**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **ý**                         | ** **         | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------|--------------------|-----------------------------------------------------------------------------------------------|
|                               |               |                                                                                          |   |   |
| **For the quarterly period ended** | **March 25, 2006** |
| ** **                         | ** **         | ** **                                                                                    |
| **OR**                             |
| ** **                         |
| **o**                              | ** **         | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                    |                    |                                                                                               |  |  |  |

 
| **For the transition period from                         ** | **to                        ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                     |
| **Commission file number**                                                                                                                                                     | **0-7597**                                                                                                                                   |
|                                                                                                                                                                                |                                                                                                                                              |  |

 

**COURIER CORPORATION**

(Exact name of registrant as specified in its charter)

 

**Massachusetts**

(State or other jurisdiction of incorporation or organization)

 

**04-2502514**

(I.R.S. Employer Identification No.)

 

| **15  Wellman Avenue, North Chelmsford, Massachusetts** | ** ** | **01863**  |
|---------------------------------------------------------|------------|------------|
| (Address of  principal executive offices)               |       | (Zip Code) |

 

**(978) 251-6000**

(Registrant’s telephone number, including area code)

 

**NO CHANGE**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d)

of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant

was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.

 
| Yes  ý | No o |
|------------------|------|

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer

(as defined inExchange Act Rule 12b-2).

 
| Large accelerated filer o | Accelerated filer | ý | Non-accelerated filer   o |
|--------------------------------|-------------------|--------|--------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Exchange Act Rule12b-2).

 
| Yes  o | No ý |
|-------------|-----------|

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable

date.

 

| **Class**                   | ** ** | **Outstanding  at April 25, 2006** |
|-----------------------------|------------|------------------------------------|
| Common Stock, $1  par value |       | 12,357,803  shares                 |

 

----

** **

COURIERCORPORATION

CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)

(Dollars inthousands except per share amounts)

 
| ** **                                  | ** ** | **QUARTER ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **March 25,**     | ** ** | **March 26,**             | ** ** | **March 25,** | ** ** | **March 26,** | ** ** |
| ** **                                  | ** ** | **2006**               | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Net sales                                   |       | $                      | 57,527     |                           | $          | 53,495 |   | $ | 115,211 |   | $ | 104,764 |   |
| Cost of sales                               |       | 39,652                 |       | 37,141                         |       | 78,805 |   | 71,710 |   |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Gross profit                                |       | 17,875                 |       | 16,354                         |       | 36,406 |   | 33,054 |   |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Selling and  administrative expenses        |       | 11,123                 |       | 10,299                         |       | 22,803 |   | 20,965 |   |
| Interest income,  net                       |       | (100                   | )          | (42                            | )          | (248 | ) | (69 | ) |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Pretax income                               |       | 6,852                  |       | 6,097                          |       | 13,851 |   | 12,158 |   |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Provision for  income taxes (Note C)        |       | 2,459                  |       | 2,272                          |       | 4,971 |   | 4,531 |   |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Net income                                  |       | $                      | 4,393      |                           | $          | 3,825 |   | $ | 8,880 |   | $ | 7,627 |   |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Net income per  share (Note D):             |       |                   |       |                           |       |   |   |   |   |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Basic                                       |       | $                      | 0.36       |                           | $          | 0.32 |   | $ | 0.72 |   | $ | 0.63 |   |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Diluted                                     |       | $                      | 0.35       |                           | $          | 0.31 |   | $ | 0.71 |   | $ | 0.61 |   |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Cash dividends  declared per share (Note A) |       | $                      | 0.12       |                           | $          | 0.167 |   | $ | 0.24 |   | $ | 0.233 |   |

 

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

 

2

----

 

COURIERCORPORATION

CONSOLIDATEDCONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars inthousands)

 
| ** **                                                                                                                    | ** ** | **March 25,** | ** ** | **September 24,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                    | ** ** | **2006**           | ** ** | **2005**               | ** ** |
| ASSETS                                                                                                                        | ** ** | ** **         | ** ** | ** **             | ** ** |
| Current assets:                                                                                                          | ** ** | ** **         | ** ** | ** **             | ** ** |
| Cash and cash  equivalents                                                                                                    |       | $                  | 14,302     |                   | $          | 34,038 |   |
| Accounts  receivable, less allowance for uncollectible accounts of $1,328 at March 25,  2006 and $1,139 at September 24, 2005 |       | 34,539             |       | 34,207                 |       |
| Inventories  (Note B)                                                                                                         |       | 29,318             |       | 25,451                 |       |
| Deferred income  taxes                                                                                                        |       | 3,063              |       | 2,945                  |       |
| Other current  assets                                                                                                         |       | 512                |       | 962                    |       |
|                                                                                                                          |       |               |       |                   |       |
| Total current  assets                                                                                                         |       | 81,734             |       | 97,603                 |       |
|                                                                                                                          |       |               |       |                   |       |
| Property, plant  and equipment, less accumulated depreciation: $123,937 at March 25, 2006 and  $118,285 at September 24, 2005 |       | 72,556             |       | 59,115                 |       |
|                                                                                                                          |       |               |       |                   |       |
| Goodwill (Note  A)                                                                                                            |       | 38,706             |       | 33,255                 |       |
|                                                                                                                          |       |               |       |                   |       |
| Prepublication  costs (Note A)                                                                                                |       | 5,556              |       | 5,399                  |       |
|                                                                                                                          |       |               |       |                   |       |
| Other assets                                                                                                                  |       | 1,716              |       | 1,593                  |       |
|                                                                                                                          |       |               |       |                   |       |
| Total assets                                                                                                                  |       | $                  | 200,268    |                   | $          | 196,965 |   |
|                                                                                                                               |            |                    |            |                        |            |  |  |  |  |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

3

----

 

COURIER CORPORATION

CONSOLIDATEDCONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars inthousands)

