**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-K**

 
| **x**                                                 | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE**     |
|-------------------------------------------------------|-------------------------------------------------------------------------|
|                                                  | **SECURITIES EXCHANGE ACT OF 1934**                                     |
|                                                  |                                                                    |
| **For the fiscal year ended  December 31, 2008** |
|                                                  |                                                                    |
| **OR**                                                |
|                                                  |                                                                    |
| **o**                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE** |
|                                                  | **SECURITIES EXCHANGE ACT OF 1934**                                     |

 

**For the transition period from                        to                        **

 

**Commission file number: 001-12648**

 

**UFP Technologies, Inc.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                              | ** ** | **04-2314970**      |
|-------------------------------------------|------------|---------------------|
| (State or other  jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or  organization)           |       | Identification No.) |
|                                      |       |                |
| **172 East Main Street,  Georgetown,**    | ** ** | ** **          |
| **Massachusetts — USA**              | ** ** | **01833-2107**      |
| (Address of principal  executive offices) |       | (Zip Code)          |

 

**(978) 352-2200**

(Registrant’s telephone number, includingarea code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

| **Title of each class**  | ** ** | **Name of each exchange on which registered** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------|
| Common Stock, $0.01 par value per share |       | The NASDAQ Stock Market L.L.C.                                              |
| Preferred Share Purchase Rights         |       | The NASDAQ Stock Market L.L.C.                                              |

 

Securities registered pursuant to Section 12(g) of theAct:   **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.
|   | Yes  o | No  x |
|--------|--------|-------|

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.
|   | Yes  o | No  x |
|--------|--------|-------|

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.
|   | Yes  x | No  o |
|--------|--------|-------|

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.                                                 x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company.

 
| Large  accelerated filer o. |   | Accelerated  filer o. |   | Non-accelerated  filer o. |   | Smaller  reporting company x |
|-----------------------------|--------|-----------------------|--------|---------------------------|--------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).
|   | Yes  o | No  x |
|--------|--------|-------|

 

As of June 30, 2008, the aggregate market value ofthe registrant’s common stock held by non-affiliates of the registrant was$48,169,111, based on the closing price of $10.01 on that date as reported onthe Nasdaq Capital Market.

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

Asof March 3, 2009, there were 5,784,982 shares of common stock, $0.01 parvalue per share, of the Registrant outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

| **Document**                                                                                    | ** ** | **Parts of this Form 10-K Into  Which Incorporated** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|
| Portions of the registrant’s Proxy Statement  for the 2008 Annual Meeting of Shareholders. |       | Part III                                                                      |

 

 

 

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# **PART I**

# ** **

This report contains certain statements that are“forward-looking statements” as that term is defined under the PrivateSecurities Litigation Reform Act of 1995 and releases issued by the Securitiesand Exchange Commission.  The words “believe,”  “expect,” “anticipate,” “intend,” “estimate” and other expressions which arepredictions of or indicate future events and trends and which do not relate tohistorical matters identify forward-looking statements.  Forward-looking statements involve known andunknown risks, uncertainties and other factors, which may cause the actualresults, performance or achievements of the Company to differ materially fromanticipated future results, performance or achievements expressed or implied bysuch forward-looking statements.

 

Examples of these risks, uncertainties, andother factors include, without limitation, the following: (i) economicconditions that affect sales of the products of the Company’s customers, (ii) actionsby the Company’s competitors and the ability of the Company to respond to suchactions, (iii) the ability of UFP Technologies, Inc. (the “Company”or “UFPT”) to obtain new customers, (iv) the ability of the Company tofulfill its obligations on long-term contracts, and (v) the ability of theCompany to execute and integrate favorable acquisitions.  In addition to the foregoing, the Company’sactual future results could differ materially from those projected in theforward-looking statements as a result of risk factors set forth elsewhere inthis report and changes in general economic conditions, interest rates and theassumptions used in making such forward-looking statements.  The Company’s forward-looking statements setforth in this report represent estimates and assumptions only as of the datethat they are made. The Company undertakes no obligation to publicly update orrevise any forward-looking statement, whether as a result of new information,future events or otherwise.

 

## ITEM 1.              BUSINESS

##  

The Company’s principal executive offices arelocated at 172 East Main Street, Georgetown, Massachusetts 01833; telephonenumber 978-352-2200; corporate website www.ufpt.com.  We make available through our website ourannual report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, and amendments to these reports filed or furnished pursuantto Section 13(a) of the Securities Exchange Act of 1934 as soon aspracticable after we electronically file such material with, or furnish it tothe Securities and Exchange Commission. The information found on our website is not part of this or any otherreport we file with or furnish to the SEC.

 

The Company designs and manufactures engineeredpackaging solutions utilizing molded fiber, vacuum-formed plastics, and moldedand fabricated foam plastic products. The Company also designs and manufactures engineered component productsusing laminating, molding, and fabricating technologies.  The Company serves a myriad of manufacturingsectors, but specifically targets opportunities in the automotive, computer andelectronics, medical, aerospace and defense, industrial, and consumer markets.

 

The Company’s high-performance cushion packagingproducts are made primarily from polyethylene and polyurethane foams, and awide range of sheet plastics. These products are custom designed and fabricatedor molded to provide protection for fragile and valuable items, and are soldprimarily to original equipment and component manufacturers.  Molded fiber products are made primarily from100% recycled paper principally derived from waste newspaper. These productsare custom designed, engineered and molded into shapes for packaging highvolume consumer goods, 

 

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including computer components, medical devices,other light electronics, scented candles, and health and beauty products.

 

In addition to packaging products, the Companyfabricates and molds component products made from cross-linked polyethylenefoam and other materials.  The Companyalso laminates fabrics and other materials to cross-linked polyethylene foams,polyurethane foams and other substrates. The Company’s component products include automotive interior trim,athletic and industrial safety belts, components for medical equipment anddevices, abrasive nail files and other beauty aids, anti-fatigue mats, andshock absorbing inserts used in athletic and leisure footwear.

 

Unless the context otherwise requires, the term “Company”or “UFPT” refers to UFP Technologies, Inc. and its wholly-ownedsubsidiaries: Moulded Fibre Technology, Inc. (“MFT”), Simco Technologies, Inc.and Simco Automotive Trim, Inc. (collectively “Simco”), and UnitedDevelopment Company Limited (“UDT”), of which the Company owns 26.32%.  Effective January 18, 2008, the term “Company”or “UFPT” also includes Stephenson & Lawyer, Inc.(“S&L”), theCompany’s wholly-owned subsidiary, and Patterson Properties Corporation,S&L’s wholly-owned subsidiary, pursuant to a purchase and sale agreementthat was executed on January 18, 2008.

 

### **Market Overview**

### ** **

#### Packaging

####  

The interior cushion packaging market ischaracterized by three primary sectors: (1) custom fabricated or moldedproducts for low volume, high fragility products; (2) molded or die-cutproducts for high volume, industrial and consumer goods; and (3) loosefill and commodity packaging materials for products that do not requirecustom-designed packaging. Packaging products are used to contain, display,and/or protect their contents during shipment, handling, storage, marketing,and use. The Company serves both the low volume, high fragility market and thehigh volume industrial and consumer market with a range of product offerings,but does not materially serve the commodity packaging market.

 

The low volume, high fragility market isgenerally characterized by annual production volumes of less than 50,000pieces. Typical goods in this market include precision instruments, medicaldevices, sensitive electronic components, and other high value industrialproducts that are very sensitive to shock, vibration, and other damage that mayoccur during shipment and distribution. The principal materials used to packagethese goods include polyethylene and polyurethane foams, foam-in-placepolyurethane, and molded expanded polystyrene. Polyurethane and polyethylenefoams have high shock absorbency, high resiliency, and vibration dampingcharacteristics.

 

The higher volume consumer packaging market isgenerally characterized by annual production volumes in excess of 50,000pieces. Typical goods in this market include toys, light electronics, computersand computer peripherals, stereo equipment, and small appliances. These goodsgenerally do not require as high a level of shock and vibration protection asgoods in the low volume, high fragility market. The principal materials used topackage these goods include various molded, rigid and foamed plastics, such asexpanded polystyrene foam (EPS), vacuum-formed polystyrene (PS) and polyvinylchloride (PVC), and corrugated die-cut inserts that generally are lessprotective and less expensive than resilient foams and molded fiber.

 

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#### ComponentProducts

####  

Component Products applications of foam andother types of plastics are numerous and diverse. Examples include automotiveinterior components, medical devices, toys, gaskets, health and beautyproducts, and carrying cases. Cross-linked polyethylene foams have many of thesame properties as traditional polyethylene foams, including light weight,durability, resiliency, and flexibility. Cross-linked foams have many advantagesover traditional foams, including the ability to be thermoformed (molded),availability in vibrant colors, a fine cell structure providing improvedesthetics and lower abrasiveness, and enhanced resistance to chemicals andultraviolet light. Certain grades of cross-linked foams can beradiation-sterilized and have been approved by the U.S. Food and DrugAdministration for open wound skin contact.

 

Cross-linked foam can be combined with othermaterials to increase product applications and market applications. Forexample, cross-linked foams can be laminated to fabrics to produce lightweight, flexible and durable insoles for athletic and walking shoes, weightlifting and industrial safety belts, gun holsters, backpacks, and otherproducts for the leisure, athletic and retail markets. The Company believesthat, as a result of their many advantages, cross-linked foam and cross-linkedfoam laminated products are being used in a wide range of markets assubstitutes for traditional rubber, leather, and other product materialalternatives.

 

### **Regulatory Climate**

### ** **

The packaging industry has been subject to user,industry, and legislative pressure to develop environmentally responsiblepackaging alternatives that reduce, reuse, and recycle packaging materials.Government authorities have enacted legislation relating to source reduction,specific product bans, recycled content, recyclability requirements, and “greenmarketing” restrictions.

 

In order to provide packaging that complies withall regulations regardless of a product’s destination, manufacturers seekpackaging materials that meet both environmentally related demands andperformance specifications. Some packaging manufacturers have responded by reducingproduct volume and ultimate waste product disposal through reengineeringtraditional packaging products; adopting new manufacturing processes;participating in recovery and reuse systems for resilient materials that areinherently reusable; creating programs to recycle packaging following itsuseful life; and developing materials that use a high percentage of recycledcontent in their manufacture.  Whereverfeasible, the Company employs one or more of these techniques to createenvironmentally responsible packaging products.

 

### **Products**

### ** **

The Company’s products include foam, plastic,and fiber packaging products, and component products.

 

### **Packaging Products**

### ** **

The Company designs, manufactures, and markets abroad range of packaging products primarily using polyethylene, polyurethaneand cross-linked polyethylene foams, and rigid plastics. These products arecustom-designed and fabricated or molded to provide protection for lessdurable, higher value items, and are primarily sold to original equipment andcomponent manufacturers. Examples of the Company’s packaging products includeend-cap packs for computers, corner blocks for 

 

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telecommunications consoles, anti-static foampacks for printed circuit boards, die-cut or routed inserts for cases andplastic trays for medical devices and components. Markets for these productsare typically characterized by lower to moderate volumes where performance,such as shock absorbency and vibration damping, is valued.

 

The Company’s engineering personnel collaboratedirectly with customers to study and evaluate specific customer requirements.Based on the results of this evaluation, packaging products are engineered tocustomer specifications using various types and densities of materials with thegoal of providing the desired protection for the lowest cost and with thelowest physical package volume. The Company believes that its engineeringexpertise and breadth of product and manufacturing capabilities have enabled itto provide unique solutions to achieve these goals.

 

The markets for the Company’s molded fiberpackaging and vacuum-formed trays are characterized by high volume productionruns and require rapid manufacturing turnaround times. Raw materials used inthe manufacture of molded fiber are primarily recycled newspaper, a variety ofother grades of recycled paper and water. Raw materials used in vacuum-formed plastics include polystyrene (PS)and polyvinyl chloride (PVC).  Theseproducts compete with expanded polystyrene (EPS) and manually assembledcorrugated die-cut inserts.

 

The Company’s molded fiber products providecustomers with packaging solutions that are more responsive to stringentenvironmental packaging regulations worldwide and meet the demands ofenvironmentally-aware consumers while simultaneously meeting customer cost andperformance objectives.

 

### **Component Products**

### ** **

The Company specializes in engineered productsthat use the Company’s close tolerance manufacturing capabilities and itsexpertise in various foam materials and lamination techniques, and the Company’sability to manufacture in clean room environments. The Company’s componentproducts are sold primarily to customers in the automotive, sporting goods,medical, beauty, leisure, and footwear industries. These products includeautomotive interior trim, athletic and industrial safety belts, components formedical equipment and devices, abrasive nail files and other beauty aids,anti-fatigue mats, and shock absorbing inserts used in athletic and leisurefootwear.

 

The Company believes that it is one of the largestpurchasers of cross-linked foam in the United States and as a result it hasbeen able to establish important relationships with the relatively small numberof suppliers of this product. Through its strong relationships withcross-linked foam suppliers, the Company believes that it is able to offercustomers a wide range of cross-linked foam products.

 

The Company benefits from its ability to customdesign its own proprietary manufacturing equipment in conjunction with itsmachinery suppliers. For example, the Company has custom-designed its ownlamination machines, allowing the Company to achieve adhesive bonds betweencross-linked foam and fabric and other materials that do not easily combine.These specialty laminates typically command higher prices than traditional foamproducts.

 

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### **Marketing and Sales**

### ** **

The Company markets and sells its packaging andcomponent products in the United States principally through direct regionalsales forces comprised of skilled engineers. The Company also uses independentmanufacturer representatives to sell its products. The Company’s salesengineers collaborate with customers and the Company’s design and manufacturingexperts to develop custom engineered solutions on a cost-effective basis. TheCompany also markets its products through attendance by in-house marketspecialists at trade shows and expositions. The Company markets a line of products to the health and beautyindustry, primarily through distributors. The Company believes that its sales are somewhat seasonal, withincreased sales in the second and fourth quarters.

 

The top customer in the Company’s ComponentProducts segment, Recticel Interiors North America, comprised 23% of thatsegment’s total sales and 13% of the Company’s total sales for the year ended December 31,2008.  The top customer in the Packagingsegment, Stephen Gould Corporation, comprised 11% of that segment’s total salesand 5% of the Company’s total sales for the year ended December 31,2008.  The loss of either Recticel orStephen Gould Corp. as a customer could have a material adverse effect on theCompany.

 

### **Manufacturing**

### ** **

The Company’s manufacturing operations consistprimarily of cutting, molding, vacuum forming, laminating, and assembly. Forcustom molded foam products, the Company’s skilled engineering personnelanalyze specific customer requirements to design and build prototype productsto determine product functionality. Upon customer approval, prototypes areconverted to final designs for commercial production runs.

 

Molded cross-linked foam products are producedin a thermoforming process using heat, pressure, and precision metal tooling.

 

Cushion foam packaging products that do notutilize cross-linked foam are fabricated by cutting shapes from blocks of foamusing specialized cutting tools, routers, waterjets and hot wire equipment, andassembling these shapes into the final product using a variety of foam weldingor gluing techniques. Products can be used on a stand-alone basis or bonded toanother foam product or other material such as a corrugated medium.

 

Laminated products are produced through aprocess whereby the foam medium is heated to the melting point. The heated foamis then typically bonded to a non-foam material through the application ofmechanical pressure.

 

Molded fiber products are manufactured by vacuumforming a pulp of recycled or virgin paper materials onto custom engineeredmolds. With the application of vacuum and air, the molded parts are pressed andtransferred to an in-line conveyorized dryer from which they exit ready forpacking or subsequent value-added operations.

 

The Company does not manufacture any of the rawmaterials used in its products. With the exception of certain grades ofcross-linked foam and technical polyurethane foams, these raw materials areavailable from multiple supply sources. Although the Company relies upon alimited number of suppliers for cross-linked foam, the Company’s relationshipswith such suppliers are good, and the Company expects that these suppliers willbe able to meet the Company’s 

 

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requirements for cross-linked foam. Any delay orinterruption in the supply of raw materials could have a material adverseeffect on the Company’s business.

 

### **Research and Development**

### ** **

The Company’s engineering personnel continuouslyexplore design and manufacturing techniques as well as new innovative materialsto meet the unique demands and specifications of its customers. Because theCompany’s products tend to have relatively short life cycles, research anddevelopment is an integral part of the Company’s ongoing cost structure.

 

### **Competition**

### ** **

The packaging industry is highly competitive.While there are several national companies that sell interior packaging, theCompany’s primary competition for its packaging products has been from smallerindependent regional manufacturing companies. These companies generally markettheir products in specific geographic areas from neighboring facilities. Inaddition, the Company’s foam and fiber packaging products compete againstproducts made from alternative materials, including expanded polystyrene foams,die-cut corrugated, plastic peanuts, plastic bubbles, and foam-in-placeurethane.

 

The component products industry is also highlycompetitive. The Company’s component products face competition primarily fromsmaller companies that typically concentrate on production of componentproducts for specific industries. The Company believes that its access to awide variety of materials, its engineering expertise, its ability to combinefoams with other materials such as plastics and laminates, and its ability tomanufacture products in a clean room environment will enable it to continue tocompete effectively in the engineered component products market. The Company’scomponent products also compete with products made from a wide range of othermaterials, including rubber, leather and other foams.

 

The Company believes that its customerstypically select vendors based on price, product performance, productreliability, and customer service. The Company believes that it is able tocompete effectively with respect to these factors in each of its targetedmarkets.

 

### **Patents and Other Proprietary Rights**

### ** **

The Company relies upon trade secrets, patents,and trademarks to protect its technology and proprietary rights. The Companybelieves that the improvement of existing products, reliance upon trade secretsand unpatented proprietary know-how, and the development of new products aregenerally as important as patent protection in establishing and maintaining acompetitive advantage. Nevertheless, the Company has obtained patents and maycontinue to make efforts to obtain patents, when available, although there canbe no assurance that any patent obtained will provide substantial protection orbe of commercial benefit to the Company, or that its validity will be upheld ifchallenged.

 

The Company has four U.S. patents relating toits molded fiber technology (including certain proprietary machine designs),and has patents with respect to such technology in certain foreign countries.The Company also has a total of thirteen U.S. patents relating to technologiesincluding foam and packaging, rubber mat, patterned nail file, and superformingprocess technologies.  There can be noassurance that any patent or patent application of the Company will providesignificant 

 

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protection for the Company’s products andtechnology, or will not be challenged or circumvented by others.  The expiration dates for the Company’s USpatents range from 2009 through 2022.

 

### **Environmental Considerations**

### ** **

In addition to offering molded fiber packagingproducts made from recycled paper derived primarily from post-consumernewspaper waste, the Company actively promotes its philosophy of reducingproduct volume and resulting post-user product waste. The Company designsproducts to provide optimum performance with minimum material. In addition, theCompany participates in a recovery and reuse program for certain of its plasticpackaging products. The Company is aware of public support for environmentallyresponsible packaging and other products. Future government action may impose restrictions affecting the industry inwhich the Company operates. There can be no assurance that any such action willnot adversely impact the Company’s products and business.

 

### **Backlog**

### ** **

The Company’s backlog, as of February 16,2009, and February 17, 2008, totaled approximately $8.5 million and $10.7million, respectively, for the Packaging segment, and $14.5 million and $26.2million, respectively, for the Component Products segment. The backlog consistsof purchase orders for which a delivery schedule within the next twelve monthshas been specified by customers. Orders included in the backlog may be canceledor rescheduled by customers without significant penalty.  The backlog as of any particular date shouldnot be relied upon as indicative of the Company’s revenues for any period.

 

### **Employees**

### ** **

As of January 31, 2009,  the Company had a total of 586 full-timeemployees (as compared to 614 full-time employees as of February 8, 2008),with 297 full-time employees in the Component Products segment (26 inengineering, 215 in manufacturing operations, 25 in marketing, sales andsupport services, and 31 in general and administration) and 289 full-timeemployees in the Packaging segment (28 in engineering, 221 in manufacturing, 19in marketing, sales and support services, and 21 in general and administration).  The Company is not a party to any collectivebargaining agreement. The Company considers its employee relations to be good.

