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 July 4, 2009
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 0-50063
MOD-PAC CORP.
(Exact name of registrant as specified in its charter)
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New York State
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16-0957153
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(State or other jurisdiction of incorporation or organization)
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(IRS employer identification no.)
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1801 Elmwood Ave., Buffalo, NY
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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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
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
o
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Smaller reporting company
þ
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(Do not check if a smaller reporting company)
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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 July 4, 2009 were:
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Common Stock, $0.01 par value
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2,790,616 shares
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Class B Common Stock, $0.01 par value
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639,515 shares
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MOD-PAC CORP.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Part 1. Financial Information
Item 1. Financial Statements
MOD-PAC CORP.
Consolidated Balance Sheets
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(dollars in thousands)
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July 4,
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December 31,
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2009
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2008
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(Unaudited)
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Current assets:
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Cash and cash equivalents
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$
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166
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$
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200
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Trade accounts receivable, net of allowance
of $196 in 2009 and $170 in 2008
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4,648
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4,750
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Inventories
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4,193
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4,313
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Prepaid expenses
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521
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357
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Total current assets
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9,528
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9,620
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Property, plant and equipment, at cost
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63,409
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68,707
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Less accumulated depreciation
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(47,028
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)
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(47,116
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)
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Net property, plant and equipment
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16,381
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21,591
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Assets held for sale
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1,928
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Other assets
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1,324
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1,340
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Totals assets
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$
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29,161
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$
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32,551
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Current liabilities:
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Current maturities of long-term debt
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$
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174
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$
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168
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Accounts payable
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2,805
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3,222
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Accrued expenses
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580
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581
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Line of credit, current
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2,300
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Total current liabilities
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5,859
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3,971
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Line of credit, long-term
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1,000
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Long-term debt
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2,325
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2,413
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Other liabilities
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52
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37
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Deferred income taxes
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118
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Total liabilities
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$
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8,236
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$
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7,539
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Shareholders equity:
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Common stock, $.01 par value
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Authorized 20,000,000 shares, issued
3,441,314 in 2009, 3,439,347 in 2008
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34
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34
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Class B common stock, $.01 par value
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Authorized 5,000,000 shares, issued
639,515 in 2009, 641,482 in 2008
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7
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7
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Additional paid-in capital
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2,555
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2,385
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Retained earnings
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24,544
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28,801
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27,140
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31,227
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Less treasury shares, at cost 650,698 in 2009 and 2008
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(6,215
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)
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(6,215
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)
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Total shareholders equity
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20,925
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25,012
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Total liabilities and shareholders equity
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$
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29,161
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$
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32,551
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See notes to financial statements.
3
MOD-PAC CORP.
Consolidated Statements of Operations
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(dollars in thousands)
(Unaudited)
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Six Months Ended
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Three Months Ended
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July 4,
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June 28,
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July 4,
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June 28,
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2009
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2008
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2009
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2008
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Revenue:
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Net sales
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$
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23,281
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$
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22,418
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$
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11,071
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$
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10,952
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Rental income
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258
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223
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142
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112
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Total revenue
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23,539
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22,641
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11,213
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11,064
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Costs and Expenses:
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Cost of products sold
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21,663
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20,012
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10,756
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9,781
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Selling, general and
administrative expenses
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3,958
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4,140
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1,960
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2,084
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Write-down of impaired assets
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2,175
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2,175
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Interest expense, net
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130
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125
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67
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73
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Other income
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(11
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)
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(81
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)
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(22
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)
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(69
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)
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Total costs and expenses
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27,915
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24,196
