MOD-PAC CORP. 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the quarterly period ended September 29, 2007
or
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the transition period from to
Commission File Number 1-5129
MOD-PAC CORP.
(Exact name of registrant as specified in its charter)
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New York State
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16-0957153 |
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(State or other jurisdiction of
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(IRS employer identification no.) |
incorporation or organization) |
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1801 Elmwood Avenue, Buffalo, New York
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14207 |
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(Address of principal executive offices)
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(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 September 29, 2007 were:
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Common Stock, $0.01 par value
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2,777,475 shares |
Class B Common Stock, $0.01 par value
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672,915 shares |
MOD-PAC CORP.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Part 1. Financial Information
Item 1. Financial Statements
MOD-PAC CORP.
Consolidated Balance Sheets
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(dollars in thousands) |
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September 29, 2007 |
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December 31, |
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(Unaudited) |
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2006 |
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Current assets: |
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Cash and cash equivalents |
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$ |
265 |
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$ |
2,444 |
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Temporary investments |
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1,000 |
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Trade accounts receivable, net of allowance of $101 in
2007 and $74 in 2006 |
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5,779 |
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4,004 |
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Inventories |
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4,311 |
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3,235 |
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Refundable income taxes |
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685 |
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Prepaid expenses |
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344 |
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449 |
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Total current assets |
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10,699 |
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11,817 |
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Property, plant and equipment, at cost |
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67,180 |
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65,391 |
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Less accumulated depreciation and amortization |
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(43,178 |
) |
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(39,654 |
) |
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Net property, plant and equipment |
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24,002 |
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25,737 |
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Other assets |
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1,620 |
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1,452 |
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Totals assets |
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$ |
36,321 |
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$ |
39,006 |
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Current liabilities: |
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Current maturities of long-term debt |
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$ |
19 |
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$ |
37 |
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Accounts payable |
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3,958 |
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3,872 |
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Accrued expenses |
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1,017 |
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1,048 |
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Income taxes payable |
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56 |
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Total current liabilities |
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5,050 |
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4,957 |
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Line of credit |
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1,800 |
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Long-term debt |
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1,917 |
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1,931 |
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Other liabilities |
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27 |
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31 |
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Deferred income taxes |
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782 |
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2,426 |
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Total liabilities |
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9,575 |
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9,345 |
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Shareholders equity: |
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Common stock, $.01 par value, authorized 20,000,000
shares, issued 3,403,173 in 2007, 3,381,881 in 2006 |
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34 |
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34 |
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Class B common stock, $.01 par value, authorized 5,000,000
shares, issued 672,915 in 2007, 692,738 in 2006 |
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7 |
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7 |
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Additional paid-in capital |
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2,063 |
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1,888 |
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Retained earnings |
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30,706 |
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33,797 |
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32,810 |
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35,726 |
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Less treasury shares, at cost 625,698 in 2007 and 2006 |
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(6,065 |
) |
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(6,065 |
) |
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Total shareholders equity |
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26,745 |
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29,661 |
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Total liabilities and shareholders equity |
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$ |
36,321 |
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$ |
39,006 |
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See notes to financial statements
3
MOD-PAC CORP.