 

## ITEM 1A.          RISK FACTORS

##  

Youshould carefully consider the risks described below and the other informationin this report before deciding to invest in shares of our common stock. Theseare the risks and uncertainties we believe are most important for you toconsider. Additional risks and uncertainties not presently known to us, whichwe currently deem immaterial or which are similar to those faced by othercompanies in our industry or business in general, may also impair our businessoperations. If any of the following risks or uncertainties actually occurs, ourbusiness, financial condition and operating results would likely suffer. Inthat event, the market price of our common stock could decline and you couldlose all or part of your investment.

 

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**The recent worldwide financialturmoil and associated economic downturn has and is likely to continue to harmour business and prospects.**

 

The recent worldwidefinancial turmoil and associated economic downturn has adversely affected, andis likely to continue to adversely affect, sales of our products, therebyharming our business and prospects.  Aslow-down or reduction in industrial output or a contraction of the UnitedStates economy may reduce the requirements for certain of our products or forcertain end-user products into which our products are incorporated.  These factors would likely result indecreased demand and increased pricing pressures on the sales of our products.

 

**Wedepend on a small number of customers for a large percentage of our revenues. ****The loss of any single customer, a reduction in salesto any such customer, or the decline in the financial condition of any suchcustomer could have a material adverse effect on our business, financialcondition, and results of operations.**

 

Alimited number of customers typically represent a significant percentage of ourrevenues in any given year.  Our top tencustomers represent approximately 40% of our total revenues in both 2008 and2007.  A single automotive programaccounted for approximately 31% and 30%, respectively, of our ComponentProducts segment sales and approximately 18% of our total sales in 2008 and2007.  The program is scheduled to phaseout beginning in 2011.  It is uncertainat this time whether the phase-out will occur according to this schedule, orwhether it will happen on a more aggressive timeframe.  It is also uncertain whether the nextgeneration of automobiles in this program will require the same design of partsand, if so, whether we will be selected as the supplier.  We expect sales from this program to declineover the next three years.  Our revenuesare directly dependent on the ability of our customers to develop, market, andsell their products in a timely, cost-effective manner.  The loss of a significant portion of ourexpected future sales to any of our large customers would have a materialadverse effect on our business, financial condition, and financialresults.  Likewise, a material adversechange in the financial condition of any of these customers, for example, dueto a loss of liquidity by such a customer due to the current financialdownturn, could have a material adverse effect on our ability to collectaccounts receivable from any such customer.

 

**Fluctuations in the supply of components and raw materials weuse in manufacturing our products could cause production delays or reductionsin the number of products we manufacture, which could materially adverselyaffect our business, financial condition and results of operations.**

 

Ourbusiness is subject to the risk of periodic shortages of raw materials.  We purchase raw materials pursuant topurchase orders placed from time to time in the ordinary course ofbusiness.  Failure or delay by suchsuppliers in supplying us necessary raw materials could adversely affect ourability to manufacture and deliver products on a timely and competitivebasis.  For example, a key supplier oftechnical urethane foams has recently filed for protection under Chapter 11 ofthe US Bankruptcy Code.  As of this pointof time, there has been no interruption in the supply of such foams, but therecan be no guarantee that such interruption will not occur in the near future.

 

Whilewe believe that we may, in certain circumstances, secure alternative sources ofthese materials, we may incur substantial delays and significant expense indoing so, the quality and reliability of alternative sources may not be thesame and our operating results may be materially adversely affected.Alternative suppliers might charge significantly higher prices for materialsthan we currently pay. Under such circumstances, the disruption to our businesscould have a material 

 

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adverseimpact on our customer relationships, business, financial condition, and resultsof operations.

 

**Reductions in the availability of energy supplies or anincrease in energy costs may increase our operating costs.**

 

Weuse electricity and natural gas at our manufacturing facilities to operate ourequipment. Over the past several years, prices for electricity and natural gashave fluctuated significantly. An outbreak or escalation of hostilities betweenthe United States and any foreign power and, in particular, a prolonged armedconflict in the Middle East, or a natural disaster such as the recenthurricanes and related flooding in the oil producing region of the Gulf Coastof the United States, could result in a real or perceived shortage of petroleumand/or natural gas, which could result in an increase in the cost ofelectricity or energy generally as well as an increase in the cost of our rawmaterials, of which many are petroleum-based. In addition, increased energy costs negatively impact our freight costsdue to higher fuel prices.  Futurelimitations on the availability or consumption of petroleum products and/or anincrease in energy costs, particularly electricity for plant operations, couldhave a material adverse effect upon our business and results of operations.

 

**Our Packaging segment may lose business if our customersshift their manufacturing offshore.**

 

Historically, geography has played a large factor inthe packaging business.  Manufacturingand other companies shipping products typically buy packaging from companiesthat are relatively close to their manufacturing facilities to increaseshipping efficiency and decrease costs. As many U.S. companies move their manufacturing operations overseas,particularly to the Far East, the associated packaging business often follows.  We have lost customers in the past and maylose customers again in the future as a result of customers moving theirmanufacturing facilities offshore, then hiring our competitors that operatepackaging-production facilities perceived to be more territoriallyadvantageous.  As a result, our sales maysuffer, which could havea material adverse effect upon our business and results of operations.

 

**Failure to retain key personnel could impair our ability toexecute our business strategy.**

 

Thecontinuing service of our executive officers and essential engineering,technical and management personnel, together with our ability to attract andretain such personnel, is an important factor in our continuing ability toexecute our strategy. There is substantial competition to attract suchemployees, and the loss of any such key employees could have a material adverseeffect on our business and operating results. The same could be true if we wereto experience a high turnover rate among engineering and technical personneland we were unable to replace them.

 

**Members of our board of directors and management who also are ourstockholders****exert significant influence over us.**

 

Basedon information made available to us, we believe that our executive officers,directors and their affiliates collectively owned approximately 12.9% of ouroutstanding shares of common stock as of June 30, 2008.  As a result, those stockholders may, ifacting together, control or exert substantial influence over actions requiringstockholders’ approval, including elections of our directors, amendments to ourcertificate of incorporation, mergers, sales of assets or other businessacquisitions or dispositions.

 

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**We may pursue acquisitions or joint ventures that involveinherent risks, any of which may cause us to not realize anticipated benefits.**

 

Ourbusiness strategy includes the potential acquisition of businesses and enteringinto joint ventures and other business combinations that we expect willcomplement and expand our business.  Forexample, on January 18, 2008, we acquired Stephenson & Lawyer, Inc.,as discussed in Note 18 of the “*Notes to ConsolidatedFinancial Statements*.”  We maynot be able to successfully identify suitable acquisition or joint ventureopportunities or complete any particular acquisition, combination, jointventure or other transaction on acceptable terms. Our identification ofsuitable acquisition candidates and joint venture opportunities involves risksinherent in assessing the values, strengths, weaknesses, risks and profitabilityof these opportunities including their effects on our business, diversion ofour management’s attention and risks associated with unanticipated problems orunforeseen liabilities. If we are successful in pursuing future acquisitions orjoint ventures, we may be required to expend significant funds, incuradditional debt, or issue additional securities, which may materially andadversely affect our results of operations and be dilutive to our stockholders.If we spend significant funds or incur additional debt, our ability to obtainfinancing for working capital or other purposes could decline and we may bemore vulnerable to economic downturns and competitive pressures. In addition,we cannot guarantee that we will be able to finance additional acquisitions orthat we will realize any anticipated benefits from acquisitions or jointventures that we complete. Should we successfully acquire another business, theprocess of integrating acquired operations into our existing operations mayresult in unforeseen operating difficulties and may require significantfinancial resources that would otherwise be available for the ongoingdevelopment or expansion of our existing business. Our failure to identifysuitable acquisition or joint venture opportunities may restrict our ability togrow our business.

 

**As a****public company, we need to comply with the reportingobligations of the Securities Exchange Act of 1934 and Section 404 of theSarbanes-Oxley Act of 2002.  If we failto comply with the reporting obligations of the Exchange Act and Section 404of the Sarbanes-Oxley Act, or if we fail to maintain adequate internal controlsover financial reporting, our business, results of operations and financialcondition, and investors’ confidence in us, could be materially and adverselyaffected.**

 

As a public company, we are required to complywith the periodic reporting obligations of the Exchange Act, includingpreparing annual reports, quarterly reports and current reports. Our failure toprepare and disclose this information in a timely manner could subject us topenalties under federal securities laws, expose us to lawsuits, and restrictour ability to access financing. We may identify areas requiring improvementwith respect to our internal control over financial reporting, and we may berequired to design enhanced processes and controls to address issuesidentified. This could result in significant delays and cost to us and requireus to divert substantial resources, including management time, from otheractivities.  If we fail to maintain theadequacy of our internal controls, we may not be able to ensure that we canconclude on an ongoing basis that we have effective internal control overfinancial reporting in accordance with the Sarbanes-Oxley Act.  Moreover, effective internal controls arenecessary for us to produce reliable financial reports and are important tohelp prevent fraud.

 

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**Provisionsof our corporate charter documents, Delaware law, and our stockholder rightsplan may dissuade potential acquirers, prevent the replacement or removal ofour current management and may thereby affect the price of our common stock.**

 

The board of directorshas the authority to issue up to 1,000,000 shares of preferred stock and todetermine the price, rights, preferences, privileges, and restrictions,including voting rights of those shares without any further vote or action bythe stockholders.  The rights of theholders of common stock will be subject to, and may be adversely affected by,the rights of the holders of any preferred stock that may be issued in thefuture.  The issuance of preferred stock,while providing flexibility in connection with possible financings,acquisitions and other corporate purposes, could have the effect of making itmore difficult for a third party to acquire a majority of our outstandingvoting stock.  We have no present plansto issue shares of preferred stock.  Further,certain provisions of our certificate of incorporation, bylaws, and Delawarelaw could delay or make more difficult a merger, tender offer or proxy contestinvolving us.

 

Wealso have a stockholder rights plan designed to protect and enhance the valueof our outstanding equity interests in the event of an unsolicited attempt toacquire us in a manner or on terms not approved by the board of directors andthat would prevent stockholders from realizing the full value of their sharesof our common stock. Its purposes are to deter those takeover attempts that theboard believes are undesirable, to give the board more time to evaluatetakeover proposals and consider alternatives, and to increase the board’snegotiating position to enhance value in the event of a takeover. The rightsissued pursuant to the plan are not intended to prevent all takeovers of ourcompany.  However, the rights may havethe effect of rendering more difficult or discouraging our acquisition. Therights may cause substantial dilution to a person or group that attempts toacquire us on terms or in a manner not approved by the board of directors,except pursuant to an offer conditioned upon the negation, purchase, orredemption of the rights with respect to which the condition is satisfied.

 

Additionalprovisions of our certificate of incorporation and bylaws could have the effectof making it more difficult for a third party to acquire a majority of ouroutstanding voting common stock. These include provisions that classify ourboard of directors, limit the ability of stockholders to take action by writtenconsent, call special meetings, remove a director for cause, amend the bylaws,or approve a merger with another company. In addition, our bylaws set forth advance notice procedures forstockholders to nominate candidates for election as directors or to bring mattersbefore an annual meeting of stockholders.

 

Weare subject to the provisions of Section 203 of the Delaware GeneralCorporation Law which prohibits a publicly-held Delaware corporation fromengaging in a “business combination” with an “interested stockholder” for aperiod of three years after the date of the transaction in which the personbecame an interested stockholder, unless the business combination is approvedin a prescribed manner. For purposes of Section 203, a “businesscombination” includes a merger, asset sale or other transaction resulting in afinancial benefit to the interested stockholder, and an “interested stockholder”is a person who, either alone or together with affiliates and associates, owns(or within the past three years did own) 15% or more of the corporation’svoting stock.

 

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## ITEM 2.                                         PROPERTIES

##  

The following table presents certain informationrelating to each of the Company’s properties:

 
| **Location**                  | ** ** | **Square  Feet** | ** ** | **Lease  Expiration  Date** | ** ** | **Principal Use**                                                                                    |
|-------------------------------|------------|------------------|------------|-----------------------------|------------|-----------------------------------------------------------------------------------------------------------|
| Georgetown, Massachusetts(2)  |       | 57,600           |       | (ownedby the Company)       |       | Headquarters, fabrication, molding, test lab,  clean room, and engineering for Component Products segment |
|                          |       |             |       |                        |       |                                                                                                      |
| Grand Rapids, Michigan(2),(3) |       | 255,260          |       | (owned by the Company)      |       | Fabrication and engineering for the Component  Products segment                                           |
|                          |       |             |       |                        |       |                                                                                                      |
| Decatur, Alabama(1)           |       | 47,250           |       | 12/31/11                    |       | Fabrication and engineering for the Packaging  segment                                                    |
|                          |       |             |       |                        |       |                                                                                                      |
| Decatur, Alabama              |       | 14,000           |       | month-to-month              |       | Warehousing and fabrication for the Packaging  segment                                                    |
|                          |       |             |       |                        |       |                                                                                                      |
| Kissimmee, Florida(1)         |       | 49,400           |       | 12/31/11                    |       | Fabrication, molding, test lab, and  engineering for the Packaging segment                                |
|                          |       |             |       |                        |       |                                                                                                      |
| Miami, Florida                |       | 7,000            |       | 11/30/09                    |       | Warehousing and fabrication for the Packaging  segment                                                    |
|                          |       |             |       |                        |       |                                                                                                      |
| Haverhill, Massachusetts      |       | 48,772           |       | 2/28/13                     |       | Flame lamination for the Component Products segment                                                       |
|                          |       |             |       |                        |       |                                                                                                      |
| Raritan, New Jersey           |       | 67,125           |       | 2/28/13                     |       | Fabrication, molding, test lab, clean-room,  and engineering for the Packaging segment                    |
|                          |       |             |       |                        |       |                                                                                                      |
| Clinton, Iowa                 |       | 60,000           |       | 12/31/14                    |       | Molded fiber operations for the Packaging  segment                                                        |
|                          |       |             |       |                        |       |                                                                                                      |
| Clinton, Iowa                 |       | 62,000           |       | 2/28/15                     |       | Molded fiber operations for the Packaging  segment                                                        |
|                          |       |             |       |                        |       |                                                                                                      |
| Addison, Illinois             |       | 30,000           |       | 07/31/10                    |       | Fabrication and engineering for the Packaging  segment                                                    |
|                          |       |             |       |                        |       |                                                                                                      |
| Addison, Illinois             |       | 15,000           |       | 06/30/10                    |       | Fabrication and engineering for the Packaging  segment                                                    |
|                          |       |             |       |                        |       |                                                                                                      |
| Ventura, California           |       | 48,300           |       | month-to-month              |       | Fabrication and engineering for the Component  Products segment                                           |
|                          |       |             |       |                        |       |                                                                                                      |
| Atlanta, Georgia              |       | 47,000           |       | 04/30/11                    |       | Fabrication and engineering for the Component  Products segment                                           |
|                          |       |             |       |                        |       |                                                                                                      |
| El Paso, Texas                |       | 40,000           |       | 6/30/10                     |       | Warehousing and fabrication for the Packaging  segment                                                    |

 

----

(1)          United Development Company Limited, a Floridalimited partnership and an affiliate of the Company and certain officers,directors and stockholders of the Company, is the lessor of theseproperties.  United Development CompanyLimited was consolidated into the Company’s financial statements in 2003  (see Note 1 to the Consolidated Financial Statements).

 

(2)          Subject to mortgage (see Note 8 to the Consolidated FinancialStatements).

 

(3)          Acquired as part of the Stephenson & Lawyer acquisition on January 18,2008

 

## ITEM 3.                                         LEGALPROCEEDINGS

##  

The Company is not a party to any materialpending legal proceedings.

 

13

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## ITEM 4.                                         SUBMISSION OFMATTERS TO A VOTE TO SECURITY HOLDERS

##  

None.

 

# **PART II**

# ** **

## ITEM 5.                                         MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

##  

### **Market Price**

### ** **

FromJuly 8, 1996, until April 18, 2001, the Company’s Common Stock waslisted on the NASDAQ National Market under the symbol “UFPT.”  Since April 19, 2001, the Company’sCommon Stock has been listed on the NASDAQ Capital Market.  The following table sets forth the range ofhigh and low quotations for the Common Stock as reported by NASDAQ for thequarterly periods from January 1, 2007, to December 31, 2008:

 
| **Fiscal Year Ended December 31, 2007** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                                                    |       | $        | 5.78       |    | $          | 4.41 |   |
| Second Quarter                                                   |       | 6.43     |       | 4.56    |       |
| Third Quarter                                                    |       | 5.88     |       | 4.45    |       |
| Fourth Quarter                                                   |       | 8.75     |       | 5.03    |       |
|                                                                  |            |          |            |         |            |  |  |

 
| **Fiscal Year Ended December 31, 2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                                                    |       | $        | 7.83       |    | $          | 5.20 |   |
| Second Quarter                                                   |       | 14.63    |       | 7.36    |       |
| Third Quarter                                                    |       | 12.18    |       | 6.71    |       |
| Fourth Quarter                                                   |       | 7.09     |       | 3.92    |       |
|                                                                  |            |          |            |         |            |  |  |

 

### **Number of Stockholders**

### ** **

Asof February 16, 2009, there were 90 holders of record of the Company’s CommonStock.

 

Dueto the fact that many of the shares are held by brokers and other institutionson behalf of stockholders, the Company is unable to estimate the total numberof individual stockholders represented by these holders of record.

 

### **Dividends**

### ** **

TheCompany did not pay any dividends in 2008, although prior to becoming a publiccompany in December 1993, the Company had from time to time paid cashdividends on its capital stock. The Company presently intends to retain all ofits earnings to provide funds for the operation of its business, although itwould consider paying cash dividends in the future.  The Company’s ability to pay dividends issubject to approval by its principal lending institution.

 

14

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### **Stock Plans**

### ** **

TheCompany maintains two active stock option plans to provide long-term rewardsand incentives to the Company’s key employees, officers, employee directors,non-employee directors and advisors.  The1993 Employee Stock Option Plan provides for the issuance of up to 1,550,000shares of the Company’s Common Stock. The 1993 Director Plan provided for the issuance of 110,000 shares ofthe Company’s Common Stock to non-employee directors; this plan was frozen withthe inception of the 1998 Director Plan, which provides for the issuance of upto 975,000 shares of the Company’s Common Stock to non-employee directors.  Additional details of these plans arediscussed in Note 12 to the consolidated financial statements.

 

ThroughJune 2008, the Company also maintained an Employee Stock Purchase Plan,which was intended to qualify as an “employee stock purchase plan” under Section 423of the Internal Revenue Code of 1986.

 

TheCompany also maintains the 2003 Incentive Plan, which provides the Company withthe ability to offer equity-based incentives to present and future executivesand other employees who are in a position to contribute to the long-termsuccess and growth of the Company.

 

Eachof these plans and their amendments has been approved by the Company’sstockholders.

 

Summaryplan information as of December 31, 2008, is as follows:

 
| ** **                         | ** ** | **Number of  shares of UFPT  common stock  to be issued (1)** | ** ** | **Weighted  average  exercise  price of  outstanding  options** | ** ** | **Number of  shares of UFPT  common stock  remaining  available for  future issuance** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| 1993 Employee  Plan                |       | 634,375                                                                                          |       | $                                                                    | 2.36       |                                                                                                                 | 322,293    |   |
| 1993 Director  Plan                |       | —                                                                                           |       | —                                                               |       | —                                                                                                               |       |
| 1998 Director  Plan                |       | 338,808                                                                                          |       | 4.11                                                                 |       | 334,890                                                                                                              |       |
| Total Option  Plans                |       | 973,183                                                                                          |       | $                                                                    | 2.97       |                                                                                                                 | 657,183    |   |
|                               |       |                                                                                             |       |                                                                 |       |                                                                                                                 |       |
| 1998 Employee  Stock Purchase Plan |       | —                                                                                           |       | —                                                               |       | —                                                                                                               |       |
| 2003 Incentive  Plan               |       | 352,000                                                                                          |       | —                                                               |       | 461,321                                                                                                              |       |
| Total All Stock  Plans             |       | 1,325,183                                                                                        |       | —                                                               |       | 1,118,504                                                                                                            |       |

 

----

(1)  Will be issued upon exercise ofoutstanding options or vesting of stock unit awards.

