MOD-PAC CORP.

(Exact Name of Registrant as Specified in Its Charter)

                New York

16-0957153

(I.R.S. Employer
 Identification No.)

14207

(Zip Code)

716-873-0640

(Registrant's Telephone Number, Including Area Code)

$.01 par value Common Stock, $.01 par value Class B Stock

(Title of Class)

(Dollars in Thousands)

March 29, 2003

December 31,

    (Unaudited)    

2002  

Current Assets:

     Cash

 590

$

 1

     Accounts receivable:

         VistaPrint Ltd.

2,199

2,307

         All other customers

2,582

927

     Inventories

3,119

2,803

     Prepaid expenses

325

87

         Total current assets

8,815

6,682

Property, Plant and Equipment, at cost

47,615

43,719

     Less accumulated depreciation and amortization

21,929

21,048

          Net property, plant and equipment

25,686

22,671

Other Assets

1,023

689

 35,524

 30,042

Current Liabilities:

     Current maturities of long-term debt

 932

630

     Accounts payable

2,731

1,330

     Accrued expenses

362

806

          Total current liabilities

4,025

2,766

Long-term debt

7,768

4,412

Other Liabilities

2,630

2,475

Common Shareholders' Equity:

     Common stock, $.01 par value

         Authorized 20,000,000 shares, issued

         2,868,316 in 2003; 2,836,290 in 2002

29

30

     Class B common stock, $.01 par value

         Authorized 5,000,000 shares, issued

         1,007,341 in 2003; 1,206,296 in 2002

10

10

     Additional paid-in capital

186

-

     Accumulated other comprehensive income

(64)

(64)

     Retained earnings

20,940

20,413

         Total shareholders’equity

21,101

20,389

         Total liabilities and shareholders’ equity

35,524

$

30,042

(Dollars in Thousands)

(Unaudited)

2003

2002

Sales

$

9,430

$

8,531

    Less: Freight charges

262

968

Net Sales

9,168

7,563

Costs and Expenses:

    Cost of products sold

6,836

5,629

    Selling, general and administrative expenses

1,490

1,182

   
Interest expenses, net

9

3

       Total costs and expenses

8,335

6,814

Income before taxes

833

749

Provision for income taxes

306

272

Net Income

527

477

Retained Earnings:

       January 1

20,413

25,413

       March 29

$

 20,941

$

 25,890

Earnings per share:

      
       Basic

$

 .13

$

 .12

       Diluted

$

 .13

$

 .12

(Dollars in Thousands)

(Unaudited)

2003

2002

Cash Flows from Operating Activities:

   Net income

 527

 477

   Adjustments to reconcile net income to net cash
      provided by operating activities:

      Depreciation and amortization

895

748

      Other

100

156

      Cash flows from changes in operating assets
          and liabilities, excluding effects of
          acquisitions:

          Accounts receivable

(1,055)

(69)

          Inventories

(251)

(5)

          Prepaid expenses

(238)

(117)

          Accounts payable

1,399

218

          Accrued expenses

(467)

(445)

          Income taxes

24

4

     Net Cash provided (used) by Operating
         Activities

934

967

Cash Flows from Investing Activities:

     Change in other assets

(11)

(150)

     Capital expenditures

(3,896)

(545)

    
     Net Cash provided (used) by Investing Activities

(3,907)

(695)

Cash Flows from Financing Activities:

     New long-term debt

8,700

-

     Principal payments on long-term debt and
     capital lease obligations

(290)

(40)

     Due to Astronics

(4,848)

(232)

     Net Cash provided (used) by Financing Activities

3,562

(272)

Net increase (decrease) in Cash and Cash Equivalents

589

0

Cash and Cash Equivalents at Beginning of Year

1

1

Cash and Cash Equivalents at March 29

 590

 1

Cash payments for:

     Interest

1

 3

     Income taxes

 286

 272

The accompanying unaudited statements have been prepared in accordance with generally accepted accounting principles 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. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the three-month period ended March 29, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.
 

The balance sheet at December 31, 2002 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 accounting principles for complete financial statements.
 

For further information, refer to the financial statements and footnotes thereto included in the Company’s 2002 annual report to shareholders.
 

On March 14, 2003, MOD-PAC CORP. was spun-off from Astronics Corporation (Astronics) initially by means of a tax-free distribution ("The Distribution") of all of the outstanding shares of MOD-PAC CORP.'s common stock and Class B stock. The Astronics Board of Directors set a one-for-two distribution ratio, in which (i) each Astronics common stock owner received one share of MOD-PAC CORP. common stock for every two shares of Astronics common stock owned on the record date for the Distribution and (ii) each Astronics Class B stock owner received one share of MOD-PAC CORP. Class B for every two shares of Astronics Class B stock owned on the record date for the Distribution. As a result of the Distribution, MOD-PAC CORP. became a separately traded, publicly held company.
 

