BUFFALO, N.Y.--Feb. 10, 2006-- MOD-PAC CORP. a commercial on demand printer and manufacturer of custom paper board packaging, today reported revenue of $24.5 million for the fourth quarter of 2005 compared with $15.1 million in the fourth quarter of 2004. In the 2005 fourth quarter, the Company recognized $14.1 million in revenue relating to the remaining contract buy-out fee received in 2004 from a former customer of the Company. The fourth quarter of 2004 revenue included $1.8 million of this contract buy-out fee. Product sales for the fourth quarter 2005 were $10.3 million compared with $13.1 million in the same quarter of 2004. A 33.0%, or $1.5 million, increase in custom folding cartons partially offset the $4.3 million decline in commercial printing sales. Commercial printing sales declined primarily as a result of the loss of a large commercial print customer that bought out their contract in 2004 so they could manufacture in house in 2005. This customer had fully transitioned manufacturing in-house during the third quarter of 2005 resulting in zero sales to this customer in the fourth quarter of 2005. Gross margin for the fourth quarter, excluding the contract buy-out fee related revenue, was 5.8% compared with 22.0% in the same period last year. The reduction in gross margin was primarily due to increased raw material costs and reduced operating leverage caused by lower volumes. In an effort to minimize further gross margin declines, the Company has reduced labor costs primarily through attrition while at the same time maintaining its highly skilled workforce. On an absolute basis, selling, general and administrative (SG&A) expenses increased $0.3 million to $2.4 million in the fourth quarter of 2005 compared with the same period in the prior year. The SG&A increase in the quarter was primarily the result of increased expenses associated with the Company's PrintLizard.com web-to-print store. Net income for the fourth quarter of 2005 was $8.0 million, or $2.30 per diluted share. Net income in the fourth quarter of 2004 was $1.7 million, or $0.45 per diluted share. Excluding the impact of revenue and earnings associated with the contract buy-out fee, net loss in the fourth quarter of 2005 was $1.2 million, or $0.36 per diluted share, and net income in the fourth quarter of 2004 was $0.5 million, or $0.14 per diluted share. Daniel G. Keane, President and Chief Executive Officer of MOD-PAC CORP. commented, "While we have concluded selling to our largest commercial print customer during the third quarter of 2005, we have had strong growth in our custom paper board packaging market, and we are continuing to invest in the growth of our commercial print market. We have recently announced some major commercial print partnerships that should begin to fill our capacity. These are customers who value our unique capabilities to provide short run, quality on demand print products. We anticipate seeing the sales through these partnerships building through the year. Once we have significant volumes from these relationships, we will begin to realize the efficiencies of our operation." Full-year Review For the full year, revenue was $71.2 million and $50.3 million in 2005 and 2004, respectively. Excluding the contract buy-out fee related revenue, 2005 revenue was $51.6 million compared with $47.8 million in 2004. Gross margin, excluding the contract buy-out fee related revenue, was 16.8% in 2005 compared with 22.6% the prior year. The decline in gross margin was primarily the result of increased raw material cost, changing sales mix, and continued investment in resources to support growth of the commercial print business. SG&A increased $2.8 million in 2005 when compared with 2004 and was primarily the result of increased expenses associated with the Company's PrintLizard.com web-to-print store. Net income was $11.0 million, or $2.97 per diluted share, in 2005 compared with $3.7 million, or $0.97 per diluted share, in 2004. Excluding the impact of revenue and earnings associated with the contract buy-out fee, net loss in 2005 was $1.9 million or $0.51 per diluted share compared with net income of $2.1 million in 2004, or $0.55 per diluted share. Mr. Keane added, "The next year or so will be a transition period for us as we build our distributor relationships in the commercial print market, continue to develop our direct web-to-print efforts and maintain our market share growth in packaging. It is difficult to predict the length of the transition period, but we are very optimistic that given our unique capabilities, the size and needs of the market, and the successes we have had to date that, over the next few years, we believe we will more than replace the VistaPrint business." Sales by Product Line Custom folding cartons: MOD-PAC's custom folding carton sales continue to show strong growth as it adds new customers and increases volume to existing customers. Sales for the fourth quarter of 2005 were $6.0 million, a 33% increase from $4.5 million in the same quarter the previous year. Sales of the custom folding carton line increased 32.7% to $23.6 million for the full year. MOD-PAC has increased its sales efforts for this product line the last two years primarily through direct sales to manufacturers that use the Company's packaging for their products. Commercial print: Sales to commercial print declined to $0.1 million in the fourth quarter of 2005 from $4.4 million in the prior year's fourth quarter. Sales in the fourth quarter of 2004 were all attributed to VistaPrint, a former customer of the Company that chose to in source its printing needs. During 2004, VistaPrint bought out its long term printing contract with MOD-PAC for $22.0 million. The cash from the buy out was received by the Company in August 2004. The buy-out fee was originally scheduled to be amortized over three years, however, as a result of the full conclusion of the business relationship with no further sales by the Company to VistaPrint, the remaining unamortized buy-out fee was recognized as revenue in the fourth quarter of 2005. There were no product sales to VistaPrint in the fourth quarter of 2005. Sales via the new web-to-print store for small businesses, PrintLizard.com(R), accounted for approximately $81,000 of commercial print sales in the fourth quarter, up from $59,000 in the 2005 third quarter. The balance of commercial print revenue was from direct sales. In addition to the Internet channel to market, MOD-PAC has been pursuing partnerships with commercial print distributors in an effort to grow the Company's commercial print business. In January 2006, the Company announced a Preferred Limited Partner agreement with Proforma, one of North America's leading distributors of printed materials. Personalized print consumer products and stock boxes: Personalized print had sales in the fourth quarter of $0.8 million, up 10.4% from the same period last year, while stock box sales were $3.3 million, down 2.8% from the same period last year. For the year, personalized print increased 4.6% over 2004 while stock box sales remained relatively flat. Liquidity Capital expenditures for the quarter were $1.2 million and $4.7 million for the year. Depreciation and amortization was $1.3 million in the fourth quarter 2005 and $5.7 million for the full year. During 2005, 292,787 shares of stock were purchased by the Company for $3.5 million. The Company currently has authorization to repurchase an additional 100,885 shares. No shares were repurchased in the fourth quarter of 2005.