UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

MOD-PAC CORP.

(Exact name of registrant as specified in its charter)

New York State		16-0957153
(State or other jurisdiction of incorporation or organization)		(IRS employer identification no.)
1801 Elmwood Avenue, Buffalo, New York		14207
(Address of principal executive offices)		(Zip code)

Telephone number including area code: (716) 873-0640

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer  o               Accelerated filer  o               Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o     No þ

The number of shares outstanding of each class of common stock as of June 30, 2007 were:

Common Stock, $0.01 par value		2,770,582 shares
Class B Common Stock, $0.01 par value		679,808 shares

 

 

MOD-PAC CORP.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

						Page
PART I.				FINANCIAL INFORMATION
		Item 1.		Consolidated Balance Sheets June 30, 2007 and December 31, 2006		3
				Consolidated Statements of Operations Three and Six Months Ended June 30, 2007 and July 1, 2006		4
				Consolidated Statements of Cash Flows Six Months Ended June 30, 2007 and July 1, 2006		5
				Notes to Consolidated Financial Statements		6-9
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operation		10-13
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk		14
		Item 4.		Controls and Procedures		14
PART II.				OTHER INFORMATION
		Item 1.		Legal Proceedings		15
		Item 1A.		Risk Factors		15
		Item 2.		Unregistered Sales of Equity Securities		15
		Item 3.		Defaults Upon Senior Securities		15
		Item 4.		Submission of Matters to a Vote of Securities Holders		15
		Item 5.		Other Information		16
		Item 6.		Exhibits		16
SIGNATURES						17
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

Part 1. Financial Information

Item 1. Financial Statements

MOD-PAC CORP.
Consolidated Balance Sheets

		(dollars in thousands)
		June 30, 2007				December 31,
		(Unaudited)				2006
Current assets:
Cash and cash equivalents		$	76			$	2,444
Temporary investments			—				1,000
Trade accounts receivable, net of allowance of $102 in 2007 and $74 in 2006			4,436				4,004
Inventories			3,882				3,235
Refundable income taxes			—				685
Prepaid expenses			404				449
Total current assets			8,798				11,817
Property, plant and equipment, at cost			66,781				65,391
Less accumulated depreciation and amortization			(42,080	)			(39,654	)
Net property, plant and equipment			24,701				25,737
Other assets			1,630				1,452
Totals assets		$	35,129			$	39,006
Current liabilities:
Current maturities of long-term debt		$	19			$	37
Accounts payable			2,827				3,872
Accrued expenses			789				1,048
Income taxes payable			365				—
Total current liabilities			4,000				4,957
Long-term debt			1,921				1,931
Other liabilities			31				31
Deferred income taxes			1,398				2,426
Total liabilities		$	7,350			$	9,345
Shareholders’ equity:
Common stock, $.01 par value, authorized 20,000,000 shares, issued 3,396,280 in 2007, 3,381,881 in 2006			34				34
Class B common stock, $.01 par value, authorized 5,000,000 shares, issued 679,808 in 2007, 692,738 in 2006			7				7
Additional paid-in capital			2,026				1,888
Retained earnings			31,777				33,797
			33,844				35,726
Less treasury shares, at cost 625,698 in 2007 and 2006			(6,065	)			(6,065	)
Total shareholders’ equity			27,779				29,661
Total liabilities and shareholders’ equity		$	35,129			$	39,006

See notes to financial statements

MOD-PAC CORP.
Consolidated Statements of Operations

		(dollars in thousands)
		(Unaudited)
		Six Months Ended								Three Months Ended
		June 30, 2007				July 1, 2006				June 30, 2007				July 1, 2006
Revenue:
Net sales		$	21,908			$	22,233			$	10,768			$	10,818
Rental income			257				272				138				139
Total revenue			22,165				22,505				10,906				10,957
Costs and Expenses:
Cost of products sold			20,289				20,905				10,477				10,222
Selling, general and administrative expenses			4,876				4,902				2,320				2,282
Interest expense			36				36				31				23
Other income			(26	)			(47	)			(20	)			(11	)
Total costs and expenses			25,175				25,796				12,808				12,516
Loss before income taxes			(3,010	)			(3,291	)			(1,902	)			(1,559	)
Income tax benefit			(990	)			(1,137	)			(631	)			(553	)
Net loss		$	(2,020	)		$	(2,154	)		$	(1,271	)		$	(1,006	)
Retained earnings:
Beginning of period			33,797				37,228
End of period			31,777				35,074
Loss per share:
Basic		$	(.59	)		$	(.63	)		$	(.37	)		$	(.29	)
Diluted		$	(.59	)		$	(.63	)		$	(.37	)		$	(.29	)

