**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

**(Mark One)**

 
| ** ****x**                                        | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                              |
| **For  the quarterly period ended June 26, 2010** |
| ** **                                             |
| **OR**                                                 |
| ** **                                             | ** **                                                                                              |
| ** ****o**                                        | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from                  to                  **

 

**Commissionfile number 0-7597**

 

**COURIERCORPORATION**

(Exactname of registrant as specified in its charter)

 

| **Massachusetts**                                               | ** ** | **04-2502514**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
|                                                            |       |                                  |
| **15  Wellman Avenue, North Chelmsford, Massachusetts**         | ** ** | **01863**                             |
| (Address  of principal executive offices)                       |       | (Zip  Code)                           |

 

**(978)251-6000**

(Registrant’stelephone number, including area code)

 

**NOCHANGE**

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 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 x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one:)

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-  accelerated filer o                      |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                         |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x

 

Indicate the number ofshares outstanding of each of the registrant’s classes of common stock, as ofthe latest practicable date.

 

| **Class**                   | ** ** | **Outstanding at July 23, 2010** |
|-----------------------------|------------|------------------------------------------------------|
| Common  Stock, $1 par value |       | 12,001,459  shares                                   |

 

 

 

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COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS(UNAUDITED)

(Dollars in thousands except per share amounts)

 
| ** **                                   | ** ** | **QUARTER ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **June 26,**      | ** ** | **June 27,**               | ** ** | **June 26,** | ** ** | **June 27,** | ** ** |
| ** **                                   | ** ** | **2010**               | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Net sales                                    |       | $                      | 64,919     |                            | $          | 61,390 |   | $ | 186,902 |   | $ | 180,397 |   |
| Cost of sales (Note E)                       |       | 51,036                 |       | 47,313                          |       | 141,423 |   | 141,269 |   |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Gross profit                                 |       | 13,883                 |       | 14,077                          |       | 45,479 |   | 39,128 |   |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Selling and administrative expenses (Note E) |       | 10,877                 |       | 11,305                          |       | 35,374 |   | 36,462 |   |
| Impairment charge (Note A)                   |       | —                 |       | —                          |       | — |   | 15,607 |   |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Operating income (loss)                      |       | 3,006                  |       | 2,772                           |       | 10,105 |   | (12,941 | ) |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Interest expense, net                        |       | 130                    |       | 153                             |       | 367 |   | 574 |   |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Pretax income (loss)                         |       | 2,876                  |       | 2,619                           |       | 9,738 |   | (13,515 | ) |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Income tax provision (benefit) (Note C)      |       | 1,106                  |       | 1,007                           |       | 3,749 |   | (4,657 | ) |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Net income (loss)                            |       | $                      | 1,770      |                            | $          | 1,612 |   | $ | 5,989 |   | $ | (8,858 | ) |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Net income (loss) per share (Note G):        |       |                   |       |                            |       |   |   |   |   |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Basic                                        |       | $                      | 0.15       |                            | $          | 0.14 |   | $ | 0.50 |   | $ | (0.75 | ) |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Diluted                                      |       | $                      | 0.15       |                            | $          | 0.14 |   | $ | 0.50 |   | $ | (0.75 | ) |
|                                         |       |                   |       |                            |       |   |   |   |   |
| Cash dividends declared per share            |       | $                      | 0.21       |                            | $          | 0.21 |   | $ | 0.63 |   | $ | 0.63 |   |

 

Theaccompanying notes are an integral part of the consolidated condensed financialstatements.

 

2

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COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 
| ** **                                                                                                                    | ** ** | **June 26,** | ** ** | **September 26,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                                    | ** ** | **2010**          | ** ** | **2009**               | ** ** |
| ASSETS                                                                                                                        |       |              |       |                   |       |
|                                                                                                                          |       |              |       |                   |       |
| Current assets:                                                                                                               |       |              |       |                   |       |
| Cash and cash equivalents                                                                                                     |       | $                 | 113        |                   | $          | 492 |   |
| Investments                                                                                                                   |       | 1,064             |       | 1,017                  |       |
| Accounts receivable, less allowance for  uncollectible accounts of $1,797 at June 26, 2010 and $1,600 at September 26,  2009  |       | 36,340            |       | 34,176                 |       |
| Inventories (Note B)                                                                                                          |       | 40,724            |       | 38,026                 |       |
| Deferred income taxes                                                                                                         |       | 4,675             |       | 4,462                  |       |
| Other current assets                                                                                                          |       | 1,996             |       | 1,404                  |       |
|                                                                                                                          |       |              |       |                   |       |
| Total current assets                                                                                                          |       | 84,912            |       | 79,577                 |       |
|                                                                                                                          |       |              |       |                   |       |
| Property, plant and equipment, less accumulated  depreciation of $167,066 at June 26, 2010 and $160,783 at September 26, 2009 |       | 91,046            |       | 89,754                 |       |
|                                                                                                                          |       |              |       |                   |       |
| Goodwill (Note A)                                                                                                             |       | 26,497            |       | 24,980                 |       |
|                                                                                                                          |       |              |       |                   |       |
| Other intangibles, net (Note A)                                                                                               |       | 5,319             |       | 3,720                  |       |
|                                                                                                                          |       |              |       |                   |       |
| Prepublication costs, net (Note A)                                                                                            |       | 8,426             |       | 9,194                  |       |
|                                                                                                                          |       |              |       |                   |       |
| Other assets                                                                                                                  |       | 1,263             |       | 1,212                  |       |
|                                                                                                                          |       |              |       |                   |       |
| Total assets                                                                                                                  |       | $                 | 217,463    |                   | $          | 208,437 |   |

 

Theaccompanying notes are an integral part of the consolidated condensed financialstatements.

 

3

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COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

 
| ** **                                                                                                                           | ** ** | **June 26,** | ** ** | **September 26,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-------------------|------------|
| ** **                                                                                                                           | ** ** | **2010**     | ** ** | **2009**          | ** ** |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                            |       |         |       |              |       |
| ** **                                                                                                                           |       |         |       |              |       |
| Current liabilities:                                                                                                                 |       |         |       |              |       |
| Current maturities of long-term debt (Note I)                                                                                        |       | $            | 778        |              | $          | 96 |   |
| Accounts payable                                                                                                                     |       | 11,270       |       | 10,974            |       |
| Accrued payroll                                                                                                                      |       | 7,408        |       | 5,950             |       |
| Accrued taxes                                                                                                                        |       | 441          |       | 3,032             |       |
| Other current liabilities                                                                                                            |       | 7,180        |       | 7,098             |       |
|                                                                                                                                 |       |         |       |              |       |
| Total current liabilities                                                                                                            |       | 27,077       |       | 27,150            |       |
|                                                                                                                                 |       |         |       |              |       |
| Long-term debt (Note I)                                                                                                              |       | 21,651       |       | 13,514            |       |
| Deferred income taxes                                                                                                                |       | 1,064        |       | 177               |       |
| Other liabilities                                                                                                                    |       | 3,515        |       | 3,006             |       |
|                                                                                                                                 |       |         |       |              |       |
| Total liabilities                                                                                                                    |       | 53,307       |       | 43,847            |       |
|                                                                                                                                 |       |         |       |              |       |
| Stockholders’ equity (Note F):                                                                                                  |       |         |       |              |       |
| Preferred stock, $1 par value - authorized 1,000,000  shares; none issued                                                            |       |         |       |              |       |
| Common stock, $1 par value - authorized 18,000,000  shares; issued 12,001,000 at June 26, 2010 and 11,956,000 at September 26,  2009 |       | 12,001       |       | 11,956            |       |
| Additional paid-in capital                                                                                                           |       | 17,559       |       | 16,479            |       |
| Retained earnings                                                                                                                    |       | 135,223      |       | 136,782           |       |
| Accumulated other comprehensive loss                                                                                                 |       | (627         | )          | (627              | )          |
|                                                                                                                                 |       |         |       |              |       |
| Total stockholders’ equity                                                                                                      |       | 164,156      |       | 164,590           |       |
|                                                                                                                                 |       |         |       |              |       |
| Total liabilities and stockholders’ equity                                                                                      |       | $            | 217,463    |              | $          | 208,437 |   |

 

Theaccompanying notes are an integral part of the consolidated condensed financialstatements.

 

4

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COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(UNAUDITED)

(Dollars in thousands)

 
| ** **                                                                              | ** ** | **NINE MONTHS ENDED** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **June 26,**          | ** ** | **June 27,** | ** ** |
| ** **                                                                              | ** ** | **2010**              | ** ** | **2009** | ** ** |
| Operating Activities:                                                                   |       |                  |       |   |   |
| Net income (loss)                                                                       |       | $                     | 5,989      |   | $ | (8,858 | ) |
| Adjustments to reconcile net income (loss) to cash  provided from operating activities: |       |                  |       |   |   |
| Depreciation and amortization                                                           |       | 15,527                |       | 15,824 |   |
| Impairment charge (Note A)                                                              |       | —                |       | 15,607 |   |
| Stock-based compensation                                                                |       | 1,012                 |       | 1,073 |   |
| Deferred income taxes                                                                   |       | 674                   |       | (3,813 | ) |
| Gain on disposition of assets                                                           |       | (183                  | )          | — |   |
| Changes in assets and liabilities:                                                      |       |                  |       |   |   |
| Accounts receivable                                                                     |       | (1,785                | )          | 9,509 |   |
| Inventory                                                                               |       | (2,657                | )          | (2,379 | ) |
| Accounts payable                                                                        |       | 7                     |       | (6,792 | ) |
| Accrued taxes                                                                           |       | (2,591                | )          | (2,830 | ) |
| Other elements of working capital                                                       |       | 608                   |       | (2,245 | ) |
| Other long-term, net                                                                    |       | (249                  | )          | (150 | ) |
|                                                                                    |       |                  |       |   |   |
| Cash provided from operating activities                                                 |       | 16,352                |       | 14,946 |   |
|                                                                                    |       |                  |       |   |   |
| Investment Activities:                                                                  |       |                  |       |   |   |
| Capital expenditures                                                                    |       | (12,635               | )          | (5,601 | ) |
| Acquisition (Note H)                                                                    |       | (3,000                | )          | — |   |
| Prepublication costs                                                                    |       | (3,151                | )          | (3,119 | ) |
| Proceeds on disposition of assets                                                       |       | 590                   |       | — |   |
| Short-term investments                                                                  |       | (47                   | )          | (72 | ) |
|                                                                                    |       |                  |       |   |   |
| Cash used for investment activities                                                     |       | (18,243               | )          | (8,792 | ) |
|                                                                                    |       |                  |       |   |   |
| Financing Activities:                                                                   |       |                  |       |   |   |
| Long-term debt borrowings, net                                                          |       | 8,819                 |       | 878 |   |
| Cash dividends                                                                          |       | (7,548                | )          | (7,495 | ) |
| Proceeds from stock plans                                                               |       | 241                   |       | 412 |   |
|                                                                                    |       |                  |       |   |   |
| Cash provided from (used for) financing  activities                                     |       | 1,512                 |       | (6,205 | ) |
|                                                                                    |       |                  |       |   |   |
| Decrease in cash and cash equivalents                                                   |       | (379                  | )          | (51 | ) |
|                                                                                    |       |                  |       |   |   |
| Cash and cash equivalents at the beginning of the  period                               |       | 492                   |       | 178 |   |
|                                                                                    |       |                  |       |   |   |
| Cash and cash equivalents at the end of the  period                                     |       | $                     | 113        |   | $ | 127 |   |
|                                                                                    |       |                  |       |   |   |
| Supplemental disclosure of noncash investing  activities:                               |       |                  |       |   |   |
| Contingent consideration (Note H)                                                       |       | $                     | 850        |   | — |   |

 

Theaccompanying notes are an integral part of the consolidated condensed financialstatements.

