**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended  December 25, 2004**

 

**OR**

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition periodfrom                               to**

 

**Commissionfile number  0-7597**

 

**COURIERCORPORATION**

(Exact name of registrant as specified in its charter)

 
| **Massachusetts**                                                                   |
|-------------------------------------------------------------------------------------|
| (State or other jurisdiction of incorporation or organization)                      |
| ** **                                                                          |
| **04-2502514**                                                                      |
| (I.R.S. Employer Identification No.)                                                |
| ** **                                                                          |
| **15 Wellman Avenue, North Chelmsford, Massachusetts**                              | ** ** | **01863** |
| (Address of principal executive offices)                                            |   | (Zip Code) |
|                                                                                |   |   |
| **(978) 251-6000**                                                                  |
| (Registrant’s telephone number, including area code)                           |
|                                                                                |
| **NO CHANGE**                                                                       |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes     ý     No     o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2).

 

Yes     ý     No     o

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 
| **Class**                  | ** ** | **Outstanding  at January 20, 2005** |
|----------------------------|------------|-------------------------------------------|
| Common Stock, $1 par value |       | 8,054,630 Shares                          |

 

 

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COURIERCORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars inthousands except per share amounts)

 
| ** **                          | ** ** | **THREE MONTHS ENDED**      | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
|                                |       |                        |       |   |   |
| Net sales                           |       | $                           | 51,269     |   | $ | 46,819 |   |
| Cost of sales                       |       | 34,569                      |       | 31,190 |   |
|                                |       |                        |       |   |   |
| Gross profit                        |       | 16,700                      |       | 15,629 |   |
|                                |       |                        |       |   |   |
| Selling and administrative expenses |       | 10,283                      |       | 9,638 |   |
| Interest income, net                |       | (27                         | )          | (27 | ) |
|                                |       |                        |       |   |   |
| Pretax income                       |       | 6,444                       |       | 6,018 |   |
|                                |       |                        |       |   |   |
| Provision for income taxes (Note C) |       | 2,313                       |       | 2,106 |   |
|                                |       |                        |       |   |   |
| Net income                          |       | $                           | 4,131      |   | $ | 3,912 |   |
|                                |       |                        |       |   |   |
| Net income per share (Note D):      |       |                        |       |   |   |
|                                |       |                        |       |   |   |
| Basic                               |       | $                           | 0.51       |   | $ | 0.49 |   |
|                                |       |                        |       |   |   |
| Diluted                             |       | $                           | 0.50       |   | $ | 0.48 |   |
|                                |       |                        |       |   |   |
| Cash dividends declared per share   |       | $                           | 0.10       |   | $ | 0.0875 |   |

 

Theaccompanying notes are an integral part of the consolidated financialstatements.

 

2

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COURIERCORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS(UNAUDITED)

(Dollars inthousands)

 
| **ASSETS**                                                                                                                                 | ** ** | **December 25,  2004** | ** ** | **September 25,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                                                                                                                                       |       |                        |       |                         |       |
| Current assets:                                                                                                                            |       |                        |       |                         |       |
| Cash and cash equivalents                                                                                                                  |       | $                           | 22,886     |                         | $          | 23,965 |   |
| Accounts receivable, less allowance for  uncollectible accounts of $1,658 at December 25, 2004 and $1,630 at September 25,  2004 |       | 28,679                      |       | 34,072                       |       |
| Inventories (Note B)                                                                                                                       |       | 25,929                      |       | 25,108                       |       |
| Deferred income taxes                                                                                                                      |       | 2,849                       |       | 2,852                        |       |
| Other current assets                                                                                                                       |       | 804                         |       | 840                          |       |
|                                                                                                                                       |       |                        |       |                         |       |
| Total current assets                                                                                                                       |       | 81,147                      |       | 86,837                       |       |
|                                                                                                                                       |       |                        |       |                         |       |
| Property, plant and equipment, less  accumulated depreciation: $111,706 at December 25, 2004 and $109,383 at September 25,  2004 |       | 52,383                      |       | 48,482                       |       |
|                                                                                                                                       |       |                        |       |                         |       |
| Goodwill (Note A)                                                                                                                          |       | 33,255                      |       | 33,255                       |       |
|                                                                                                                                       |       |                        |       |                         |       |
| Prepublication costs (Note A)                                                                                                              |       | 5,168                       |       | 5,127                        |       |
|                                                                                                                                       |       |                        |       |                         |       |
| Other assets                                                                                                                               |       | 1,510                       |       | 1,498                        |       |
|                                                                                                                                       |       |                        |       |                         |       |
| Total assets                                                                                                                               |       | $                           | 173,463    |                         | $          | 175,199 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

3

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COURIERCORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS(UNAUDITED)

(Dollars inthousands)