See notes to financial statements

MOD-PAC CORP.
Consolidated Statements of Cash Flows

		(dollars in thousands)
		(Unaudited)
		Six Months Ended
		June 30,				July 1,
		2007				2006
Cash flows from operating activities:
Net loss		$	(2,020	)		$	(2,154	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,460				2,582
Provision for doubtful accounts			28				14
Stock option compensation expense			129				284
Deferred income taxes			(992	)			(379	)
Loss on disposal of assets			9				—
Cash flows from changes in operating assets and liabilities:
Accounts receivable			(460	)			(131	)
Inventories			(647	)			(116	)
Prepaid expenses			45				(39	)
Other liabilities			—				(24	)
Accounts payable			(1,046	)			(656	)
Refundable or payable income taxes			1,014				474
Accrued expenses			(259	)			(980	)
Net cash used in operating activities			(1,739	)			(1,125	)
Cash flows from investing activities:
Sale of temporary investments			1,000				1,700
Change in other assets			(25	)			(41	)
Capital expenditures			(597	)			(366	)
Acquisition of DDM assets			(947	)			—
Net cash (used in) provided by investing activities			(569	)			1,293
Cash flows from financing activities
Principal payments on long-term debt and capital lease			(28	)			(44	)
Proceeds from issuance of stock			8				46
Deferred financing fees			(40	)			—
Net cash (used in) provided by financing activities			(60	)			2
Net (decrease) increase in cash and cash equivalents			(2,368	)			170
Cash and cash equivalents at beginning of year			2,444				1,178
Cash and cash equivalents at end of period		$	76			$	1,348

See notes to financial statements.

MOD-PAC CORP.
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2007

1)

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. Operating results for the six-month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

The balance sheet at December 31, 2006 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 Company’s 2006 annual report on Form 10-K.

Revenue is recognized on the accrual basis, which is at the time of shipment of goods.

2)

Stock-Based Compensation

MOD-PAC CORP. established a Stock Option Plan that authorized the issuance of 800,000 shares of Common Stock for the purpose of attracting and retaining executive officers and key employees, and to align management’s 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 Director’s 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 $5.75 for options granted during the six months ended July 1, 2006. No stock options were granted during the six months ended June 30, 2007. The following table provides the range of assumptions used to value stock options granted during the six months ended July 1, 2006.

		Six Months Ended
		June 30,				July 1,
		2007				2006
Expected volatility			N/A				41	%
Risk-free rate			N/A				4.8	%
Expected dividends			N/A				0	%
Expected term (in years)			N/A				6.5

To determine expected volatility, the Company uses historical volatility based on weekly closing prices of its Common Stock since the Company’s 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 Company’s history and expectation of dividend payouts. The expected term of stock options is based on vesting schedules, expected exercise patterns and contractual terms.

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2007 is as follows:

						Weighted
						Average Exercise				Aggregate
($ in thousands, except for per option data)		Options				Price				Intrinsic Value
Outstanding at January 1, 2007			379,135			$	9.43			$	595
Options granted			—				N/A
Options forfeited			(1,600	)			11.83
Options exercised			(1,469	)			5.28				(8	)
Outstanding at June 30, 2007			376,066				9.43			$	293
Exercisable at June 30, 2007			287,965			$	9.30			$	262

The aggregate intrinsic value in the proceeding table represents the total pretax option holder’s intrinsic value, based on the Company’s closing stock price of Common Stock of $10.21 as of June 30, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The aggregate intrinsic value of the options exercised is based on the Company’s closing stock price of common stock as of the date the option is exercised. The Company’s current policy is to issue additional new shares upon exercise of stock options.

The fair value of options vested since December 31, 2006 is $0.2 million. At June 30, 2007, total compensation costs related to non-vested awards not yet recognized was $0.4 million which will be recognized over a weighted average period of 1.88 years.