Consolidated Statements of Operations
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(dollars in thousands) |
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(Unaudited) |
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Nine Months Ended |
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Three Months Ended |
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September |
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September |
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September 29, |
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September 30, |
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29, 2007 |
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30, 2006 |
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2007 |
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2006 |
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Revenue: |
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Net sales |
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$ |
34,849 |
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$ |
33,559 |
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$ |
12,941 |
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$ |
11,326 |
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Rental income |
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398 |
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416 |
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141 |
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143 |
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Total revenue |
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35,247 |
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33,975 |
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13,082 |
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11,469 |
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Costs and Expenses: |
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Cost of products sold |
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32,307 |
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31,088 |
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12,017 |
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10,183 |
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Selling, general and administrative expenses |
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7,411 |
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7,221 |
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2,536 |
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2,317 |
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Interest expense |
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130 |
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89 |
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94 |
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54 |
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Other expense (income) |
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11 |
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(58 |
) |
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37 |
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(10 |
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Total costs and expenses |
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39,859 |
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38,340 |
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14,684 |
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12,544 |
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Loss before income taxes |
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(4,612 |
) |
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(4,365 |
) |
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(1,602 |
) |
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(1,075 |
) |
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Income tax benefit |
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(1,521 |
) |
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(1,495 |
) |
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(531 |
) |
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(358 |
) |
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Net loss |
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$ |
(3,091 |
) |
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$ |
(2,870 |
) |
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$ |
(1,071 |
) |
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$ |
(717 |
) |
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Retained earnings: |
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Beginning of period |
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33,797 |
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37,228 |
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End of period |
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30,706 |
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34,358 |
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Loss per share: |
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Basic |
|
$ |
(.90 |
) |
|
$ |
(.83 |
) |
|
$ |
(.31 |
) |
|
$ |
(.21 |
) |
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Diluted |
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$ |
(.90 |
) |
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$ |
(.83 |
) |
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$ |
(.31 |
) |
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$ |
(.21 |
) |
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See notes to financial statements
4
MOD-PAC CORP.
Consolidated Statements of Cash Flows
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(dollars in thousands) |
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(Unaudited) |
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Nine Months Ended |
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September 29, |
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September |
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2007 |
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30, 2006 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(3,091 |
) |
|
$ |
(2,870 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation and amortization |
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3,645 |
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3,792 |
|
Provision for doubtful accounts |
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33 |
|
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|
114 |
|
Stock option compensation expense |
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166 |
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|
319 |
|
Deferred income taxes |
|
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(1,524 |
) |
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(863 |
) |
Loss on disposal of assets |
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59 |
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Cash flows from changes in operating assets and liabilities: |
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Accounts receivable |
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(1,808 |
) |
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|
(465 |
) |
Inventories |
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(1,076 |
) |
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|
(224 |
) |
Prepaid expenses |
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|
105 |
|
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|
10 |
|
Other liabilities |
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(4 |
) |
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(397 |
) |
Accounts payable |
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86 |
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(50 |
) |
Refundable or payable income taxes |
|
|
621 |
|
|
|
624 |
|
Accrued expenses |
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(31 |
) |
|
|
(809 |
) |
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Net cash used in operating activities |
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(2,819 |
) |
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(819 |
) |
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Cash flows from investing activities: |
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Proceeds from sale of assets |
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52 |
|
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Sale of temporary investments |
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1,000 |
|
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|
1,700 |
|
Change in other assets |
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(30 |
) |
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(44 |
) |
Capital expenditures |
|
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(1,171 |
) |
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(525 |
) |
Acquisition of DDM assets |
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(947 |
) |
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Net cash (used in) provided by investing activities |
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(1,096 |
) |
|
|
1,131 |
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Cash flows from financing activities
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Principal payments on long-term debt and capital lease |
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(32 |
) |
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(65 |
) |
Increase in line of credit |
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|
1,800 |
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Proceeds from issuance of stock |
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8 |
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46 |
|
Deferred financing fees |
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(40 |
) |
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Net cash provided by (used in) financing activities |
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1,736 |
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(19 |
) |
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Net (decrease) increase in cash and cash equivalents |
|
|
(2,179 |
) |
|
|
293 |
|
|
Cash and cash equivalents at beginning of year |
|
|
2,444 |
|
|
|
1,178 |
|
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Cash and cash equivalents at end of period |
|
$ |
265 |
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$ |
1,471 |
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|
See notes to financial statements.
5
MOD-PAC CORP.
Notes to Consolidated Financial Statements
Nine Months Ended September 29, 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 nine-month period ended September 29, 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
Companys 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 managements interests with those of the shareholders of MOD-PAC CORP. The options must be
exercised no more than ten years from the grant date and vest over up to a five-year period. The
exercise price for the options is equal to the fair market value of the common stock at the date of
grant.
