** **

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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, 2009**                    | ** ** |
|       |                                                                    |       |
|       | **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**

 

**UFPTechnologies, Inc.**

 (Exact name of registrant asspecified in its charter)

 

| **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, including area 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**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes  o   No  x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act.  Yes  o    No  x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x    No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate website, if any, every interactive data file required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes  o    No  o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment 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. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer  o                                             |   | Accelerated filer o          |
|------------------------------------------------------------------------|--------|------------------------------|
|                                                                   |   |                         |
| Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting  company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).  Yes  o    No  x

 

Asof June 30, 2009, the aggregate market value of the registrant’s commonstock held by non-affiliates of the registrant was $16,673,553, based on theclosing price of $4.17 on that date as reported on the Nasdaq Capital Market.

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date.

 

As of March 10,2010, there were 6,085,821 shares of common stock, $0.01 par value per share,of the Registrant outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

| **Document**                                                                                    | ** ** | **Parts of  this Form 10-K Into Which Incorporated** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|
| Portions of the  registrant’s Proxy Statement for the 2009 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, and (iv) the ability of the Company toexecute and integrate favorable acquisitions. In addition to the foregoing, the Company’s actual future results coulddiffer materially from those projected in the forward-looking statements as aresult of risk factors set forth elsewhere in this report and changes ingeneral economic conditions, interest rates and the assumptions used in makingsuch forward-looking statements.  TheCompany’s forward-looking statements set forth in this report representestimates and assumptions only as of the date that they are made. The Companyundertakes no obligation to publicly update or revise any forward-lookingstatement, 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 furnishedpursuant to Section 13(a) of the Securities Exchange Act of 1934 assoon as practicable after we electronically file such material with, or furnishit to the 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 and fabricated foams, vacuum-formedplastics, and molded fiber. The Company also designs and manufacturesengineered component products using laminating, molding, and fabricatingtechnologies. The Company serves a myriad of manufacturing sectors, butspecifically targets opportunities in the medical and scientific, automotive,aerospace and defense, computer and electronics, industrial, and consumer markets.

 

The Company’s high-performance packaging solutions aremade primarily from polyethylene and polyurethane foams, and a wide range ofsheet plastics. These solutions are custom designed and fabricated or molded toprovide protection for fragile and valuable items, and are sold primarily tooriginal equipment and component manufacturers. Molded fiber products are madeprimarily from 100% recycled paper principally derived from waste newspaper.These products are custom designed, engineered and molded into shapes forpackaging high volume consumer goods, including computer components, lightelectronics, candles, and health and beauty products.

 

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In addition to packaging solutions, the Companyfabricates and molds component products made from cross-linked polyethylenefoams, reticulated polyurethane foams, and other specialty materials. TheCompany also laminates fabrics and other materials to cross-linked polyethylenefoams, polyurethane foams and other substrates. The Company’s component products include automotive interior trim,athletic padding, industrial safety belts, medical device components, airfiltration, high-temperature insulation, abrasive nail files and other beautyaids, anti-fatigue mats, and shock absorbing inserts used in athletic andleisure 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 Stephenson &Lawyer, Inc. (“S&L”), as well as Patterson Properties Corporation,S&L’s wholly-owned subsidiary, and United Development Company Limited (“UDT”),of which the Company owns 26.32%.

 

Wine Packs®, T-Tubes®, and Pro-Sticks® are our U.S. registered trademarks.  Each trademark, trade name, or service markof any other company appearing in this report belongs to its respective holder.

 

**Market Overview**

 

Packaging

 

The interior cushion packaging market is characterizedby three primary sectors: (1) custom fabricated or molded products for lowvolume, high fragility products; (2) molded or die-cut products for highvolume, industrial and consumer goods; and (3) loose fill and commoditypackaging materials for products that do not require custom-designed packaging.Packaging solutions are used to contain, display, and/or protect their contentsduring shipment, handling, storage, marketing, and use. The Company serves boththe low volume, high fragility market and the high volume industrial andconsumer market with a range of materials and manufacturing capabilities, butdoes not materially serve the commodity packaging market.

 

The low volume, high fragility market is generallycharacterized by annual production volumes of less than 50,000 pieces. Typicalgoods in this market include precision instruments, medical devices, sensitiveelectronic components, and other high value industrial products that are verysensitive to shock, vibration, and other damage that may occur during shipmentand distribution. The principal materials used to package these goods includepolyethylene and polyurethane foams, foam-in-place polyurethane, and moldedexpanded polystyrene. Polyurethane and polyethylene foams have high shockabsorbency, high resiliency, and vibration damping characteristics.

 

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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Component Products

 

Component Products applications of foam and othertypes of plastics are numerous and diverse. Examples include automotive interiorcomponents, medical devices, toys, gaskets, health and beauty products, andcarrying cases. Cross-linked polyethylene foams have many of the sameproperties as traditional polyethylene foams, including light weight,durability, resiliency, and flexibility. Cross-linked foams have manyadvantages over traditional foams, including the ability to be thermoformed(molded), availability in vibrant colors, a fine cell structure providingimproved esthetics and lower abrasiveness, and enhanced resistance to chemicalsand ultraviolet 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 other materialsto increase product applications and market applications. For example,cross-linked foams can be laminated to fabrics to produce light weight,flexible and durable insoles for athletic and walking shoes, weight lifting andindustrial safety belts, gun holsters, backpacks, and other products for theleisure, athletic and retail markets. The Company believes that, as a result oftheir many advantages, cross-linked foam and cross-linked foam laminatedproducts are being used in a wide range of markets as substitutes for traditionalrubber, leather, and other product material alternatives.

 

Reticulated polyurethane foam is a versatile materialtypically used to make component products that involve filtration, liquidabsorption, noise control, wiping, and padding. These foams feature hightensile, elongation, and tear characteristics; they are used extensively in themedical industry as they are easy to clean, impervious to microbial organisms,and can be made with fungicidal and bactericidal additives for added safety.

 

**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 with allregulations regardless of a product’s destination, manufacturers seek packagingmaterials that meet both environmentally related demands and performancespecifications. Some packaging manufacturers have responded by reducing productvolume and ultimate waste product disposal through reengineering traditionalpackaging solutions; adopting new manufacturing processes; participating inrecovery and reuse systems for resilient materials that are inherentlyreusable; creating programs to recycle packaging following its useful life; anddeveloping materials that use a high percentage of recycled content in theirmanufacture.  Wherever feasible, theCompany employs one or more of these techniques to create environmentallyresponsible packaging solutions.

 

**Products**

 

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

 

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Packaging Solutions

 

The Company designs, manufactures, and markets a broadrange of packaging solutions primarily using polyethylene, polyurethane, andcross-linked polyethylene foams, and rigid plastics. These solutions 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 solutions includeend-cap packs for computers, corner blocks for telecommunications consoles,anti-static foam packs for printed circuit boards, die-cut or routed insertsfor cases, molded foam enclosures for orthopedic products, and plastic traysfor medical devices and components. Markets for these products are typicallycharacterized by lower to moderate volumes where performance, such as shockabsorbency 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 solutions 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, breadth of material offerings, and manufacturing capabilities haveenabled it to provide unique solutions to achieve these goals.

 

The markets for the Company’s molded fiber packagingand vacuum-formed trays are characterized by high volume production runs andrequire rapid manufacturing turnaround times. Raw materials used in themanufacture 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 provide customerswith packaging solutions that are more responsive to stringent environmentalpackaging regulations worldwide and meet the demands of environmentally-awareconsumers while simultaneously meeting customer cost and performanceobjectives.

 

Component Products

 

The Company specializes in engineered products thatuse the Company’s close tolerance manufacturing capabilities, its expertise invarious foam materials and lamination techniques, and the Company’s ability tomanufacture in clean room environments. The Company’s component products aresold primarily to customers in the automotive, sporting goods, medical, beauty,leisure, and footwear industries. These products include automotive interiortrim, athletic and industrial safety belts, components for medical equipmentand devices, cosmetic applicators, air conditioner filters, abrasive nail filesand other beauty aids, anti-fatigue mats, and shock absorbing inserts used in athleticand leisure footwear.

 

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.

 

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The Company benefits from its ability to custom designits own proprietary manufacturing equipment in conjunction with its machinerysuppliers. For example, the Company has custom-designed its own laminationmachines, allowing the Company to achieve adhesive bonds between cross-linkedfoam and fabric and other materials that do not easily combine. These specialtylaminates typically command higher prices than traditional foam products.

 

The Company has developed a variety of standardproducts that are branded and, in some cases, trademarked and patented.  These products include Wine Packs (wineshipping solutions made from molded fiber); T-Tubes (tube and pipe insulationfor clean room environments); BioShell (pharmaceutical bag protection system);and Pro-Sticks (sanitary solution for nail care services).

 

**Marketing and Sales**

 

The Company goes to market through three major brands:United Foam, Simco Automotive, and Molded Fiber.  Each brand represents specific materials,capabilities, and services the Company offers. The Company markets its brands through websites, online advertising anddirectories, press releases, and trade shows and expositions.

 

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.  The Company markets a line of products to thehealth and beauty industry, primarily through distributors.  The Company believes that its sales aresomewhat seasonal, with increased sales in the second and fourth quarters.

 

The top customer in theCompany’s Component Products segment, Recticel Interiors North America,comprised 13.0% of that segment’s total sales and 8.0% of the Company’s totalsales for the year ended December 31, 2009.  The top customer in the Packaging segment,Stephen Gould Corporation, comprised 10.6% of that segment’s total sales and4.1% of the Company’s total sales for the year ended December 31,2009.  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 assembling. 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.

 

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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 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.

 

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### ** **

### **Patents and OtherProprietary 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 fourteen 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 protection for the Company’s products and technology, or will notbe challenged or circumvented by others. The expiration dates for the Company’s US patents range from 2010through 2023.

 

### **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 industryin which the Company operates. There can be no assurance that any such actionwill not adversely impact the Company’s products and business.

 

### **Backlog**

### ** **

The Company’s backlog, as of February 15,2010, and February 16, 2009, totaled approximately $10.1 million and $8.5million, respectively, for the Packaging segment, and $15.5 million and$14.5 million, respectively, for the Component Products segment. Thebacklog consists of purchase orders for which a delivery schedule within thenext twelve months has been specified by customers. Orders included in thebacklog may be canceled or rescheduled by customers without significantpenalty.  The backlog as of anyparticular date should not be relied upon as indicative of the Company’srevenues for any period.

 

### **Employees**

### ** **

As of January 31, 2010, the Company had atotal of 603 full-time employees (as compared to 586 full-time employeesas of January 31, 2009), with 359 full-time employees in the ComponentProducts segment (30 in engineering, 268 in manufacturing operations, 28 inmarketing, sales and support services, and 33 in general and administration)and 244 full-time employees in the Packaging segment (32 in engineering, 176 inmanufacturing, 17 in marketing, sales and support services, and 19 in generaland administration).  The Company is nota party to any collective bargaining agreement. The Company considers itsemployee relations to be good.

 

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## 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.

 

**Wedepend on a small number of customers for a large percentage of ourrevenues. ****The loss of any single customer, a reduction in sales to any suchcustomer, or the decline in the financial condition of any such customer couldhave a material adverse effect on our business, financial condition, andresults of operations.**

 

Alimited number of customers typically represent a significant percentage of ourrevenues in any given year.  Our top tencustomers represent approximately 32.1% and 40.0% of our total revenues in 2009and 2008, respectively.  A singleautomotive program accounted for approximately 13.0% and 31.0%, respectively,of our Component Products segment sales and approximately 8.0% and 18.0% of ourtotal sales in 2009 and 2008, respectively. The program is scheduled to phase out beginning in 2011.  It is uncertain at this time whether thephase-out will occur according to this schedule.  It is also uncertain whether the next generationof automobiles in this program will require the same design of parts and, ifso, whether we will be selected as the supplier.  We expect sales from this program to declineover the next two 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 financial results.  Likewise, a material adverse change in the financialcondition of any of these customers could have a material adverse effect on ourability to collect accounts receivable from any such customer.

 

**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, during 2009 we acquired selected assets of Foamade Industries, Inc.,E.N. Murray Co., and Advanced Materials, Inc., and during 2008 we acquiredStephenson & Lawyer, Inc., as discussed in Note 19 of the “*Notes to Consolidated Financial Statements*.”  We may not be able to successfully identifysuitable acquisition or joint venture opportunities or complete any particularacquisition, combination, joint venture or other transaction on acceptableterms. Our identification of suitable acquisition candidates and joint ventureopportunities involves risks inherent in assessing the values, strengths,weaknesses, risks and profitability of these opportunities including theireffects on our business, diversion of our management’s attention and risksassociated with unanticipated problems or unforeseen liabilities. If we aresuccessful in pursuing future acquisitions or joint ventures, we may berequired to expend significant funds, incur additional debt, or issueadditional securities, which may materially and adversely affect our results ofoperations and be dilutive to our stockholders. If we spend significant fundsor incur additional debt, our ability to obtain financing 

 

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forworking capital or other purposes could decline and we may be more vulnerableto economic downturns and competitive pressures. In addition, we cannotguarantee that we will be able to finance additional acquisitions or that wewill realize any anticipated benefits from acquisitions or joint ventures thatwe complete. Should we successfully acquire another business, the process ofintegrating acquired operations into our existing operations may result inunforeseen operating difficulties and may require significant financialresources that would otherwise be available for the ongoing development orexpansion of our existing business. Our failure to identify suitableacquisition or joint venture opportunities may restrict our ability to grow ourbusiness.

 

**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 competitive basis.

 

Whilewe believe that we may, in certain circumstances, secure alternative sources ofthese materials, we may incur substantial delays and significant expense in doingso, the quality and reliability of alternative sources may not be the same andour operating results may be materially adversely affected. Alternativesuppliers might charge significantly higher prices for materials than wecurrently pay. Under such circumstances, the disruption to our business couldhave a material adverse impact on our customer relationships, business,financial condition, and results of operations.

 

**Therecent worldwide financial unrest and associated economic uncertainty maycontinue to harm our business and prospects.**

 

Therecent worldwide financial unrest and associated economic uncertainty has andmay continue to adversely affect sales of our products.  The resultingtightening of credit markets may make it difficult for our customers andpotential customers to obtain financing on reasonable terms, if at all. Additionally, even if our customers (particularly those in the automotiveindustry) are able to obtain financing, there is no assurance that they willpay their obligations within agreed-upon terms, if at all.  In addition, aslow-down or contraction of the United States’ economy may reduce needs for ourproducts and, therefore, adversely affect sales of our products.  Thesefactors have and could continue to result in increased pressure on the pricingof our products.

 

**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 

 

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whichmany are petroleum-based.  In addition,increased energy costs negatively impact our freight costs due to higher fuelprices.  Future limitations on theavailability or consumption of petroleum products and/or an increase in energycosts, particularly electricity for plant operations, could have a material adverseeffect 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 oftenfollows.  We have lost customers in thepast and may lose customers again in the future as a result of customers movingtheir manufacturing facilities offshore, then hiring our competitors that operatepackaging-production facilities perceived to be more territoriallyadvantageous.  As a result, our sales maysuffer, which could have a material adverse effect upon ourbusiness 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.

