of case insert products to key accounts.

Gross profit as a percentage of sales (“Gross Margin”) increased to 24.4% in 2007 from 20.5% in 2006. The improvement in gross margin is primarily

attributable to manufacturing efficiency initiatives, particularly in the Company’s automotive operations (Component Products segment). The Company

estimates that these initiatives in the automotive operations improved gross margins by approximately 2.0%.

Selling, General and Administrative Expenses (“SG&A”) increased 9.7% to $15.6 million for the year ended December 31, 2007, from $14.2 million in 2006.

As a percentage of sales, SG&A was 16.7% and 15.1% in the years ended December 31, 2007, and 2006, respectively. The increase in SG&A spending is

primarily attributable to increased sales resources of approximately $700,000 (across both business segments) as well as equity-based compensation resulting

from the implementation of SFAS No. 123R (Component Products and Packaging segments) of approximately $250,000.

Interest expense decreased to approximately $479,000 for the year ended December 31, 2007, from $964,000 in 2006. The decrease in interest expense is

primarily attributable to lower average borrowings partially offset by the impact of higher interest rates.

The Company recorded income tax expense as a percentage of pre-tax income of 38.3% and 37.3% for the years ended December 31, 2007, and 2006,

respectively. The higher effective tax rate for 2007 reflects a reduction in the amount of eligible research and development tax credits expected to be taken on

the Company’s 2007 tax returns. The Company has deferred tax assets on its books associated with net operating losses generated in previous years. The

Company has considered both positive and negative available evidence in its determination that the deferred tax assets will be realized, and has not recorded a

tax valuation allowance at December 31, 2007. The Company expects to utilize a significant amount of its federal net operating losses when it prepares its

2007 tax returns. The Company will continue to assess the realizability of deferred tax assets created by recording tax benefits on operating losses and, where

appropriate, record a valuation allowance against these assets. The amount of the net deferred tax asset considered realizable, however, could be reduced in

the near term, if estimates of future taxable income during the carryforward period are reduced.

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.

As of December 31, 2008, and 2007, working capital was approximately $18,688,000 and $14,952,000, respectively. The increase in working capital is primarily

attributable to an increase in receivables and inventory of approximately $959,000 and $2.3 million, respectively, due largely to the acquisition of Stephenson

& Lawyer, Inc. in January 2008 and a decrease in accounts payable of approximately $2.4 million due to the timing of year-end check runs, partially offset

by a decrease in cash of approximately $2.3 million due to the Company’s acquisition of Stephenson & Lawyer. Cash provided from operations was approximately
$7.3 million and $10.1 million in 2008 and 2007, respectively. The primary reason for the decrease in cash generated from operations in 2008 is a decrease in

accounts payable of approximately $2.1 million during the fiscal year ended December 31, 2008, compared to an increase in accounts payable of approximately

$500,000 during fiscal 2007. This change was caused by the difference in the timing of check runs at the end of each respective year. Net cash used in investing

activities in 2008 was approximately $7.8 million and was used primarily for the acquisition of Stephenson & Lawyer, Inc. of approximately $5.2 million and the

acquisition of new manufacturing equipment of approximately $2.8 million.

On February 28, 2003, the Company obtained a credit facility, which was 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 was comprised of: (i) a revolving credit facility of $17 million; (ii) a term loan of

$3.7 million with a seven-year straight-line amortization; and (iii) a term loan of $2.3 million with a 15-year straight-line amortization. The amended credit facility

called for interest of Prime or LIBOR plus a margin that ranges from 1.0% to 1.5%, depending upon Company performance. The loans were collateralized by a first

priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts. All borrowings at December 31, 2008, had interest

computed at Prime or LIBOR plus 1.0%. Under the amended credit facility, the Company was subject to certain financial covenants, including maximum capital

expenditures and minimum fixed-charge coverage. As of December 31, 2008, the Company was in compliance with all of these covenants. At December 31,

2008, the interest rate on these facilities ranged from 1.5% to 3.25%.

On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA. The facility is comprised of: (i) a revolving credit facility of

$17 million; (ii) a term loan of $2.1 million with a seven-year straight-line amortization; (iii) a term loan of $1.8 million with a 20-year straight-line amortization; and

(iv) a term loan of $4.0 million with a 20-year straight-line amortization. Extensions of credit under the revolving credit facility are based in part upon accounts

receivable and inventory levels. Therefore, the entire $17 million may not be available to the Company. The credit facility calls for interest of LIBOR plus a margin

that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that ranges from 0.25% to zero. In both cases the

applicable margin is dependent upon Company performance. The loans are collateralized by a first priority lien on all of the Company’s assets, including its real

estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan. Under the credit facility, the Company is subject to a minimum fixed-charge coverage

financial covenant. The Company’s $17 million revolving credit facility is due November 30, 2013; the term loans are all due on January 29, 2016.

As a result of the consolidation of UDT, a mortgage note collateralized by the Alabama and Florida facilities, dated September 4, 2002, originally for $470,313, was

included within long-term debt in the December 31, 2006 consolidated financial statements. On May 22, 2007, this note was refinanced. The remaining principal

balance of $388,356 on the old note was paid in full. The new note is secured by the Florida facility and has a principal balance of $786,000. The note calls for

180 monthly payments of $7,147. The interest rate is fixed at approximately 7.2%. The additional funds of approximately $400,000 were used to fund building

improvements in the Florida facility. The outstanding balance on this note at December 31, 2008, is $737,289.

In addition to the above credit facilities, the Company had capital lease debt of $1,612,665 as of December 31, 2008. These leases are secured by specific

manufacturing equipment used by the Company and have remaining lives ranging from one to six years and bear interest at rates ranging from 7% to 8%.

Subsequent to December 31, 2008, the Company paid off these obligations in full.

The Company has no significant capital commitments in 2009, but plans on adding capacity to enhance operating efficiencies in its manufacturing plants. The

Company may consider the acquisition of companies, technologies, or products in 2009 that are complementary to its business. The Company believes that its

existing resources, including its revolving credit 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 2009. However, there can be

no assurances that such financing will be available at favorable terms, if at all.

COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
The following table summarizes the Company’s contractual obligations at December 31, 2008, as adjusted for January 2009 refinancing activity, as well as

the January 2009 payoff of the capital lease obligations, and the effect such obligations are expected to have on its cash flow in future periods:

Payments due in:

Operating
Leases

Grand Rapids
Mortgage

Term
Loans

Massachusetts
Mortgage

UDT
Mortgage

Debt
Interest

Supplemental
Retirement

2009

2010

2011

2012

$1,445,505

$166,667

$308,211

$97,608

$33,896

$392,689

1,197,619

922,757

860,075

200,000

288,360

889,114

92,300

36,417

39,120

41,725

1,484,492

586,131

472,847

435,295

397,781

997,693

2013 and thereafter

850,033

3,233,333

$95,600

101,000

80,000

280,800

Total

$2,540,176

2,388,543

2,057,832

1,960,241

8,321,596

$5,275,989

$4,000,000

$2,062,405

$1,859,000

$737,289

$2,696,305

$637,400

$17,268,388

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,

2008, it cannot guarantee that its operations will generate cash in future periods.

The Company does not believe that inflation has had a material impact on its results of operations in the last three years.

CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities,

revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related

to product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, restructuring charges, contingencies, and litigation. The Company

bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, including current and

anticipated worldwide economic conditions, both in general and specifically in relation to the packaging industry, the results of which form the basis for making

judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under

different assumptions or conditions.

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K. The Company

believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

The Company has reviewed these policies with its Audit Committee.

(cid:129) Revenue Recognition The Company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive
evidence of an arrangement exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is

reasonably assured of collection. If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Determination of these

criteria, in some cases, requires management’s judgments. Should changes in conditions cause management to determine that these criteria are not

met for certain future transactions, revenue for any reporting period could be adversely affected.

(cid:129) Long-Lived Assets and Intangible Assets Intangible assets include patents and other intangible assets. Intangible assets with an indefinite life are not

amortized. Intangible assets with a definite life are amortized on a straight-line basis, with estimated useful lives ranging from eight to 14 years.