MOD-PAC CORP. established the Directors Stock Option Plan that authorized the issuance of 200,000
shares of Common Stock for the purpose of attracting and retaining the services of experienced and
knowledgeable outside directors, and to align their interest with those of its shareholders. The
options must be exercised no more than ten years from the grant date and vest after six months. The
exercise price for the options is equal to the fair market value of
the common stock 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 $5.75 for options granted
during the nine months ended September 30, 2006. No stock options were granted during the nine
months ended September 29, 2007. The following table provides the range of assumptions used to
value stock options granted during the nine months ended September 30, 2006.
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Nine Months Ended |
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September 29, |
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September 30, |
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2007 |
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2006 |
|
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|
Expected volatility |
|
N/A |
|
41% |
Risk-free rate |
|
N/A |
|
4.8% |
Expected dividends |
|
N/A |
|
0% |
Expected term (in years) |
|
N/A |
|
6.5 |
6
To determine expected volatility, the Company uses historical volatility based on weekly closing
prices of its Common Stock since the Companys spin-off from Astronics Corporation in March 2003.
The risk-free rate is based on the United States Treasury yield curve at the time of grant for the
appropriate term of the options granted. Expected dividends are based on the Companys history and
expectation of dividend payouts. The expected term of stock options is based on vesting schedules,
expected exercise patterns and contractual terms.
A summary of the Companys stock option activity and related information for the nine months ended
September 29, 2007 is as follows:
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Weighted |
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|
|
|
|
|
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|
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Average Exercise |
|
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Aggregate |
|
($ 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2007 |
|
|
376,066 |
|
|
|
9.43 |
|
|
$ |
277 |
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 29, 2007 |
|
|
287,965 |
|
|
$ |
9.30 |
|
|
$ |
247 |
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the proceeding table represents the total pretax option holders
intrinsic value, based on the Companys closing stock price of Common Stock of $8.60 as of
September 29, 2007, which would have been received by the option holders had all options with an
exercise price less than $8.60 been exercised as of that date. The aggregate intrinsic value of the
options exercised is based on the Companys closing stock price of common stock as of the date the
option is exercised. The Companys 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 September 29, 2007,
total compensation costs related to non-vested awards not yet recognized was $0.3 million, which
will be recognized over a weighted average period of 1.95 years.
The following is a summary of weighted average exercise prices and contractual lives for
outstanding and exercisable stock options as of September 29, 2007:
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Outstanding |
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Exercisable |
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
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|
|
Weighted |
|
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|
|
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|
|
Average |
|
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|
|
Average |
|
|
|
|
|
|
|
|
Remaining |
|
Weighted |
|
|
|
|
|
Remaining |
|
Weighted |
|
|
|
|
|
|
Life |
|
Average |
|
|
|
|
|
Life in |
|
Average |
Exercise Price Range |
|
Shares |
|
in Years |
|
Exercise Price |
|
Shares |
|
Years |
|
Exercise Price |
|
|
|