 

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

 

Basedon information made available to us, we believe that our executive officers,directors and their affiliates collectively owned approximately 19% of ouroutstanding shares of common stock as of March 10, 2010.  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.

 

**As a****public company, we need to complywith the reporting obligations of the Securities Exchange Act of 1934 and Section 404of the Sarbanes-Oxley Act of 2002.  If wefail to 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 

 

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could result in significant delays and cost tous and require us to divert substantial resources, including management time,from other activities.  If we fail tomaintain the adequacy of our internal controls, we may not be able to ensurethat we can conclude on an ongoing basis that we have effective internalcontrol over financial reporting in accordance with the Sarbanes-OxleyAct.  Moreover, effective internalcontrols are necessary for us to produce reliable financial reports and areimportant to help prevent fraud.

 

**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 Delaware law could delay or make more difficult a merger, tender offer orproxy contest involving 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 bringmatters before 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 

 

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“interestedstockholder” is a person who, either alone or together with affiliates andassociates, owns (or within the past three years did own) 15% or more of thecorporation’s voting stock.

 

## 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(1) |       | 57,600                 |       | (ownedby the  Company)           |       | Headquarters,  fabrication, molding, test lab, clean room, and engineering for Component  Products segment |
| Haverhill,  Massachusetts     |       | 48,772                 |       | 02/28/2013                       |       | Flame  lamination for the Component Products segment                                                       |
| Atlanta,  Georgia             |       | 47,000                 |       | 04/30/2011                       |       | Fabrication  and engineering for the Component Products segment                                            |
| Ventura,  California          |       | 48,300                 |       | month-to-month                   |       | Fabrication  and engineering for the Component Products segment                                            |
| Grand  Rapids, Michigan(1)    |       | 255,260                |       | (ownedby the  Company)           |       | Fabrication  and engineering for the Component Products segment                                            |
| Rancho  Dominguez, California |       | 56,000                 |       | 11/14/2010                       |       | Fabrication  and engineering for the Component Products segment                                            |
| Denver,  Colorado             |       | 18,270                 |       | 07/07/2011                       |       | Fabrication  and engineering for the Component Products segment                                            |
| Denver,  Colorado             |       | 28,383                 |       | 07/07/2011                       |       | Fabrication  and engineering for the Component Products segment                                            |
| Raritan,  New Jersey          |       | 67,125                 |       | 02/28/2013                       |       | Fabrication,  molding, test lab, clean-room, and engineering for the Packaging segment                     |
| Kissimmee,  Florida(2)        |       | 49,400                 |       | 12/31/2011                       |       | Fabrication,  molding, test lab, and engineering for the Packaging segment                                 |
| El  Paso, Texas               |       | 40,000                 |       | 06/30/2010                       |       | Warehousing  and fabrication for the Packaging segment                                                     |
| Decatur,  Alabama(2)          |       | 47,250                 |       | 12/31/2011                       |       | Fabrication  and engineering for the Packaging segment                                                     |
| Decatur,  Alabama             |       | 14,000                 |       | month-to-month                   |       | Warehousing  and fabrication for the Packaging segment                                                     |
| Glendale  Heights, Illinois   |       | 78,913                 |       | 07/31/2014                       |       | Fabricating  and engineering for the Packaging segment                                                     |
| Clinton,  Iowa                |       | 60,000                 |       | 12/31/2014                       |       | Molded  fiber operations for the Packaging segment                                                         |
| Clinton,  Iowa                |       | 62,000                 |       | 02/28/2015                       |       | Molded  fiber operations for the Packaging segment                                                         |

----

(1)    Subject to mortgage (see Note 9 to the ConsolidatedFinancial Statements).

 

(2)    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 (seeNote 8 to the Consolidated Financial Statements).

 

13

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##  

## ITEM 3.                  LEGALPROCEEDINGS

##  

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

 

# **PART II**

# ** **

## ITEM5.                                                     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’s commonstock 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, 2008, to December 31, 2009:

 
| **Fiscal  Year Ended December 31, 2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                                 |       | $        | 8.20       |    | $          | 5.20 |   |
| Second Quarter                                |       | 14.63    |       | 7.36    |       |
| Third Quarter                                 |       | 12.18    |       | 6.71    |       |
| Fourth Quarter                                |       | 7.09     |       | 3.92    |       |
|                                          |       |     |       |    |       |
| **Fiscal Year Ended  December 31, 2009** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter                                 |       | $        | 6.10       |    | $          | 3.47 |   |
| Second Quarter                                |       | 5.20     |       | 4.03    |       |
| Third Quarter                                 |       | 6.46     |       | 4.09    |       |
| Fourth Quarter                                |       | 7.10     |       | 5.91    |       |

 

### **Number of Stockholders**

### ** **

Asof February 16, 2010, there were 84 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 or 2009.  The Company presently intends to retain allof its 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.

 

### **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 

 

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advisors.  The 1993 Employee Stock Option Plan providesfor the issuance of up to 1,550,000 shares of the Company’s common stock.  The 2009 Non-Employee Director StockIncentive Plan provides for the issuance of up to 975,000 shares of the Company’scommon stock to non-employee directors. Additional details of these plans are discussed in Note 13 to theconsolidated financial statements.

 

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, 2009, 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    |       | 605,000                                                           |       | $                                                                    | 2.33       |                                                                                             | 312,293    |   |
| 1998 Director Plan    |       | 391,609                                                           |       | 4.12                                                                 |       | 282,089                                                                                          |       |
| Total Option Plans    |       | 996,609                                                           |       | $                                                                    | 3.03       |                                                                                             | 594,382    |   |
|                  |       |                                                              |       |                                                                 |       |                                                                                             |       |
| 2003 Incentive Plan   |       | 276,124                                                           |       | —                                                               |       | 297,918                                                                                          |       |
| Total All Stock Plans |       | 1,272,733                                                         |       | —                                                               |       | 892,300                                                                                          |       |

----

(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, 2009, is derived from the auditedconsolidated financial statements of the Company.  The data should be read in conjunction withthe consolidated financial statements and the related notes included in thisreport, and in conjunction with Item 7, “Management’s Discussion and Analysisof Financial Condition and Results of Operations.”

 

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Selected ConsolidatedFinancial Data:

 
| ** **                                                    | ** ** | **Years Ended December 31**           | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **(in  thousands, except per share data)** | ** ** |
| **Consolidated  statement of operations data(****1)**         | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net  sales                                                    |       | $                                          | 99,231     |   | 110,032 |   | 93,595 |   | 93,749 |   | 83,962 |   |
| Gross  profit                                                 |       | 26,719                                     |       | 28,563 |   | 22,810 |   | 19,237 |   | 14,601 |   |
| Operating  income                                             |       | 8,180                                      |       | 8,425 | (2) | 7,247 |   | 5,054 |   | 2,171 |   |
| Net  income attributable to UFP  Technologies, Inc. |       | 5,929                                      |       | 5,116 |   | 4,159 |   | 2,515 |   | 659 |   |
| Diluted  earnings per share                                   |       | 0.94                                       |       | 0.82 |   | 0.71 |   | 0.45 |   | 0.14 |   |
| Weighted  average number of diluted shares outstanding        |       | 6,294                                      |       | 6,263 |   | 5,861 |   | 5,571 |   | 5,261 |   |
|                                                               |            |                                            |            |  |  |  |  |  |  |  |  |  |

 
| ** **                                                               | ** ** | **As of December 31** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **(in  thousands)**        | ** ** |
| **Consolidated  balance sheet data**                                     | ** ** | **2009**                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Working  capital                                                         |       | $                          | 27,702     |   | 18,688 |   | 14,952 |   | 8,236 |   | 3,321 |   |
| Total  assets                                                            |       | 59,452                     |       | 48,723 |   | 45,553 |   | 39,037 |   | 44,000 |   |
| Short-term  debt and capital lease obligations                           |       | 623                        |       | 1,419 |   | 1,419 |   | 1,767 |   | 9,716 |   |
| Long-term  debt and capital lease obligations, excluding current portion |       | 7,502                      |       | 4,852 |   | 6,271 |   | 6,921 |   | 7,650 |   |
| Total  liabilities                                                       |       | 20,446                     |       | 16,832 |   | 20,726 |   | 19,796 |   | 28,605 |   |
| Stockholders’  equity                                               |       | 39,005                     |       | 31,890 |   | 24,827 |   | 19,241 |   | 15,395 |   |
|                                                                          |            |                            |            |  |  |  |  |  |  |  |  |  |

----

(1)          See Note 21 to the consolidated financialstatements for segment information.

 

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

 
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS |
|---------|---------------------------------------------------------------------------------------------|

##  

This report contains certain statements that are“forward-looking statements” as that term is defined under the 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 impliedby such forward-looking statements.

 

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 

 

16

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integratefavorable acquisitions.  In addition tothe foregoing, the Company’s actual future results could differ materially fromthose projected in the forward-looking statements as a result of the riskfactors set forth elsewhere in this report and changes in general economicconditions, interest rates and the assumptions used in making suchforward-looking statements.  The Companyundertakes no obligation to publicly update or revise any forward-lookingstatement, whether as a result of new information, future events, or otherwise.

 

### **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:

 
| ** **                                              | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net  sales                                              |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Cost  of sales                                          |       | 73.1     | %          | 74.0     | %          | 75.6     | %          |
| Gross  profit                                           |       | 26.9     | %          | 26.0     | %          | 24.4     | %          |
| Selling,  general, and administrative expenses          |       | 18.7     | %          | 17.1     | %          | 16.7     | %          |
| Restructuring  charge                                   |       | 0.0      | %          | 1.2      | %          | 0.0      | %          |
| Operating  income                                       |       | 8.2      | %          | 7.7      | %          | 7.7      | %          |
| Total  other expenses (income), net                     |       | -0.7     | %          | 0.3      | %          | 0.5      | %          |
| Income  before taxes                                    |       | 8.9      | %          | 7.4      | %          | 7.2      | %          |
| Income  tax expense                                     |       | 2.9      | %          | 2.8      | %          | 2.8      | %          |
| Net  income attributable to UFP Technologies, Inc. |       | 6.0      | %          | 4.6      | %          | 4.4      | %          |

 

### **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.

 

On March 9, 2009,the Company acquired selected assets of the Hillsdale, Michigan, operations ofFoamade Industries, Inc. (“Foamade”), a business specializing in thefabrication of technical urethane foams for a myriad of industries.  The Company transitioned the acquired assetsto its Grand Rapids, Michigan, plant.

 

On July 7, 2009, theCompany acquired substantially all of the assets of E.N. Murray Co. (“ENM”), aDenver, Colorado-based foam fabricator. ENM specialized in the fabrication of technical urethane foams,primarily for the medical industry.  Thisacquisition brings to the Company further access and expertise in fabricatingtechnical urethane foams and a seasoned management team.

 

On August 24, 2009,the Company acquired selected assets of Advanced Materials, Inc. (“AMI”),a wholly-owned subsidiary of Advanced Materials Group, Inc.  Located in Rancho Dominguez, California, AMIspecialized in the fabrication of technical urethane foams, primarily for themedical industry.

 

On October 29, 2009,the Company’s largest customer, Recticel Interiors North America, filed forbankruptcy protection pursuant to Chapter 11 of the bankruptcy code.  Sales to Recticel for the fiscal 

 

17

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years ended December 31,2009, 2008, and 2007 were $8.0 million, $13.8 million, and $16.5 million,respectively.  On October 29, 2009,the Company was owed $897,445 from Recticel, all of which was withincontractual payment terms.  The Company hadnot recorded a specific reserve against this receivable in its December 31,2009, financial statements, as on December 31, 2009, the Company believedthat full collection was probable.  Theentire $897,445 was paid on March 8, 2010. The Company also expects that the bankruptcy filing will have no impacton future orders from Recticel, and that program volumes will fluctuate basedupon consumer demand for the program vehicles.

 

The Company experiencedsignificantly lower sales in the first half of fiscal 2009, largely due to theweak economy and materially reduced demand for cars in North America.  However, sales improved in the third andfourth quarters as many of the Company’s customers increased forecasts (bothbusiness segments).  Although sales for thefiscal year were down, the Company reported record earnings largely due togains recorded from acquisitions, and the impact on gross margins and selling,general, and administrative expenses of cost-control efforts.

 

The Company’s currentstrategy includes organic growth and growth through strategic acquisitions.

 

**2009Compared to 2008**

 

Netsales decreased 9.8% to $99.2 million in the year ended December 31, 2009,from $110.0 million in the same period of 2008. Without sales from its newly acquired Foamade, E.N. Murray Co., and AMIoperations (all within the Component Products segment), sales would havedeclined 19.5% for the year ended December 31, 2009.  Sales in the Component Products segment(including those from the newly acquired operations) increased slightly to$61.0 million in 2009, from $60.8 million in 2008.  Without sales from the newly acquiredoperations, Component Product sales would have declined 17.3% to $50.4 millionfor the year ended December 31, 2009. This decrease in sales is primarily due to a decrease in sales to theautomotive industry of approximately $9.6 million.  Sales in the Packaging segment decreased22.2% to $38.2 million for the year ended December 31, 2009, from$49.2 million in the same period of 2008. The decrease in sales is largely due to a decrease in sales of $3.9million to a key electronics customer and overall reduced demand for packagingbecause of the impact of the poor economy on demand for our customers’products, partially offset by an increase in demand for environmentallyfriendly molded fiber packaging of approximately $700,000.

 

Grossprofit as a percentage of sales (“Gross Margin”) increased to 26.9% in 2009from 26.0% in 2008.  The improvement ingross margin is primarily attributable to Companywide manufacturing efficiencyand cost-cutting initiatives, as well as a favorable shift in product mix(lower auto sales); material cost as a percentage of sales is down 1.2%,partially offset by higher overhead as a percentage of sales due to the fixed-costcomponents of overhead measured against lower sales.

 

Selling,General, and Administrative Expenses (“SG&A”) decreased 1.5% to $18.5million for the year ended December 31, 2009, from $18.8 million in2008.  As a percentage of sales, SG&Awas 18.7% and 17.1% in the years ended December 31, 2009, and 2008,respectively.  The decline in SG&A for the yearended December 31, 2009, is primarily due to reduced administrativevariable compensation of approximately $900,000 (both business segments) andreduced SG&A associated with the consolidation of the Company’s twoMichigan facilities of approximately $550,000 (Component Products segment),partially offset by SG&A associated with newly acquired companies ofapproximately $1.3 million (Component Products segment).  The increase in SG&A as 

 

18

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a percentage of sales isprimarily a result of the fixed-cost components of SG&A being measuredagainst lower sales.

 

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 was 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.  The Company believes that cost savingsexceeded $1.4 million as a result of the consolidation for the fiscal yearended December 31, 2009.

 

The Company recordedacquisition-related gains of approximately $840,000 for the year ended December 31,2009.  The acquisitions of Foamade, ENM,and AMI all resulted in bargain purchase gains as the consideration paid wasless than the fair market value of the net assets acquired.  The Company believes the net assets wereacquired at a bargain purchase due to the overall weak economy.

 

Interestexpense decreased to approximately $233,000 for the year ended December 31,2009, from $334,000 in 2008.  Thedecrease in interest expense is primarily attributable to lower averageinterest rates.