 

5

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**COURIER CORPORATION**

 

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

 

**A.****           ****SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**Unaudited Financial Statements**

The consolidated condensed balance sheet as of June 26,2010, the consolidated condensed statements of operations for the three-monthand nine-month periods ended June 26, 2010 and June 27, 2009, and theconsolidated condensed statements of cash flows for the nine-month periodsended June 26, 2010 and June 27, 2009 are unaudited.  In the opinion of management, alladjustments, consisting of normal recurring items, considered necessary for afair presentation of such financial statements have been recorded.  The Company considers events or transactionsthat occur after the balance sheet date, but before the financial statementsare issued, to provide additional evidence relative to certain estimates or toidentify matters that require additional disclosure.

 

Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America (“generallyaccepted accounting principles”) have been condensed or omitted.  The balance sheet data as of September 26,2009 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 Annual Reporton Form 10-K for the year ended September 26, 2009.

 

**Goodwilland Other Intangibles**

TheCompany evaluates possible impairment annually at the end of its fiscal year orwhenever events or changes in circumstances indicate that the carrying value ofthe assets may not be recoverable. There were no such events or changes incircumstances in the period ended June 26, 2010.  In the second quarter of fiscal 2009, theCompany recorded a $15.6 million impairment charge related to DoverPublications, Inc. (“Dover”), representing 100% of Dover’s goodwill.

 

Duringthe second quarter of fiscal 2010, the Company acquired Highcrest Media LLC (“HighcrestMedia”) and recorded goodwill of $1.5 million (see Note H). In addition, theCompany recorded intangibles related to customer lists and technology with thisacquisition totaling $1.9 million, which are being amortized over a 5-yearperiod.  “Other intangibles” also includecustomer lists related to Federal Marketing Corporation, d/b/a CreativeHomeowner (“Creative Homeowner”) and Moore-Langen Printing Company, Inc. (“MooreLangen”), which are being amortized over 15-year and 10-year periods,respectively.  Related amortizationexpense was approximately $150,000 and $50,000 in the third quarters of fiscalyears 2010 and 2009, respectively.  For thefirst nine months, amortization expense was approximately $330,000 and $150,000in fiscal years 2010 and 2009, respectively. Annual amortization expense overthe next five years will be approximately $600,000 prospectively.

 

**Fair Value of Financial Instruments**

Financial instruments consistprimarily of cash, investments in mutual funds, accounts receivable, accountspayable and debt obligations.  At June 26,2010 and September 26, 2009, the fair value of the Company’s financialinstruments approximated their carrying values. The fair value of the Company’s revolving credit facility approximatesits carrying value due to the variable interest rate and the Company’s currentrate standing.  At June 26, 2010,the Company had a forward exchange contract to purchase approximately 2.5million euros as a hedge against a foreign currency equipment purchasecommitment, designated as a fair value hedge. The fair value of the foreignexchange forward contract was valued using market exchange rates.  The Company does not use financialinstruments for trading or speculative purposes.

 

**PrepublicationCosts**

Prepublication costs, associated with creating newtitles in the specialty publishing segment, are amortized to cost of salesusing the straight-line method over estimated useful lives of three to fiveyears.

 

6

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**COURIER CORPORATION**

 

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

 

**Recent Accounting Pronouncements****:**

Atthe beginning of fiscal 2010, the Company****adopted the provisions of the Financial Accounting Standards Board (“FASB”)authoritative literature on business combinations, which expands the definitionof a business combination and changes the manner in which the Company accountsfor business combinations. Significant changes include the capitalization ofIPR&D as an indefinite-lived asset, the recognition of certain acquiredcontingent assets and liabilities at fair value, the expensing ofacquisition-related restructuring actions and transaction costs, and therecognition of contingent purchase price consideration at fair value on theacquisition date. In addition, post-acquisition changes in deferred tax assetvaluation allowances and acquired income tax uncertainties will be recognizedas income tax expense or benefit. The accounting treatment for taxes will beapplicable to acquisitions that close both prior and subsequent to the adoptionof this guidance. The Company has applied this standard to the acquisition ofHighcrest Media, described in Note H. As a result of adopting this guidance,the Company expensed approximately $55,000 of transaction costs related to theacquisition and recorded contingent consideration of $1.2 million in theinitial purchase price at its estimated fair value of $850,000.

 

**B.****           ****INVENTORIES**

 

Inventories are valued at the lower of cost ormarket.  Cost was determined using thelast-in, first-out (LIFO) method for approximately 53% of the Company’sinventories at both June 26, 2010 and September 26, 2009.  Other inventories, primarily in the specialtypublishing segment, are determined on a first-in, first-out (FIFO) basis.  Inventories consisted of the following:

 
| ** **      | ** ** | **(000’s Omitted)**  | ** ** |
|-----------------|------------|---------------------------|------------|
| ** **      | ** ** | **June 26,****2010** | ** ** | **September 26,****2009** | ** ** |
| Raw materials   |       | $                         | 5,074      |   | $ | 4,384 |   |
| Work in process |       | 9,350                     |       | 8,286 |   |
| Finished goods  |       | 26,300                    |       | 25,356 |   |
| Total           |       | $                         | 40,724     |   | $ | 38,026 |   |

 

**C.****           ****INCOME TAXES**

 

The provision (benefit) for income taxes differs fromthat computed using the statutory federal income tax rates for the followingreasons:

 
| ** **                               | ** ** | **(000’s Omitted)** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Quarter Ended**        | ** ** |
| ** **                               | ** ** | **June 26, 2010**   | ** ** | **June 27, 2009** | ** ** |
| Federal taxes at  statutory rates        |       | $                             | 1,007      |   | 35.0 | %  | $ | 917 |   | 35.0 | % |
| State taxes, net of  federal tax benefit |       | 170                           |       | 5.9 |   | 121 |   | 4.6 |   |
| Federal manufacturer’s  deduction   |       | (41                           | )          | (1.4 | ) | (27 | ) | (1.0 | ) |
| Other                                    |       | (30                           | )          | (1.0 | ) | (4 | ) | (0.2 | ) |
| Total                                    |       | $                             | 1,106      |   | 38.5 | %  | $ | 1,007 |   | 38.4 | % |

 

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**COURIERCORPORATION**

 

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

 
| ** **                               | ** ** | **(000’s Omitted)** | ** ** |
|------------------------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **Nine Months Ended**    | ** ** |
| ** **                               | ** ** | **June 26, 2010**   | ** ** | **June 27, 2009** | ** ** |
| Federal taxes at  statutory rates        |       | $                        | 3,408      |   | 35.0 | %  | $ | (4,730 | ) | (35.0 | )% |
| State taxes, net of  federal tax benefit |       | 518                      |       | 5.3 |   | 96 |   | 0.7 |   |
| Federal manufacturer’s  deduction   |       | (165                     | )          | (1.7 | ) | (20 | ) | (0.1 | ) |
| Other                                    |       | (12                      | )          | (0.1 | ) | (3 | ) | — |   |
| Total                                    |       | $                        | 3,749      |   | 38.5 | %  | $ | (4,657 | ) | (34.5 | )% |

 

The tax benefit related to theimpairment charge for Dover recorded in the second quarter of last year wasrecognized at 35% (see Note A).  No statetax benefit was recognized as the Company fully provided a valuation allowanceon the related deferred state tax asset.

 

**D.****           ****BUSINESS SEGMENTS**

 

The Company has two business segments: bookmanufacturing and specialty publishing. The book manufacturing segment offers afull range of services from production through storage and distribution forreligious, educational and specialty trade book publishers. In January 2010,the Company acquired Highcrest Media, which has been included in the bookmanufacturing segment (see Note H).  Thespecialty publishing segment consists of Dover, Creative Homeowner and Research &Education Association, Inc. (“REA”).

 

Segment performance isevaluated based on several factors, of which the primary financial measure isoperating income.  Operating income isdefined as gross profit (sales less cost of sales) less selling andadministrative expenses, and includes severance and other restructuring costsbut excludes stock-based compensation. As such, segment performance is evaluated exclusive of interest, incometaxes, stock-based compensation, intersegment profit, and impairmentcharges.  The elimination of intersegmentsales and related profit represents sales from the book manufacturing segmentto the specialty publishing segment.

