MOD PAC CORP - 10-Q Quarterly Report

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

MOD-PAC CORP.
Consolidated Balance Sheet
July 3, 2004
With Comparative Figures for December 31, 2003

			Dollars in Thousands
			July 3, 2004			December 31,
			(Unaudited)			2003

Current Assets:
	Cash		$	810		$	1,310
	Accounts Receivable:
		Vista Print Ltd.		2,097			2,239
		All other customers		3,243			2,968
	Prepaid income taxes			770			565
	Inventories			3,980			2,878
	Prepaid expenses			325			338

		Total current assets		11,225			10,298

Property, Plant and Equipment, at cost				57,788			53,744
	Less accumulated depreciation and amortization			27,225			24,866

		Net property, plant and equipment		30,563			28,878
Other Assets				853			1,340

			$	42,641		$	40,516




Current Liabilities:
	Current maturities of long-term debt		$	1,505		$	1,429
	Accounts payable			3,478			2,107
	Accrued expenses			1,432			1,639

		Total current liabilities		6,415			5,175

Long-term debt				9,249			9,657
Other liabilities				3,910			3,733

Common Shareholders' Equity:
	Common stock, $.01 par value
		Authorized 20,000,000 shares, issued
		2,995,107 in 2004, 2,943,384 in 2003		30			30
	Class B common stock, $.01 par value
		Authorized 5,000,000 shares, issued
		955,809 in 2004, 975,979 in 2003		10			10
	Additional paid-in capital			425			359
	Accumulated other comprehensive income (loss)			(55	)		(59	)
	Retained earnings			23,738			22,613

				24,148			22,953
	Less treasury shares, at cost 208,651 in 2004
		and 199,082 in 2003		1,081			1,002

		Total shareholders' equity		23,067			21,951


			$	42,641		$	40,516




See notes to financial statements.

MOD-PAC CORP.

Consolidated Statement of Income and Retained Earnings
Period Ended July 3, 2004
With Comparative Figures for 2003

		(Dollars in Thousands)
		(Unaudited)
		SIX MONTHS				THREE MONTHS

		2004		2003		2004		2003


Sales		$	23,617	$	19,103	$	11,701	$	9,673
	Less: Freight Charges		619		521		267		259


Net Sales			22,998		18,582		11,434		9,414

Costs and Expenses:
	Cost of products sold		17,238		14,080		8,678		7,245
	Selling, general and administrative expenses		3,826		3,062		1,936		1,572
	Interest expenses		194		68		93		58


	Total costs and expenses		21,258		17,210		10,707		8,875


Income before taxes			1,740		1,372		727		539

Provision for income taxes			615		500		256		194


Net income			1,125		872	$	471	$	345




Retained Earnings:

	January 1		22,613		20,414


	July 3	$	23,738	$	21,286




Earnings per share:

	Basic	$	.30	$	.23	$	.13	$	.09




	Diluted	$	.29	$	.22	$	.12	$	.09




See notes to financial statements

MOD-PAC CORP.

Consolidated Statement of Cash Flows
Six Months Ended July 3, 2004
With Comparative Figures for 2003

				(Dollars in Thousands)
				(Unaudited)
					2004			2003

Cash Flows from Operating Activities:
	Net income			$	1,125		$	872
	Adjustments to reconcile net income to net cash
		provided by operating activities:
		Depreciation and amortization			2,387			1,900
		Other			177			62
		Cash flows from changes in operating assets and liabilities:
			Accounts receivable		(209	)		(1,346	)
			Inventories		(1,102	)		(580	)
			Prepaid expenses		(192	)		(395	)
			Accounts payable		1,445			960
			Accrued expenses		(207	)		(10	)


	Net cash provided by Operating Activities				3,424			1,463


Cash Flows from Investing Activities:
	Change in other assets				464			(34	)
	Capital expenditures				(4,044	)		(6,470	)


	Net Cash used by Investing Activities				(3,580	)		(6,504	)


Cash Flows from Financing Activities
	New long-term debt				200			11,450
	Principal payments on long-term debt and capital lease				(531	)		(290	)
	Astronics through spin-off				--			(4,751	)
	Proceeds from issuance of stock				66			14
	Purchase of treasury stock				(79	)		(1,002	)


	Net Cash provided (used) by Financing Activities				(344	)		5,421


Net increase (decrease) in Cash and Cash Equivalents					(500	)		380

Cash and Cash Equivalents at Beginning of Year					1,310			1


Cash and Cash Equivalents at July 3				$	810		$	381




Cash payments for:
	Interest			$	218		$	46
	Income taxes			$	203		$	162

See notes to financial statements.