 

TheCompany recorded income tax expense as a percentage of pre-tax income of 32.0%and 36.9% for the years ended December 31, 2009, and 2008,respectively.  The primary reason for thedecrease in income tax expense as a percentage of pre-tax income is due to thenon-taxable gains recorded on the acquisitions of Foamade, ENM, and AMI.  The Company has deferred tax assets on itsbooks associated with net operating losses generated in previous years.  The Company has considered both positive andnegative available evidence in its determination that the deferred tax assetswill be realized, and has not recorded a tax valuation allowance at December 31,2009.  The Company will continue toassess the realizability of deferred tax assets created by recording taxbenefits on operating losses and, when appropriate, will 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.

 

**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,partially offset by a decrease in sales to the automotive industry ofapproximately $5.9 million.  The Companybelieves that sales to the automotive industry will continue to weaken in2009.  Sales in the Engineered Packagingsegment increased 23.5% to $49.2 million for the year ended December 31,2008, from $39.8 million in the same period of 2007.  The increase in sales is largely due to anincrease in sales of $3.9 million to a key electronics customer, as well asincreased demand for environmentally friendly molded fiber packaging.

 

19

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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 Productssegment).

 

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 ofapproximately $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.

 

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, whenappropriate, will 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.

 

### **Liquidity and CapitalResources**

### ** **

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

 

Asof December 31, 2009, and 2008, working capital was approximately$27,702,000 and $18,688,000, respectively. The increase in working capital is primarily attributable to an increasein cash of approximately $8.3 million due to cash generated from operations andan increase in accounts receivable of approximately $1.5 million due mostly tostrong December 2009 sales partially offset by an increase in accountspayable of approximately $970,000 due to the timing of year-end cashdisbursements.  Cash provided fromoperations was approximately $10.7 million and $6.7 million in 2009 and 2008,respectively.  The primary reason for theincrease in cash generated from operations in 2009 is an increase in profits ofapproximately $821,000, a decrease in inventory, net of amounts acquired inbusiness combinations, of approximately $1.9 million during the fiscal 

 

20

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yearended December 31, 2009, compared to an increase in inventory ofapproximately $435,000 during fiscal 2008 (due to inventory managementefforts), an increase in accounts payable, net of amounts acquired in businesscombinations, of approximately $393,000 for the year ended December 31,2009, compared to a decrease in accounts payable of approximately $2.8 millionfor the year ended December 31, 2008 (difference in the timing of checkruns at the end of the respective years), partially offset by an increase inaccounts receivable, net of accounts receivable acquired in businesscombinations, of approximately $342,000 for the year ended December 31,2009, compared to a decrease in accounts receivable of approximately $777,000for the year ended December 31, 2008 (due mostly to strong December 2009sales).  Net cash used in investing activitiesin 2009 was approximately $4.3 million and was used primarily for theacquisitions of the selected assets of Foamade Industries, Inc, E.N. MurrayCo., and Advanced Materials Group of approximately $2.4 million (net of cashacquired) and the acquisition of new manufacturing equipment of approximately$1.9 million.

 

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. As of December 31, 2009, the Company had availability ofapproximately $14.4 million based upon collateral levels in place as ofthat date.  The credit facility calls forinterest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at thediscretion of the Company, the bank’s prime rate less a margin that ranges from0.25% to zero.  In both cases theapplicable margin is dependent upon Company performance.  The loans are collateralized by a firstpriority lien on all of the Company’s assets, including its real estate locatedin Georgetown, Massachusetts, and in Grand Rapids, Michigan.  Under the credit facility, the Company issubject to a minimum fixed-charge coverage financial covenant.  The Company’s $17 million revolvingcredit facility matures November 30, 2013; the term loans are all due on January 29,2016.  At December 31, 2009, theinterest rate on these facilities was 1.26%.

 

UDThas a mortgage note collateralized by the Florida facility, dated May 22,2007.  The note had an original principalbalance of $786,000 and calls for 180 monthly payments of $7,147.  The interest rate is fixed at approximately7.2%.

 

### **Commitments, ContractualObligations, and Off-Balance Sheet Arrangements**

### ** **

Thefollowing table summarizes the Company’s contractual obligations at December 31,2009:

 
| **Payments due in:** | ** ** | **Operating  Leases** | ** ** | **Grand********Rapids Mortgage** | ** ** | **Equipment  Loans** | ** ** | **Term********Loans** | ** ** | **Massa-********chusetts********Mortgage** | ** ** | **UDT********Mortgage** | ** ** | **Debt********Interest** | ** ** | **Supple-********mental********Retirement** | ** ** | **Total** | ** ** |
|----------------------|------------|-----------------------|------------|----------------------------------|------------|----------------------|------------|-----------------------|------------|--------------------------------------------|------------|-------------------------|------------|--------------------------|------------|---------------------------------------------|------------|-----------|------------|
| 2010                 |       | $                     | 1,803,371  |                             | $          | 200,000              |       | $                     | 5,755      |                                       | $          | 288,360                 |       | $                        | 92,300     |                                        | $          | 36,592    |       | $ | 217,456 |   | $ | 96,250 |   | $ | 2,740,084 |   |
| 2011                 |       | 1,338,139             |       | 200,000                          |       | 35,095               |       | 288,360               |       | 92,300                                     |       | 39,120                  |       | 209,361                  |       | 75,000                                      |       | $         | 2,277,375  |   |
| 2012                 |       | 1,180,901             |       | 200,000                          |       | —               |       | 288,360               |       | 92,300                                     |       | 42,025                  |       | 192,197                  |       | 75,000                                      |       | $         | 2,070,783  |   |
| 2013                 |       | 779,534               |       | 200,000                          |       | —               |       | 288,360               |       | 92,300                                     |       | 45,147                  |       | 174,265                  |       | 75,000                                      |       | $         | 1,654,606  |   |
| 2014 and thereafter  |       | 588,853               |       | 3,033,332                        |       | —               |       | 624,784               |       | 1,399,883                                  |       | 540,457                 |       | 624,918                  |       | 170,833                                     |       | $         | 6,983,060  |   |
|                 |       | $                     | 5,690,798  |                             | $          | 3,833,332            |       | $                     | 40,850     |                                       | $          | 1,778,224               |       | $                        | 1,769,083  |                                        | $          | 703,341   |       | $ | 1,418,197 |   | $ | 492,083 |   | $ | 15,725,908 |   |

 

21

----

 

TheCompany requires cash to pay its operating expenses, purchase capital equipment,and to service the obligations listed above. The Company’s principal sources of funds are its operations and itsrevolving credit facility.  Although theCompany generated cash from operations in the year ended December 31,2009, it cannot guarantee that its operations will generate cash in futureperiods.

 

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

 

TheCompany had no off-balance sheet arrangements in 2009.

 

### **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 assets andliabilities.  On an ongoing basis, theCompany evaluates its estimates, including those related to product returns,bad debts, inventories, intangible assets, income taxes, warranty obligations,restructuring charges, contingencies, and litigation.  The Company bases its estimates on 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 necessitated that significant judgments and estimates beused in the 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. Determination of these criteria, in some cases, requires management’sjudgments. Should changes in conditions cause management to determine thatthese criteria are not met for certain future transactions, revenue for anyreporting period could be adversely affected.

 

*IntangibleAssets*

 

Intangible assets includepatents and other intangible assets. Intangible assets with an indefinite life are not amortized.  Intangible assets with a definite life areamortized on a straight-line basis, with estimated useful lives ranging fromeight 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 

 

22

----

 

assets with a definite lifeare tested for impairment whenever events or circumstances indicate that theirvalue may be reduced.

 

*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.  Impairmenttesting for goodwill is done at a reporting unit level.  Reporting units are one level below thebusiness segment level, but can be combined when reporting units within thesame segment have similar economic characteristics.  The Company’s reporting units include its ComponentProducts segment, Packaging segment (excluding its Molded Fiber operation), andits Molded Fiber operation.  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 annualgoodwill impairment test as of December 31, 2009.  Fair values of the reporting units weredetermined using a combination of several valuation methodologies, includingincome and market approaches, which include the use of Level 1 and Level 3inputs (see Note 19 to the Consolidated Financial Statements).  The fair values of reporting units that havegoodwill balances were estimated to be more than 100% greater than theirrespective carrying values and, therefore, it was determined that no goodwillwas 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.

 

*Inventories*

 

The Company providesreserves for estimated obsolescence or unmarketable inventory equal to thedifference between the cost of the inventory and the estimated market valuebased upon 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 less favorablethan those projected by management, additional inventory write-downs may berequired 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 

 

23

----

 

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

 
| ITEM 7A. | QUANTITATIVE AND 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 equityprices.  At December 31, 2009, theCompany’s cash and cash equivalents consisted of bank accounts in U.S. dollars,and their valuation would not be affected by market risk.  The Company has four debt instruments whereinterest is based upon either the Prime rate or LIBOR and, therefore, futureoperations could be affected by interest rate changes; however, the Company believesthat the market risk of the debt is minimal.

 
| ITEM 8. | FINANCIAL STATEMENTS 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 AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE |
|---------|---------------------------------------------------------------------------------------|

##  

None.

 
| ITEM 9A(T). | CONTROLS AND PROCEDURES |
|-------------|-------------------------|

##  

(a)          The Company carried out an evaluation, under thesupervision and with the participation of its management, including the ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s “disclosure controls and procedures” (asdefined in Exchange Act Rule 13a-15(e)) as of the end of the periodcovered by this report. Based upon that evaluation, the Chief Executive Officerand Chief Financial Officer concluded that the Company’s disclosure controlsand procedures are effective.

 

(b)         The Company’s management is responsible forestablishing and maintaining an adequate system of internal control overfinancial reporting, as defined in Exchange Act Rule 13a-15(f). Managementconducted an assessment of the Company’s internal control over financialreporting as of December 31, 2009, based on the framework established bythe Committee of Sponsoring Organizations of the Treadway Commission in*Internal Control — Integrated Framework.*  Based on the assessment, management concludedthat, as of December 31, 2009, the Company’s internal control overfinancial 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 

 

24

----

 

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.

 

(c)          There was no change in the Company’s internalcontrol over financial reporting that occurred during the Company’s mostrecently completed fiscal quarter that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 
| ITEM 9B. | OTHER INFORMATION |
|----------|-------------------|

##  

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. | EXECUTIVE COMPENSATION |
|----------|------------------------|

##  

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. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  AND RELATED STOCKHOLDER 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. | CERTAIN RELATIONSHIPS 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.

 

25

----

 

 

## 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.

 

# **PART IV**

# ** **

## ITEM 15.                EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

##  

|         |                                                                                                             | **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, 2009, 2008, and 2007                          | F-3      |
|         |                                                                                                             |     |
|         | Consolidated  Balance Sheets as of December 31, 2009 and 2008                                               | F-4      |
|         |                                                                                                             |     |
|         | Consolidated  Statements of Operations for the years ended December 31, 2009, 2008, and 2007                | F-5      |
|         |                                                                                                             |     |
|         | Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008, and 2007 | F-6      |
|         |                                                                                                             |     |
|         | Consolidated  Statements of Cash Flows for the years ended December 31, 2009, 2008, and 2007                | 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**        |

 

26

----

 
|   | 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**      |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |          |
|   | 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**     |

 

27

----

 
|   | 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**        |
|   |   |   |                                                                                                                                                                         |   |             |
|   | 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                                                                                                                                     |   | 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                                                                                                                                |   | 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.                                              |   | JJ-10.51**       |
|   |   |   |                                                                                                                                                                         |   |             |
|   | 10.52  |   | 2009  Non-Employee Director Stock Incentive Plan                                                                                                                             |   | KK-10.52*,  **   |
|   |   |   |                                                                                                                                                                         |   |             |
|   | 10.53  |   | Lease  agreement dated July 29, 2009, between ProLogis and UFP  Technologies, Inc.                                                                                 |   | LL-10.53**       |
|   |   |   |                                                                                                                                                                         |   |             |
|   | 10.54  |   | Form of  2010 Stock Unit Award Agreement                                                                                                                                |   | Filed  herewith  |

 

28

----

 
|   | 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 |
|   |   |   |                                                                                                                                                                                        |   |            |
|   | 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’sRegistration Statement on Form S-1 (Registration No. 33-70912). Thenumber set forth herein is the number of the Exhibit in said RegistrationStatement.

 

B.                         Incorporated by reference to the Company’sAnnual 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 saidAnnual Report.

 

C.                         Incorporated by reference to the Company’sreport on 8-K dated February 3, 1997. The number set forth herein is the number of the Exhibit insaid  report.

 

D.                        Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,1998.  The number set forth herein is thenumber of the Exhibit in said Annual Report.

 

E.                          Incorporated by reference to the Company’sReport on Form 8-K dated January 31, 2000.  The number set forth herein is the number ofthe Exhibit in said Report.

 

F.                          Incorporated by reference to the Company’sQuarterly 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 saidQuarterly Report.

 

G.                         Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended March 31,2004.  The number set forth herein is thenumber of the exhibit in said Quarterly Report.

 

H                           Incorporated by reference to the Company’sreport on Form 8-K dated January 13, 1999.  The number set forth herein is the number ofthe Exhibit in said Report.

 

I.                             Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended June 30,1998.  The number set forth herein is thenumber of the Exhibit in said Quarterly Report.

 

J.                            Incorporated by reference to the Company’sRegistration Statement on Form S-8 (Registration No. 33-76440). Thenumber set forth herein is the number of the Exhibit in said RegistrationStatement.

 

K.                        Incorporated by reference to the Company’sAnnual 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 saidAnnual Report.

 

29

----

 

L.                          Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended June 30,1995.  The number set forth herein is thenumber of the Exhibit in said Quarterly Report.

 

M.                     Incorporated by reference to the Company’sProxy Statement relating to the Company’s Annual Meeting of Stockholders on June 5,2002.

 

N.                        Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2000.  The number set forth herein is thenumber of the Exhibit in said Annual Report.

 

O.                        Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2001.  The number set forth herein is thenumber of the Exhibit in said Annual Report.

 

P.                          Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended September 30,2002.  The number set forth herein is thenumber of the Exhibit in said Quarterly Report.

 

Q.                        Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2002.  The number set forth is the numberof the exhibit in said Annual Report.

 

R.                         Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended June 30,2003.  The number set forth herein is thenumber of the Exhibit in said Annual Report.

 

S.                          Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2003.  The number set forth is the numberof the exhibit in said Annual Report.

 

T.                         Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended June 30,2004.  The number set forth herein is thenumber of the exhibit in said Quarterly Report.

 

U.                        Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2005.  The number set forth herein is thenumber of the exhibit in said annual report.

 

V.                         Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended March 31,2006.  The number set forth herein is thenumber of the exhibit in said quarterly report.

 

W.                    Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended June 30,2006.  The number set forth herein is thenumber of the exhibit in said quarterly report.

 

X.                        Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended September 30,2006.  The number set forth herein is thenumber of the exhibit in said Quarterly Report.

 

Y.                         Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended June 30,2007.  The number set forth herein is thenumber of the exhibit in said Quarterly Report.

 

Z.                         Incorporated by reference to the Company’sCurrent Report on Form 8-K filed October 12, 2007.  The number set forth herein is the number ofthe Exhibit in said Report.

