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MOD-PAC CORP. Reports Reduced Revenue in Q1

Press release from the issuing company

BUFFALO, N.Y.--May 9, 2006-- MOD-PAC CORP. a commercial on demand printer and manufacturer of custom paper board packaging, today reported results for its first quarter of 2006 which ended April 1, 2006. Revenue for the quarter was $11.5 million compared with revenue of $16.2 million for the first quarter of 2005. The first quarter of this year had a net loss of $1.1 million, or $0.33 per share, compared with net income of $1.5 million, or $0.39 per share, for the same period last year. Revenue Included in last year's first quarter was $1.8 million in amortization of the contract buy-out fee received in September 2004 from MOD-PAC's former customer, VistaPrint. Also included in last year's first quarter was $5.5 million in sales to VistaPrint, which was the Company's only commercial print customer at that time. The custom folding carton product line grew 33.5%, or $1.8 million, to a quarterly record of $7.1 million, and the commercial print (excluding VistaPrint) and personalized print product lines combined increased $0.6 million. Custom folding cartons higher sales were primarily driven by increased volume to new customers and higher prices reflecting increased material costs, while commercial print's first quarter sales primarily reflect the initial orders received from a major print distributor. The personalized print product line's sales growth reflects higher sales through internet resellers. When compared with the fourth quarter of 2005, which is a more comparative quarter for evaluating the Company's progress in its efforts to fill capacity, product sales (which exclude the contract buy out fee) grew 11.0%. All product lines had measurable improvements, except for stock boxes which typically has its strongest performance in the fourth quarter. Daniel G. Keane, President and Chief Executive Officer of MOD-PAC CORP. commented, "Custom folding cartons continues to grow at a pace ahead of most of the industry as we gain new customers. Our ability to provide these customers with short-run, high quality products while meeting their just-in-time supply requirements helped us to grab more share of the custom folding carton market." He continued, "Albeit that quarter-to-quarter comparatives for the commercial print product line are challenging with the exodus of VistaPrint last fall, we are pleased with the progress we are making on many fronts in this arena. Orders from our distributor market channel, which effectively started up in January, are expanding every month. Web sales, primarily through third party online distributors and resellers, are also growing rapidly." Commercial print revenue was $215 thousand for the first quarter of 2006. In the first quarter of 2005, total commercial print product sales were $5.5 million which was entirely attributed to the fulfillment of orders for VistaPrint. Personalized print revenue jumped 54.8% quarter-over-quarter, from $784 thousand in the first quarter of 2005 to $1.2 million in the first quarter of 2006. Both commercial print and personalized print have internet sales to retail and commercial customers via the Company's web stores PrintLizard.com(TM) and PartyBasics.com(TM), and via other third party internet distributors. Combined, internet sales were $372 thousand, up from $194 thousand and $254 thousand in the first quarter and the fourth quarters of last year, respectively. MOD-PAC's stock box product line had sales of $2.8 million, an 8.4% increase from the previous year's first quarter revenue of $2.6 million. Mr. Keane added, "Our commercial and personalized print strategy is to grow our sales through multiple market channels, including: -- Print distributors -- Commanding about $2.5 billion in print in the U.S., print distributors' customers range from small businesses to corporate enterprises. We offer a branded webstore through which the distributors sales network can seamlessly place orders for their customers and have it drop shipped directly within days. -- Third party internet providers - We can provide print and fulfillment services to private label web stores that target business and consumer print markets. -- Direct --- Our sales and design personnel are targeting regional prospects for custom print orders. We also have our branded web stores: PrintLizard.com and PartyBasics.com It is early in our efforts to maximize these channels; however, we are strongly encouraged by our results to date." Costs and Expenses Cost of goods sold for the first quarter 2006 as a percentage of sales was 92.5% compared with 78.6% in the prior year, excluding the contract buy out fee, or when including the contract buy out fee, 69.7%. The resulting lower gross margin was primarily the result of lower commercial print sales volume, increased paperboard costs, and changing sales mix. Commercial print production efficiencies are also lower as volume from new customers and market channels are not yet sufficient. When compared with the fourth quarter of 2005 (exclusive of the contract buy out fee), gross margin improved from 5.8% to 7.5%. Selling, general and administrative expenses for the quarter were $2.6 million, or 22.7% of sales, and were relatively flat compared with the same period last year. Lower advertising expenses were offset by higher sales commissions, website re-development expenses, and costs for stock-based compensation expense of $146 thousand due to the adoption of SFAS 123R in the quarter. Liquidity Cash, cash equivalents and temporary investments decreased from $3.9 million to $1.1 million during the quarter primarily due to changes in working capital driven mostly by expected cash requirements. Capital expenditures for the quarter were $105 thousand compared with $1.1 million in the first quarter of 2005. Depreciation and amortization for the first quarter this year was $1.3 million. Long term debt remained relatively unchanged from the end of the year at $1.9 million. During the first quarter of 2006, there were no purchases of shares of stock by the Company. The Company currently has authorization to repurchase up to 100,885 shares. Outlook The Company expects to achieve positive cash flow for the balance of the year primarily as a result of continued improvement in operating results via growth in sales of its custom folding cartons line and expansion of its market in commercial print.

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