MOD-PAC CORP.

Notes to Financial Statements

July 3, 2004

1)	The accompanying unaudited statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U. S. 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 six-month period ended July 3, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

	The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by U. S. generally accepted accounting principles for complete financial statements.

	For further information, refer to the financial statements and footnotes thereto included in the Company's 2003 annual report.

	On March 14, 2003, MOD-PAC CORP. was spun off from Astronics Corporation (Astronics) 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 holder 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 July 3, 2004 the Company has $8.6 million outstanding under the term loan facility, which is repayable in quarterly installments through 2010. Interest is paid monthly at floating rates 125 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 2,868,316 shares of MOD-PAC CORP. Common stock and approximately 1,007,341 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 purpose 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 option's vesting period. The Company's pro forma information for 2004 and 2003 is presented in the table below.


	SIX MONTHS						THREE MONTHS

		2004			2003			2004			2003
(in thousands)

Net income as reported	$	1,125		$	872		$	471		$	345

Adjustments to record compensation expense for stock option awards under the fair value method of accounting		(80	)		(65	)		(40	)		(32	)


Pro forma net income	$	1,045		$	807		$	431		$	313



Pro forma basic earnings per share	$	0.28		$	0.21		$	0.12		$	0.08
Pro forma diluted earnings per share	$	0.27		$	0.20		$	0.11		$	0.08

2)	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)
			July 3, 2004 (Unaudited)	December 31, 2003


		Finished Goods	$2,559	$1,707
		Work in Progress	184	151
		Raw Material	1,237	1,020

			$3,980	$2,878

3)	The Company performed printing and order fulfillment services for VistaPrint Limited, resulting in net sales of $7,948,000 and $6,314,000, respectively for the first six months of 2004 and 2003. VistaPrint owed MOD-PAC CORP. $2,097,000 and $2,239,000 at July 3, 2004 and December 31, 2003 respectively, related to such services. Robert S. Keane, the son of Kevin T. Keane, is a shareholder in and chief executive officer of VistaPrint Limited. In addition, Kevin T. Keane is a shareholder in VistaPrint Limited, holding less than 2% of its capital stock.

	The Company has a supply agreement with VistaPrint Limited pursuant to which the Company is VistaPrint Limited's exclusive North American supplier of printed products. Printed products delivered to VistaPrint Limited's customers pursuant to this agreement are billed to VistaPrint Limited at the Company's fully burdened cost divided by 0.75. VistaPrint Limited is obligated to pay the Company for such shipments within 40 days of invoice. This agreement is scheduled to expire April 2, 2011. However, as announced on July 6, 2004, MOD-PAC, under a new agreement to take effect September 1, 2004, will receive from VistaPrint $22 million, in effect for surrendering MOD-PAC's rights, for the period September 1, 2005 through March 31, 2011, as the exclusive provider of print products to VistaPrint's North American market. In addition, the MOD-PAC agreed to change the pricing arrangement from a cost-plus nature to a unit-basis pricing structure. The $22 million payment to be received September 1, 2004, will be recorded as deferred revenue and amortized over 36 months. The 36-month period includes the 12 months that the restructured agreement is operative, that is from September 1, 2004, through August 30, 2005. In addition, there are 24 months beyond the expiration of the agreement during which the framework for pricing has been described in the event that there is a subsequent agreement during that period.

4)	Comprehensive income:
			SIX MONTHS				THREE MONTHS

			2004		2003		2004		2003
Net Income		$	1,125	$	872	$	471	$	345
Other Comprehensive Income			4		-		2		-

Comprehensive Income		$	1,129	$	872	$	473	$	345

5)	The following table sets forth the computation of earnings per share:

		(in thousands, except for per share data)
			Six Months Ended July 3

			2004		2003


Net income			$	1,125	$	872




Basic earnings per share weighted average shares				3,734		3,839

Net effect of dilutive stock options				78		54


Diluted earnings per share weighted average shares				3,812		3,893

Basic earnings per share			$	.30	$	.23




Diluted earnings per share			$	.29	$	.22

MOD-PAC CORP.

Item 2.

Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following table sets forth income statement data as a percent of net sales:

		Percent of Net Sales				Percent of Net Sales
		Six Months Ended July 3				Three Months Ended July 3


		2004		2003		2004		2003


Net Sales		100.0	%	100.0	%	100.0	%	100.0	%

Cost of products sold		75.0		75.7		75.9		77.0
Selling, general and
	administrative expenses	16.6		16.5		16.9		16.7
Interest expenses, net		.8		.4		.8		.6

		92.4	%	92.6	%	93.6	%	94.3	%

Income before provision
	for income taxes	7.6	%	7.4	%	6.4	%	5.7	%

Provision for taxes		2.7		2.7		2.2		2.0


Net Income		4.9	%	4.7	%	4.2	%	3.7	%

NET SALES	For the second quarter of 2004 net sales were $11.4 million compared with $9.4 million in 2003, an increase of 21.5%. This increase of $2.0 million was due to the $.5 million increase in short run commercial printing net sales and a $1.3 million increase in net sales for the custom folding carton product line.

	Net sales for the first six months of 2004 were $23.0 million compared to $18.6 million in 2003, an increase of $4.4 million or 23.8%. This was due to the $1.6 million increase in short run commercial printing net sales and a $2.0 million increase in net sales for the custom folding carton product line.


EXPENSES AND MARGINS	Cost of products sold as a percentage of net sales for the three months ended July 3, 2004 was 75.9% compared to 77.0% for the second quarter of 2003, a decrease of 1.1% due to improved leverage because of volume.

	Cost of products sold as a percentage of net sales for the six months ended July 3, 2004 was 75.0% compared to 75.7% for the six nine months of 2003, a decrease of 0.7 due to improved leverage because of volume.

	Selling, general and administrative costs, increased $0.3 million for the three months ended July 3, 2004 to $1.9 million or 16.9% of net sales from $1.6 million or 16.7% of net sales in 2003 due to higher administrative employee costs and professional services due to growth in sales, new product and market development and the renegotiation of the VistaPrint Supply Agreement. Selling, general and administrative costs, increased $0.7 million for the six months ended July 3, 2004 to $3.8 million or 16.6% from $3.1 million or 16.5% in 2003.

	Interest expense increased to $93,000 for the quarter and $194,000 for the year-to-date in 2004 compared to $58,000 for the quarter and $68,000 for the year-to-date in 2003. This is mainly a result of the borrowings to finance our expansion. Most of which occurred since March 14, 2003, the date of the spin-off.

TAXES	Income tax rates were lower for the quarter 2004 compared to 2003, 35.2% compared to 36.0% in 2003. For the year to date the tax rates were 35.3% and 36.4%, respectively, for 2004 and 2003.

NET INCOME AND EARNINGS PER SHARE	Net income for the second quarter of 2004 was $471,000, up $126,000 or 36.5%, from the 2003 second quarter; diluted earnings per share were $.12 compared to $.09. For the six months of 2004, our bottom line performance was $1,125,000 compared to last year's first six-month performance of $872,000, an increase of $253,000 or 29.0%.

LIQUIDITY	Cash provided by operating activities was $3,424,000 during the first six months of 2004. Net income plus depreciation, amortization and other non-cash expenses was $3,689,000, which was offset by an increase in working capital components of $265,000. Cash provided by operating activities was $1,463,000 during the first six months of 2003. Net income plus depreciation, amortization and other non-cash expenses was $2,834,000 less an increase in working capital components of $1,371,000.

	The Company's capital expenditures of $4,044,000 for the six months of 2004 were down by $2,426,000 from 2003 level. Although the Company expects this gap to narrow somewhat over the balance of 2004, it expects capital expenditures in 2004 to be less than the 2003 level.

	We have a $6 million line of credit facility available to us. At July 3, 2004 we have nothing outstanding on this line of credit. Interest on the line of credit is either, 1.25% over LIBOR or the prime rate, at the company's option.

	In connection with renegotiating its supply agreement the Company expects to receive a payment of $22 million from VistaPrint September 1, 2004. Proceeds will be used as to pay taxes ($8 million) and retire debt ($10 million). The balance will be held by the company and used for capital stock repurchases and capital asset and operating expenditures. As of the end of the second quarter the company had an outstanding authorization from its Board of Directors to repurchase 190,431 shares of its capital stock.