 
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                   | ** ** | **December 25,  2004** | ** ** | **September 25,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                                                                                                                                             |       |                        |       |                         |       |
| Current liabilities:                                                                                                                             |       |                        |       |                         |       |
| Current maturities of long-term debt                                                                                                             |       | $                           | 83         |                         | $          | 83 |   |
| Accounts payable                                                                                                                                 |       | 6,608                       |       | 10,059                       |       |
| Accrued payroll                                                                                                                                  |       | 4,810                       |       | 6,470                        |       |
| Accrued taxes                                                                                                                                    |       | 4,385                       |       | 5,557                        |       |
| Other current liabilities                                                                                                                        |       | 7,495                       |       | 7,194                        |       |
|                                                                                                                                             |       |                        |       |                         |       |
| Total current liabilities                                                                                                                        |       | 23,381                      |       | 29,363                       |       |
|                                                                                                                                             |       |                        |       |                         |       |
| Long-term debt                                                                                                                                   |       | 490                         |       | 510                          |       |
| Deferred income taxes                                                                                                                            |       | 7,701                       |       | 7,706                        |       |
| Other liabilities                                                                                                                                |       | 2,742                       |       | 2,630                        |       |
|                                                                                                                                             |       |                        |       |                         |       |
| Total liabilities                                                                                                                                |       | 34,314                      |       | 40,209                       |       |
|                                                                                                                                             |       |                        |       |                         |       |
| Stockholders’ equity:                                                                                                                       |       |                        |       |                         |       |
| Preferred stock, $1 par value - authorized 1,000,000  shares; none issued                                                                        |       |                        |       |                         |       |
| Common stock, $1 par value - authorized  18,000,000 shares; issued 8,052,000 at December 25, 2004 and 8,031,000  at September 25, 2004 |       | 8,052                       |       | 8,031                        |       |
| Additional paid-in capital                                                                                                                       |       | 1,655                       |       | 869                          |       |
| Retained earnings                                                                                                                                |       | 129,900                     |       | 126,573                      |       |
| Unearned compensation                                                                                                                            |       | (458                        | )          | (483                         | )          |
|                                                                                                                                             |       |                        |       |                         |       |
| Total stockholders’ equity                                                                                                                  |       | 139,149                     |       | 134,990                      |       |
|                                                                                                                                             |       |                        |       |                         |       |
| Total liabilities and stockholders’ equity                                                                                                  |       | $                           | 173,463    |                         | $          | 175,199 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

4

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COURIERCORPORATION

CONSOLIDATEDCONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars inthousands)

 
| ** **                                                                       | ** ** | **THREE MONTHS ENDED**      | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                       | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
|                                                                             |       |                        |       |   |   |
| Operating Activities:                                                            |       |                        |       |   |   |
| Net income                                                                       |       | $                           | 4,131      |   | $ | 3,912 |   |
| Adjustments to reconcile net income to cash  provided from operating activities: |       |                        |       |   |   |
| Depreciation and amortization                                                    |       | 2,966                       |       | 2,590 |   |
| Deferred income taxes                                                            |       | (2                          | )          | 536 |   |
| Changes in assets and liabilities:                                               |       |                        |       |   |   |
| Accounts receivable                                                              |       | 5,393                       |       | 2,828 |   |
| Inventory                                                                        |       | (821                        | )          | (2,589 | ) |
| Accounts payable                                                                 |       | (3,451                      | )          | (444 | ) |
| Accrued taxes                                                                    |       | (1,172                      | )          | (878 | ) |
| Other elements of working capital                                                |       | (1,323                      | )          | (1,795 | ) |
| Tax benefits of stock option activity                                            |       | 241                         |       | 384 |   |
| Other, net                                                                       |       | 121                         |       | 196 |   |
|                                                                             |       |                        |       |   |   |
| Cash provided from operating activities                                          |       | 6,083                       |       | 4,740 |   |
|                                                                             |       |                        |       |   |   |
| Investment Activities:                                                           |       |                        |       |   |   |
| Capital expenditures                                                             |       | (6,224                      | )          | (4,481 | ) |
| Prepublication costs                                                             |       | (680                        | )          | (563 | ) |
|                                                                             |       |                        |       |   |   |
| Cash used for investment activities                                              |       | (6,904                      | )          | (5,044 | ) |
|                                                                             |       |                        |       |   |   |
| Financing Activities:                                                            |       |                        |       |   |   |
| Long-term debt repayments                                                        |       | (20                         | )          | (20 | ) |
| Cash dividends                                                                   |       | (804                        | )          | (704 | ) |
| Proceeds from stock plans                                                        |       | 566                         |       | 42 |   |
|                                                                             |       |                        |       |   |   |
| Cash used for financing activities                                               |       | (258                        | )          | (682 | ) |
|                                                                             |       |                        |       |   |   |
| Decrease in cash and cash equivalents                                            |       | (1,079                      | )          | (986 | ) |
|                                                                             |       |                        |       |   |   |
| Cash and cash equivalents at the beginning  of the period                        |       | 23,965                      |       | 23,824 |   |
|                                                                             |       |                        |       |   |   |
| Cash and cash equivalents at the end of the  period                              |       | $                           | 22,886     |   | $ | 22,838 |   |

 

The accompanying notes are an integral part of the consolidatedfinancial statements.

