BUFFALO, N.Y.-MOD-PAC CORP. a commercial on demand printer and manufacturer of custom paper board packaging, today reported revenue of $11.5 million for the third quarter of 2006, which ended September 30, 2006. This compares with revenue of $14.2 million for the third quarter of 2005. Net loss for the third quarter this year was $0.7 million, or $0.21 per diluted share compared with net income of $0.8 million, or $0.22 per diluted share, in the same period last year. Impacting the quarter-to-quarter revenue comparative was $1.8 million in amortization in the third quarter of 2005 for contract buy-out fees and $3.1 million in commercial print sales to a former customer that elected to take its printing in house effective September 2005. (VistaPrint.com used to outsource its print to MOD-PAC, VistaPrint now has its own production facility.) VistaPrint paid $22 million in September 2004 for the contract buyout, which had been amortized over a 16-month period. In the fourth quarter of 2005, the final $14.1 million of the contract buy-out fee was fully amortized. Sequentially, revenue and net loss for the third quarter improved over the second quarter this year. Revenue increased $0.5 million, or 4.7%, while net loss was reduced by $0.3 million, or 28.7%. On a per share basis, the loss was reduced by $0.08 per share. Revenue Custom folding carton product line sales in the 2006 third quarter were $7.3 million, a $1.3 million increase over third quarter 2005 sales for this product line. The Company continues to capture incremental business from existing customers and attract new customers. Custom folding carton’s growth offset some of the decline in the commercial print line when compared with last year’s third quarter. Commercial print sales were $0.4 million in this year’s third quarter compared with $3.1 million last year. Excluding the royalty fee impact, commercial print revenue in the third quarter of last year would have been $1.5 million compared with $0.4 million in commercial print in the third quarter of this year. On a sequential basis, commercial print sales grew 33.5% compared with the second quarter of 2006. Total web-based sales for this year’s third quarter increased to $0.4 million, a 51% increase from $0.3 million in the third quarter last year and down from $0.5 million in the second quarter of 2006. Web-based sales include commercial print sales for MOD-PAC’s website PrintLizard.com® and personalized print sales from its webstore, PartyBasics.com®, and through other internet stores which rely on MOD-PAC to provide their customers with personalized print products such as special event napkins. Other commercial print sales include wholesale sales through various distributor channels. For the first nine months of the year, revenue through distributor channels was $0.6 million. The Company announced the addition of its second major distributor relationship in the third quarter. Development of sales through distributors has taken longer than originally anticipated as relationships are established with each individual sales representative within a distributor channel customer. Personalized print had sales of $1.2 million in the third quarter. Sales grew 34%, or $0.3 million, compared with the third quarter of 2005. The increase was primarily the result of its internet wholesale strategy. Revenue in the third quarter for the stock box product line was $2.4 million, a 7.4% increase from the same period last year. Daniel G. Keane, President and Chief Executive Officer of MOD-PAC CORP. commented, “We believe our strategy to expand the channels through which we sell our products, to increase the number of products available to each channel and to leverage our value added services across more of our product lines will continue to generate accelerating sales growth. Our newest product line, commercial print, is still in the early stages of development, whereas our more mature custom folding carton line reflects the success of our strategy. As we continue to develop our service offering with capabilities such as asset management and to expand the functionality of our private label web to print stores, we expect to accelerate market penetration with our distributors. We are assertively working to build and expand our relationships and sales with current and new channel partners. Costs and Expenses Gross margin for the third quarter of 2006 was 11.2% compared with 17.7% last year, excluding the contract buy-out fee amortization, or 28.3% including the amortization. Gross margin improved 4.5% over the gross margin in the second quarter of this year. The decline in gross margin on a quarter over quarter basis was a result of a number of factors, including the loss in commercial print volume resulting in underutilization of manufacturing capacity, as well as changes in product mix. The sequential improvement in gross margin is a result of higher sales and improved sales mix. Selling, general and administrative (SG&A) expenses were $2.3 million in the third quarter of 2006, or 20.2% of revenue, compared with expenses of $2.7 million, or 18.9% of revenue, in the same period last year. The decrease in absolute expenses was primarily the result of reduced website advertising in the third quarter of this year. Nine Month Review For the first nine months of the fiscal year, revenue was $34.0 million compared with $46.7 million in the same period in 2005. Last year’s first nine months included $12.1 million in commercial print sales, $2.2 million in royalty fees, and the buyout fee amortization of $5.5 million associated with the Company’s former customer. Year to date, custom folding cartons sales has grown 24.4%, or $4.3 million, personalized print has increased 44.6% or $1.2 million, and stock boxes has grown 7.9% or $0.5 million. In total, excluding the commercial print line and the amortization fee, combined sales of MOD-PAC’s historic core product lines grew $6.0 million, or 22.4% which has offset 45% of the full year to date decline in commercial print sales. Gross margin for the first nine months of 2006 was 8.5%, down from 19.6%, excluding the contract buy-out fee amortization, or 29.0% including the amortization. SG&A expenses were $7.2 million, or 21.3% of sales in the first nine months of 2006, a $0.9 million decrease from $8.1 million, or 17.3% of sales during the same period last year. Net loss for the nine month period was $2.9 million, or $0.83 per diluted share, compared with net income of $3.0 million, or $0.79 per diluted share, for the same period of the previous year. Liquidity Cash, cash equivalents and temporary investments decreased from $3.9 million at December 31, 2005, to $2.5 million at the end of the third quarter. Sequentially, the cash, cash equivalents and temporary investments were up slightly by $0.1 million from the end of the second quarter. The first nine months of 2006 included cash used by operating activities of $0.8 million which was net of income tax refunds of $1.3 million during the period. Capital expenditures for the quarter were $0.2 million and were $0.5 million for the first nine months of 2006, down from $3.5 million in the first nine months of 2005. Depreciation and amortization for the quarter and first nine months of the year were $1.2 million and $3.8 million, respectively. The Company believes that cash, cash equivalents and temporary investments are sufficient to meet requirements for the balance of the fiscal year. In addition, the Company has access to a $6 million discretionary line of credit with a commercial bank of which $0.3 million is in use through standby letters of credit. There were no share repurchases by the Company during the first nine months of 2006. The Company has authorization to repurchase 100,885 shares.