 

AA.             Incorporated by reference to the Company’sCurrent Report on Form 8-K filed January 18, 2008.  The number set forth herein is the number ofthe Exhibit in said Report.

 

30

----

 

BB.                 Incorporated by reference to Appendix Cto the Company’s Proxy Statement relating to the Company’s Annual Meeting ofStockholders on June 6, 2007.

 

CC.                 Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2007.  The number set forth herein is thenumber of the exhibit in said Annual Report.

 

DD.               Incorporated by reference to Appendix Ato the Company’s Proxy Statement relating to the Company’s Annual Meeting ofStockholders on June 4, 2008.

 

EE.                   Incorporated by reference to Appendix Bto the Company’s Proxy Statement relating to the Company’s Annual Meeting ofStockholders on June 4, 2008.

 

FF.                   Incorporated by reference to the Company’sCurrent Report on Form 8-K filed June 10, 2008.  The number set forth herein is the number ofthe exhibit in said Report.

 

GG                    Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended September 30,2008.  The number set forth herein is thenumber of the exhibit in said Quarterly Report.

 

HH.               Incorporated by reference to the Company’sCurrent Report on Form 8-K filed March 2, 2009.  The number set forth herein is the number ofthe Exhibit in said Report.

 

II.                         Incorporated by reference to the Company’sCurrent Report on Form 8-K filed March 24, 2009.  The number set forth herein is the number ofthe Exhibit in said Report.

 

JJ.                       Incorporated by reference to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2008.  The number set forth herein is thenumber of the exhibit in said Annual Report.

 

KK.               Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended June 30,2009.  The number set forth herein is thenumber of the exhibit in said Quarterly Report.

 

LL.                   Incorporated by reference to the Company’sQuarterly Report on Form 10-Q for the three months ended September 30,2009.  The number set forth herein is thenumber of the exhibit in said Quarterly Report.

----

*                 Management contract or compensatory planor arrangement.

 

**          In accordance with Rule 12b-32 underthe Securities Exchange Act of 1934, as amended, reference is made to thedocuments previously filed with the Securities and Exchange Commission, whichdocuments 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               |   |                       |

 

31

----

 

Youmay also obtain copies of this information by mail from the Public Reference Room ofthe SEC, 450 Fifth Street, NW, Room 1024, Washington, DC 20549, atprescribed rates.  Please call the SEC at1-800-SEC-0330 for further information on the public reference room.  The SEC also maintains a World Wide Web sitethat contains reports, proxy statements and other information about issuers,including the Company, that file electronically with the SEC.  The address of that site ishttp://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.

 

32

----

 

# **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  30, 2010 |   | 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 date indicated.

 
| **SIGNATURE**                   | ** ** | **TITLE**                                   | ** ** | **DATE**       |
|---------------------------------|------------|---------------------------------------------|------------|----------------|
|                            |       |                                        |       |           |
| /s/  R. Jeffrey Bailly          |       | Chairman,  Chief Executive Officer,         |       | March 30, 2010 |
| R.  Jeffrey Bailly              |       | President,  and Director                    |       |           |
|                            |       |                                        |       |           |
| /s/  Ronald J. Lataille         |       | Chief  Financial Officer, Vice President,   |       | March 30, 2010 |
| Ronald  J. Lataille             |       | Principal  Financial and Accounting Officer |       |           |
|                            |       |                                        |       |           |
| /s/  Richard L. Bailly          |       | Director                                    |       | March 30, 2010 |
| Richard  L. Bailly              |       |                                        |       |           |
|                            |       |                                        |       |           |
| /s/  Kenneth L. Gestal          |       | Director                                    |       | March 30, 2010 |
| Kenneth  L. Gestal              |       |                                        |       |           |
|                            |       |                                        |       |           |
| /s/  David B. Gould             |       | Director                                    |       | March 30, 2010 |
| David  B. Gould                 |       |                                        |       |           |
|                            |       |                                        |       |           |
| /s/  Thomas Oberdorf            |       | Director                                    |       | March 30, 2010 |
| Thomas  Oberdorf                |       |                                        |       |           |
|                            |       |                                        |       |           |
| /s/  Marc Kozin                 |       | Director                                    |       | March 30, 2010 |
| Marc  Kozin                     |       |                                        |       |           |
|                            |       |                                        |       |           |
| /s/  David K. Stevenson         |       | Director                                    |       | March 30, 2010 |
| David  K. Stevenson             |       |                                        |       |           |
|                            |       |                                        |       |           |
| /s/  Robert W. Pierce, Jr. |       | Director                                    |       | March 30, 2010 |
| Robert  W. Pierce, Jr.     |       |                                        |       |           |

 

33

----

 

**UFP TECHNOLOGIES, INC.**

 

Consolidated Financial Statements

and Financial Statement Schedule

 

As of December 31, 2009 and 2008

And for the Years Ended December 31, 2009, 2008, and 2007

 

With Report of Independent Registered Public Accounting Firm

 

F-1

----

 

UFP TECHNOLOGIES, INC.

 

##### Index to Consolidated Financial Statementsand Financial Statement Schedule

 
| ** **                                                                                                            | **Page** |
|-----------------------------------------------------------------------------------------------------------------------|----------|
| Report of Independent Registered Public Accounting  Firm, CCR LLP                                                     | F-3      |   |
| Consolidated Balance Sheets as of December 31,  2009 and 2008                                                    | F-4      |   |
| Consolidated Statements of Operations for the years  ended December 31, 2009, 2008,  and 2007                    | F-5      |   |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2009, 2008, and 2007 | F-6      |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2009, 2008,  and 2007                    | F-7      |   |
| Notes to Consolidated Financial Statements                                                                            | F-8      |   |
| 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.** and subsidiaries as of December 31,2009 and 2008, and the related consolidated statements of operations,stockholders’ equity and cash flows for each of the years in the three yearperiod ended December 31, 2009.  Ouraudits also included the financial statement schedule for each of the years inthe three year period ended December 31, 2009 as listed in the index atItem 15(a)(2).  These consolidatedfinancial statements and schedule are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements and schedulebased 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 audits to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’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 consolidatedfinancial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide 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.** and subsidiaries as of December 31,2009 and 2008, and the results of their operations and their cash flows foreach of the years in the three year period ended December 31, 2009 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 30,2010

 

F-3

----

 

UFP TECHNOLOGIES, INC.

# **CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                 | ** ** | **December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                 | ** ** | **2009**             | ** ** | **2008** | ** ** |
| **Assets**                                                                                                                                 |       |                 |       |   |   |
| Current  assets:                                                                                                                           |       |                 |       |   |   |
| Cash  and cash equivalents                                                                                                                 |       | $                    | 14,998,514 |   | $ | 6,729,370 |   |
| Receivables,  net                                                                                                                          |       | 14,218,005           |       | 12,754,875 |   |
| Inventories,  net                                                                                                                          |       | 7,647,517            |       | 8,152,746 |   |
| Prepaid  expenses                                                                                                                          |       | 476,381              |       | 516,388 |   |
| Deferred  income taxes                                                                                                                     |       | 1,410,780            |       | 1,488,575 |   |
| Total  current assets                                                                                                                      |       | 38,751,197           |       | 29,641,954 |   |
| Property,  plant, and equipment                                                                                                            |       | 43,582,578           |       | 40,666,779 |   |
| Less  accumulated depreciation and amortization                                                                                            |       | (31,364,683          | )          | (28,912,455 | ) |
| Net  property, plant and equipment                                                                                                         |       | 12,217,895           |       | 11,754,324 |   |
| Goodwill                                                                                                                                   |       | 6,481,037            |       | 6,481,037 |   |
| Intangible  assets                                                                                                                         |       | 817,737              |       | 175,841 |   |
| Other  assets                                                                                                                              |       | 1,183,930            |       | 669,505 |   |
| Total  assets                                                                                                                              |       | $                    | 59,451,796 |   | $ | 48,722,661 |   |
| **Liabilities and Stockholders’  Equity**                                                                                             |       |                 |       |   |   |
| Current  liabilities:                                                                                                                      |       |                 |       |   |   |
| Accounts  payable                                                                                                                          |       | $                    | 4,273,625  |   | $ | 3,304,194 |   |
| Accrued  taxes and other expenses                                                                                                          |       | 6,152,826            |       | 6,230,001 |   |
| Current  installments of long-term debt                                                                                                    |       | 623,007              |       | 716,697 |   |
| Current  installments of capital lease obligations                                                                                         |       | —               |       | 702,765 |   |
| Total  current liabilities                                                                                                                 |       | 11,049,458           |       | 10,953,657 |   |
| Long-term  debt, excluding current installments                                                                                            |       | 7,501,823            |       | 3,941,996 |   |
| Capital  lease obligations, excluding current installments                                                                                 |       | —               |       | 909,900 |   |
| Deferred  income taxes                                                                                                                     |       | 776,877              |       | 113,073 |   |
| Retirement  and other liabilities                                                                                                          |       | 1,118,197            |       | 913,644 |   |
| Total  liabilities                                                                                                                         |       | 20,446,355           |       | 16,832,270 |   |
| Commitments  and contingencies (Note 16)                                                                                                   |       |                 |       |   |   |
| 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  5,945,357 shares in 2009 and 5,666,703 shares in 2008 |       | 59,454               |       | 56,667 |   |
| Additional  paid-in capital                                                                                                                |       | 15,009,613           |       | 13,774,334 |   |
| Retained  earnings                                                                                                                         |       | 23,465,812           |       | 17,536,387 |   |
| Total  UFP Technologies, Inc. stockholders’ equity                                                                               |       | 38,534,879           |       | 31,367,388 |   |
| Non-controlling  interests                                                                                                                 |       | 470,562              |       | 523,003 |   |
| Total  stockholders’ equity                                                                                                           |       | 39,005,441           |       | 31,890,391 |   |
| Total  liabilities and stockholders’ equity                                                                                           |       | $                    | 59,451,796 |   | $ | 48,722,661 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-4

----

 

UFP TECHNOLOGIES, INC.

# **CONSOLIDATED STATEMENTS OFOPERATIONS**

 
| ** **                                              | ** ** | **Years  Ended December 31** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                              | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  sales                                              |       | $                                 | 99,231,334 |   | $ | 110,031,601 |   | $ | 93,595,140 |   |
| Cost  of sales                                          |       | 72,511,919                        |       | 81,468,539 |   | 70,784,986 |   |
| Gross  profit                                           |       | 26,719,415                        |       | 28,563,062 |   | 22,810,154 |   |
| Selling,  general, and administrative expenses          |       | 18,539,005                        |       | 18,822,965 |   | 15,562,800 |   |
| Restructuring  charge                                   |       | —                            |       | 1,315,366 |   | — |   |
| Operating  income                                       |       | 8,180,410                         |       | 8,424,731 |   | 7,247,354 |   |
| Other  income (expense):                                |       |                              |       |   |   |   |   |
| Interest  expense, net                                  |       | (232,747                          | )          | (334,293 | ) | (479,171 | ) |
| Equity  in net income of unconsolidated partnership     |       | —                            |       | 7,218 |   | 15,038 |   |
| Other,  net                                             |       | 11,206                            |       | 57,457 |   | 32,500 |   |
| Gains  on acquisitions                                  |       | 839,690                           |       | — |   | — |   |
| Total  other (expense) income                           |       | 618,149                           |       | (269,618 | ) | (431,633 | ) |
| Income  before income tax provision                     |       | 8,798,559                         |       | 8,155,113 |   | 6,815,721 |   |
| Income  tax expense                                     |       | 2,816,575                         |       | 2,994,648 |   | 2,584,250 |   |
| Net  income from consolidated operations                |       | $                                 | 5,981,984  |   | $ | 5,160,465 |   | $ | 4,231,471 |   |
| Net  income attributable to non-controlling interests   |       | (52,559                           | )          | (44,465 | ) | (72,370 | ) |
| Net  income attributable to UFP Technologies, Inc. |       | $                                 | 5,929,425  |   | $ | 5,116,000 |   | $ | 4,159,101 |   |
| Net  income per share:                                  |       |                              |       |   |   |   |   |
| Basic                                                   |       | $                                 | 1.02       |   | $ | 0.92 |   | $ | 0.78 |   |
| Diluted                                                 |       | $                                 | 0.94       |   | $ | 0.82 |   | $ | 0.71 |   |
| Weighted  average common shares:                        |       |                              |       |   |   |   |   |
| Basic                                                   |       | 5,829,580                         |       | 5,549,830 |   | 5,306,948 |   |
| Diluted                                                 |       | 6,293,964                         |       | 6,262,666 |   | 5,861,420 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-5

----

 

UFP TECHNOLOGIES, INC.

# **CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

# ** **

Years Ended December 31, 2009, 2008, and 2007

 
| ** **                                                       | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Non-Controlling** | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------------|------------|-------------------|------------|-------------------------|------------|--------------|------------|---------------------|------------|-------------------------------|------------|
| ** **                                                       | ** ** | **Shares**        | ** ** | **Amount**              | ** ** | **Capital**  | ** ** | **Earnings**        | ** ** | **Interests**                 | ** ** | **Equity** | ** ** |
| Balance at  December 31, 2006                               |       | 5,156,764         |       | $                       | 51,568     |         | $          | 10,311,682          |       | $                             | 8,261,286  |   | $ | 616,157 |   | $ | 19,240,693 |   |
| Stock issued under  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 |   |
| Excess tax benefits on  share-based compensation                 |       | —            |       | —                  |       | 215,094      |       | —              |       | —                        |       | 215,094 |   |
| Net income                                                       |       | —            |       | —                  |       | —       |       | 4,159,101           |       | 72,370                        |       | 4,231,471 |   |
| Distribution to  non-controlling interests                       |       | —            |       | —                  |       | —       |       | —              |       | (104,994                      | )          | (104,994 | ) |
| Balance at  December 31, 2007                               |       | 5,375,381         |       | $                       | 53,754     |         | $          | 11,768,799          |       | $                             | 12,420,387 |   | $ | 583,533 |   | $ | 24,826,473 |   |
| Stock issued under  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 | ) |
| Excess tax benefits on  share-based compensation                 |       | —            |       | —                  |       | 211,234      |       | —              |       | —                        |       | 211,234 |   |
| Net income                                                       |       | —            |       | —                  |       | —       |       | 5,116,000           |       | 44,465                        |       | 5,160,465 |   |
| Distribution to  non-controlling interests                       |       | —            |       | —                  |       | —       |       | —              |       | (104,995                      | )          | (104,995 | ) |
| Balance at  December 31, 2008                               |       | 5,666,703         |       | $                       | 56,667     |         | $          | 13,774,334          |       | $                             | 17,536,387 |   | $ | 523,003 |   | $ | 31,890,391 |   |
| Stock issued in lieu of  compensation                            |       | 43,279            |       | 433                     |       | 183,067      |       | —              |       | —                        |       | 183,500 |   |
| Share-based  compensation                                        |       | 196,000           |       | 1,960                   |       | 898,853      |       | —              |       | —                        |       | 900,813 |   |
| Exercise of stock  options                                       |       | 39,375            |       | 394                     |       | 129,938      |       | —              |       | —                        |       | 130,332 |   |
| Excess tax benefits on  share-based compensation                 |       | —            |       | —                  |       | 23,421       |       | —              |       | —                        |       | 23,421 |   |
| Net income                                                       |       | —            |       | —                  |       | —       |       | 5,929,425           |       | 52,559                        |       | 5,981,984 |   |
| Distribution to  non-controlling interests                       |       | —            |       | —                  |       | —       |       | —              |       | (105,000                      | )          | (105,000 | ) |
| Balance at  December 31, 2009                               |       | 5,945,357         |       | $                       | 59,454     |         | $          | 15,009,613          |       | $                             | 23,465,812 |   | $ | 470,562 |   | $ | 39,005,441 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-6

----

 

UFP TECHNOLOGIES, INC.