 

## ITEM 6.                                         SELECTEDFINANCIAL DATA

##  

The following selected financial data for thefive years ended December 31, 2008, is derived from the auditedconsolidated financial statements of the Company.  The consolidated financial statements for the2004 fiscal year were audited by PricewaterhouseCoopers LLP.  The data should be read in conjunction withthe consolidated financial statements and the related notes included in thisreport, 

 

15

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and in conjunction with Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

SelectedConsolidated Financial Data:

 
| ** **                                                                | ** ** | **Years Ended December 31**                         | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated statement of operations data:(1),(2)** | ** ** | **2008**                                                           | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                                 |       | $                                                                  | 110,032    |   | 93,595 |   | 93,749 |   | 83,962 |   | 68,624 |   |
| Gross profit                                                              |       | 28,563                                                             |       | 22,810 |   | 19,237 |   | 14,601 |   | 13,971 |   |
| Operating income                                                          |       | 8,425                                                              | (3)        | 7,247 |   | 5,054 |   | 2,171 |   | 2,144 |   |
| Net income                                                                |       | 5,116                                                              |       | 4,159 |   | 2,515 |   | 659 |   | 871 |   |
| Diluted earnings  per share                                               |       | 0.82                                                               |       | 0.71 |   | 0.45 |   | 0.14 |   | 0.17 |   |
| Weighted average  number of diluted shares outstanding                    |       | 6,263                                                              |       | 5,861 |   | 5,571 |   | 5,261 |   | 4,995 |   |
|                                                                           |            |                                                                    |            |  |  |  |  |  |  |  |  |  |

 
| ** **                                                               | ** ** | **As of December 31** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                               | ** ** | **(in thousands)**              | ** ** |
| **Consolidated balance sheet data:(1),(2)**               | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Working capital                                                          |       | $                                    | 18,688     |   | 14,952 |   | 8,236 |   | 3,321 |   | 1,431 |   |
| Total assets                                                             |       | 48,723                               |       | 45,553 |   | 39,037 |   | 44,000 |   | 39,632 |   |
| Short-term debt  and capital lease obligations                           |       | 1,419                                |       | 1,419 |   | 1,767 |   | 9,716 |   | 9,484 |   |
| Long-term debt  and capital lease obligations, excluding current portion |       | 4,852                                |       | 6,271 |   | 6,921 |   | 7,650 |   | 7,497 |   |
| Total  liabilities                                                       |       | 17,355                               |       | 21,310 |   | 20,412 |   | 29,239 |   | 25,846 |   |
| Stockholders’  equity                                               |       | 31,367                               |       | 24,243 |   | 18,625 |   | 14,761 |   | 13,787 |   |
|                                                                          |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

----

(1)           See Note 20 to the consolidated financial statements for segmentinformation.

(2)           Amounts include the consolidation of United Development CompanyLimited, a 26.32%-owned real estate limited partnership.  See Note 1 to the consolidated financialstatements.

(3)           Amount includes restructuring charges of $1.3 million.

 

## ITEM 7.                                         MANAGEMENT’SDISCUSSION 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 PrivateSecurities Litigation Reform Act of 1995 and releases issued by the Securitiesand Exchange Commission.  The words “believe,”  “expect,” “anticipate,” “intend,” “plan,” “estimate” and other expressions, whichare predictions of or indicate future events and trends and that do not relateto historical matters, identify forward-looking statements.  Forward-looking statements involve known andunknown risks, uncertainties and other factors, which may cause the actualresults, performance or achievements of the Company to differ materially fromanticipated future results, performance or achievements expressed or implied bysuch forward-looking statements.

 

16

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Examplesof these risks, uncertainties and other factors include, without limitation,the following: (i) economic conditions that affect sales of the productsof the Company’s customers; (ii) actions by the Company’s competitors andthe ability of the Company to respond to such actions; (iii) the abilityof the Company to obtain new customers; and (iv) the ability of theCompany to execute and integrate favorable acquisitions.  In addition to the foregoing, the Company’sactual future results could differ materially from those projected in theforward-looking statements as a result of the risk factors set forth elsewherein this report and changes in general economic conditions, interest rates andthe assumptions used in making such forward-looking statements.  The Company undertakes no obligation topublicly update or revise any forward-looking statement, whether as a result ofnew information, future events or otherwise.

 

### **Investment in and Advances to Affiliated Partnership**

### ** **

TheCompany has a 26.32% ownership interest in a realty limited partnership, UnitedDevelopment Company Limited (“UDT”).  Incompliance with the provisions of FIN 46R, the Company has consolidated thefinancial statements of UDT for all periods presented, because — when includingrelated party ownership — the Company effectively owns greater than 50% of UDT.

 

### **Results of Operations**

### ** **

Thefollowing table sets forth, for the years indicated, the percentage of revenuesrepresented by the items as shown in the Company’s consolidated statements ofoperations:

 
| ** **                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net sales                                     |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost of sales                                 |       | 74.0     | %          | 75.6     | %          | 79.5     | %          |
| Gross profit                                  |       | 26.0     | %          | 24.4     | %          | 20.5     | %          |
| Selling, general  and administrative expenses |       | 17.1     | %          | 16.7     | %          | 15.1     | %          |
| Restructuring  charge                         |       | 1.2      | %          | 0.0      | %          | 0.0      | %          |
| Operating income                              |       | 7.7      | %          | 7.7      | %          | 5.4      | %          |
| Total other  expenses, net                    |       | 0.3      | %          | 0.5      | %          | 1.1      | %          |
| Income before  income taxes                   |       | 7.4      | %          | 7.2      | %          | 4.3      | %          |
| Income tax  expense                           |       | 2.8      | %          | 2.8      | %          | 1.6      | %          |
| Net income                                    |       | 4.6      | %          | 4.4      | %          | 2.7      | %          |

 

### **Overview**

### ** **

UFPTechnologies is an innovative designer and custom converter of foams, plastics,and fiber products.  The Company serves amyriad of markets, but specifically targets opportunities in the automotive,computers and electronics, medical, aerospace and defense, industrial, andconsumer markets.

 

OnJanuary 18, 2008, the Company acquired Stephenson & Lawyer, Inc.(“S&L”), a Grand Rapids, Michigan-based foam fabricator.  Operating out of a 255,000-square-footmanufacturing plant, S&L specializes in the fabrication of technicalurethane foams.  In addition tosignificantly adding to the Company’s real estate, S&L brings access tothis family of foams, modern manufacturing capabilities, and a seasonedmanagement team to the Company.  Theacquisition is an example of the 

 

17

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Company’sdual strategy of growing its top line organically through a focused marketingplan as well as through strategic acquisitions.

 

TheCompany 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 salesin the fourth quarter of 2008.  Sales tothe automotive industry have weakened significantly as holiday shutdownsstarted earlier than normal and extended well into January 2009, largelyattributable to very soft automotive sales in North America.  Given the current condition of the automobileindustry as well as the overall weak economy, the Company expects continuedsoft sales at least through the first quarter of 2009.

 

**2008Compared to 2007**

 

Netsales 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 GrandRapids, Michigan (Component Products segment), sales increased 4% for the yearended December 31, 2008.  Sales inthe Component Products segment increased 13.1% to $60.8 million for the yearended December 31, 2008, from $53.8 million in the same period of2007.  The increase is primarily due tosales of $12.7 million from the newly acquired plant in Grand Rapids, partiallyoffset by a decrease in sales to the automotive industry of approximately $5.9million.  The Company believes that salesto the automotive industry will continue to weaken in 2009.  Sales in the Engineered Packaging segmentincreased 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 $3.9million to a key electronics customer, as well as increased demand forenvironmentally friendly molded fiber packaging.

 

Grossprofit as a percentage of sales (“Gross Margin”) increased to 26.0% in 2008from 24.4% in 2007.  The improvement ingross margin is primarily attributable to Company-wide continued strategicpricing and manufacturing efficiency initiatives (material and labor as apercentage of sales are down 1.2% and 0.8%, respectively) partially offset bylower gross margins in the Company’s automotive plants (Component Products segment).

 

Selling,General and Administrative Expenses (“SG&A”) increased 20.9% to $18.8million for the year ended December 31, 2008, from $15.6 million in2007.  As a percentage of sales, SG&Awas 17.1% and 16.7% in the years ended December 31, 2008, and 2007,respectively.  The increase in SG&Aspending is primarily attributable to increased SG&A from the newlyacquired plant in Grand Rapids of approximately $2.2 million (ComponentProducts segment) as well as increased equity-based compensation of approximately$600,000 (Component Products and Packaging segments).

 

TheCompany recorded a restructuring charge of approximately $1.3 million duringthe year ended December 31, 2008, associated with the consolidation of itsMacomb Township, Michigan, automotive operations into its newly acquired plantin Grand Rapids, Michigan.  The $1.3million charge is for the costs associated with vacating the Macomb Townshippremises, severance, relocation and stay-bonuses for its employees, equipmentmoving and hook-up costs, and training and other start-up costs.  As of December 31, 2008, the move wascompleted and all significant costs had been incurred.

 

18

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Interestexpense decreased to approximately $334,000 for the year ended December 31,2008, from $479,000 in 2007.  Thedecrease in interest expense is primarily attributable to lower averageborrowings.

 

TheCompany 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 deferredtax assets on its books associated with net operating losses generated inprevious years.  The Company hasconsidered both positive and negative available evidence in its determinationthat the deferred tax assets will be realized, and has not recorded a taxvaluation allowance at December 31, 2008. The Company will continue to assess the realizability of deferred taxassets 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 assetconsidered realizable, however, could be reduced in the near term, if estimatesof future taxable income during the carryforward period are reduced.

 

### **2007 Compared to 2006**

### ** **

TheCompany’s net sales decreased slightly to $93.6 million for the year ended December 31,2007, from $93.7 million in 2006.  While2007 sales were virtually the same as sales in 2006, there was a shift inproduct mix.  Sales in the ComponentProducts segment decreased approximately 4.2%, largely due to shrinking salesto the automotive market.  The Companyattributes the reduction in automotive sales to the end of certain programs inits Michigan plant, as well as the maturing of its large southeast automotiveprogram.  Sales to the automotiveindustry declined by approximately $1.9 million.  The decline was largely offset by anapproximately 4.8% increase in Engineered Packaging segment sales.  The Company attributes this increase primarilyto approximately $1.3 million in increased sales of case insert products to keyaccounts.

 

Grossprofit as a percentage of sales (“Gross Margin”) increased to 24.4% in 2007from 20.5% in 2006.  The improvement ingross margin is primarily attributable to manufacturing efficiency initiatives,particularly in the Company’s automotive operations (Component Productssegment).  The Company estimates thatthese initiatives in the automotive operations improved gross margins byapproximately 2.0%.

 

Selling,General and Administrative Expenses (“SG&A”) increased 9.7% to $15.6million for the year ended December 31, 2007, from $14.2 million in2006.  As a percentage of sales, SG&Awas 16.7% and 15.1% in the years ended December 31, 2007, and 2006,respectively.  The increase in SG&Aspending is primarily attributable to increased sales resources ofapproximately $700,000 (across both business segments) as well as equity-basedcompensation resulting from the implementation of SFAS No. 123R (ComponentProducts and Packaging segments) of approximately $250,000.

 

Interestexpense decreased to approximately $479,000 for the year ended December 31,2007, from $964,000 in 2006.  Thedecrease in interest expense is primarily attributable to lower averageborrowings partially offset by the impact of higher interest rates.

 

TheCompany 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 taxrate for 2007 reflects a reduction in the amount of eligible research anddevelopment tax credits expected to be taken on the Company’s 2007 taxreturns.  The Company has deferred taxassets on its books associated with net operating losses generated in previousyears. The Company has considered both 

 

19

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positiveand negative available evidence in its determination that the deferred taxassets will be realized, and has not recorded a tax valuation allowance at December 31,2007.  The Company expects to utilize asignificant amount of its federal net operating losses when it prepares its2007 tax returns.  The Company willcontinue to assess the realizability of deferred tax assets created by recordingtax benefits on operating losses and, where appropriate, record a valuationallowance against these assets.  Theamount of the net deferred tax asset considered realizable, however, could bereduced in the near term, if estimates of future taxable income during thecarryforward period are reduced.

 

### **Liquidity and Capital Resources**

### ** **

TheCompany funds its operating expenses, capital requirements, and growth planthrough internally generated cash, bank credit facilities, and long-termcapital leases.

 

Asof 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 increasein 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 $2.4million due to the timing of year-end check runs, partially offset by adecrease in cash of approximately $2.3 million due to the Company’s acquisitionof Stephenson & Lawyer. Cash provided from operations wasapproximately $7.3 million and $10.1 million in 2008 and 2007,respectively.  The primary reason for thedecrease in cash generated from operations in 2008 is a decrease in accountspayable of approximately $2.1 million during the fiscal year ended December 31,2008, compared to an increase in accounts payable of approximately $500,000during fiscal 2007.  This change wascaused by the difference in the timing of check runs at the end of each respectiveyear.  Net cash used in investing activitiesin 2008 was approximately $7.8 million and was used primarily for theacquisition of Stephenson & Lawyer, Inc. of approximately $5.2million and the acquisition of new manufacturing equipment of approximately$2.8 million.

 

OnFebruary 28, 2003, the Company obtained a credit facility, which wasamended effective March 24, 2004, June 28, 2004, and November 21,2005, to reflect, among other things, changes to certain financialcovenants.  The amended facility wascomprised of:  (i) a revolvingcredit facility of $17 million; (ii) a term loan of $3.7 millionwith 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 forinterest of Prime or LIBOR plus a margin that ranges from 1.0% to 1.5%,depending upon Company performance.  Theloans were collateralized by a first priority lien on all of the Company’sassets, including its real estate located in Georgetown, Massachusetts.  All borrowings at December 31, 2008, hadinterest computed at Prime or LIBOR plus 1.0%. Under the amended credit facility, the Company was subject to certainfinancial covenants, including maximum capital expenditures and minimum fixed-chargecoverage.  As of December 31, 2008,the Company was in compliance with all of these covenants.  At December 31, 2008, the interest rateon these facilities ranged from 1.5% to 3.25%.

 

OnJanuary 29, 2009, the Company amended and extended its credit facilitywith Bank of America, NA.  The facilityis comprised of: (i) a revolving credit facility of $17 million; (ii) aterm loan of $2.1 million with a seven-year straight-line amortization; (iii) aterm loan of $1.8 million with a 20-year straight-line amortization; and (iv) aterm loan of $4.0 million with a 20-year straight-line amortization.  Extensions of credit under the revolvingcredit facility are based in part upon accounts receivable and inventorylevels.  Therefore, the entire $17million may not be available to the 

 

20

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Company.  The credit facility calls for interest ofLIBOR plus a margin that ranges from 1.0% to 1.5% or, at the discretion of theCompany, the bank’s prime rate less a margin that ranges from 0.25% tozero.  In both cases the applicablemargin is dependent upon Company performance. The loans are collateralized by a first priority lien on all of the Company’sassets, including its real estate located in Georgetown, Massachusetts, and inGrand Rapids, Michigan.  Under the creditfacility, the Company is subject to a minimum fixed-charge coverage financialcovenant.  The Company’s $17 millionrevolving credit facility is due November 30, 2013; the term loans are alldue on January 29, 2016.

 

Asa result of the consolidation of UDT, a mortgage note collateralized by theAlabama and Florida facilities, dated September 4, 2002, originally for$470,313, was included within long-term debt in the December 31, 2006consolidated financial statements.  On May 22,2007, this note was refinanced.  Theremaining principal balance of $388,356 on the old note was paid in full.  The new note is secured by the Floridafacility and has a principal balance of $786,000.  The note calls for 180 monthly payments of$7,147.  The interest rate is fixed atapproximately 7.2%.  The additional fundsof approximately $400,000 were used to fund building improvements in theFlorida facility.    The outstandingbalance on this note at December 31, 2008, is $737,289.

 

Inaddition 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 theCompany and have remaining lives ranging from one to six years and bearinterest at rates ranging from 7% to 8%. Subsequent to December 31, 2008, the Company paid off theseobligations in full.

 

TheCompany has no significant capital commitments in 2009, but plans on addingcapacity to enhance operating efficiencies in its manufacturing plants.  The Company may consider the acquisition ofcompanies, technologies, or products in 2009 that are complementary to itsbusiness.  The Company believes that itsexisting resources, including its revolving credit facility, together with cashgenerated from operations and funds expected to be available to it through anynecessary equipment financing and additional bank borrowings, will besufficient to fund its cash flow requirements through at least the end of 2009.  However, there can be no assurances that suchfinancing will be available at favorable terms, if at all.

 

### **Commitments, Contractual Obligations and Off-Balance Sheet Arrangements**

### ** **

Thefollowing table summarizes the Company’s contractual obligations at December 31,2008, as adjusted for January 2009 refinancing activity, as well as the January 2009payoff of the capital lease obligations, and the effect such obligations areexpected to have on its cash flow in future periods:

 
| **Payments  due in:** | ** ** | **Operating  Leases** | ** ** | **Grand  Rapids  Mortgage** | ** ** | **Term  Loans** | ** ** | **Massa-  chusetts  Mortgage** | ** ** | **UDT  Mortgage** | ** ** | **Debt  Interest** | ** ** | **Supple-  mental  Retirement** | ** ** | **Total** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------------|------------|-----------------|------------|--------------------------------|------------|-------------------|------------|--------------------|------------|---------------------------------|------------|-----------|------------|
| 2009                       |       | $                     | 1,445,505  |                        | $          | 166,667         |       | $                              | 308,211    |              | $          | 97,608             |       | $                               | 33,896     |      | $          | 392,689 |   | $ | 95,600 |   | $ | 2,540,176 |   |
| 2010                       |       | 1,197,619             |       | 200,000                     |       | 288,360         |       | 92,300                         |       | 36,417            |       | 472,847            |       | 101,000                         |       | 2,388,543 |       |
| 2011                       |       | 922,757               |       | 200,000                     |       | 288,360         |       | 92,300                         |       | 39,120            |       | 435,295            |       | 80,000                          |       | 2,057,832 |       |
| 2012                       |       | 860,075               |       | 200,000                     |       | 288,360         |       | 92,300                         |       | 41,725            |       | 397,781            |       | 80,000                          |       | 1,960,241 |       |
| 2013 and  thereafter       |       | 850,033               |       | 3,233,333                   |       | 889,114         |       | 1,484,492                      |       | 586,131           |       | 997,693            |       | 280,800                         |       | 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 |   |

 

TheCompany requires cash to pay its operating expenses, purchase capital equipmentand to service the obligations listed above. The Company’s principal sources of funds are its operations and its 

 

21

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revolvingcredit facility.  Although the Companygenerated cash from operations in the year ended December 31, 2008, itcannot guarantee that its operations will generate cash in future periods.

 

TheCompany does not believe that inflation has had a material impact on itsresults of operations in the last three years.

 

### **Critical Accounting Policies**

### ** **

Thepreparation of consolidated financial statements requires the Company to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an ongoing basis,the Company evaluates its estimates, including those related to productreturns, bad debts, inventories, intangible assets, income taxes, warrantyobligations, restructuring charges, contingencies, and litigation.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, including current and anticipated worldwide economicconditions, both in general and specifically in relation to the packagingindustry, the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources.  Actual results may differfrom these estimates under different assumptions or conditions.

 

TheCompany’s significant accounting policies are described in Note 1 to theconsolidated financial statements included in Item 8 of this Form 10-K.  The Company believes the following criticalaccounting policies affect its more significant judgments and estimates used inthe preparation of its consolidated financial statements.

 

TheCompany has reviewed these policies with its Audit Committee.

 

*RevenueRecognition*

 

The Company recognizesrevenue at the time of shipment when title and risk of loss have passed to thecustomer, persuasive evidence of an arrangement exists, performance of itsobligation is complete, its price to the buyer is fixed or determinable, andthe Company is reasonably assured of collection.  If a loss is anticipatedon any contract, a provision for the entire loss is made immediately.  Determinationof these criteria, in some cases, requires management’s judgments. Shouldchanges in conditions cause management to determine that these criteria are notmet for certain future transactions, revenue for any reporting period could beadversely affected.

