UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended
June 28, 2008
or
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o
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number 1-5129
MOD-PAC CORP.
(Exact name of registrant as specified in its charter)
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New York State
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1
6-0957153
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(State or other jurisdiction of
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(IRS employer identification no.)
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incorporation or organization)
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1801 Elmwood Avenue, Buffalo, New York
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14207
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(Address of principal executive offices)
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(Zip code)
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Telephone number including area code:
(716) 873-0640
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for
such shorter period that the registrant was required to file such reports, and (2) has been subject
to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
o
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Accelerated filer
o
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Non-accelerated filer
þ
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
The number of shares outstanding of each class of common stock as of June 28, 2008 were:
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Common Stock, $0.01 par value
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2,779,469 shares
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Class B Common Stock, $0.01 par value
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650,662 shares
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MOD-PAC CORP.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Part 1. Financial Information
Item 1. Financial Statements
MOD-PAC CORP.
Consolidated Balance Sheets
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(dollars in thousands)
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June 28, 2008
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December 31,
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(Unaudited)
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2007
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Current assets:
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Cash and cash equivalents
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$
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128
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$
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98
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Trade accounts receivable, net of allowance of :
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$76 in 2008 and in 2007
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4,498
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4,256
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Inventories
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3,877
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3,541
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Prepaid expenses
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336
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259
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Total current assets
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8,839
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8,154
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Property, plant and equipment, at cost
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67,959
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67,812
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Less accumulated depreciation and amortization
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(45,399
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)
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(44,488
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)
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Net property, plant and equipment
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22,560
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23,324
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Other assets
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1,351
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1,316
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Totals assets
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$
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32,750
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$
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32,794
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Current liabilities:
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Current maturities of long-term debt
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$
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151
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$
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48
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Accounts payable
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2,966
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2,912
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Accrued expenses
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641
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815
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Total current liabilities
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3,758
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3,775
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Line of credit
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1,700
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400
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Long-term debt
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2,485
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2,050
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Other liabilities
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30
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269
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Deferred income taxes
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499
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Total liabilities
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$
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7,973
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$
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6,993
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Shareholders equity:
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Common stock, $.01 par value
Authorized 20,000,000 shares, issued
3,430,167 in 2008, 3,414,051 in 2007
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34
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34
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Class B common stock, $.01 par value
Authorized 5,000,000 shares, issued
650,662 in 2008, 666,778 in 2007
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7
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7
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Additional paid-in capital
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2,293
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2,129
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Retained earnings
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28,658
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29,696
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30,992
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31,866
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Less treasury shares, at cost 650,698 in 2008
and 625,698 in 2007
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(6,215
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)
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(6,065
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)
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Total shareholders equity
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24,777
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25,801
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Total liabilities and shareholders equity
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$
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32,750
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$
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32,794
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See notes to financial statements
3
MOD-PAC CORP.
Consolidated Statements of Operations
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(dollars in thousands)
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(Unaudited)
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Six Months Ended
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Three Months Ended
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June 28,
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June 30,
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June 28,
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June 30,
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2008
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2007
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2008
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2007
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Revenue:
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Net sales
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$
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22,418
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$
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21,908
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$
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10,952
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$
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10,768
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Rental income
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223
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257
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112
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138
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Total revenue
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22,641
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22,165
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11,064
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10,906
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Costs and Expenses:
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Cost of products sold
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20,012
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20,289
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9,781
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10,477
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Selling, general and
administrative expenses
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4,140
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4,876
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2,084
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2,320
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Interest expense, net
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125
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36
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73
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31
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Other income
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(81
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)
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(26
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)
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(69
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)
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(20
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Total costs and expenses
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24,196
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25,175
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11,869
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12,808
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Loss before income taxes
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(1,555
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)
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(3,010
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)
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(805
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)
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(1,902
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)
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Income tax benefit
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(517
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)
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(990
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)
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(267
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)
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(631
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Net loss
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$
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(1,038
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)
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$
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(2,020
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)
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$
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(538
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$
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(1,271
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)
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Loss per share:
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Basic
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$
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(.30
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)
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$
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(.59
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)
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$
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(.16
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)
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$
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(.37
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)
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Diluted
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$
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(.30
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$
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(.59
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)
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$
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(.16
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)
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$
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(.37
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)
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See notes to financial statements
4
MOD-PAC CORP.