 
| ** **                                                                                                                            | ** ** | **March 25,** | ** ** | **September 24,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                            | ** ** | **2006**           | ** ** | **2005**               | ** ** |
|                                                                                                                                  |       |               |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                            |       |               |       |                   |       |
| Current  liabilities:                                                                                                                 |       |               |       |                   |       |
| Current  maturities of long-term debt                                                                                                 |       | $                  | 85         |                   | $          | 85 |   |
| Accounts payable                                                                                                                      |       | 9,618              |       | 10,534                 |       |
| Accrued payroll                                                                                                                       |       | 6,553              |       | 7,799                  |       |
| Accrued taxes                                                                                                                         |       | 3,842              |       | 5,770                  |       |
| Other current  liabilities                                                                                                            |       | 6,092              |       | 6,474                  |       |
|                                                                                                                                  |       |               |       |                   |       |
| Total current  liabilities                                                                                                            |       | 26,190             |       | 30,662                 |       |
|                                                                                                                                  |       |               |       |                   |       |
| Long-term debt                                                                                                                        |       | 383                |       | 425                    |       |
| Deferred income  taxes (Note F)                                                                                                       |       | 7,211              |       | 6,398                  |       |
| Other  liabilities                                                                                                                    |       | 2,796              |       | 3,020                  |       |
|                                                                                                                                  |       |               |       |                   |       |
| Total  liabilities                                                                                                                    |       | 36,580             |       | 40,505                 |       |
|                                                                                                                                  |       |               |       |                   |       |
| Stockholders’  equity (Notes A and F):                                                                                           |       |               |       |                   |       |
| Preferred stock,  $1 par value - authorized 1,000,000 shares; none issued                                                             |       |               |       |                   |       |
| Common stock, $1  par value - authorized 18,000,000 shares; issued 12,348,000 at March 25, 2006  and 12,313,000 at September 24, 2005 |       | 12,348             |       | 12,313                 |       |
| Additional  paid-in capital                                                                                                           |       | 6,582              |       | 5,311                  |       |
| Retained  earnings                                                                                                                    |       | 144,758            |       | 138,836                |       |
|                                                                                                                                  |       |               |       |                   |       |
| Total stockholders’  equity                                                                                                      |       | 163,688            |       | 156,460                |       |
|                                                                                                                                  |       |               |       |                   |       |
| Total  liabilities and stockholders’ equity                                                                                      |       | $                  | 200,268    |                   | $          | 196,965 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

4

----

 

COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

 
| ** **                                                                       | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | **March 25,**             | ** ** | **March 26,** | ** ** |
| ** **                                                                       | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                                             |       |                           |       |   |   |
| Operating  Activities:                                                           |       |                           |       |   |   |
| Net income                                                                       |       | $                              | 8,880      |   | $ | 7,627 |   |
| Adjustments to reconcile  net income to cash provided from operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                   |       | 7,101                          |       | 5,935 |   |
| Stock based  compensation                                                        |       | 696                            |       | 939 |   |
| Deferred income  taxes                                                           |       | 748                            |       | (112 | ) |
| Changes in  assets and liabilities:                                              |       |                           |       |   |   |
| Accounts receivable                                                              |       | 1,229                          |       | 4,737 |   |
| Inventory                                                                        |       | (3,524                         | )          | (1,334 | ) |
| Accounts payable                                                                 |       | (1,078                         | )          | (2,522 | ) |
| Accrued taxes                                                                    |       | (1,928                         | )          | (2,501 | ) |
| Other elements  of working capital                                               |       | (1,660                         | )          | (2,425 | ) |
| Other, net                                                                       |       | (339                           | )          | (174 | ) |
|                                                                             |       |                           |       |   |   |
| Cash provided  from operating activities                                         |       | 10,125                         |       | 10,170 |   |
|                                                                             |       |                           |       |   |   |
| Investment  Activities:                                                          |       |                           |       |   |   |
| Capital  expenditures                                                            |       | (11,793                        | )          | (7,933 | ) |
| Business  acquisition, net of cash acquired                                      |       | (14,163                        | )          | — |   |
| Prepublication  costs                                                            |       | (1,600                         | )          | (1,442 | ) |
|                                                                             |       |                           |       |   |   |
| Cash used for  investment activities                                             |       | (27,556                        | )          | (9,375 | ) |
|                                                                             |       |                           |       |   |   |
| Financing  Activities:                                                           |       |                           |       |   |   |
| Long-term debt  repayments                                                       |       | (42                            | )          | (41 | ) |
| Cash dividends                                                                   |       | (2,958                         | )          | (1,610 | ) |
| Proceeds from  stock plans                                                       |       | 695                            |       | 1,065 |   |
| Excess tax  benefits from stock-based compensation                               |       | —                         |       | 341 |   |
|                                                                             |       |                           |       |   |   |
| Cash used for  financing activities                                              |       | (2,305                         | )          | (245 | ) |
|                                                                             |       |                           |       |   |   |
| (Decrease)  Increase in cash and cash equivalents                                |       | (19,736                        | )          | 550 |   |
|                                                                             |       |                           |       |   |   |
| Cash and cash  equivalents at the beginning of the period                        |       | 34,038                         |       | 23,965 |   |
|                                                                             |       |                           |       |   |   |
| Cash and cash  equivalents at the end of the period                              |       | $                              | 14,302     |   | $ | 24,515 |   |

 

The accompanyingnotes are an integral part of the consolidated financial statements.

 

5

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**COURIER CORPORATION**

** **

**NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

**A.            SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

**Unaudited Financial Statements**

 

Thebalance sheet as of March 25, 2006, the statements of income for thethree-month and six-month periods ended March 25, 2006 and March 26, 2005, andthe statements of cash flows for the six-month periods ended March 25, 2006 andMarch 26, 2005 are unaudited. In the opinion of management, all adjustmentsnecessary for a fair presentation of such financial statements have beenrecorded. Such adjustments consisted only of normal recurring items. Certainamounts for fiscal 2005 have been reclassified in the accompanying financialstatements in order to reflect the adoption of SFAS 123R, as discussed below.

 

Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States (“generally accepted accounting principles”) have been condensedor omitted. The balance sheet data as of September 24, 2005 was derived fromaudited year-end financial statements, as adjusted for the adoption of SFAS123R, but does not include disclosures required by generally acceptedaccounting principles. It is suggested that these interim financial statementsbe read in conjunction with the Company’s most recent Form 10-K and AnnualReport for the year ended September 24, 2005.

 

**PrepublicationCosts**

 

Prepublicationcosts, associated with the specialty publishing segment, are amortized usingthe straight-line method over an estimated useful life of four years for DoverPublications, Inc. (“Dover”) and three years for Research & EducationAssociation, Inc. (“REA”).

 

**Goodwill**

 

The Company evaluatespossible impairment annually or whenever events or circumstances indicate thatthe carrying value of the assets may not be recoverable. There were no suchevents or circumstances in the period presented. In the first quarter of fiscal2006, goodwill increased by approximately $5.5 million for the acquisition ofMoore-Langen Printing Company, Inc. (Note G).

 

**Stock Split and Dividend Increase**

 

OnMarch 10, 2005, the Company announced a three-for-two stock split, effected inthe form of a 50% stock dividend, which was distributed on May 27, 2005. Simultaneously,the quarterly cash dividend was increased to $.10 per post-split share ofcommon stock, 50% higher than the $.067 per post-split share declared inJanuary 2005. It was the second dividend declared in the Company’s secondfiscal quarter and, therefore, no dividend was declared in the third quarter offiscal 2005. Previously authorized but unissued shares were used to effect thedividend. Weighted average shares outstanding and per share amounts presentedin the accompanying financial statements for periods prior to the stock splithave been restated to give effect to the stock splits.

 

**Change inAccounting Principle**

 

Asmore fully discussed in Note F below, the Company adopted Statement ofFinancial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”). Theeffective date of this new standard was the beginning of the Company’s 2006fiscal year. The Company implemented this new standard on a retrospective basis.Under this new standard, companies are required to account for stock-basedcompensation transactions using a fair-value method and to recognize the expenseover the service period.