 

5

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**COURIER CORPORATION**

 

**NOTES TO CONSOLIDATED CONDENSEDFINANCIAL STATEMENTS (UNAUDITED)**

 

**A.****                                    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Unaudited Financial Statements**

The balance sheet as of December 25,2004, the statements of income for the three-month periods ended December 25,2004 and December 27, 2003, and the statements of cash flows for thethree-month periods ended December 25, 2004 and December 27, 2003 areunaudited.  In the opinion of management,all adjustments necessary for a fair presentation of such financial statementshave been recorded.  Such adjustmentsconsisted only of normal recurring items. Certain amounts for fiscal 2004 havebeen reclassified in the accompanying financial statements in order to beconsistent with the current year’s classification.

 

Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States (“generallyaccepted accounting principles”) have been condensed or omitted.  The balance sheet data as of September 25,2004 was derived from audited year-end financial statements, but does notinclude disclosures required by generally accepted accounting principles.  It is suggested that these interim financialstatements be read in conjunction with the Company’s most recent Form 10-K andAnnual Report for the year ended September 25, 2004.

 

**PrepublicationCosts**

Prepublication costs, associated with thespecialty publishing segment, are amortized using the straight-line method overan estimated useful life of four years for Dover Publications and three yearsfor Research and Education Association (“REA”) which was acquired in January 2004.

 

**Goodwill**

The Company evaluates possible impairment annually or whenever eventsor circumstances indicate that the carrying value of the assets may not berecoverable.

 

**Stock-Based Compensation**

Pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation,” asamended by SFAS No. 148, the Company applies the recognition and measurementprinciples of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB25”) and related interpretations. Accordingly, because the number of shares is fixed and the exerciseprice of the stock options equals the market price of the underlying stock onthe date of grant, no compensation expense has been recognized. Hadcompensation cost for stock options, and grants under the Employee StockPurchase Plan, been determined under the provisions of SFAS No. 123, theCompany’s net income would have been as follows:

 
| ** **                                                                                          | ** ** | **(000’s Omitted)**    | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                          | ** ** | **Three Months Ended**      | ** ** |
| ** **                                                                                          | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
|                                                                                                |       |                        |       |   |   |
| Net income as reported                                                                              |       | $                           | 4,131      |   | $ | 3,912 |   |
| Deduct: Stock-based compensation expense  determined under SFAS No. 123, net of related tax effects |       | (339                        | )          | (316 | ) |
| Pro forma net income                                                                                |       | $                           | 3,792      |   | $ | 3,596 |   |
|                                                                                                |       |                        |       |   |   |
| Net income per share as reported:                                                                   |       |                        |       |   |   |
| Basic                                                                                               |       | $                           | 0.51       |   | $ | 0.49 |   |
| Diluted                                                                                             |       | 0.50                        |       | 0.48 |   |
|                                                                                                |       |                        |       |   |   |
| Pro forma net income per share:                                                                     |       |                        |       |   |   |
| Basic                                                                                               |       | $                           | 0.47       |   | $ | 0.45 |   |
| Diluted                                                                                             |       | 0.46                        |       | 0.44 |   |

 

6

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**New Accounting Pronouncements**

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment”(“SFAS 123R”).  Under this new standard,companies will no longer be able to account for share-based compensationtransactions using the intrinsic method in accordance with APB 25.  Instead, companies will be required toaccount for such transactions using a fair-value method and to recognize theexpense over the service period.  SFAS123R will be effective for periods beginning after June 15, 2005 andallows for several alternative transition methods.  The Company expects to adopt SFAS 123R in itsfourth quarter on a prospective basis, which will require recognition ofcompensation expense for all stock option or other equity-based awards thatvest or become exercisable after the effective date.  Because of the vesting schedule of theCompany’s outstanding stock options, the after-tax expense expected to be recognizedin the fourth quarter is approximately $0.9 million, or $0.11 per dilutedshare.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”(“SFAS 151”), an amendment of ARB No. 43, Chapter 4.  SFAS 151 clarifies the accounting for abnormalamounts of idle facility expense, freight, handling costs and wastedmaterial.  SFAS 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005.  The Company does not believeadoption of SFAS 151 will have a material effect on its consolidated financialposition, results of operations or cash flows.