 

The following table provides segment information for thethree-month and nine-month periods ended June 26, 2010and June 27, 2009.

 
| ** **                           | ** ** | **(000’s Omitted)** | ** ** |
|--------------------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **June 26****,**    | ** ** | **June 27****,** | ** ** | **June 26****,** | ** ** | **June 27****,** | ** ** |
| ** **                           | ** ** | **2010**                 | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales:                           |       |                     |       |   |   |   |   |   |   |
| Book manufacturing                   |       | $                        | 56,838     |   | $ | 52,691 |   | $ | 161,659 |   | $ | 153,472 |   |
| Specialty publishing                 |       | 10,854                   |       | 11,327 |   | 34,136 |   | 34,888 |   |
| Elimination of intersegment  sales   |       | (2,773                   | )          | (2,628 | ) | (8,893 | ) | (7,963 | ) |
| Total                                |       | $                        | 64,919     |   | $ | 61,390 |   | $ | 186,902 |   | $ | 180,397 |   |
|                                 |       |                     |       |   |   |   |   |   |   |
| Pretax income (loss):                |       |                     |       |   |   |   |   |   |   |
| Book manufacturing operating  income |       | $                        | 3,727      |   | $ | 3,740 |   | $ | 12,224 |   | $ | 6,676 |   |
| Specialty publishing  operating loss |       | (424                     | )          | (624 | ) | (925 | ) | (3,117 | ) |
| Impairment charge (Note  A)          |       | —                   |       | — |   | — |   | (15,607 | ) |
| Stock-based compensation             |       | (329                     | )          | (347 | ) | (1,012 | ) | (1,072 | ) |
| Elimination of intersegment  profit  |       | 32                       |       | 3 |   | (182 | ) | 179 |   |
| Interest expense, net                |       | (130                     | )          | (153 | ) | (367 | ) | (574 | ) |
| Total                                |       | $                        | 2,876      |   | $ | 2,619 |   | $ | 9,738 |   | $ | (13,515 | ) |

 

8

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**COURIER CORPORATION**

 

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

 

**E.****            ****RESTRUCTURINGCOSTS**

 

In fiscal 2009, the Company recorded restructuringcosts of $65,000 in the third quarter and $3.8 million in the first nine monthsof the year. Restructuring costs included employee severance expenses relatedto cost savings initiatives in both of the Company’s segments, as well aswinding down Creative Homeowner’s distribution services and closing andconsolidating the Book-mart Press manufacturing facility during the secondquarter of fiscal 2009.  The followingtable details restructuring costs by segment and by classification in theaccompanying consolidated condensed statements of operations.

 
| ** **                                       | ** ** | **(000’s Omitted)**    | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **Quarter Ended**           | ** ** | **Nine Months Ended** | ** ** |
| ** **                                       | ** ** | **Book  Manufacturing  Segment** | ** ** | **Specialty  Publishing  Segment** | ** ** | **Total  Company** | ** ** | **Book  Manufacturing  Segment** | ** ** | **Specialty  Publishing  Segment** | ** ** | **Total  Company** | ** ** |
|                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Included in cost of sales                        |       | $                                | 65         |   | — |   | $ | 65 |   | $ | 2,819 |   | $ | 107 |   | $ | 2,926 |   |
| Included in selling and administrative  expenses |       | —                           |       | — |   | — |   | 491 |   | 377 |   | 868 |   |
| Total restructuring costs                        |       | $                                | 65         |   | — |   | $ | 65 |   | $ | 3,310 |   | $ | 484 |   | $ | 3,794 |   |

 

For the entire fiscal year 2009, the Companyrecorded restructuring costs totaling $4.8 million.  The following table depicts the accrualbalances for these restructuring costs that remained as of September 26,2009 and June 26, 2010, which relate to closing and consolidating theBook-mart Press manufacturing facility.

 
| ** **                                           | ** ** | **(000’s Omitted)** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|
| ** **                                           | ** ** | **Accrual at**           | ** ** | ** ** | ** ** | ** ** | ** ** | **Accrual at** | ** ** |
| ** **                                           | ** ** | **September 26,**   | ** ** | **Charges** | ** ** | **Cash** | ** ** | **June 26,** | ** ** |
| ** **                                           | ** ** | **2009**                 | ** ** | **(Reversals)** | ** ** | **Paid** | ** ** | **2010** | ** ** |
|                                                 |       |                     |       |   |   |   |   |   |   |
| Employee severance and benefit costs                 |       | $                        | 495        |   | $ | (125 | ) | $ | (291 | ) | $ | 79 |   |
| Lease termination, facility closure and other  costs |       | 546                      |       | 65 |   | (432 | ) | 179 |   |
|                                                 |       |                     |       |   |   |   |   |   |   |
| Total                                                |       | $                        | 1,041      |   | $ | (60 | ) | $ | (723 | ) | $ | 258 |   |

 

In the first quarter of fiscal 2010, the Companyaccrued $140,000 for lease termination and facility closure costs.  During the third quarter, $200,000 of accruedrestructuring costs were reversed.  Amounts accruedfor restructuring costs at June 26, 2010 and September 26, 2009 areincluded in “Other current liabilities” in the accompanying consolidatedbalance sheet.  In addition to the above, the Company recorded a gain on the dispositionof Book-mart Press assets in the first quarter of fiscal 2010 of $140,000.  The Company anticipates that payments associatedwith Book-mart Press, including rental payments related to the lease obligationand closing costs associated with the termination of the lease, will besubstantially completed by the end of this fiscal year.

 

9

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**COURIER CORPORATION**

 

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

 

**F.****            ****STOCK-BASEDCOMPENSATION**

 

The Company records stock-based compensationexpense for the cost of stock options and stock grants as well as shares issuedunder the Company’s 1999 Employee Stock Purchase Plan, as amended (the “ESPP”).The fair value of each option awarded is calculated on the date of grant usingthe Black-Scholes option-pricing model. Stock-based compensation recognized inselling and administrative expenses in the accompanying financial statements inthe third quarters of fiscal 2010 and 2009 was $329,000 and $347,000,respectively.  The related tax benefitrecognized in the third quarters of fiscal 2010 and 2009 was $117,000 and$113,000, respectively.  For the firstnine months of 2010 and 2009, stock-based compensation was $1,012,000 and$1,072,000, respectively, and the related tax benefit recognized was $361,000and $350,000, respectively.  Unrecognizedstock-based compensation cost at June 26, 2010 was $1.5 million, to berecognized over a weighted-average period of 2.0 years.

 

**Stock Incentive Plan:** TheCompany’s Amended and Restated 1993 Stock Incentive Plan provides for thegranting of stock options and stock grants up to a total of 2,064,375shares.  Under the plan provisions, bothnon-qualified and incentive stock options to purchase shares of the Company’scommon stock may be granted to key employees. The option price per share may not be less than the fair market value ofstock at the time the option is granted and incentive stock options must expirenot later than ten years from the date of grant.  The Company annually issues a combination ofstock options and stock grants to its key employees. Stock options and stockgrants generally vest over 3 years.

 

The following is a summary of option activity under thisplan in the first nine months of fiscal 2010:

 
| ** **                              | ** ** | ** **           | ** ** | **Weighted  Average** | ** ** | **Aggregate**             | ** ** |
|-----------------------------------------|------------|----------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                              | ** ** | **Option****Shares** | ** ** | **Exercise  Price**   | ** ** | **Remaining  Term (yrs)** | ** ** | **Intrinsic  Value** | ** ** |
| Outstanding at September 26,  2009 |       | 463,886              |       | $                     | 24.74      |                      |       |   |   |   |
| Granted                                 |       | 4,558                |       | 13.71                 |       |                      |       |   |   |
| Outstanding at June 26,  2010      |       | 468,444              |       | $                     | 24.63      |                      | 2.5        |   | — |   |
|                                    |       |                 |       |                  |       |                      |       |   |   |
| Exercisable at June 26,  2010      |       | 259,181              |       | $                     | 28.94      |                      | 1.4        |   | — |   |
| Available for future grants             |       | 193,050              |       |                  |       |                      |       |   |   |

 

The fair value of each option grant was estimated on thedate of the grant using the Black-Scholes option-pricing model. The keyassumptions used to value the options granted, which were issued in the secondquarter of fiscal 2010, were a risk-free interest rate of 2.7%, expectedvolatility of 46%, a dividend yield of 6.1%, and an expected life of fiveyears, resulting in a weighted average fair value of $3.46 per share.

 

In the second quarter of fiscal 2010, 869 stock awardswere granted with a weighted-average fair value of $13.71 per share.  During the first nine months of fiscal 2010,7,093 stock grants vested with a weighted-average fair value of $38.47 pershare. At June 26, 2010, there were 59,937 non-vested stock grantsoutstanding with a weighted-average fair value of $21.95.

 

**Directors’ Stock Equity Plans:** In January 2010,stockholders approved the Courier Corporation 2010 Stock Equity Plan forNon-Employee Directors (the “2010 Plan”). Under the plan provisions, stock grants as well as non-qualified stockoptions to purchase shares of the Company’s common stock may be granted tonon-employee directors up to a total of 300,000 shares.  The 2010 Plan replaced the previousnon-employee directors’ plan, which had been adopted in 2005 (the “2005 Plan”).No further options will be granted under the 2005 Plan.  Under the 2010 Plan, the option price pershare is the fair market value of stock at the time the option is granted andoptions have a term of five years. Stock options and stock grants generallyvest over three years.

 

10

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**COURIER CORPORATION**

 

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

 

During the second quarter of fiscal 2010, 53,179 optionswere granted under the 2010 Plan. The fair value of each option grant wasestimated on the date of the grant using the Black-Scholes option-pricingmodel.  The key assumptions used to valuethe options granted were a risk-free interest rate of 2.7%, expected volatilityof 46%, a dividend yield of 6.1%, and an expected life of five years, resultingin a weighted average fair value of $3.46 per share.

 

The following is a summary of option activity under the2010 Plan and the 2005 Plan in the first nine months of fiscal 2010:

 
| ** **                              | ** ** | ** **           | ** ** | **Weighted  Average** | ** ** | **Aggregate**             | ** ** |
|-----------------------------------------|------------|----------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                              | ** ** | **Option****Shares** | ** ** | **Exercise  Price**   | ** ** | **Remaining  Term (yrs)** | ** ** | **Intrinsic  Value** | ** ** |
| Outstanding at  September 26, 2009 |       | 186,687              |       | $                     | 28.89      |                      |       |   |   |   |
| Granted                                 |       | 53,179               |       | 13.71                 |       |                      |       |   |   |
| Expired                                 |       | (33,000              | )          | 32.65                 |       |                      |       |   |   |
| Outstanding at June 26,  2010      |       | 206,866              |       | $                     | 24.39      |                      | 2.8        |   | — |   |
|                                    |       |                 |       |                  |       |                      |       |   |   |
| Exercisable at June 26,  2010      |       | 153,687              |       | $                     | 28.08      |                      | 2.2        |   | — |   |
| Available for future grants             |       | 221,236              |       |                  |       |                      |       |   |   |

 

During the second quarter offiscal 2010, 13,181 stock awards were granted to non-employee directors with aweighted-average fair value of $13.71 per share, representing all suchnon-vested stock grants outstanding at June 26, 2010.  Directors may also elect to receive theirannual retainer and committee chair fees as shares of stock in lieu of cash;12,404 such shares were issued in the second quarter of fiscal 2010.

 

**Employee Stock Purchase Plan:** TheESPP allows eligible employees to purchase shares of Company common stock atnot less than 85% of fair market value at the end of the grant period.  On January 20, 2010, stockholdersapproved an amendment to the ESPP increasing the shares authorized under theplan by 300,000 to an aggregate of 637,500 shares of Company common stockavailable for issuance under the plan. During the second quarter of fiscal 2010, 18,419 shares were issuedunder the ESPP at a price of $13.08 per share. At June 26, 2010, there were 293,357 shares available for futureissuances.