The following is a summary of weighted average exercise prices and contractual lives for outstanding and exercisable stock options as of June 30, 2007:

		Outstanding												Exercisable
						Weighted												Weighted
						Average				Weighted								Average
						Remaining				Average								Remaining				Weighted
Exercise Price						Life				Exercise								Life in				Average
Range		Shares				in Years				Price				Shares				Years				Exercise Price
$5.21 to $8.44			168,612				5.2			$	6.96				150,331				5.1			$	6.98
$10.00 to $15.54			207,454				8.1			$	11.44				137,634				7.4			$	11.82
			376,066				6.7			$	9.43				287,965				6.2			$	9.30

3)

Inventories

Inventories are stated at the lower of cost or market, cost being determined in accordance with the first-in, first-out method. Inventories are as follows:

		(in thousands)
		Six months ended
		(unaudited)
		June 30,				December
		2007				31, 2006
Finished goods		$	2,316			$	1,556
Work in progress			126				136
Raw material			1,440				1,543
Total inventory		$	3,882			$	3,235

4)

Product Line Net Sales

Product line net sales are as follows:

		(in thousands)
		Six months ended								Three months ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Custom Folding Cartons		$	13,686			$	14,617			$	6,949			$	7,474
Commercial Print			1,304				537				846				322
Stock Box			4,447				4,505				1,638				1,662
Personalized Print			2,471				2,574				1,335				1,360
		$	21,908			$	22,233			$	10,768			$	10,818

5)

Loss Per Share

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

(in thousands except per share data)		Six months ended								Three months ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Net loss as reported		$	(2,020	)		$	(2,154	)		$	(1,271	)		$	(1,006	)
Basic loss per share weighted average shares			3,450				3,441				3,450				3,443
Net effect of dilutive stock options			—				—				—				—
Diluted loss per share weighted average shares			3,450				3,441				3,450				3,443
Basic loss per share		$	(.59	)		$	(.63	)		$	(.37	)		$	(.29	)
Diluted loss per share		$	(.59	)		$	(.63	)		$	(.37	)		$	(.29	)

The effect of dilutive stock options has not been included for the six months and three months ended June 30, 2007 and July 1, 2006, since this would be anti-dilutive as a result of the Company’s net loss.

6)

Income Taxes

The Company’s effective tax rate for the first six months of 2007 was 32.9%, which approximates the Company’s expected tax rate for 2007. The effective tax rate for the first six months of 2006 was 34.5%.

The Company’s continuing practice is not to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2007, the Company had no amounts accrued related to uncertain tax positions. The tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which the Company is subject.

7)

Capital Structure

The Company’s Class B stock is fully convertible into Common stock on a one-for-one basis at no cost. During the first six months of 2007, 12,930 shares of Class B stock were converted to Common stock.

8)

Information Regarding Industry Segments

The Company operates as one reporting segment. The Company’s 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 Company’s CEO is consistent with the reporting format used in the Company’s 2006 Form 10-K and other external information.

9)

DDM Acquisition

Effective May 1, 2007, the Company acquired certain assets of DDM — Digital Imaging, Data Processing and Mailing Services LC (“DDM”) for a total purchase price of $850,000 for the purpose of expanding the Company’s service offerings and capabilities.

The purchase price including acquisition related costs has been allocated as follows:

		(in thousands)
Property, plant and equipment		$	807
Intangible assets			140
Total		$	947

10)

Recent Accounting Pronouncements

In June of 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement. The scope of this consensus includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include, but is not limited to sales, use, value added and some excise taxes. Additionally, this consensus seeks to address how a company should address the disclosure of such items in interim and annual financial statements, either gross or net pursuant to APB Opinion No. 22, Disclosure of Accounting Policies. EITF Issue 06-3 is effective for all financial reports for interim and annual reporting periods beginning after December 15, 2006. The Company presents sales net of sales taxes in its condensed consolidated statement of operations. No change in presentation resulted from the adoption of EITF 06-3.

In July 2006, the Financial Accounting Standards Board issued Financial Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which applies to all tax positions related to income taxes subject to SFAS 109, Accounting for Income Taxes. FIN 48 requires a new evaluation process for all tax positions taken. If the probability for sustaining said tax position is greater than 50%, then the tax position is warranted and recognition should be at the highest amount which would be expected to be realized upon ultimate settlement.

Interpretation 48 requires expanded disclosure at each annual reporting period unless a significant change occurs in an interim period. Differences between the amounts recognized in the statements of financial position prior to the adoption of Interpretation 48 and the amounts reported after adoption are to be accounted for as an adjustment to the beginning balance of retained earnings. The adoption of FIN 48 did not have a material impact on the Company’s financial position or results from operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines fair value, establishes a framework for measurement and expands disclosure about fair value measurements. Where applicable, SFAS 157 simplifies and codifies related guidance within generally accepted accounting principles. This statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of SFAS No. 157 on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which allows measurement of specified financial instruments, warranty and insurance contracts at fair value on a contract by contract basis, with changes in fair value recognized in earnings in each period. SFAS 159 is effective at the beginning of the fiscal year that begins after November 15, 2007, and will be effective for the Company in fiscal 2008. The Company is in the process of determining the effect the adoption of SFAS No. 159 will have, if any, on our consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