 

# **B.**                                    INVENTORIES

# ** **

Inventories are valued at the lower of costor market.  Cost is determined using thelast-in, first-out (LIFO) method for approximately 37% of the Company’sinventories at both December 25, 2004 and September 25, 2004.  Other inventories, primarily at Dover andREA, are determined on a first-in, first-out (FIFO) basis.  Inventories consisted of the following:

 
| ** **       | ** ** | **(000’s Omitted)**    | ** ** |
|------------------|------------|-----------------------------|------------|
| ** **       | ** ** | **December 25,  2004** | ** ** | **September 25,  2004** | ** ** |
| Raw materials    |       | $                           | 3,044      |   | $ | 3,338 |   |
| Work in  process |       | 5,898                       |       | 5,317 |   |
| Finished goods   |       | 16,987                      |       | 16,453 |   |
| Total            |       | $                           | 25,929     |   | $ | 25,108 |   |

# ** **

# **C.**                                    INCOMETAXES

# ** **

The provision for income taxes differs from that computedusing the statutory federal income tax rates for the following reasons:                                                
| ** **                            | ** ** | **(000’s Omitted)**    | ** ** |
|---------------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Three Months Ended**      | ** ** |
| ** **                            | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
| Federal taxes  at statutory rates     |       | $                           | 2,255      |   | $ | 2,106 |   |
| State taxes,  net of federal benefit  |       | 187                         |       | 153 |   |
| Tax benefit of  export related income |       | (139                        | )          | (162 | ) |
| Other                                 |       | 10                          |       | 9 |   |
| Total                                 |       | $                           | 2,313      |   | $ | 2,106 |   |

 

7

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# **D.**                                    NETINCOME PER SHARE

# ** **

Following is a reconciliationof the shares used in the calculation of basic and diluted income per share.  Potentially dilutive shares, calculated usingthe treasury stock method,        consist of shares issuedunder the Company’s stock option plans.

 
| ** **                              | ** ** | **(000’s Omitted)**    | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Three Months Ended**      | ** ** |
| ** **                              | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
|                                    |       |                        |       |   |   |
| Average shares  outstanding for basic   |       | 8,040                       |       | 7,933 |   |
| Effect of  potentially dilutive shares  |       | 250                         |       | 256 |   |
| Average shares  outstanding for diluted |       | 8,290                       |       | 8,189 |   |

# ** **

# **E.**                                      BUSINESS SEGMENTS

# ** **

The Company has two business segments:full-service book manufacturing and specialty publishing. The bookmanufacturing segment offers a full range of services from production throughstorage and distribution for religious, educational and specialty trade bookpublishers. The specialty publishing segment consists of Dover Publications,Inc. and, beginning in the second quarter of fiscal 2004, REA (see Note F).

 

In evaluating segment performance, management primarilyfocuses on income or loss before taxes and other income.  The elimination of intersegment sales andrelated profit represents sales from the book manufacturing segment to thespecialty publishing segment.  Corporateexpenses that are allocated to the segments include various support functionssuch as information technology services, finance, human resources andengineering, and include depreciation and amortization expense related tocorporate assets*.*

 

8

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The following table provides segment information for thethree-month periods ended December 25, 2004 and December 27, 2003.

 
| ** **                          | ** ** | **(000’s) Omitted)**   | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **Three Months Ended**      | ** ** |
| ** **                          | ** ** | **December 25,  2004** | ** ** | **December 27,  2003** | ** ** |
|                                |       |                        |       |   |   |
| Net sales:                          |       |                        |       |   |   |
| Book  manufacturing                 |       | $                           | 42,923     |   | $ | 39,657 |   |
| Specialty  publishing               |       | 10,270                      |       | 9,067 |   |
| Elimination of  intersegment sales  |       | (1,924                      | )          | (1,905 | ) |
| Total                               |       | $                           | 51,269     |   | $ | 46,819 |   |
|                                |       |                        |       |   |   |
| Income before  taxes:               |       |                        |       |   |   |
| Book  manufacturing                 |       | $                           | 5,555      |   | $ | 4,823 |   |
| Specialty  publishing               |       | 1,061                       |       | 1,313 |   |
| Elimination of  intersegment profit |       | (172                        | )          | (118 | ) |
| Total                               |       | $                           | 6,444      |   | $ | 6,018 |   |

# ** **

**F.****                                      BUSINESSACQUISITION**

 

On January 6, 2004, the Companypurchased substantially all of the assets of Research & EducationAssociation (“REA”), a publisher of test preparation and study guide books andsoftware for high school, college, graduate students, and professionals.  The acquisition was accounted for as apurchase, and accordingly, REA’s financial results were included in thespecialty publishing segment in the consolidated financial statements from thedate of acquisition.  The purchase pricewas approximately $12 million, with an allocation of approximately $8.4 millionto goodwill and $0.7 million to prepublication costs in the accompanyingfinancial statements.