Consolidated Statements of Cash Flows
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(dollars in thousands)
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(Unaudited)
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Six Months Ended
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June 28,
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June 30,
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2008
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2007
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Cash flows from operating activities:
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Net loss
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$
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(1,038
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)
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$
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(2,020
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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1,990
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2,460
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Provision for doubtful accounts
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12
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28
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Stock option compensation expense
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164
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129
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Deferred income taxes
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(519
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)
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(992
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)
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(Gain) loss on disposal of assets
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(54
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)
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9
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Cash flows from changes in operating assets and liabilities
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Accounts receivable
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(254
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)
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(460
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)
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Inventories
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(336
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)
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(647
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)
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Prepaid expenses
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(77
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)
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45
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Other liabilities
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(239
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)
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Accounts payable
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54
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(1,046
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)
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Refundable or payable income taxes
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1,014
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Accrued expenses
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(174
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)
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(259
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)
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Net cash used in operating activities
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(471
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)
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(1,739
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)
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Cash flows from investing activities:
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Proceeds from sale of assets
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125
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Sale of temporary investments
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1,000
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Change in other assets
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(41
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)
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(25
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)
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Capital expenditures
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(1,266
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)
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(597
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)
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Acquisition of DDM assets
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(947
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)
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Net cash used in investing activities
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(1,182
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)
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(569
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)
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Cash flows from financing activities:
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Principal payments on long-term debt and capital leases
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(42
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)
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(28
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)
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Increase in line of credit
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1,300
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Proceeds from loans
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580
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Proceeds from issuance of stock
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8
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Purchase of treasury stock
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(150
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)
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Deferred financing fees
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(5
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)
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(40
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)
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Net cash provided by (used in) financing activities
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1,683
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(60
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)
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Net increase (decrease) in cash and cash equivalents
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30
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|
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(2,368
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)
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Cash and cash equivalents at beginning of year
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|
98
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|
|
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2,444
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Cash and cash equivalents at end of period
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$
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128
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$
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76
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|
|
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|
See notes to financial statements.
5
MOD-PAC CORP.
Notes to Consolidated Financial Statements
Six Months Ended June 28, 2008
1)
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included and are of a normal recurring
nature. The results of operations for any interim period are not necessarily indicative of results
for the full year. Operating results for the six-month period ended June 28, 2008 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2008.
The balance sheet at December 31, 2007 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required by generally accepted
U.S. accounting principles for complete financial statements.
For further information, refer to the financial statements and footnotes thereto included in the
Companys 2007 annual report on Form 10-K.
Revenue is recognized on the accrual basis, which is at the time of shipment of goods or acceptance
at the United States Postal Service.
2)
Stock-Based Compensation
MOD-PAC CORP. established a Stock Option Plan that authorized the issuance of 800,000 shares of
Common Stock for the purpose of attracting and retaining executive officers and key employees, and
to align managements interests with those of the shareholders
of
MOD-PAC CORP.
The options must
be exercised no more than ten years from the grant date and vest over up to a five-year period.
The exercise price for the options is equal to the fair market value of the common stock at the
date of grant.
MOD-PAC CORP. established the Directors Stock Option Plan that authorized the issuance of 200,000
shares of Common Stock for the purpose of attracting and retaining the services of experienced and
knowledgeable outside directors, and to align their interest with those of its shareholders. The
options must be exercised no more than ten years from the grant date and vest after six months.
The exercise price for the options is equal to the fair market value at the date of grant.
The Company uses a straight-line method of attributing the value of stock-based compensation
expense, subject to minimum levels of expense, based on vesting. Stock compensation expense
recognized during the period is based on the value of the portion of shared-based payment awards
that is ultimately expected to vest during the period.
The fair value of stock options granted was estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted average fair value of the options was $2.27 for options granted
during the six months ended June 28, 2008. No options were granted during the six months ended
June 30, 2007. The following table provides the range of assumptions used to value stock options
granted during the six months ended June 28, 2008.