# **CONSOLIDATED STATEMENTS OF CASHFLOWS**

 
| ** **                                                                         | ** ** | **Years Ended December 31** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                             |       |                             |       |   |   |   |   |
| Net income                                                                         |       | $                                | 5,981,984  |   | $ | 5,160,465 |   | $ | 4,231,471 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation and  amortization                                                     |       | 2,895,062                        |       | 2,976,550 |   | 2,815,021 |   |
| Restructuring  charge—leasehold improvement write-off                         |       | —                           |       | 170,000 |   | — |   |
| Equity in net income of  unconsolidated affiliate and partnership                  |       | —                           |       | (7,218 | ) | (15,038 | ) |
| Gain on disposal of  property, plant, and equipment                                |       | (11,206                          | )          | (57,457 | ) | (32,500 | ) |
| Gain on acquisitions                                                               |       | (839,690                         | )          | — |   | — |   |
| Share-based  compensation                                                          |       | 900,813                          |       | 1,305,789 |   | 692,024 |   |
| Stock issued in lieu of  compensation                                              |       | 183,500                          |       | 343,880 |   | 256,076 |   |
| Deferred income taxes                                                              |       | 226,950                          |       | 16,469 |   | 1,209,664 |   |
| Changes in operating  assets and liabilities, net of effects from acquisition:     |       |                             |       |   |   |   |   |
| Receivables, net                                                                   |       | (341,536                         | )          | 777,392 |   | (166,829 | ) |
| Inventories                                                                        |       | 1,863,118                        |       | (434,506 | ) | 53,051 |   |
| Prepaid expenses                                                                   |       | 72,715                           |       | 350,013 |   | (54,783 | ) |
| Accounts payable                                                                   |       | 392,641                          |       | (2,776,715 | ) | 1,073,753 |   |
| Accrued taxes and other  expenses                                                  |       | (330,726                         | )          | (937,577 | ) | 760,267 |   |
| Retirement and other  liabilities                                                  |       | 204,553                          |       | (119,173 | ) | 94,560 |   |
| Other assets                                                                       |       | (509,425                         | )          | (98,161 | ) | (228,077 | ) |
| Net cash provided by  operating activities                                         |       | 10,688,753                       |       | 6,669,751 |   | 10,688,660 |   |
| Cash flows from  investing activities:                                             |       |                             |       |   |   |   |   |
| Additions to property,  plant, and equipment                                       |       | (1,856,837                       | )          | (2,763,250 | ) | (2,100,584 | ) |
| Acquisition of  Stephenson & Lawyer net of cash acquired                  |       | —                           |       | (5,181,066 | ) | — |   |
| Acquisition of Foamade  Industries, Inc.’s assets                        |       | (375,000                         | )          | — |   | — |   |
| Acquisition of E.N.  Murray Co. net of cash acquired                               |       | (1,440,534                       | )          | — |   | — |   |
| Acquisition of Advanced  Materials Group assets                                    |       | (620,000                         | )          | — |   | — |   |
| Payments received on  affiliated partnership                                       |       | —                           |       | 7,218 |   | 15,038 |   |
| Proceeds from sale of  property, plant, and equipment                              |       | 13,364                           |       | 101,020 |   | 32,500 |   |
| Net cash used in  investing activities                                             |       | (4,279,007                       | )          | (7,836,078 | ) | (2,053,046 | ) |
| Cash flows from  financing activities:                                             |       |                             |       |   |   |   |   |
| Proceeds from long-term  borrowings                                                |       | 4,000,000                        |       | — |   | 786,000 |   |
| Distribution to United  Development Company Partners (non-controlling interest)    |       | (105,000                         | )          | (104,995 | ) | (104,994 | ) |
| Excess tax benefits on  share-based compensation                                   |       | 23,421                           |       | 211,234 |   | 215,094 |   |
| Proceeds from sale of  common stock                                                |       | —                           |       | 20,563 |   | 23,895 |   |
| Proceeds from the  exercise of stock options                                       |       | 130,332                          |       | 333,026 |   | 272,214 |   |
| Principal repayment of  long-term debt                                             |       | (576,690                         | )          | (714,027 | ) | (1,095,607 | ) |
| Principal repayment of  obligations under capital leases                           |       | (1,612,665                       | )          | (704,407 | ) | (688,991 | ) |
| Cash settlements of  restricted stock units                                        |       | —                           |       | (206,044 | ) | — |   |
| Net cash provided by  (used in) financing activities                               |       | 1,859,398                        |       | (1,164,650 | ) | (592,389 | ) |
| Net change in cash                                                                 |       | 8,269,144                        |       | (2,330,977 | ) | 8,043,225 |   |
| Cash and cash  equivalents at beginning of year                                    |       | 6,729,370                        |       | 9,060,347 |   | 1,017,122 |   |
| Cash and cash  equivalents at end of year                                          |       | $                                | 14,998,514 |   | $ | 6,729,370 |   | $ | 9,060,347 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-7

----

 

 

UFP TECHNOLOGIES, INC.

 

##### **Notes to ConsolidatedFinancial Statements**

**December 31, 2009 and 2008**

 

### **(1)           Summary of Significant Accounting Policies**

### ** **

UFPTechnologies, Inc. (“the Company”) is an innovative designer and customconverter of foams, plastics, and natural fiber products principally servingthe automotive, computer and electronics, medical, aerospace and defense,consumer, and industrial markets.  TheCompany was incorporated in the State of Delaware in 1993.

 

*(a)**      **Principlesof Consolidation*

 

Theconsolidated financial statements include the accounts and results ofoperations of UFP Technologies, Inc., its wholly-owned subsidiaries,Moulded Fibre Technology, Inc., Simco Automotive Trim, Inc., SimcoTechnologies, Inc., and Stephenson & Lawyer, Inc. and itswholly-owned subsidiary, Patterson Properties Corporation.  The Company also consolidates UnitedDevelopment Company Limited, of which the Company owns 26.32% (see Note8).  All significant inter-companybalances and transactions have been eliminated in consolidation.

 

*(b)*       *Codification*

 

EffectiveJuly 1, 2009, the Financial Accounting Standards Board’s (“FASB”)Accounting Standards Codification (“ASC”) became the single official source ofauthoritative, nongovernmental generally accepted accounting principles (“GAAP”)in the United States.  The historicalGAAP hierarchy was eliminated and the ASC became the only level ofauthoritative GAAP, other than guidance issued by the Securities and ExchangeCommission.  The Company’s accountingpolicies were not affected by the conversion to ASC.  However, references to specific accountingstandards in the footnotes to the Company’s consolidated financial statementshave been changed to refer to the appropriate section of ASC.

 

*(c)**       **AccountsReceivable*

 

TheCompany periodically reviews the collectability of its accountsreceivable.  Provisions are recorded foraccounts that are potentially uncollectible. Determining adequate reserves for accounts receivable requiresmanagement’s judgment.  Conditionsimpacting the realizability of the Company’s receivables could cause actualasset write-offs to be materially different than the reserved balances as of December 31,2009.

 

*(d)**      **Inventories*

 

Inventoriesthat include material, labor, and manufacturing overhead are valued at thelower of cost or market.  Cost isdetermined using the first-in, first-out (FIFO) method.

 

TheCompany periodically reviews the realizability of its inventory for potentialobsolescence.  Determining adequateobsolescence requires management’s judgment. Conditions impacting the realizability of the Company’s inventory couldcause actual asset write-offs to be materially different than the reservebalances as of December 31, 2009.

 

F-8

----

 

*(e)**       **Property,Plant, and Equipment*

 

Property,plant, and equipment are stated at cost and are depreciated or amortized usingthe straight-line method over the estimated useful lives of the assets or therelated lease term, if shorter (for financial statement purposes) andaccelerated methods (for income tax purposes). Certain manufacturing machines that are dedicated to a specificprogram—where total units to be produced over the life of the program areestimable—are depreciated using the modified units of production method forfinancial statement purposes.

 

Estimateduseful lives of property, plant, and equipment are as follows:

 
| **Leasehold improvements**  | ** ** | **Shorter  of estimated useful life  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 impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset (assetgroup) may not be recoverable.  Animpairment loss would be recognized when the carrying amount of an assetexceeds the estimated undiscounted future cash flows expected to result fromthe use of the asset and its eventual disposition.  The amount of the impairment loss to berecorded is calculated by the excess of the asset’s carrying value over itsfair value.  Fair value is generallydetermined using a discounted cash flow analysis.

 

*(f)**          **IncomeTaxes*

 

TheCompany’s income taxes are accounted for under the asset and liabilitymethod.  Under the asset and liabilitymethod, deferred tax assets and liabilities are recognized for the estimatedfuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and their respectivetax basis and operating loss and tax credit carryforwards.  Deferred tax expense (benefit) results fromthe net change during the year in deferred tax assets and liabilities.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

TheCompany evaluates the need for a valuation allowance to reduce its deferred taxassets to the amount that is more likely than not to be realized.  The Company has considered future taxableincome and ongoing prudent and feasible tax planning strategies in assessingthe need for a valuation allowance. Should the Company determine that it would not be able to realize all orpart of its deferred tax assets in the future, an adjustment to the deferred taxassets would be charged to income in the period such determination was made.

 

TheCompany recognizes the tax benefit from an uncertain tax position only if it ismore likely than not that the tax position will be sustained on examination bythe taxing authorities, based on the technical merits of the position.  The tax benefits recognized in theconsolidated financial statements from such positions are then measured basedon the largest benefit that has a greater than 50% likelihood of being realizedupon settlement.  The Company recognizesinterest and penalties accrued related to unrecognized tax benefits in taxexpense.

 

F-9

----

 

*(g)**      **RevenueRecognition*

 

TheCompany recognizes revenue at the time of shipment when title and risk of losshave passed to the customer, persuasive evidence of an arrangement exists,performance of its obligation is complete, its price to the buyer is fixed ordeterminable, and the Company is reasonably assured of collection.  If aloss is anticipated on any contract, a provision for the entire loss is madeimmediately.  Determination of thesecriteria, 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.

 

*(h)**      **Investmentsin Realty Partnership*

 

TheCompany has invested in Lakeshore Estates Associates, a realty limitedpartnership.  The Lakeshore Estatesinvestment is stated at cost, plus or minus the Company’s proportionate shareof the limited partnership’s income or losses, less any distributions receivedfrom the limited partnership.  TheCompany has recognized its share of Lakeshore Estates Associates’ losses onlyto the extent of its original investment in, and advances to, thispartnership.  The Company’s carryingamount for this investment is zero at December 31, 2009, and 2008,respectively.

 

*(i)**         **Goodwill*

 

Goodwillis tested for impairment annually, and will be tested for impairment betweenannual tests if an event occurs or circumstances change that would indicatethat the carrying amount may be impaired.  Impairment testing for goodwill is done at areporting unit level.  Reporting unitsare one level below the business segment level, but can be combined whenreporting units within the same segment have similar economiccharacteristics.  The Company’s reporting units include itsComponent Products segment, Packaging segment (excluding its Molded Fiberoperation), and its Molded Fiber operation.  An impairment loss generally would berecognized when the carrying amount of the reporting unit’s net assets exceedsthe estimated fair value of the reporting unit.  The Company completed its most recent annualgoodwill impairment test as of December 31, 2009.  Fair values of the reporting units weredetermined using several valuation methodologies, including a combination ofincome and market approaches, which include the use of Level 1 and Level 3inputs (Note 19).  The fair values ofboth reporting units that had goodwill balances were estimated to be more than100% greater than their respective carrying values and, therefore, it wasdetermined that there was no goodwill impairment in 2009.  There also was no goodwill impairment in 2008or 2007.

 

*(j)**          **Intangible Assets*

 

Intangibleassets 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.

 

F-10

----

 

*(k)**      **Cashand Cash Equivalents*

 

TheCompany considers all highly liquid investments with original maturities ofthree months or less to be cash equivalents. At December 31, 2009, and 2008, cash equivalents primarily consistedof money market accounts and certificates of deposit that are readily convertedinto cash.  The Company utilizeszero-balance disbursement accounts to manage its funds.  As such, outstanding checks at the end of ayear are reclassified to accounts payable. At December 31, 2009, and 2008, the amount reclassified wasapproximately $1.6 million.

 

TheCompany maintains its cash in bank deposit accounts, money market funds, andcertificates of deposit that at times exceed federally insured limits.  The Company periodically reviews thefinancial stability of institutions holding its accounts, and does not believeit is exposed to any significant risk on cash.

 

*(l)**         **Use ofEstimates*

 

Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amounts ofrevenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

*(m)**    **Segmentsand Related Information*

 

TheCompany has adopted the provisions of ASC 280, *SegmentReporting*, which established standards for the way that publicbusiness enterprises report information and operating segments in annualfinancial statements, and requires reporting of selected information in interimfinancial reports (see Note 21).

 

*(n)**      **Share-BasedCompensation*

 

Whenaccounting for equity instruments exchanged for employee services, share-basedcompensation cost is measured at the grant date, based on the calculated fairvalue of the award, and is recognized as an expense over the employee’srequisite service period (generally the vesting period of the equity grant).

 

Share-basedcompensation cost that has been charged against income for stock compensationplans is as follows:

 
| ** **                                    | ** ** | **Year  Ended December 31** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Selling,  general, and administrative expense |       | $                                | 900,813    |   | $ | 1,305,789 |   | $ | 692,024 |   |
|                                               |            |                                  |            |  |  |  |  |  |  |  |

 

F-11

----

 

Thecompensation expense for stock options granted during the three-year periodended December 31, 2009, 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**                   | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|
| ** **              | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected volatility     |       | 68.8%  to 84.6%                                   |       | 88.0% |   | 76.7%  to 89.3% |   |
| Expected dividends      |       | None                                              |       | None |   | None |   |
| Risk-free interest rate |       | 3.6%                                              |       | 4.0% |   | 3.4%  to 5.0% |   |
| Exercise price          |       | Closing  price on date of grant                   |       | Closing  price on date of grant |   | Closing  price on date of grant |   |
| Imputed life            |       | 4.1  to 7.9 years (output in lattice-based model) |       | 7.9  years (output in lattice-based model) |   | 4.1  to 7.9 years (output in lattice-based model) |   |

 

Theweighted average grant date fair value of options granted during 2009, 2008,and 2007 was $1.83, $2.87, and $2.38, respectively.

 

Thetotal income tax benefit recognized in the statement of operations forshare-based compensation arrangements was approximately $291,000, $458,000, and$223,000, for the years ended December 31, 2009, 2008, and 2007,respectively.