Indefinite-lived intangible assets are tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or

circumstances change that would indicate that the carrying amount may be impaired. Intangible assets with a definite life are tested for impairment

whenever events or circumstances indicate that their value may be reduced.

(cid:129) Goodwill Goodwill is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change
that would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one

level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics. At

December 31, 2008 the Company redefined its reporting units to include its Component Products segment, Packaging segment (excluding its Molded

Fiber operation), and its Molded Fiber operation as separate reporting units for goodwill impairment testing. An impairment loss generally would be

recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company completed

its annual goodwill impairment test as of December 31, 2008, and determined that no goodwill was impaired.

(cid:129) Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments. These allowances for doubtful accounts are determined by reviewing specific accounts that the Company has deemed are at risk of

being uncollectible and other credit risks associated with groups of customers. If the financial condition of the Company’s customers were to deteriorate

or economic conditions were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required with a

resulting charge to results of operations.

(cid:129) Inventory The Company provides reserves for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and market conditions. The Company fully reserves for inventories

deemed obsolete. The Company performs periodic reviews of all inventory items to identify excess inventories on hand by comparing on-hand balances

to anticipated usage using recent historical activity, as well as anticipated or forecasted demand, based upon sales and marketing inputs through its

planning systems. If estimates of demand diminish or actual market conditions are less favorable than those projected by management, additional

inventory write-downs may be required with a resulting charge to operations.

(cid:129) Deferred Income Taxes The Company evaluates the need for a valuation allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the

need for a valuation allowance. Should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future,

an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

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 December 31, 2008, 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 four 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.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

UFP Technologies, Inc.

Georgetown, MA

We have audited the accompanying consolidated balance sheets of UFP Technologies, Inc. as of December 31,

2008, and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for

each of the years in the three year period ended December 31, 2008. Our audit also included the financial

statement schedule for each of the years in the three year period ended December 31, 2008, as listed in

the index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the

Company’s management. Our responsibility is to express an opinion on these consolidated financial statements

and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board

(United States). Those standards require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material misstatement. The Company is not

required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

Our audit included consideration of internal control over financial reporting as a basis for designing audit

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such

opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements, assessing the accounting principles used and significant estimates

made by management, as well as evaluating the overall financial statement presentation. We believe that our

audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,

the consolidated financial position of UFP Technologies, Inc. as of December 31, 2008, and 2007, and

the consolidated results of its operations and its cash flows for each of the years in the three year period

ended December 31, 2008, in conformity with accounting principles generally accepted in the United

States of America. Also, in our opinion, the related financial statement schedule when considered in

relation to the basic consolidated financial statements taken as a whole, presents fairly in all material

respects the information set forth therein.

Westborough, Massachusetts

March 18, 2009

CONSOLIDATED BALANCE SHEETS

ASSETS

Current assets:

Cash and cash equivalents

Receivables, net

Inventories, net

Prepaid expenses

Deferred income taxes

Total current assets

Property, plant and equipment

Less accumulated depreciation and amortization

Net property, plant and equipment

Cash surrender value of officers’ life insurance

Deferred income taxes

Goodwill

Other assets

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Current installments of long-term debt

Current installments of capital lease obligations

Accounts payable

Accrued taxes and other expenses

Total current liabilities

Long-term debt, excluding current installments

Capital lease obligations, excluding current installments

Minority interest (Note 7)

Deferred income taxes

Retirement and other liabilities

Total liabilities

Commitments and contingencies (Note 15)

Stockholders’ equity:

December 31

2008

2007

6,729,370

12,754,875

8,152,746

516,388

1,488,575

29,641,954

40,666,779

(28,912,455)

11,754,324

187,830

—

6,481,037

657,516

9,060,347

11,795,468

5,876,626

821,250

1,021,320

28,575,011

38,269,142

(28,777,323)

9,491,819

172,536

188,650

6,481,037

643,721

48,722,661

45,552,774

716,697

702,765

3,304,194

6,230,001

10,953,657

3,941,996

909,900

523,003

113,073

913,644

17,355,273

—

56,667

13,774,334

17,536,387

31,367,388

714,256

704,408

5,694,152

6,510,216

13,623,032

4,658,464

1,612,664

583,533

—

832,141

21,309,834

—

53,754

11,768,799

12,420,387

24,242,940

Preferred stock, $.01 par value. Authorized 1,000,000 shares;

no shares issued or outstanding

Common stock, $.01 par value. Authorized 20,000,000 shares; issued and

outstanding 5,666,703 shares in 2008 and 5,375,381 shares in 2007

Additional paid-in capital

Retained earnings

Total stockholders’ equity

Total liabilities and stockholders’ equity

48,722,661

45,552,774

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

CONSOLIDATED STATEMENTS OF OPERATIONS

Net sales

Cost of sales

Gross profit

Selling, general and administrative expenses

Restructuring charge

Operating Income

Other income (expense):

Interest expense

Equity in net income of unconsolidated partnership

Minority interest earnings

Other, net

Total other expense

Income before income tax provision

Income tax expense

Net income

Net income per share:

Basic

Diluted

Weighted average common shares:

Basic

Diluted

Years Ended December 31

2008

2007

2006

$ 110,031,601

$ 93,595,140

93,749,239

81,468,539

28,563,062

18,822,965

1,315,366

8,424,731

(334,293)

7,218

(44,465)

57,457

(314,083)

8,110,648

2,994,648

5,116,000

0.92

0.82

70,784,986

74,511,940

22,810,154

19,237,299

15,562,800

—

7,247,354

(479,171)

15,038

(72,370)

32,500

(504,003)

6,743,351

2,584,250

4,159,101

0.78

0.71

14,183,117

—

5,054,182

(963,982)

15,037

(87,298)

(9,705)

(1,045,948)

4,008,234

1,493,361

2,514,873

0.50

0.45

5,549,830

6,262,666

5,306,948

5,861,420

5,022,532

5,571,068

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years ended December 31, 2008, 2007 and 2006

Common Stock

Amount

Additional

Paid-in

Capital

Retained

Earnings

Total

Stockholders’

Equity

Balance at December 31, 2005

4,828,079

$ 48,281

$ 8,966,472

5,746,413

$ 14,761,166

Employee Stock Purchase Plan

Stock issued in lieu of compensation

Share-based compensation

Exercise of stock options, net

21,148

54,411

—

211

544

—

of shares presented for exercise

253,126

2,532

Windfall tax benefits

Net income

—

47,111

143,703

459,340

518,189

176,867

—

2,514,873

47,322

144,247

459,340

520,721

176,867

2,514,873

Balance at December 31, 2006

5,156,764

$ 51,568

$ 10,311,682

8,261,286

$ 18,624,536

Employee Stock Purchase Plan

Stock issued in lieu of compensation

Share-based compensation

Exercise of stock options, net

4,721

55,189

41,000

552

410

of shares presented for exercise

117,707

1,177

Windfall tax benefits

Net income

—

23,848

255,524

691,614

271,037

215,094

—

4,159,101

23,895

256,076

692,024

272,214

215,094

4,159,101

Balance at December 31, 2007

5,375,381

$ 53,754

$ 11,768,799

$ 12,420,387

$ 24,242,940

Employee Stock Purchase Plan

Stock issued in lieu of compensation

Share-based compensation

2,817

55,644

93,680

556

937

Exercise of stock options

139,181

1,392

Net share settlement of restricted

stock units

Windfall tax benefits

Net income

—

20,535

343,324

1,304,852

331,634

(206,044)

211,234

—

5,116,000

20,563

343,880

1,305,789

333,026

(206,044)

211,234

5,116,000

Balance at December 31, 2008

5,666,703

$ 56,667

$ 13,774,334

$ 17,536,387

$ 31,367,388

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

Cash flows from operating activities:

Net income

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation and amortization

Restructuring charge—leasehold improvement write-off

Equity in net income of unconsolidated affiliate and partnership

Minority interest

(Gain) or Loss on disposal of property, plant and equipment

Share-based compensation

Stock issued in lieu of compensation

Deferred income taxes

Changes in operating assets and liabilities, net of effects

from acquisition:

Receivables, net

Inventories, net

Prepaid expenses

Accounts payable

Accrued taxes and other expenses

Retirement and other liabilities

Other assets

Years Ended December 31

2008

2007

2006

5,116,000

4,159,101

2,514,873

2,976,550

170,000

(7,218)

44,465

(57,457)

1,305,789

343,880

16,469

777,392

(434,506)

350,013

(2,776,715)

(937,577)

(119,173)

(82,867)

2,815,021

3,059,701

—

(15,038)

72,370

(32,500)

692,024

256,076

1,209,664

(166,829)

53,051

(54,783)

1,073,753

760,267

94,560

(213,376)

—

(15,037)

87,298

9,705

459,340

144,247

856,605

3,767,676

598,132

25,210

(1,479,406)

1,269,710

41,801

(61,105)

Net cash provided by operating activities

6,685,045

10,703,361

11,278,750

Cash flows from investing activities:

Additions to property, plant and equipment

Cash surrender value of officers’ life insurance

Acquisition of Stephenson & Lawyer net of cash acquired

Payments received on affiliated partnership

Proceeds from sale of property, plant and equipment

Acquisition of assets of Stephen Packaging Corp.

(2,763,250)

(15,294)

(5,181,066)

7,218

101,020

—

(2,100,584)

(14,701)

—

15,038

32,500

—

Net cash used in investing activities

(7,851,372)

(2,067,747)

(1,515,533)

(17,700)

—

15,038

30,000

(309,229)

(1,797,424)

Cash flows from financing activities:

Net borrowings (payments) under notes payable

Proceeds from long-term borrowings

—

Distribution of United Development Company Partners (minority interest)

(104,995)

Tax benefit from exercise of non-qualified stock options
Proceeds from sale of common stock

Proceeds from exercise of stock options

Principal repayment of long-term debt

Principal repayment of obligations under capital leases

Proceeds from refinancing capital leases

Cash settlements of restricted stock units

Net cash used in financing activities

Net change in cash

Cash and cash equivalents at beginning of year

211,234
20,563

333,026

(714,027)

(704,407)

—

(206,044)

(1,164,650)

(2,330,977)

9,060,347

—

(7,990,521)

786,000

(104,994)

215,094
23,895

272,214

(1,095,607)

(688,991)

—

(104,994)

176,867
47,322

520,701

(691,251)

(2,046,680)

1,359,000

—

(592,389)

(8,729,556)

8,043,225

1,017,122

751,770

265,352

Cash and cash equivalents at end of year

6,729,370

9,060,347

1,017,122

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 and 2007

(1) Summary of Significant Accounting Policies

UFP Technologies, Inc. (“the Company”) is an innovative designer and custom converter of foams, plastics and natural fiber products principally serving the

automotive, computer and electronics, medical, aerospace and defense, consumer and industrial markets. The Company was incorporated in the State of

Delaware in 1993.

(a)

Principles of Consolidation

The consolidated financial statements include the accounts and results of operations of UFP Technologies, Inc., its wholly-owned subsidiaries, Moulded Fibre

Technology, Inc., Simco Automotive Trim, Inc., and Simco Technologies, Inc. The consolidated financial statements also include the accounts and results of

operations of Stephenson & Lawyer, Inc. and its wholly-owned subsidiary, Patterson Properties Corporation, from January 1, 2008, through December 31,

2008. The Company also consolidates United Development Company Limited, of which the Company owns 26.32% (see Note 7). All significant inter-

company balances and transactions have been eliminated in consolidation.

(b)

Accounts Receivable

The Company periodically reviews the collectability of its accounts receivable. Provisions are established for accounts that are potentially uncollectible.

Determining adequate reserves for accounts receivable requires management’s judgment. Conditions impacting the realizability of the Company’s

receivables could cause actual asset write-offs to be materially different than the reserved balances as of December 31, 2008.

(c)

Inventories

Inventories that include material, labor, and manufacturing overhead are valued at the lower of cost or market. Cost is determined using the first-in,

first-out (FIFO) method.

The Company periodically reviews the realizability of its inventory. Provisions are established for potential obsolescence. Determining adequate

reserves for inventory obsolescence requires management’s judgment. Conditions impacting the realizability of the Company’s inventory could cause

actual asset write-offs to be materially different than the reserve balances as of December 31, 2008.

(d) Property, Plant and Equipment

Property, plant, and equipment are stated at cost and depreciated and amortized using the straight-line method over the estimated useful lives of the

assets (for financial statement purposes) and accelerated methods (for income tax purposes). Certain manufacturing machines that are dedicated to

a specific program—where total units to be produced over the life of the program are estimable—are depreciated using the modified units of

production method for financial statement purposes.

Estimated useful lives of property, plant, and equipment are as follows:

Leasehold improvements

Shorter of estimated useful life or remaining lease term

Buildings and improvements

Equipment

Furniture and fixtures

31.5 years

8–10 years

5–7 years

Property, plant, and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying

amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds

the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the

impairment loss to be recorded is calculated by the excess of the asset’s carrying value over its fair value. Fair value is generally determined using a

discounted cash flow analysis.

(e)

Income Taxes

The Company’s income taxes are accounted for under the asset and liability method of accounting. Under the asset and liability method, deferred tax

assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying

amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax expense (benefit)

results from the net change during the year in deferred tax assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax

rates is recognized in income in the period that includes the enactment date.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result

of the implementation of Interpretation No. 48, the Company recognized no increase in the liability for unrecognized tax benefits. The Company

recognizes interest and penalties accrued related to unrecognized tax benefits in tax expense.

(f)

Revenue Recognition

The Company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer, persuasive evidence of an arrangement

exists, performance of its obligation is complete, its price to the buyer is fixed or determinable, and the Company is reasonably assured of collection.

If a loss is anticipated on any contract, a provision for the entire loss is made immediately. Determination of these criteria, in some cases, requires

management’s judgments. Should changes in conditions cause management to determine these criteria are not met for certain future transactions,

revenue for any reporting period could be adversely affected.

(g)

Investments in Realty Partnership

The Company has invested in Lakeshore Estates Associates, a realty limited partnership. The Lakeshore Estates investment is stated at cost, plus or

minus the Company’s proportionate share of the limited partnership’s income or losses, less any distributions received from the limited partnership.

The Company has recognized its share of Lakeshore Estates Associates’ losses only to the extent of its original investment in, and advances to, this

partnership. The Company’s carrying amount for this investment is zero at December 31, 2008, and 2007, respectively.

(h) Goodwill

Goodwill is tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that

would indicate that the carrying amount may be impaired. Impairment testing for goodwill is done at a reporting unit level. Reporting units are one

level below the business segment level, but can be combined when reporting units within the same segment have similar economic characteristics.

At December 31, 2008 the Company redefined its reporting units to include its Component Products segment, Packaging segment (excluding its

Molded Fiber operation), and its Molded Fiber operation as separate reporting units for goodwill impairment testing. An impairment loss generally

would be recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The

Company completed its annual goodwill impairment test as of December 31, 2008, and determined that no goodwill was impaired.

(i)

Intangible Assets

Intangible assets include patents and other intangible assets. Intangible assets with an indefinite life are not amortized. Intangible assets with a

definite life are amortized on a straight-line basis, with estimated useful lives ranging from eight to 14 years. Indefinite-lived intangible assets are

tested for impairment annually, and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate

that the carrying amount may be impaired. Intangible assets with a definite life are tested for impairment whenever events or circumstances indicate

that their value may be reduced.

(j)

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2008,

and 2007, cash equivalents primarily consist of a money market account that is readily converted into cash. The Company utilizes zero-balance

disbursement accounts to manage its funds. As such, outstanding checks at the end of a period are reclassified to accounts payable. At December 31,

2008, and 2007, the amounts reclassified were approximately $1.6 million and $2.2 million, respectively.