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14,936
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11,869
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Loss before income taxes
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(4,376
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)
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(1,555
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)
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(3,723
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)
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(805
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)
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Income tax benefit
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(120
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)
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(517
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)
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(267
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)
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Net loss
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$
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(4,256
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)
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$
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(1,038
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)
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$
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(3,723
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)
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$
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(538
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)
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Loss per share:
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Basic
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$
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(1.24
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)
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$
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(0.30
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)
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$
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(1.09
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)
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$
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(0.16
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)
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Diluted
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$
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(1.24
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)
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$
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(0.30
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)
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$
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(1.09
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$
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(0.16
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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)
(Unaudited)
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Six Months Ended
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July 4,
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June 28,
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2009
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2008
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Cash flows from operating activities:
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Net loss
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$
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(4,256
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)
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$
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(1,038
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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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1,869
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1,990
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Provision for doubtful accounts
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39
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12
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Stock option compensation expense
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169
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164
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Deferred income taxes
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(118
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)
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(519
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)
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Write-down of impairment of assets
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2,175
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Loss (gain) on disposal of assets
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24
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(54
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)
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Cash flows from changes in operating assets and liabilities
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Accounts receivable
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63
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(254
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)
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Inventories
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120
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(336
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)
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Prepaid expenses
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(164
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)
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(77
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)
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Other liabilities
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15
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(239
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)
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Accounts payable
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(417
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)
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54
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Accrued expenses
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(1
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)
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(174
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)
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|
|
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Net cash used in operating activities
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(482
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)
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(471
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)
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Cash flows from investing activities:
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Proceeds from the sale of assets
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6
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125
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Change in other assets
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(74
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)
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|
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(41
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)
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Capital expenditures
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|
(702
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)
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|
|
(1,266
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)
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|
|
|
|
|
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|
|
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Net cash used in investing activities
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(770
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)
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(1,182
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)
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Cash flows from financing activities:
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|
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Principal payments on long-term debt
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(82
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)
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(42
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)
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Increase in line of credit
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|
1,300
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|
|
|
1,300
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|
Purchase of treasury stock
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|
|
|
|
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(150
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)
|
Deferred financing fees
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|
|
|
|
|
(5
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net cash provided by financing activities
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1,218
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|
|
|
1,683
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net (decrease) increase in cash and cash equivalents
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(34
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)
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|
|
30
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|
|
|
|
|
|
|
|
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|
Cash and cash equivalents at beginning of year
|
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|
200
|
|
|
|
98
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Cash and cash equivalents at end of period
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|
$
|
166
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|
|
$
|
128
|
|
|
|
|
|
|
|
|
See notes to financial statements.
5
MOD-PAC CORP.
Notes to Consolidated Financial Statements
Six Months Ended July 4, 2009
(unaudited)
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 July 4, 2009 are not
necessarily indicative of the results that may be expected for the year ending December 31, 2009.
The balance sheet at December 31, 2008 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 2008 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)
Rationalization of Product Lines
In the second quarter of 2009, the Company rationalized its product lines in order to capitalize on
its growing position in the custom folding cartons product line.
The following charges, incurred in the second quarter of 2009, are associated with this
rationalization process:
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(in thousands)
|
|
|
|
|
|
Write-down of impaired assets
|
|
$
|
1,933
|
|
Workforce reduction costs (included in Selling, general and
administrative expenses)
|
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|
65
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|
Other rationalization charges (included in Cost of products sold)
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|
|
134
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|
|
|
|
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Total
|
|
$
|
2,132
|
|
|
|
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|
As of July 4, 2009, approximately $96 thousand of accrued liabilities associated with workforce
reduction charges and contract settlement costs are recorded on the consolidated balance sheet.
Approximately $76 thousand of this amount is expected to be paid in the third quarter of 2009. The Company does
not expect to incur any additional cost associated with this rationalization.