 

6

----

 

# **B.            INVENTORIES**

# ** **

Inventories are valued at the lower of cost or market. Costis determined using the last-in, first-out (LIFO) method for approximately 42%and 41% of the Company’s inventories at March 25, 2006 and September 24, 2005,respectively. Other inventories, primarily at Dover and REA, are determined ona first-in, first-out (FIFO) basis. Inventories consisted of the following:

 
| ** **      | ** ** | **(000’s Omitted)** | ** ** |
|-----------------|------------|-------------------------------|------------|
| ** **      | ** ** | **March 25,  2006**      | ** ** | **September 24,  2005** | ** ** |
| Raw materials   |       | $3,272                        |       | $2,319 |   |
| Work in process |       | 8,396                         |       | 6,276 |   |
| Finished goods  |       | 17,650                        |       | 16,856 |   |
| Total           |       | $29,318                       |       | $25,451 |   |

# ** **

# **C.            INCOME TAXES**

# ** **

The provision for income taxes differs from that computedusing the statutory federal income tax rates for the following reasons:

 
| ** **                            | ** ** | **(000’s Omitted)** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Quarter Ended**        | ** ** |
| ** **                            | ** ** | **March 25,  2006**      | ** ** | **March 26,  2005** | ** ** |
| Federal taxes at statutory rates      |       | $                             | 2,400      |   | 35.0 | % | $ | 2,134 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 203                           |       | 3.0 |   | 189 |   | 3.1 |   |
| Federal manufacturers’ deduction |       | (72                           | )          | (1.1 | ) | — |   | — |   |
| Tax benefit of export related income  |       | (110                          | )          | (1.6 | ) | (145 | ) | (2.4 | ) |
| Stock-based compensation (Note F)     |       | 37                            |       | 0.5 |   | 77 |   | 1.3 |   |
| Other                                 |       | 1                             |       | 0.1 |   | 17 |   | 0.3 |   |
| Total                                 |       | $                             | 2,459      |   | 35.9 | % | $ | 2,272 |   | 37.3 | % |

 
|                                  |   | **(000’s Omitted)**  |   |
|---------------------------------------|--------|--------------------------------|--------|
|                                  |   | **Six Months Ended** |   |
|                                  |   | **March 25,  2006**       |   | **March 26,  2005** |   |
| Federal taxes at statutory rates      |   | $                              | 4,849  |   | 35.0 | % | $ | 4,255 |   | 35.0 | % |
| State taxes, net of federal benefit   |   | 411                            |   | 3.0 |   | 376 |   | 3.1 |   |
| Federal manufacturers’ deduction |   | (145                           | )      | (1.1 | ) | — |   | — |   |
| Tax benefit of export related income  |   | (222                           | )      | (1.6 | ) | (284 | ) | (2.3 | ) |
| Stock-based compensation (Note F)     |   | 75                             |   | 0.5 |   | 153 |   | 1.3 |   |
| Other                                 |   | 3                              |   | 0.1 |   | 31 |   | 0.2 |   |
| Total                                 |   | $                              | 4,971  |   | 35.9 | % | $ | 4,531 |   | 37.3 | % |

 

7

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# **D.            NETINCOME PER SHARE**

# ** **

# **Followingis a reconciliation of the shares used in the calculation of basic and dilutedincome per share. Potentially dilutive shares, calculated using the treasurystock method, consist of shares issued under the Company’s stock option plans.These shares have been adjusted to reflect the three-for-two stock spliteffected in the form of a dividend distributed on May 27, 2005 (Note A) and theimplementation of SFAS 123R (Note A).**

 
| ** **                             | ** ** | **(000’s Omitted)** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Quarter Ended**        | ** ** | **Six Months Ended** | ** ** |
| ** **                             | ** ** | **March 25,  2006**      | ** ** | **March 26,  2005** | ** ** | **March 25,  2006** | ** ** | **March 26,  2005** | ** ** |
|                                   |       |                          |       |   |   |   |   |   |   |
| Average shares outstanding for basic   |       | 12,307                        |       | 12,080 |   | 12,298 |   | 12,055 |   |
| Effect of potentially dilutive shares  |       | 274                           |       | 391 |   | 270 |   | 392 |   |
| Average shares outstanding for diluted |       | 12,581                        |       | 12,471 |   | 12,568 |   | 12,447 |   |

# ** **

# **E.             BUSINESS SEGMENTS**

# ** **

TheCompany has two business segments: book manufacturing and specialty publishing.The book manufacturing segment offers a full range of services from productionthrough storage and distribution for religious, educational and specialty tradebook publishers. The specialty publishing segment consists of Dover and REA.

 

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

 

The following table provides segment information for thequarter and six-month periods ended March 25, 2006 and March 26, 2005.

 
| ** **                         | ** ** | **(000’s Omitted)** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **Quarter Ended**        | ** ** | **Six Months Ended** | ** ** |
| ** **                         | ** ** | **March 25,  2006**      | ** ** | **March 26,  2005** | ** ** | **March 25,  2006** | ** ** | **March 26,  2005** | ** ** |
|                               |       |                          |       |   |   |   |   |   |   |
| Net sales:                         |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                 |       | $                             | 49,431     |   | $ | 45,278 |   | $ | 97,665 |   | $ | 88,201 |   |
| Specialty publishing               |       | 10,262                        |       | 9,737 |   | 21,183 |   | 20,007 |   |
| Elimination of intersegment sales  |       | (2,166                        | )          | (1,520 | ) | (3,637 | ) | (3,444 | ) |
| Total                              |       | $                             | 57,527     |   | $ | 53,495 |   | $ | 115,211 |   | $ | 104,764 |   |
|                               |       |                          |       |   |   |   |   |   |   |
| Income before taxes:               |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                 |       | $                             | 6,338      |   | $ | 5,834 |   | $ | 12,501 |   | $ | 11,462 |   |
| Specialty publishing               |       | 1,064                         |       | 804 |   | 2,149 |   | 1,876 |   |
| Stock-based compensation           |       | (360                          | )          | (473 | ) | (696 | ) | (940 | ) |
| Elimination of intersegment profit |       | (190                          | )          | (68 | ) | (103 | ) | (240 | ) |
| Total                              |       | $                             | 6,852      |   | $ | 6,097 |   | $ | 13,851 |   | $ | 12,158 |   |

 

8

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**F.             STOCK-BASED COMPENSATION**

 

In the first quarter offiscal 2006, the Company adopted the provisions of SFAS 123R. All prior periodspresented have been restated on a retrospective basis consistent with the proforma disclosures required for those periods by SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”). Prior to the adoption of SFAS 123R, theCompany applied APB 25 to account for its stock-based awards. Under APB 25, theCompany generally only recorded stock-based compensation expense for thevesting of stock grants as well as shares issued to directors in lieu of cashfor annual retainer fees. Under the provisions of APB 25, the Company was notrequired to recognize compensation expense for the cost of stock options or forshares issued under the Company’s Employee Stock Purchase Plan (“ESPP”). Beginningwith its 2006 fiscal year, with the adoption of SFAS 123R, the Company recordedstock-based compensation expense for the cost of stock options, stock grants,and shares issued under the ESPP. The fair value of each option awarded wascalculated on the date of grant using the Black-Scholes option-pricing model.