 

9

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| **Item 2.** | **COURIER CORPORATION**                                                                        | ** ** |
|-------------|------------------------------------------------------------------------------------------------|------------|
|        | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS** |       |

 

**Critical Accounting Policies and Estimates:**

 

The Company’s consolidated condensedfinancial statements have been prepared in accordance with generally acceptedaccounting principles.  The preparationof these financial statements requires management to make estimates andassumptions that affect the amounts reported in these financial statements andaccompanying notes.   On an ongoingbasis, management evaluates its estimates and judgments, including thoserelated to collectibility of accounts receivable, recovery of inventories,impairment of goodwill, prepublication costs and income taxes.  Management bases its estimates and judgmentson historical experience and various other factors believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe periods presented.  Actual resultsmay differ from these estimates.  Thesignificant accounting policies which management believes are most critical toaid in fully understanding and evaluating the Company’s reported financialresults include the following:

 

# **Accounts Receivable**  Management performsongoing credit evaluations of the Company’s customers and adjusts credit limitsbased upon payment history and the customer’s current creditworthiness.  Collections and payments from customers arecontinuously monitored.  A provision for estimatedcredit losses is determined based upon historical experience and any specificcustomer collection issues that have been identified.  If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required.

 

Inventories  Management records reductions in thecost basis of inventory for excess and obsolete inventory based primarily uponhistorical and forecasted product demand. If actual market conditions are less favorable than those projected bymanagement, additional inventory charges may be required.

 

Goodwill The Company evaluates possible impairment annually or whenever events orcircumstances indicate that the carrying value of the assets may not berecoverable.  The Company completed theannual impairment test at September 25, 2004 resulting in no change to thenature or carrying amounts of its intangible assets.  Changes in market conditions or pooroperating results could result in a decline in value thereby potentiallyrequiring an impairment charge in the future.

 

Prepublication Costs   The Company capitalizes prepublicationcosts, which include the costs of acquiring rights to publish a work and costsassociated with bringing a manuscript to publication such as artwork andeditorial efforts. Prepublication costs are amortized on a straight-line basisover periods ranging from three to four years. Management regularly evaluates the sales and profitability of theproducts based upon historical and forecasted demand.  Based upon this evaluation, adjustments maybe required to amortization expense.

 

Income Taxes  The income tax provision and related accrued taxes are based on amountsreported on the Company’s tax returns and changes in deferred taxes.  Deferred income tax liabilities and assets are determined based upon the differences betweenthe financial statement and tax bases of assets and liabilities.  Changes in the recoverability of the Company’sdeferred tax assets or audits by tax authorities could result in future chargesor credits to income tax expense, and related accrued and deferred taxes.

 

10

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**Results of Operations:**

 

For the first quarter of fiscal2005, the Company’s net income was $4.1 million, or $.50 per diluted share, anincrease of 6% over last year’s first quarter results of $3.9 million, or $.48per diluted share.  Sales for the firstthree months of fiscal 2005 were $51.3 million, up 10% from last year’s firstquarter sales of $46.8 million.  Grossprofit increased to $16.7 million in the first quarter compared to $15.6million in the same period last year.  Asa percentage of sales, gross profit decreased to 32.6% from 33.4% in the prioryear.  Selling and administrativeexpenses for the first quarter of fiscal 2005 were $10.3 million, 7% higherthan the corresponding period last year.

 

On January 6, 2004, theCompany purchased substantially all of the assets of Research & EducationAssociation (“REA”), a publisher of test preparation and study-guide books andsoftware for high school, college, graduate students, and professionals.  The acquisition was accounted for as apurchase, and accordingly, REA’s financial results were included in thespecialty publishing segment in the consolidated financial statements from thedate of acquisition.

 

*Book Manufacturing Segment*

Sales from the Company’s book manufacturingsegment were $42.9 million, an increase of 8% over the first quarter of fiscal2004.  Within this segment, the Companyfocuses on three key markets: education, religious and specialty trade, all ofwhich experienced growth in the first quarter. Sales to the education market rose 9% in the first quarter compared tothe prior year, with increases at the elementary, high school and collegelevels.  Growth in sales of four-colortextbooks to the education market was particularly strong in the first quarterof fiscal 2005, enabled by the new four-color press installed last April.  Sales to the religious market increased 6%,resulting in 4% growth over the latest twelve-month period, in line with ourexpectations.  Sales to the specialtytrade market were up 7% in the first quarter compared to a relatively weakfirst quarter last year.

 

Gross profit in the quarter increased 5% to$11.9 million, but decreased as a percentage of sales to 27.8% in the firstquarter of fiscal 2005 from 28.6% in the same quarter last year. Tight costcontrols and continued gains in productivity were not enough to offset theeffects of lowered pricing tied to market share increases that were achieved ina highly competitive environment in the past year.