REVENUE

For the second quarter of 2007 total revenue was $10.9 million compared with $11.0 million in 2006, a decrease of 0.5%. This decrease was mainly due to the decrease in sales in the custom folding carton product line. The custom folding carton line sales were $6.9 million compared with $7.5 million in the second quarter of 2006, a decrease of 7.0%. The custom folding carton decline was due primarily to declines in the business of several existing customers offset by new business from new customers. Sales of the Company’s stock box product line were $1.6 million, relatively unchanged from the prior year’s second quarter sales. Personalized print sales for the second quarter of 2007 were $1.3 million, also relatively unchanged from the prior year’s second quarter sales. Second quarter 2007 commercial print sales grew 163% to $0.8 million compared with sales of $0.3 million in the second quarter of 2006. The commercial print increase was primarily due to additional sales driven by capability from the DDM — Digital Imaging, Data Processing and Mailing Services LC acquisition which was effective May 1, 2007.

For the first six months of 2007 total revenue was $22.2 million compared with $22.5 million in 2006, a decrease of 1.5%. This decrease was mainly due to the custom folding carton product line sales which were down $0.9 million, or 6.4%, for the first six months of 2007 compared to 2006. The custom folding carton decline was due primarily to declines in the business of several existing customers offset by new business from new customers. Sales of the Company’s stock box product line were $4.4 million, relatively unchanged from the prior year’s first six month’s sales. Personalized print sales for the first six months of 2007 were $2.5 million compared with $2.6 million in the same period of 2006. The first six months of 2007 commercial print sales grew 143% to $1.3 million compared with sales of $0.5 million in the first six months of 2006, and included growth in distribution sales and additional business driven by capability from the DDM — Digital Imaging, Data Processing and Mailing Services LC acquisition which was effective May 1, 2007.

EXPENSES AND MARGINS

Gross margin was 3.9% for the second quarter of 2007, a decrease from 6.7% in the second quarter of 2006. This decrease was a result of weaker product mix and higher repairs and utilities expense. Selling, general, and administrative costs remained relatively unchanged from the prior year’s second quarter, however lower advertising and stock-based compensation expenses were offset by increased wage related expenses.

Gross margin was 8.5% for the first six months of 2007, an increase from 7.1% in the first six months of 2006. This increase was a result of overall improved product mix, lower workers’ compensation and depreciation expense, partially offset by higher repairs and utilities expense. Selling, general, and administrative costs remained relatively unchanged from the prior year’s first six months, however lower advertising and stock-based compensation expenses were offset by increased wage related expenses.

TAXES

The Company’s effective tax rate for the second quarter of 2007 was 33.2% and 32.9% for the first six months of 2007, which approximates the Company’s expectations. The effective tax rate in the second quarter of 2006 was 35.5% and 34.5% for the first six months of 2006.

NET LOSS AND LOSS PER SHARE

The net loss for the second quarter of 2007 was $1.3 million, an increase in loss of $0.3 million from the second quarter of 2006. This increase in loss was due to the fluctuations discussed above. Diluted loss per share was $0.37 in the second quarter of 2007 and $0.29 in the second quarter of 2006.

The net loss for the first six months of 2007 was $2.0 million, an improvement of $0.1 million from the first six months of 2006. This decrease in loss was due to the fluctuations discussed above. Diluted loss per share was $0.59 in the first six months of 2007 and $0.63 in the first six months of 2006.

LIQUIDITY

Cash, cash equivalents and temporary investments were $0.1 million at June 30, 2007, compared with $3.4 million at December 31, 2006. The lower balances were the result of higher working capital requirements, net losses, and an increase in capital expenditures including the acquisition of DDM assets, partially offset by non-cash depreciation and amortization expense and an income tax refund.

Accounts receivable at June 30, 2007 was $0.5 million higher compared to December 31, 2006 due to strong sales in June, 2007. Finished goods inventory was $0.8 million higher at June 30, 2007 as a result of shipment timing and some inventory build-up for a new custom folding carton customer compared to December 31, 2006. Accounts payable was $1.0 million lower at June 30, 2007 compared to December 31, 2006 primarily as a result of raw material inventory changes and timing of fourth quarter 2006 capital expenditures.

Capital expenditures for the first six months of 2007 were $1.4 million compared with $0.4 million for the first six months of 2006. Capital expenditures include $0.8 million related to the DDM purchase transaction that was closed by the Company effective May 1, 2007. Depreciation and amortization for the first six months of 2007 was $2.5 million.