 

Stock-based compensationrecognized in selling and administrative expenses in the accompanying financialstatements, and the related tax benefit, were as follows:

 
| ** **                      | ** ** | **(000’s Omitted)** | ** ** |
|---------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **Quarter Ended**        | ** ** |
| ** **                      | ** ** | **March 25, 2006**  | ** ** | **March 26, 2005** | ** ** |
| ** **                      | ** ** | **Stock-Based  Compensation** | ** ** | **Tax  Benefit** | ** ** | **After-Tax  Cost** | ** ** | **Stock-Based  Compensation** | ** ** | **Tax  Benefit** | ** ** | **After-Tax  Cost** | ** ** |
| Stock grants                    |       | $                             | 112        |   | $ | 39 |   | $ | 73 |   | $ | 89 |   | $ | 31 |   | $ | 58 |   |
| Incremental SFAS  123R costs    |       | 248                           |       | 49 |   | 199 |   | 384 |   | 55 |   | 329 |   |
| Total  stock-based compensation |       | $                             | 360        |   | $ | 88 |   | $ | 272 |   | $ | 473 |   | $ | 86 |   | $ | 387 |   |

# ** **

| ** **                      | ** ** | **(000’s Omitted)**  | ** ** |
|---------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **Six Months Ended** | ** ** |
| ** **                      | ** ** | **March 25, 2006**   | ** ** | **March 26, 2005** | ** ** |
| ** **                      | ** ** | **Stock-Based  Compensation**  | ** ** | **Tax  Benefit** | ** ** | **After-Tax  Cost** | ** ** | **Stock-Based  Compensation** | ** ** | **Tax  Benefit** | ** ** | **After-Tax   Cost** | ** ** |
| Stock grants                    |       | $                              | 209        |   | $ | 73 |   | $ | 136 |   | $ | 173 |   | $ | 60 |   | $ | 113 |   |
| Incremental SFAS  123R costs    |       | 487                            |       | 95 |   | 392 |   | 767 |   | 109 |   | 658 |   |
| Total  stock-based compensation |       | $                              | 696        |   | $ | 168 |   | $ | 528 |   | $ | 940 |   | $ | 169 |   | $ | 771 |   |

 

Unrecognized stock-based compensation cost at March 25, 2006 was $1.2million to be recognized over a weighted-average period of 1.1 years.

 

9

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The following tableprovides information on the impact on the accompanying income statements ofadopting SFAS 123R on a retrospective basis.

 
| ** **                           | ** ** | **(000’s Omitted)** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Quarter Ended**        | ** ** | **Six Months Ended** | ** ** |
| ** **                           | ** ** | **March 25,  2006**      | ** ** | **March 26,  2005** | ** ** | **March 25,  2006** | ** ** | **March 26,  2005** | ** ** |
| Reported net  income                 |       | $                             | 4,393      |   | $ | 3,825 |   | $ | 8,880 |   | $ | 7,627 |   |
| Add: Total  Stock-Based Compensation |       | 272                           |       | 387 |   | 528 |   | 771 |   |
| Less: Stock  grants                  |       | (73                           | )          | (58 | ) | (136 | ) | (113 | ) |
|                                 |       |                          |       |   |   |   |   |   |   |
| Pro forma net  income                |       | $                             | 4,592      |   | $ | 4,154 |   | $ | 9,272 |   | $ | 8,285 |   |
|                                 |       |                          |       |   |   |   |   |   |   |
| Net income per  diluted share:       |       |                          |       |   |   |   |   |   |   |
| As reported                          |       | $                             | 0.35       |   | $ | 0.31 |   | $ | 0.71 |   | $ | 0.61 |   |
| Pro forma                            |       | $                             | 0.37       |   | $ | 0.33 |   | $ | 0.74 |   | $ | 0.67 |   |

 

The cumulative effect ofthe adoption of SFAS 123R on the Company’s consolidated balance sheet atSeptember 24, 2005 resulted in an increase in additional paid-in capital of$3,858,000, a reduction in retained earnings of $3,909,000, elimination ofunearned compensation of $577,000, and a reduction in deferred income taxliabilities of $526,000.

 

**Stock Incentive Plan:** The Company’s stock incentive plan provides for the granting of stockoptions and stock grants up to a total of 2,064,375 shares. Under the planprovisions, both non-qualified and incentive stock options to purchase sharesof the Company’s common stock may be granted to key employees. The option priceper share may not be less than the fair market value of stock at the time theoption is granted and incentive stock options must expire not later than tenyears from the date of grant. The Company annually issues a combination ofstock options and stock grants to its key employees. Prior to 2004, stock-basedawards to key employees consisted primarily of stock options. Beginning in2004, the Company reduced the number of stock options granted and addedrestricted stock awards. Stock options awarded in 2004 vested in one year. Stockoptions awarded in 2005 vest over three years. Stock grants generally vest over3 years. At March 25, 2006 non-vested stock grants outstanding were 26,078shares with a weighted-average grant-date fair value of $26.65. Stock optionsoutstanding at March 25, 2006 were 400,808 shares with a weighted-averageexercise price of $18.91 per share, a weighted-average remaining life of 3.5years, and an aggregate intrinsic value of $9,293,000. Of these options,329,225 shares were exercisable at March 25, 2006 with a weighted-averageexercise price of $16.76 per share, a weighted-average remaining life of 3.2years, and an aggregate intrinsic value of $8,341,000. No awards wereissued by the Company under this plan in the first six months of fiscal 2006.

 

**Directors’ Option Plan:** In January 2005, stockholders approved the Courier Corporation 2005Stock Equity Plan for Non-Employee Directors (the “2005 Plan”). Under the planprovisions, non-qualified stock options to purchase shares of the Company’scommon stock may be granted to non-employee directors up to a total of 225,000shares. The option price per share is the fair market value of stock at thetime the option is granted. The options are immediately exercisable and have aterm of five years. The 2005 Plan replaced the previous non-employee directors’plan which had been adopted in 1989 (the “1989 Plan”). The 1989 Plan allowed directorsto make an

 

10

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electionto apply their annual retainer fee toward the granting of stock options at aprice per share that was $5 below the fair market value at the time of theoption award. In the first quarter of fiscal 2005, 9,000 options were grantedunder the 1989 Plan. No further options will be granted under the 1989 Plan. Duringthe second quarter of fiscal 2006, non-employee directors, as part of their2006 compensation plan, were awarded 43,752 options. The key assumptions usedto value these options were a risk-free interest rate of 4.3%, an expectedvolatility of 23%, an expected dividend yield of 1.3%, and an expected term of5 years, resulting in a fair-value per share of $9.14 for these options. At March 25, 2006, 217,928 options wereoutstanding and exercisable under the directors’ option plans. These optionshad a weighted-average exercise price of $22.99 per share, a weighted-averageremaining life of 2.7 years and an aggregate intrinsic value of $4,164,000.