 

*(o)**      **DeferredRent*

 

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

 

*(p)**      **Shippingand 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.

 

*(q)**      **Researchand Development*

 

Ona routine basis, the Company incurs costs related to research and developmentactivity.  These costs are expensed asincurred.  Approximately $1.4 million,$1.4 million, and $1.3 million were expensed in the years ended December 31,2009, 2008, and 2007, respectively.

 

*(r)**        **FairValue of Financial Instruments*

 

Cash and cashequivalents, accounts receivable, accounts payable, and accrued taxes and otherexpenses are stated at carrying amounts that approximate fair value because ofthe short maturity of those instruments. The carrying amount of the Company’s long-term debt approximates fairvalue as the interest rate on the debt approximates the Company’s currentincremental borrowing rate.

 

F-12

----

 

*(s)**        **FairValue Measurement*

 

TheCompany has adopted ASC 820, *Fair Value Measurementsand Disclosures*, which defines fair value, establishes guidelinesfor measuring fair value, and expands disclosures regarding fair valuemeasurements for all assets and liabilities that are measured at fair value oneither a recurring or non-recurring basis. The Company defines fair value as the price that would be received fromselling an asset or paid to transfer a liability in an orderly transactionbetween market participants at the measurement date.  When determining the fair value measurementsfor assets and liabilities, which are required to be recorded at fair value,the Company considers the principal or most advantageous market in which theCompany would transact and the market-based risk measurement or assumptionsthat market participants would use in pricing the asset or liability, such asinherent risk, transfer restrictions, and credit risk.

 

TheCompany has not elected fair value accounting for any financial instruments forwhich fair value accounting is optional.

 

### **(2)**                                 New AccountingPronouncements

### ** **

*Non-ControllingInterests*

 

The Company adoptedupdated guidance included in ASC 810, *Consolidation*,effective January 1, 2009*.*  The updated guidance in ASC 810 requires (i) thatnon-controlling (minority) interests be reported as a component of stockholders’equity; (ii) that net income attributable to the parent and the non-controllinginterest be separately identified in the consolidated statements of operations;(iii) that changes in a parent’s ownership interest while the parentretains the controlling interest be accounted for as equity transactions; (iv) thatany retained non-controlling equity investment upon the deconsolidation of asubsidiary be initially measured at fair value; and (v) that sufficientdisclosures be provided that clearly identify and distinguish between theinterests of the parent and the interests of the non-controlling owners.  As a result of the adoption, the Company hasreported its non-controlling interest in United Development Company Limited (“UDT”)as a component of stockholders’ equity in the consolidated balance sheets, andthe net income attributable to its non-controlling interest in UDT has beenseparately identified in the consolidated statements of operations.  The prior periods presented have also beenreclassified to conform to the current classification required by ASC 810.

 

*BusinessCombinations*

 

The Company adoptedupdated guidance included in ASC 805, *Business Combinations*,effective January 1, 2009.  ASC 805now requires the acquiring entity in a business combination to recognize all(and only) the assets acquired and liabilities assumed in the transaction, andestablishes the acquisition date fair value as the measurement objective forall assets acquired and liabilities assumed in a business combination. Certainprovisions of this updated guidance will, among other things, impact thedetermination of acquisition date fair value of consideration paid in abusiness combination (including contingent consideration); exclude transactioncosts from acquisition accounting; and change accounting practices for acquiredcontingencies, acquisition-related restructuring costs, in-process research anddevelopment, indemnification assets, and tax benefits.  Implementation of this updated guidanceresulted in the Company recognizing gains of approximately $81,000 related toits 

 

F-13

----

 

acquisition of selectedassets of Foamade Industries, Inc. (“Foamade”) in the first quarter of2009, as well as gains of approximately $558,000 and $201,000 related to itsacquisition of selected assets of E.N. Murray Co. (“ENM”) and AdvancedMaterials, Inc. (“AMI”), a wholly-owned subsidiary of Advanced MaterialsGroup, Inc., respectively, in the third quarter of 2009(Note 19).  Cumulativeacquisition-related costs of $90,000, that would otherwise have been includedas part of the acquisition cost prior to the adoption of this updated guidance,were charged to expense as incurred.

 

*VariableInterest Entities*

 

In June 2009, theFASB issued guidance to change financial reporting of enterprises with variableinterest entities (“VIEs”) to require an enterprise to qualitatively assess thedetermination of the primary beneficiary of a VIE based on whether theenterprise (1) has the power to direct the activities of a VIE that mostsignificantly impact the VIE’s economic performance and (2) has theobligation to absorb losses of the VIE or the right to receive benefits fromthe VIE that could potentially be significant to the VIE.  Also, the guidance requires an ongoingreconsideration of the primary beneficiary and amends the events that trigger areassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about anenterprise’s involvement in a VIE.  Thisguidance shall be effective as of the beginning of the Company’s first annualreporting period that begins after November 15, 2009, for interim periodswithin that first annual reporting period and for interim and annual reportingperiods thereafter.  Earlier applicationis prohibited.  The Company is currentlyevaluating the impact of this new guidance.

 

### **(3)           Supplemental Cash Flow Information**

### ** **

Cash paid for interestand income taxes is as follows:

 
| ** **                   | ** ** | **Years Ended December 31** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest                     |       | $                                | 205,828    |   | $ | 355,221 |   | $ | 486,826 |   |
| Income taxes, net of refunds |       | $                                | 1,648,764  |   | $ | 3,817,383 |   | $ | 322,824 |   |

 

### **(4)           Receivables**

### ** **

Receivablesconsist of the following:

 
| ** **                               | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Accounts  receivable—trade          |       | $                    | 14,691,917 |   | $ | 13,141,912 |   |
| Less  allowance for doubtful receivables |       | (473,912             | )          | (387,037 | ) |
|                                     |       | $                    | 14,218,005 |   | $ | 12,754,875 |   |

 

TheCompany’s accounts receivable balance is comprised of many accounts.  The highest receivable account balance as of December 31,2009, represented 6% of the total accounts receivable balance as of thatdate.  The Company performs creditevaluations on its customers and obtains credit insurance on a large percentageof its accounts.

 

F-14

----

 

Thetop customer in the Company’s Component Products segment comprises 13% of thatsegment’s total sales and 8% of the Company’s total sales for the year ended December 31,2009.  The top customer in the Company’sPackaging segment comprises 10.6% of that segment’s total sales and 4.1% of theCompany’s total sales for the year ended December 31, 2009.

 

### **(5)           Inventories**

### ** **

Inventoriesconsist of the following:

 
| ** **                     | ** ** | **December 31** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Raw  materials                 |       | $                    | 4,924,228  |   | $ | 5,120,755 |   |
| Work  in process               |       | 699,102              |       | 324,782 |   |
| Finished  goods                |       | 2,574,813            |       | 3,012,984 |   |
| Less  reserve for obsolescence |       | (550,626             | )          | (305,775 | ) |
|                           |       | $                    | 7,647,517  |   | $ | 8,152,746 |   |

 

### **(**6)           OtherIntangible Assets

### ** **

The carrying values of the Company’s definite-livedintangible assets as of December 31, 2009, and 2008 are as follows:

 
| ** **                                               | ** ** | **Patents** | ** ** | **Non-********Compete** | ** ** | **Customer********List** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|-------------|------------|-------------------------|------------|--------------------------|------------|-----------|------------|
| Gross  amount at December 31, 2009                  |       | $           | 448,306    |                    | $          | 200,000                  |       | $         | 769,436    |   | $ | 1,417,742 |   |
| Accumulated  amortization at December 31, 2009 |       | (385,933    | )          | (53,240                 | )          | (160,832                 | )          | $         | (600,005   | ) |
| Net  balance at December 31, 2009                   |       | $           | 62,373     |                    | $          | 146,760                  |       | $         | 608,604    |   | $ | 817,737 |   |
|                                                     |       |        |       |                    |       |                     |       |      |       |
| Gross  amount at December 31, 2008                  |       | 448,306     |       | 50,000                  |       | 120,436                  |       | $         | 618,742    |   |
| Accumulated  amortization at December 31, 2008 |       | (351,481    | )          | (26,720                 | )          | (64,700                  | )          | $         | (442,901   | ) |
| Net  balance at December 31, 2008                   |       | $           | 96,825     |                    | $          | 23,280                   |       | $         | 55,736     |   | $ | 175,841 |   |

 

Amortization expense related to intangible assetswas $157,104, $69,072, and $69,072 for the years ended December 31, 2009,2008, and 2007, respectively.  Futureamortization for the years ending December 31 will be approximately:

 
| 2010                 |   | $       | 228,872 |   |
|----------------------|--------|---------|---------|--------|
| 2011                 |   | 197,456 |    |
| 2012                 |   | 159,800 |    |
| 2013                 |   | 159,800 |    |
| 2014  and thereafter |   | 71,809  |    |
| Total:               |   | $       | 817,737 |   |

 

F-15

----

### ** **

### **(7)           Property, Plant, and Equipment**

### ** **

Property, plant, and equipment consist of thefollowing:

 
| ** **                                         | ** ** | **December 31** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Land  and improvements                             |       | $                    | 589,906    |   | $ | 470,872 |   |
| Buildings  and improvements                        |       | 6,579,670            |       | 6,496,542 |   |
| Leasehold  improvements                            |       | 2,778,894            |       | 1,570,906 |   |
| Equipment                                          |       | 31,133,446           |       | 28,873,836 |   |
| Furniture  and fixtures                            |       | 2,480,510            |       | 2,288,428 |   |
| Construction  in progress—equipment/buildings |       | 20,152               |       | 966,195 |   |
|                                               |       | $                    | 43,582,578 |   | $ | 40,666,779 |   |

 

Depreciation and amortization expense for the yearsended December 31, 2009, 2008, and 2007 was $2,737,958, $2,907,478, and$2,745,948, respectively.

 

### **(8)           Investment in and Advances to Affiliated Partnership**

### ** **

The Company has a 26.32% ownership interest in arealty limited partnership, United Development Company Limited (“UDT”).  The Company has consolidated the financialstatements of UDT for all periods presented because it has determined that UDTis a VIE, and the Company is the primary beneficiary.

 

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

 
| ** **                          | ** ** | **December 31** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Cash                                |       | $                    | 166,940    |   | $ | 148,746 |   |
| Net  property, plant, and equipment |       | 1,187,966            |       | 1,311,273 |   |
| Accrued  expenses                   |       | 12,900               |       | 12,900 |   |
| Current  and long-term debt         |       | 703,341              |       | 737,289 |   |
|                                     |            |                      |            |  |  |  |  |

 

### **(9)           Indebtedness**

### ** **

On January 29, 2009, the Company amended andextended its credit facility with Bank of America, NA.  The facility is comprised of: (i) arevolving credit facility of $17 million; (ii) a term 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. As of December 31, 2009, the Company had availability ofapproximately $14.4 million based upon collateral levels in place as ofthat date.  The credit facility calls forinterest of LIBOR plus a margin that ranges from 1.0% to 1.5% or, at thediscretion of the Company, the bank’s prime rate less a margin that ranges from0.25% to zero.  In both cases theapplicable margin is dependent upon Company performance.  The loans are collateralized by a firstpriority lien on all of the Company’s assets, including its real estate 

 

F-16

----

 

located in Georgetown, Massachusetts, and in GrandRapids, Michigan.  Under the creditfacility, the Company is subject to a minimum fixed-charge coverage financialcovenant.  The Company’s $17 millionrevolving credit facility matures November 30, 2013; the term loans areall due on January 29, 2016.  At December 31,2009, the interest rate on these facilities was 1.26%.

 

UDT has a mortgage note collateralized by theFlorida facility, dated May 22, 2007. The note had an original principal balance of $786,000 and calls for 180monthly payments of $7,147.  The interestrate is fixed at approximately 7.2%.

 

The Company had capital lease debt of $1,612,665 asof December 31, 2008, which was paid off in full with proceeds from theabove credit facilities.

 

Long-term debt consists of the following:

 
| ** **                                              | ** ** | **December 31** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|
| ** **                                              | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Mortgage  notes                                         |       | $                    | 5,602,415  |   | $ | 1,859,000 |   |
| Note  payable                                           |       | 1,778,224            |       | 2,062,405 |   |
| UDT  mortgage                                           |       | 703,341              |       | 737,288 |   |
| Equipment  loan                                         |       | 40,850               |       | — |   |
| Total  long-term debt                                   |       | 8,124,830            |       | 4,658,693 |   |
| Current  installments                                   |       | (623,007             | )          | (716,697 | ) |
| Long-term  debt, excluding current installments         |       | $                    | 7,501,823  |   | $ | 3,941,996 |   |
| Aggregate  maturities of long-term debt are as follows: |       |                 |       |   |   |
| Year  ending December 31:                          |       |                 |       |   |   |
| 2010                                                    |       | $                    | 623,007    |   |   |   |
| 2011                                                    |       | 654,875              |       |   |   |
| 2012                                                    |       | 622,685              |       |   |   |
| 2013                                                    |       | 625,807              |       |   |   |
| 2014  and thereafter                                    |       | 5,598,456            |       |   |   |
|                                                    |       | $                    | 8,124,830  |   |   |   |

 

F-17

----

 

**(10)****                         ****Accrued Taxes and Other Expenses**

 

Accruedtaxes and other expenses consist of the following:

 
| ** **                          | ** ** | **December 31** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Compensation                        |       | $                    | 2,116,597  |   | $ | 2,215,874 |   |
| Benefits  / self-insurance reserve  |       | 648,791              |       | 901,580 |   |
| Paid  time off                      |       | 764,576              |       | 688,315 |   |
| Commissions  payable                |       | 334,356              |       | 370,432 |   |
| Plant  consolidation                |       | —               |       | 316,000 |   |
| Income  taxes payable (overpayment) |       | 389,384              |       | (573,953 | ) |
| Unrecognized  tax benefits          |       | 545,000              |       | 560,000 |   |
| Other                               |       | 1,354,122            |       | 1,751,753 |   |
|                                |       | $                    | 6,152,826  |   | $ | 6,230,001 |   |

 

**(11)****                         ****Income Taxes**

### ** **

TheCompany’s income tax provision (benefit) for the years ended December 31,2009, 2008, and 2007 consists of the following:

 
| ** **                  | ** ** | **Years  Ended December 31** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Current:                    |       |                              |       |   |   |   |   |
| Federal                     |       | $                                 | 2,100,000  |   | $ | 2,270,000 |   | $ | 983,000 |   |
| State                       |       | 490,000                           |       | 709,000 |   | 391,000 |   |
|                        |       | 2,590,000                         |       | 2,979,000 |   | 1,374,000 |   |
| Deferred:                   |       |                              |       |   |   |   |   |
| Federal                     |       | 263,000                           |       | 41,000 |   | 1,147,000 |   |
| State                       |       | (36,000                           | )          | (25,000 | ) | 63,000 |   |
|                        |       | 227,000                           |       | 16,000 |   | 1,210,000 |   |
| Total  income tax provision |       | $                                 | 2,817,000  |   | $ | 2,995,000 |   | $ | 2,584,000 |   |

 

AtDecember 31, 2009, the Company has net operating loss carryforwards forfederal income tax purposes of approximately $2,192,000 and for state incometax purposes of approximately $1,545,000, 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.