 

**G.****           ****NETINCOME PER SHARE**

 

The following is a reconciliation of the outstandingshares used in the calculation of basic and diluted net income (loss) pershare.  Potentially dilutive shares,calculated using the treasury stock method, consist of shares issued under theCompany’s stock option plans.  In thefirst nine months of fiscal 2009, approximately 6,000 potentially dilutiveshares were excluded as the Company incurred a loss in that period.

 
| ** **                              | ** ** | **(000’s  Omitted)** | ** ** |
|-----------------------------------------|------------|---------------------------|------------|
| ** **                              | ** ** | **Quarter  Ended**        | ** ** | **Nine  Months Ended** | ** ** |
| ** **                              | ** ** | **June 26,  2010**   | ** ** | **June 27,  2009** | ** ** | **June 26,  2010** | ** ** | **June 27,  2009** | ** ** |
|                                    |       |                      |       |   |   |   |   |   |   |
| Average shares outstanding  for basic   |       | 11,928                    |       | 11,861 |   | 11,910 |   | 11,844 |   |
| Effect of potentially  dilutive shares  |       | 34                        |       | 10 |   | 27 |   | — |   |
| Average shares outstanding  for diluted |       | 11,962                    |       | 11,871 |   | 11,937 |   | 11,844 |   |

 

11

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**COURIER CORPORATION**

 

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

 

**H.****           ****BUSINESS ACQUISITION**

 

On January 15, 2010, the Company acquired the assets of Highcrest Media, aMassachusetts-based provider of solutions that streamline the productionof customized textbooks and other materials for use in colleges, universitiesand businesses.  The acquisition alsocomplements the Company’s investment during fiscal 2010 in digital printingtechnology. The $3 million cash acquisition, which has additional future “earnout” potential payments of up to $1.2 million, was accounted for as a purchase, and accordingly, Highcrest Media’sfinancial results are included in the book manufacturing segment in theconsolidated financial statements from the date of acquisition. The future earnout potential payments were valued at acquisition at $850,000 using aprobability weighted discounted cash flow model and may be paid out over threeyears.

 

The acquisition of Highcrest Media was recorded byallocating the fair value of consideration of the acquisition to the identifiedassets acquired, including intangible assets and liabilities assumed, based ontheir estimated fair value at the acquisition date.  The excess of the fair value of considerationof the acquisition over the net amounts assigned to the fair value of the assetsacquired and liabilities assumed was recorded as goodwill. Goodwill and otherintangibles are tax deductible. Based on these valuations, the purchase priceallocation was as follows:

 
| ** **                                                         | ** ** | **(000’s Omitted)** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|
|                                                               |       |                     |       |
| Accounts receivable                                                |       | $                        | 379        |   |
| Inventories                                                        |       | 41                       |       |
| Machinery, equipment and  other long-term assets                   |       | 272                      |       |
| Amortizable intangibles                                            |       | 1,930                    |       |
| Goodwill                                                           |       | 1,517                    |       |
| Accounts payable and accrued  liabilities                          |       | (289                     | )          |
| Total purchase price                                               |       | $                        | 3,850      |   |
| Less: Fair value of  contingent “earn out” consideration |       | (850                     | )          |
| Net cash paid                                                      |       | $                        | 3,000      |   |

 

The Company also assumed operating leases for some ofHighcrest Media’s equipment.  Theacquisition of Highcrest Media is expected to be modestly accretive to theCompany’s earnings for fiscal 2010.  TheCompany expects to finalize the preliminary estimates of the fair value of theintangible assets in the next quarter.

 

**I.****          ****LONG-TERM DEBT**

 

On March 26, 2010, the Company entered into afour-year term loan providing up to $8 million to finance the new digital printoperation assets.  At June 26, 2010,$2.8 million of debt was outstanding under this arrangement with a fixed annualinterest rate of 3.9%.  Subsequent to theend of the third quarter, an additional $4.1 million was borrowed under thisarrangement with a concurrent term and a fixed annual interest rate of 3.6%.

 

**J.****          ****DERIVATIVES**

 

In April 2010, the Company ordered a fourth manroland press to expandfour-color capacity in its Kendallville, Indiana facility.  At June 26, 2010, the Company had aforward exchange contract to purchase approximately 2.5 million euros as ahedge against the balance remaining under the equipment purchase commitment,designated as a fair value hedge (see Note A). The Company does not usefinancial instruments for trading or speculative purposes.

 

12

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

 

**Critical Accounting Policies and Estimates****:**

 

The Company’s consolidated condensed financialstatements have been prepared in accordance with generally accepted accountingprinciples.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the amounts reported in these financial statements and accompanying notes.  On an ongoing basis, management evaluates itsestimates and judgments, including those related to collectibility of accountsreceivable, recovery of inventories, impairment of goodwill and otherintangibles, 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 performs ongoingcredit evaluations of the Company’s customers and adjusts credit limits basedupon payment history and the customer’s current creditworthiness.  Collections and payments from customers arecontinuously monitored.  A provision forestimated credit losses is determined based upon historical experience and anyspecific customer collection issues that have been identified.  If the financial condition of the Company’scustomers were to deteriorate, it may result in their inability to makepayments, and such events could possibly lead to their insolvency, andtherefore additional allowances may be required.

 

Inventories.  Managementrecords reductions in the cost basis of inventory for excess and obsoleteinventory based primarily upon historical and forecasted product demand.  If actual market conditions are lessfavorable than those projected by management, additional inventory charges maybe required.

 

Goodwill and Other Intangibles.  Other intangible assets includecustomer lists and technology, which are amortized on a straight-line basisover periods ranging from five to fifteen years. The Company evaluates possibleimpairment of goodwill and other intangibles on an annual basis or wheneverevents or changes in circumstances indicate that the carrying value of theassets may not be recoverable.  TheCompany completed its annual impairment test at September 26, 2009resulting in no change to the nature or carrying amounts of its intangibleassets.  An impairment charge had beenrecorded in the second quarter of fiscal 2009 in the specialty publishingsegment related to Dover Publications, Inc. The Company continues tomonitor the value of its intangible assets closely in each of itssegments.  Changes in market conditionsor poor operating results could result in a decline in the value of the Company’sgoodwill and other intangible assets thereby potentially requiring anadditional impairment charge in the future.

 

PrepublicationCosts.  The Company capitalizesprepublication costs, which include the costs of acquiring rights to publish awork and costs associated with bringing a manuscript to publication such as artworkand editorial efforts. Prepublication costs are amortized on a straight-linebasis over periods ranging from three to five years.  Management regularly evaluates the sales andprofitability of the products based upon historical and forecasted demand.  If actual market conditions are lessfavorable than those projected by management, additional amortization expensemay be required.

 

IncomeTaxes.  The income tax provision andrelated accrued taxes are based on amounts reported on the Company’s tax returnsand changes in deferred taxes.  Deferredincome tax liabilities and assets aredetermined based upon the differences between the financial statement and taxbases of assets and liabilities.  Changesin the recoverability of the Company’s deferred tax assets or audits by taxauthorities could result in future charges or credits to income tax expense,and related accrued and deferred taxes.

 

13

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**Overview:**

Courier Corporation, founded in 1824, is one of America’sleading book manufacturers and specialty publishers.  The Company has two business segments: bookmanufacturing and specialty publishing. The book manufacturing segment streamlines the process of bringing booksfrom the point of creation to the point of use. Based on sales, Courier is the third largest book manufacturer in theUnited States, offering services from prepress and production, through storageand distribution.  The specialty publishingsegment consists of Dover Publications, Inc. (“Dover”), Research &Education Association, Inc. (“REA”), and Federal Marketing Corporation,d/b/a Creative Homeowner (“Creative Homeowner”).  Dover publishes over 9,000 titles in morethan 30 specialty categories ranging from literature to paper dolls, and frommusic scores to clip art.  REA publishestest preparation and study-guide books and software for high school, collegeand graduate students, as well as professionals.  Creative Homeowner publishes books on homedesign, decorating, landscaping, and gardening, and sells home plans.

 

**Results of Operations:**

 
| ** **                           | ** ** | **FINANCIAL HIGHLIGHTS**                                                     | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **June 26,  2010**                                                           | ** ** | **June 27,  2009** | ** ** | **%  Change** | ** ** | **June 26,  2010** | ** ** | **June 27,  2009** | ** ** | **%  Change** | ** ** |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                                                                 | 64,919     |   | $ | 61,390 |   | 5.7 | %  | $ | 186,902 |   | $ | 180,397 |   | 3.6 | % |
| Cost of sales                        |       | 51,036                                                                            |       | 47,313 |   | 7.9 | % | 141,423 |   | 141,269 |   | 0.1 | % |
| Gross profit                         |       | 13,883                                                                            |       | 14,077 |   | -1.4 | % | 45,479 |   | 39,128 |   | 16.2 | % |
| As a percentage of sales             |       | 21.4                                                                              | %          | 22.9 | % |   |   | 24.3 | % | 21.7 | % |   |   |
| Selling and administrative  expenses |       | 10,877                                                                            |       | 11,305 |   | -3.8 | % | 35,374 |   | 36,462 |   | - 3.0 | % |
| Impairment charge                    |       | —                                                                            |       | — |   |   |   | — |   | 15,607 |   |   |   |
| Operating income (loss)              |       | 3,006                                                                             |       | 2,772 |   | 8.4 | % | 10,105 |   | (12,941 | ) |   |   |
| Interest expense, net                |       | 130                                                                               |       | 153 |   | -15.0 | % | 367 |   | 574 |   | -36.1 | % |
| Pretax income (loss)                 |       | 2,876                                                                             |       | 2,619 |   | 9.8 | % | 9,738 |   | (13,515 | ) |   |   |
| Income tax provision  (benefit)      |       | 1,106                                                                             |       | 1,007 |   | 9.8 | % | 3,749 |   | (4,657 | ) |   |   |
| Net income (loss)                    |       | $                                                                                 | 1,770      |   | $ | 1,612 |   | 9.8 | % | $ | 5,989 |   | $ | (8,858 | ) |   |   |
| Net income (loss) per  diluted share |       | $                                                                                 | 0.15       |   | $ | 0.14 |   | 7.1 | %  | $ | 0.50 |   | $ | (0.75 | ) |   |   |

 

Revenues grew in the third quarter and first nine monthsof fiscal 2010 compared to the same periods last year. For the third quarter,revenues were up 6% to $64.9 million and for the first nine months were up 4%to $186.9 million compared to fiscal 2009. Book manufacturing segment revenues increased 8% in the quarter to $56.8million and 5% year to date to $161.7 million. Sales growth was experienced in all three of this segment’s principalmarkets of education, religious and specialty trade largely due to increaseddemand for four-color books.  In thespecialty publishing segment, revenues were down 4% to $10.9 million in thequarter compared to last year’s third quarter, with sales growth at REA offsetby sales declines at Dover and Creative Homeowner.  On a year-to-date basis, sales in thissegment were down 2% to $34.1 million compared to the first nine months offiscal 2009 with sales growth at both REA and Dover largely offset by a declinein sales at Creative Homeowner. The winding down of Creative Homeowner’s bookdistribution services in January 2009 also contributed $1.2 million to itssales decline compared to the first nine months of this year.

