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PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

MOD-PAC CORP.
Consolidated Balance Sheet
October 2, 2004
With Comparative Figures for December 31, 2003

 

 

 

 

Dollars in Thousands

 

 

 

 

October 2, 2004

 

December 31, 2003

 

 

 

 

(Unaudited)

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

Cash

 

$

12,951

 

 

$

660

 

 

Accounts Receivable:

 

 

 

 

 

 

 

 

 

 

Vista Print Ltd.

 

 

2,858

 

 

 

2,239

 

 

 

All other customers

 

 

3,397

 

 

 

2,968

 

 

Prepaid income taxes

 

 

-

 

 

 

655

 

 

Inventories

 

 

3,780

 

 

 

2,878

 

 

Prepaid expenses

 

 

295

 

 

 

338

 

 

 

Total current assets

 

 

23,281

 

 

 

9,738

 

 

 

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment, at cost

 

 

59,187

 

 

 

53,744

 

 

Less accumulated depreciation and amortization

 

 

28,462

 

 

 

24,866

 

 

 

Net property, plant and equipment

 

 

30,725

 

 

 

28,878

 

 

 

 

 

 

 

 

 

 

Deferred Income Taxes

 

 

4,498

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

864

 

 

 

1,340

 

 

 

 

 

$

59,368

 

 

$

39,956

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

83

 

 

$

1,429

 

 

Accounts payable

 

 

2,768

 

 

 

1,707

 

 

Accrued expenses

 

 

1,533

 

 

 

1,639

 

 

Income taxes

 

 

7,274

 

 

 

0

 

 

 

Total current liabilities

 

 

11,658

 

 

 

4,775

 

Long-term debt

 

 

2,080

 

 

 

9,657

 

Deferred Compensation

 

 

512

 

 

 

894

 

Deferred Income - Vista Print Fee

 

 

21,389

 

 

 

0

 

Other liabilities

 

 

-

 

 

 

2,839

 

Common Shareholders' Equity:

 

 

 

 

 

 

 

 

 

Common stock, $.01 par value

 

 

 

 

 

 

 

 

 

 

Authorized 20,000,000 shares, issued

 

 

 

 

 

 

 

 

 

 

3,033,736 in 2004, 2,943,384 in 2003

 

 

30

 

 

 

30

 

 

Class B common stock, $.01 par value

 

 

 

 

 

 

 

 

 

 

Authorized 5,000,000 shares, issued

 

 

 

 

 

 

 

 

 

 

941,183 in 2004, 975,979 in 2003

 

 

10

 

 

 

10

 

 

Additional paid-in capital

 

 

574

 

 

 

359

 

 

Accumulated other comprehensive income (loss)

 

 

(52

)

 

 

(59

)

 

Retained earnings

 

 

24,434

 

 

 

22,453

 

 

 

 

 

 

24,996

 

 

 

22,793

 

 

Less treasury shares, at cost 227,454 in 2004

 

 

 

 

 

 

 

 

 

 

and 199,082 in 2003

 

 

1,267

 

 

 

1,002

 

 

 

Total shareholders' equity

 

 

23,729

 

 

 

21,791

 

 

 

 

 

$

59,368

 

 

$

39,956

 

 

See notes to financial statements.

MOD-PAC CORP.

Consolidated Statement of Income and Retained Earnings
Period Ended October 2, 2004
With Comparative Figures for 2003

 

 

(Dollars in Thousands)

 

 

(Unaudited)

 

 

NINE MONTHS

 

THREE MONTHS

 

 

 

2004

 

2003

 

2004

 

2003

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Sales

 

$

35,279

 

$

29,571

 

$

11,903

 

$

10,468

 

 

Less: Freight Charges

 

 

1,007

 

 

795

 

 

388

 

 

274

 

Net Product Sales

 

 

34,272

 

 

28,776

 

 

11,515

 

 

10,194

 

Fee and rental income

 

 

958

 

 

-

 

 

717

 

 

-

 

Total Revenues

 

 

35,230

 

 

28,776

 

 

12,232

 

 

10,194

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

 

26,443

 

 

21,861

 

 

9,381

 

 

7,781

 

 

Rental operations

 

 

256

 

 

-

 

 

80

 

 

-

 

 

Selling, general and administrative expenses

 

 

5,604

 

 

4,588

 

 

1,778

 

 

1,526

 

 

Interest expenses

 

 

267

 

 

151

 

 

73

 

 

83

 

 

Total costs and expenses

 

 

32,570

 

 

26,600

 

 

11,312

 

 

9,390

 

Income before taxes

 

 

2,660

 

 

2,176

 

 

920

 

 

804

 

Provision for income taxes

 

 

679

 

 

794

 

 

64

 

 

294

 

Net income

 

$

1,981

 

$

1,382

 

$

856

 

$

510

 

Retained Earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1

 

 

22,613

 

 

20,414

 

 

 

 

 

 

 

 

October 2

 

$

24,594

 

$

21,796

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

.53

 

$

.36

 

$

.23

 

$

.14

 

 

Diluted

 

$

.52

 

$

.36

 

$

.22

 

$

.14

 

 

See notes to financial statements

MOD-PAC CORP.