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Expected volatility
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|
39
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%
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Risk-free rate
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2.9
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%
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Expected dividends
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0
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%
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Expected term (in years)
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|
5.5
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|
To determine expected volatility, the Company uses historical volatility based on weekly closing
prices of its Common Stock since the Companys spin-off from Astronics Corporation in March 2003.
The risk-free rate is based on the United States Treasury yield curve at the time of grant for the
appropriate term of the options granted. Expected dividends are based on the Companys history and
expectation of dividend payouts. The expected term of stock options is based on vesting schedules,
expected exercise patterns and contractual terms.
6
A summary of the Companys stock option activity and related information for the six months ended
June 28, 2008 is as follows:
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|
|
|
|
|
|
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|
|
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|
|
Weighted
|
|
|
|
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|
|
|
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Average Exercise
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Aggregate
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(aggregate intrinsic value in thousands)
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Options
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Price
|
|
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Intrinsic Value
|
|
|
|
|
Outstanding at January 1, 2008
|
|
|
406,867
|
|
|
$
|
9.15
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|
$
|
149
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|
Options granted
|
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|
16,000
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|
5.62
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|
|
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Options forfeited
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|
|
(9,656
|
)
|
|
|
7.03
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 28, 2008
|
|
|
413,211
|
|
|
$
|
9.06
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 28, 2008
|
|
|
315,401
|
|
|
$
|
9.23
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax option holders
intrinsic value, based on the Companys closing stock price of Common Stock of $4.17 as of June 28,
2008, which would have been received by the option holders had all option holders with an exercise
price less than the market price been exercised as of that date. As of June 28, 2008, there were
no options with an exercise price below the closing stock price on that date. The intrinsic value
of the options exercised is based on the Companys closing stock price of common stock as of the
date the option is exercised. There were no options exercised in the first six months of 2008.
The Companys current policy is to issue additional new shares upon exercise of stock options.
The fair value of options vested since December 31, 2007 is $0.1 million. At June 28, 2008, total
compensation costs related to non-vested awards not yet recognized was $0.3 million which will be
recognized over a weighted average period of 1.70 years.
The following is a summary of weighted average exercise prices and contractual lives for
outstanding and exercisable stock options as of June 28, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
|
|
Remaining
|
|
Weighted
|
Exercise Price
|
|
|
|
|
|
Life
|
|
Exercise
|
|
|
|
|
|
Life in
|
|
Average
|
Range
|
|
Shares
|
|
in Years
|
|
Price
|
|
Shares
|
|
Years
|
|
Exercise Price
|
|
|
|
$5.22 to $6.22
|
|
|
71,626
|
|
|
|
3.0
|
|
|
$
|
5.55
|
|
|
|
71,626
|
|
|
|
3.0
|
|
|
$
|
5.55
|
|
$7.36 to $8.44
|
|
|
149,220
|
|
|
|
7.7
|
|
|
$
|
7.64
|
|
|
|
94,890
|
|
|
|
6.6
|
|
|
$
|
8.12
|
|
$10.00 to $15.54
|
|
|
192,365
|
|
|
|
7.0
|
|
|
$
|
11.45
|
|
|
|
148,885
|
|
|
|
6.7
|
|
|
$
|
11.70
|
|
|
|
|
|
|
|
413,211
|
|
|
|
6.6
|
|
|
$
|
9.06
|
|
|
|
315,401
|
|
|
|
5.8
|
|
|
$
|
9.23
|
|
|
|
|
|
|
3)
Inventories
Inventories are stated at the lower of cost or market, cost being determined in accordance with the
first-in, first-out method. Inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Three months ended
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
June 28,
|
|
|
December
|
|
|
|
2008
|
|
|
31, 2007
|
|
Finished goods
|
|
$
|
2,636
|
|
|
$
|
2,214
|
|
Work in progress
|
|
|
214
|
|
|
|
118
|
|
Raw material
|
|
|
1,027
|
|
|
|
1,209
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
3,877
|
|
|
$
|
3,541
|
|
|
|
|
|
|
|
|
7
4)
Product Line Net Sales
Product line net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
June 28,
|
|
|
June 30,
|
|
|