(k) Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America

requires management to make estimates and assumptions that affect assets and liabilities, and disclosure of contingent assets and liabilities at the

date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could

differ from those estimates.

(l)

Segments and Related Information

The Company has adopted the provisions of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” which

established standards for the way that public business enterprises report information and operating segments in annual financial statements and

requires reporting of selected information in interim financial reports (see Note 20).

(m) Recent Accounting Pronouncements Not Yet Effective

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which changes how business acquisitions are accounted for. SFAS No.

141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction

and establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination.

Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business

combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired

contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. SFAS No. 141R is
effective for the Company for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after

December 31, 2008.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.”

This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160

requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s

equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income

statement. SFAS No. 160 amends the consolidation procedures of certain aspects of ARB No. 51 for consistency with the requirements of SFAS

No.141R. This statement requires changes in the parent’s ownership interest of consolidated subsidiaries to be accounted for as equity transactions.

This statement also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. The Company is

currently evaluating the future impacts and disclosures of this standard.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which changes the disclosure

requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses

derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative

Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s

financial position, financial performance, and cash flows. This statement’s disclosure requirements are effective for fiscal years and interim periods

beginning after November 15, 2008. The Company is currently evaluating the future impacts and disclosures of this standard.

(n)

Share-Based Compensation

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 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). The Company expenses its share-based compensation on a straight-line basis over the requisite service period for each award.

The provisions of SFAS No. 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:

Cost of sales

Selling, general and administrative expense

Total share-based compensation expense

2008

—

1,305,789

Year Ended December 31
2007

—

692,024

2006

—

439,340

The compensation expense for stock options granted during the three-year period ended December 31, 2008, 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

Expected dividends

Risk-free interest rate

Exercise price

Imputed life

2008

88.0%

—

4.0%

Year Ended December 31

2007

2006

76.7% to 89.3%

92.7% to 96.7%

—

3.4% to 5.0%

4.7% to 5.1%

Closing price on
date of grant

7.9 years (ouput in
lattice-based model)

4.1 to 7.9 years (ouput in
lattice-based model)

4.0 to 8.0 years (ouput in
lattice-based model)

The weighted average grant date fair value of options granted during 2008, 2007, and 2006 was $2.87, $2.38, and $2.51, respectively.

The total income tax benefit recognized in the statement of operations for share-based compensation arrangements was approximately $458,000,

$223,000, and $149,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

(o) Deferred Rent

The Company accounts for escalating rental payments on the straight-line basis over the term of the lease.

(p) Shipping and Handling Costs

Costs incurred related to shipping and handling are included in cost of sales. Amounts charged to customers pertaining to these costs are included as revenue.

(q) Research and Development

On a routine basis, the Company incurs costs related to research and development activity. These costs are expensed as incurred. Approximately $1.4 million

and $1.3 million were expensed in the years ended December 31, 2008, and 2007, respectively.

(r)

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, inventories, prepaid expenses, accounts payable and accrued expenses and payroll withholdings are stated

at carrying amounts that approximate fair value because of the short maturity of those instruments. The carrying amount of the Company’s long-term debt and

obligations under capital leases approximates fair value as the interest rate on the debt approximates the Company’s current incremental borrowing rate.

(s) Fair Value

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework in generally accepted

accounting principles for measuring fair value and expands disclosures about fair value measurements. This standard only applies when other standards

require or permit the fair value measurement of assets and liabilities. It does not increase the use of fair value measurement. The Company adopted SFAS No.

157 in the first quarter of 2008, except as it relates to nonrecurring fair value measurements of nonfinancial assets and liabilities for which the standard is

effective for fiscal years beginning after November 15, 2008.

The major categories of non financial assets and liabilities that have not been measured and disclosed using SFAS No. 157 fair value guidance include goodwill

and intangible assets and property, plant and equipment if subject to a periodic impairment test, as well as the assets and liabilities acquired in the Stephenson

& Lawyer, Inc. acquisition (Note 18).

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB

Statement No. 115,” which permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses

on items, for which the fair value option has been elected, in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning

after November 15, 2007. The adoption of SFAS No. 159 in 2008 did not have an impact on the Company’s results of operations or financial position, as the

Company has not elected the fair value option for any of its eligible financial assets or liabilities.

(2) Supplemental Cash Flow Information

Cash paid for interest and income taxes is as follows:

Interest

2008

355,221

Income taxes, net of refunds

$ 3,817,383

Years Ended December 31
2007

486,826

322,824

2006

1,001,382

368,975

Significant non-cash transactions:

Years Ended December 31

2008

2007

2006

Property and equipment acquired

under capital lease

—

Shares presented for stock

option exercises

—

691,705

(15,500)

(3) Receivables

Receivables consist of the following:

Accounts receivable—trade

Less allowance for doubtful receivables

(4)

Inventories

Inventories consist of the following:

Raw materials

Work in process

Finished goods

Less: reserve for obsolescence

December 31

2008

2007

13,141,912

(387,037)

12,754,875

12,102,599

(307,131)

11,795,468

December 31

2008

2007

5,352,926

3,681,262

324,782

3,115,285

(640,247)

340,134

2,150,635

(295,405)

8,152,746

5,876,626

(5) Goodwill and Other Intangible Assets

The Company completed its annual impairment test of goodwill in the fourth quarter of 2008, and determined that no goodwill was impaired.

At December 31, 2008, and 2007, the carrying value of the Company’s definite-lived intangible assets was $175,841 and $244,913, respectively, net

of accumulated amortization, and is included in the accompanying balance sheets. Amortization expense related to intangible assets was $69,072, $69,072,

and $56,632 for the years ended December 31, 2008, 2007, and 2006, respectively. Future amortization for years ended December 31 will be

approximately:

2009

2010

2011

2012

2013

Thereafter

Total:

69,000

37,841

—

175,841

(6) Property, Plant and Equipment

Property, plant, and equipment consist of the following:

Land

Buildings and improvements

Leasehold improvements

Equipment

Furniture and fixtures

Construction in progress—equipment/buildings

December 31

2008

2007

470,872

6,496,542

1,570,906

28,873,836

2,288,428

966,195

409,119

4,947,111

1,849,216

28,601,575

2,055,184

406,937

40,666,779

38,269,142

Depreciation and amortization expense for the years ended December 31, 2008, 2007 and 2006 was $2,907,478, $2,745,948, and $3,003,070, respectively.

(7)

Investment in and Advances to Affiliated Partnership

The Company has a 26.32% ownership interest in a realty limited partnership, United Development Company Limited (“UDT”). In compliance with FIN

46R, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” the Company has consolidated the financial statements of UDT as of

December 31, 2003. 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.

Included in the December 31 consolidated balance sheets are the following amounts related to UDT:

Cash

Net property, plant and equipment

Accrued expenses

Current and long-term debt

There was no impact on net income.

December 31

2008

148,746

1,311,273

12,900

737,289

2007

165,361

1,408,264

12,900

768,744

As a component of consolidating UDT’s assets, the Company included $148,746 in cash at December 31, 2008. Although this cash balance is not

legally restricted, the Company does not use this cash in its operations.

(8)

Indebtedness

On February 28, 2003, the Company obtained a credit facility, which was 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 was comprised of: (i) a revolving credit facility of $17 million;

(ii) a term loan of $3.7 million with a seven-year straight-line amortization; and (iii) a term loan of $2.3 million with a 15-year straight-line amortization.

The amended credit facility called for interest of Prime or LIBOR plus a margin that ranges from 1.0% to 1.5%, depending upon Company performance.

The loans were collateralized by a first priority lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts. All

borrowings at December 31, 2008, had interest computed at Prime or LIBOR plus 1.0%. Under the amended credit facility, the Company was subject to

certain financial covenants, including maximum capital expenditures and minimum fixed-charge coverage. As of December 31, 2008, the Company was in

compliance with all of these covenants. At December 31, 2008, the interest rate on these facilities ranged from 1.5% to 3.25%.