 

*Long-LivedAssets and Intangible Assets*

 

Intangible assets includepatents and other intangible assets. Intangible assets with an indefinite life are not amortized. Intangibleassets with a definite life are amortized on a straight-line basis, withestimated useful lives ranging from eight to 14 years. Indefinite-livedintangible assets are tested for impairment annually, and will be tested forimpairment between annual tests if an event occurs or circumstances change thatwould indicate that the carrying amount may be impaired. Intangible assets witha definite life are tested for impairment whenever events or circumstancesindicate that their value may be reduced.

 

22

----

 

*Goodwill*

 

Goodwill is tested forimpairment annually, and will be tested for impairment between annual tests ifan event occurs or circumstances change that would indicate that the carryingamount may be impaired. Impairment testing for goodwill is done at a reportingunit level. Reporting units are one level below the business segment level, butcan be combined when reporting units within the same segment have similareconomic characteristics.  At December 31,2008 the Company redefined its reporting units to include its ComponentProducts segment, Packaging segment (excluding its Molded Fiber operation), andits Molded Fiber operation as separate reporting units for goodwill impairmenttesting.  An impairment loss generallywould be recognized when the carrying amount of the reporting unit’s net assetsexceeds the estimated fair value of the reporting unit. The Company completedits annual goodwill impairment test as of December 31, 2008, anddetermined that no goodwill was impaired.

 

*AccountsReceivable*

 

The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of its customers to make required payments.  These allowances for doubtful accounts aredetermined by reviewing specific accounts that the Company has deemed are atrisk of being uncollectible and other credit risks associated with groups ofcustomers.  If the financial condition ofthe Company’s customers were to deteriorate or economic conditions were todeteriorate resulting in an impairment of their ability to make payments,additional allowances may be required with a resulting charge to results ofoperations.

 

*Inventory*

 

The Company providesreserves for estimated obsolescence or unmarketable inventory equal to thedifference between the cost of inventory and the estimated market value basedupon assumptions about future demand and market conditions.  The Company fully reserves for inventoriesdeemed obsolete.  The Company performsperiodic reviews of all inventory items to identify excess inventories on handby comparing on-hand balances to anticipated usage using recent historicalactivity, as well as anticipated or forecasted demand, based upon sales andmarketing inputs through its planning systems. If estimates of demand diminish or actual market conditions are lessfavorable than those projected by management, additional inventory write-downsmay be required with a resulting charge to operations.

 

*DeferredIncome Taxes*

 

The Company evaluates theneed for a valuation allowance to reduce its deferred tax assets to the amountthat is more likely than not to be realized. The Company has considered future taxable income and ongoing prudent andfeasible tax planning strategies in assessing the need for a valuationallowance.  Should the Company determinethat it would not be able to realize all or part of its net deferred tax assetin the future, an adjustment to the deferred tax asset would be charged toincome in the period such determination was made.

 

23

----

 

## ITEM 7A.                               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

##  

Thefollowing discussion of the Company’s market risk includes “forward-lookingstatements” that involve risk and uncertainties.  Actual results could differ materially fromthose projected in the forward-looking statements.

 

Marketrisk represents the risk of changes in value of a financial instrument causedby fluctuations in interest rates, foreign exchange rates, and equity prices.  At December 31, 2008, the Company’s cashand cash equivalents consisted of bank accounts in U.S. dollars, and their valuationwould not be affected by market risk. The Company has four debt instruments where interest is based uponeither the Prime rate or LIBOR and, therefore, future operations could beaffected by interest rate changes; however, the Company believes that themarket risk of the debt is minimal.

 

## ITEM 8.                                         FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

##  

Theconsolidated Financial Statements and Supplementary Data of the Company arelisted under Part IV, Item 15, in this Report.

 

## ITEM 9.                                         CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

##  

None.

 

## ITEM 9A.                               CONTROLS ANDPROCEDURES

##  

(a)          The Company carried out an evaluation, under the supervision and withthe participation of its management, including the Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e))as of the end of the period covered by this report. Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective.

 

(b)         The Company’s management is responsible for establishing andmaintaining an adequate system of internal control over financial reporting, asdefined in Exchange Act Rule 13a-15(f). The management conducted anassessment of the Company’s internal control over financial reporting as of December 31,2008, based on the framework established by the Committee of SponsoringOrganizations of the Treadway Commission in*  Internal Control — Integrated Framework.*  Based on the assessment, the managementconcluded that, as of December 31, 2008, the Company’s internal controlover financial reporting is effective.

 

Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by the Company’s independent registered publicaccounting firm pursuant to temporary rules of the Securities and ExchangeCommission that permit the Company to provide only management’s report in thisannual report.

 

24

----

 

(c)          There was no change in the Company’s internal control over financialreporting that occurred during the Company’s most recently completed fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

## ITEM 9B.                                 OTHERINFORMATION

##  

None.

 

# **PART III**

# ** **

## ITEM 10.                                   DIRECTORS,EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

##  

Theinformation required by this Item 10 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its fiscal year.

 

## ITEM 11.                                   EXECUTIVECOMPENSATION

##  

Theinformation required by this Item 11 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its fiscal year.

 

## ITEM 12.                                   SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS

##  

Theinformation required by this Item 12 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its fiscal year.

 

## ITEM 13.                                   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

##  

Theinformation required by this Item 13 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its fiscal year.

 

## ITEM 14.                                   PRINCIPALACCOUNTANT FEES AND SERVICES

##  

Theinformation required by this Item 14 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its fiscal year.

 

25

----

 

# **PART IV**

# ** **

## ITEM 15.            EXHIBITS AND FINANCIAL STATEMENTSCHEDULES

##  

|         | ** ** | ** **                                                                                                        | ** ** | **Page** |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------|
| (a) (1) | ** ** | **Financial Statements**                                                                                          | ** ** |     |
|         |       | Index  to Consolidated Financial Statements and Financial Statement Schedules                                     |       | F-2      |
|         |       | Report of Independent  Registered Public Accounting Firm, CCR  LLP, 2008, 2007, and 2006                          |       | F-3      |
|         |       | Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                |       | F-4      |
|         |       | Consolidated  Statements of Operations for the years ended December 31, 2008, 2007, and 2006                 |       | F-5      |
|         |       | Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2008, 2007, and 2006 |       | F-6      |
|         |       | Consolidated Statements  of Cash Flows for the years ended December 31, 2008, 2007, and 2006                 |       | F-7      |
|         |       | Notes to Consolidated Financial Statements                                                                        |       | F-8      |
|         |       | ** **                                                                                                        |       |     |
| (a) (2) |       | **Financial  Statement Schedule**                                                                                 |       |     |
|         |       | Schedule II — Valuation and Qualifying Accounts                                                              |       | F-32     |

 
| (a) (3) |   | **Exhibits** |   |   |
|--------------|--------|--------------|--------|--------|

 
| ** ** | ** ** | **Number** | ** ** | ** **                                                                                                                                                                                     | ** ** | **Reference**    |
|------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|
| ** ** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                     | ** ** | ** **       |
|       |       | 2.01       |       | Agreement and Plan of Reorganization among the  Company, Moulded Fibre Technology, Inc. and UFP Acquisition, Inc.                                                                    |       | A-2.01**         |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 2.02       |       | Agreement of Merger between Moulded Fibre  Technology, Inc. and UFP Acquisition, Inc.                                                                                                |       | B-2.02**         |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 2.03       |       | Merger Agreement relating to the  reincorporation of the Company in Delaware.                                                                                                                  |       | A-2.02**         |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 2.04       |       | Asset Purchase Agreement relating to the  purchase of Foam Cutting Engineers, Inc.                                                                                                        |       | C-2**            |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 2.05       |       | Asset Purchase Agreement relating to the  purchase of the assets of Pacific Foam Technologies, Inc.                                                                                       |       | D-2.05**         |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 2.06       |       | Stock Purchase Agreement dated  January 14, 2000, relating to the acquisition of the stock of Simco  Industries, Inc.                                                                |       | E-2.01**         |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 3.01       |       | Certificate of Incorporation of the Company,  as amended.                                                                                                                                      |       | F-3.01**G-3.01** |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 3.02       |       | Amended and Restated Certificate of  Designation of Series A Junior Participating Preferred Stock, as filed  with the Secretary of State of the State of Delaware on March 20, 2009. |       | II-3.02**        |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 3.03       |       | Amended and Restated Bylaws of the Company.                                                                                                                                                    |       | II-3.03**        |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 4.01       |       | Specimen Certificate for shares of the Company’s  Common Stock.                                                                                                                           |       | A-4.01**         |
|       |       |       |       |                                                                                                                                                                                           |       |             |
|       |       | 4.02       |       | Description of Capital Stock (contained in the  Certificate of Incorporation of the Company, filed as Exhibit 3.01).                                                                      |       | F-3.01**         |

 

26

----

 
| ** ** | ** ** | **Number** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **Reference** |
|------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 4.03       |       | Rights Agreement, dated as of March 20,  2009, by and between the Company and American Stock Transfer & Trust  Company, LLC, as Rights Agent, which includes as Exhibit A, the  Form of Amended and Restated Certificate of Designation of Series A  Junior Participating Preferred Stock, as Exhibit B, the Form of  Rights Certificate, and as Exhibit C, the Summary of Rights to Purchase  Shares of Preferred Stock of UFP Technologies, Inc. |       | II-4.03**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.01      |       | Agreement between the Company and William H.  Shaw.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | A-10.08*, **  |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.02      |       | Agreement and Severance Agreement between the  Company and Richard L. Bailly.                                                                                                                                                                                                                                                                                                                                                                                                                       |       | A-10.09*, **  |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.03      |       | Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | A-10.18**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.04      |       | 1993 Combined Stock Option Plan, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | I-10.19*, **  |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.05      |       | 1993 Non-employee Director Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | J-4.5**       |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.06      |       | Facility Lease between the Company and Raritan  Associates.                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | A-10.22**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.07      |       | Facility Lease between the Company and Dana  Evans d/b/a Evans Enterprises.                                                                                                                                                                                                                                                                                                                                                                                                                         |       | A-10.27**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.08      |       | Form of Indemnification Agreement for  directors and officers of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                  |       | A-10.30**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.09      |       | Facility Lease between the Company and Clinton  Area Development Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                       |       | K-10.37**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.10      |       | Employment Agreement with R. Jeffrey Bailly  dated April 4, 1995.                                                                                                                                                                                                                                                                                                                                                                                                                              |       | L-10.37*, **  |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.11      |       | Amended 1998 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | M**           |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.12      |       | Facility Lease between the Company and  Quadrate Development, LLC                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | N-10.43**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.13      |       | Amended 1998 Director Stock Option Incentive  Plan, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | M, DD*, **    |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.14      |       | Amended Facility Lease between the Company and  United Development Company Limited.                                                                                                                                                                                                                                                                                                                                                                                                                 |       | O-10.27**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.15      |       | Amended Facility Lease between the Company and  United Development Company Limited.                                                                                                                                                                                                                                                                                                                                                                                                                 |       | O-10.28**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.16      |       | Amended Facility Lease between the Company and  Ward Hill Realty Associates, LLC, successors in interest to Evans Enterprises  of South Beach                                                                                                                                                                                                                                                                                                                                                       |       | P-10.30**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.17      |       | Credit and Security Agreement between the  Company and Fleet Capital Corporation                                                                                                                                                                                                                                                                                                                                                                                                                    |       | Q-10.31**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.18      |       | Facility Lease between Simco Automotive  Trim, Inc. and Insite Atlanta, LLC                                                                                                                                                                                                                                                                                                                                                                                                                    |       | R-10.31**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.19      |       | Amended Credit and Security Agreement between  the Company and Fleet Capital Corporation.                                                                                                                                                                                                                                                                                                                                                                                                           |       | S-10.33**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.20      |       | Facility lease between the Company and Clinton  Base Company LLC                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | G-10.34**     |
|       |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |          |
|       |       | 10.21      |       | Second Amendment to the Credit Agreement  between the Company and Fleet Capital Corporation                                                                                                                                                                                                                                                                                                                                                                                                         |       | T-10.35**     |

 

27

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| ** ** | ** ** | **Number** | ** ** | ** **                                                                                                                                                                  | ** ** | **Reference**   |
|------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.22      |       | Third Amendment to the Credit and Security  Agreement between the Company and Bank of America                                                                               |       | U-10.37**       |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.23      |       | 1998 Employee Stock Purchase Plan as amended                                                                                                                                |       | V-10.38**       |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.24      |       | Form of Stock Unit Award Agreement under  2003 Equity Incentive Plan                                                                                                   |       | W-10.40*,**     |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.25      |       | Executive Non-qualified Excess Plan                                                                                                                                         |       | X-10.41*,**     |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.26      |       | UFP Technologies, Inc. 2003 Incentive  Plan, as amended                                                                                                                |       | Y-10.26, EE*,** |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.27      |       | Promissory note of United Development Company  Limited in favor of Bank of America, N.A. dated May 22, 2007                                                            |       | Y-10.27         |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.28      |       | Employment Agreement with R. Jeffrey Bailly  dated October 8, 2007                                                                                                     |       | Z-10.28*,**     |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.29      |       | Agreement and Plan of Merger dated as of  January 14, 2008, among UFP Technologies, Inc., S&L Acquisition  Corp., and Stephenson & Lawyer, Inc. |       | AA-10.29**      |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.30      |       | Form of 2008 Stock Unit Award Agreement  under 2003 Incentive Plan                                                                                                     |       | CC-10.30*,**    |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.42      |       | Amended facility lease between the Company and  Rothbart Realty Co.                                                                                                         |       | CC-10.42**      |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.43      |       | Amended facility lease between the Company and  Rothbart Realty Co.                                                                                                         |       | CC-10.43**      |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.44      |       | Amended facility lease between the Company and  Quadrate Development, LLC                                                                                                   |       | CC-10.44**      |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.45      |       | Amended facility lease between the Company and  Kessler Industries, Inc.                                                                                               |       | CC-10.45**      |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.46      |       | Amended facility lease between the Company and  Raritan Johnson Associates, LLC                                                                                             |       | CC-10.46**      |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.47      |       | Amended facility lease between the Company and  Ward Hill Realty Associates, LLC                                                                                            |       | CC-10.47**      |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.48      |       | Form of Stock Unit Award Agreement by and  between UFP Technologies, Inc. and R. Jeffrey Bailly.                                                                  |       | FF-10.48*,**    |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.49      |       | Third Amendment to Iowa facility lease, signed  as of August 20, 2008, between Moulded Fibre  Technology, Inc.(Tenant) and Clinton Base Company, LLC (Landlord).  |       | GG-10.49**      |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.50      |       | Form of 2009 Stock Unit Award Agreement.                                                                                                                               |       | HH-10.50*,**    |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 10.51      |       | Amended and restated Credit and Security  Agreement between the Company and Bank of America, N.A, dated  January 27, 2009.                                             |       | Filed herewith  |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 14.00      |       | Code of Ethics                                                                                                                                                              |       | BB**            |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 21.01      |       | Subsidiaries of the Company.                                                                                                                                                |       | Filed herewith  |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 23.01      |       | Consent of CCR LLP                                                                                                                                                          |       | Filed herewith  |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 31.01      |       | Certification of Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   |       | Filed herewith  |
|       |       |       |       |                                                                                                                                                                        |       |            |
|       |       | 31.02      |       | Certification of Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   |       | Filed herewith  |

 

28

----

 
| ** ** | ** ** | **Number** | ** ** | ** **                                                                                                                                                                                 | ** ** | **Reference**  |
|------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
|       |       |       |       |                                                                                                                                                                                       |       |           |
|       |       | 32.01      |       | Certification of Chief Executive Officer and  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |       | Filed herewith |

 

----

| A.     |   | Incorporated by reference to the Company’s  Registration Statement on Form S-1 (Registration No. 33-70912). The  number set forth herein is the number of the Exhibit in said Registration  Statement.   |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                         |
| B.     |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for its fiscal year ended December 31,  1993. The number set forth herein is the number of the Exhibit in said  Annual Report.    |
|   |   |                                                                                                                                                                                                                         |
| C.     |   | Incorporated by reference to the Company’s  report on 8-K dated February 3, 1997. The number set forth herein is the  number of the Exhibit in said report.                                                   |
|   |   |                                                                                                                                                                                                                         |
| D.     |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31,  1998. The number set forth herein is the number of the Exhibit in said  Annual Report.    |
|   |   |                                                                                                                                                                                                                         |
| E.     |   | Incorporated by reference to the Company’s  Report on Form 8-K dated January 31, 2000. The number set forth  herein is the number of the Exhibit in said Report.                                         |
|   |   |                                                                                                                                                                                                                         |
| F.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended June 30,  1996. The number set forth herein is the number of the Exhibit in said  Quarterly Report. |
|   |   |                                                                                                                                                                                                                         |
| G.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended March 31,  2004. The number set forth herein is the number of the exhibit in said  Quarterly Report.     |
|   |   |                                                                                                                                                                                                                         |
| H      |   | Incorporated by reference to the Company’s  report on Form 8-K dated January 13, 1999. The number set forth  herein is the number of the Exhibit in said Report.                                         |
|   |   |                                                                                                                                                                                                                         |
| I.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended June 30,  1998. The number set forth herein is the number of the Exhibit in said  Quarterly Report. |
|   |   |                                                                                                                                                                                                                         |
| J.     |   | Incorporated by reference to the Company’s  Registration Statement on Form S-8 (Registration No. 33-76440). The  number set forth herein is the number of the Exhibit in said  Registration Statement.   |
|   |   |                                                                                                                                                                                                                         |
| K.     |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31,  1995. The number set forth herein is the number of the Exhibit in said  Annual Report.    |
|   |   |                                                                                                                                                                                                                         |
| L.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended June 30,  1995. The number set forth herein is the number of the Exhibit in said  Quarterly Report. |
|   |   |                                                                                                                                                                                                                         |
| M.     |   | Incorporated by reference to the Company’s  Proxy Statement relating to the Company’s Annual Meeting of Stockholders on  June 5, 2002.                                                                        |
|   |   |                                                                                                                                                                                                                         |
| N.     |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2000. The number set forth herein is the number of the Exhibit in said  Annual Report.    |

 

29

----

 
| O.     |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2001. The number set forth herein is the number of the Exhibit in said  Annual Report.         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                              |
| P.     |   | Incorporated by reference to the Company’s Quarterly  Report on Form 10-Q for the three months ended September 30, 2002.  The number set forth herein is the number of the Exhibit in said  Quarterly Report. |
|   |   |                                                                                                                                                                                                                              |
| Q.     |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2002. The number set forth is the number of the exhibit in said Annual  Report.                     |
|   |   |                                                                                                                                                                                                                              |
| R.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended June 30,  2003. The number set forth herein is the number of the Exhibit in said  Annual Report.         |
|   |   |                                                                                                                                                                                                                              |
| S.     |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2003. The number set forth is the number of the exhibit in said Annual  Report.                     |
|   |   |                                                                                                                                                                                                                              |
| T.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended June 30,  2004. The number set forth herein is the number of the exhibit in said  Quarterly Report.           |
|   |   |                                                                                                                                                                                                                              |
| U.     |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2005. The number set forth herein is the number of the exhibit in said annual  report.              |
|   |   |                                                                                                                                                                                                                              |
| V.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended March 31,  2006. The number set forth herein is the number of the exhibit in said  quarterly report.          |
|   |   |                                                                                                                                                                                                                              |
| W.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended June 30,  2006. The number set forth herein is the number of the exhibit in said  quarterly report.           |
|   |   |                                                                                                                                                                                                                              |
| X.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended  September 30, 2006. The number set forth herein is the number of the  exhibit in said Quarterly Report.      |
|   |   |                                                                                                                                                                                                                              |
| Y.     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended June 30,  2007. The number set forth herein is the number of the exhibit in said  Quarterly Report.           |
|   |   |                                                                                                                                                                                                                              |
| Z.     |   | Incorporated by reference to the Company’s  Current Report on Form 8-K filed October 12, 2007. The number set  forth herein is the number of the Exhibit in said Report.                                      |
|   |   |                                                                                                                                                                                                                              |
| AA.    |   | Incorporated by reference to the Company’s  Current Report on Form 8-K filed January 18, 2008. The number set  forth herein is the number of the Exhibit in said Report.                                      |
|   |   |                                                                                                                                                                                                                              |
| BB.    |   | Incorporated by reference to Appendix C to the  Company’s Proxy Statement relating to the Company’s Annual Meeting of  Stockholders on June 6, 2007.                                                               |
|   |   |                                                                                                                                                                                                                              |
| CC.    |   | Incorporated by reference to the Company’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2007. The number set forth herein is the number of the exhibit in said Annual  Report.              |

 

 

30

----

 
| DD.    |   | Incorporated by reference to Appendix A to the  Company’s Proxy Statement relating to the Company’s Annual Meeting of  Stockholders on June 4, 2008.                                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                         |
| EE.    |   | Incorporated by reference to Appendix B to the  Company’s Proxy Statement relating to the Company’s Annual Meeting of  Stockholders on June 4, 2008.                                                          |
|   |   |                                                                                                                                                                                                                         |
| FF.    |   | Incorporated by reference to the Company’s  Current Report on Form 8-K filed June 10, 2008. The number set  forth herein is the number of the exhibit in said Report.                                         |
|   |   |                                                                                                                                                                                                                         |
| GG     |   | Incorporated by reference to the Company’s  Quarterly Report on Form 10-Q for the three months ended  September 30, 2008. The number set forth herein is the number of the  exhibit in said Quarterly Report. |
|   |   |                                                                                                                                                                                                                         |
| HH.    |   | Incorporated by reference to the Company’s  Current Report on Form 8-K filed March 2, 2009. The number set forth  herein is the number of the Exhibit in said Report.                                    |
|   |   |                                                                                                                                                                                                                         |
| II.    |   | Incorporated by reference to the Company’s  Current Report on Form 8-K filed March 24, 2009. The number set  forth herein is the number of the Exhibit in said Report.                                   |

 
| *      |   | Management contract or compensatory plan or  arrangement.                                                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                 |
| **     |   | In accordance with Rule 12b-32 under the  Securities Exchange Act of 1934, as amended, reference is made to the  documents previously filed with the Securities and Exchange Commission, which  documents are hereby incorporated by reference. |

 

TheSEC allows the Company to incorporate by reference certain information intothis annual report on Form 10-K. This means that the Company can disclose important information byreference to other documents the Company has filed separately with theSEC.  These documents contain importantinformation about the Company and its financial condition.  The Company has incorporated by referenceinto this annual report the information indicated above.  This information is considered to be a partof this annual report, except for any information that is superseded byinformation that is filed at a later date.