 

Selling and administrative expenses in thefirst three months of fiscal 2005 decreased by 1% to $6.5 million compared tothe same period in the prior year.  As apercentage of sales, selling and administrative expenses declined to 15.2% from16.6% last year.

 

Intercompany interest income allocated to thebook manufacturing segment was $116,000 for the first three months of fiscal2005 compared to $74,000 last year as a result of the cash flow produced bythis segment.

 

First quarter pretax income in this segmentincreased 15% to $5.6 million, or $.43 per diluted share, from $4.8 million, or$.39 per diluted share, in the corresponding quarter last year.  As a percentage of sales, pretax incomeincreased to 13% in the quarter from 12% last year.

 

*Specialty Publishing Segment*

The Company’s specialty publishing segment iscomprised of Dover Publications, Inc. (“Dover”), as well as REA since itsacquisition on January 6, 2004. Sales were $10.3 million in the first three months of fiscal 2005, up13% from $9.1 million in last year’s first quarter, with $1.1 million of theincrease coming from the inclusion of REA sales. First quarter sales at REAreflect the off season in a business that typically peaks in relation toexamination periods.  At Dover, firstquarter sales were $9.1 million, up 1% from a year earlier.  Sales to major booksellers anddirect-to-consumer sales were both up 8%, but these increases were offset byweaker-than-expected sales to non-bookstore customers such as gift shops andcraft stores.

 

Gross profit in the specialty publishing segment increased by 12% to$4.9 million, but decreased slightly as a percent of sales to 47.9% in thefirst quarter compared to 48.6% in the same period last year. Dover’s grossprofit as a percentage of sales increased to 49.1% from 48.6% a year earlier,reflecting a more favorable sales

 

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mix as well as modest price increases. REA’s gross profit percentage was 39.0%, which included approximately$50,000 of expense related to a required purchase accounting write up ofinventory to fair market value when REA was acquired.  The original inventory write up was approximately$1 million and is being expensed as the acquired inventory is sold.  To date, approximately $650,000 of the $1million has been expensed.

 

Selling and administrative expenses in thissegment were $3.8 million in the first quarter, an increase of 24% over thecorresponding prior year period, resulting from the addition of REA to thesegment, as well as two key additions to management.  The first quarter of fiscal 2005 alsoincluded expenses of approximately $100,000 incurred in connection with programsaimed at improving customer service and operating efficiencies, throughwarehousing changes and the development of a common technologicalinfrastructure at Dover and REA.  Whilethe incremental expense of these efforts are expected to approach $600,000during fiscal 2005 as a whole, we expect to generate annual savings in excessof $800,000 beginning in fiscal 2006.

 

Intercompany interest expense is allocated tothe specialty publishing segment based on the acquisition costs of Dover andREA, reduced by cash generated by each business since acquisition.  Such interest expense for the first quarterof fiscal 2005 was $89,000 compared to $47,000 in the prior year.  The increase was primarily attributable tothe acquisition of REA.

 

Pretax income in the specialty publishingsegment was $1.1 million, or, on an after-tax basis, $.08 per diluted share, inthe first quarter of fiscal 2005, compared to $1.3 million, or $.10 per dilutedshare, in last year’s first quarter.

 

*Total Consolidated Company*

Interest income, net of interest expense, was$27,000 in the first quarter of fiscal 2005, comparable to the same period offiscal 2004.  There were no borrowingsunder the Company’s $60 million revolving credit facility in the first quarterof either year, however, interest expense includes commitment fees and othercosts associated with maintaining this credit facility.  Cash investments in the first quarter offiscal 2005 averaged approximately $25 million invested at an average annualinterest rate of 1.7% generating interest income of approximately $0.1million.  For the same period last year,the Company’s average cash investments were $26.6 million invested at anaverage interest rate of 1.0%.

 

The Company’s effective tax rate for thefirst quarter of fiscal 2005 was 36% compared to 35% for the first three monthslast year, reflecting a higher effective state tax rate and a reduced benefitfrom export related income associated with recently enacted federal taxlegislation.

 

For purposes of computing net income perdiluted share, weighted average shares outstanding increased by approximately101,000 shares over last year’s first quarter. The increase was largely due to options exercised and shares issuedunder the Company’s stock plans and the impact of potentially dilutive shares.

 

**Liquidity and Capital Resources:**

During the first three months of fiscal2005, operations provided approximately $6.1 million of cash.  Net income was $4.1 million and depreciationand amortization were $3.0 million. Working capital used approximately $1.4 million of cash.

 

Investment activities in the first quarter offiscal 2005 used approximately $6.9 million of cash. Capital expenditures wereapproximately $6.2 million, primarily for deposits on another four-color pressto be installed in late 2005.  This pressis identical to the four-color press installed in 2004 and will further expandthe Company’s capacity to produce four-color textbooks.  For the entire fiscal year, capitalexpenditures are expected to be approximately $18 to $20 million, approximatelyhalf of which will be payments on the new press.  Prepublication costs for the first quarterwere $0.7 million and for the full fiscal year are projected to beapproximately $3 million.