At March 14, 2003 the Company paid Astronics all amounts due at the time of the spin-off with a portion of the proceeds of a $10 million term loan facility with HSBC Bank USA. At March 29, 2003 the Company has $8.7 million outstanding under the term loan facility, which is repayable quarterly over seven years beginning in September of 2003. Interest is paid monthly at floating rates 100 basis points over LIBOR.
 

Prior to the Distribution, the Company was recapitalized. Astronics exchanged its existing shares of MOD-PAC CORP. Common stock for approximately 2,934,489 shares of MOD-PAC CORP. Common stock and approximately 1,010,912 shares of MOD-PAC CORP. Class B stock. The accompanying financial statements give retroactive effect to this recapitalization.
 

The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. The measurement prescribed by APB Opinion No. 25 does not recognize compensation expense if the exercise price of the stock option equals the market price of the underlying stock on the date of grant. Accordingly, no compensation expense related to stock options has been recorded in the financial statements.
 

For purposes of pro forma disclosures, the estimated fair value of the MOD-PAC stock options at the date of grant is amortized to expense over the options' vesting period. The Company’s pro forma information for the 2003 and 2002 first quarters are presented in the table below:

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:

Percent of Net Sales

Three Months Ended March 29,

2003

2002

9.1%

9.9%

3.3

Net income for the first quarter of 2003 was $527,000, 10.5% higher that the 2002 first quarter net income of $477,000. Earnings per diluted share increased a penny to $0.13 for the 2003 first quarter compared with $0.12 last year. This improvement was a function of increased net sales; partially offset by higher administrative costs and a somewhat higher effective income tax rate.

Per share amounts reported here reflect Astronics shares outstanding and common stock equivalents for the periods prior to the distribution factored by the distribution ratio.

Cash provided by operating activities was $934,000 during the three months ended March 29, 2003. Net income plus depreciation, amortization and other non-cash expenses was $1,522,000, which was offset by an increase in working capital components of $588,000. Cash provided by operating activities was $937,000 during the three months ended March 30, 2002. Net income plus depreciation, amortization and other non-cash expenses was $1,381,000, which was offset by an increase in working capital components of $414,000.

The Company’s capital expenditures of $3,896,000 for the 2003 quarter were up by $3,351,000 from 2002 level. In the first quarter of 2003 we continued the $12 million expansion program started in September of 2002. This program increases our printing capacity by over 50% and will enable us to produce our own electric power in order to have a sufficient, stable and scaleable power source for our current and future needs.

We closed on our senior debt financing during the quarter. To fund our expansion we have a $10 million term-loan facility available to us. At the end of the first quarter we had $8.7 million outstanding on this facility. We expect to draw down the balance as needed during the second quarter. Interest on the loan is at 1% over LIBOR and the principal must be repaid quarterly over seven years. In case we need it, we have a $6 million dollar line of credit facility available to us. There have been no borrowings on the credit line to date.

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, nor of any long-term commitments that would have a material adverse affect on its financial condition.

Risks due to fluctuation in interest rates is a function of the Company’s floating rate debt obligations that total $8,700,000 at March 29, 2003. As a result, a change of 1% in interest rates would impact annual net income by approximately $55,000.

The preparation of financial statements in accordance with generally accepted accounting policies requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. In developing such estimates, management evaluates the facts known to it at the time and applies such facts within the framework of certain critical accounting policies that govern valuation allowances of the Company’s assets. These policies include determining the need for a valuation allowance with respect to doubtful accounts receivable, lower of cost or market reserves related to the Company’s inventories, depreciation allowances and impairment reserves with respect to the Company’s long-lived assets and valuation allowances with respect to the reliability of deferred tax assets. Often, management must make certain assumptions about the future when applying these policies. Management uses past experience in developing such assumptions about the future. Actual experience will be different than the assumptions made and the differences could result in material adjustments to management's estimates.

Specifically and with respect to deferred tax assets, MOD-PAC had gross deferred tax assets at March 31, 2003 of $1.5 million, which relate primarily to New York State Investment Tax Credits. These credits are subject to certain statutory provisions, such as the length of available carry forward period and minimum tax, which reduces the probability of realization of the full value of such credits. Management established a valuation allowance of $0.7 million for these credits based on actual historical realization rates and the statutory carry forward period. The valuation allowance is reviewed at least annually. 

There are no recently issued accounting standards that will have a material impact on our financial position or results of operations.

In 2002, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 146, Costs Associated with Disposal Activities. This new accounting standard is effective for our 2003 fiscal year and no material impact on our financial position or results of operations is expected because we do not expect to engage in any asset disposals nor exit any activities in the foreseeable future.

1.

2.

3.

4.

a.

b.

c.

5.

Date: May 9, 2003

/s/ Daniel G. Keane

Daniel G. Keane
Chief Executive Officer

1.

2.

3.

4.

a.

b.

c.

5.

Date: May 9, 2003

/s/ C. Anthony Rider

C. Anthony Rider

Chief Financial Officer