 

Youmay read and copy any of the documents incorporated by reference in this annualreport at the following locations of the SEC by using the Company’s filenumber, 001-12648:

 

| Public  Reference Room |   | Midwest  Regional Office         |   | Northeast  Regional Office |
|------------------------|--------|----------------------------------|--------|----------------------------|
| 450  Fifth Street, NW  |   | Citicorp  Center                 |   | 233  Broadway              |
| Room 1024         |   | 500  West Madison Street, # 1400 |   | New  York, NY 10279        |
| Washington,  DC 20549  |   | Chicago,  IL 60661               |   |                       |

 

You may also obtain copies of this information by mail from the PublicReference Room of the SEC, 450 Fifth Street, NW, Room 1024,Washington, DC 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on thepublic reference room.  The SEC alsomaintains a World Wide Web site that contains reports, proxy statements andother information about issuers, including the Company, that fileelectronically with the SEC.  The addressof that site is http://www.sec.gov.

 

Documentsincorporated by reference are also available from the Company without charge,excluding any exhibits to those documents unless the exhibit is specificallyincorporated by reference in this annual report.  You can obtain these documents by requestingthem by telephone or in writing from the Company at 172 East Main Street,Georgetown, MA 01833, (978) 352-2200.

 

31

----

 

# **SIGNATURES**

# ** **

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   | UFP  TECHNOLOGIES, INC. |
|--------|-------------------------|
|   |                    |   |
| Date:  | March 27, 2009     |   | By: | /s/  R. Jeffrey Bailly |
|   |                    |   |   | R.  Jeffrey Bailly, President |
|        |                         |  |  |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the dateindicated.

 
| **SIGNATURE**                  | ** ** | **TITLE**                                  | ** ** | **DATE**            |
|--------------------------------|------------|--------------------------------------------|------------|---------------------|
|                           |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ R. Jeffrey Bailly          |       | Chairman, Chief Executive Officer,         |       | March 27, 2009 |
| R. Jeffrey Bailly              |       | President, and Director                    |       |                |
|                           |       |                                       |       |                |
| /s/ Ronald J. Lataille         |       | Chief Financial Officer, Vice President,   |       | March 27, 2009 |
| Ronald J. Lataille             |       | Principal Financial and Accounting Officer |       |                |
|                           |       |                                       |       |                |
| /s/ Richard L. Bailly          |       | Director                                   |       | March 27, 2009 |
| Richard L. Bailly              |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ Kenneth L. Gestal          |       | Director                                   |       | March 27, 2009 |
| Kenneth L. Gestal              |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ David B. Gould             |       | Director                                   |       | March 27, 2009 |
| David B. Gould                 |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ Thomas W. Oberdorf         |       | Director                                   |       | March 27, 2009 |
| Thomas W. Oberdorf             |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ Marc Kozin                 |       | Director                                   |       | March 27, 2009 |
| Marc Kozin                     |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ David K. Stevenson         |       | Director                                   |       | March 27, 2009 |
| David K. Stevenson             |       |                                       |       |                |
|                           |       |                                       |       |                |
| /s/ Robert W. Pierce, Jr. |       | Director                                   |       | March 27, 2009 |
| Robert W. Pierce, Jr.     |       |                                       |       |                |

 

32

----

 

**UFP TECHNOLOGIES, INC.**

 

Consolidated Financial Statements

and Financial Statement Schedule

 

As of December 31, 2008 and 2007

And for the Years Ended December 31, 2008, 2007, and 2006

 

With Report of Independent Registered Public Accounting Firm

 

F-1

----

 

UFP TECHNOLOGIES, INC.

 

##### Index to ConsolidatedFinancial Statements and Financial Statement Schedule

 
| ** **                                                                                                              | ** **                                      | **Page** |
|-------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------|----------|
|                                                                                                                    |                                            |     |
| Report  of Independent Registered Public Accounting Firm, CCR LLP, 2008, 2007, and 2006                                 |                                            | F-3      |
|                                                                                                                    |                                            |     |
| Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                      |                                            | F-4      |
|                                                                                                                    |                                            |     |
| Consolidated  Statements of Operations for the years ended December 31, 2008, 2007, and 2006                       |                                            | F-5      |
|                                                                                                                    |                                            |     |
| Consolidated  Statements of Stockholders’ Equity for the years ended  December 31, 2008, 2007,  and 2006 |                                            | F-6      |
|                                                                                                                    |                                            |     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2008, 2007, and 2006                       |                                            | F-7      |
|                                                                                                                    |                                            |     |
| Notes to Consolidated Financial Statements                                                                              |                                            | F-8      |
|                                                                                                                    |                                            |     |
| (1)                                                                                                                     | Schedule                                        |     |   |
|                                                                                                                    |                                            |     |   |
|                                                                                                                    | Schedule II - Valuation and Qualifying Accounts |     | F-32 |

 

F-2

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Stockholders

**UFPTechnologies, Inc.**

Georgetown,MA

 

Wehave 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 thefinancial statement schedule for each of the years in the three year periodended December 31, 2008, as listed in the index at Item 15(a)(2).  These consolidated financial statements andschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements and schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company isnot required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, 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 foreach of the years in the three year period ended December 31, 2008, inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, therelated financial statement schedule when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

 

| /s/  *CCR LLP*              | * *   |       |
|-----------------------------|------------|------------|
| Westborough,  Massachusetts |       |       |
| **March 18,  2009**    | ** ** | ** ** |

 

F-3

----

 

UFP TECHNOLOGIES, INC.

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                 | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                 | ** ** | **2008**             | ** ** | **2007** | ** ** |
| **Assets**                                                                                                                                 | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                            |       |                 |       |   |   |
| Cash and cash  equivalents                                                                                                                 |       | $                    | 6,729,370  |   | $ | 9,060,347 |   |
| Receivables, net                                                                                                                           |       | 12,754,875           |       | 11,795,468 |   |
| Inventories, net                                                                                                                           |       | 8,152,746            |       | 5,876,626 |   |
| Prepaid expenses                                                                                                                           |       | 516,388              |       | 821,250 |   |
| Deferred income  taxes                                                                                                                     |       | 1,488,575            |       | 1,021,320 |   |
| Total current  assets                                                                                                                      |       | 29,641,954           |       | 28,575,011 |   |
| Property, plant  and equipment                                                                                                             |       | 40,666,779           |       | 38,269,142 |   |
| Less accumulated  depreciation and amortization                                                                                            |       | (28,912,455          | )          | (28,777,323 | ) |
| Net property,  plant and equipment                                                                                                         |       | 11,754,324           |       | 9,491,819 |   |
| Cash surrender  value of officers’ life insurance                                                                                     |       | 187,830              |       | 172,536 |   |
| Deferred income  taxes                                                                                                                     |       | —               |       | 188,650 |   |
| Goodwill                                                                                                                                   |       | 6,481,037            |       | 6,481,037 |   |
| Other assets                                                                                                                               |       | 657,516              |       | 643,721 |   |
| Total assets                                                                                                                               |       | $                    | 48,722,661 |   | $ | 45,552,774 |   |
| **Liabilities and Stockholders’ Equity**                                                                                              |       |                 |       |   |   |
| Current  liabilities:                                                                                                                      |       |                 |       |   |   |
| Current  installments of long-term debt                                                                                                    |       | $                    | 716,697    |   | $ | 714,256 |   |
| Current  installments of capital lease obligations                                                                                         |       | 702,765              |       | 704,408 |   |
| Accounts payable                                                                                                                           |       | 3,304,194            |       | 5,694,152 |   |
| Accrued taxes  and other expenses                                                                                                          |       | 6,230,001            |       | 6,510,216 |   |
| Total current  liabilities                                                                                                                 |       | 10,953,657           |       | 13,623,032 |   |
| Long-term debt,  excluding current installments                                                                                            |       | 3,941,996            |       | 4,658,464 |   |
| Capital lease  obligations, excluding current installments                                                                                 |       | 909,900              |       | 1,612,664 |   |
| Minority  interest (Note 7)                                                                                                                |       | 523,003              |       | 583,533 |   |
| Deferred income  taxes                                                                                                                     |       | 113,073              |       | — |   |
| Retirement and  other liabilities                                                                                                          |       | 913,644              |       | 832,141 |   |
| Total  liabilities                                                                                                                         |       | 17,355,273           |       | 21,309,834 |   |
| Commitments and  contingencies (Note 15)                                                                                                   |       |                 |       |   |   |
| Stockholders’  equity:                                                                                                                |       |                 |       |   |   |
| 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 |       | 56,667               |       | 53,754 |   |
| Additional  paid-in capital                                                                                                                |       | 13,774,334           |       | 11,768,799 |   |
| Retained  earnings                                                                                                                         |       | 17,536,387           |       | 12,420,387 |   |
| Total  stockholders’ equity                                                                                                           |       | 31,367,388           |       | 24,242,940 |   |
| Total  liabilities and stockholders’ equity                                                                                           |       | $                    | 48,722,661 |   | $ | 45,552,774 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-4

----

 

UFP TECHNOLOGIES, INC.

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                          | ** ** | **Years Ended December 31** | ** **  |
|-----------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                          | ** ** | **2008**                                   | ** **  | **2007** | ** ** | **2006** | ** ** |
| Net sales                                           |       | $                                          | 110,031,601 |   | $ | 93,595,140 |   | $ | 93,749,239 |   |
| Cost of sales                                       |       | 81,468,539                                 |        | 70,784,986 |   | 74,511,940 |   |
| Gross profit                                        |       | 28,563,062                                 |        | 22,810,154 |   | 19,237,299 |   |
| Selling, general  and administrative expenses       |       | 18,822,965                                 |        | 15,562,800 |   | 14,183,117 |   |
| Restructuring  charge                               |       | 1,315,366                                  |        | — |   | — |   |
| Operating income                                    |       | 8,424,731                                  |        | 7,247,354 |   | 5,054,182 |   |
| Other income  (expense):                            |       |                                       |        |   |   |   |   |
| Interest expense                                    |       | (334,293                                   | )           | (479,171 | ) | (963,982 | ) |
| Equity in net  income of unconsolidated partnership |       | 7,218                                      |        | 15,038 |   | 15,037 |   |
| Minority  interest earnings                         |       | (44,465                                    | )           | (72,370 | ) | (87,298 | ) |
| Other, net                                          |       | 57,457                                     |        | 32,500 |   | (9,705 | ) |
| Total other  expense                                |       | (314,083                                   | )           | (504,003 | ) | (1,045,948 | ) |
| Income before  income tax provision                 |       | 8,110,648                                  |        | 6,743,351 |   | 4,008,234 |   |
| Income tax  expense                                 |       | 2,994,648                                  |        | 2,584,250 |   | 1,493,361 |   |
| Net income                                          |       | $                                          | 5,116,000   |   | $ | 4,159,101 |   | $ | 2,514,873 |   |
| Net income per  share:                              |       |                                       |        |   |   |   |   |
| Basic                                               |       | $                                          | 0.92        |   | $ | 0.78 |   | $ | 0.50 |   |
| Diluted                                             |       | $                                          | 0.82        |   | $ | 0.71 |   | $ | 0.45 |   |
| Weighted average  common shares:                    |       |                                       |        |   |   |   |   |
| Basic                                               |       | 5,549,830                                  |        | 5,306,948 |   | 5,022,532 |   |
| Diluted                                             |       | 6,262,666                                  |        | 5,861,420 |   | 5,571,068 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-5

----

 

UFP TECHNOLOGIES, INC.

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

 

Years Ended December 31, 2008, 2007, and 2006

 
| ** **                                                       | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|-------------------------------|------------|
| ** **                                                       | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**                  | ** ** | **Equity** | ** ** |
| Balance at  December 31, 2005                                    |       | 4,828,079             |       | $                       | 48,281     |         | $          | 8,966,472                     |       | $ | 5,746,413 |   | $ | 14,761,166 |   |
| Employee Stock  Purchase Plan                                    |       | 21,148                |       | 211                     |       | 47,111       |       | —                        |       | 47,322 |   |
| Stock issued in  lieu of compensation                            |       | 54,411                |       | 544                     |       | 143,703      |       | —                        |       | 144,247 |   |
| Share-based  compensation                                        |       | —                |       | —                  |       | 459,340      |       | —                        |       | 459,340 |   |
| Exercise of  stock options, net of shares presented for exercise |       | 253,126               |       | 2,532                   |       | 518,189      |       | —                        |       | 520,721 |   |
| Windfall tax  benefits                                           |       | —                |       | —                  |       | 176,867      |       | —                        |       | 176,867 |   |
| Net income                                                       |       | —                |       | —                  |       | —       |       | 2,514,873                     |       | 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                                    |       | 4,721                 |       | 47                      |       | 23,848       |       | —                        |       | 23,895 |   |
| Stock issued in  lieu of compensation                            |       | 55,189                |       | 552                     |       | 255,524      |       | —                        |       | 256,076 |   |
| Share-based  compensation                                        |       | 41,000                |       | 410                     |       | 691,614      |       | —                        |       | 692,024 |   |
| Exercise of  stock options, net of shares presented for exercise |       | 117,707               |       | 1,177                   |       | 271,037      |       | —                        |       | 272,214 |   |
| Windfall tax  benefits                                           |       | —                |       | —                  |       | 215,094      |       | —                        |       | 215,094 |   |
| Net income                                                       |       | —                |       | —                  |       | —       |       | 4,159,101                     |       | 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                                    |       | 2,817                 |       | 28                      |       | 20,535       |       | —                        |       | 20,563 |   |
| Stock issued in  lieu of compensation                            |       | 55,644                |       | 556                     |       | 343,324      |       | —                        |       | 343,880 |   |
| Share-based  compensation                                        |       | 93,680                |       | 937                     |       | 1,304,852    |       | —                        |       | 1,305,789 |   |
| Exercise of  stock options                                       |       | 139,181               |       | 1,392                   |       | 331,634      |       | —                        |       | 333,026 |   |
| Net share  settlement of restricted stock units                  |       | —                |       | —                  |       | (206,044     | )          | —                        |       | (206,044 | ) |
| Windfall tax  benefits                                           |       | —                |       | —                  |       | 211,234      |       | —                        |       | 211,234 |   |
| Net income                                                       |       | —                |       | —                  |       | —       |       | 5,116,000                     |       | 5,116,000 |   |
| Balance at  December 31, 2008                                    |       | 5,666,703             |       | $                       | 56,667     |         | $          | 13,774,334                    |       | $ | 17,536,387 |   | $ | 31,367,388 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-6

----

 

UFP TECHNOLOGIES, INC.

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                         | ** ** | **Years Ended December 31** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                             |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 5,116,000  |   | $ | 4,159,101 |   | $ | 2,514,873 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 2,976,550                                  |       | 2,815,021 |   | 3,059,701 |   |
| Restructuring  charge—leasehold improvement write-off                         |       | 170,000                                    |       | — |   | — |   |
| Equity in net  income of unconsolidated affiliate and partnership                  |       | (7,218                                     | )          | (15,038 | ) | (15,037 | ) |
| Minority  interest                                                                 |       | 44,465                                     |       | 72,370 |   | 87,298 |   |
| (Gain) or loss  on disposal of property, plant and equipment                       |       | (57,457                                    | )          | (32,500 | ) | 9,705 |   |
| Share-based  compensation                                                          |       | 1,305,789                                  |       | 692,024 |   | 459,340 |   |
| Stock issued in  lieu of compensation                                              |       | 343,880                                    |       | 256,076 |   | 144,247 |   |
| Deferred income  taxes                                                             |       | 16,469                                     |       | 1,209,664 |   | 856,605 |   |
| Changes in  operating assets and liabilities, net of effects from acquisition:     |       |                                       |       |   |   |   |   |
| Receivables, net                                                                   |       | 777,392                                    |       | (166,829 | ) | 3,767,676 |   |
| Inventories, net                                                                   |       | (434,506                                   | )          | 53,051 |   | 598,132 |   |
| Prepaid expenses                                                                   |       | 350,013                                    |       | (54,783 | ) | 25,210 |   |
| Accounts payable                                                                   |       | (2,776,715                                 | )          | 1,073,753 |   | (1,479,406 | ) |
| Accrued taxes  and other expenses                                                  |       | (937,577                                   | )          | 760,267 |   | 1,269,710 |   |
| Retirement and  other liabilities                                                  |       | (119,173                                   | )          | 94,560 |   | 41,801 |   |
| Other assets                                                                       |       | (82,867                                    | )          | (213,376 | ) | (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                                        |       | (2,763,250                                 | )          | (2,100,584 | ) | (1,515,533 | ) |
| Cash surrender  value of officers’ life insurance                             |       | (15,294                                    | )          | (14,701 | ) | (17,700 | ) |
| Acquisition of  Stephenson & Lawyer net of cash acquired                  |       | (5,181,066                                 | )          | — |   | — |   |
| Payments  received on affiliated partnership                                       |       | 7,218                                      |       | 15,038 |   | 15,038 |   |
| Proceeds from  sale of property, plant and equipment                               |       | 101,020                                    |       | 32,500 |   | 30,000 |   |
| Acquisition of  assets of Stephen Packaging Corp.                                  |       | —                                     |       | — |   | (309,229 | ) |
| Net cash used in  investing activities                                             |       | (7,851,372                                 | )          | (2,067,747 | ) | (1,797,424 | ) |
| Cash flows from  financing activities:                                             |       |                                       |       |   |   |   |   |
| Net borrowings  (payments) under notes payable                                     |       | —                                     |       | — |   | (7,990,521 | ) |
| Proceeds from  long-term borrowings                                                |       | —                                     |       | 786,000 |   | — |   |
| Distribution to  United Development Company Partners (minority interest)           |       | (104,995                                   | )          | (104,994 | ) | (104,994 | ) |
| Tax benefit from  exercise of non-qualified stock options                          |       | 211,234                                    |       | 215,094 |   | 176,867 |   |
| Proceeds from  sale of common stock                                                |       | 20,563                                     |       | 23,895 |   | 47,322 |   |
| Proceeds from  the exercise of stock options                                       |       | 333,026                                    |       | 272,214 |   | 520,701 |   |
| Principal  repayment of long-term debt                                             |       | (714,027                                   | )          | (1,095,607 | ) | (691,251 | ) |
| Principal  repayment of obligations under capital leases                           |       | (704,407                                   | )          | (688,991 | ) | (2,046,680 | ) |
| Proceeds from  refinancing capital leases                                          |       | —                                     |       | — |   | 1,359,000 |   |
| Cash settlements  of restricted stock units                                        |       | (206,044                                   | )          | — |   | — |   |
| Net cash used in  financing activities                                             |       | (1,164,650                                 | )          | (592,389 | ) | (8,729,556 | ) |
| Net change in  cash                                                                |       | (2,330,977                                 | )          | 8,043,225 |   | 751,770 |   |
| Cash and cash  equivalents at beginning of year                                    |       | 9,060,347                                  |       | 1,017,122 |   | 265,352 |   |
| Cash and cash  equivalents at end of year                                          |       | $                                          | 6,729,370  |   | $ | 9,060,347 |   | $ | 1,017,122 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-7

----

 

UFP TECHNOLOGIES,INC.