On January 29, 2009, the Company amended and extended its credit facility with Bank of America, NA. The facility is comprised of: (i) a revolving credit

facility of $17 million; (ii) a term loan of $2.1 million with a seven-year straight-line amortization; (iii) a term loan of $1.8 million with a 20-year straight-

line amortization; and (iv) a term loan of $4.0 million with a 20-year straight-line amortization. Extensions of credit under the revolving credit facility are

based in part upon accounts receivable and inventory levels. Therefore, the entire $17 million may not be available to the Company. The credit facility

calls for interest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s prime rate less a margin that

ranges from 0.25% to zero. In both cases the applicable margin is dependent upon Company performance. The loans are collateralized by a first priority

lien on all of the Company’s assets, including its real estate located in Georgetown, Massachusetts, and in Grand Rapids, Michigan. Under the credit

facility, the Company is subject to a minimum fixed-charge coverage financial covenant. The Company’s $17 million revolving credit facility is due

November 30, 2013; the term loans are all due on January 29, 2016.

As a result of the consolidation of UDT, a mortgage note collateralized by the Alabama and Florida facilities, dated September 4, 2002, originally for

$470,313, was included within long-term debt in the December 31, 2006 consolidated financial statements. On May 22, 2007, this note was

refinanced. The remaining principal balance of $388,356 on the old note was paid in full. The new note is secured by the Florida facility and has a

principal balance of $786,000. The note calls for 180 monthly payments of $7,147. The interest rate is fixed at approximately 7.2%. The additional

funds of approximately $400,000 were used to fund building improvements in the Florida facility. The outstanding balance on this note at December 31,

2008, is $737,289.

In addition to the above credit facilities, the Company has capital lease debt of $1,612,665 as of December 31, 2008. These leases are secured by

specific manufacturing equipment used by the Company and have remaining lives ranging from one to six years and bear interest at rates ranging from 7%

to 8%. Subsequent to December 31, 2008, the Company paid off these lease obligations in full.

Long-term debt consists of the following:

Mortgage note

Notes payable, term loans

United Development Company mortgage

Total long-term debt

Less current installments

December 31

2008

1,859,000

2,062,405

737,288

2007

2,015,000

2,588,976

768,744

4,658,693

5,372,720

716,697

714,256

Long-term debt, excluding current installments

3,941,996

4,658,464

Aggregate maturities of long-term debt are as follows:

Year ending December 31:

2009

2010

2011

2012

2013 and thereafter

(9) Accrued Taxes and Other Expenses

Accrued taxes and other expenses consist of the following:

716,697

718,985

721,691

677,098

1,824,222

4,658,693

Compensation

Benefits/Self-insurance reserve

Paid time off

Commissions payable

Plant consolidation

Income taxes payable (overpayment)

Unrecognized tax benefits

Other

December 31

2008

2007

2,215,874

2,165,994

901,580

688,315

370,432

316,000

(573,953)

560,000

1,751,753

973,405

545,426

275,783

—

507,986

560,000

1,481,622

6,230,001

6,510,216

(10) Income Taxes

The Company’s income tax (benefit) provision for the years ended December 31, 2008, 2007 and 2006 consists of the following:

Current:

Federal

State

Deferred:

Federal

State

Years Ended December 31

2008

2007

2006

2,270,000

709,000

2,979,000

41,000

(25,000)

16,000

983,000

391,000

1,374,000

1,147,000

63,000

1,210,000

160,000

300,000

460,000

1,061,000

(28,000)

1,033,000

Total income tax provision

2,995,000

2,584,000

$ 1,493,000

At December 31, 2008, the Company has net operating loss carryforwards for federal income tax purposes of approximately $2,488,000, and for state

income tax purposes of approximately $500,000, which are available to offset future taxable income and expire during the federal tax years ending

December 31, 2019 through 2024. The future benefit of the federal net operating loss carryforwards will be limited to approximately $300,000 per year

in accordance with Section 382 of the Internal Revenue Code.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are approximately as follows:

Deferred tax assets related to:

Equity-based compensation

Compensation programs

Retirement liability

Net operating loss carryforwards

Inventory capitalization

Reserves

Total deferred tax assets

Deferred tax liabilities related to:

Excess of book over tax basis of fixed assets

Goodwill

Inventory method change

Other

Total deferred tax liabilities

December 31

2008

2007

387,000

497,000

184,000

866,000

246,000

412,000

244,000

278,000

190,000

979,000

66,000

243,000

2,592,000

2,000,000

417,000

499,000

295,000

5,000

1,216,000

339,000

434,000

—

17,000

790,000

Net deferred tax assets

$ 1,376,000

1,210,000

The amount recorded as net deferred tax assets as of December 31, 2008 and 2007 represents the amount of tax benefits of existing deductible temporary

differences or carryforwards that are more likely than not to be realized through the generation of sufficient future taxable income within the carryforward

period. The Company believes that the net deferred tax asset of $1,376,000 at December 31, 2008, is more likely than not to be realized in the

carryforward period. This balance includes the tax benefit associated with the acquisition of the common stock of Stephenson & Lawyer, Inc., as discussed

in Note 18. Management reviews the recoverability of deferred tax assets during each reporting period.

The actual tax provision for the years presented differs from the “expected” tax provision for those years, computed by applying the U.S. federal corporate

rate of 34% to income before income tax expense as follows:

Computed “expected” tax rate

Increase (decrease) in income taxes resulting from:

State taxes, net of federal tax benefit

Officers’ life insurance

Meals and entertainment

R&D credits

Domestic production deduction

Non-deductible ISO stock option expense

Other

Effective tax rate

Years Ended December 31

2008

34.0%

5.6

0.0

0.2

(1.2)

(2.1)

0.4

0.0

2007

34.0%

4.5

0.0

0.3

(1.1)

0.0

0.5

0.1

2006

34.0%

4.6

0.1

0.3

(2.7)

0.0

1.0

0.0

36.9%

38.3%

37.3%

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company has not been audited by the

Internal Revenue Service since 2001 or by any states in connection with income taxes, with the exception of returns filed in Michigan (which have
been audited through 2004) and income tax returns filed in Massachusetts for 2005 and 2006 (which are currently being audited). The tax returns

for the years 2004 through 2006, and certain items carried forward from earlier years and utilized in those returns, remain open to examination by the

IRS and various state jurisdictions.

FIN 48 prescribes the recognition, measurement, and disclosure standards for uncertainties in income tax positions. A reconciliation of the beginning

and ending amount of gross unrecognized tax benefits (“UTB”) is as follows:

Gross UTB balance at beginning of fiscal year

560,000

235,000

Federal and State Tax

2008

2007

Additions based on tax positions

related to the current year

Additons for tax positions for prior years

Reductions for tax position for prior years

Settlements

Reductions due to lapse of applicable

statute of limitations

Gross UTB balance at December 31

Net UTB impacting the

effective tax rate at December 31

—

325,000

—

560,000

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of December 31, 2008, and 2007 are

$560,000 for each year.

At December 31, 2008, and 2007, accrued interest and penalties on a gross basis were $115,000 for each year.

(11) Net Income Per Share

Basic income per share is based upon the weighted average common shares outstanding during each year. Diluted income per share is based upon the

weighted average of common shares and dilutive common stock equivalent shares outstanding during each year. The weighted average number of shares

used to compute both basic and diluted income per share consisted of the following:

2008

Years Ended December 31
2007

2006

Basic weighted average common shares

outstanding during the year

5,549,830

5,306,948

5,022,532

Weighted average common equivalent

shares due to stock options

Diluted weighted average common

shares outstanding during the year

712,836

554,472

548,536

6,262,666

5,861,420

5,571,068

(12) Stock Option and Equity Incentive Plans

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 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 Compensation 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 a different schedule. At December 31,

2008, there were 634,375 options outstanding under the Employee Stock Option 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.

