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MOD-PAC CORP. Reports Earnings per Share Increase 50% on 42% Higher Revenue in Q2

Press release from the issuing company

BUFFALO, N.Y.--Aug. 9, 2005-- MOD-PAC CORP, a commercial on demand printer and manufacturer of custom paper board packaging, today reported revenue of $16.3 million for the second quarter of 2005, which ended July 2, 2005, up 42.4% from sales of $11.4 million in the second quarter of 2004. Included in revenue was the amortization of $1.8 million in revenue related to a $22 million advanced payment received last year from VistaPrint, the Company's largest customer. Net income for the quarter was $687 thousand, a 45.9% increase over net income of $471 thousand in the second quarter of 2004. Quarterly diluted earnings per share were $.18 compared with $.12 from a year ago. Net income was negatively impacted by an income tax charge of approximately $600 thousand which was related to a change in New York State (NYS) tax law. As a result of the NYS tax law change, MOD-PAC anticipates it is unlikely the company will be able to utilize certain tax credit carry-forwards it had been carrying as deferred tax assets as it anticipates a reduction in its state tax liabilities for future years. Daniel G. Keane, President and CEO of MOD-PAC CORP. stated, "We continue to see strong demand for our printing services in the custom folding carton and commercial print markets. Our on demand print capability provides our customers the flexibility they need for inventory management and to address the on demand needs of their customers. We launched our on-line print service shopping capability under the brand of PrintLizard.com(R) in mid-June and have been pleased with the initial response by the market. In July, often a month with low demand for print products, we had bookings of over $13 thousand. As we have stated before, we believe once this channel to market gains traction, we anticipate it will have growth similar to what we have seen in our commercial products line since 2000." Driving the year-over-year growth in revenue was higher sales from both the commercial printing and custom folding carton product lines. Sales of the commercial print product line were $5.6 million, an increase of $1.7 million, or 44.2%, over the same period the previous year. Included in second quarter sales was a royalty fee of approximately $500 thousand. MOD-PAC's customer, VistaPrint, is required to pay a royalty fee through August 2005 for any product it ships to North America from its Windsor, Ontario, Canada plant. Mr. Keane noted, "We recognize that VistaPrint, as it has stated in its filings with the SEC, will be increasing the amount of print product it ships directly. We anticipate this decline in orders from VistaPrint will accelerate in the third and fourth quarters. We expect that VistaPrint revenue is likely to fall off at a greater rate than revenue growth resulting from of our new marketing activities. This could result in a reduction in year-over-year comparatives lasting from 6 months to a year. However, we believe that the momentum we are just beginning to gain in our commercial print services, combined with the continued addition of new customers for our custom folding carton line, can lessen the impact of the anticipated revenue decline and continue to drive our overall long-term growth." The custom folding carton product line had sales of $6.2 million for the second quarter. Sales grew $1.2 million, or 23.9%, from $5.0 million in the second quarter of 2004. Approximately 40% of the increase came from new customers such as CooperVision, division of The Cooper Companies, Inc. (NYSE: COO), Tom's of Maine, a natural products manufacturer, and Steuben Foods. Gross margin improved to 28.5% of sales in this quarter from 24.1% during the same period last year. Excluding the VistaPrint fee, gross margin on a quarter-over-quarter basis decreased as a percentage of sales primarily as a result of a change in product mix, higher depreciation and increased labor to support the fulfillment of the commercial product line. On a sequential basis, gross margin for the second quarter was down from 30.3% in the first quarter of 2005 due to the seasonal decline in stock box sales, which have higher contributions to gross margin. On an absolute basis, SG&A expenses increased over $900 thousand to $2.8 million from $1.9 million in the second quarter last year. This was primarily a result of a $500 thousand increase in selling and advertising for the promotion of the company's new distribution channel, www.PrintLizard.com, which was officially launched on June 14, 2005, and severance expense of $200 thousand. As a percent of sales, SG&A was 17.5% and 16.9% for the second quarters of 2005 and 2004, respectively. Sequentially from the first quarter of this year, SG&A increased $280 thousand most of which is attributed to a severance payment, with the remainder associated with selling and advertising costs. Income from operations more than doubled to $1.8 million from $820 thousand in the second quarter of 2004. Income from operations for the second quarter of 2005 decreased from $2.4 million in the first quarter of 2005 primarily as a result of product mix, selling and advertising expenses and severance costs. Mr. Keane continued, "We have been investing heavily in technology, advertising and people to launch PrintLizard.com(R). We see many opportunities to continue to aggregate the $25 billion market currently served by the multitude of small print shops across the country. We believe the economies of scale we gain through our super print facility, our application of advanced technologies, the breadth of finishing services we offer and the speed with which we can deliver enable us to capture a solid share of this market." Capital expenditures in the quarter of $1.9 million were for facilities and infrastructure improvements and were down $600 thousand from the same period last year. Year-to-date capital expenditures are $3.0 million. MOD-PAC expects capital spending of approximately $5.0 million for the full year. Depreciation and amortization for the second quarter was $1.6 million compared with $1.2 million in the same period the previous year. Six Month Review For the six month period ended July 2, 2005, MOD-PAC had net sales of $32.5 million, up 41% over the first six months of the prior year. Included in 2005 revenue in the six month period was $3.7 million for the amortization of the VistaPrint revenue which will continue to be amortized through August of 2007. Commercial printing products had sales in the first half of 2005 of $11.1 million, up 40% from $7.9 million in the same period of 2004. Sales of the custom folding carton line increased 30% to $11.6 million for the first half of 2005, while the stock box and personalized print lines remained relatively flat. Gross margin for the first six months, which benefited from the amortization of the VistaPrint fee, was 29.4% compared with gross margin of 25% for the same period last year. Selling, general and administrative costs remained at 16.7% of sales for the six-month period in both years. Net income doubled for the first six months of the year to $2.2 million compared with the previous year's net income of $1.1 million for the same period. Diluted earnings per share increased to $0.57 for the first six months of this year from $0.29 in the first half of 2004.