 

Net income was $1.8 millionfor the quarter, or $0.15 per diluted share, compared to $1.6 million, or $0.14per diluted share, in the third quarter last year.  Year to date, net income was $6.0 millioncompared to a loss of $8.9 million in the first nine months of fiscal 2009.  In the prior year, the Company recordedrestructuring costs related to cost saving initiatives in both of the Company’ssegments totaling $3.8 million in the first nine months.  In addition, the Company recorded a pre-taximpairment charge of $15.6 million in last year’s second quarter related toDover’s goodwill. Pre-tax restructuring and impairment charges totaled $19.4million in the first nine months of fiscal 2009, or $1.06 per diluted share.

 

14

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*BusinessAcquisition*

On January 15, 2010, the Company acquired the assets of Highcrest Media LLC (“HighcrestMedia”), a Massachusetts-based provider of solutions that streamline theproduction of customized textbooks for use in colleges, universities andbusinesses.  The acquisition alsocomplements the Company’s investment during fiscal 2010 in digital printingtechnology. The $3 million cash acquisition, which has additional future “earnout” potential payments of up to $1.2 million, was accounted for as a purchase, and accordingly, Highcrest Media’sfinancial results are included in the book manufacturing segment in theconsolidated financial statements from the date of acquisition.  The acquisition of Highcrest Media isexpected to be modestly accretive to the Company’s earnings for fiscal 2010.

 

*Restructuring Costs*

In fiscal 2009, the Company recorded restructuringcosts of $65,000 in the third quarter and $3.8 million in the first nine monthsof the year. Restructuring costs included employee severance expenses relatedto cost savings initiatives in both of the Company’s segments, as well aswinding down Creative Homeowner’s distribution services and closing andconsolidating the Book-mart Press manufacturing facility during the secondquarter of fiscal 2009.  The followingtable details restructuring costs by segment and by classification in theaccompanying consolidated statements of operations.

 
| ** **                                       | ** ** | **(000’s Omitted)**                         | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                       | ** ** | **Quarter Ended********June 27, 2009** | ** ** | **Nine Months Ended********June 27, 2009** | ** ** |
| ** **                                       | ** ** | **Book  Manufacturing  Segment**                      | ** ** | **Specialty  Publishing  Segment** | ** ** | **Total  Company** | ** ** | **Book  Manufacturing  Segment** | ** ** | **Specialty  Publishing  Segment** | ** ** | **Total  Company** | ** ** |
|                                             |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Included in cost of sales                        |       | $                                                     | 65         |   | — |   | $ | 65 |   | $ | 2,819 |   | $ | 107 |   | $ | 2,926 |   |
| Included in selling and administrative  expenses |       | —                                                |       | — |   | — |   | 491 |   | 377 |   | 868 |   |
| Total restructuring costs                        |       | $                                                     | 65         |   | — |   | $ | 65 |   | $ | 3,310 |   | $ | 484 |   | $ | 3,794 |   |

 

For the entire fiscal year 2009, the Companyrecorded restructuring costs totaling $4.8 million.  The following table depicts the accrual balancesfor these restructuring costs that remained as of September 26, 2009 and June 26,2010, which relate to closing and consolidating the Book-mart Pressmanufacturing facility.

 
| ** **                                           | ** ** | **(000’s Omitted)** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|
| ** **                                           | ** ** | **Accrual at**           | ** ** | ** ** | ** ** | ** ** | ** ** | **Accrual at** | ** ** |
| ** **                                           | ** ** | **September 26,**   | ** ** | **Charges** | ** ** | **Cash** | ** ** | **June 26,** | ** ** |
| ** **                                           | ** ** | **2009**                 | ** ** | **(Reversals)** | ** ** | **Paid** | ** ** | **2010** | ** ** |
|                                                 |       |                     |       |   |   |   |   |   |   |
| Employee severance and benefit costs                 |       | $                        | 495        |   | $ | (125 | ) | $ | (291 | ) | $ | 79 |   |
| Lease termination, facility closure and other  costs |       | 546                      |       | 65 |   | (432 | ) | 179 |   |
|                                                 |       |                     |       |   |   |   |   |   |   |
| Total                                                |       | $                        | 1,041      |   | $ | (60 | ) | $ | (723 | ) | $ | 258 |   |

 

Inthe first quarter of fiscal 2010, the Company accrued $140,000 for leasetermination and facility closure costs. During the third quarter, $200,000 of accrued restructuring costs werereversed.  Amounts accrued for restructuring costs at June 26,2010 and September 26, 2009 are included in “Other current liabilities” inthe accompanying consolidated balance sheet. In addition to the above, the Company recorded a gain on the dispositionof Book-mart Press assets in the first quarter of fiscal 2010 of $140,000.  The Company anticipates that paymentsassociated with Book-mart Press, including rental payments related to the leaseobligation and closing costs associated with the termination of the lease, willbe substantially completed by the end of this fiscal year.

 

15

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*ImpairmentCharge*

TheCompany evaluates possible impairment of goodwill and other intangibles on anannual basis or whenever events or circumstances indicate that the carryingvalue of the assets may not be recoverable. Due to a decline in sales andprofits at Dover during the second quarter of fiscal 2009, resulting from thecontinued downturn in the economic environment and in consumer spending, theCompany performed an interim test of Dover’s goodwill. As a result of theimpairment test, the Company had concluded that the carrying value of Dover’sgoodwill exceeded its estimated fair value and recorded a pre-tax impairmentcharge of $15.6 million, representing 100% of Dover’s goodwill, at the end oflast year’s second quarter. On an after-tax basis, the impairment charge was$10.1 million, or $.86 per diluted share.

 

*Book Manufacturing Segment*

 
| ** **                           | ** ** | **SEGMENT HIGHLIGHTS**          | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**               | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **June 26,  2010**              | ** ** | **June 27,  2009** | ** ** | **%  Change** | ** ** | **June 26,****2010** | ** ** | **June 27,****2009** | ** ** | **%  Change** | ** ** |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                    | 56,838     |   | $ | 52,691 |   | 7.9 | %  | $ | 161,659 |   | $ | 153,472 |   | 5.3 | % |
| Cost of sales                        |       | 46,847                               |       | 42,824 |   | 9.4 | % | 128,856 |   | 126,964 |   | 1.5 | % |
| Gross profit                         |       | 9,991                                |       | 9,867 |   | 1.3 | % | 32,803 |   | 26,508 |   | 23.7 | % |
| As a percentage of sales             |       | 17.6                                 | %          | 18.7 | % |   |   | 20.3 | % | 17.3 | % |   |   |
| Selling and administrative  expenses |       | 6,264                                |       | 6,127 |   | 2.2 | % | 20,579 |   | 19,832 |   | 3.8 | % |
| Operating income                     |       | $                                    | 3,727      |   | $ | 3,740 |   | -0.3 | % | $ | 12,224 |   | $ | 6,676 |   | 83.1 | % |

 

Within the book manufacturing segment, the Companyfocuses primarily on three key markets: education, religious and specialtytrade.  In the third quarter of fiscal2010, sales to the education market were up 7% to $24.4 million and up 6% to $65.3million in the first nine months compared to the same periods last year,primarily from sales of four-color textbooks to colleges and universities aswell as elementary and high school books. Sales to the specialty trade marketgrew 22% to $15.4 million in the quarter and grew 9% to $44.5 million year todate compared to prior year periods, with growth in new accounts, computer gamebooks and other four-color sales.  Salesto the religious market were up 1% in the third quarter to $15.2 million and up5% to $46.1 million compared to the first nine months of last year.

 

During the second quarter of fiscal 2010, the Companyacquired Highcrest Media, a solutionsprovider specializing in customized textbooks for use in colleges, universitiesand businesses.  The acquisition ofHighcrest Media is expected to be modestly accretive to the Company’s earningsfor fiscal 2010.  In addition, the Company completed the installation of a new HP digitalprinting system during the third quarter and will add a second such system infiscal 2011 to provide increased capacity.

 

Cost of sales in the book manufacturing segmentincreased by 9% to $46.8 million for the quarter and by 1% to $128.9 millionyear to date compared to the same periods last year, reflecting the increasedsales volume.  The strong demand for four-colortextbooks necessitated the use of older, less productive presses during thethird quarter.  The Company ordered afourth manroland press in April 2010 for its Kendallville, Indianafacility in order to expand its four-color production capacity.  Cost of sales in fiscal 2010 also includedstart up expenses related to the Company’s digital print operation ofapproximately $500,000 in the quarter and $700,000 year to date, including over$150,000 of costs to relocate Highcrest Media to the Company’s digital facilityin North Chelmsford, Massachusetts.  Inthe prior year, cost of sales in the third quarter and first nine monthsincluded $65,000 and $2.8 million, respectively, of restructuring costs.

 

Gross profit increased by 1% to $10.0 million for thequarter, and as a percentage of sales, was 17.6% compared to 18.7% in last year’sthird quarter.  For the first nine monthsof the year, gross profit increased 24% to $32.8 million and, as a percentageof sales, improved to 20.3% from 17.3% in the same period last year.  In addition to last year’s restructuringcosts, the improvement in gross profit reflects the growth in sales, improvedcapacity utilization, the benefit of last year’s cost reduction measures, andincreased revenue from recycling programs. These improvements were offset in part by continued industry-widecompetitive pricing pressures and the impact of start-up costs for the digitalprint operation 

 

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and relocation of Highcrest Media.

 

Selling and administrative expenses for the segmentincreased 2% in the quarter to $6.3 million compared to the third quarter offiscal 2009. Year-to-date selling and administrative expenses increased 4% inthe first nine months of fiscal 2010 compared to the same period last year,which included approximately $0.5 million of severance-related restructuringcosts.  Cost savings from staffreductions in fiscal 2009 were offset by an increase in variable compensationtied to this year’s increased sales and income.