Incentive Plan

In June 2003, the Company formally adopted the 2003 Equity Incentive Plan (the “Plan”). The Plan was originally 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 Plan was amended effective

June 4, 2008, to permit certain performance-based cash awards to be made under the Plan. The amendment also added appropriate language so as to

enable grants of stock-based awards under the Plan to continue to be eligible for exclusion from the $1,000,000 limitation on deductibility under Section

162(m) of the Internal Revenue Code (the “Code”). On February 21, 2008, the Board of Directors also changed the name of the Plan from the “2003

Equity Incentive Plan” to the “2003 Incentive Plan,” in part to reflect the amendment described above.

Two types of equity 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 Restricted Stock Unit Awards (“RSUs”), unrestricted or restricted 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 1,250,000 shares.

Through December 31, 2008, 436,679 shares of common stock have been issued under the 2003 Incentive Plan, none of which have been restricted;

an additional 352,000 shares are being reserved for outstanding grants of RSUs and other share-based compensation that are subject to various

performance and time-vesting contingencies.

Stock Purchase Plan

On April 18, 1998, the Company adopted the 1998 Stock Purchase Plan (the “Stock Purchase Plan”), which provided that all employees of the

Company (who worked more than 20 hours per week and more than five months in any calendar year, and who were employees on or before the

applicable offering period) were eligible to participate. The Stock Purchase Plan was 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 could have had up to 10% of their base salaries

withheld 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

offering periods were from January 1 through June 30 and from July 1 through December 31 of each calendar year. The 1998 Stock Purchase Plan

provides for the issuance of up to 400,000 shares of common stock. Through December 31, 2008, there were 305,866 shares issued under this plan.

The Company no longer offers the plan to employees, and plans to dissolve the Stock Purchase 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 (the “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 on the date of the grant and expire 10 years from the date of grant. The exercise price was the fair market value of the

common stock on the date of grant. At December 31, 2008, there were no options outstanding under the 1993 Director Plan.

Effective July 15, 1998, the Company adopted the 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 1998 Director Plan

to increase the allowable amount to 725,000 shares. On June 4, 2008, the Company further amended the Director Plan to increase the allowable

amount to 975,000 shares. These options become exercisable in full at the date of grant and expire 10 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. At December 31, 2008, there were 338,808 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

Aggregate
Intrinsic Value

Outstanding December 31, 2005

Granted

Exercised

Cancelled or expired

Outstanding December 31, 2006

Granted

Exercised

Cancelled or expired

Outstanding December 31, 2007

Granted

Exercised

Cancelled or expired

Outstanding December 31, 2008

Exercisable at December 31, 2008

Vested and expected to vest at

December 31, 2008

1,375,546

64,877

(255,614)

(28,750)

1,156,059

65,456

(117,707)

—

1,103,808

41,769

(139,181)

(33,213)

973,183

935,308

973,183

2.23

5.86

2.10

4.45

2.40

5.35

2.31

—

2.59

10.90

2.39

2.68

2.97

2.90

2.97

—

2,536,931

2,498,662

2,536,931

The following is a summary of information relating to stock options outstanding and exercisable by price range as of December 31, 2008:

Range of
exercise prices

Outstanding
as of 12/31/08

OPTIONS OUTSTANDING

OPTIONS EXERCISABLE

Weighted average
remaining contractual
life (years)

Weighted remaining
average
exercise price

Exercisable as
of 12/31/08

Weighted
average
exercise price

$0.00 - $0.99

$1.00 - $1.99

$2.00 - $2.99

$3.00 - $3.99

$4.00 - $4.99

$5.00 - $5.99

$6.00 - $6.99

$10.00 - $10.99

$12.00 - $12.99

50,000

231,911

333,148

203,985

5,000

59,456

47,914

27,500

14,269

973,183

3.1

4.1

4.2

3.8

3.0

7.3

6.7

9.5

9.4

4.6

0.81

1.15

2.49

3.29

4.94

5.14

6.18

10.14

12.37

50,000

231,911

333,148

184,860

2,500

50,706

40,414

27,500

14,269

0.81

1.15

2.49

3.28

4.94

5.13

6.11

10.14

12.37

2.97

935,308

2.90

During the years ended December 31, 2008, 2007, and 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 $929,281, $357,426, and $883,417, respectively, and the total amount of
consideration received from the exercise of these options was $333,026, $272,214, and $520,701, respectively.

During the years ended December 31, 2008, 2007, and 2006, the Company recognized compensation expense related to stock options granted to

directors and employees of $221,324, $211,050, and $235,382, respectively.

On February 8, 2008, the Company’s Compensation Committee approved the issuance of 25,000 shares of unrestricted common stock to the Company’s

Chairman, Chief Executive Officer, and President under the 2003 Equity Incentive Plan. The shares were issued on December 31, 2008. Based upon

the provisions of SFAS No. 123R, the Company has recorded compensation expense of $154,500 for the year ended December 31, 2008, based on the

grant date price of $6.18 at February 8, 2008.

Beginning in 2006, RSUs have been granted under the 2003 Equity Incentive Plan to the executive officers of the Company. The stock unit awards are subject

to various time-based vesting requirements, and certain portions of these awards are subject to performance criteria of the Company. Compensation

expense on these awards is recorded based on the fair value of the award at the date of grant, which is equal to the Company’s stock price, and is

charged to expense ratably during the service period. Upon vesting, RSUs are generally net-share settled to cover the required withholding tax, and the

remaining amount is converted into an equivalent number of common shares. No compensation expense is taken on awards that do not become vested,

and the amount of compensation expense recorded is adjusted based on management’s determination of the probability that these awards will become vested.

The following table summarizes information about stock unit award activity during the three-year period ended December 31, 2008:

Outstanding at December 31, 2005

Awarded

Shares distributed

Forfeited/cancelled

Outstanding at December 31, 2006

Awarded

Shares distributed

Forfeited/cancelled

Outstanding at December 31, 2007

Awarded

Shares distributed

Shares exchanged for cash

Forfeited/cancelled

Outstanding at December 31, 2008

Restricted Stock Units

Award Date Fair Value

Weighted Average

—

144,000

—

144,000

(16,000)

—

272,000

144,000

(43,680)

(20,320)

—

352,000

—

6.15

—

6.15

4.91

6.15

—

5.49

6.35

5.82

3.82

—

5.79

The Company recorded $929,965, $364,977, and $223,957 in compensation expense related to these RSUs during the years ended December 31,

2008, 2007, and 2006, respectively. The total fair value of RSUs that vested during 2008 and 2007, at vest date, was $659,100 and $83,040,

respectively. No RSUs vested during 2006.

The following summarizes the future share-based compensation expense the Company will record as the equity securities granted through December

31, 2008, vest:

Options

Common Stock

42,403

22,682

11,082
—

$ —

—

—
—

Restricted

Stock Units

560,325

330,620

164,678
17,884

Total

602,728

353,302

175,760
17,884

76,167

$ —

$ 1,073,507

$ 1,149,674

2009

2010

2011
2012

Total

(13) Preferred Stock

On March 18, 2009, the Company declared a dividend of one preferred share purchase right (a “Right”) for each outstanding share of common stock,

par value $0.01 per share on March 20, 2009, to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the

Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share (the “Preferred Share”), of the

Company, at a price of $25.00 per one one-thousandth of a Preferred Share subject to adjustment and the terms of the Rights Agreement. The rights

expire on March 19, 2019.

(14) Supplemental Retirement Benefit

The Company provides discretionary supplemental retirement benefits for certain retired officers, which will provide an annual benefit to these individuals

for various terms following separation from employment. The Company recorded an expense of approximately $27,000, $4,000, and $111,000 for the

years ended December 31, 2008, 2007, and 2006, respectively. The present value of the supplemental retirement obligation has been calculated using

an 8.5% discount rate. Total projected future cash payments for the years ending December 31, 2009 through 2012 are approximately $96,000,

$101,000, $80,000, and $80,000, respectively, and approximately $280,000 thereafter.

(15) Commitments and Contingencies

(a)

Leases – The Company has operating leases for certain facilities that expire through 2015. Certain of the leases contain escalation clauses that
require payments of additional rent, as well as increases in related operating costs. The Company also leases various equipment under capital

leases that expire through 2011.