6
3)
Product Line Net Sales
Product line net sales are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
July 4,
|
|
|
June 28,
|
|
|
July 4,
|
|
|
June 28,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Folding cartons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom folding cartons
|
|
$
|
16,480
|
|
|
$
|
13,994
|
|
|
$
|
7,989
|
|
|
$
|
7,043
|
|
Stock packaging
|
|
|
3,649
|
|
|
|
4,114
|
|
|
|
1,475
|
|
|
|
1,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Folding cartons sub-total
|
|
|
20,129
|
|
|
|
18,108
|
|
|
|
9,464
|
|
|
|
8,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty print and direct mail
|
|
|
1,519
|
|
|
|
2,138
|
|
|
|
747
|
|
|
|
1,150
|
|
Personalized
|
|
|
1,633
|
|
|
|
2,172
|
|
|
|
860
|
|
|
|
1,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print services sub-total
|
|
|
3,152
|
|
|
|
4,310
|
|
|
|
1,607
|
|
|
|
2,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,281
|
|
|
$
|
22,418
|
|
|
$
|
11,071
|
|
|
$
|
10,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4)
Loss Per Share
The following table sets forth the computation of loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
July 4,
|
|
|
June 28,
|
|
|
July 4,
|
|
|
June 28,
|
|
(in thousands except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Net loss as reported
|
|
$
|
(4,256
|
)
|
|
$
|
(1,038
|
)
|
|
$
|
(3,723
|
)
|
|
$
|
(538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per
share weighted average shares
|
|
|
3,430
|
|
|
|
3,438
|
|
|
|
3,430
|
|
|
|
3,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(1.24
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(1.09
|
)
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no effect for stock options that were dilutive for the three and six months ended July 4,
2009 and June 28, 2008, since the Company had a net loss in both periods.
5)
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:
|
|
|
|
|
|
|
|
|
|
|
July 4,
|
|
|
December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
2,505
|
|
|
$
|
2,671
|
|
Work in progress
|
|
|
433
|
|
|
|
238
|
|
Raw material
|
|
|
1,255
|
|
|
|
1,404
|
|
|
|
|
|
|
|
|
Total inventory
|
|
$
|
4,193
|
|
|
$
|
4,313
|
|
|
|
|
|
|
|
|
7
6)
Income Taxes
The Companys effective tax rate for the second quarter and first six months of 2009 was 0% and
2.7%, respectively. This benefit was less than the statutory income tax rate, primarily as a
result of the Company recording a full valuation allowance of $1.3 million related to its net
deferred tax asset. The valuation allowance was recorded due to the uncertainty with respect to
utilizing this net deferred tax asset in the future based on the trend of operating losses. The
effective tax rate for the second quarter and first six months of 2008 was 33.2%.
The Companys continuing practice is not to recognize interest and/or penalties related to income
tax matters in income tax expense. As of July 4, 2009, the Company had no amounts accrued related
to uncertain tax positions. The tax years 2006, 2007, and 2008 remain open to examination by the
major taxing jurisdictions to which the Company is subject.
7)
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 $1.08 and $2.27 for
options granted during the six months ended July 4, 2009 and June 28, 2008, respectively. The
following table provides the range of assumptions used to value stock options granted during the
six months ended July 4, 2009 and June 28, 2008.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
July 4,
|
|
|
June 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
75
|
%
|
|
|
39
|
%
|
Risk-free rate
|
|
|
2.0
|
%
|
|
|
2.9
|
%
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected term (in years)
|
|
|
5.5
|
|
|
|
5.5
|
|
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.
8
A summary of the Companys stock option activity and related information for the six months ended
July 4, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Intrinsic
|
|
(aggregate intrinsic value in thousands)
|
|
Options
|
|
|
Exercise Price
|
|
|
Value
|
|
Outstanding at January 1, 2009
|
|
|
537,009
|
|
|
$
|
7.33
|
|
|
$
|
67
|
|
Options granted
|
|
|
30,000
|
|
|
|
1.68
|
|
|
|
|
|
Options forfeited
|
|
|
(17,180
|
)
|
|
|
4.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 4, 2009
|
|
|
549,829
|
|
|
$
|
7.10
|
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 4, 2009
|
|
|
411,589
|
|
|
$
|
7.80
|
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
|
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 $2.98 as of July 4,
2009, 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. The intrinsic value of 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 2009. The Companys
current policy is to issue additional new shares upon exercise of stock options.