 

F-18

----

 

Thetax effects of temporary differences that give rise to significant portions ofthe deferred tax assets and (liabilities) are approximately as follows:

 
| ** **                                     | ** ** | **December 31** | ** ** |
|------------------------------------------------|------------|----------------------|------------|
| ** **                                     | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Equity-based  compensation                     |       | $                    | 401,000    |   | $ | 387,000 |   |
| Compensation  programs                         |       | 474,000              |       | 497,000 |   |
| Retirement  liability                          |       | 95,000               |       | 184,000 |   |
| Net  operating loss carryforwards              |       | 806,000              |       | 866,000 |   |
| Inventory  capitalization                      |       | 230,000              |       | 246,000 |   |
| Reserves                                       |       | 489,000              |       | 412,000 |   |
| Other                                          |       | 49,000               |       | (5,000 | ) |
| Excess  of book over tax basis of fixed assets |       | (930,000             | )          | (417,000 | ) |
| Goodwill                                       |       | (563,000             | )          | (499,000 | ) |
| Acquisition  gains                             |       | (270,000             | )          | — |   |
| Inventory  method change                       |       | (147,000             | )          | (295,000 | ) |
| Net  deferred tax assets                       |       | $                    | 634,000    |   | $ | 1,376,000 |   |

 

Theamount recorded as net deferred tax assets as of December 31, 2009, and2008 represents the amount of tax benefits of existing deductible temporarydifferences or carryforwards that are more likely than not to be realizedthrough the generation of sufficient future taxable income within thecarryforward period.  The Companybelieves that the net deferred tax asset of $634,000 at December 31, 2009,is more likely than not to be realized in the carryforward period.  This balance includes the tax benefitassociated with the acquisition of the common stock of Stephenson &Lawyer, Inc., as discussed in Note 19. Management reviews the recoverability of deferred tax assets during eachreporting period.

 

Theactual tax provision for the years presented differs from the “expected” taxprovision for those years, computed by applying the U.S. federal corporate rateof 34% to income before income tax expense as follows:

 
| ** **                                           | ** ** | **Years  Ended December 31** | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Computed  “expected” tax rate              |       | 34.00                             | %          | 34.00 | % | 34.00 | % |
| Increase  (decrease) in income taxes resulting from: |       |                              |       |   |   |   |   |
| State  taxes, net of federal tax benefit             |       | 3.40                              |       | 5.60 |   | 4.50 |   |
| Meals  and entertainment                             |       | 0.20                              |       | 0.20 |   | 0.30 |   |
| R&D  credits                                     |       | (0.90                             | )          | (1.20 | ) | (1.10 | ) |
| Domestic  production deduction                       |       | (1.70                             | )          | (2.10 | ) | — |   |
| Non-deductible  ISO stock option expense             |       | 0.20                              |       | 0.40 |   | 0.50 |   |
| Acquisition  gains                                   |       | (3.30                             | )          | — |   | — |   |
| Other                                                |       | 0.10                              |       | (0.20 | ) | (0.30 | ) |
| Effective  tax rate                                  |       | 32.00                             | %          | 36.70 | % | 37.90 | % |

 

TheCompany files income tax returns in the U.S. federal jurisdiction and variousstate jurisdictions. The Company has not been audited by the Internal RevenueService since 2001 or by any states in connection with income taxes, with theexception of returns filed in 

 

F-19

----

 

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 through2006, and certain items carried forward from earlier years and utilized inthose returns, remain open to examination by the IRS and various statejurisdictions.

 

Areconciliation of the beginning and ending amount of gross unrecognized taxbenefits (“UTB”) resulting from uncertain tax positions is as follows:

 
| ** **                                     | ** ** | **Federal  and State Tax** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| Gross  UTB balance at beginning of fiscal year |       | $                          | 560,000    |   | $ | 560,000 |   |
| Reductions  for tax positions of prior years   |       | (15,000                    | )          | — |   |
| Gross  UTB balance at December 31         |       | $                          | 545,000    |   | $ | 560,000 |   |

 

Thetotal amount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate as of December 31, 2009, and 2008 are $545,000 and$560,000, respectively, for each year.

 

AtDecember 31, 2009, and 2008, accrued interest and penalties on a grossbasis, which are included above in the gross UTB balance, were $115,000 foreach year.

 

**(12)****                         ****Net Income Per Share**

### ** **

Basicincome per share is based upon the weighted average common shares outstandingduring each year.  Diluted income pershare is based upon the weighted average of common shares and dilutive commonstock equivalent shares outstanding during each year.  The weighted average number of shares used tocompute both basic and diluted income per share consisted of the following:

 
| ** **                                                                                  | ** ** | **Years  Ended December 31** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Basic  weighted average common shares outstanding during the year                           |       | 5,829,580                         |       | 5,549,830 |   | 5,306,948 |   |
| Weighted  average common equivalent shares due to stock options and restricted stock  units |       | 464,384                           |       | 712,836 |   | 554,472 |   |
| Diluted  weighted average common shares outstanding during the year                         |       | 6,293,964                         |       | 6,262,666 |   | 5,861,420 |   |

 

Thecomputation of diluted earnings per share excludes the effect of the potentialexercise of stock awards, including stock options, when the average marketprice of the common stock is lower than the exercise price of the relatedoptions during the period.  Theseoutstanding stock awards are not included in the computation of dilutedearnings per share because the effect would have been antidilutive.  For the years ended December 31, 2009,2008, and 2007, the number of stock awards excluded from the computation was190,484, 41,769, and 29,877, respectively.

 

F-20

----

### ** **

**(13)****                         ****Stock Option and Equity IncentivePlans**

### ** **

#### Employee Stock Option Plan

####  

TheCompany’s 1993 Employee Stock Option Plan (“Employee Stock Option Plan”), whichis stockholder approved, provides long-term rewards and incentives in the formof stock options to the Company’s key employees, officers, employee directors,consultants, and advisors.  The plan providesfor either non-qualified stock options or incentive stock options for theissuance of up to 1,550,000 shares of common stock.  The exercise price of the incentive stockoptions may not be less than the fair market value of the common stock on thedate of grant, and the exercise price for non-qualified stock options shall bedetermined by the Compensation Committee. These options expire over five- to ten-year periods.

 

Optionsgranted under the plan generally become exercisable with respect to 25% of thetotal number of shares subject to such options at the end of each 12-monthperiod following the grant of the options, except for options granted toofficers, which may vest on a different schedule.  At December 31, 2009, there were 605,000options outstanding under the Employee Stock Option Plan.

 

#### Incentive Plan

####  

In June 2003, theCompany formally adopted the 2003 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 also added appropriate languageso as to enable grants of stock-based awards under the Plan to continue to beeligible for exclusion from the $1,000,000 limitation on deductibility under Section 162(m) ofthe Internal Revenue Code (the “Code”).

 

Two types of equityawards may be granted to participants under the Plan: restricted shares orother 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.

 

ThroughDecember 31, 2009, 675,958 shares of common stock have been issued underthe 2003 Incentive Plan, none of which have been restricted.  An additional 276,124 shares are beingreserved for outstanding grants of RSUs and other share-based compensation thatare subject to various performance and time-vesting contingencies.

 

F-21

----

####  

#### Director Plan

####  

EffectiveJuly 15, 1998, the Company adopted the 1998 Director Plan for the benefitof non-employee directors of the Company. The 1998 Director Plan provides for options for the issuance of up to975,000 shares of common stock.  Theseoptions become exercisable in full at the date of grant and expire 10 yearsfrom the date of grant.  At December 31,2009, there were 391,609 options outstanding under the 1998 Director Plan.  On June 3, 2009, the 1998 Director Plan wasamended to permit the issuance of other equity-based securities and was renamedthe 2009 Non-Employee Director Stock Incentive Plan.

 

Thefollowing is a summary of stock option activity under all plans:

 
| ** **                                             | ** ** | **Shares  Under Options** | ** ** | **Weighted  Average********Exercise Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|--------------------------------|------------|
| Outstanding  December 31, 2008                    |       | 973,183                   |       | $                                           | 2.97       |                           |       |   |
| Granted                                                |       | 69,301                    |       | 4.17                                        |       |                           |       |
| Exercised                                              |       | (39,375                   | )          | 3.31                                        |       |                           |       |
| Cancelled  or expired                                  |       | (6,500                    | )          | 3.65                                        |       |                           |       |
| Outstanding  December 31, 2009                    |       | 996,609                   |       | $                                           | 3.03       |                           | $          | 3,458,233 |   |
| Exercisable  at December 31, 2009                 |       | 975,359                   |       | $                                           | 2.99       |                           | $          | 3,423,510 |   |
| Vested  and expected to vest at December 31, 2009 |       | 996,609                   |       | $                                           | 3.03       |                           | $          | 3,458,233 |   |

 

Thefollowing is a summary of information relating to stock options outstanding andexercisable by price range as of December 31, 2009:

 
| ** **                   | ** ** | **Options  Outstanding**        | ** ** | **Options  Exercisable**                                 | ** ** |
|------------------------------|------------|---------------------------------|------------|----------------------------------------------------------|------------|
| **Range of exercise prices** | ** ** | **Outstanding  as of 12/31/09** | ** ** | **Weighted  average remaining contractual life (years)** | ** ** | **Weighted  average exercise price** | ** ** | **Exercisable  as of 12/31/09** | ** ** | **Weighted  average exercise price** | ** ** |
| $0.00  - $0.99               |       | 50,000                          |       | 2.1                                                      |       | $ | 0.81 |   | 50,000 |   | $ | 0.81 |   |
| $1.00  - $1.99               |       | 231,911                         |       | 3.1                                                      |       | 1.15 |   | 231,911 |   | 1.15 |   |
| $2.00  - $2.99               |       | 333,148                         |       | 3.2                                                      |       | 2.49 |   | 333,148 |   | 2.49 |   |
| $3.00  - $3.99               |       | 158,110                         |       | 3.7                                                      |       | 3.26 |   | 158,110 |   | 3.26 |   |
| $4.00  - $4.99               |       | 74,301                          |       | 8.3                                                      |       | 4.22 |   | 63,051 |   | 4.22 |   |
| $5.00  - $5.99               |       | 59,456                          |       | 6.3                                                      |       | 5.14 |   | 54,456 |   | 5.14 |   |
| $6.00  - $6.99               |       | 47,914                          |       | 5.7                                                      |       | 6.18 |   | 42,914 |   | 6.14 |   |
| $10.00  - $10.99             |       | 27,500                          |       | 8.5                                                      |       | 10.14 |   | 27,500 |   | 10.14 |   |
| $12.00  - $12.99             |       | 14,269                          |       | 8.4                                                      |       | 12.37 |   | 14,269 |   | 12.37 |   |
|                         |       | 996,609                         |       | 4.1                                                      |       | $ | 3.03 |   | 975,359 |   | $ | 2.99 |   |

 

Duringthe years ended December 31, 2009, 2008, and 2007, 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 $79,269,$929,281, and $357,426, respectively, and the 

 

F-22

----

 

totalamount of consideration received from the exercise of these options was$130,332, $333,026, and $272,214, respectively.

 

Duringthe years ended December 31, 2009, 2008, and 2007, the Company recognizedcompensation expense related to stock options granted to directors andemployees of $150,482, $221,324, and $211,050, respectively.

 

OnFebruary 24, 2009, the Company’s Compensation Committee approved the issuanceof 25,000 shares of unrestricted common stock to the Company’s Chairman, ChiefExecutive Officer, and President under the 2003 Equity Incentive Plan.  The shares were issued on December 31,2009.  The Company has recordedcompensation expense of $106,000 for the year ended December 31, 2009,based on the grant date price of $4.24 at February 24, 2009.  Stock compensation expense of $154,500 and$115,997 was recorded in 2008 and 2007, respectively, for similar awards.

 

Ithas been the Company’s practice to allow executive officers to take a portionof their earned bonuses in the form of the Company’s common stock.  The value of the stock received by executiveofficers, measured at the closing price of the stock on the date of grant, was$183,500, $343,880, and $256,076 for the years ended December 31, 2009,2008, and 2007, respectively.

 

Beginningin 2006, RSUs have been granted under the 2003 Incentive Plan to the executiveofficers of the Company.  The stock unitawards are subject to various time-based vesting requirements, and certainportions of these awards are subject to performance criteria of theCompany.  Compensation expense on theseawards is recorded based on the fair value of the award at the date of grant,which is equal to the Company’s closing stock price, and is charged to expenseratably during the service period.  Uponvesting, RSUs are, in some instances, net-share settled to cover the requiredwithholding tax, and the remaining amount is converted into an equivalentnumber of common shares.  No compensationexpense is taken on awards that do not become vested, and the amount ofcompensation expense recorded is adjusted based on management’s determinationof the probability that these awards will become vested.  The following table summarizes informationabout stock unit award activity during the year ended December 31, 2009:

 
| ** **                             | ** ** | **Restricted  Stock Units** | ** ** | **Weighted  Average Award Date Fair Value** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|
| Outstanding  at December 31, 2008 |       | 352,000                     |       | $                                           | 5.79       |   |
| Awarded                                |       | 95,124                      |       | 4.24                                        |       |
| Shares  distributed                    |       | (171,000                    | )          | 5.83                                        |       |
| Shares  exchanged for cash             |       | —                      |       | —                                      |       |
| Forfeited  / Cancelled                 |       | —                      |       | —                                      |       |
| Outstanding  at December 31, 2009 |       | 276,124                     |       | $                                           | 5.19       |   |

 

TheCompany recorded $644,331, $929,965, and $364,977 in compensation expenserelated to these RSUs during the years ended December 31, 2009, 2008, and2007, respectively.

 

F-23

----

 

Thefollowing summarizes the future share-based compensation expense the Companywill record as the equity securities granted through December 31, 2009,vest:

 
| ** ** | ** ** | **Options** | ** ** | **Common********Stock** | ** ** | **Restricted********Stock Units** | ** ** | **Total** | ** ** |
|------------|------------|-------------|------------|-------------------------|------------|-----------------------------------|------------|-----------|------------|
| 2010       |       | $           | 27,904     |                    | $          | —                            |       | $         | 431,451    |   | $ | 459,355 |   |
| 2011       |       | 16,394      |       | —                  |       | 265,509                           |       | 281,903   |       |
| 2012       |       | 5,312       |       | —                  |       | 118,715                           |       | 124,027   |       |
| 2013       |       | 2,646       |       | —                  |       | 16,805                            |       | 19,451    |       |
| Total      |       | $           | 52,256     |                    | $          | —                            |       | $         | 832,480    |   | $ | 884,736 |   |

 

**(14)****                         ****Preferred Stock**

### ** **

OnMarch 18, 2009, the Company declared a dividend of one preferred sharepurchase right (a “Right”) for each outstanding share of common stock, parvalue $0.01 per share on March 20, 2009, to the stockholders of record onthat date.  Each Right entitles theregistered holder to purchase from the Company one one-thousandth of a share ofSeries A Junior Participating Preferred Stock, par value $0.01 per share(the “Preferred Share”), of the Company, at a price of $25.00 per one one-thousandthof a Preferred Share subject to adjustment and the terms of the Rights Agreement.The rights expire on March 19, 2019.