Consolidated Statement of Cash Flows
Nine Months Ended October 2, 2004
With Comparative Figures for 2003

 

 

 

 

 

(Dollars in Thousands)

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

2004

 

 

 

2003

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net income

$

1,981

 

 

$

1,382

 

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

3,638

 

 

 

2,959

 

 

 

Deferred compensation

 

(382

)

 

 

151

 

 

 

Deferred taxes

 

(7,337

)

 

 

77

 

 

 

Deferred income - Vista Print fee

 

21,389

 

 

 

-

 

 

 

Cash flows from changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(767

)

 

 

(2,503

)

 

 

 

Inventories

 

(902

)

 

 

(819

)

 

 

 

Prepaid expenses

 

43

 

 

 

(363

)

 

 

 

Accounts payable

 

779

 

 

 

1,113

 

 

 

 

Accrued expenses

 

(17)

 

 

 

160

 

 

 

 

Accrued income taxes

 

7,840

 

 

 

143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by Operating Activities

 

26,265

 

 

 

2,300

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Change in other assets

 

441

 

 

 

(39

)

 

Capital expenditures

 

(5,443

)

 

 

(7,460

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash used by Investing Activities

 

(5,002

)

 

 

(7,499

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

New long-term debt

 

200

 

 

 

11,650

 

 

Principal payments on long-term debt and capital lease

 

(9,123

)

 

 

(647

)

 

Astronics through spin-off

 

-

 

 

 

(4,751

)

 

Proceeds from issuance of stock

 

216

 

 

 

26

 

 

Purchase of treasury stock

 

(265

)

 

 

(1,002

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash provided (used) by Financing Activities

 

(8,972

)

 

 

5,276

 

 

 

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in Cash and Cash Equivalents

 

12,291

 

 

 

77

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Year

 

660

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents at October 2, 2004

$

12,951

 

 

$

78

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

 

Interest

$

304

 

 

$

46

 

 

Income taxes

$

532

 

 

$

162

 

 

See notes to financial statements.

MOD-PAC CORP.


Notes to Financial Statements


October 2, 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 nine-month period ended October 2, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

 

 

 

The Company identified errors in its financial statements for 2003. The errors reduced earnings in the fourth quarter of 2003 by $160,000 or $0.4 per share. The accompanying balance sheet at December 31, 2003, has been restated to reflect this error and reclassifications identified.

 

 

 

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.

 

 

 

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.

 

NINE MONTHS

 

THREE MONTHS

 

 

 

2004

 

 

2003

 

 

2004

 

 

2003

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Net income as reported

$

1,981

 

$

1,382

 

$

856

 

$

510

 

Adjustments to record compensation expense for stock option awards under the fair value method of accounting

 

 

 

(120

 

 

)

 

 

 

(83

 

 

)

 

 

 

(40

 

 

)

 

 

 

(21

 

 

)

Pro forma net income

$

1,861

 

$

1,299

 

$

816

 

$

489

 

Pro forma basic earnings per share

$

0.50

 

$

0.34

 

$

0.23

 

$

0.13

 

Pro forma diluted earnings per share

$

0.49

 

$

0.34

 

$

0.22

 

$

0.13

 

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)

 

 

October 2, 2004
(Unaudited)

 

December 31, 2003

 

 

 

 

 

 

Finished Goods

$2,673

 

$1,707

 

Work in Progress

20

 

151

 

Raw Material

1,087

 

1,020

 

 

$3,780

 

$2,878

3)

The Company performed printing and order fulfillment services for VistaPrint Limited, resulting in net sales of $12,054,000 and $9,756,000, respectively for the first nine months of 2004 and 2003. VistaPrint owed MOD-PAC CORP. $2,858,000 and $2,239,000 at October 2, 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 through August 31, 2005. Printed products delivered to VistaPrint Limited's customers pursuant to this agreement are billed to VistaPrint Limited at unit costs set forth in the agreement which were established to approximate the Company's fully burdened cost divided by 0.8. VistaPrint Limited is obligated to pay the Company for such shipments within 40 days of invoice.

As announced on July 6, 2004, the current agreement with VistaPrint took effect September 1, 2004 and replaced an earlier agreement that extended to March 31, 2011. MOD-PAC received from VistaPrint $22 million, for surrendering MOD-PAC's rights under this earlier agreement, for the period September 1, 2005 through March 31, 2011, as the exclusive provider of print products to VistaPrint's North American market.