 

**Employee Stock Purchase Plan:** The Company’s 1999 Employee Stock Purchase Plan (“ESPP”), as amended,covers an aggregate of 337,500 shares of Company common stock for issuanceunder the plan. Eligible employees may purchase shares of Company common stockat not less than 85% of fair market value at the end of the grant period. Priorto 2005, the purchase price was determined based upon 85% of fair market valueat the beginning or end of the grant period.

 

**G.            BUSINESS ACQUISITION**

 

OnOctober 17, 2005, the Company acquired Moore-Langen Printing Company, Inc. (“MooreLangen”), an Indianapolis-based printer specializing in book covers, in a $15million cash transaction. The acquisition was accounted for as a purchase, andaccordingly, Moore Langen’s financial results were included in the bookmanufacturing segment in the consolidated financial statements from the date ofacquisition. The initial allocation of the purchase price to assets acquiredincluded, in the accompanying financial statements, approximately $5.5 millionto goodwill. This allocation will be finalized later in this fiscal year.

 

11

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

 

**CriticalAccounting Policies and Estimates:**

 

The Company’s consolidated condensedfinancial statements have been prepared in accordance with generally acceptedaccounting principles. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the amounts reportedin these financial statements and accompanying notes. On an ongoing basis,management evaluates its estimates and judgments, including those related tocollectibility of accounts receivable, recovery of inventories, impairment ofgoodwill, prepublication costs and income taxes. Management bases its estimatesand judgments on historical experience and various other factors believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the periods presented. Actual results may differ from these estimates. Thesignificant accounting policies which management believes are most critical toaid in fully understanding and evaluating the Company’s reported financialresults include the following:

 

# **Accounts Receivable**  Management performsongoing credit evaluations of the Company’s customers and adjusts credit limitsbased upon payment history and the customer’s current creditworthiness. Collectionsand payments from customers are continuously monitored. A provision forestimated credit losses is determined based upon historical experience and anyspecific customer collection issues that have been identified. If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

# ** **

Inventories Managementrecords reductions in the cost basis of inventory for excess and obsoleteinventory based primarily upon historical and forecasted product demand. Ifactual market conditions are less favorable than those projected by management,additional inventory charges may be required.

 

##### Goodwill  The Company evaluates possible impairmentannually or whenever events or circumstances indicate that the carrying valueof the assets may not be recoverable. The Company completed the annualimpairment test at September 24, 2005 resulting in no change to the nature orcarrying amounts of its intangible assets. Changes in market conditions or pooroperating results could result in a decline in value thereby potentiallyrequiring an impairment charge in the future.

 

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

 

Income Taxes The income tax provision and relatedaccrued taxes are based on amounts reported on the Company’s tax returns andchanges in deferred taxes. Deferred income tax liabilities and assets are determined based upon the differences betweenthe financial statement and tax bases of assets and liabilities. Changes in therecoverability 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.

 

12

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###### ** **

**Overview:**

 

Courier Corporation, founded in 1824, isone of America’s leading book manufacturers and specialty publishers. TheCompany has two business segments: book manufacturing and specialty publishing.The book manufacturing segment streamlines the process of bringing books fromthe point of creation to the point of use. Based on sales, Courier is the fifthlargest book manufacturer in the United States and largest in the Northeast,offering services from prepress and production through storage and distribution.The specialty publishing segment consists of Dover Publications, Inc. (“Dover”)as well as Research & Education Association, Inc. (“REA”). Dover publishesover 9,000 titles in more than 30 specialty categories ranging from literatureand poetry classics to paper dolls, and from music scores to clip art. REApublishes test preparation and study-guide books and software for high school,college and graduate students, and professionals.

 

**Results ofOperations:**

 
| ** **                          | ** ** | **FINANCIAL HIGHLIGHTS**                                                     | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                          | ** ** | **Quarter Ended**                                                            | ** ** | **Six Months Ended** | ** ** |
| ** **                          | ** ** | **March 25,  2006**                                                          | ** ** | **March 26,  2005 ** | ** ** | **%  Change** | ** ** | **March 25,  2006** | ** ** | **March 26,  2005 ** | ** ** | **%  Change** | ** ** |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                           |       | $                                                                                 | 57,527     |   | $ | 53,495 |   | 7.5 | % | $ | 115,211 |   | $ | 104,764 |   | 10.0 | % |
| Gross profit                        |       | 17,875                                                                            |       | 16,354 |   | 9.3 | % | 36,406 |   | 33,054 |   | 10.1 | % |
| As a percentage of sales            |       | 31.1                                                                              | %          | 30.6 | % |   |   | 31.6 | % | 31.6 | % |   |   |
| Selling and administrative expenses |       | 11,123                                                                            |       | 10,299 |   | 8.0 | % | 22,803 |   | 20,965 |   | 8.8 | % |
| Interest income, net                |       | (100                                                                              | )          | (42 | ) |   |   | (248 | ) | (69 | ) |   |   |
| Pretax income                       |       | 6,852                                                                             |       | 6,097 |   | 12.4 | % | 13,851 |   | 12,158 |   | 13.9 | % |
| Net income                          |       | $                                                                                 | 4,393      |   | $ | 3,825 |   | 14.8 | % | $ | 8,880 |   | $ | 7,627 |   | 16.4 | % |
| Net income per diluted share        |       | $                                                                                 | 0.35       |   | $ | 0.31 |   | 12.9 | % | $ | 0.71 |   | $ | 0.61 |   | 16.4 | % |

# ** **

# **Revenues in the second quarter and first half of fiscal2006 increased in both of the Company’s operating segments compared to the sameperiods last year. Book manufacturing revenues were up 9% for the secondquarter and 11% for the first half of the year compared to the correspondingperiods last year, reflecting higher textbook sales and the Moore Langenacquisition discussed below. Sales in the specialty publishing segment were up5% in the second quarter and 6% year to date compared to the same periods lastyear, reflecting growth in both of the segment’s businesses.**

# ** **

# ***Business Acquisition***

# ** **

# **On October 17, 2005, the Company acquired Moore-LangenPrinting Company, Inc. (“Moore Langen”) an Indianapolis-based printerspecializing in book covers. The acquisition was accounted for as a purchase,and accordingly, Moore Langen’s financial results were included in the bookmanufacturing segment from the date of acquisition.**