The fair value of options vested since December 31, 2008 is $105 thousand. At July 4, 2009, total
compensation costs related to non-vested awards not yet recognized was $229 thousand which will be
recognized over a weighted average period of 1.5 years.
The following is a summary of weighted average exercise prices and contractual lives for
outstanding and exercisable stock options as of July 4, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
Exercise Price
|
|
|
|
|
|
Life
|
|
|
Exercise
|
|
|
|
|
|
|
Life
|
|
|
Exercise
|
|
Range
|
|
Shares
|
|
|
in Years
|
|
|
Price
|
|
|
Shares
|
|
|
in Years
|
|
|
Price
|
|
$1.68 to $5.62
|
|
|
211,659
|
|
|
|
8.4
|
|
|
$
|
2.77
|
|
|
|
135,659
|
|
|
|
6.7
|
|
|
$
|
3.33
|
|
$6.22 to $8.44
|
|
|
148,919
|
|
|
|
5.7
|
|
|
$
|
7.72
|
|
|
|
119,719
|
|
|
|
5.1
|
|
|
$
|
7.81
|
|
$10.00 to $11.73
|
|
|
132,474
|
|
|
|
6.6
|
|
|
$
|
10.79
|
|
|
|
99,874
|
|
|
|
6.3
|
|
|
$
|
10.91
|
|
$12.41 to $15.54
|
|
|
56,777
|
|
|
|
4.8
|
|
|
$
|
13.01
|
|
|
|
56,337
|
|
|
|
4.8
|
|
|
$
|
13.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
549,829
|
|
|
|
6.9
|
|
|
$
|
7.10
|
|
|
|
411,589
|
|
|
|
5.9
|
|
|
$
|
7.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8)
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 July 4, 2009, $2.3 million was borrowed and an additional $0.2 million
was in use through standby letters of credit. The amount of the line of credit that was unused and
available to the Company at July 4, 2009 was $2.5 million. 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.
9)
Assets Held for Sale
As a result of the Companys rationalization of its product lines in the second quarter of 2009 and
managements change of plans regarding its use of the Blasdell, NY facility in the second quarter
of 2009, the Company has presented the following assets as held for sale as of July 4, 2009. The
presentation of assets held for sale is based on managements committed plan and related actions to
sell these assets.
9
Assets held for sale are as follows:
|
|
|
|
|
(in thousands)
|
|
|
|
|
Specialty Print and Direct Mail equipment
|
|
$
|
537
|
|
Land and building Blasdell, NY facility
|
|
|
1,391
|
|
|
|
|
|
Total
|
|
$
|
1,928
|
|
|
|
|
|
The Company recognized asset impairment charges in the second quarter of 2009 of $2.1 million ($0.2
million for the Blasdell, NY facility and $1.9 million for Specialty Print and Direct Mail
equipment) related to these assets based upon an estimate of the net realizable value based on
expected selling prices less costs to sell. The reported fair value
of these assets held for sale is considered to be level three within the fair
value hierarchy as established by SFAS No. 157 Fair Value Measurements. Level three is defined
as inputs for which significant valuation assumptions are
unobservable in a market and therefore value is based on the best
available data, some of which is internally developed and considers
risk premiums that a market participant would require.
10)
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 2009, 947 shares of Class B stock were converted to Common
stock.
11)
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 President and
CEO is consistent with the reporting format used in the Companys 2008 Form 10-K and other external
information.
12)
Financial Instruments
The Companys financial instruments consist primarily of cash and cash equivalents, receivables,
accounts payable and long-term debt. The carrying value of the Companys accounts receivable and
accounts payable approximate fair value due to the short-term nature of the instruments. The
recorded amounts for long-term debt approximate fair value based on current market rates of similar
instruments.
13)
Recent Accounting Pronouncements
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 is January 1, 2009. The impact of SFAS 141R on future business
combinations cannot currently be determined.