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	Risks due to fluctuation in interest rates are a function of the Company's floating rate debt obligations that total $8,754,000 at July 3, 2004. As a result, a change of 1% in interest rates would impact annual net income by approximately $53,000. The company operates its own power generation facility, which accounts for over 90% of its electric power needs. The generation plant is fired by natural gas. The company routinely evaluates market conditions and considers supply contracts of various lengths. It has not made any such arrangements beyond 30 days at July 3, 2004. The price of natural gas has fluctuated widely in the past 24 months, from a low of $3.00 per decatherm to a high of $7.00 and is currently in the range of $6.00 per decatherm. A one-dollar per decatherm change in the price of natural gas would affect the company's annual net income by $73,000. An alternative power source would be a diesel-powered generator. The company has made arrangements for and tested this alternative. We have no foreign operations, nor do we transact business in foreign currencies. Accordingly, we have no foreign currency market risks.

CRITICAL ACCOUNTING POLICIES	The preparation of financial statements in accordance with U. S. generally accepted accounting principles 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 realizability of deferred tax assets. Often, management must make certain assumptions about the future when applying these policies. Management uses past experience in developing such assumpt ions about the future. Actual experience will be different than the assumptions made and differences could result in material adjustments to management's estimates. Specifically, and with respect to deferred tax assets, MOD-PAC had a gross deferred tax asset at July 3,2004 of $1.5 million, which relates 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.

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

FORWARD-LOOKING STATEMENTS	This Quarterly Report contains "forward-looking statements". Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions affecting our customers and suppliers, competitors' responses to our products and services, particularly with respect to pricing, the overall market acceptance of such products and services' and successful completion of our capital expansion program. We use words like "will," "may," "should," "plan," "believe," "expect," "anticipate." "intend," "future" and other similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of their respective dates. These forward-looking statements are based on our current expectations and are subject to number of risks and uncertainties. Our actual operating results could differ materially from those predicted in these forward-looking statements, and any other events anticipated in the forward-looking statements may not actually occur.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

See Market Risk in Item 2, above.

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the end of the period covered by this report. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls over financial reporting during the second quarter of 2004.

PART II - OTHER INFORMATION

Item 1.		Legal Proceedings.

		None.

Item 2.		Changes in Securities and Use of Proceeds.

Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)	© Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
April 4 - April 30, 2004	1,471		8.54	1,471	190,431
May 1 - May 28, 2004	-		-	-	190,431
May 29 - July 3, 2004	-		-	-	190,431
Total	1,471		8.54	1,471	190,431

On May 16, 2003, the Company's Board of Directors authorized the repurchase of 200,000 shares of the Company's capital stock.
Item 3.	Defaults Upon Senior Securities.

	None.

Item 4. Submission of Matters to a Vote of Securities Holders.

At the annual meeting of shareholders held on May 20, 2004, the nominees to the Board of Directors were re-elected based on the following results:

Nominees

Votes For

Votes Withholding Authority

William G. Gisel, Jr.

10,477,585

148,027

Daniel G. Keane

10,469,098

156,541

Kevin T. Keane

10,467,475

158,137

Robert J. McKenna

10,477,330

148,282

Howard Zemsky

10,477,330

148,282

The selection of Ernst & Young LLP as the Registrant's auditors was approved by the following vote: 10,394,326 in favor; 229,385 against; and 1,451 abstentions.

The shareholder proposal relating to Poison Pill was defeated by the following vote: 2,657,517 in favor; 5,247,600 against; and 74,962 abstentions.

The shareholder proposal relating to conflict of interest policies was defeated by the following vote: 709,409 in favor; 7,238,072 against; and 2,645,523 abstentions.

Under Applicable New York law and the Company's charter documents, abstentions and non-votes have no effect.

Item 5.	Other Information.

	None.

Item 6.	Exhibits and Reports on Form 8-K

	(a) Exhibits

	Exhibit 31.1 Section 302 Certification - Chief Executive Officer

	Exhibit 31.2 Section 302 Certification - Chief Financial Officer

	Exhibit 32. Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	(b) Reports on Form 8-K

	None

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 5, 2004		By: /s/ C. Anthony Rider

		C. Anthony Rider Vice President-Finance and Treasurer (Principal Financial Officer and Chief Accounting Officer)

Nominees	Votes For	Votes Withholding Authority
William G. Gisel, Jr.	10,477,585	148,027
Daniel G. Keane	10,469,098	156,541
Kevin T. Keane	10,467,475	158,137
Robert J. McKenna	10,477,330	148,282
Howard Zemsky	10,477,330	148,282