# ** **

# ***Stock-Based Compensation***

# ** **

# **In the first quarter of fiscal 2006, the Company adoptedthe provisions of Statement of Financial Accounting Standards 123R, “Share-BasedPayment” (“SFAS 123R”), an accounting rule requiring the expensing of stockoptions. All prior periods presented have been restated on a retrospectivebasis consistent with the pro forma disclosures required for those periods bySFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Prior tothe adoption of SFAS 123R, the Company applied APB 25 to account for itsstock-based awards. Under APB 25, the Company generally only recordedstock-based compensation expense for the vesting of stock grants as well asshares issued to directors in lieu of cash for annual retainer fees. Under theprovisions of APB 25, the Company was not required to recognize compensationexpense for the cost of stock options or for shares issued under the Company’sEmployee Stock Purchase Plan (“ESPP”). Beginning with its 2006 fiscal year,with the adoption of SFAS 123R, the Company recorded stock-based compensation**

 

13

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expense for the cost ofstock options (using the Black-Scholes option-pricing model), stock grants, andshares issued under the ESPP. The incremental impact of adoption of thisstandard was a reduction of second-quarter net income by approximately $199,000and $329,000 in fiscal 2006 and 2005, respectively, and by approximately$392,000 and $658,000 for the first six months of fiscal 2006 and 2005,respectively. The following table provides information on the impact on theaccompanying income statements of adopting SFAS 123R on a retrospective basis.

 
| ** **                           | ** ** | **(000’s Omitted)** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **Quarter Ended**        | ** ** | **Six Months Ended** | ** ** |
| ** **                           | ** ** | **March 25,  2006**      | ** ** | **March 26,  2005** | ** ** | **March 25,  2006** | ** ** | **March 26,  2005** | ** ** |
| Reported net  income                 |       | $                             | 4,393      |   | $ | 3,825 |   | $ | 8,880 |   | $ | 7,627 |   |
| Add: Total  Stock-Based Compensation |       | 272                           |       | 387 |   | 528 |   | 771 |   |
| Less: Stock  grants                  |       | (73                           | )          | (58 | ) | (136 | ) | (113 | ) |
|                                 |       |                          |       |   |   |   |   |   |   |
| Pro forma net  income                |       | $                             | 4,592      |   | $ | 4,154 |   | $ | 9,272 |   | $ | 8,285 |   |
|                                 |       |                          |       |   |   |   |   |   |   |
| Net income per  diluted share:       |       |                          |       |   |   |   |   |   |   |
| As reported                          |       | $                             | 0.35       |   | $ | 0.31 |   | $ | 0.71 |   | $ | 0.61 |   |
| Pro forma                            |       | $                             | 0.37       |   | $ | 0.33 |   | $ | 0.74 |   | $ | 0.67 |   |

 

# **Unrecognized compensation cost at March 25, 2006 was $1.2million to be recognized over a weighted-average period of 1.1 years. Thecumulative effect of adoption of SFAS 123R on the Company’s consolidatedbalance sheet at September 24, 2005 resulted in an increase in additionalpaid-in capital of $3,858,000, a reduction in retained earnings of $3,909,000,elimination of unearned compensation of $577,000, and a reduction in deferredincome tax liabilities of $526,000.**

# ** **

TheCompany annually issues a combination of stock options and stock grants to itskey employees under its stock plans. Prior to 2004, stock-based awards to keyemployees consisted primarily of stock options. Beginning in 2004, the Companyreduced the number of stock options granted and added restricted stock awards.Stock options awarded in 2004 vested in one year. Stock options awarded in 2005vest over three years. Stock grants generally vest over 3 years. Under theCompany’s ESPP, eligible employees may purchase shares of stock for not lessthan 85% of fair market value at the end of the grant period. Prior to 2005,the purchase price was determined based upon 85% of fair market value at thebeginning or end of the grant period. In January 2005, stockholders approved anew stock equity plan for non-employee directors (the “2005 Plan”). The optionprice per share is the fair market value at the time the option is granted. The2005 Plan replaced a plan that had allowed directors to make an election toapply their annual retainer fee toward the granting of stock options at a priceper share that was $5 below the fair market value at the time of the optionaward. During the second quarter of fiscal 2006 and 2005, 43,752 and36,000 options, respectively, were granted under the non-employee directors’option plan; 9,000 shares were issued inthe first half of fiscal 2005 to non-employee directors under the previousDirectors Option Plan. No other awards were issued under any of the Company’splans in the first six months of fiscal 2006 and 2005.

 

14

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*BookManufacturing Segment*

 
| ** **                          | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                          | ** ** | **Quarter Ended**                                                            | ** ** | **Six Months Ended** | ** ** |
| ** **                          | ** ** | **March 25,  2006**                                                          | ** ** | **March 26,  2005 ** | ** ** | **%  Change** | ** ** | **March 25,  2006** | ** ** | **March 26,  2005 ** | ** ** | **%  Change** | ** ** |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                           |       | $                                                                                 | 49,431     |   | $ | 45,278 |   | 9.2 | % | $ | 97,665 |   | $ | 88,201 |   | 10.7 | % |
| Gross profit                        |       | 13,165                                                                            |       | 11,850 |   | 11.1 | % | 26,729 |   | 23,797 |   | 12.3 | % |
| As a percentage of sales            |       | 26.6                                                                              | %          | 26.2 | % |   |   | 27.4 | % | 27.0 | % |   |   |
| Selling and administrative expenses |       | 6,972                                                                             |       | 6,154 |   | 13.3 | % | 14,572 |   | 12,589 |   | 15.8 | % |
| Interest income                     |       | (145                                                                              | )          | (138 | ) |   |   | (344 | ) | (254 | ) |   |   |
| Pretax income                       |       | $                                                                                 | 6,338      |   | $ | 5,834 |   | 8.6 | % | $ | 12,501 |   | $ | 11,462 |   | 9.1 | % |

 

Withinthis segment, the Company focuses on three key markets: education, religiousand specialty trade. Sales in this segment were driven by growth in theeducation market and by the October 2005 acquisition of Moore Langen, whichfocuses on printing book covers for the education market. Sales to theeducation market (excluding Moore Langen sales) rose 14% both in the quarterand first six months of fiscal 2006 compared to last year, with the greatestgrowth in four-color elementary and high school textbooks. The newestfour-color press start up was completed at the end of the first quarter offiscal 2006 and provided the necessary capacity to meet the growing demand foreducational books. Sales to the religious market were down 2% both for thequarter and first six months compared to the same periods last year, reflectinga decision last year to discontinue manufacturing certain low-priced religioustrade work. Sales to the specialty trade market were up 2% for the quarter and8% year to date compared to the same periods in fiscal 2005. Year-to-date salesbenefited from a few large one-time orders in the first quarter.