 

**(15)****                         ****Supplemental Retirement 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 $35,000, $27,000, and $4,000 for the years ended December 31,2009, 2008, and 2007, respectively.  Thepresent value of the supplemental retirement obligation has been calculatedusing an 8.5% discount rate, which is included in retirement and otherliabilities.  Total projected future cashpayments for the years ending December 31, 2010 through 2013 areapproximately $96,250, $75,000, $75,000, and $75,000, respectively, andapproximately $170,833 thereafter.

 

**(16)****                         ****Commitments and Contingencies**

### ** **

(a)          *Leases***— The Company has operatingleases for certain facilities that expire through 2015.  Certain of the leases contain escalationclauses that require payments of additional rent, as well as increases inrelated operating costs.

 

F-24

----

 

Futureminimum lease payments under non-cancelable operating leases as of December 31,2009, are as follows:

 
| **Years Ending December 31:** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| 2010                               |       | $                     | 1,803,371  |   |
| 2011                               |       | 1,338,139             |       |
| 2012                               |       | 1,180,901             |       |
| 2013                               |       | 779,534               |       |
| Thereafter                         |       | 588,853               |       |
| Total  minimum lease payments      |       | $                     | 5,690,798  |   |

 

Rentexpense amounted to approximately $2,442,000, $2,214,000, and $2,464,000, in2009, 2008, and 2007, respectively.

 

(b)         *Legal***— The Company is a defendantin various administrative proceedings that are being handled in the ordinarycourse of business.  In the opinion ofmanagement of the Company, these suits and claims should not result in finaljudgments or settlements that, in the aggregate, would have a material adverseeffect on the Company’s financial condition or results of operations.

 

**(17)****                         ****Employee Benefit 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 $709,000, $703,000, and $646,000 in 2009, 2008, and 2007,respectively.

 

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 retirement and other liabilities in theaccompanying balance sheets.  At December 31,2009, the balance of the deferred compensation liability totaled approximately$753,000.  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 $749,000 as of December 31,2009.

 

F-25

----

 

### **(18)**              Fair Value of FinancialInstruments

### ** **

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 ASC 820, *Fair Value Measurements and Disclosures*, and directlyrelated to the amount of subjectivity associated with inputs to fair valuationof 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.

 

*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.

 

*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 the model.

 

TheCompany’s assets and liabilities that are measured at fair value consist ofmoney market funds and certificates of deposit, both considered cashequivalents, which are categorized by the levels discussed above and in thetable below:

 
| **Cash Equivalents**     | ** ** | **Level  1** | ** ** | **Level  2** | ** ** | **Level  3** | ** ** | **Total** | ** ** |
|--------------------------|------------|--------------|------------|--------------|------------|--------------|------------|-----------|------------|
| Money  market funds      |       | $            | 100,000    |         | $          | —       |       | $         | —     |   | $ | 100,000 |   |
| Certificates  of deposit |       | $            | —     |         | $          | 3,000,000    |       | $         | —     |   | $ | 3,000,000 |   |
| Total                    |       | $            | 100,000    |         | $          | 3,000,000    |       | $         | —     |   | $ | 3,100,000 |   |

 

Asof December 31, 2009, the Company does not have any significantnon-recurring measurements of non-financial assets and non-financialliabilities.  The Company may haveadditional disclosure requirements in the event an impairment of the Company’snon-financial assets occurs in a future period.

 

### **(19)**              Acquisitions

### ** **

On March 9, 2009,the Company acquired selected assets of the Hillsdale, Michigan, operations ofFoamade.  The Hillsdale operations ofFoamade specialized in the fabrication of technical urethane foams for a myriadof industries and bring to the Company further penetration into applicationsusing this family of foams, as well as incremental sales to fold into itsoperations.  The Company has transitionedthe acquired assets to its Grand Rapids, Michigan, plant.

 

F-26

----

 

On July 7, 2009, theCompany acquired substantially all of the assets of ENM, a Denver,Colorado-based foam fabricator, for $2,750,000. ENM specialized in the fabrication of technical urethane foams primarilyfor the medical industry.  Thisacquisition brings to the Company further access and expertise in fabricatingtechnical urethane foams and a seasoned management team.  The Company has leased the former ENM Denverfacilities for a period of two years.

 

On August 24, 2009,the Company acquired selected assets of AMI for $620,000.  Located in Rancho Dominguez, California, AMIspecialized in the fabrication of technical urethane foams primarily for themedical industry and brings to the Company further penetration into thismarket.  The Company has assumed thelease of the 56,000-square-foot Rancho Dominguez location that is due to expirein November 2010.

 

The Company recordedgains of approximately $81,000, $558,000, and $201,000 on the acquisitions ofselected assets of Foamade, ENM, and AMI, respectively, as it acquired theassets in bargain purchases.  The Companybelieves that the bargain purchase gains resulted from opportunities created bythe overall weak economy.

 

The following tablesummarizes the consideration paid and the acquisition date fair value of theassets acquired and liabilities assumed relating to each transaction:

 
| ** **                                           | ** ** | **Foamade**    | ** ** | **ENM**        | ** ** | **AMI**         | ** ** |
|------------------------------------------------------|------------|----------------|------------|----------------|------------|-----------------|------------|
| ** **                                           | ** ** | **9-Mar-2009** | ** ** | **7-Jul-2009** | ** ** | **24-Aug-2009** | ** ** |
| Consideration                                        |       |           |       |           |       |            |       |
| Cash                                                 |       | $              | 375,000    |           | $          | 2,750,000       |       | $ | 620,000 |   |
| Fair  value of total consideration transferred       |       | $              | 375,000    |           | $          | 2,750,000       |       | $ | 620,000 |   |
| Acquisition  costs (legal fees) included in SG&A |       | $              | 25,000     |           | $          | 30,000          |       | $ | 35,000 |   |
| Recognized  amounts of identifiable assets acquired: |       |           |       |           |       |            |       |
| Cash                                                 |       | $              | —     |           | $          | 1,309,466       |       | $ | — |   |
| Accounts  receivable                                 |       | 0              |       | 832,054        |       | 289,540         |       |
| Inventory                                            |       | 182,864        |       | 922,497        |       | 252,528         |       |
| Other  assets                                        |       | —         |       | 37,708         |       | —          |       |
| Fixed  assets                                        |       | 189,100        |       | 812,000        |       | 345,750         |       |
| Non-compete                                          |       | 30,000         |       | 120,000        |       | —          |       |
| Customer  list                                       |       | 103,000        |       | 490,000        |       | 56,000          |       |
| Total  identifiable net assets                       |       | $              | 504,964    |           | $          | 4,523,725       |       | $ | 943,818 |   |
| Payables  and accrued expenses                       |       | $              | —     |           | $          | (830,341        | )          | $ | — |   |
| Equipment  loan                                      |       | —         |       | (42,827        | )          | —          |       |
| Deferred  tax liabilities                            |       | (49,386        | )          | (342,212       | )          | (123,051        | )          |
| Net  assets acquired                                 |       | $              | 455,578    |           | $          | 3,308,345       |       | $ | 820,767 |   |

 

With respect to theacquisition of selected assets of ENM, the Company acquired gross accountsreceivable of $873,919, of which it deemed $41,865 to be uncollectible.  It therefore recorded the accounts receivableat its fair market value of $832,054. With respect to the acquisition of selected assets of AMI, the Companyacquired gross accounts receivable of $324,540, of which it deemed $35,000 tobe uncollectible.  It therefore recordedthe accounts receivable at its fair market value of $289,540.  With respect to the noncompete and customer 

 

F-27

----

 

list intangible assetsacquired from Foamade, ENM, and AMI, the weighted average amortization periodis five years.  No residual balance isanticipated for any of the intangible assets.

 

The following tablecontains an unaudited pro forma condensed consolidated statement of operationsfor the years ended December 31, 2009, and 2008, as if the ENM acquisitionhad occurred at the beginning of the respective periods:

 
| ** **            | ** ** | **Years  Ended December 31** | ** **  |
|-----------------------|------------|-----------------------------------|-------------|
| ** **            | ** ** | **2009**                          | ** **  | **2008** | ** ** |
| Sales                 |       | $                                 | 105,228,869 |   | $ | 123,049,859 |   |
| Net  income           |       | 6,070,518                         |        | 5,615,326 |   |
| *Earnings Per Share:* | * *   | * *                          | * *    | * * | * * |
| Basic                 |       | $                                 | 1.04        |   | $ | 1.01 |   |
| Diluted               |       | 0.96                              |        | 0.90 |   |

 

It isimpractical to determine the amount of sales and earnings that would have beenrecorded, had the Foamade and AMI acquisitions occurred on January 1,2009, or January 1, 2008, as records for these time periods areunavailable since the Company only acquired selected assets and not the entireoperations.  The following table containsthe 2009 sales and net income associated withENM and AMI from the date of acquisition through December 31, 2009:

 
| ** **  | ** ** | **ENM** | ** ** | **AMI** | ** ** |
|-------------|------------|---------|------------|---------|------------|
| Sales       |       | $       | 6,396,000  |    | $          | 1,149,000 |   |
| Net  income |       | 381,000 |       | (74,000 | )          |
|             |            |         |            |         |            |  |  |

 

The amount of revenueincluded in the Company’s condensed consolidated statements of operations forthe year ended December 31, 2009, associated with the acquisition ofFoamade is approximately $3,078,000.  TheCompany is unable to break out the Foamade net income as these products havebeen merged into its Grand Rapids, Michigan, facility (Component Products) andhave become part of that reporting unit.

 

The above unaudited proforma information is presented for illustrative purposes only and may not beindicative of the results of operations that would have actually occurred hadthe ENM acquisition occurred as presented. In addition, future results may vary significantly from the resultsreflected in such pro forma information.

 

### **(20)**              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 Companyrecorded restructuring charges of approximately $1.3 million in one-time,pre-tax expenses and, through December 31, 2009, invested approximately$759,000 in building improvements in the Grand Rapids facility.  The Company does not expect to incuradditional costs.

 

F-28

----

 

Throughthe year ended December 31, 2009, the Company has recorded the followingactivity:

 
| ** **          | ** ** | **Ending Restructuring** | ** **  | **Cash Payments in**    | ** ** | **Ending Restructuring** | ** ** |
|---------------------|------------|--------------------------|-------------|-------------------------|------------|--------------------------|------------|
| ** **          | ** ** | **Accrual Balance**      | ** **  | **the 12 Months Ended** | ** ** | **Accrual Balance**      | ** ** |
| ** **          | ** ** | **31-Dec-2008**          | ** **  | **31-Dec-2009**         | ** ** | **31-Dec-2009**          | ** ** |
| Earned severance    |       | $                        | 116,000     |                    | $          | 116,000                  |       | $ | — |   |
| Moving and training |       | 200,000                  |        | 200,000                 |       | —                   |       |
| ** **          | ** ** | **$**                    | **316,000** | ** **              | **$**      | **316,000**              | ** ** | **$** | **—** | ** ** |

### ** **

### **(21)**              Segment Data

### ** **

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 beautyindustries with engineered product for numerous purposes.

 

Theaccounting policies of the segments are the same as those described in Note1.  Income taxes and interest expensehave been allocated based on operating results and total assets employed ineach segment.

 

Inter-segmenttransactions are uncommon and not material. Therefore, they have not been separately reflected in the financialtable below.  The totals of thereportable segments’ 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 13% of thatsegment’s total sales and 8% of the Company’s total sales for the year ended December 31,2009.  The top customer in the Company’sPackaging segment comprises 10.6% of that segment’s total sales and 4.1% of theCompany’s total sales for the year ended December 31, 2009.

 

Theresults for the Packaging segment include the operations of United DevelopmentCompany Limited.

 

F-29

----

 

Financialstatement information by reportable segment is as follows:

 
| **2009**                     | ** ** | **Component********Products** | ** ** | **Packaging** | ** ** | **Total**  | ** ** |
|------------------------------|------------|-------------------------------|------------|---------------|------------|------------|------------|
| Sales                        |       | $                             | 60,973,325 |          | $          | 38,258,009 |       | $ | 99,231,334 |   |
| Operating  income            |       | 5,806,122                     |       | 2,374,288     |       | 8,180,410  |       |
| Total  assets                |       | 25,409,608                    |       | 34,042,188    |       | 59,451,796 |       |
| Depreciation  / Amortization |       | 1,658,290                     |       | 1,236,772     |       | 2,895,062  |       |
| Capital  expenditures        |       | 989,027                       |       | 867,810       |       | 1,856,837  |       |
| Interest  expense            |       | 90,121                        |       | 142,626       |       | 232,747    |       |
| Goodwill                     |       | 4,463,246                     |       | 2,017,791     |       | 6,481,037  |       |
|                              |            |                               |            |               |            |            |            |  |  |  |

 
| **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  |       |
|                              |            |                               |            |               |            |            |            |  |  |  |

### ** **

F-30

----

 

### **(22)**              Quarterly FinancialInformation (unaudited)

 
| ** **                                              | ** ** | **Q1**    | ** ** | **Q2**    | ** ** | **Q3**     | ** ** | **Q4**    | ** ** |
|---------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|-----------|------------|
| Year  Ended December 31, 2009                      |       |      |       |      |       |       |       |      |       |
| Net  sales                                              |       | $         | 21,607,763 |      | $          | 20,959,033 |       | $         | 27,620,250 |   | $ | 29,044,288 |   |
| Gross  profit                                           |       | 4,942,788 |       | 5,370,964 |       | 7,454,276  |       | 8,951,387 |       |
| Net  income attributable to UFP Technologies, Inc. |       | 344,961   |       | 566,198   |       | 2,112,742  |       | 2,905,524 |       |
| Basic  net income per share                             |       | 0.06      |       | 0.10      |       | 0.36       |       | 0.49      |       |
| Diluted  net income per share                           |       | 0.06      |       | 0.09      |       | 0.34       |       | 0.45      |       |
|                                                    |       |      |       |      |       |       |       |      |       |
| 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 attributable to UFP Technologies, Inc. |       | 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      |       |

 

 

F-31

----

 

****Schedule II****

 

**UFP TECHNOLOGIES, INC.**

 

**ConsolidatedFinancial Statement Schedule**

 

Valuation and QualifyingAccounts

 

Years ended December 31, 2009, 2008, and 2007

 

Accountsreceivable, allowance for doubtful accounts:

 
| ** **                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance  at beginning of year               |       | $        | 387,037    |     | $          | 307,131  |       | $ | 340,977 |   |
| Provision  (Recoveries) credited to expense |       | 155,069  |       | 64,320   |       | 58,025   |       |
| (Write-offs)  and recoveries                |       | (68,194  | )          | 15,586   |       | (91,871  | )          |
| Balance  at end of year                     |       | $        | 473,912    |     | $          | 387,037  |       | $ | 307,131 |   |

 

Inventoryallowance for obsolescence:

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance  at beginning of year |       | $        | 305,775    |     | $          | 295,405  |       | $ | 240,820 |   |
| Provision                     |       | 382,033  |       | 222,661  |       | 243,141  |       |
| Write-offs                    |       | (137,182 | )          | (212,291 | )          | (188,556 | )          |
| Balance  at end of year       |       | $        | 550,626    |     | $          | 305,775  |       | $ | 295,405 |   |

 

F-32

----