On April 5, 2009, the Company adopted the provisions of FSP SFAS No. 107-1,
Interim Disclosures
about Fair Value of Financial Instruments
(FSP SFAS 107-1), which amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
, and APB Opinion No. 28,
Interim Financial
Reporting
. FSP SFAS No. 107-1 requires disclosures about fair value of financial instruments in
financial statements for interim reporting periods and in annual financial statements of
publicly-traded companies. This FSP also requires entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial instruments in financial
statements on an interim and annual basis and to highlight any changes from prior periods. The
adoption of FSP SFAS 107-1 did not have a material impact on the Companys consolidated financial
position or results of operations. Disclosures required by SFAS 107 are included in Note 12.
In May 2009, the FASB issued SFAS No. 165,
Subsequent Events
(SFAS 165). SFAS 165 establishes
general standards for accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are available to be issued (subsequent events). More
specifically, SFAS 165 sets forth the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for potential
recognition in the financial statements, identifies the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its financial statements
and the disclosures that should be made about events or transactions that occur after the balance
sheet date. SFAS 165 provides largely the same guidance on subsequent events which previously
existed only in auditing
literature. The Company does not anticipate that the adoption of this statement will have a
material impact on its consolidated financial statements. The Company adopted SFAS 165 on April 5,
2009. We have evaluated subsequent events through August 10, 2009, the date this quarterly report
on Form 10-Q was filed with the U.S. Securities and Exchange Commission. We made no significant
changes to our condensed consolidated financial statements as a result of our subsequent events
evaluation.
10
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162
(SFAS No. 168). SFAS No. 168 stipulates the FASB Accounting Standards Codification is the source
of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS
No. 168 is effective for the financial statements issued for interim and annual reporting periods
ending after September 15, 2009. The Company does not expect that the adoption of this standard
will have a material impact on its consolidated financial statements.
14)
Long-Term Debt
Long-term debt includes the following:
|
|
|
|
|
|
|
|
|
|
|
July 4,
|
|
|
December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations:
|
|
|
|
|
|
|
|
|
Building due in 2023; bears interest
at 10%; payable monthly
|
|
$
|
1,800
|
|
|
$
|
1,800
|
|
Equipment
|
|
|
14
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
1,814
|
|
|
|
1,820
|
|
Less estimated current maturities
|
|
|
12
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
1,802
|
|
|
|
1,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Equipment loans
|
|
|
583
|
|
|
|
650
|
|
Other
|
|
|
102
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
685
|
|
|
|
761
|
|
Less estimated current maturities
|
|
|
162
|
|
|
|
156
|
|
|
|
|
|
|
|
|
Loans long-term
|
|
|
523
|
|
|
|
605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
2,325
|
|
|
$
|
2,413
|
|
|
|
|
|
|
|
|
15)
Assets Under Capital Leases Included in Property, Plant and Equipment
Assets under capital leases included in property, plant and equipment are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
July 4,
|
|
|
December 31,
|
|
(in thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
400
|
|
|
$
|
400
|
|
Buildings
|
|
|
4,148
|
|
|
|
4,148
|
|
Equipment
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
4,548
|
|
|
|
4,573
|
|
Less accumulated depreciation
|
|
|
800
|
|
|
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets under capital leases
|
|
$
|
3,748
|
|
|
$
|
3,862
|
|
|
|
|
|
|
|
|
16)
Long-Lived Assets
Long-lived assets, including acquired identifiable intangible assets, are tested for impairment
whenever events or changes in circumstances indicate that the carrying amount of those assets may
not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset or asset
group is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset or
asset group is not recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset or asset group. That assessment is based
on the carrying amount of the asset or asset group at the date tested. An impairment loss is
measured as the amount by which the carrying amount of a long-lived asset or asset group exceeds
its fair value.
Based on this testing, no asset impairment charges were recognized in 2008. The Company recognized
asset impairment charges in the second quarter of 2009 of $2.2 million.