 

Financing activities for the first three monthsof fiscal 2005 used approximately $0.3 million of cash.  At December 25, 2004, the Company had$23 million in cash and no borrowings under its $60 million long-term

 

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revolving credit facility, which bearsinterest at a floating rate.  Therevolving credit facility is used by the Company for both its long-term andshort-term financing needs.  The Company’sdividend rate was increased by 14% in December 2004 and dividend paymentsincreased to $0.8 million.  Proceeds fromstock plans were $0.6 million, primarily from the exercise of stockoptions.  The Company believes that itscash from operations and available credit facilities will be sufficient to meetits cash requirements through fiscal 2005.

 

The following table summarizes the Company’scontractual obligations and commitments at September 25, 2004 to makefuture payments as well as its existing commercial commitments.

 
| ** **                   | ** ** | ** ** | ** ** | **(000’s omitted)**   | ** ** |
|------------------------------|------------|------------|------------|----------------------------|------------|
| ** **                   | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
| **Contractual Payments:**    | ** ** | **Total**  | ** ** | **Less than  1 Year**      | ** ** | **1 to 3  Years** | ** ** | **4 to 5  Years** | ** ** | **After 5  Years** | ** ** |
| Long-Term Debt               |       | $          | 593        |                       | $          | 83 |   | $ | 173 |   | $ | 184 |   | $ | 153 |   |
| Operating  Leases            |       | $          | 11,039     |                       | $          | 3,198 |   | $ | 3,700 |   | $ | 1,691 |   | $ | 2,450 |   |
| Purchase  Obligations (1)    |       | $          | 7,347      |                       | $          | 7,347 |   | $ | — |   | $ | — |   | $ | — |   |
| Other  Long-Term Liabilities |       | $          | 2,630      |                       | $          | — |   | $ | 635 |   | $ | 210 |   | $ | 1,785 |   |

 

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(1)          Represent amounts at December 25, 2004 forcapital commitments for new four-color press and other projects.

 

**New Accounting Pronouncements:**

In December 2004, the FinancialAccounting Standards Board issued SFAS No. 123R, “Share-Based Payment” (“SFAS123R”).  Under this new standard,companies will no longer be able to account for share-based compensationtransactions using the intrinsic method in accordance with APB 25.  Instead, companies will be required toaccount for such transactions using a fair-value method and to recognize theexpense over the service period.  SFAS123R will be effective for periods beginning after June 15, 2005 andallows for several alternative transition methods.  The Company expects to adopt SFAS 123R in itsfourth quarter on a prospective basis, which will require recognition ofcompensation expense for all stock option or other equity-based awards thatvest or become exercisable after the effective date.  Because of the vesting schedule of theCompany’s outstanding stock options, the after-tax expense expected to berecognized in the fourth quarter is approximately $0.9 million, or $0.11 perdiluted share.

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”(“SFAS 151”), an amendment of ARB No. 43, Chapter 4.  SFAS 151 clarifies the accounting forabnormal amounts of idle facility expense, freight, handling costs and wastedmaterial.  SFAS 151 is effective forinventory costs incurred during fiscal years beginning after June 15,2005.  The Company does not believeadoption of SFAS 151 will have a material effect on its consolidated financialposition, results of operations or cash flows.

 

**Forward-Looking Information:**

This Quarterly Report onForm 10-Q and the Company’s Annual Report for the year ended September 25,2004 on Form 10-K include forward-looking statements.  Statements that describe future expectations,plans or strategies are considered “forward-looking statements” as that term isdefined under the Private Securities Litigation Reform Act of 1995 and releasesissued by the Securities and Exchange Commission.  The words “believe,” “expect,” “anticipate,” “intend,”“estimate” and other expressions which are predictions of or indicate futureevents and trends and which do not relate to historical matters identifyforward-looking statements.  Suchstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those currently anticipated.  Factors that could affect actual resultsinclude, among others, changes in customers’ demand for the Company’s products,including seasonal changes in customers’ orders, changes in raw material costs,pricing actions by competitors, consolidation among customers and competitors,success in the integration of acquired businesses, unanticipated changes inoperating expenses, changes in technology, difficulties in the start up of newequipment, changes in copyright laws, changes in tax regulations, and generalchanges in economic conditions, including currency fluctuations and changes ininterest rates.  Although the Companybelieves that the assumptions underlying the forward-looking statements arereasonable, any of the assumptions could be inaccurate, and therefore, therecan be no assurance that the forward-looking statements will prove to beaccurate.  The forward-looking statementsincluded herein are made as of the date hereof, and the Company undertakes noobligation to update publicly such statements to reflect subsequent events orcircumstances.