 

Operating income in the book manufacturing segment inthe quarter was $3.7 million, comparable to last year’s third quarter.  For the first nine months of fiscal 2010,operating income was $12.2 million compared to $6.7 million in thecorresponding period last year, which included $3.3 million of restructuringcosts.

 

*Specialty Publishing Segment*

 
| ** **                           | ** ** | **SEGMENT HIGHLIGHTS**          | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**               | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **June 26,  2010**              | ** ** | **June 27,  2009** | ** ** | **%  Change** | ** ** | **June 26,****2010** | ** ** | **June 27,****2009** | ** ** | **%  Change** | ** ** |
|                                 |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                    | 10,854     |   | $ | 11,327 |   | -4.2 | % | $ | 34,136 |   | $ | 34,888 |   | -2.2 | % |
| Cost of sales                        |       | 6,992                                |       | 7,120 |   | -1.8 | % | 21,276 |   | 22,447 |   | -5.2 | % |
| Gross profit                         |       | 3,862                                |       | 4,207 |   | -8.2 | % | 12,860 |   | 12,441 |   | 3.4 | % |
| As a percentage of sales             |       | 35.6                                 | %          | 37.1 | % |   |   | 37.7 | % | 35.7 | % |   |   |
| Selling and administrative  expenses |       | 4,286                                |       | 4,831 |   | -11.3 | % | 13,785 |   | 15,558 |   | -11.4 | % |
| Operating loss                       |       | $                                    | (424       | ) | $ | (624 | ) |   |   | $ | (925 | ) | $ | (3,117 | ) |   |   |

 

Within the Company’s specialty publishing segment, salesin the third quarter were down 4% to $10.9 million and down 2% for the firstnine months to $34.1 million, compared to the corresponding periods in fiscal2009, reflecting weak consumer spending and continued caution among bookretailers.  Sales were down 6% at Doverto $6.9 million with growth in sales through online retailers more than offsetby lower bookstore, direct-to-consumer and international sales.  For the first nine months of fiscal 2010,Dover’s sales grew 3% to $22.2 million compared to the same period last year.Sales at REA increased 2% over last year’s third quarter to $1.7 million andgrew 22% to $5.9 million in the first nine months of fiscal 2010 compared tothe same period last year.  REA’s salesgrowth resulted from a strong list of new titles released early in the year tomaximize sell-through to consumers as well as a generally robust market fortest preparation books.  Sales atCreative Homeowner decreased 4% to $2.2 million, reflecting the persistentweakness in the nation’s housing sector, which has reduced store traffic andsales in the home center market, its largest channel. Creative Homeowner’syear-to-date sales decreased 28% to $6.1 million compared to the first ninemonths of last year. The sales decrease on a year-to-date basis also includesthe cessation of Creative Homeowner’s book distribution services in January 2009,which supported one nationwide retailer and contributed approximately $1.2million of revenue last year.

 

Cost of sales in the specialty publishing segmentdecreased 2% to $7.0 million in the third quarter and decreased 5% to $21.3million for the first nine months of fiscal 2010 compared to the correspondingprior year periods primarily due to the cost reductions initiated in fiscal2009.  Cost of sales in the first ninemonths of last year included approximately $100,000 of severance-relatedrestructuring costs.  During the thirdquarter of fiscal 2010, the Company continued to integrate functions acrossthis segment and consolidated Creative Homeowner’s warehousing with the otherpublishing businesses in order to reduce costs. Gross profit as a percentage of sales decreased to 35.6% from 37.1%in last year’s third quarter.  On ayear-to-date basis, gross profit as a percentage of sales increased to 37.7%from 35.7% in the first nine months of fiscal 2009, primarily as a result ofcost reductions.

 

Sellingand administrative expenses in this segment decreased 11% in the quarter andfirst nine months to $4.3 million and $13.8 million, respectively, compared tothe same periods in fiscal 2009.  Sellingand administrative expenses in the first nine months of last year includedapproximately $400,000 in severance pay as well as other costs related toCreative Homeowner ending its distribution service.  

 

17

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Fiscal2010 expenses reflect the cost reductions achieved by prior year initiatives,which included centralizing back office and order fulfillment operations.

 

The specialty publishing segment had an operating lossof $424,000 in the third quarter, compared to an operating loss of $624,000 inlast year’s third quarter.  CreativeHomeowner’s third quarter operating loss was $406,000, which was 30% less thanit’s third quarter loss last year.  Thesegment’s year-to-date operating loss was $0.9 million compared to $3.1 millionin the first nine month’s of last year, which included approximately $500,000of severance and other restructuring costs. This improvement reflects the benefit of the cost reductions initiatedin fiscal 2009, particularly at Creative Homeowner, combined with sales growthat REA and Dover.

 

*Total Consolidated Company*

Interest expense, net of interest income, was $130,000in the third quarter of fiscal 2010, compared to $153,000 of net interestexpense in the same period last year. Year-to-date interest expense, net of interest income, was $367,000compared to $574,000 in the first nine months of fiscal 2009. Average debtunder the revolving credit facility in the third quarter of fiscal 2010 wasapproximately $16.4 million at an average annual interest rate of 0.8%,generating interest expense of approximately $32,000.  Average debt under the revolving creditfacility in the third quarter of last year was approximately $27.2 million atan average annual interest rate of 0.9%, generating interest expense ofapproximately $62,000.  Average debtunder the revolving credit facility for the first nine months of fiscal 2010was approximately $13.4 million at an average annual interest rate of 0.8%,generating interest expense of approximately $76,000.  For the first nine months of fiscal 2009,average debt under this facility was approximately $26.4 million at an averageannual interest rate of 1.6%, generating interest expense of approximately$320,000.  Interest expense also includescommitment fees and other costs associated with maintaining the Company’s $100million revolving credit facility.  Inaddition, on March 26, 2010, the Company entered into a four-year, $8million term loan to finance the new digital print operation assets.  At June 26, 2010, $2.8 million wasborrowed under this term loan, which added $30,000 of interest expense in thethird quarter.  Interest capitalized inthe third quarter and first nine months of fiscal 2010 was approximately$40,000; no interest was capitalized in the first nine months of fiscal 2009.

 

The Company’s effective tax rate for the third quarterof fiscal 2010 was 38.5% compared to 38.4% for the same period last year.  On a year-to-date basis, income tax expensewas $3.7 million compared to an income tax benefit of $4.7 million for thefirst nine months of fiscal 2009. The tax benefit in fiscal 2009 related toDover’s impairment charge was recognized at 35%; no state tax benefit wasrecognized as the Company fully provided a valuation allowance on the relateddeferred state tax asset.  Excluding theeffect of the tax benefit of the impairment charge for Dover, the effective taxrate was 38.5% in the first nine months of both fiscal 2010 and 2009.

 

For purposes of computing net income per diluted share,weighted average shares outstanding increased by approximately 91,000 sharesand 93,000 from last year’s third quarter and first nine months, respectively,primarily due to options exercised and shares issued under the Company’s stockplans.

 

**Liquidity and Capital Resources****:**

During the first nine months of fiscal 2010, operationsprovided $16.4 million of cash, compared to $14.9 million in the same periodlast year.  Net income was $6.0 millionand depreciation and amortization were $15.5 million.  Working capital used $6.4 million of cashcompared to $4.7 million in the first nine months of last year.

 

Investment activities in the first nine months offiscal 2010 used $18.2 million of cash, of which $3.0 million was attributableto the acquisition of Highcrest Media in January.  Capital expenditures for the first ninemonths of the year used $12.6 million of cash, compared to $5.6 million lastyear.  In April 2010, the Companyordered a fourth manroland press to expand four-color capacity in itsKendallville, Indiana facility. Spending in fiscal 2010 on this $17million project is expected to be approximately $12 million.  Capital expenditures relating to the newdigital print operation are expected to be approximately $10 million in fiscal2010, including progress payments on the second HP press.  As a result, overall capital expenditures forfiscal 2010 are now projected to be approximately $27 to $29 million.  Both presses are scheduled to be installedearly in fiscal 2011.  Taking intoaccount remaining spending on these two presses, capital expenditures forfiscal 2011 are expected to be approximately $20 million.  In fiscal 2010, proceeds of approximately$0.6 million were received on the disposition of assets, including equipmentfrom the Book-mart Press manufacturing facility.  Prepublication costs were $3.2 million yearto date, 

 

18

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comparable to the first nine months of lastyear.  For the full fiscal year,prepublication costs are projected to be approximately the same as last year’s$4.8 million.

 

Financing activities for the first nine months of fiscal2010 provided approximately $1.5 million of cash.  Borrowings increased by $8.8 million duringthe first nine months of fiscal 2010, including a new four-year term loanproviding up to $8 million to finance the purchase of assets in the Company’snew digital print operation.  At June 26,2010, $2.8 million of debt was outstanding under this arrangement with a fixedannual interest rate of 3.9%.  Subsequentto the end of the third quarter, an additional $4.1 million was borrowed underthis arrangement with a concurrent term and a fixed annual interest rate of3.6%.  The Company also has a $100million long-term revolving credit facility in place under which the Companycan borrow at a rate not to exceed LIBOR plus 1.5%.  At June 26, 2010, the Company had $19.5million in borrowings under this facility at an interest rate of 0.9%.  The revolving credit facility, which matures in 2013,contains restrictive covenants including provisions relating to the maintenanceof working capital, the incurrence of additional indebtedness and a quarterlytest of EBITDA to debt service.  TheCompany was in compliance with all such covenants at June 26, 2010.  The facility also provides for a commitmentfee not to exceed 3/8% per annum on the unused portion.  The revolving credit facility isused by the Company for both its long-term and short-term financing needs.  Cash dividends of $7.5 million were paid inthe first nine months of fiscal 2010. The Company believes that its cash on hand, cash from operations, newfinancing arrangement, and the available credit facility will be sufficient tomeet its cash requirements through 2011.

 

The following table summarizes the Company’s contractualobligations and commitments at June 26, 2010 to make future payments aswell as its existing commercial commitments.

 
| ** **                  | ** ** | ** ** | ** ** | **(000’s Omitted)**                      | ** ** |
|-----------------------------|------------|------------|------------|----------------------------------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Payments due by period (1)** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **Less than**                                 | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | **More than** | ** ** |
| ** **                  | ** ** | **Total**  | ** ** | **1 Year**                                    | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| Contractual Payments:       |       |       |       |                                               |       |   |   |   |   |   |   |
| Long-Term Debt (2)          |       | $          | 22,429     |                                               | $          | 778 |   | $ | 21,000 |   | $ | 651 |   | $ | — |   |
| Operating Leases (3)        |       | 7,746      |       | 1,663                                              |       | 2,734 |   | 2,444 |   | 905 |   |
| Purchase Obligations (4)    |       | 10,071     |       | 10,071                                             |       | — |   | — |   | — |   |
| Other Long-Term Liabilities |       | 3,515      |       | —                                             |       | 1,586 |   | 390 |   | 1,639 |   |
| Total                       |       | $          | 43,761     |                                               | $          | 12,512 |   | $ | 25,320 |   | $ | 3,485 |   | $ | 2,544 |   |

 

----

(1) Amounts do not include interest expense.