 

Grossprofit in this segment increased by 11% to $13.2 million for the quarter, andas a percentage of sales increased to 26.6% from 26.2% in last year’s secondquarter. Improvements were similar for the first six months of fiscal 2006compared to the prior year period. The improvement in margin reflects thegrowth in sales volume as well as continued gains in productivity and a morefavorable overall mix of sales. Margins improved despite a significant increasein utility costs, which were up approximately $600,000 from last year’s secondquarter and $1.1 million on a year-to-date basis. The successful start up ofthe four-color press at the end of the preceding quarter resulted in minimaladditional costs in the second quarter.

 

Sellingand administrative expenses for the segment increased 13% in the second quarterto $7.0 million and, as a percentage of sales, increased to 14.1% from 13.6%last year. The increase both for the quarter and the first half of the year,was the result of the acquisition of Moore Langen as well as costs associatedwith the increased sales volume, such as selling and customer service expenses,and incentive compensation costs tied directly to improved profitability.

 

Intercompanyinterest income allocated to the book manufacturing segment was $145,000 in thesecond quarter compared to $138,000 in the same period last year and for thefirst six months, increased to $344,000 compared to $254,000 last year. Theincrease in allocated interest income was primarily the result of higherinterest rates.

 

Pretaxincome in this segment for the second quarter was $6.3 million, or $.33 perdiluted share, up 9% from $5.8 million, or $.30 per diluted share in thecorresponding quarter last year. For the first half of fiscal 2006, pretaxincome in this segment was $12.5 million or $.65 per diluted share, also up 9%from last year’s $11.5 million or $.59 per diluted share.

 

15

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*SpecialtyPublishing Segment*

 
| ** **                          | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                          | ** ** | **Quarter Ended**                                                            | ** ** | **Six Months Ended** | ** ** |
| ** **                          | ** ** | **March 25,  2006**                                                          | ** ** | **March 26,  2005 ** | ** ** | **%  Change** | ** ** | **March 25,  2006** | ** ** | **March 26,  2005 ** | ** ** | **%  Change** | ** ** |
|                                |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                           |       | $                                                                                 | 10,262     |   | $ | 9,737 |   | 5.4 | % | $ | 21,183 |   | $ | 20,007 |   | 5.9 | % |
| Gross profit                        |       | 4,900                                                                             |       | 4,572 |   | 7.2 | % | 9,780 |   | 9,497 |   | 3.0 | % |
| As a percentage of sales            |       | 47.7                                                                              | %          | 47.0 | % |   |   | 46.2 | % | 47.5 | % |   |   |
| Selling and administrative expenses |       | 3,791                                                                             |       | 3,672 |   | 3.2 | % | 7,535 |   | 7,436 |   | 1.3 | % |
| Interest expense                    |       | 45                                                                                |       | 96 |   |   |   | 96 |   | 185 |   |   |   |
| Pretax income                       |       | $                                                                                 | 1,064      |   | $ | 804 |   | 32.3 | % | $ | 2,149 |   | $ | 1,876 |   | 14.6 | % |

 

Specialty publishing sales increased 5%over the prior year second quarter to $10.3 million and rose 6% for the firstsix months to $21.2 million, reflecting sales growth in both of the segment’sbusinesses. During the preceding quarter, Dover completed two major projectsbegun in fiscal 2005; specifically, a warehouse consolidation and theimplementation of SAP, an enterprise-wide information system, resulting insignificant improvements to both infrastructure and service levels. REA’s salesincrease reflects its growing line of titles in teacher certification andhigh-stakes testing as well as enhancements in its direct marketing programs.

 

Gross profit as apercentage of sales for the segment increased in the quarter to 47.7% from47.0% in the corresponding period last year, reflecting cost reductionsresulting from the warehouse consolidation being realized as anticipated in thesecond quarter of fiscal 2006. For the first six months, gross profit as apercentage of sales decreased to 46.2% from 47.5% in the first half of lastyear. This decrease was primarily due to additional labor and freight costs ofapproximately $200,000 in the first quarter of fiscal 2006 related to thewarehouse consolidation and systems implementation.

 

Selling andadministrative expenses in this segment were $3.8 million in the secondquarter, an increase of 3% over the corresponding prior year period, primarilyrelated to an increase in sales compensation during the quarter. For the firstsix months, selling and administrative expenses increased 1% to $7.5 millioncompared to the prior year period, but as a percentage of sales decreased to35.6% from 37.2% in the first half of last year.

 

Intercompanyinterest expense is allocated to the specialty publishing segment based on theacquisition costs of Dover and REA, reduced by cash generated by each businesssince acquisition. Such interest expense for the second quarter of fiscal 2006was $45,000 compared to $96,000 last year and, for the first six months,decreased to $96,000 in fiscal 2006 from $185,000 in fiscal 2005. Thereduction, both for the quarter and the first six months, reflects the benefitof cash generated by the publishing operations over the past year.

 

Pretaxincome in the specialty publishing segment for the second quarter increased 32%to $1.1 million, or, on an after-tax basis, $.05 per diluted share, compared tolast year’s second quarter. For the first half of the year, pretax incomeincreased 15% over last year to $2.1 million, or $.11 per diluted share on anafter-tax basis.

 

*TotalConsolidated Company*

 

Interestincome, net of interest expense, was $100,000 in the second quarter of fiscal2006, compared to $42,000 in the same period last year. For the first sixmonths, net interest income was $248,000 compared to $69,000 in thecorresponding prior year period. There were no borrowings under the Company’srevolving credit facility in the first six months of either year; however,interest expense includes commitment fees and other costs associated withmaintaining this credit facility. Cash investments in the second quarter offiscal 2006 averaged approximately $14.8 million invested at an average annualinterest rate of 4.2% generating interest income of approximately $155,000. Forthe same period last year, the Company’s average cash investments were $22.3million invested at an average interest rate of 2.2% generating interest incomeof approximately $120,000. For the first six months of fiscal 2006, averagecash investments were $18.9 million invested at an average interest rate of3.8% generating interest income of approximately $355,000 compared

 

16

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to average cash investments of $23.7million invested at an average interest rate of 1.9% generating interest incomeof approximately $220,000 in the first half of last year. The reduction inaverage cash investments reflects the acquisition of Moore Langen.

 

The Company’s effective tax rate for thesecond quarter and first six months of fiscal 2006 was 35.9% compared to 37.3%for the same periods last year. The decline in the effective tax rate is inlarge part due to the impact of the retrospective adoption of SFAS 123R at thebeginning of fiscal 2006. Although non-deductible stock compensation costs increasedthe effective tax rate by 0.5% in fiscal 2006, the impact was considerablyhigher at 1.3% in fiscal 2005. In addition, this year’s effective rate reflectsa federal tax benefit for manufacturers associated with the American JobsCreation Act of 2004.

 

For purposes of computing net income perdiluted share, weighted average shares outstanding increased by approximately110,000 shares and 121,000 shares over last year’s second quarter and first sixmonths, respectively. The increase in both periods was largely due to optionsexercised and shares issued under the Company’s stock plans. On March 10, 2005,the Company announced a three-for-two stock split effected in the form of a 50%stock dividend, which was distributed on May 27, 2005 to stockholders of recordon May 6, 2005. Weighted average shares outstanding and net income per shareamounts have been restated to give effect to the stock split.