June 28,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Folding cartons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom folding cartons
|
|
$
|
13,994
|
|
|
$
|
13,686
|
|
|
$
|
7,043
|
|
|
$
|
6,949
|
|
Stock box
|
|
|
4,114
|
|
|
|
4,447
|
|
|
|
1,570
|
|
|
|
1,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Folding cartons sub-total
|
|
|
18,108
|
|
|
|
18,133
|
|
|
|
8,613
|
|
|
|
8,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2,138
|
|
|
|
1,304
|
|
|
|
1,150
|
|
|
|
846
|
|
Personalized
|
|
|
2,172
|
|
|
|
2,471
|
|
|
|
1,189
|
|
|
|
1,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print services sub-total
|
|
|
4,310
|
|
|
|
3,775
|
|
|
|
2,339
|
|
|
|
2,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,418
|
|
|
$
|
21,908
|
|
|
$
|
10,952
|
|
|
$
|
10,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5)
Loss Per Share
The following table sets forth the computation of loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
June 28,
|
|
|
June 30,
|
|
|
June 28,
|
|
|
June 30,
|
|
(in thousands except per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net loss as reported
|
|
$
|
(1,038
|
)
|
|
$
|
(2,020
|
)
|
|
$
|
(538
|
)
|
|
$
|
(1,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share weighted average shares
|
|
|
3,438
|
|
|
|
3,450
|
|
|
|
3,430
|
|
|
|
3,450
|
|
Net effect of dilutive stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share weighted average shares
|
|
|
3,438
|
|
|
|
3,450
|
|
|
|
3,430
|
|
|
|
3,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share
|
|
$
|
(.30
|
)
|
|
$
|
(.59
|
)
|
|
$
|
(.16
|
)
|
|
$
|
(.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(.30
|
)
|
|
$
|
(.59
|
)
|
|
$
|
(.16
|
)
|
|
$
|
(.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of dilutive stock options has not been included for the six months and three months
ended June 28, 2008 and June 30, 2007, since this would be anti-dilutive as a result of the
Companys net loss.
6)
Income Taxes
The Companys effective tax rate for the first six months of 2008 was 33.2%, which approximates the
Companys expected tax rate for 2008 exclusive of the recording of any valuation allowances which
may be necessary to offset any deferred tax assets which may be recorded in future quarters of
2008. The effective tax rate for the first six months of 2007 was 32.9%.
The Companys continuing practice is not to recognize interest and/or penalties related to income
tax matters in income tax expense. As of June 28, 2008, the Company had no amounts accrued related
to uncertain tax positions. The tax years 2006 and 2007 remain open to examination by the major
state and federal taxing jurisdictions to which the Company is subject.
8
7)
Capital Structure
The Companys Class B stock is fully convertible into Common stock on a one-for-one basis at no
cost. During the first six months of 2008, 16,116 shares of Class B stock were converted to Common
stock.
8)
Information Regarding Industry Segments
The Company operates as one reporting segment. The Companys customer base is comprised of
companies and individuals throughout the United States and North America and is diverse in both
geographic and demographic terms. The format of the information used by the Companys CEO is
consistent with the reporting format used in the Companys 2007 Form 10-K and other external
information.
9)
Line of Credit
The Company has access to a $5.0 million committed line of credit with a commercial bank, which
expires in March, 2010. At June 28, 2008, $1.7 million was borrowed and an additional $0.25
million was in use through standby letters of credit. Interest on the line of credit is either
LIBOR plus 150 basis points or the prime rate plus 50 basis points, at the Companys option.
10)
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement
establishes a framework for measuring fair value under generally accepted accounting principles
(GAAP), changes the definition of fair value within that framework, and expands disclosures about
the use of fair value measurement. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years; however, the FASB provided a one
year deferral for implementation of the standard for nonfinancial assets and liabilities. The
adoption of SFAS 157 did not have an impact on the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve financial reporting
by providing entities with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply complex hedging
accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. The adoption of SFAS 159 did not have an impact on the Companys consolidated financial
statements.
In December 2007, the FASB Statement 141R, Business Combinations (SFAS 141R) was issued. SFAS
141R replaces SFAS 141. SFAS 141R requires the acquirer of a business to recognize and measure the
identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to the business
combination to be expensed as incurred. SFAS 141R applies prospectively to business combinations;
the effective date for the Company will be January 1, 2009. The Company has not yet determined the
impact SFAS 141R will have, if any, on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51. The objective of SFAS No. 160 is to improve the relevance,
comparability and transparency of the financial information that a reporting entity provides in its
consolidated financial statements by establishing additional accounting and reporting standards.
SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Early adoption
of this statement is prohibited. The Company does not believe that SFAS 160 will have an impact on
its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133 (SFAS 161), which is intended to improve
financial reporting about derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an entitys financial
position, financial performance and cash flows. SFAS 161 is effective in fiscal years beginning
after November 15, 2008. The Company does not believe that SFAS 161 will have an impact on its
consolidated financial statements.
9
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
REVENUE
For the second quarter of 2008 total revenue was $11.1 million compared with $10.9 million in 2007,
an increase of 1.4%. The custom folding cartons line sales were $7.0 million in 2008 compared with
$6.9 million in the second quarter of 2007, an increase of 1.4% with increased business volumes
from several customers being partially offset by decreased business from primarily one customer due
to that customers business conditions. Sales of the Companys stock box product line were $1.6
million, a decrease of 4.1% from the prior years second quarter sales. Personalized print sales
for the second quarter of 2008 were $1.2 million, compared with $1.3 million in the second quarter
of 2007, a decrease of 10.9% due to one customer changing from buying product from the Company to
making product internally, along with general soft market conditions. Second quarter 2008
commercial print sales grew 35.9% to $1.2 million compared with sales of $0.8 million in the second
quarter of 2007. The commercial print increase was primarily due to additional sales driven by
capability from the DDM Digital Imaging, Data Processing and Mailing Services LC acquisition
which was effective May 1, 2007, along with sales to custom folding cartons customers.
For the first six months of 2008 total revenue was $22.6 million compared with $22.2 million in
2007, an increase of 2.1%. The custom folding cartons product line sales were $14.0 million
compared with $13.7 million in 2007, an increase of 2.3% with increased business volumes from
several customers being partially offset by decreased business from primarily one customer due to
that customers business conditions. Sales of the Companys stock box product line were $4.1
million, compared with $4.4 million in the prior year, a decrease of 7.5% primarily due to the
early Easter season. Personalized print sales for the first six months of 2008 were $2.2 million
compared with $2.5 million in the same period of 2007, a decrease of 12.1% due to one customer
changing from buying product from the Company to making product internally, along with general soft
market conditions. The first six months of 2008 commercial print sales grew 64.0% to $2.1 million
compared with sales of $1.3 million in the first six months of 2007. The commercial print increase
was primarily due to additional sales driven by capability from the DDM Digital Imaging, Data
Processing and Mailing Services LC acquisition which was effective May 1, 2007, along with sales to
custom folding cartons customers.
EXPENSES AND MARGINS
Gross margin was 11.6% for the second quarter of 2008, an improvement from 3.9% in the second
quarter of 2007. This improvement was a result of decreases in labor costs, repairs expense and
depreciation expense, combined with price increases, offset partially by higher paperboard cost.
Selling, general, and administrative costs decreased 10.2% to $2.1 million in the first quarter of
2008 from $2.3 million during the same period in the prior year due to lower wage related costs,
depreciation expense and other cost reduction measures.
Gross margin was 11.6% for the first six months of 2008, an increase from 8.5% in the first six
months of 2007. This increase was a result of decreases in labor costs, repairs expense and
depreciation expense combined with price increases, offset partially by increases in paperboard
cost and a weaker product mix. Selling, general, and administrative costs decreased 15.1% to $4.1
million in the first half of 2008 from $4.9 million during the prior years first half, due to
lower depreciation expense, wage related costs and other cost reduction measures.
TAXES
The Companys effective tax rate for the second quarter and the first six months of 2008 was 33.2%,
which approximates the Companys expectations. The effective tax rate in the second quarter of
2007 was 33.2% and 32.9% for the first six months of 2007.
Due to its continued loss position, the Company will not be able to record any additional benefit
for future tax losses as a deferred tax asset in 2008.
NET LOSS AND LOSS PER SHARE
The net loss for the second quarter of 2008 was $0.5 million, an improvement of $0.7 million from
the second quarter of 2007. This decrease in loss was due to the fluctuations discussed above.