(2) Includes the Company’s revolving creditfacility, which has a maturity date of March 2013.

(3) Represents amounts at September 26, 2009.

(4) Represents capital commitments.

 

**RecentAccounting Pronouncements:**

At the beginning offiscal 2010, the Company****adopted the provisions of the Financial Accounting Standards Board (“FASB”) authoritativeliterature on business combinations, which expands the definition of a businesscombination and changes the manner in which the Company accounts for businesscombinations. Significant changes include the capitalization of IPR&D as anindefinite-lived asset, the recognition of certain acquired contingent assetsand liabilities at fair value, the expensing of acquisition-relatedrestructuring actions and transaction costs, and the recognition of contingentpurchase price consideration at fair value on the acquisition date. Inaddition, post-acquisition changes in deferred tax asset valuation allowancesand acquired income tax uncertainties will be recognized as income tax expenseor benefit. The accounting treatment for taxes will be applicable toacquisitions that close both prior and subsequent to the adoption of thisguidance. The Company has applied this standard to the acquisition of HighcrestMedia in January 2010. As a result of adopting this guidance, the Companyexpensed approximately $55,000 of transaction costs related to the acquisitionand recorded contingent consideration of $1.2 million in the initial purchaseprice at its estimated fair value of $850,000.

 

**Forward-Looking Information****:**

This Quarterly Report on Form 10-Q includesforward-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 

 

19

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uncertainties that couldcause actual results to differ materially from those currentlyanticipated.  Some of the factors thatcould affect actual results are discussed in Item 1A of this Form 10-Q andinclude, among others, changes in customers’ demand for the Company’s products,including seasonal changes in customer orders and shifting orders to lower costregions, changes in market growth rates, changes in raw material costs andavailability, pricing actions by competitors and other competitive pressures inthe markets in which the Company competes, consolidation among customers andcompetitors, success in the execution of acquisitions and the performance andintegration of acquired businesses including carrying value of intangibleassets, restructuring and impairment charges required under generally acceptedaccounting principles, changes in operating expenses including medical andenergy costs, changes in technology including migration from paper-based booksto digital, difficulties in the start up of new equipment or informationtechnology systems, changes in copyright laws, changes in consumer productsafety regulations, changes in environmental regulations, changes in taxregulations, changes in the Company’s effective income tax rate and generalchanges in economic conditions, including currency fluctuations, changes ininterest rates, changes in consumer confidence, changes in the housing market,and tightness in the credit markets. Although the Company believes that the assumptions underlying theforward-looking statements are reasonable, any of the assumptions could beinaccurate, and therefore, there can be no assurance that the forward-lookingstatements will prove to be accurate. The forward-looking statements included herein are made as of the datehereof, and the Company undertakes no obligation to update publicly suchstatements to reflect subsequent events or circumstances.

 

**Item 3****.****                   ****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

There have been no material changes from the informationconcerning the Company’s “Quantitative and Qualitative Disclosures About MarketRisk” as previously reported in the Company’s Annual Report on Form 10-Kfor the year ended September 26, 2009. At June 26, 2010,the Company had a forward exchange contract to purchase approximately 2.5million euros as a hedge against a foreign currency equipment purchasecommitment, designated as a fair value hedge. The fair value of the foreignexchange forward contract was valued using market exchange rates.  The Company does not use financialinstruments for trading or speculative purposes.

 

**Item 4****.****                   ****CONTROLS AND PROCEDURES**

 

**(a)****          ****Evaluation of disclosurecontrols and procedures**

 

As required by Rule 13a-15 under the Securities ExchangeAct of 1934, as of the end of the period covered by this Quarterly Report, theCompany carried out an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by the Company in the reports it files or submitsunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported, within the time periods specified in the Securitiesand Exchange Commission’s rules and forms.

 

**(b)****          ****Changes in internal controlsover financial reporting**

 

There was no change in the Company’s internal controlover financial reporting that occurred during the period covered by thisQuarterly Report that has materially affected, or that is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1****.****                  ****LEGAL PROCEEDINGS**

 

None.

 

**Item 1A****.****               ****RISK FACTORS**

 

The Company’s consolidated results of operations,financial condition and cash flows can be adversely affected by variousrisks.  Our business is influenced bymany factors that are difficult to predict, involve uncertainties that maymaterially affect actual results and are often beyond our control.  These risks include, but are not limited to,the principal factors listed below and the other matters set forth in thisQuarterly Report on Form 10-Q.  Youshould carefully consider all of these factors. For other factors that may cause actual results to differ materiallyfrom those indicated in any forward-looking statement contained in this report,see *Forward-Looking Information* in *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*.

 

**Industry competition andconsolidation may increase pricing pressures and adversely impact our marginsor result in a loss of customers.**

 

The book industry isextremely competitive.  In the book manufacturingsegment, consolidation over the past few years of both customers andcompetitors within the markets in which the Company competes has causeddownward pricing pressures.  In addition,excess capacity and competition from printing companies in lower cost countriesmay increase competitive pricing pressures. Furthermore, some of our competitors have greater sales, assets andfinancial resources than us, particularly those in foreign countries, who mayderive significant advantages from local governmental regulation, including taxholidays and other subsidies.  All or anyof these competitive pressures could affect prices or customers’ demand for ourproducts, impacting our profit margins and/or resulting in a loss of customersand market share.

 

**A reduction in orders or pricingfrom, or the loss of, any of our significant customers may adversely impact ouroperating results.**

 

We derived approximately 44%of our fiscal 2009 revenues from two major customers.  In fiscal 2008, we derived approximately 50%of our revenues from three major customers. We expect similar concentrations in fiscal 2010.  We do business with these customers on apurchase order basis and they are not bound to purchase at particular volume orpricing levels.  As a result, any of thesecustomers could determine to reduce their order volume with us or demandreduced pricing.  A significant reductionin order volumes or price levels with, or the loss of, any of these customerscould have a material adverse effect on our results of operations and financialcondition.

 

**The substitution of electronicdelivery for printed materials may adversely affect our business.**

 

Electronic delivery ofdocuments and data, including the online distribution and hosting of mediacontent, offers alternatives to traditional delivery of printed documents.  Widespread consumer acceptance of electronicdelivery of books is uncertain, as is the extent to which consumers are willingto replace print materials with online hosted media content.  To the extent that our customers’ acceptanceof these electronic alternatives should continue to grow, demand for ourprinted products may be adversely affected.

 

**Declines ingeneral economic conditions may adversely impact our business.**

 

Economic conditions have thepotential to impact our financial results significantly.  Within the book manufacturing and specialtypublishing segments, we may be adversely affected by the current worldwideeconomic downturn, including as a result of changes in government, business andconsumer spending.  Examples of how ourfinancial results may be impacted include:

 

·      Fluctuations in federal or state governmentspending on education, including a reduction in tax revenues due to the currenteconomic environment, could lead to a corresponding decrease in the demand foreducational materials, which are produced in our book manufacturing segment andcomprise a portion of our publishing products.

 

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·      Consumer demand for books can be impacted byreductions in disposable income when costs such as electricity and gasolinereduce discretionary spending.

 

·      Tightness in credit markets may result incustomers delaying orders to reduce inventory levels and may impact theirability to pay their debts as they become due and may disrupt supplies fromvendors.

 

·      Changes in the housing market may impact the saleof Creative Homeowner’s products.

 

·      Reduced fundraising by religious customers maydecrease their order levels.

 

·      A slowdown in book purchases may result inretailers returning an unusually large number of books to publishers who, inturn reduce their reorders.

 

**A failure to keep pace with rapidindustrial and technological change may have an adverse impact on our business.**

 

The printing industry is in aperiod of rapid technological evolution. Our future financial performance will depend, in part, upon the abilityto anticipate and adapt to rapid industrial and technological changes occurringin the industry and upon the ability to offer, on a timely basis, services thatmeet evolving industry standards.  If weare unable to adapt to such technological changes, we may lose customers andmay not be able to maintain our competitive position.  In addition, we may encounter difficulties inthe implementation and start-up of new equipment and technology.

 

We are unable to predict whichof the many possible future product and service offerings will be important toestablish and maintain a competitive position or what expenditures will berequired to develop and provide these products and services.  We cannot assure investors that one or moreof these factors will not vary unpredictably, which could have a materialadverse effect on us. In addition, we cannot assure investors, even if thesefactors turn out as we anticipate, that we will be able to implement ourstrategy or that the strategy will be successful in this rapidly evolvingmarket.

 

**Ouroperating results are unpredictable and fluctuate significantly, which mayadversely affect our stock price.**

 

Our quarterly and annual operating results havefluctuated in the past and are likely to fluctuate in the future due to avariety of factors, some of which are outside of our control. Factors that mayaffect our future operating results include:

 

·      thetiming and size of the orders for our books;

 

·      theavailability of markets for sales or distribution by our major customers;

 

·      thelengthy and unpredictable sales cycles associated with sales of textbooks tothe elementary and high school market;

 

·      our customers’ willingness and success in shiftingorders from the peak textbook season to the off-peak season to even out ourmanufacturing load over the year;

 

·      fluctuationsin the currency market may make manufacturing in the United States more or lessattractive and make equipment more or less expensive for us to purchase;

 

·      issuesthat might arise from the integration of acquired businesses, including theirinability to achieve expected results; and

 

·      tightnessin credit markets affecting the availability of capital for ourselves, ourvendors, and/or our customers.

 

As a result of these and other factors,period-to-period comparisons of our operating results are not necessarilymeaningful or indicative of future performance. In addition, the factors notedabove may make it difficult for us to forecast and provide in a timely mannerpublic guidance (including updates to prior guidance) related to our projectedfinancial performance. Furthermore, it is possible that in future quarters ouroperating results could fall below the expectations of securities analysts orinvestors. If this occurs, the trading price of our common stock could decline.