The $22 million payment, which was received September 1, 2004, was recorded as deferred revenue and is being amortized over 36 months and is included in the income statement as part of Fee and Rental income. The 36-month period includes the 12 months that the current agreement is operative, that is from September 1, 2004, through August 31, 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:

 

 

NINE MONTHS

 

 

THREE MONTHS

 

 

 

2004

 

 

2003

 

 

2004

 

 

2003

 

Net Income

$

1,981

 

$

1,382

 

$

856

 

$

510

 

Other Comprehensive Income

 

(7

)

 

(2

)

 

(2

)

 

(2

)

Comprehensive Income

$

1,974

 

$

1,380

 

$

856

 

$

508

 

5)

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

 

(in thousands, except for per share data)

 

 

Nine Months Ended October 2

 

 

 

 

 

 

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Net income

 

$

1,981

 

$

1,382

Basic earnings per share weighted average shares

 

 

3,734

 

 

3,789

Net effect of dilutive stock options

 

 

83

 

 

62

Diluted earnings per share weighted average shares

 

 

3,817

 

 

3,851

Basic earnings per share

 

$

.53

 

$

.36

Diluted earnings per share

 

$

.52

 

$

.36

6) Income Taxes:

In the third quarter of 2004 the company reevaluated its reserve for deferred tax assets that primarily relate to state investment tax credits and adjusted the reserve downward so that the effective tax rate in the third quarter was 7% as opposed to the statutory rate of 35%.

7) Capital structure

No stock options were exercised in the third quarter of 2004. Options resulting in the issuance of 31,553 shares were exercised during the first nine months of 2004. The company's Class B stock is fully convertible into common at no cost and during the first nine months of 2004, 41,151 shares of Class B stock were converted to Common, while during the third quarter of 2004 14,626 shares of Class B stock were converted to Common.

MOD-PAC CORP.

Item 2.

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

NET PRODUCT SALES

For the third quarter of 2004 net product sales were $11.5 million compared with $10.2 million in 2003, an increase of 13%. This increase of $1.3 million was due mainly to the $0.6 million increase in short run commercial printing net product sales and a $0.5 million increase in net product sales for the custom folding carton product line. The Company's other product lines, stock boxes and personnel printing, netted an increase of $0.1 million.

 

 

 

Net product sales for the first nine months of 2004 were $34.3 million compared to $28.8 million in 2003, an increase of $5.5 million or 19.1%. This was due to a $2.3 million increase in short run commercial printing net product sales and a $2.6 million increase in net product sales for the custom folding carton product line. The Company's other product lines, stock boxes and personnel printing, combined for an increase of $0.6 million.

 

 

FEE AND RENTAL INCOME

Fee and rental income includes $0.6 of amortized revenue from the VistaPrint Fee relative to the renegotiation of the North American Supply Agreement and rental revenue from the properties adjoining the Company's main production facilities. Control of these properties was acquired in November of 2003.

 

 

EXPENSES AND MARGINS

Cost of products sold as a percentage of net product sales for the three months ended October 2, 2004 was 81.5% compared to 76.3% for the third quarter of 2003, an increase of 5.2% due to lower absorption of our increased capacity (2.7%), the timing of certain expenses for production employee training, production supplies and equipment repairs (2.0%) and increased paperboard costs (0.5%).

 

 

 

Cost of products sold as a percentage of net sales for the nine months ended October 2, 2004 was 77.2% compared to 75.6% for the nine months of 2003, an increase of 1.6% due to the factors described in the preceding paragraph relative to the third quarter.

 

 

 

Rental operations expenses represent the direct costs of property operations associated with the properties adjoining the Company's main production facility and include utilities, maintenance and depreciation. Control of these properties was acquired in November of 2003.

 

 

 

Selling, general and administrative costs, increased $0.3 million for the three months ended October 2, 2004 to $1.8 million or 14.5% of Total Revenue from $1.5 million or 15.0% of Total Revenue in 2003. Selling, general and administrative costs, increased $1.0 million for the nine months ended October 2, 2004 to $5.6 million or 15.9% of Total Revenue from $4.6 million or 15.9% in 2003. For both the quarterly comparisons and the year-to-date the increase in selling general and administrative costs in 2004 compared to 2003 were 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.

 

 

 

Interest expense decreased to $73,000 for the 2004 third quarter from $83,000 in 2003 because we retired all bank debt after receiving the $22 million fee from VistaPrint. For the year-to-date comparison interest expense in 2004 was $267,000 compared to $151,000 in 2003. This is mainly a result of increased average outstanding borrowings to finance our expansion.