11
|
|
|
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of
Operations
|
REVENUE
For the second quarter of 2009, total revenue was $11.2 million compared with $11.1 million in
2008, an increase of 1.3%. The custom folding carton product line sales were $8.0 million compared
with $7.0 million in the second quarter of 2008. The 13.4% increase was mainly due to substantial
growth with one large existing customer and sales to one large new customer, offset partially by
decreased business with several existing customers. Sales of the Companys stock packaging product
line were $1.5 million compared with $1.6 million in the second quarter of 2008, down 6.1%
primarily due to weakness in general business conditions. Second quarter 2009 specialty print and
direct mail sales decreased 35.0% to $0.7 million compared with sales of $1.2 million in the second
quarter of 2008. The decrease was primarily due to decreased business with one large customer and
general soft market conditions. During the second quarter of 2009, the Company rationalized its
product lines and exited the commercial print market which the specialty print and direct mail
product line served. Personalized print sales for the second quarter of 2009 were $0.9
million compared with $1.2 million in 2008, a decrease of 27.7%, mainly due to weakness in general
business conditions.
For the first six months of 2009, total revenue was $23.5 million compared with $22.6 million in
2008, an increase of 4.0%. The custom folding cartons product line sales were $16.5 million
compared with $14.0 million in 2008, an increase of 17.8% with increased business volumes from
several customers including substantial growth from one large existing customer and sales to one
large new customer, being partially offset by decreased business from several existing customers.
Sales of the Companys stock packaging product line were $3.6 million, compared with $4.1 million
in the prior year, a decrease of 11.3% mainly due to weakness in general business conditions.
Personalized print sales for the first six months of 2009 were $1.6 million compared with $2.2
million in the same period of 2008, a decrease of 24.8% primarily due to general soft market
conditions. The first six months of 2009 specialty print and direct mail sales declined 29.0% to
$1.5 million from sales of $2.1 million in the first six months of 2008. This decrease was
primarily due to weakness in general business conditions including decreased sales from one large
customer.
EXPENSES AND MARGINS
Gross margin was 4.1% for the second quarter of 2009, down from 11.6% in the second quarter of
2008. The second quarter 2009 gross margin was negatively affected by decreased waste sales due to
a drop in the recycled paperboard market, increased repairs expense, and a generally weaker sales
mix, offset slightly by lower depreciation expense in the current year. Additionally, the second
quarter gross margin was negatively impacted by an increase in the raw material inventory reserve
of $89 thousand which was the result of the Companys rationalization of the specialty print and
direct mail product lines in the second quarter of 2009. Selling, general, and administrative
costs (SG&A) decreased 6.0% to $2.0 million in the second quarter of 2009 from $2.1 million
during the same period in the prior year. This decrease was driven primarily by lower professional
service costs. Included in the second quarter of 2009 SG&A, was $65 thousand in workforce
reduction costs that were the result of the Companys rationalization of the specialty print and
direct mail product lines in the second quarter of 2009. Additionally, $2.2 million of expense
was incurred that was associated with the write-down of impaired assets in the second quarter of
2009. This impairment resulted from the Companys rationalization of the specialty print and
direct mail product line in the second quarter of 2009 and the write-down of its Blasdell, NY
facility to fair market value based on expected selling prices net of costs to sell.
Gross margin was 8.0% for the first six months of 2009, down from 11.6% for the same period of
2008. The current year gross margin for the first six months was negatively affected by decreased
waste sales due to a drop in the recycled paperboard market, increased repairs expense, and a
generally weaker sales mix, offset slightly by lower depreciation expense in the current year.
Selling, general, and administrative costs decreased 4.4% to $4.0 million in the first six months
of 2009 from $4.1 million during the same period in the prior year. This slight decrease was driven
primarily by lower professional service costs, offset partially by higher depreciation expense.
Included in the first six months of 2009 SG&A, was $65 thousand in workforce reduction costs that
were the result of the Companys rationalization of the specialty print and direct mail product
lines in the second quarter of 2009.