 

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#### **COURIER CORPORATION**

#### ** **

**Item 3.                    QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

There have been no material changes from theinformation concerning the Company’s “Quantitative and Qualitative DisclosuresAbout Market Risk” as previously reported in the Company’s Annual Report onForm 10-K for the year ended September 25, 2004.

 

**Item 4.                    CONTROLS ANDPROCEDURES**

 

**(a)****                                 ****Evaluation of disclosure controls and procedures**

 

As required by Rule 13a-15under the Securities Exchange Act of 1934, as of the end of the period coveredby this quarterly report, the Company carried out an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures.  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed by the Company in the reports itfiles or submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

**(b)****                                 ****Changes in internal controls over financialreporting**

 

There was no change in theCompany’s internal control over financial reporting that occurred during theperiod covered by this quarterly report that has materially affected, or thatis reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**COURIER CORPORATION**

 

#### **PART II.  OTHER INFORMATION**

 

**Item 1.****                                                           Legal Proceedings**

 

None.

 

**Item 2.****                                                           Changes in Securities and Use of Proceeds**

 

None.

 

**Item 3.****                                                           DefaultsUpon Senior Securities**

 

None.

 

**Item 4.****                                                           Submission of Matters to a Vote of SecurityHolders**

 

None.

 

**Item 5.****                                                           Other Information**

 

At the Annual Meeting of Stockholders of theregistrant held on January 20, 2005, the stockholders approved amendmentsto Courier Corporation’s Amended and Restated 1993 Stock Incentive Plan, which,among other things, increased the number of shares of the registrant’s commonstock available under the Plan by 150,000 shares.  At such meeting, the stockholders alsoapproved the adoption of the Courier Corporation 2005 Stock Equity Plan forNon-Employee Directors under which 150,000 shares of the registrant’s commonstock may be issued.  Informationconcerning the terms and conditions of both plans was contained in thepreviously reported definitive proxy statement of the registrant dated December9, 2004 under the captions “Item 2: Approval of Amended and Restated 1993 Stock Incentive Plan”, “Item 3:  Approval of 2005 Stock Equity Plan forNon-Employee Directors” and Exhibits A and B to such proxy statement, suchprovisions being herein incorporated by reference.

 

**Item 6.****                                                           Exhibitsand Reports on Form 8-K**

 

(a) Exhibits

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                         |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Courier Corporation Amended and Restated  1993 Stock Incentive Plan (filed January 19, 2005 as Exhibit 10.5 to the  Company’s Registration Statement No. 333-122136 and incorporated herein by  reference).   |
|            |       |                                                                                                                                                                                                                    |
| 10.2            |       | Courier Corporation 2005 Stock Equity Plan for Non-Employee Directors  (filed January 19, 2005 as Exhibit 10.1 to the Company’s Registration  Statement No. 333-122137 and incorporated herein by reference). |
|            |       |                                                                                                                                                                                                                    |
| 31.1            |       | Certification of Chief Executive Officer                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                    |
| 31.2            |       | Certification of Chief Financial Officer                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                    |
| **32.1**        | ** ** | **Certification of Chief  Executive Officer**                                                                                                                                                                           |
| ** **      | ** ** | ** **                                                                                                                                                                                                              |
| 32.2            |       | Certification of Chief Financial Officer                                                                                                                                                                                |

 

(b) Reports on Form 8-K

 

Filed September 29, 2004, reportingunder Item 5.02 the appointment of two directors and the appointment of aprincipal officer.

 

Filed November 4, 2004, reporting underItem 2.02 a press release dated November 4, 2004 reporting financialresults for the quarter and year ended September 25, 2004.

 

Filed December 8, 2004, reporting underItem 1.01 modifications to the Courier Executive Compensation Program.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the Company has duly caused this report to besigned on its behalf by the undersigned thereunto duly authorized.

 

**COURIER CORPORATION**

**(Registrant)**

 

 
| * January 25, 2005* | * * | By:                                                 | * s/James F. Conway III*  | * * |
|-------------------------------|----------|-----------------------------------------------------|--------------------------------|----------|
| Date                          |     | James F.  Conway III                                |
|                          |     | Chairman,  President and  Chief Executive Officer   |
|                          |     |                                                |
|                          |     |                                                |
| * January 25, 2005* |     | By:                                                 | * s/Robert P. Story, Jr.* |     |
| Date                          |     | Robert P.  Story, Jr.                               |
|                          |     | Senior Vice  President and  Chief Financial Officer |
|                          |     |                                                |
|                          |     |                                                |
| * January 25, 2005* |     | By:                                                 | * s/Peter M. Folger*      |     |
| Date                          |     | Peter M.  Folger                                    |
|                          |     | Vice President  and  Chief Accounting Officer       |
|                               |          |                                                     |                                |          |  |  |

 

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