$5.21 to $8.44
|
|
|
168,612 |
|
|
|
4.9 |
|
|
$ |
6.96 |
|
|
|
150,331 |
|
|
|
4.8 |
|
|
$ |
6.98 |
|
$10.00 to $15.54
|
|
|
207,454 |
|
|
|
7.8 |
|
|
$ |
11.44 |
|
|
|
137,634 |
|
|
|
7.2 |
|
|
$ |
11.82 |
|
|
|
|
|
|
|
376,066 |
|
|
|
6.5 |
|
|
$ |
9.43 |
|
|
|
287,965 |
|
|
|
6.0 |
|
|
$ |
9.30 |
|
|
|
|
|
|
7
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) |
|
|
|
Nine months ended |
|
|
|
September 29, |
|
|
December |
|
|
|
2007 |
|
|
31, 2006 |
|
Finished goods |
|
$ |
2,433 |
|
|
$ |
1,556 |
|
Work in progress |
|
|
188 |
|
|
|
136 |
|
Raw material |
|
|
1,690 |
|
|
|
1,543 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
4,311 |
|
|
$ |
3,235 |
|
|
|
|
|
|
|
|
4) Product Line Net Sales
Product line net sales are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
Nine months ended |
|
|
Three months ended |
|
|
|
September |
|
|
September |
|
|
September |
|
|
September |
|
|
|
29, 2007 |
|
|
30, 2006 |
|
|
29, 2007 |
|
|
30, 2006 |
|
Folding Cartons: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Custom Folding Cartons |
|
$ |
22,031 |
|
|
$ |
21,877 |
|
|
$ |
8,346 |
|
|
$ |
7,260 |
|
Stock Box |
|
|
6,995 |
|
|
|
6,954 |
|
|
|
2,548 |
|
|
|
2,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Folding Cartons sub-total |
|
|
29,026 |
|
|
|
28,831 |
|
|
|
10,894 |
|
|
|
9,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Printing |
|
|
2,171 |
|
|
|
967 |
|
|
|
867 |
|
|
|
430 |
|
Personalized Print |
|
|
3,652 |
|
|
|
3,761 |
|
|
|
1,180 |
|
|
|
1,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print Services sub-total |
|
|
5,823 |
|
|
|
4,728 |
|
|
|
2,047 |
|
|
|
1,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
34,849 |
|
|
$ |
33,559 |
|
|
$ |
12,941 |
|
|
$ |
11,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5) Loss Per Share
The following table sets forth the computation of loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Three months ended |
|
|
|
September |
|
|
September |
|
|
September |
|
|
September |
|
(in thousands except per share data) |
|
29, 2007 |
|
|
30, 2006 |
|
|
29, 2007 |
|
|
30, 2006 |
|
Net loss as reported |
|
$ |
(3,091 |
) |
|
$ |
(2,870 |
) |
|
$ |
(1,071 |
) |
|
$ |
(717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
(.90 |
) |
|
$ |
(.83 |
) |
|
$ |
(.31 |
) |
|
$ |
(.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share |
|
$ |
(.90 |
) |
|
$ |
(.83 |
) |
|
$ |
(.31 |
) |
|
$ |
(.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
8
The effect of dilutive stock options has not been included for the nine months and three months
ended September 29, 2007 and September 30, 2006, since this would be anti-dilutive as a result of
the Companys net loss.
6) Income Taxes
The Companys effective tax rate for the first nine months of 2007 was 33.0%, which approximates
the Companys expected tax rate for 2007. The effective tax rate for the first nine months of 2006
was 34.2%.
The Companys continuing practice is not to recognize interest and/or penalties related to income
tax matters in income tax expense. As of September 29, 2007, the Company had no amounts accrued
related to uncertain tax positions. The tax year 2006 remains open to examination by the major
state taxing jurisdictions to which the Company is subject.
7) Capital Structure
The Companys Class B stock is fully convertible into Common stock on a one-for-one basis at no
cost. During the first nine months of 2007, 19,823 shares of Class B stock were converted to Common
stock.
8) Information Regarding Industry Segments
The Company operates as one reporting segment. The Companys customer base is comprised of
companies and individuals throughout the United States and North America and is diverse in both
geographic and demographic terms. The format of the information used by the Companys CEO is
consistent with the reporting format used in the Companys 2006 Form 10-K and other external
information.
9) Line of Credit
The Company has access to an $8.0 million committed line of credit with a commercial bank, which
expires in February, 2010. At September 29, 2007, $1.8 million was borrowed and an additional $0.3
million was 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 Companys option.