The Company has access to an $8.0 million committed line of credit with a commercial bank, which expires in February, 2010; of which $0.25 million is in use through standby letters of credit. Interest on the line of credit is either LIBOR plus 100 basis points or the prime rate, at the Company’s option. The Company believes that cash, cash equivalents and the recently added line of credit, are sufficient to meet cash requirements for operations, capital expenditures and debt service for the balance of 2007.

There were no share repurchases by the Company during the first six months of 2007. The Company has authorization to repurchase 100,885 shares at June 30, 2007. The closing price of the Company’s stock at June 30, 2007 was $10.21. At this price, the repurchase of 100,885 shares would require $1,030,036.

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, 2006.

As a result of short cycle times, the Company does not have any long-term commitments to purchase production raw materials or sell products that would present significant risks due to price fluctuations. Raw paper stock is available to us from multiple domestic sources; as a result, we believe the risk of supply interruptions due to such things as strikes at the source of supply or to logistics systems are limited.

Risks due to fluctuation in interest rates are not material to the Company at June 30, 2007 because of no exposure to floating rate debt. The Company had no balance in temporary investments at June 30, 2007.

Since May of 2003, over 90% of the Company’s 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 95% of its estimated usage through April, 2008 and approximately 50% of its estimated usage from May 2008 through September 2009. Historically, the price of natural gas has fluctuated widely. Although the Company is concerned about cost, its main concern is availability. The Company monitors the availability of natural gas, considering such factors as amount in storage, gas production data and transportation data, so that it can take appropriate action if concerns about availability occur. The Company has investigated and tested a back-up power source in the form of a rented transportable diesel-powered generator. Although such generators are generally available, the Company cannot be assured that a generator adequate to meet the Company’s 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.

The market risk that the Company was exposed to at December 31, 2006 was generally the same as described above.

CRITICAL ACCOUNTING POLICIES

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 realizability of deferred tax assets. Often, management must make certain assumptions about the future when applying these policies. Management uses experience in developing such assumptions about the future. Actual experience will be different than the assumptions made and differences could result in material adjustments to management’s estimates.

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-PAC’s 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-PAC’s goods and services;
	•		Customer acceptance of the products and services MOD-PAC provides;
	•		Competitive factors in commercial printing and folding cartons industries;
	•		Changes in tax requirements (including tax rate changes, new tax laws and revised tax law interpretations);
	•		The availability and costs of natural gas supplies in Western New York State;
	•		The internal and external costs of compliance with laws and regulations such as Section 404 of the Sarbanes-Oxley Act of 2002;
	•		Litigation against the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Market Risk in Item 2, above.

Item 4. Controls and Procedures

The company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a — 15(e) and 15(d) — 15(e) of the Securities Exchange Act of 1934, as of June 30, 2007. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2007. There were no changes in the Company’s internal control over financial reporting during the second quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Total Number

(d) Maximum Number

(a) Total

of Shares (or Units)

(or Approximate Dollar

Number of

Purchased as Part

Value) of Shares (or

Shares (or

(b) Average Price

of Publicly

Units) that May Yet Be

Units)

Paid per Share

Announced Plans

Purchased Under the

Period

Purchased

(or Unit)

or Programs

Plans or Programs

April 1 — April 28, 2007

—

—

—

100,885

April 29 — May 26, 2007

—

—

—

100,885

May 26 — June 30, 2007

—

—

—

100,885

Total

—

—

—

Item 3. Defaults Upon Senior Securities

Not applicable.

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

The Company’s Annual Meeting of Shareholders was held on May 8, 2007.

1.)

The nominees to the Board of Directors were elected based on the following shares voted:

Nominee		For				Authority Withheld
William G. Gissel, Jr.			7,370,873				628,693
Daniel G. Keane			7,281,849				717,717
Kevin T. Keane			7,223,951				775,615
Robert J. McKenna			7,370,873				628,693
Howard Zemsky			7,395,603				603,963

2.)

The ratification of Ernst & Young LLP as the Registrant’s auditors was approved by the following vote: 7,577,572 in favor; 312,197 against; and 109,785 abstentions.

3.)

The action to convert all of the Company’s shares of Class B Stock into shares of Class A Stock was defeated by the following vote: 1,518,952 in favor; 4,861,691 against; 58,768 abstentions; and 1,560,155 broker non-votes.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

		Exhibit 31.1		Section 302 Certification — Chief Executive Officer
		Exhibit 31.2		Section 302 Certification — Chief Financial Officer
		Exhibit 32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
		Exhibit 32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

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.