 

##### **Notes to Consolidated Financial Statements**

**December 31, 2008 and 2007**

 

### **(1)**                     Summary of SignificantAccounting Policies

### ** **

UFP Technologies, Inc. (“the Company”) is an innovative designerand custom converter of foams, plastics and natural fiber products principallyserving the automotive, computer and electronics, medical, aerospace anddefense, 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 resultsof operations of UFP Technologies, Inc., its wholly-owned subsidiaries,Moulded Fibre Technology, Inc., Simco Automotive Trim, Inc., andSimco Technologies, Inc.  Theconsolidated financial statements also include the accounts and results ofoperations of Stephenson & Lawyer, Inc. and its wholly-ownedsubsidiary, Patterson Properties Corporation, from January 1, 2008,through December 31, 2008. The Company also consolidates UnitedDevelopment Company Limited, of which the Company owns 26.32% (see Note7).  All significant inter-companybalances and transactions have been eliminated in consolidation.

 

*(b)**      **Accounts Receivable*

 

The Company periodically reviews the collectability of its accountsreceivable.  Provisions are establishedfor accounts that are potentially uncollectible.  Determining adequate reserves for accountsreceivable requires management’s judgment. Conditions impacting the realizability of the Company’s receivablescould cause actual asset write-offs to be materially different than thereserved balances as of December 31, 2008.

 

*(c)**       **Inventories*

 

Inventories that include material, labor, and manufacturing overheadare 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 itsinventory.  Provisions are establishedfor potential obsolescence.  Determiningadequate reserves for inventory obsolescence requires management’sjudgment.  Conditions impacting therealizability of the Company’s inventory could cause actual asset write-offs tobe 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 andamortized using the straight-line method over the estimated useful lives of theassets (for financial statement purposes) and accelerated methods (for incometax purposes).  Certain manufacturingmachines that are dedicated to a specific program—where total units to beproduced over the life of the program are estimable—are depreciated using themodified units of production method for financial statement purposes.

 

F-8

----

 

Estimated useful lives of property, plant, and equipment are asfollows:

 
| ** **                      | ** ** | **Shorter of estimated useful life** | ** ** |
|---------------------------------|------------|----------------------------------------------------------|------------|
| **Leasehold improvements** | ** ** | **or remaining lease term**               | ** ** |
| Buildings and  improvements     |       | 31.5 years                                               |       |
| Equipment                       |       | 8-10 years                                               |       |
| Furniture and  fixtures         |       | 5-7 years                                                |       |

 

Property, plant, and equipment amounts are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset (asset group) may not be recoverable.  An impairment loss would be recognized whenthe carrying amount of an asset exceeds the estimated undiscounted future cashflows expected to result from the use of the asset and its eventualdisposition.  The amount of theimpairment loss to be recorded is calculated by the excess of the asset’scarrying value over its fair value.  Fairvalue is generally determined using a discounted cash flow analysis.

 

*(e)**       **Income Taxes*

 

The Company’s income taxes are accounted for under the asset andliability method of accounting.  Underthe asset and liability method, deferred tax assets and liabilities arerecognized for the estimated future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax basis and operating loss and tax creditcarryforwards.  Deferred tax expense(benefit) results from the net change during the year in deferred tax assetsand liabilities.  The effect on deferredtax assets and liabilities of a change in tax rates is recognized in income inthe period that includes the enactment date.

 

The Company adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes,” on January 1, 2007.  As a result of the implementation ofInterpretation No. 48, the Company recognized no increase in the liabilityfor unrecognized tax benefits.  TheCompany recognizes interest and penalties accrued related to unrecognized taxbenefits in tax expense.

 

*(f)**          **Revenue Recognition*

 

The Company recognizes revenue at the time of shipment when title andrisk of loss have passed to the customer, persuasive evidence of an arrangementexists, performance of its obligation is complete, its price to the buyer isfixed or determinable, and the Company is reasonably assured of collection. If a loss is anticipated on any contract, a provision for the entire lossis made immediately.  Determination ofthese criteria, in some cases, requires management’s judgments.  Should changes in conditions cause managementto 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 realtylimited partnership.  The LakeshoreEstates investment is stated at cost, plus or minus the Company’s proportionateshare of the limited partnership’s income or losses, less any distributionsreceived 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, 

 

F-9

----

 

this partnership.  The Company’scarrying amount for this investment is zero at December 31, 2008, and2007, respectively.

 

*(h)**      **Goodwill*

 

Goodwill is tested for impairment annually, and will be tested forimpairment between annual tests if an event occurs or circumstances change thatwould indicate that the carrying amount may be impaired. Impairment testing forgoodwill is done at a reporting unit level. Reporting units are one level belowthe business segment level, but can be combined when reporting units within thesame segment have similar economic characteristics.  At December 31, 2008 the Companyredefined its reporting units to include its Component Products segment,Packaging segment (excluding its Molded Fiber operation), and its Molded Fiberoperation as separate reporting units for goodwill impairment testing.  Animpairment loss generally would be recognized when the carrying amount of thereporting unit’s net assets exceeds the estimated fair value of the reportingunit. 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 arenot amortized.  Intangible assets with adefinite life are amortized on a straight-line basis, with estimated usefullives 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 orcircumstances change that would indicate that the carrying amount may beimpaired.  Intangible assets with adefinite life are tested for impairment whenever events or circumstancesindicate that their value may be reduced.

 

*(j)**          **Cash and Cash Equivalents*

 

The Company considers all highly liquid investments with originalmaturities of three months or less to be cash equivalents.  At December 31, 2008, and 2007, cashequivalents primarily consist of a money market account that is readilyconverted into cash.  The Companyutilizes zero-balance disbursement accounts to manage its funds.  As such, outstanding checks at the end of a periodare reclassified to accounts payable.  AtDecember 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 withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect assets andliabilities, and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses 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, “DisclosuresAbout Segments of an Enterprise and Related Information,” which establishedstandards for the way that public business enterprises report information andoperating segments in annual financial 

 

F-10

----

 

statements and requires reporting of selected information in interimfinancial 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 accountedfor.  SFAS No. 141R requires theacquiring entity in a business combination to recognize all (and only) theassets acquired and liabilities assumed in the transaction and establishes theacquisition date fair value as the measurement objective for all assetsacquired and liabilities assumed in a business combination.  Certain provisions of this standard will,among other things, impact the determination of acquisition-date fair value ofconsideration paid in a business combination (including contingentconsideration); exclude transaction costs from acquisition accounting; andchange accounting practices for acquired contingencies, acquisition-relatedrestructuring costs, in-process research and development, indemnificationassets and tax benefits.  SFAS No. 141Ris effective for the Company for business combinations and adjustments to anacquired 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 ofARB No. 51.”  This statement iseffective 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 andseparate from the parent’s equity.  Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement. SFAS No. 160amends the consolidation procedures of certain aspects of ARB No. 51 forconsistency with the requirements of SFAS No. 141R. This statementrequires changes in the parent’s ownership interest of consolidatedsubsidiaries to be accounted for as equity transactions.  This statement also includes expandeddisclosure requirements regarding the interests of the parent and itsnoncontrolling interest.  The Company iscurrently 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,” whichchanges the disclosure requirements for derivative instruments and hedgingactivities.  SFAS No. 161 requires enhanceddisclosures about (a) how and why an entity uses derivative instruments, (b) howderivative instruments and related hedged items are accounted for under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  This statement’s disclosurerequirements are effective for fiscal years and interim periods beginning afterNovember 15, 2008.  The Company iscurrently evaluating the future impacts and disclosures of this standard.

 

*(n)**      **Share-Based Compensation*

 

Effective January 1, 2006, the Company adopted the provisions ofSFAS No. 123R “Share-Based Payment,” which establishes accounting forequity instruments exchanged for employee services.  Under the provisions of SFAS No. 123R,share-based compensation cost is measured at the grant date, based on thecalculated fair value of the award, and is recognized as an expense over theemployee’s requisite service period (generally the 

 

F-11

----

 

vesting period of the equity grant). The Company expenses its share-based compensation on a straight-linebasis over the requisite service period for each award.

 

Theprovisions of SFAS No. 123R apply to share-based payments made throughseveral plans, which are described below. The compensation cost that has been charged against income for thoseplans is as follows:

 
| ** **                                   | ** ** | **Year Ended December 31** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cost of sales                                |       | $                                         | —     |   | $ | — |   | $ | — |   |
| Selling, general  and administrative expense |       | 1,305,789                                 |       | 692,024 |   | 439,340 |   |
| Total  share-based compensation expense      |       | $                                         | 1,305,789  |   | $ | 692,024 |   | $ | 439,340 |   |

 

Thecompensation expense for stock options granted during the three-year periodended December 31, 2008, was determined as the intrinsic fair market valueof the options, using a lattice-based option valuation model with theassumptions noted as follows:

 
| ** **               | ** ** | **Year Ended December 31** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2008**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected  volatility     |       | 88.0%                                     |       | 76.7% to 89.3% |   | 92.7% to 96.7% |   |
| Expected  dividends      |       | None                                      |       | None |   | None |   |
| Risk-free  interest rate |       | 4.0%                                      |       | 3.4% to 5.0% |   | 4.7% to 5.1% |   |
| Exercise price           |       | Closing price on date of grant            |       | Closing price on date of grant |   | Closing price on date of grant |   |
| Imputed life             |       | 7.9 years (output in lattice-based model) |       | 4.1 to 7.9 years (output in lattice-based model) |   | 4.0 to 8.0 years (output in lattice-based model) |   |

 

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

 

Thetotal income tax benefit recognized in the statement of operations forshare-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*

 

TheCompany accounts for escalating rental payments on the straight-line basis overthe term of the lease.

 

*(p)**      **Shipping and Handling Costs*

 

Costsincurred related to shipping and handling are included in cost of sales.  Amounts charged to customers pertaining tothese costs are included as revenue.

 

F-12

----

* *

*(q)**      **Research and Development*

 

Ona routine basis, the Company incurs costs related to research and developmentactivity.  These costs are expensed asincurred.  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 andaccrued expenses and payroll withholdings are stated at carrying amounts thatapproximate fair value because of the short maturity of those instruments.  The carrying amount of the Company’slong-term debt and obligations under capital leases approximates fair value asthe interest rate on the debt approximates the Company’s current incrementalborrowing rate.

 

*(s)**        **Fair Value*

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements,” which defines fair value, establishes a framework in generallyaccepted accounting principles for measuring fair value and expands disclosuresabout fair value measurements.  Thisstandard only applies when other standards require or permit the fair valuemeasurement of assets and liabilities. It does not increase the use of fair value measurement.  The Company adopted SFAS No. 157 in thefirst quarter of 2008, except as it relates to nonrecurring fair valuemeasurements of nonfinancial assets and liabilities for which the standard iseffective for fiscal years beginning after November 15, 2008.

 

Themajor categories of non financial assets and liabilities that have not beenmeasured and disclosed using SFAS No. 157 fair value guidance includegoodwill and intangible assets and property, plant and equipment if subject toa periodic impairment test, as well as the assets and liabilities acquired inthe Stephenson & Lawyer, Inc. acquisition (Note 18).

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115,” which permits entities to choose to measure eligibleitems at fair value at specified election dates and report unrealized gains andlosses on items, for which the fair value option has been elected, in earningsat each subsequent reporting date.  SFAS No. 159is effective for fiscal years beginning after November 15, 2007.  The adoption of SFAS No. 159 in 2008 didnot have an impact on the Company’s results of operations or financialposition, as the Company has not elected the fair value option for any of itseligible financial assets or liabilities.

 

### ** (2)**                  SupplementalCash Flow Information

### ** **

Cashpaid for interest and income taxes is as follows:

 
| ** **                    | ** ** | **Years Ended December 31** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest                      |       | $                                          | 355,221    |   | $ | 486,826 |   | $ | 1,001,382 |   |
| Income taxes,  net of refunds |       | $                                          | 3,817,383  |   | $ | 322,824 |   | $ | 368,975 |   |

 

F-13

----

 

Significant non-cash transactions:

 
| ** **                                           | ** ** | **Years Ended December 31** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Property and  equipment acquired under capital lease |       | $                                          | —     |   | $ | — |   | $ | 691,705 |   |
| Shares presented  for stock option exercises         |       | —                                     |       | — |   | (15,500 | ) |
|                                                      |            |                                            |            |  |  |  |  |  |  |  |

 

### **(3)**                     Receivables

### ** **

Receivables consist of the following:

 
| ** **                               | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Accounts  receivable—trade          |       | $                    | 13,141,912 |   | $ | 12,102,599 |   |
| Less allowance  for doubtful receivables |       | (387,037             | )          | (307,131 | ) |
|                                     |       | $                    | 12,754,875 |   | $ | 11,795,468 |   |

 

### **(4)**                     Inventories

### ** **

Inventories consist of the following:

 
| ** **                      | ** ** | **December 31** | ** ** |
|---------------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Raw materials                   |       | $                    | 5,352,926  |   | $ | 3,681,262 |   |
| Work in process                 |       | 324,782              |       | 340,134 |   |
| Finished goods                  |       | 3,115,285            |       | 2,150,635 |   |
| Less: reserve  for obsolescence |       | (640,247             | )          | (295,405 | ) |
|                            |       | $                    | 8,152,746  |   | $ | 5,876,626 |   |

 

### **(5)**                     Goodwill and OtherIntangible Assets

### ** **

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

 

At December 31, 2008, and 2007, the carryingvalue of the Company’s definite-lived intangible assets was $175,841 and$244,913, respectively, net of accumulated amortization, and is included in theaccompanying 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 foryears ended December 31 will be approximately:

 
| 2009       |   | 69,000 |    |
|------------|--------|--------|---------|
| 2010       |   | 69,000 |    |
| 2011       |   | 37,841 |    |
| 2012       |   | — |    |
| 2013       |   | — |    |
| Thereafter |   | — |    |
| Total:     |   | $      | 175,841 |   |
|            |        |        |         |  |

 

F-14

----

 

### **(6)**                     Property, Plantand Equipment

### ** **

Property, plant, and equipment consist of thefollowing:

 
| ** **                                         | ** ** | **December 31** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Land                                               |       | $                    | 470,872    |   | $ | 409,119 |   |
| Buildings and  improvements                        |       | 6,496,542            |       | 4,947,111 |   |
| Leasehold  improvements                            |       | 1,570,906            |       | 1,849,216 |   |
| Equipment                                          |       | 28,873,836           |       | 28,601,575 |   |
| Furniture and  fixtures                            |       | 2,288,428            |       | 2,055,184 |   |
| Construction in  progress—equipment/buildings |       | 966,195              |       | 406,937 |   |
|                                               |       | $                    | 40,666,779 |   | $ | 38,269,142 |   |

 

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

 

### **(7)**                     Investment in and Advancesto Affiliated Partnership

### ** **

The Company has a 26.32% ownership interest in arealty limited partnership, United Development Company Limited (“UDT”).  In compliance with FIN 46R, “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51,” the Companyhas 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 theCompany’s proportionate share of the limited partnership’s income, less anydistributions received from the limited partnership.

 

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

 
| ** **                         | ** ** | **December 31** | ** ** |
|------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Cash                               |       | $                    | 148,746    |   | $ | 165,361 |   |
| Net property,  plant and equipment |       | 1,311,273            |       | 1,408,264 |   |
| Accrued expenses                   |       | 12,900               |       | 12,900 |   |
| Current and  long-term debt        |       | 737,289              |       | 768,744 |   |
|                                    |            |                      |            |  |  |  |  |

 

There was no impact on net income.

 

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

 

### **(8)**                     Indebtedness

### ** **

OnFebruary 28, 2003, the Company obtained a credit facility, which wasamended effective March 24, 2004, June 28, 2004, and November 21,2005, to reflect, among other things, 

 

F-15

----

 

changesto certain financial covenants.  Theamended facility was comprised of:  (i) arevolving credit facility of $17 million; (ii) a term loan of $3.7 millionwith 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 forinterest of Prime or LIBOR plus a margin that ranges from 1.0% to 1.5%,depending upon Company performance.  Theloans 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, hadinterest computed at Prime or LIBOR plus 1.0%. Under the amended credit facility, the Company was subject to certainfinancial covenants, including maximum capital expenditures and minimumfixed-charge coverage.  As of December 31,2008, the Company was in compliance with all of these covenants.  At December 31, 2008, the interest rateon these facilities ranged from 1.5% to 3.25%.

 

OnJanuary 29, 2009, the Company amended and extended its credit facilitywith Bank of America, NA.  The facilityis comprised of: (i) a revolving credit facility of $17 million; (ii) aterm loan of $2.1 million with a seven-year straight-line amortization; (iii) aterm loan of $1.8 million with a 20-year straight-line amortization; and (iv) aterm loan of $4.0 million with a 20-year straight-line amortization.  Extensions of credit under the revolvingcredit facility are based in part upon accounts receivable and inventorylevels.  Therefore, the entire $17million may not be available to the Company. The credit facility calls for interest of LIBOR plus a margin thatranges from 1.0% to 1.5% or, at the discretion of the Company, the bank’s primerate less a margin that ranges from 0.25% to zero.  In both cases the applicable margin isdependent upon Company performance.  Theloans are collateralized by a first priority lien on all of the Company’sassets, including its real estate located in Georgetown, Massachusetts, and inGrand Rapids, Michigan.  Under the creditfacility, the Company is subject to a minimum fixed-charge coverage financialcovenant.  The Company’s $17 millionrevolving credit facility is due November 30, 2013; the term loans are alldue on January 29, 2016.

 

Asa result of the consolidation of UDT, a mortgage note collateralized by theAlabama and Florida facilities, dated September 4, 2002, originally for$470,313, was included within long-term debt in the December 31, 2006consolidated financial statements.  On May 22,2007, this note was refinanced.  Theremaining principal balance of $388,356 on the old note was paid in full.  The new note is secured by the Floridafacility and has a principal balance of $786,000.  The note calls for 180 monthly payments of$7,147.  The interest rate is fixed atapproximately 7.2%.  The additional fundsof approximately $400,000 were used to fund building improvements in theFlorida facility.  The outstandingbalance on this note at December 31, 2008, is $737,289.

 

Inaddition 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 theCompany and have remaining lives ranging from one to six years and bearinterest at rates ranging from 7% to 8%. Subsequent to December 31, 2008, the Company paid off these leaseobligations in full.

