BUFFALO, N.Y.--Aug. 9, 2006-- MOD-PAC CORP. a commercial on demand printer and manufacturer of custom paper board packaging, today reported revenue of $11.0 million for the second quarter of 2006, which ended July 1, 2006. This compares with revenue of $16.3 million for the second quarter of 2005. For the second quarter this year, a net loss of $1.0 million, or $0.29 per diluted share, compares with net income of $0.7 million, or $0.18 per diluted share, in the same period last year. Revenue Impacting the quarter-to-quarter revenue comparative was $1.8 million in amortization in the second quarter of 2005 for a contract buy-out fee from a former customer that elected to produce its own printed materials. In addition, the second quarter last year included $5.6 million in commercial print sales primarily to its former customer that elected to take its printing in house. The former customer paid $22 million in September 2004 for the contract buyout, and it 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. Growth in the custom folding carton product line in the 2006 second quarter of $1.2 million, or 19.8%, reached a quarter record of $7.5 million and helped to offset the decline in commercial print and the effect of the contract buy-out fee. Growth was driven by increased volume to new customers and slightly higher prices resulting from higher material costs. The second quarter has tended to be the strongest quarter for custom folding cartons. Excluding the amortization and royalty fee impacts, commercial print revenue in the second quarter of last year would have been $5.1 million compared with $0.32 million in commercial print in the second quarter of this year. On a sequential basis, commercial print sales grew 50% compared with the first quarter of 2006. Total web-based sales for this year's second quarter increased to $0.50 million, a 99% increase from $0.25 million in the second quarter last year and a 33% increase from $0.37 million in the first quarter of 2006. Web-based sales include commercial print sales for MOD-PAC's website PrintLizard.com(R) and personalized print sales from its webstore, PartyBasics.com(R), 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. Sales through this channel, which began in January of this year, have been growing monthly. The Company expects that sales through this channel should continue to expand at a healthy rate over the next year and beyond as its web to print services are adopted by its channel partners and as more partners are brought on line. For the first six months of the year, revenue through internet channels has grown 96% year-over-year. Personalized print sales achieved its second consecutive record quarter with sales of $1.4 million. Sales grew 46.1%, or $0.4 million, compared with the second quarter of 2005 and grew 12%, or $0.2 million, from the first quarter of this year. The increase was primarily the result of the success of its internet wholesale strategy. Revenue in the second quarter for the stock box product line was $1.7 million, a 7.9% increase from the same period last year. The second quarter is historically the slowest period for sales of this product line. 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 and to increase the number of products available to each channel is working and beginning to gain traction. We are excited by the inroads we are making in distributor sales of our commercial print line. As we continue to expand the functionality of our private label web to print stores, we expect to accelerate market penetration with our distributors. We also are aggressively pursuing additional channel partners." Costs and Expenses Gross margin for the second quarter of 2006 was 6.7% compared with 19.4% last year, excluding the contract buy-out fee amortization, or 28.5% including the amortization. The decline in gross margin was a result of a number of factors, including the loss in commercial print volume resulting in a current underutilization of manufacturing capacity, as well as changes in product mix and higher costs for paperboard purchases. Selling, general and administrative (SG&A) expenses were $2.3 million in the second quarter of 2006, or 20.8% of revenue, compared with expenses of $2.8 million, or 17.4% of revenue, in the same period last year. The decrease in absolute expenses was primarily the result of reduced website advertising in the second quarter of this year and a severance expense paid in the second quarter of 2005. Partially offsetting these decreases was stock-based compensation expense of $138 thousand recorded in this quarter due to the adoption of SFAS 123R in 2006. Six Month Review For the first six months of the fiscal year, revenue was $22.5 million compared with $32.5 million in the first half of 2005. In the first half of 2005, MOD-PAC fulfilled $10.6 million in commercial print primarily for VistaPrint, received $0.5 million in royalty fees and amortized $3.7 million of the contract buy-out fee. The $10.0 million decline was partially offset by increases in revenue of $3.0 million in custom folding cartons, $0.9 million in personalized print and $0.3 million in stock box products. Excluding the commercial print line and the amortization fee, combined sales of MOD-PAC's historic core product lines grew $4.2 million, or 24.2%. Gross margin for the first six months of 2006 was 7.1%, down from 20.4%, excluding the contract buy-out fee amortization, or 29.4% including the amortization. SG&A expenses were $4.9 million in the first half of 2006, a $0.5 million decrease from $5.4 million during the first half of 2005. Net loss for the first six months of the year was $2.2 million, or $.63 per diluted share, compared with net income of $2.2 million, or $.57 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 $2.3 million at the end of the second quarter. Sequentially, cash, cash equivalents and temporary investments increased $1.2 million from the end of the first quarter this year. Included in the increase were income tax refunds of $1.2 million. Capital expenditures for the quarter were $0.26 million and were $0.37 million for the first six months of 2006, down from $3.0 million in the first six months of 2005. The Company expects capital expenditures to be less than $1.0 million for the full fiscal year. Depreciation and amortization for the quarter and first six months of the year were $1.3 million and $2.6 million, respectively. The Company believes that cash, cash equivalents and temporary investments, cash flow from operations and the $6 million available on its line of credit are sufficient to meet requirements for the balance of the fiscal year. There were no share repurchases during the first and second quarters by the Company. The Company has authorization to repurchase 100,885 shares.