Included in property, plant and equipment are the following amounts held under capital lease:

December 31

2008

2007

Equipment

Less accumulated depreciation

$ 4,261,592

(2,996,045)

$ 4,261,592

( 2,213,238)

$ 1,265,547

$ 2,048,354

Future minimum lease payments under noncancelable operating leases and the present value of future minimum lease payments under capital leases

as of December 31, 2008, are as follows:

Years Ending December 31:

Capital Leases1

Operating Leases

2009

2010

2011

2012

Thereafter

798,979

717,916

244,251

—

$ 1,445,505

1,197,619

922,757

860,075

850,033

Total minimum lease payments

$ 1,761,146

$ 5,275,989

Less amount representing interest

Present value of future minimum lease payments

Less current installments of obligations under capital leases

148,481

1,612,665

702,765

Obligations under capital lease, excluding current installments

909,900

1 On January 30, 2009, these leases were paid in full.

Rent expense amounted to approximately $2,214,000, $2,464,000, and $2,375,000 in 2008, 2007, and 2006, respectively.

(b)

Legal – The Company is a defendant in various administrative proceedings that are being handled in the ordinary course of business. In the opinion
of management of the Company, these suits and claims should not result in final judgments or settlements that, in the aggregate, would have a

material adverse effect on the Company’s financial condition or results of operations.

(16) Employee Benefits Plans

The Company maintains a profit-sharing plan for eligible employees. Contributions to the Plan are made in the form of matching contributions to employee

401k deferrals as well as discretionary amounts determined by the Board of Directors, and amounted to approximately $703,000, $646,000, and

$604,000, respectively, in 2008, 2007, and 2006.

The Company has a partially self-insured health insurance program that covers all eligible participating employees. The maximum liability is limited by a

stop loss of $100,000 per insured person, along with an aggregate stop loss determined by the number of participants.

During 2006, the Company established an Executive, Non-qualified “Excess” Plan (“the Plan”), which is a deferred compensation plan available to certain

executives. The Plan permits participants to defer receipt of part of their current compensation to a later date as part of their personal retirement or financial

planning. Participants have an unsecured contractual commitment by the Company to pay amounts due under the Plan. There is currently no security

mechanism to ensure that the Company will pay these obligations in the future.

The compensation withheld from Plan participants, together with investment income on the Plan, is reflected as a deferred compensation obligation to

participants, and is classified within accrued liabilities in the accompanying balance sheets. At December 31, 2008, the balance of the deferred

compensation liability totaled approximately $368,000. The related assets, which are held in the form of a Company-owned, variable life insurance policy

that names the Company as the beneficiary, are reported within other assets in the accompanying balance sheets, and are accounted for based on the

underlying cash surrender values of the policies, and totaled approximately $362,000 as of December 31, 2008.

(17) Fair Value of Financial Instruments

Financial instruments recorded at fair value in the balance sheets, or disclosed at fair value in the footnotes, are categorized below based upon the level of

judgment associated with the inputs used to measure their fair value. Hierarchical levels defined by SFAS No.157 and directly related to the amount of

subjectivity associated with inputs to fair valuation of these assets and liabilities are as follows:

Level 1 – Valued based on unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. An active market for
the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on

an ongoing basis. The assets valued and carried by the Company using Level 1 inputs are our money market accounts and certificates of deposit. There

are no liabilities valued and carried using Level 1 inputs.

Level 2 – Valued based on either directly or indirectly observable prices for the asset or liability through correlation with market data at the measurement
date and for the duration of the instrument’s anticipated life. No assets or liabilities are currently valued based on Level 2 inputs.

Level 3 – Valued based on management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. These assets and liabilities are

excluded from the initial adoption of SFAS No. 157.

Financial instruments that currently require disclosure under SFAS No. 157 consist of money market funds and certificates of deposit, which are both considered

cash equivalents. Assets and liabilities measured at fair value on a recurring basis are categorized by the levels discussed above, and in the table below:

Cash Equivalents

Level 1

Level 2

Level 3

Total

Money market funds

Certificates of deposits

Total

6,010,000

200,000

6,210,000

—

6,010,000

200,000

6,210,000

(18) Acquisition

On January 18, 2008, the Company acquired 100% of the common stock of Stephenson & Lawyer, Inc. (“S&L”), a Grand Rapids, Michigan-based foam

fabricator, and its wholly-owned subsidiary, Patterson Properties Corporation. S&L was consolidated into the Company’s financial statements effective as of

January 1, 2008. S&L specializes in the fabrication of technical urethane foams, and brings to the Company access to this family of foams, modern

manufacturing capabilities, and a seasoned management team. Including a purchase price of $7,225,000 plus transaction costs, the total acquisition cost

was $7,325,000. The acquisition cost was allocated as follows:

Cash and cash equivalents

2,144,000

Accounts receivable

Inventories

Prepaids

Deferred tax assets

Property, plant and equipment

Current liabilities
Other liabilities

Purchase price

Cash and cash equivalents acquired

1,737,000

1,842,000

45,000

182,000

2,620,000

(1,045,000)
(200,000)

7,325,000

(2,144,000)

Purchase price net of cash acquired

5,181,000

The following table contains an unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2007, as if the

S&L acquisition had occurred on January 1, 2007. No pro forma adjustments have been made to the comparative condensed consolidated statement of

operation for the year ended December 31, 2008, since the S&L acquisition was effective as of the beginning of that year:

Sales

Operating income

Net income

Earnings per share:

Basic
Diluted

Years Ended December 31

2008

2007 Unaudited

110,031,601

107,050,787

8,424,731

5,116,000

6,621,853

3,804,315

$
$

0.92
0.82

$
$

0.72
0.65

The above pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred

had the S&L acquisition occurred as presented. In addition, future results may vary significantly from the results reflected in such pro forma information.

(19) Plant Consolidation

On August 5, 2008, the Company committed to move forward with a plan to close its Macomb Township, Michigan, automotive plant and consolidate

operations into its newly acquired 250,000-square-foot building in Grand Rapids, Michigan. Through December 31, 2008, the Company incurred

restructuring charges of approximately $1.3 million in one-time, pre-tax expenses and committed to invest approximately $650,000 in building

improvements in the Grand Rapids facility over a six-month transitional period. The Company expects annual cost savings of approximately $1.2 million

as a result of the plant consolidation.

Through the year ended December 31, 2008, the Company has incurred the following expenses:

Total cost
originally
expected

Cost incurred in the
12-month period
ended 12/31/08

Cash
payments

Non-cash
item

Ending accrual
balance at
12/31/08

Macomb Township

building improvement

write-off

170,000

—

$ (170,000)

Macomb Township

building restoration

Earned severance

Moving and training

50,000

400,000

780,000

56,000

327,000

762,000

(56,000)

(211,000)

(562,000)

—

116,000

200,000

Total

$ 1,400,000

$ 1,315,000

$ (829,000)

$ (170,000)

$ 316,000

Through December 31, 2008, the Company has also funded $650,000 in related capitalized building improvements in the Grand Rapids facility.

(20) Segment Data

The Company has adopted SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.”

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: Packaging and Component Products. Within the 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 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. Income taxes and interest expense have been allocated based on

operating results and total assets employed in each segment.

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, net profits, and assets agree with the Company’s consolidated amounts contained in the audited financial statements.

Revenues from customers outside of the United States are not material.

The top customer in the Company’s Component Products segment comprises 23% of that segment’s total sales and 13% of the Company’s total sales for

the year ended December 31, 2008. The top customer in the Company’s Packaging segment comprises 11% of that segment’s total sales and 5% of the

Company’s total sales for the year ended December 31, 2008. The results for the Packaging segment include the operations of United Development

Company Limited.