10) 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 Companys 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 |
|
|
|
|
|
9
11) 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 Companys 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. This statement is effective at the beginning of the fiscal
year that begins after November 15, 2007. 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.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
REVENUE
For the third quarter of 2007, total revenue was $13.1 million compared with $11.5 million in 2006,
an increase of 14.1%. This increase was mainly due to the increase in sales in the custom folding
carton product line. The custom folding carton line sales were $8.3 million compared with $7.3
million in the third quarter of 2006, an increase of 15.0%. The custom folding carton increase was
due primarily to increased demand from several top customers. Sales of the Companys stock box
product line were $2.5 million, an increase of 4.0% over the prior years third quarter sales of
$2.4 million. Personalized print sales for the third quarter of 2007 were $1.2 million, relatively
unchanged from the prior years third quarter sales. Third quarter 2007 commercial print sales grew
101.6% to $0.9 million compared with sales of $0.4 million in the third 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 nine months of 2007, total revenue was $34.8 million compared with $33.6 million in
2006, an increase of 3.8%. This increase was mainly due to the increase in sales in the commercial
print product line. The commercial print product line sales were $2.2 million in the first nine
months of 2007 compared with $1.0 million in the first nine months of 2006, an increase of 124.5%,
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. Custom folding carton product line sales were up $0.2 million, or 0.7%, for the first nine
months of 2007 compared with 2006. Sales of the Companys stock box product line were $7.0 million,
relatively unchanged from the prior years first nine months sales. Personalized print sales for
the first nine months of 2007 were $3.7 million compared with $3.8 million in the same period of
2006, down 2.9%.
EXPENSES AND MARGINS
Gross margin was 8.1% for the third quarter of 2007, a decrease from 11.2% in the third quarter of
2006. This decrease was a result of weaker product sales mix, higher paperboard costs and higher
energy costs combined with increased repairs and maintenance expense. Selling, general, and
administrative (SG&A) costs for the third quarter of 2007 were $2.5 million compared with $2.3
million in the same period last year. Included in SG&A was approximately $0.3 million in charges
associated with the realignment of personnel and associated severance related costs.
Gross margin was 8.3% for the first nine months of 2007, compared to 8.5% in the same period last
year. Improvements in yield on higher volume was offset by higher paperboard costs and increase in
repairs and energy costs. Selling, general, and administrative costs were $7.4 million for the
first nine months of 2007, an increase of $0.2 million from the prior years first nine months.
This increase was the result of $0.3 million in severance related costs and increases in wage and
benefit-related expenses, partially offset by lower advertising, stock-based compensation and bad
debt expenses.
TAXES
The Companys effective tax rate for the third quarter of 2007 was 33.1% and 33.0% for the first
nine months of 2007, which approximates the Companys expectations. The effective tax rates for
2006 were 33.3% and 34.2% for the third quarter and first nine months, respectively.
NET LOSS AND LOSS PER SHARE
The net loss for the third quarter of 2007 was $1.1 million, an increase in loss of $0.3 million
from the third quarter of 2006. This increase in loss was due to expenses and margins previously
discussed. Diluted loss per share was $0.31 in the third quarter of 2007 and $0.21 in the third
quarter of 2006.
The net loss for the first nine months of 2007 was $3.1 million, compared with $2.9 million in the
first nine months of 2006. This increase in loss was due to expenses and margins previously
discussed. Diluted loss per share was $0.90 in the first nine months of 2007 and $0.83 in the first
nine months of 2006.
11
LIQUIDITY
Cash, cash equivalents and temporary investments were $0.3 million at September 29, 2007, compared
with $3.4 million at December 31, 2006.
The Company has access to an $8.0 million committed line of credit with a commercial bank, which
expires in February, 2010. At September 29, 2007, $1.8 million was borrowed and an additional $0.3
million was 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 Companys option.
The lower cash, cash equivalents and temporary investments, along with the increase in debt under
the line of credit, were primarily 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.
Accounts receivable at September 29, 2007 was $1.8 million higher compared with December 31, 2006,
due to strong sales in September 2007. Finished goods inventory was $0.9 million higher at
September 29, 2007 compared with December 31, 2006 as a result of shipment timing and some
inventory build-up for our stock box line and a new custom folding carton customer.