 

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**Ourfinancial results could be negatively impacted by impairments of goodwill orother intangible assets.**

 

We perform an annualassessment for impairment of goodwill and other intangible assets at the end ofour fiscal year or whenever events or changes in circumstances occur that wouldmore likely than not reduce the fair value of a reporting unit below it’scarrying value.  A downward revision inthe fair value of one of our acquired businesses could result in impairments ofgoodwill and non-cash charges.  Anyimpairment charge could have a significant negative effect on our reportedresults of operations.  For example, inthe second quarter of fiscal 2009, due to a decline in sales and profits atDover resulting from the continued downturn in the economic environment and inconsumer spending, the Company recorded a non-cash, pre-tax impairment chargeof $15.6 million, which represented 100% of Dover’s goodwill.

 

**Fluctuations in the cost andavailability of paper and other raw materials may cause disruption and impactmargins.**

 

Purchases of paper and otherraw materials represent a large portion of our costs.  In our book manufacturing segment, paper isnormally supplied by our customers at their expense or price increases arepassed through to our customers.  In ourspecialty publishing segment, cost increases have generally been passed on tocustomers through higher prices or we have substituted a less expensive gradeof paper.  However, if we are unable tocontinue to pass on these increases or substitute a less expensive grade ofpaper, our margins and profits could be adversely affected.

 

Availability of paper isimportant to both our book manufacturing and specialty publishingsegments.  Although we generally have notexperienced difficulty in obtaining adequate supplies of paper, unexpectedchanges in the paper markets could result in a shortage of supply.  If this were to occur in the future, it couldcause disruption to the business or increase paper costs, adversely impactingeither or both net sales or profits.

 

Fluctuations in the costs andavailability of other raw materials could adversely affect operating costs orcustomer demand and thereby negatively impact our operating results, financialcondition or cash flows.

 

In addition,fluctuations in the markets for paper and raw materials may adversely affectthe market for our waste byproducts, including recycled paper, used plates andused film, and therefore adversely affect our income from such sales.

 

**Energy costs and availability maynegatively impact our financial results.**

 

Energy costs are incurreddirectly to run production equipment and facilities and indirectly throughexpenses such as freight and raw materials such as ink.  In a competitive market environment,increases to these direct and indirect energy related costs might not be ableto be passed through to customers through price increases or mitigated throughother means.  In such instances,increased energy costs could adversely impact operating costs or customerdemand.  In addition, interruption in theavailability of energy could disrupt operations, adversely impacting operatingresults.

 

**Inadequateintellectual property protection for our publications could negatively impactour financial results.**

 

Certain of ourpublications are protected by copyright, primarily held in the Company’sname.  Such copyrights protect ourexclusive right to publish the work in the United States and in many othercountries for specified periods.  Ourability to continue to achieve anticipated results depends in part on ourability to defend our intellectual property against infringement.  Our operating results may be adverselyaffected by inadequate legal and technological protections for intellectualproperty and proprietary rights in some jurisdictions and markets.  In addition, some of our publications are ofworks in the public domain, for which there is nearly no intellectual propertyprotection.  Our operating results may beadversely affected by the increased availability of such works elsewhere, includingon the Internet, either for free or for a lower price.

 

**A failure to maintain or improveour operating efficiencies could adversely impact our profitability.**

 

Because the markets in whichwe operate are highly competitive, we must continue to improve our operatingefficiency in order to maintain or improve our profitability.  Although we have been able to 

 

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expand our capacity, improveour productivity and reduce costs in the past, there is no assurance that wewill be able to do so in the future.  Inaddition, reducing operating costs in the future may require significantinitial costs to reduce headcount, close or consolidate operations, or upgradeequipment and technology.

 

**Changes in postal rates andpostal regulations may adversely impact our business.**

 

Postal costs are asignificant component of our direct marketing cost structure and postal ratechanges can influence the number of catalogs that we may mail.  In addition, increased postal rates canimpact the cost of delivering our products to customers.  The occurrence of either of these eventscould adversely affect consumer demand and our results of operations.

 

**Our facilities are subject tostringent environmental laws and regulations, which may subject us to liabilityor increase our costs.**

 

We use various materials inour operations that contain substances considered hazardous or toxic underenvironmental laws.  In addition, ouroperations are subject to federal, state, and local environmental laws relatingto, among other things, air emissions, waste generation, handling, managementand disposal, waste water treatment and discharge and remediation of soil andgroundwater contamination.  Permits arerequired for the operation of certain of our businesses and these permits aresubject to renewal, modification and in some circumstances, revocation.  Under certain environmental laws, includingthe Comprehensive Environmental Response, Compensation and Liability Act, asamended (“CERCLA,” commonly referred to as “Superfund”), and similar state lawsand regulations, we may be liable for costs and damages relating to soil andgroundwater contamination at off-site disposal locations or at ourfacilities.  Future changes toenvironmental laws and regulations may give rise to additional costs orliabilities that could have a material adverse impact on our financial positionand results of operations.

 

**A failure to successfullyintegrate acquired businesses may have a material adverse effect on our businessor operations.**

 

Over the past several years,we have completed four acquisitions, including Moore Langen and CreativeHomeowner in fiscal year 2006, REA in fiscal 2004 and Highcrest Media in fiscal2010, and may continue to make acquisitions in the future.  We believe that these acquisitions providestrategic growth opportunities for us. Achieving the anticipated benefits of these acquisitions will depend inpart upon our ability to integrate these businesses in an efficient andeffective manner.  The challengesinvolved in successfully integrating acquisitions include:

 

·      we may find that the acquired company or assets do notfurther our business strategy, or that we overpaid for the company or assets,or that economic conditions have changed, all of which may result in a futureimpairment charge;

 

·      we may have difficulty integrating the operations andpersonnel of the acquired business and may have difficulty retaining thecustomers and/or the key personnel of the acquired business;

 

·      we may have difficulty incorporating and integrating acquiredtechnologies into our business;

 

·      our ongoing business and management’s attention may bedisrupted or diverted by transition or integration issues and the complexity ofmanaging diverse locations;

 

·      we may have difficulty maintaining uniform standards,controls, procedures and policies across locations;

 

·      an acquisition may result in litigation from terminatedemployees of the acquired business or third parties; and

 

·      we may experience significant problems or liabilitiesassociated with technology and legal contingencies of the acquired business.

 

These factors could have a material adverse effecton our business, results of operations and financial condition or cash flows,particularly in the case of a larger acquisition or multiple acquisitions in ashort period of time.  From time to time,we may enter into negotiations for acquisitions that are not ultimatelyconsummated.  Such negotiations couldresult in significant diversion of management’s time from our business as wellas significant out-of-pocket costs. Tightness in credit markets may also affect

 

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our ability to consummate such acquisitions.

 

The consideration thatwe pay in connection with an acquisition could affect our financialresults.  If we were to proceed with oneor more significant acquisitions in which the consideration included cash, wecould be required to use a substantial portion of our available cash and creditfacilities to consummate such acquisitions. To the extent we issue shares of stock or other rights to purchasestock, including options or other rights, our existing stockholders mayexperience dilution in their share ownership in our company and their earningsper share may decrease.  In addition,acquisitions may result in the incurrence of debt, large one-time write-offsand restructuring charges.  They may alsoresult in goodwill and other intangible assets that are subject to impairmenttests, which could result in future impairment charges.  Any of these factors may materially andadversely affect our business and operations.

 

**A failure to hire and train keyexecutives and other qualified employees could adversely affect our business.**

 

Our success depends, in part,on our ability to continue to retain our executive officers and key managementpersonnel.  Our business strategy alsodepends on our ability to attract, develop, motivate and retain employees whohave relevant experience in the printing and publishing industries.  There can be no assurance that we cancontinue to attract and retain the necessary talented employees, includingexecutive officers and other key members of management and, if we fail to doso, it could adversely affect our business.

 

**A lack of skilled employees tomanufacture our products may adversely affect our business.**

 

Ifwe experience problems hiring and retaining skilled employees, our business maybe negatively affected.  The timelymanufacture and delivery of our products requires an adequate supply of skilledemployees, and the operating costs of our manufacturing facilities can beadversely affected by high turnover in skilled positions.  Accordingly, our ability to increase sales,productivity and net earnings could be impacted by our ability to employ theskilled employees necessary to meet our requirements.  Although our book manufacturing locations aregeographically dispersed, individual locations may encounter strong competitionwith other manufacturers for skilled employees. There can be no assurance that we will be able to maintain an adequateskilled labor force necessary to efficiently operate our facilities.  In addition, unions represent certain groupsof employees at two of our locations, and periodically, contracts with those unionscome up for renewal.  The outcome ofthose negotiations could have an adverse affect on our operations at thoselocations.  Also, changes in federaland/or state laws may facilitate the organization of unions at locations thatdo not currently have unions, which could have an adverse affect on ouroperations.

 

**We are subject to various laws andregulations that may require significant expenditures.**

 

We are subject to federal, state and local laws andregulations affecting our business, including those promulgated under theConsumer Product Safety Act, the rules and regulations of the ConsumerProducts Safety Commission as well as laws and regulations relating to personalinformation.  We may be required to makesignificant expenditures to comply with such governmental laws and regulationsand any amendments thereto. Complying with existing or future laws orregulations may materially limit our business and increase our costs.  Failure to comply with such laws may exposeus to potential liability and have a material adverse effect on our results ofoperations.

 

**Item 2****.****                  ****UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**Item 3****.****                  ****DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**Item 4****.****                  ****REMOVED AND RESERVED**

 

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**Item 5****.****                  ****OTHER INFORMATION**

 

There have been no material changes to theprocedures by which security holders may recommend nominees to the Company’sBoard of Directors.

 

**Item 6****.****                  ****EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                           |
|----------------------|------------|-------------------------------------------|
|                 |       |                                      |
| 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 |

 

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* Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Company has duly caused this report to be signed onits behalf by the undersigned thereunto duly authorized.

 

 
| **COURIER CORPORATION** |
|-------------------------|
| **(Registrant)**        |
| * *                | * * |   | * * |
| * *                | * * |   | * * |
| *July 28, 2010*         | * * | By: | *s/James F. Conway III* |
| Date                    |   |   | James F. Conway III |
|                    |   |   | Chairman, President and Chief  Executive Officer |
|                    |   |   |   |
|                    |   |   |   |
| *July 28, 2010*         | * * | By: | *s/Peter M. Folger* |
| Date                    |   |   | Peter M. Folger |
|                    |   |   | Senior Vice President and Chief  Financial Officer |
|                    |   |   |   |
|                    |   |   |   |
| *July 28, 2010*         | * * | By: | *s/Kathleen M. Leon* |
| Date                    |   |   | Kathleen M. Leon |
|                    |   |   | Vice President and Controller |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                           |
|----------------------|------------|-------------------------------------------|
|                 |       |                                      |
| 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 |

 

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* Filed herewith.

 

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