Financial statement information by reportable segment is as follows:

2008

Sales

Operating Income

Total assets

Depreciation/Amortization

Captial expenditures

Interest expense

Goodwill

2007

Sales

Operating Income

Total assets

Depreciation/Amortization

Captial expenditures

Interest expense

Goodwill

2006

Sales

Operating Income

Total assets

Depreciation/Amortization

Captial expenditures

Interest expense

Goodwill

Component Products

Packaging

Total

60,847,533

49,184,068

110,031,601

3,076,360

22,098,941

1,820,239

1,053,622

139,586

4,463,246

5,348,371

26,623,720

1,156,311

1,709,628

194,707

2,017,791

Component Products

Packaging

8,424,731

48,722,661

2,976,550

2,763,250

334,293

6,481,037

Total

53,782,483

39,812,657

93,595,140

4,767,544

18,665,208

1,875,488

309,600

174,171

4,463,246

2,479,810

26,887,566

939,533

1,790,984

305,000

2,017,791

Component Products

Packaging

7,247,354

45,552,774

2,815,021

2,100,584

479,171

6,481,037

Total

55,757,985

37,991,254

93,749,239

2,833,743

21,131,060

1,933,949

911,032

493,534

4,463,246

2,220,439

17,905,952

1,125,753

604,501

470,448

2,017,791

5,054,182

39,037,012

3,059,702

1,515,533

963,982

6,481,037

(21) Quarterly Financial Information (unaudited)

Year Ended December 31, 2008

Net sales

Gross profit

Net income

Basic net income per share

Diluted net income per share

28,008,036

$ 28,456,090

$ 27,501,379

$ 26,066,096

6,888,126

1,148,141

0.21

0.19

7,627,616

1,574,222

0.29

0.25

7,410,354

1,247,285

0.22

0.20

6,636,966

1,146,352

0.20

0.19

Year Ended December 31, 2007

Net sales

Gross profit

Net income

Basic net income per share

Diluted net income per share

22,012,636

$ 23,180,140

$ 22,937,289

$ 25,465,075

4,599,482

521,420

0.10

0.09

5,784,955

976,967

0.18

0.17

5,302,277

883,279

0.17

0.15

7,123,440

1,777,435

0.33

0.30

(22) Subsequent Event

On March 12, 2009, the Company purchased certain assets (inventory and equipment) of the Hillsdale, Michigan, operations of Foamade

Industries, Inc. The Company anticipates that the integration of these assets will be completed within six months, including potentially moving
them to the Company's facility in Grand Rapids, Michigan. We have not completed our analysis of the acquisition date fair value of total

consideration transferred compared to the acquisition date fair value of the assets and liabilities acquired in this transaction.

Special Note Regarding Forward-Looking Statements

Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E

of the Securities Exchange Act of 1934. Forward-looking statements include, but are not limited to, statements regarding: the Company’s ability to outperform its

competition and achieve growth targets; the Company’s beliefs about the advantages that its size, engineering capability and high-quality manufacturing will help

win new business; the Company’s growth strategies and growth potential, including by way of acquisition; and the Company’s anticipated adaptability. Investors

are cautioned that such forward-looking statements involve risks and uncertainties, including economic conditions that affect sales of the products of the

Company’s customers, the ability of the Company to execute and integrate favorable acquisitions, actions by the Company’s competitors and the ability of the

Company to respond to such actions, the ability of the Company to obtain new customers, the ability of the Company to fulfill its obligations on long-term

contracts and to retain current customers, the public’s perception of environmental issues related to the Company’s business, the Company’s ability to adapt to

changing market needs and other factors. Accordingly, actual results may differ materially. Readers are referred to the documents filed by the Company with the

SEC, specifically the last reports on Forms 10-K and 10-Q. The forward-looking statements contained herein speak only of the Company’s expectations as of the

date of this financial report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statement to

reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which any such statement is based.

STOCKHOLDER INFORMATION

TRANSFER AGENT AND REGISTRAR
American Stock Transfer

and Trust Company

6201 15th Avenue, 3rd Floor

Brooklyn, NY 11219

CORPORATE HEADQUARTERS
UFP Technologies, Inc.

172 East Main Street

Georgetown, MA 01833-2107 USA

phone: (978) 352-2200

fax: (978) 352-5616

ANNUAL MEETING
The annual meeting of stockholders will be

held at 10:00 a.m., on June 3, 2009, at the

PLANT LOCATIONS
Alabama, California, Florida, Georgia,

Sheraton Ferncroft Resort, 50 Ferncroft

Illinois, Iowa, Massachusetts, Michigan,

Road, Danvers, MA 01923, USA.

New Jersey, Texas.

COMMON STOCK LISTING
UFP Technologies’ common stock is traded

on NASDAQ under the symbol UFPT.

STOCKHOLDER SERVICES
Stockholders whose shares are held in street

name often experience delays in receiving

company communications forwarded through

INDEPENDENT PUBLIC
ACCOUNTANTS
CCR LLP

1400 Computer Drive

Westborough, MA 01581

CORPORATE COUNSELS
Lynch Brewer Hoffman & Fink, LLP

brokerage firms or financial institutions. Any

101 Federal Street, 22nd Floor

shareholder or other interested party who

Boston, MA 02110

wishes to receive information directly should

call or write the Company. Please specify

Brown, Rudnick, Berlack, Israels, LLP

regular or electronic mail:

UFP Technologies, Inc.

Attn.: Shareholder Services

172 East Main Street

Georgetown, MA 01833-2107 USA

tel: (978) 352-2200

e-mail: investorinfo@ufpt.com

web: www.ufpt.com

FORM 10-K REPORT
A copy of the Annual Report on Form 10-K

for the fiscal year ended December 31,

2008, as filed with the Securities and

Exchange Commission, may be obtained

without charge by writing to the Company, or

on the Company’s website at www.ufpt.com.

1 Financial Center

Boston, MA 02111

ABOUT THIS REPORT
The objective of this report is to provide

existing and prospective shareholders a tool

to understand our financial results, what we

do as a company, and where we are headed

in the future. We aim to achieve these goals

with clarity, simplicity, and efficiency. We

welcome your comments and suggestions.

WORLD WIDE WEB
In the interest of providing timely, cost-

effective information to shareholders, press

releases, SEC filings, and other investor-

oriented matters are available on the

Company’s web site at www.ufpt.com

BOARD OF DIRECTORS
AND EXECUTIVE OFFICERS

R. Jeffrey Bailly

Chairman, CEO and President

Richard L. Bailly

Co-Founder, Retired

Kenneth L. Gestal

President & Managing Partner

Decision Capital, LLC

David B. Gould

President

Westfield, Inc.

Marc D. Kozin

President

LEK Consulting, LLC

Ronald J. Lataille

Vice President, Treasurer

and Chief Financial Officer

Richard S. LeSavoy

Vice President

Manufacturing

Thomas Oberdorf

Chief Financial Officer

infoGroup Inc.

Robert W. Pierce, Jr.

Chairman, CEO,

and Co-Owner

Pierce Aluminum Co.

Mitchell C. Rock

Vice President

Sales and Marketing

Daniel J. Shaw, Jr.

Vice President

Engineering

David K. Stevenson

Director, Trustee and

Consultant

d Directors

o Officers

OPERATING PRINCIPLES

CUSTOMERS
We believe the primary purpose of our company is to serve our customers.

We seek to “wow” our customers with responsiveness and great products.

ETHICS
We will conduct our business at all times and in all places with absolute integrity

with regard to employees, customers, suppliers, community and the environment.

EMPLOYEES
We are dedicated to providing a positive, challenging,

rewarding work environment for all of our employees.

QUALITY
We are dedicated to continuously improving our quality of service,

quality of communications, quality of relationships

and quality of commitments.

SIMPLIFICATION
We seek to simplify our business process through the constant re-examination

of our methods and elimination of all non-value-added activities.

ENTREPRENEURSHIP
We strive to create an environment that encourages autonomous decision

making and a sense of ownership at all levels of the company.

PROFIT
Although profit is not the sole reason for our existence,

it is the lifeblood that allows us to exist.

UFP TECHNOLOGIES, INC.

172 East Main Street, Georgetown, MA 01833 USA

tel: 978.352.2200 (cid:129) fax: 978.352.5616 (cid:129) web: www.ufpt.com

Alabama

California

Florida

Georgia

Illinois

Iowa

Massachusetts

Michigan

New Jersey

Texas