Capital expenditures for the first nine months of 2007 were $2.0 million compared with $0.5 million
for the first nine months of 2006. Capital expenditures includes $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 nine months of 2007 was $3.6 million compared with $3.8 million in the
same period last year.
The Company believes that cash, cash equivalents and the line of credit, are sufficient to meet
cash requirements for operations, capital expenditures and debt service for the balance of 2007.
There were no share repurchases by the Company during the first nine months of 2007. The Company
has authorization to repurchase 100,885 shares at September 29, 2007. The closing price of the
Companys stock at September 29, 2007 was $8.60. At this price, the repurchase of 100,885 shares
would require $867,611.
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 September 29, 2007
because of minimal exposure to floating rate debt. The Company had no balance in temporary
investments at September 29, 2007.
Since May of 2003, over 90% of the Companys power needs are met through natural gas. The Company
has investigated supply contracts of various lengths, and currently it has supply arrangements for
fixed prices on approximately 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
12
natural gas, considering such factors as amount in storage, gas production data and transportation
data, so that it can take appropriate action if concerns about availability occur. The Company has
investigated and tested a back-up power source in the form of a rented transportable diesel-powered
generator. Although such generators are generally available, the Company cannot be assured that a
generator adequate to meet the Companys needs would be available if and when such need should
arise.
We have no foreign operations, nor do we transact any business in foreign currencies. Accordingly,
we have no foreign currency market risks.
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 Companys 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 Companys inventories, depreciation
allowances and impairment reserves with respect to the Companys 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 managements 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-PACs communications and discussions with
investors and analysts in the normal course of business through meetings, webcasts, phone calls and
conference calls, regarding expectations with respect to sales, earnings, cash flows, operating
efficiencies, product and market channel expansions, capacity utilization and expansion, and
repurchase of capital stock, are subject to known and unknown risks, uncertainties and
contingencies. Many of these risks, uncertainties, and contingencies are beyond our control, and
may cause actual results, performance or achievements to differ materially from anticipated
results, performance or achievements. Factors that might affect such forward-looking statements
include, among other things:
|
|
|
Overall economic and business conditions; |
|
|
|
|
The demand for MOD-PACs goods and services; |
|
|
|
|
Customer acceptance of the products and services MOD-PAC provides; |
|
|
|
|
Competitive factors in 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. |
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Market Risk in Item 2, above.
Item 4. Controls and Procedures
The Companys management, with the participation of the Companys Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and
procedures as defined in Rules 13a 15(e) and 15(d) 15(e) of the Securities Exchange Act of
1934, as of September 29, 2007. Based on that evaluation, the Companys Chief Executive Officer
and Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective as of September 29, 2007. There were no changes in the Companys internal control over
financial reporting during the third quarter of 2007 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
14
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number |
|
|
|
|
|
|
(c) Total Number of |
|
(or Approximate |
|
|
|
|
|
|
Shares (or Units) |
|
Dollar Value) of |
|
|
|
|
|
|
Purchased as Part |
|
Shares (or Units) |
|
|
(a) Total Number of |
|
(b) Average Price |
|
of Publicly |
|
that May Yet Be |
|
|
Shares (or Units) |
|
Paid per Share |
|
Announced Plans or |
|
Purchased Under the |
Period |
|
Purchased |
|
(or Unit) |
|
Programs |
|
Plans or Programs |
July 1 July 28, 2007
|
|
|
|
¾
|
|
¾
|
|
|
100,885 |
|
July 29 August 25, 2007
|
|
¾
|
|
¾
|
|
¾
|
|
|
100,885 |
|
August 26 September 29, 2007
|
|
¾
|
|
¾
|
|
¾
|
|
|
100,885 |
|
|
|
|
Total
|
|
¾
|
|
¾
|
|
¾ |
|
|
|
|
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable.
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.
15
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 8, 2007
|
|
By: /s/ David B. Lupp
|
|
|
|
|
|
|
|
|
|
David B. Lupp |
|
|
|
|
Chief Financial Officer |
|
|
16