 

F-16

----

 

Long-term debt consists of the following:

 
| ** **                                      | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Mortgage note                                   |       | $                    | 1,859,000  |   | $ | 2,015,000 |   |
| Notes payable,  term loans                      |       | 2,062,405            |       | 2,588,976 |   |
| United  Development Company mortgage            |       | 737,288              |       | 768,744 |   |
| Total long-term  debt                           |       | 4,658,693            |       | 5,372,720 |   |
| Less current  installments                      |       | 716,697              |       | 714,256 |   |
| Long-term debt,  excluding current installments |       | $                    | 3,941,996  |   | $ | 4,658,464 |   |

 

Aggregatematurities of long-term debt are as follows:

 
| **Year ending December 31:** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2009                                        |       | 716,697    |       |
| 2010                                        |       | 718,985    |       |
| 2011                                        |       | 721,691    |       |
| 2012                                        |       | 677,098    |       |
| 2013 and  thereafter                        |       | 1,824,222  |       |
|                                        |       | $          | 4,658,693  |   |
|                                             |            |            |            |  |

 

### ** (9)**                  Accrued Taxes and OtherExpenses

### ** **

Accrued taxes and other expenses consist of thefollowing:

 
| ** **                          | ** ** | **December 31** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Compensation                        |       | $                    | 2,215,874  |   | $ | 2,165,994 |   |
| Benefits /  self-insurance reserve  |       | 901,580              |       | 973,405 |   |
| Paid time off                       |       | 688,315              |       | 545,426 |   |
| Commissions  payable                |       | 370,432              |       | 275,783 |   |
| Plant  consolidation                |       | 316,000              |       | — |   |
| Income taxes  payable (overpayment) |       | (573,953             | )          | 507,986 |   |
| Unrecognized tax  benefits          |       | 560,000              |       | 560,000 |   |
| Other                               |       | 1,751,753            |       | 1,481,622 |   |
|                                |       | $                    | 6,230,001  |   | $ | 6,510,216 |   |

 

### **(10)**              Income Taxes

### ** **

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

 

F-17

----

 
| ** **                  | ** ** | **Years Ended December 31** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current:                    |       |                                       |       |   |   |   |   |
| Federal                     |       | $                                          | 2,270,000  |   | $ | 983,000 |   | $ | 160,000 |   |
| State                       |       | 709,000                                    |       | 391,000 |   | 300,000 |   |
|                        |       | 2,979,000                                  |       | 1,374,000 |   | 460,000 |   |
| Deferred:                   |       |                                       |       |   |   |   |   |
| Federal                     |       | 41,000                                     |       | 1,147,000 |   | 1,061,000 |   |
| State                       |       | (25,000                                    | )          | 63,000 |   | (28,000 | ) |
|                        |       | 16,000                                     |       | 1,210,000 |   | 1,033,000 |   |
| Total income tax  provision |       | $                                          | 2,995,000  |   | $ | 2,584,000 |   | $ | 1,493,000 |   |

 

AtDecember 31, 2008, the Company has net operating loss carryforwards forfederal income tax purposes of approximately $2,488,000, and for state incometax purposes of approximately $500,000, which are available to offset futuretaxable income and expire during the federal tax years ending December 31,2019 through 2024.  The future benefit ofthe federal net operating loss carryforwards will be limited to approximately$300,000 per year in accordance with Section 382 of the Internal RevenueCode.

 

The tax effects of temporary differences that giverise to significant portions of the deferred tax assets and deferred taxliabilities are approximately as follows:

 
| ** **                                     | ** ** | **December 31** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Deferred tax  assets related to:               |       |                 |       |   |   |
| Equity-based  compensation                     |       | $                    | 387,000    |   | $ | 244,000 |   |
| Compensation  programs                         |       | 497,000              |       | 278,000 |   |
| Retirement  liability                          |       | 184,000              |       | 190,000 |   |
| Net operating  loss carryforwards              |       | 866,000              |       | 979,000 |   |
| Inventory  capitalization                      |       | 246,000              |       | 66,000 |   |
| Reserves                                       |       | 412,000              |       | 243,000 |   |
| Total deferred  tax assets                     |       | 2,592,000            |       | 2,000,000 |   |
| Deferred tax  liabilities related to:          |       |                 |       |   |   |
| Excess of book  over tax basis of fixed assets |       | 417,000              |       | 339,000 |   |
| Goodwill                                       |       | 499,000              |       | 434,000 |   |
| Inventory method  change                       |       | 295,000              |       | — |   |
| Other                                          |       | 5,000                |       | 17,000 |   |
| Total deferred  tax liabilities                |       | 1,216,000            |       | 790,000 |   |
| Net deferred tax  assets                       |       | $                    | 1,376,000  |   | $ | 1,210,000 |   |

 

The amount recorded as net deferred tax assets as ofDecember 31, 2008 and 2007 represents the amount of tax benefits ofexisting deductible temporary differences or carryforwards that are more likelythan not to be realized through the generation of sufficient future taxable incomewithin the carryforward period.  TheCompany 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 benefitassociated with the acquisition of the common

 

F-18

----

 

stock of Stephenson & Lawyer, Inc., asdiscussed in Note 18.  Management reviewsthe recoverability of deferred tax assets during each reporting period.

 

The actual tax provision for the years presenteddiffers from the “expected” tax provision for those years, computed by applyingthe U.S. federal corporate rate of 34% to income before income tax expense asfollows:

 
| ** **                                           | ** ** | **Years Ended December 31** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Computed  “expected” tax rate              |       | 34.0                                       | %          | 34.0 | % | 34.0 | % |
| Increase  (decrease) in income taxes resulting from: |       |                                       |       |   |   |   |   |
| State taxes, net  of federal tax benefit             |       | 5.6                                        |       | 4.5 |   | 4.6 |   |
| Officers’ life  insurance                       |       | 0.0                                        |       | 0.0 |   | 0.1 |   |
| Meals and  entertainment                             |       | 0.2                                        |       | 0.3 |   | 0.3 |   |
| R&D credits                                      |       | (1.2                                       | )          | (1.1 | ) | (2.7 | ) |
| Domestic  production deduction                       |       | (2.1                                       | )          | 0.0 |   | 0.0 |   |
| Non-deductible  ISO stock option expense             |       | 0.4                                        |       | 0.5 |   | 1.0 |   |
| Other                                                |       | 0.0                                        |       | 0.1 |   | 0.0 |   |
| Effective tax  rate                                  |       | 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 beenaudited by the Internal Revenue Service since 2001 or by any states inconnection with income taxes, with the exception of returns filed in Michigan(which have been audited through 2004) and income tax returns filed inMassachusetts 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 thosereturns, remain open to examination by the IRS and various state jurisdictions.

 

FIN 48 prescribes the recognition, measurement, anddisclosure standards for uncertainties in income tax positions.  A reconciliation of the beginning and endingamount of gross unrecognized tax benefits (“UTB”) is as follows:

 
| ** **                                                    | ** ** | **Federal and State Tax** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                 | ** ** | **2007** | ** ** |
| Gross UTB  balance at beginning of fiscal year                |       | $                                        | 560,000    |   | $ | 235,000 |   |
| Additions based  on tax positions related to the current year |       | —                                   |       | — |   |
| Additions for  tax positions of prior years                   |       | —                                   |       | 325,000 |   |
| Reductions for  tax positions of prior years                  |       | —                                   |       | — |   |
| Settlements                                                   |       | —                                   |       | — |   |
| Reductions due  to lapse of applicable statute of limitations |       | —                                   |       | — |   |
| Gross UTB  balance at December 31                        |       | $                                        | 560,000    |   | $ | 560,000 |   |
| Net UTB  impacting the effective tax rate at December 31 |       | $                                        | 560,000    |   | $ | 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.

 

F-19

----

 

At December 31, 2008, and 2007, accruedinterest 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 weightedaverage common shares outstanding during each year.  Diluted income per share is based upon theweighted average of common shares and dilutive common stock equivalent sharesoutstanding during each year.  The weightedaverage number of shares used to compute both basic and diluted income pershare consisted of the following:

 
| ** **                                                          | ** ** | **Years Ended December 31** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                   | ** ** | **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     |       | 712,836                                    |       | 554,472 |   | 548,536 |   |
| Diluted weighted  average common shares outstanding during the year |       | 6,262,666                                  |       | 5,861,420 |   | 5,571,068 |   |

 

### **(12)**              Stock Optionand Equity Incentive Plans

### ** **

#### EmployeeStock Option Plan

####  

The Company’s 1993 Employee Stock Option Plan (“Employee Stock OptionPlan”), which is stockholder approved, provides long-term rewards andincentives in the form of stock options to the Company’s key employees,officers, employee directors, consultants and advisors.  The plan provides for either non-qualifiedstock options or incentive stock options for the issuance of up to 1,550,000shares of common stock.  The exerciseprice of the incentive stock options may not be less than the fair market valueof the common stock on the date of grant, and the exercise price fornon-qualified stock options shall be determined by the CompensationCommittee.  These options expire overfive- to ten-year periods.

 

Options granted under the plan generally become exercisable withrespect to 25% of the total number of shares subject to such options at the endof each 12-month period following the grant of the options, except for optionsgranted to officers, which may vest on a different schedule.  At December 31, 2008, there were 634,375options outstanding under the Employee Stock Option Plan.  Should stock options be issued under theEmployee Stock Option Plan in the future, the Company will record compensationexpense based upon the intrinsic fair market value of the stock options, usinga lattice-based option valuation model.

 

#### IncentivePlan

####  

In June 2003,the Company formally adopted the 2003 Equity Incentive Plan (the “Plan”).  The Plan was originally intended to benefitthe Company by offering equity-based incentives to certain of the Company’sexecutives and employees, thereby giving them a permanent stake in the growthand long-term success of the Company and encouraging the continuance of theirinvolvement with the Company’s businesses. The Plan was amended effective June 4, 2008, to permit certainperformance-based cash awards to be made under the Plan.  The amendment

 

F-20

----

 

also addedappropriate language so as to enable grants of stock-based awards under thePlan to continue to be eligible for exclusion from the $1,000,000 limitation ondeductibility under Section 162(m) of the Internal Revenue Code (the “Code”).  On February 21, 2008, the Board ofDirectors also changed the name of the Plan from the “2003 Equity IncentivePlan” to the “2003 Incentive Plan,” in part to reflect the amendment describedabove.

 

Two types ofequity awards may be granted to participants under the Plan: restricted sharesor other stock awards.  Restricted sharesare shares of common stock awarded subject to restrictions and to possibleforfeiture upon the occurrence of specified events.  Other stock awards are awards that aredenominated or payable in, valued in whole or in part by reference to, orotherwise based on or related to, shares of common stock.  Such awards may include Restricted Stock UnitAwards (“RSUs”), unrestricted or restricted stock, nonqualified options,performance shares, or stock appreciation rights.  The Company determines the form, terms, andconditions, 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 stockissued under the Plan is 1,250,000 shares.

 

Through December 31, 2008, 436,679 shares of common stock havebeen issued under the 2003 Incentive Plan, none of which have been restricted;an additional 352,000 shares are being reserved for outstanding grants of RSUsand other share-based compensation that are subject to various performance andtime-vesting contingencies.

 

#### StockPurchase Plan

####  

On April 18, 1998, the Company adopted the 1998 Stock PurchasePlan (the “Stock Purchase Plan”), which provided that all employees of theCompany (who worked more than 20 hours per week and more than five months inany calendar year, and who were employees on or before the applicable offeringperiod) were eligible to participate. The Stock Purchase Plan was intended to qualify as an “Employee StockPurchase Plan” under Section 423 of the Internal Revenue Code of1986.  Under the Stock Purchase Plan,participants could have had up to 10% of their base salaries withheld for thepurchase of the Company’s Common Stock at 95% of the market value of the commonstock on the last day of the offering period. The offering periods were from January 1 through June 30 andfrom July 1 through December 31 of each calendar year.  The 1998 Stock Purchase Plan provides for theissuance of up to 400,000 shares of common stock.  Through December 31, 2008, there were305,866 shares issued under this plan. The Company no longer offers the plan to employees, and plans todissolve the Stock Purchase Plan.

 

#### DirectorPlans

####  

Through July 15, 1998, the Company maintained a stock option plancovering non-employee directors (the “1993 Director Plan”).  Effective July 15, 1998, with theformation of the 1998 Director Stock Option Incentive Plan (the “1998 DirectorPlan”), the 1993 Director Plan was frozen. The 1993 Director Plan provided for options for the issuance of up to110,000 shares of common stock.  On July 1of each year, each individual who at the time was serving as a non-employee directorof the Company received an automatic grant of options to purchase 2,500 sharesof common stock.  These options becameexercisable in full on the date of the grant and expire 10 years from the dateof grant.  The exercise price was thefair market value

 

F-21

----

 

of the common stock on the date of grant.  At December 31, 2008, there were nooptions outstanding under the 1993 Director Plan.

 

Effective July 15, 1998, the Company adopted the 1998 DirectorPlan for the benefit of non-employee directors of the Company.  The 1998 Director Plan provided for optionsfor the issuance of up to 425,000 shares of common stock.  On June 2, 2004, the Company amended the1998 Director Plan to increase the allowable amount to 725,000 shares.  On June 4, 2008, the Company furtheramended the Director Plan to increase the allowable amount to 975,000shares.  These options become exercisablein full at the date of grant and expire 10 years from the date of grant.  In connection with the adoption of the 1998Director Plan, the 1993 Director Plan was frozen; however, the options outstandingunder the 1993 Director Plan were not affected by the adoption of the newplan.  At December 31, 2008, therewere 338,808 options outstanding under the 1998 Director Plan.

 

The following is a summary of stock option activityunder all plans:

 
| ** **                                             | ** ** | **Shares Under  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Aggregate Intrinsic  Value** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| Outstanding  December 31, 2005                    |       | 1,375,546                      |       | $                                          | 2.23       |                                |       |   |
| Granted                                                |       | 64,877                         |       | 5.86                                       |       |                                |       |
| Exercised                                              |       | (255,614                       | )          | 2.10                                       |       |                                |       |
| Cancelled or  expired                                  |       | (28,750                        | )          | 4.45                                       |       |                                |       |
| Outstanding  December 31, 2006                    |       | 1,156,059                      |       | $                                          | 2.40       |                                |       |   |
| Granted                                                |       | 65,456                         |       | 5.35                                       |       |                                |       |
| Exercised                                              |       | (117,707                       | )          | 2.31                                       |       |                                |       |
| Cancelled or  expired                                  |       | —                         |       | —                                     |       |                                |       |
| Outstanding  December 31, 2007                    |       | 1,103,808                      |       | $                                          | 2.59       |                                |       |   |
| Granted                                                |       | 41,769                         |       | 10.90                                      |       |                                |       |
| Exercised                                              |       | (139,181                       | )          | 2.39                                       |       |                                |       |
| Cancelled or  expired                                  |       | (33,213                        | )          | 2.68                                       |       |                                |       |
| Outstanding  December 31, 2008                    |       | 973,183                        |       | $                                          | 2.97       |                                | $          | 2,536,931 |   |
| Exercisable at  December 31, 2008                 |       | 935,308                        |       | $                                          | 2.90       |                                | $          | 2,498,662 |   |
| Vested and  expected to vest at December 31, 2008 |       | 973,183                        |       | $                                          | 2.97       |                                | $          | 2,536,931 |   |

 

F-22

----

 

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

 
| ** **                              | ** ** | **Options Outstanding**          | ** ** | **Options Exercisable**                                             | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **Range of  exercise prices** | ** ** | **Outstanding  as of  12/31/08** | ** ** | **Weighted average  remaining contractual  life (years)** | ** ** | **Weighted  average  exercise price** | ** ** | **Exercisable as  of 12/31/08** | ** ** | **Weighted  average exercise  price** | ** ** |
| $0.00 - $0.99                           |       | 50,000                                |       | 3.1                                                                      |       | $ | 0.81 |   | 50,000 |   | $ | 0.81 |   |
| $1.00 - $1.99                           |       | 231,911                               |       | 4.1                                                                      |       | 1.15 |   | 231,911 |   | 1.15 |   |
| $2.00 - $2.99                           |       | 333,148                               |       | 4.2                                                                      |       | 2.49 |   | 333,148 |   | 2.49 |   |
| $3.00 - $3.99                           |       | 203,985                               |       | 3.8                                                                      |       | 3.29 |   | 184,860 |   | 3.28 |   |
| $4.00 - $4.99                           |       | 5,000                                 |       | 3.0                                                                      |       | 4.94 |   | 2,500 |   | 4.94 |   |
| $5.00 - $5.99                           |       | 59,456                                |       | 7.3                                                                      |       | 5.14 |   | 50,706 |   | 5.13 |   |
| $6.00 - $6.99                           |       | 47,914                                |       | 6.7                                                                      |       | 6.18 |   | 40,414 |   | 6.11 |   |
| $10.00 - $10.99                         |       | 27,500                                |       | 9.5                                                                      |       | 10.14 |   | 27,500 |   | 10.14 |   |
| $12.00 - $12.99                         |       | 14,269                                |       | 9.4                                                                      |       | 12.37 |   | 14,269 |   | 12.37 |   |
|                                    |       | 973,183                               |       | 4.6                                                                      |       | $ | 2.97 |   | 935,308 |   | $ | 2.90 |   |

 

Duringthe years ended December 31, 2008, 2007, and 2006, the total intrinsicvalue of all options exercised (i.e., the difference between the marketprice and the price paid by the employees to exercise the options) was$929,281, $357,426, and $883,417, respectively, and the total amount ofconsideration received from the exercise of these options was $333,026,$272,214, and $520,701, respectively.

 

Duringthe years ended December 31, 2008, 2007, and 2006, the Company recognizedcompensation expense related to stock options granted to directors andemployees of $221,324, $211,050, and $235,382, respectively.

 

OnFebruary 8, 2008, the Company’s Compensation Committee approved theissuance of 25,000 shares of unrestricted common stock to the Company’sChairman, Chief Executive Officer, and President under the 2003 EquityIncentive Plan.  The shares were issuedon December 31, 2008.  Based uponthe provisions of SFAS No. 123R, the Company has recorded compensationexpense of $154,500 for the year ended December 31, 2008, based on thegrant date price of $6.18 at February 8, 2008.

 

Beginning in 2006, RSUs have been granted under the2003 Equity Incentive Plan to the executive officers of the Company.  The stock unit awards are subject to varioustime-based vesting requirements, and certain portions of these awards are subjectto performance criteria of the Company. Compensation expense on these awards is recorded based on the fair valueof 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-sharesettled to cover the required withholding tax, and the remaining amount isconverted into an equivalent number of common shares.  No compensation expense is taken on awardsthat do

 

F-23

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not become vested, and the amount of compensationexpense recorded is adjusted based on management’s determination of theprobability that these awards will become vested.  The following table summarizes informationabout stock unit award activity during the three-year period ended December 31,2008:

 
| ** **                             | ** ** | **Restricted  Stock Units** | ** ** | **Weighted Average  Award Date Fair  Value** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------|------------|
| Outstanding at  December 31, 2005 |       | —                           |       | $                                                           | —     |   |
| Awarded                                |       | 144,000                          |       | 6.15                                                        |       |
| Shares  distributed                    |       | —                           |       | —                                                      |       |
| Forfeited /  Cancelled                 |       | —                           |       | —                                                      |       |
| Outstanding at  December 31, 2006 |       | 144,000                          |       | $                                                           | 6.15       |   |
| Awarded                                |       | 144,000                          |       | 4.91                                                        |       |
| Shares  distributed                    |       | (16,000                          | )          | 6.15                                                        |       |
| Forfeited /  Cancelled                 |       | —                           |       | —                                                      |       |
| Outstanding at  December 31, 2007 |       | 272,000                          |       | $                                                           | 5.49       |   |
| Awarded                                |       | 144,000                          |       | 6.35                                                        |       |
| Shares  distributed                    |       | (43,680                          | )          | 5.82                                                        |       |
| Shares exchanged  for cash             |       | (20,320                          | )          | 3.82                                                        |       |
| Forfeited /  Cancelled                 |       | —                           |       | —                                                      |       |
| Outstanding at  December 31, 2008 |       | 352,000                          |       | $                                                           | 5.79       |   |

 

TheCompany recorded $929,965, $364,977, and $223,957 in compensation expenserelated to these RSUs during the years ended December 31, 2008, 2007, and2006, respectively.  The total fair valueof RSUs that vested during 2008 and 2007, at vest date, was $659,100 and$83,040, respectively.  No RSUs vestedduring 2006.

