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MOD-PAC CORP. Reports 36.5% Increase in Earnings for Q2

Press release from the issuing company

BUFFALO, N.Y.--July 22, 2004-- MOD-PAC CORP. a specialized commercial printer and manufacturer of paperboard packaging, today reported for the second quarter 2004 which ended July 3, 2004 net income of $471 thousand, up 36.5%, from net income of $345 thousand in the same period last year. On a per share basis, earnings grew 33.3% to $.12 for the second quarter this year from $.09 in the second quarter last year. Second quarter 2004 net sales were $11.4 million, up 21.5% from $9.4 million in the second quarter of 2003. Higher sales in the custom folding carton and commercial print product lines contributed to the sales increase. Custom folding cartons had sales of $5.0 million, up 35.2% from last year, while the commercial print product line sales increased 14.7% to $3.9 million. The personalized print product line also improved to $906 thousand in the second quarter this year, a 10.8% increase over $818 thousand in last year's second quarter. Personalized print has been increasing sales through the Internet. Stock box sales were flat when compared with the same period last year. The second quarter is the weakest quarter for stock boxes. Daniel G. Keane, President and CEO of MOD-PAC CORP. noted, "We are gaining new customers and increasing customer share in our custom folding carton line as more manufacturers recognize the value we provide through our unique production process. We are able to provide just-in-time print of specialty product in short run quantities, which reduces our customers' inventory and obsolescence issues and helps them to meet their customers' needs more effectively. Private label manufacturers can especially appreciate our capabilities." For the second quarter of 2004, the higher level of sales created operating leverage improving gross margin 106 basis points to 24.1% from 23.04% in the prior year second quarter. Selling, general and administrative expense as a percent of sales held relatively steady at 16.9% and 16.7% for the second quarter 2004 and 2003, respectively. Previous Announcement On July 6, 2004, the Company announced that it had agreed to forego its rights as the exclusive North American supplier of all print products for VistaPrint and restructure its supply agreement. Based on the restructured agreement with VistaPrint, MOD-PAC will receive $22 million in cash on August 30, 2004 when the new Supply Agreement becomes operative. VistaPrint is currently the single customer for the commercial print product line. MOD-PAC retains its exclusive North American rights to serve VistaPrint through August 2005. Mr. Keane commented, "We are satisfied with our restructured agreement with VistaPrint and expect that they will continue as a customer beyond August of next year because of our low cost and high performance. In addition, we are now able to repurpose our equipment after August 2004, which under the previous agreement had to be dedicated to VistaPrint. As a result, as we execute on our plans to expand our commercial print product line, we will be better able to realize the operating leverage of our operations." MOD-PAC will record the $22 million cash payment as deferred revenue and amortize it over 36 months. The amortization period includes the 12-month term of the contract and an additional 24-month period which provides for a general framework for setting prices for any subsequent agreement. MOD-PAC has reviewed this accounting treatment with its independent auditors, and they concur that it is in compliance with the SEC's latest guidance on revenue recognition. In 2004, $2.4 million will be amortized into revenue, which will positively impact earnings per share by approximately $0.40. The amortization of the deferred revenue is in addition to the revenue that is expected through the sale of product to VistaPrint on a unit pricing basis. MOD-PAC expects sales to VistaPrint to be on order of $16 to $17 million in 2004, excluding the $2.4 million in amortized revenue. Six Month Review Net sales for the six month period ended July 3, 2004 were $23.0 million, up 23.8% over net sales of $18.6 million in the first half of last year. All product lines had improved sales for the six-month period with custom folding cartons growing $2.1 million, or 30.4%, and commercial print increasing $1.6 million or 25.9%. Personalized print for the first half of this year was up 14.1%, and stock boxes had a 6.3% increase in sales over last year's first half. Gross margin for the first six months of 2004 was 25.1%, up from 24.2% in the prior year period. The higher margin reflects the improved operating leverage from higher sales. Net income for the first six months of this year was $1.1 million, up from $0.8 million in the first half of last year. Earnings per share for the first six months of 2004 were $.29, a 31.8% improvement over last year's first half. Cash from operations increase to $3.4 million for the six-month period, up from $1.5 million last year as a result of higher earnings, increased depreciation and lower working capital needs. Capital spending for 2004 through the second quarter was $4.0 million compared with $6.5 million for the same period in 2003. The Company expects capital spending to be around $7.0 to $8.0 million for 2004. Debt to shareholders' equity at the end of the second quarter was 46.6%. Prospective Opportunities "We believe our unique print processes will also be beneficial to additional commercial customers. Over the last nine to ten months, our efforts have been directed internally to the development of processes to address more markets. Specifically, we are focused on expanding our retail personalized print market and also entering the broader commercial print markets. Parallel with technology development for these markets, we have been building our marketing and sales plans and capabilities," Mr. Keane remarked.