Diluted loss per share was $0.16 in the second quarter of 2008 and $0.37 in the second quarter of
2007.
10
The net loss for the first six months of 2008 was $1.0 million, an improvement of $1.0 million from
the first six months of 2007. This decrease in loss was due to the fluctuations discussed above.
Diluted loss per share was $0.30 in the first six months of 2008 and $0.59 in the first six months
of 2007.
LIQUIDITY
Cash and cash equivalents and temporary investments were $0.1 million at June 28, 2008, relatively
unchanged from December 31, 2007.
The Company has access to a $5.0 million committed line of credit with a commercial bank, which
expires in March 2010. At June 28, 2008, $1.7 million was borrowed and an additional $0.25 million
was in use through standby letters of credit. The borrowed amount is an increase of $1.3 million
from the balance at December 31, 2007. Interest on the line of credit is either LIBOR plus 150
basis points or the prime rate plus 50 basis points at the Companys option.
The increase in the amount outstanding under the line of credit in the first six months of 2008 was
primarily the result of net losses, capital expenditures, working capital requirements and a share
re-purchase in the first quarter, partially offset by non-cash depreciation, amortization expense
and proceeds from equipment loans.
Inventory increased by $0.3 million during the first six months of 2008 primarily in finished goods
and work in progress, partially offset by reduced raw material, due primarily to a planned
operation shutdown during the first week of July 2008.
Receivables increased by $0.3 million during the first six months of 2008 due primarily to sales
timing and slightly higher sales in the second quarter of 2008.
Capital expenditures driven primarily by productivity improvement investments, for the first six
months of 2008 were $1.3 million compared with $1.4 million in the first six months of 2007, which
includes the acquisition of the assets of DDM Digital Imaging, Data Processing and Mailing
Services LC. Depreciation and amortization for the first six months of 2008 was $2.0 million
compared with $2.5 million in the same period last year.
The Company believes that cash, cash equivalents and the line of credit, are sufficient to meet
cash requirements for operations, capital expenditures and debt service for the balance of 2008.
There were 25,000 shares repurchased by the Company during the first six months of 2008. The
Company has authorization to repurchase 75,885 shares at June 28, 2008. The closing price of the
Companys stock at June 28, 2008 was $4.17. At this price, the repurchase of 75,885 shares would
require $316,440.
COMMITMENTS
The Company has commitments for items that it purchases in the normal on-going affairs of the
business. The Company is not aware of any obligations in excess of normal market conditions, or of
any long-term commitments that would have a material adverse affect on its financial condition.
MARKET RISK
There has been no significant change in market risks since December 31, 2007.
As a result of short cycle times, the Company does not have any long-term commitments to purchase
production raw materials or sell products that would present significant risks due to price
fluctuations. Raw paper stock is available to us from multiple domestic sources; as a result, we
believe the risk of supply interruptions due to such things as strikes at the source of supply or
to logistics systems is limited.
Risks due to fluctuation in interest rates are not material to the Company at June 28, 2008 because
of our limited exposure to floating rate debt. The Company had no balance in temporary investments
at June 28, 2008.
Since May of 2003, over 90% of the Companys power needs are met through natural gas. The Company
has investigated supply contracts of various lengths and currently it has supply arrangements for
fixed prices on approximately 50% of its estimated usage through September 2009. Historically, the
price of natural gas has fluctuated widely. Although the Company is concerned about cost, its main
concern is availability. The Company monitors the availability of natural gas, considering such
factors as amount in storage, gas production data and
transportation data, so that it can take appropriate action if concerns about availability occur.
The Company has investigated and tested a back-up power source in the form of a rented
transportable diesel-powered generator. Although such generators are generally available, the
Company cannot be assured that a generator adequate to meet the Companys needs would be available
if and when such need should arise.
11
We have no foreign operations, nor do we transact any business in foreign currencies. Accordingly,
we have no foreign currency market risks.
The market risk that the Company was exposed to at December 31, 2007 was generally the same as
described above.