Additionally, $2.2 million of expense was incurred that was associated with the write-down of
impaired assets in the second quarter of 2009. This impairment resulted from the Companys
rationalization of the specialty print and direct mail product line in the second quarter of 2009
and the write-down of its Blasdell, NY facility to fair market value based on expected selling
prices net of costs to sell.
12
TAXES
The Companys effective tax rate for the second quarter and first six months of 2009 was 0% and
2.7%, respectively. This benefit was less than the statutory income tax rate, primarily as a
result of the Company recording a full valuation allowance of $1.3 million related to its net
deferred tax asset. The valuation allowance was recorded due to the uncertainty with respect to
utilizing this net deferred tax asset in the future based on the trend of operating losses. The
effective tax rate for the second quarter and first six months of 2008 was 33.2%.
NET LOSS AND LOSS PER SHARE
The net loss for the second quarter of 2009 was $3.7 million, compared with a net loss of $0.5
million in the second quarter of 2008. This increased loss was due to the fluctuations discussed
above. Diluted loss per share was $1.09 in the second quarter of 2009 and $0.16 in the second
quarter of 2008.
The net loss for the first six months of 2009 was $4.3 million, or $1.24 per diluted share,
compared with a net loss of $1.0 million, or $0.30 per diluted share, in the first six months of
2008. This increase in loss was due to the fluctuations discussed above.
LIQUIDITY
Cash and cash equivalents at July 4, 2009, were relatively unchanged from the $0.2 million balance
at December 31, 2008.
The Company has access to a $5.0 million committed line of credit with a commercial bank, which
expires in March 2010. At July 4, 2009, $2.3 million was borrowed and an additional $0.2 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, 2008. 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 2009 was
primarily the result of capital expenditures and working capital requirements to meet customer
demands.
Accounts payable declined $0.4 million during the first six months of 2009 primarily due to timing
of payments.
Capital expenditures driven primarily by productivity improvement and upgrade investments, for the
first six months of 2009, were $0.7 million compared with $1.3 million for the first six months of
2008. Depreciation and amortization for the first six months of 2009 was $1.9 million compared
with $2.0 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 2009.
The Companys management is beginning the process of negotiation to renew or replace the existing
line of credit that is due to expire in the first quarter of 2010.
There were no shares repurchased by the Company during the first six months of 2009. The Company
has authorization to repurchase 75,885 shares at July 4, 2009. The closing price of the Companys
stock at July 4, 2009 was $2.98. At this price, the repurchase of 75,885 shares would require
$226,137.
13
CONTRACTUAL OBLIGATIONS
The following table displays an update in the format of the information originally presented on the
Companys 2008 Form 10-K related to its capital lease obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, as of December 31, 2008)
Payments Due by Period
|
|
Total
|
|
|
2009
|
|
|
2010-2011
|
|
|
2012-2013
|
|
|
After 2013
|
|
Line of Credit
|
|
$
|
1,000
|
|
|
|
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment Loans
|
|
|
650
|
|
|
|
136
|
|
|
|
305
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Loans
|
|
|
111
|
|
|
|
20
|
|
|
|
44
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease
Obligation
Aggregate payments
(1)
|
|
|
7,844
|
|
|
|
155
|
|
|
|
339
|
|
|
|
360
|
|
|
|
6,990
|
|
Capital Lease
Obligations
Aggregate (Other)
|
|
|
21
|
|
|
|
13
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
849
|
|
|
|
514
|
|
|
|
326
|
|
|
|
9
|
|
|
|
|
|
|
Purchase Commitments
|
|
|
1,278
|
|
|
|
1,022
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,753
|
|
|
$
|
1,860
|
|
|
$
|
2,278
|
|
|
$
|
625
|
|
|
$
|
6,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents a forty-nine year lease beginning November 2003 for 203,000 square feet
of office and warehouse buildings adjacent to our corporate printing and manufacturing
property. Beginning in November 2022 and ending in October 2027, the Company has an option
to purchase the property for $1.8 million and terminate the lease. If the purchase option
is not exercised, the Company is obligated to make monthly payments of $15,000 through
October 2052.
|
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, 2008.