 

 

TAXES

The effective income tax rate for the 2004 third quarter was 7% compared to 36.6% for the 2003 third quarter. This was due to reduction of a reserve related to deferred tax assets arising from NYS investment tax credits. For the year to date the effective tax rates were 25.5% and 36.5%, respectively, for 2004 and 2003. The lower rate in 2004 was because of the reserve adjustment recorded in the third quarter.

 

 

NET INCOME
AND EARNINGS PER
SHARE

Net income for the third quarter of 2004 was $856,000, up $346,000 or 67.8%, from the 2003 third quarter; diluted earnings per share were $.22 compared to $.14. The 2004 quarter performance was boosted by the $611,000 of amortized revenue from the $22 million VistaPrint fee and the lower tax rate from the deferred tax reserve adjustment which more than offset the effect of higher costs of net products sold and increased selling general and administrative expenses. For the nine months of 2004, net income was $2.0 million compared to 2003's nine-month net income of $1.4 million, an increase of $0.6 million or 42.9%. In addition to the effect of items noted for the third quarter the nine-month period for 2004 benefited from the 19.1% growth in net product sales.

 

 

LIQUIDITY

Cash provided by operating activities was $26.3 million during the first nine months of 2004 compared to $2.3 million for 2003. This increase of $24.0 million is nearly all attributable to the $22 million fee received from VistaPrint. Of the $2.0 million remaining increase, $1.3 million was from increased earnings and depreciation.

 

 

 

The Company's capital expenditures of $5.4 million for the nine months of 2004 were down by $2.0 million 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 October 2, 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.

 

 

 

Nearly $10 million of $22 million received from VistaPrint was used to retire bank debt on September 1, 2004 approximately $8 million will be used as to pay taxes in December 2004. 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 third quarter the company had an outstanding authorization from its Board of Directors to repurchase 171,628 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

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 October 2, 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 $9.00 and is currently in the range of $8.00 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 variable rate debt outstanding. Thus the company is not exposed to interest rate adjustments.

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.

Included in deferred tax assets at October 2, 2004, MOD-PAC had a gross deferred tax asset of $1.7 million related 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 $0.6 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 o perating 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

a)

Evaluation of Disclosure Controls and Procedures

 

The company maintains a system of disclosure controls and procedures for financial reporting to give reasonable assurance that information required to be disclosed in the company's reports submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. These controls and procedures also give reasonable assurance that information required to be disclosed in such reports is accumulated and communicated to management to allow timely decisions regarding required disclosures.

 

As of October 2, 2004, the company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), together with management, conducted an evaluation of the effectiveness of the company's disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that these disclosure controls and procedures are effective.

 

 

b)

Changes in Internal Control over Financial Reporting

 

 As a result of a review of compliance with financial statement closing procedures the Company's senior management determined that routine account reconciliations for accounts, such as cash and accounts payable, had not been performed in an accurate and timely manner during 2003 and 2004. Management immediately undertook an intensive program to complete and/or reperform such account reconciliations, which is now complete. As a result management has determined that prior year financial statements required restatement as described in Note 1 to the financial statements included in Part I, Item 1.

Management has determined that this failure to comply with such routine account reconciliation procedures is a material weakness in internal controls and has advised its independent auditors, Ernst & Young, LLP, of this conclusion and they have concurred.

The interim financial statements contained in a form 10-Q are required to be reviewed under Statement on Auditing Standards No. 100, "Interim Financial Statements", (SAS 100), by an independent public accountant pursuant to rule 10-01(d) of the securities and Exchange Commission's Regulation S-X. The Company's independent public accountants have not completed their review of the account reconciliations recently completed by management for 2003 and 2004 described above. Management has made such reconciliations available to its independent public accountants and expects the SAS 100 review, for the interim periods ended October 2, 2004, to be completed in the fourth quarter.

Significant improvements in the Company's internal controls have been implemented as a result of the review of compliance with financial statement closing procedures by the Company's senior management. Management considers these improvements to be important steps toward the remediation of the material weakness in internal controls identified by its review process and described above. While management does not believe the material weakness has been fully remediated at the date of this report, management believes that the planned process that is underway will correct the weakness in the months ahead.

PART II

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 of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

July 4 -
July 31, 2004

7,700

9.32

7,700

182,731

Aug. 1 -
Aug. 28, 2004

4,668

9.99

4,668

178,063

Aug. 29 -
Oct. 2, 2004

6,435

10.16

6,435

171,628

Total

18,803

9.82

18,803

171,628

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.

 

None.

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

 

The Company filed an 8-K on July 7, 2004 regarding its press release announcing the restructuring of its agreement with VistaPrint Ltd.

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: November 22, 2004

 

By: /s/ C. Anthony Rider

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