CRITICAL ACCOUNTING POLICIES
There have been no changes in critical accounting policies in the current year from those disclosed
in our 2007 Form 10-K.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are forward-looking statements within the meaning of
the U.S. Private Securities Litigation Reform Act of 1995. All forward-looking statements involve
risks and uncertainties. All statements contained herein that are not clearly historical in nature
are forward-looking, and the word anticipate, believe, expect, estimate, project, and
similar expressions are generally intended to identify forward-looking statements. Any forward
looking statement contained herein, in press releases, written statements or other documents filed
with the Securities and Exchange Commission, or in MOD-PACs communications and discussions with
investors and analysts in the normal course of business through meetings, webcasts, phone calls and
conference calls, regarding expectations with respect to sales, earnings, cash flows, operating
efficiencies, product and market channel expansions, capacity utilization and expansion, and
repurchase of capital stock, are subject to known and unknown risks, uncertainties and
contingencies. Many of these risks, uncertainties, and contingencies are beyond our control, and
may cause actual results, performance or achievements to differ materially from anticipated
results, performance or achievements. Factors that might affect such forward-looking statements
include, among other things:
|
|
|
Overall economic and business conditions;
|
|
|
|
|
The demand for MOD-PACs goods and services;
|
|
|
|
|
Customer acceptance of the products and services MOD-PAC provides;
|
|
|
|
|
Competitive factors in print and print services and folding cartons industries;
|
|
|
|
|
Changes in tax requirements (including tax rate changes, new tax laws and revised tax
law interpretations);
|
|
|
|
|
The availability and costs of natural gas supplies in Western New York State;
|
|
|
|
|
The internal and external costs of compliance with laws and regulations such as Section
404 of the Sarbanes-Oxley Act of 2002;
|
|
|
|
|
Litigation against the Company.
|
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
See Market Risk in Item 2, above.
Item 4T.
Controls and Procedures
The companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures as defined in Rules 13a 15(e) and 15(d) 15(e) of the Securities Exchange Act of
1934, as of June 28, 2008. Based on that evaluation, the Companys Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective as of June 28, 2008. There were no changes in the Companys internal control over
financial reporting during the second quarter of 2008 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
12
PART II OTHER INFORMATION
Item 1.
Legal Proceedings
There are no material pending legal proceedings to which the Registrant or any of its
subsidiaries is a party or of which any of their property is the subject.
Item 1A
.
Risk Factors
There has been no significant change to the risk factors disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2007.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
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(c) Total Number
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(d) Maximum Number
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(a) Total
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of Shares (or Units)
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(or Approximate Dollar
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Number of
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Purchased as Part
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Value) of Shares (or
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Shares (or
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(b) Average Price
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of Publicly
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Units) that May Yet Be
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Units)
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Paid per Share
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Announced Plans
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Purchased Under the
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Period
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Purchased
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(or Unit)
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or Programs
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Plans or Programs
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March 30 April
26, 2008
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75,885
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April 27
May 24, 2008
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75,885
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May 25
June 28, 2008
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75,885
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Total
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Item 3.
Defaults Upon Senior Securities
Not applicable.
Item 4.
Submission of Matters to a Vote of Securities Holders
The Companys Annual Meeting of Shareholders was held on May 7, 2008.
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1.)
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The nominees to the Board of Directors were elected based on the following shares voted:
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Nominee
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For
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Authority Withheld
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William G. Gisel, Jr.
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7,443,561
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322,824
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Daniel G. Keane
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7,436,121
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330,264
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Kevin T. Keane
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7,412,006
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354,379
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Robert J. McKenna
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7,442,367
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324,018
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Howard Zemsky
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7,445,834
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320,551
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2.)
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The ratification of Ernst & Young LLP as the Registrants auditors was
approved by the following vote: 7,478,708 in favor; 243,236 against; and 44,441
abstentions.
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3.)
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The action to convert all of the Companys shares of
Class B Stock into shares of Common Stock was defeated by the following vote: 1,172,134 in favor;
4,771,004 against; 84,988 abstentions.
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13
Item 5.
Other Information
Not applicable.
Item 6.
Exhibits
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Exhibit 31.1
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Section 302 Certification Chief Executive Officer
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Exhibit 31.2
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Section 302 Certification Chief Financial Officer
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Exhibit 32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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Exhibit 32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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MOD-PAC CORP.
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(Registrant)
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Date: August 6, 2008
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By:
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/s/ David B. Lupp
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David B. Lupp
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Chief Financial Officer
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15
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