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 failures in logistics systems are limited.
Risks due to fluctuation in interest rates are not material to the Company at July 4, 2009 because
of our limited exposure to floating rate debt.
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 100% of its estimated usage through September 2009 and approximately
60% of its estimated usage from October 2009 through October 2010. 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.
We have no foreign operations, nor do we transact any business in foreign currencies. Accordingly,
we have no foreign currency market risks.
14
The market risk that the Company was exposed to at December 31, 2008 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 2008 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; and
|
|
|
|
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 President and Chief Executive
Officer, and Chief Operating 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 July 4, 2009. Based on that evaluation, the
Companys President and Chief Executive Officer, and Chief Operating Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures were effective as of July
4, 2009. There were no changes in the Companys internal control over financial reporting during
the second quarter of 2009 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting.
15
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, 2008.
|
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number of
|
|
|
(d) Maximum Number
|
|
|
|
(a) Total
|
|
|
|
|
|
|
Shares (or Units)
|
|
|
(or Approximate Dollar
|
|
|
|
Number of
|
|
|
(b) Average
|
|
|
Purchased as Part
|
|
|
Value) of Shares (or
|
|
|
|
Shares (or
|
|
|
Price Paid per
|
|
|
of Publicly
|
|
|
Units) that May Yet Be
|
|
|
|
Units)
|
|
|
Share
|
|
|
Announced Plans
|
|
|
Purchased Under the
|
|
Period
|
|
Purchased
|
|
|
(or Unit)
|
|
|
or Programs
|
|
|
Plans or Programs
|
|
April 5 May 2, 2009
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
75,885
|
|
May 3 May 30, 2009
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
75,885
|
|
May 31 July 4, 2009
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
75,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
75,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 6, 2009.
|
1.)
|
|
The nominees to the Board of Directors were elected based on the
following shares voted:
|
|
|
|
|
|
|
|
|
|
Nominee
|
|
For
|
|
|
Authority Withheld
|
|
William G. Gisel, Jr.
|
|
|
6,978,061
|
|
|
|
510,126
|
|
Daniel G. Keane
|
|
|
6,710,342
|
|
|
|
775,845
|
|
Kevin T. Keane
|
|
|
6,710,342
|
|
|
|
775,845
|
|
Robert J. McKenna
|
|
|
6,671,672
|
|
|
|
814,515
|
|
Howard Zemsky
|
|
|
6,975,876
|
|
|
|
510,311
|
|
|
2.)
|
|
The ratification of Ernst & Young LLP as the Registrants auditors
was approved by the following vote: 7,040,867 in favor; 326,775 against; and
118,554 abstentions.
|
Item 5.
Other Information
Not applicable.
16
Item 6.
Exhibits
|
|
|
|
|
|
Exhibit 31.1
|
|
Section 302 Certification President and Chief Executive Officer
|
|
|
|
Exhibit 31.2
|
|
Section 302 Certification Chief Operating Officer and Chief Financial
Officer
|
|
|
|
Exhibit 32.1
|
|
Certification of President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
Exhibit 32.2
|
|
Certification of Chief Operating 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
|
17
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.
|
|
|
|
|
|
MOD-PAC CORP.
|
|
|
(Registrant)
|
|
Date: August 10, 2009
|
/s/ David B. Lupp
|
|
|
David B. Lupp
|
|
|
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer)
|
|
18
EXHIBIT INDEX
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
Exhibit 31.1
|
|
Section 302 Certification President and Chief Executive Officer
|
|
|
|
Exhibit 31.2
|
|
Section 302 Certification Chief Operating Officer and Chief Financial
Officer
|
|
|
|
Exhibit 32.1
|
|
Certification of President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
Exhibit 32.2
|
|
Certification of Chief Operating 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
|
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