 

The following summarizes the future share-basedcompensation expense the Company will record as the equity securities grantedthrough December 31, 2008, vest:

 
| ** ** | ** ** | **Options** | ** ** | **Common  Stock** | ** ** | **Restricted  Stock Units** | ** ** | **Total** | ** ** |
|------------|------------|-------------|------------|-------------------|------------|----------------------------------|------------|-----------|------------|
| 2009       |       | $           | 42,403     |              | $          | —                           |       | $         | 560,325    |   | $ | 602,728 |   |
| 2010       |       | 22,682      |       | —            |       | 330,620                          |       | 353,302   |       |
| 2011       |       | 11,082      |       | —            |       | 164,678                          |       | 175,760   |       |
| 2012       |       | —      |       | —            |       | 17,884                           |       | 17,884    |       |
| Total      |       | $           | 76,167     |              | $          | —                           |       | $         | 1,073,507  |   | $ | 1,149,674 |   |

 

### **(13)**              Preferred Stock

### ** **

On March 18, 2009, the Company declared adividend of one preferred share purchase right (a “Right”) for each outstandingshare of common stock, par value $0.01 per share on March 20, 2009, to thestockholders of record on that date. Each Right entitles the registered holder to purchase from the Companyone one-thousandth of a share of Series A Junior Participating PreferredStock, par value $0.01 per share (the “Preferred Share”), of the Company, at aprice of $25.00 per one one-thousandth of a Preferred Share subject toadjustment and the terms of the Rights Agreement. The rights expire on March 19,2019.

 

F-24

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### **(14)**              SupplementalRetirement Benefits

### ** **

TheCompany provides discretionary supplemental retirement benefits for certainretired officers, which will provide an annual benefit to these individuals forvarious terms following separation from employment.  The Company recorded an expense ofapproximately $27,000, $4,000, and $111,000 for the years ended December 31,2008, 2007, and 2006, respectively.  Thepresent value of the supplemental retirement obligation has been calculatedusing an 8.5% discount rate.  Totalprojected future cash payments for the years ending December 31, 2009through 2012 are approximately $96,000, $101,000, $80,000, and $80,000,respectively, and approximately $280,000 thereafter.

 

### **(15)**              Commitments andContingencies

### ** **

(a)                      *Leases***— The Company has operating leases forcertain facilities that expire through 2015. Certain of the leases contain escalation clauses that require paymentsof additional rent, as well as increases in related operating costs.  The Company also leases various equipmentunder capital leases that expire through 2011.

 

Includedin property, plant and equipment are the following amounts held under capitallease:

 
| ** **                     | ** ** | **December 31** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2008**             | ** ** | **2007** | ** ** |
| Equipment                      |       | $                    | 4,261,592  |   | $ | 4,261,592 |   |
| Less accumulated  depreciation |       | (2,996,045           | )          | (2,213,238 | ) |
|                           |       | $                    | 1,265,547  |   | $ | 2,048,354 |   |

 

Futureminimum lease payments under noncancelable operating leases and the presentvalue of future minimum lease payments under capital leases as of December 31,2008, are as follows:

 
| **Years Ending December 31:**                     | ** ** | **Capital  Leases(1)** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| 2009                                                             |       | $                      | 798,979    |                  | $          | 1,445,505 |   |
| 2010                                                             |       | 717,916                |       | 1,197,619             |       |
| 2011                                                             |       | 244,251                |       | 922,757               |       |
| 2012                                                             |       | —                 |       | 860,075               |       |
| Thereafter                                                       |       | —                 |       | 850,033               |       |
| Total minimum  lease payments                                    |       | $                      | 1,761,146  |                  | $          | 5,275,989 |   |
| Less amount representing  interest                               |       | 148,481                |       |                  |       |
| Present value of  future minimum lease payments                  |       | 1,612,665              |       |                  |       |
| Less current  installments of obligations under capital leases   |       | 702,765                |       |                  |       |
| Obligations  under capital lease, excluding current installments |       | $                      | 909,900    |                  |       |   |

 

----

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

 

F-25

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

 

(b)                     *Legal***— The Company is a defendant in variousadministrative proceedings that are being handled in the ordinary course ofbusiness.  In the opinion of managementof the Company, these suits and claims should not result in final judgments orsettlements that, in the aggregate, would have a material adverse effect on theCompany’s financial condition or results of operations.

 

### **(16)**              EmployeeBenefit Plans

### ** **

TheCompany maintains a profit-sharing plan for eligible employees.  Contributions to the Plan are made in theform of matching contributions to employee 401k deferrals as well asdiscretionary amounts determined by the Board of Directors, and amounted toapproximately $703,000, $646,000, and $604,000, respectively, in 2008, 2007,and 2006.

 

TheCompany has a partially self-insured health insurance program that covers alleligible participating employees.  Themaximum 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.

 

During2006, the Company established an Executive, Non-qualified “Excess” Plan (“thePlan”), which is a deferred compensation plan available to certainexecutives.  The Plan permitsparticipants to defer receipt of part of their current compensation to a laterdate as part of their personal retirement or financial planning.  Participants have an unsecured contractualcommitment by the Company to pay amounts due under the Plan.  There is currently no security mechanism toensure that the Company will pay these obligations in the future.

 

Thecompensation withheld from Plan participants, together with investment incomeon the Plan, is reflected as a deferred compensation obligation toparticipants, and is classified within accrued liabilities in the accompanyingbalance sheets.  At December 31,2008, the balance of the deferred compensation liability totaled approximately$368,000.  The related assets, which areheld in the form of a Company-owned, variable life insurance policy that namesthe Company as the beneficiary, are reported within other assets in theaccompanying balance sheets, and are accounted for based on the underlying cashsurrender values of the policies, and totaled approximately $362,000 as of December 31,2008.

 

### **(17)**              Fair Value ofFinancial Instruments

### ** **

Financialinstruments recorded at fair value in the balance sheets, or disclosed at fairvalue in the footnotes, are categorized below based upon the level of judgmentassociated with the inputs used to measure their fair value.  Hierarchical levels defined by SFAS No.157and directly related to the amount of subjectivity associated with inputs tofair valuation of these assets and liabilities are as follows:

 

*Level 1*

Valuedbased on unadjusted, quoted prices in active markets for identical assets orliabilities at the measurement date.  Anactive market for the asset or liability is a market in which transactions forthe asset or liability occur with sufficient frequency and volume to providepricing information on an ongoing basis. The assets valued and carried by the 

 

F-26

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Companyusing Level 1 inputs are our money market accounts and certificates ofdeposit.  There are no liabilities valuedand carried using Level 1 inputs.

 

*Level 2*

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

 

*Level 3*

Valuedbased on management’s best estimate of what market participants would use inpricing the asset or liability at the measurement date.  Consideration is given to the risk inherentin the valuation technique and the risk inherent in the inputs to themodel.  These assets and liabilities areexcluded from the initial adoption of SFAS No. 157.

 

Financialinstruments that currently require disclosure under SFAS No. 157 consistof money market funds and certificates of deposit, which are both consideredcash equivalents.  Assets and liabilitiesmeasured at fair value on a recurring basis are categorized by the levelsdiscussed above, and in the table below:

 
| **Cash Equivalents** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|---------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Money market  funds       |       | $                | 6,010,000  |             | $          | —           |       | $         | —     |   | $ | 6,010,000 |   |
| Certificates of  deposit  |       | $                | 200,000    |             | $          | —           |       | $         | —     |   | $ | 200,000 |   |
| Total                     |       | $                | 6,210,000  |             | $          | —           |       | $         | —     |   | $ | 6,210,000 |   |
|                           |            |                  |            |                  |            |                  |            |           |            |  |  |  |  |  |

 

### **(18)**              Acquisition

### ** **

OnJanuary 18, 2008, the Company acquired 100% of the common stock ofStephenson & Lawyer, Inc. (“S&L”), a Grand Rapids,Michigan-based foam fabricator, and its wholly-owned subsidiary, PattersonProperties Corporation.  S&L wasconsolidated into the Company’s financial statements effective as of January 1,2008.  S&L specializes in thefabrication of technical urethane foams, and brings to the Company access tothis family of foams, modern manufacturing capabilities, and a seasonedmanagement team.  Including a purchaseprice of $7,225,000 plus transaction costs, the total acquisition cost was$7,325,000.  The acquisition cost wasallocated as follows:

 
| Cash and cash  equivalents           |   | $          | 2,144,000 |   |
|--------------------------------------|--------|------------|-----------|--------|
| Accounts  receivable                 |   | 1,737,000  |      |
| Inventories                          |   | 1,842,000  |      |
| Prepaids                             |   | 45,000     |      |
| Deferred tax  assets                 |   | 182,000    |      |
| Property, plant  and equipment       |   | 2,620,000  |      |
| Current  liabilities                 |   | (1,045,000 | )         |
| Other  liabilities                   |   | (200,000   | )         |
| Purchase price                       |   | $          | 7,325,000 |   |
| Cash and cash  equivalents acquired  |   | (2,144,000 | )         |
| Purchase price  net of cash acquired |   | $          | 5,181,000 |   |

 

F-27

----

 

Thefollowing table contains an unaudited pro forma condensed consolidatedstatement of operations for the year ended December 31, 2007, as if theS&L acquisition had occurred on January 1, 2007.  No pro forma adjustments have been made tothe comparative condensed consolidated statement of operation for the yearended December 31, 2008, since the S&L acquisition was effective as ofthe beginning of that year:

 
| ** **           | ** ** | **Years Ended December 31** | ** **  |
|----------------------|------------|--------------------------------------------|-------------|
| ** **           | ** ** | **2008**                                   | ** **  | **2007** | ** ** |
| ** **           | ** ** | ** **                                 | ** **  | **Unaudited** | ** ** |
| Sales                |       | $                                          | 110,031,601 |   | $ | 107,050,787 |   |
| Operating income     |       | 8,424,731                                  |        | 6,621,853 |   |
| Net income           |       | 5,116,000                                  |        | 3,804,315 |   |
| Earnings per  share: |       |                                       |        |   |   |
| Basic                |       | $                                          | 0.92        |   | $ | 0.72 |   |
| Diluted              |       | 0.82                                       |        | 0.65 |   |

 

Theabove pro forma information is presented for illustrative purposes only and maynot be indicative of the results of operations that would have actuallyoccurred had the S&L acquisition occurred as presented.  In addition, future results may varysignificantly from the results reflected in such pro forma information.

 

### **(19)**              Plant Consolidation

### ** **

OnAugust 5, 2008, the Company committed to move forward with a plan to closeits Macomb Township, Michigan, automotive plant and consolidate operations intoits newly acquired 250,000-square-foot building in Grand Rapids, Michigan.  Through December 31, 2008, the Companyincurred restructuring charges of approximately $1.3 million in one-time,pre-tax expenses and committed to invest approximately $650,000 in buildingimprovements in the Grand Rapids facility over a six-month transitional period.  The Company expects annual cost savings ofapproximately $1.2 million as a result of the plant consolidation.

 

F-28

----

 

Throughthe year ended December 31, 2008, the Company has incurred the followingexpenses:

 
| ** **                                      | ** ** | **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            |       | $                      | —     |                                               | $          | (170,000 | ) | $ | — |   |
| Macomb Township  building restoration           |       | 50,000                                    |       | 56,000                                                                         |       | (56,000            | )          | —                 |       | —                                             |       |
| Earned severance                                |       | 400,000                                   |       | 327,000                                                                        |       | (211,000           | )          | —                 |       | 116,000                                            |       |
| Moving and  training                            |       | 780,000                                   |       | 762,000                                                                        |       | (562,000           | )          | —                 |       | 200,000                                            |       |
| Total                                           |       | $                                         | 1,400,000  |                                                                           | $          | 1,315,000          |       | $                      | (829,000   | )                                                  | $          | (170,000 | ) | $ | 316,000 |   |

### ** **

ThroughDecember 31, 2008, the Company has also funded $650,000 in relatedcapitalized building improvements in the Grand Rapids facility.

 

### **(20) Segment Data**

### ** **

TheCompany has adopted SFAS No. 131, “Disclosures About Segments of anEnterprise and Related Information.”

 

TheCompany is organized based on the nature of the products and services that itoffers.  Under this structure, theCompany produces products within two distinct segments: Packaging and ComponentProducts.  Within the Packaging segment,the Company primarily uses polyethylene and polyurethane foams, sheet plastics,and pulp fiber to provide customers with cushion packaging for theirproducts.  Within the Component Productssegment, the Company primarily uses cross-linked polyethylene foam to providecustomers in the automotive, athletic, leisure and health and beauty industrieswith engineered product for numerous purposes.

 

Theaccounting policies of the segments are the same as those described in Note1.  Income taxes and interest expense havebeen allocated based on operating results and total assets employed in eachsegment.

 

Inter-segmenttransactions are uncommon and not material. Therefore, they have not been separately reflected in the financialtable below.  The totals of the reportablesegments’ revenues, net profits, and assets agree with the Company’sconsolidated amounts contained in the audited financial statements.  Revenues from customers outside of the UnitedStates are not material.

 

Thetop customer in the Company’s Component Products segment comprises 23% of thatsegment’s total sales and 13% of the Company’s total sales for the year ended December 31,2008.  The top customer in the Company’sPackaging segment comprises 11% of that segment’s total sales and 5% of theCompany’s total sales for the year ended December 31, 2008.  The results for the Packaging segment includethe operations of United Development Company Limited.

 

F-29

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Financialstatement information by reportable segment is as follows:

 
| **2008**                     | ** ** | **Component  Products** | ** ** | **Packaging** | ** ** | **Total**  | ** ** |
|------------------------------|------------|-------------------------|------------|---------------|------------|------------|------------|
| Sales                        |       | $                       | 60,847,533 |          | $          | 49,184,068 |       | $ | 110,031,601 |   |
| Operating income             |       | 3,076,360               |       | 5,348,371     |       | 8,424,731  |       |
| Total assets                 |       | 22,098,941              |       | 26,623,720    |       | 48,722,661 |       |
| Depreciation /  Amortization |       | 1,820,239               |       | 1,156,311     |       | 2,976,550  |       |
| Capital  expenditures        |       | 1,053,622               |       | 1,709,628     |       | 2,763,250  |       |
| Interest expense             |       | 139,586                 |       | 194,707       |       | 334,293    |       |
| Goodwill                     |       | 4,463,246               |       | 2,017,791     |       | 6,481,037  |       |
|                              |            |                         |            |               |            |            |            |  |  |  |

 
| **2007**                     | ** ** | **Component  Products** | ** ** | **Packaging** | ** ** | **Total**  | ** ** |
|------------------------------|------------|-------------------------|------------|---------------|------------|------------|------------|
| Sales                        |       | $                       | 53,782,483 |          | $          | 39,812,657 |       | $ | 93,595,140 |   |
| Operating income             |       | 4,767,544               |       | 2,479,810     |       | 7,247,354  |       |
| Total assets                 |       | 18,665,208              |       | 26,887,566    |       | 45,552,774 |       |
| Depreciation /  Amortization |       | 1,875,488               |       | 939,533       |       | 2,815,021  |       |
| Capital  expenditures        |       | 309,600                 |       | 1,790,984     |       | 2,100,584  |       |
| Interest expense             |       | 174,171                 |       | 305,000       |       | 479,171    |       |
| Goodwill                     |       | 4,463,246               |       | 2,017,791     |       | 6,481,037  |       |
|                              |            |                         |            |               |            |            |            |  |  |  |

 
| **2006**                     | ** ** | **Component  Products** | ** ** | **Packaging** | ** ** | **Total**  | ** ** |
|------------------------------|------------|-------------------------|------------|---------------|------------|------------|------------|
| Sales                        |       | $                       | 55,757,985 |          | $          | 37,991,254 |       | $ | 93,749,239 |   |
| Operating income             |       | 2,833,743               |       | 2,220,439     |       | 5,054,182  |       |
| Total assets                 |       | 21,131,060              |       | 17,905,952    |       | 39,037,012 |       |
| Depreciation /  Amortization |       | 1,933,949               |       | 1,125,753     |       | 3,059,702  |       |
| Capital  expenditures        |       | 911,032                 |       | 604,501       |       | 1,515,533  |       |
| Interest expense             |       | 493,534                 |       | 470,448       |       | 963,982    |       |
| Goodwill                     |       | 4,463,246               |       | 2,017,791     |       | 6,481,037  |       |
|                              |            |                         |            |               |            |            |            |  |  |  |

 

F-30

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### **(21)**              Quarterly FinancialInformation (unaudited)

 
| ** **                         | ** ** | **Q1**    | ** ** | **Q2**    | ** ** | **Q3**     | ** ** | **Q4**    | ** ** |
|------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|-----------|------------|
| Year Ended  December 31, 2008 |       |      |       |      |       |       |       |      |       |
| Net sales                          |       | $         | 28,008,036 |      | $          | 28,456,090 |       | $         | 27,501,379 |   | $ | 26,066,096 |   |
| Gross profit                       |       | 6,888,126 |       | 7,627,616 |       | 7,410,354  |       | 6,636,966 |       |
| Net income                         |       | 1,148,141 |       | 1,574,222 |       | 1,247,285  |       | 1,146,352 |       |
| Basic net income  per share        |       | 0.21      |       | 0.29      |       | 0.22       |       | 0.20      |       |
| Diluted net  income per share      |       | 0.19      |       | 0.25      |       | 0.20       |       | 0.19      |       |
|                               |       |      |       |      |       |       |       |      |       |
| Year Ended  December 31, 2007 |       |      |       |      |       |       |       |      |       |
| Net sales                          |       | $         | 22,012,636 |      | $          | 23,180,140 |       | $         | 22,937,289 |   | $ | 25,465,075 |   |
| Gross profit                       |       | 4,599,482 |       | 5,784,955 |       | 5,302,277  |       | 7,123,440 |       |
| Net income                         |       | 521,420   |       | 976,967   |       | 883,279    |       | 1,777,435 |       |
| Basic net income  per share        |       | 0.10      |       | 0.18      |       | 0.17       |       | 0.33      |       |
| Diluted net  income per share      |       | 0.09      |       | 0.17      |       | 0.15       |       | 0.30      |       |

 

### **(22)**              Subsequent Event

### ** **

On March 12, 2009,the Company purchased certain assets (inventory and equipment) of theHillsdale, Michigan, operations of Foamade Industries, Inc.  The Company anticipates that the integrationof these assets will be completed within six months, including potentiallymoving them to the Company’s facility in Grand Rapids, Michigan.  We have not completed our analysis of theacquisition date fair value of total consideration transferred compared to theacquisition date fair value of the assets and liabilities acquired in thistransaction.

 

F-31

----

 

****Schedule II****

 

**UFPTECHNOLOGIES, INC.**

 

**Consolidated Financial Statement Schedule**

 

Valuation and QualifyingAccounts

 

Yearsended December 31, 2008, 2007, and 2006

 

Accounts receivable, allowance for doubtfulaccounts:

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at  beginning of year               |       | $        | 307,131    |     | $          | 340,977  |       | $ | 565,171 |   |
| Provision  (Recoveries) credited to expense |       | 64,320   |       | 58,025   |       | (36,292  | )          |
| (Write-offs) and  recoveries                |       | 15,586   |       | (91,871  | )          | (187,902 | )          |
| Balance at end  of year                     |       | $        | 387,037    |     | $          | 307,131  |       | $ | 340,977 |   |

 

Inventory allowance for obsolescence:

 
| ** **                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance at  beginning of year |       | $        | 295,405    |     | $          | 240,820  |       | $ | 262,154 |   |
| Provision                     |       | 344,842  |       | 243,141  |       | 300,673  |       |
| Write-offs                    |       | —   |       | (188,556 | )          | (322,007 | )          |
| Balance at end  of year       |       | $        | 640,247    |     | $          | 295,405  |       | $ | 240,820 |   |

 

F-32

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