 

**Liquidityand Capital Resources:**

 

During the first six months of fiscal 2006,operations provided approximately $10.1 million of cash, compared to $10.2million in the first half of fiscal 2005. Net income was $8.9 million for thefirst six months of fiscal 2006, stock-based compensation was $0.7 million, anddepreciation and amortization were $7.1 million. Working capital usedapproximately $7.0 million of cash, compared to $4.0 million in the same periodlast year, reflecting the increase in sales volume.

 

Investment activities in the first half offiscal 2006 used approximately $27.6 million of cash, including $14.2 million,net of cash acquired, for the acquisition of Moore Langen. Capital expenditureswere approximately $11.8 million, primarily for the four-color press that wasinstalled in December 2005 and deposits on another four-color press to be installedin early fiscal 2007. This press is identical to the presses installed in April2004 and December 2005. For the entire fiscal year, capital expenditures areexpected to be approximately $30 million. This amount includes payments for thenew four-color presses as well as bindery and warehousing expansion to supportthe additional four-color press capacity. Prepublication costs were $1.6million in the first six months, up 11% from the same period last year as aresult of increases in new title publishing at both Dover and REA. Prepublicationcosts for the full fiscal year are projected to be approximately $3 million.

 

Financingactivities for the first half of fiscal 2006 used approximately $2.3 million ofcash. Dividend payments were $3.0 million compared to $1.6 million in the firsthalf of fiscal 2005 as a result of a 50% increase in the dividend rate. AtMarch 25, 2006, the Company had $14.3 million in cash and no borrowings underits $45 million long-term revolving credit facility, which bears interest at afloating rate. The revolving credit facility is used by the Company for bothits long-term and short-term financing needs. The Company believes that itscash on hand, cash from operations and the available credit facility will besufficient to meet its cash requirements through 2006. The followingtable summarizes the Company’s contractual obligations and commitments atSeptember 24, 2005 to make future payments as well as its existing commercialcommitments (except for purchase obligations, which represent amounts at March 25, 2006 for capital commitments for a newfour-color press and other projects).

 
| ** **                  | ** ** | ** ** | ** ** | **(000’s Omitted)**             | ** ** |
|-----------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **Less than**                        | ** ** | **1 to 3** | ** ** | **4 to 5** | ** ** | **After 5** | ** ** |
| ** **                  | ** ** | **Total**  | ** ** | **1 Year**                           | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Contractual Payments:  |       |       |       |                                      |       |   |   |   |   |   |   |
| Long-Term Debt              |       | $          | 510        |                                      | $          | 85 |   | $ | 179 |   | $ | 189 |   | $ | 57 |   |
| Operating Leases            |       | 11,535     |       | 2,836                                     |       | 4,411 |   | 2,290 |   | 1,998 |   |
| Purchase Obligations        |       | 9,562      |       | 9,562                                     |       | — |   | — |   | — |   |
| Other Long-Term Liabilities |       | 3,020      |       | —                                    |       | 1,068 |   | 350 |   | 1,602 |   |
| Total                       |       | $          | 24,627     |                                      | $          | 12,483 |   | $ | 5,658 |   | $ | 2,829 |   | $ | 3,657 |   |

 

17

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**Forward-LookingInformation:**

 

This Quarterly Report onForm 10-Q and the Company’s Annual Report for the year ended September 24, 2005on Form 10-K include forward-looking statements. Statements that describefuture expectations, plans or strategies are considered “forward-lookingstatements” as that term is defined under the Private Securities LitigationReform Act of 1995 and releases issued by the Securities and ExchangeCommission. The words “believe,” “expect,” “anticipate,” “intend,” “estimate”and other expressions which are predictions of or indicate future events andtrends and which do not relate to historical matters identify forward-lookingstatements. Such statements are subject to risks and uncertainties that couldcause actual results to differ materially from those currently anticipated. Factorsthat could affect actual results include, among others, changes in customers’demand for the Company’s products, including seasonal changes in customerorders, changes in raw material and energy costs and availability, pricingactions by competitors, consolidation among customers and competitors, successin the integration of acquired businesses, changes in operating expenses,changes in technology, difficulties in the start up of new equipment orinformation technology systems, changes in copyright laws, changes in taxregulations, and general changes in economic conditions, including currencyfluctuations and changes in interest rates. Although the Company believes thatthe assumptions underlying the forward-looking statements are reasonable, anyof the assumptions could be inaccurate, and therefore, there can be noassurance that the forward-looking statements will prove to be accurate. Theforward-looking statements included herein are made as of the date hereof, andthe Company undertakes no obligation to update publicly such statements toreflect subsequent events or circumstances.

 

**Item 3.                    QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Therehave been no material changes from the information concerning the Company’s “Quantitativeand Qualitative Disclosures About Market Risk” as previously reported in theCompany’s Annual Report on Form 10-K for the year ended September 24, 2005.

 

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

#### ** **

**(a)           Evaluation of disclosure controls andprocedures**

 

As required by Rule 13a-15under the Securities Exchange Act of 1934, as of the end of the period coveredby this quarterly report, the Company carried out an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures. Based upon that evaluation, the Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures are effective to ensure that information required to be disclosed bythe Company in the reports it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms.

 

**(b)           Changes in internal controls overfinancial reporting**

 

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

 

18

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**COURIERCORPORATION**

 

#### **PART II. OTHERINFORMATION**

#### ** **

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

 

None.

 

**Item 1a.****                                                     Risk Factors**

 

Notapplicable.

 

**Item 2.****                                                           Unregistered Sales of Equity Securities and Useof Proceeds**

 

None.

 

**Item 3.                    Defaults Upon SeniorSecurities**

 

None.

 

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

 

The Annual Meeting ofStockholders of the registrant was held on January 18, 2006. Following arethe matters voted on at the meeting.

 

1) All nominees of theBoard of Directors of the registrant were elected for a three-year term. Voteswere cast as follows: James F. Conway III – 11,476,763 for and 85,563 withheld;Kathleen Foley Curley – 11,434,953 for and 127,373 withheld, and W. NicholasThorndike – 11,477,671 for and 84,655 withheld.

 

2) Stockholders voted toratify and approve the selection by the Audit and Finance Committee of theBoard of Directors, of Deloitte & Touche LLP as independent publicaccountants for the Corporation for the fiscal year ending September 30, 2006. Voteswere cast as follows: 11,465,301 votes for, 72,244 votes against, and 24,781votes abstained.

 

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

 

None.

 

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

 

(a)  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    |

 

(b)  Reports on Form 8-K

 

FiledJanuary 18, 2006, reporting under Item 2.02 a press release dated January 18,2006 reporting financial results for the quarter ended December 24, 2005.

 

19

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Company hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

**COURIER CORPORATION**

**(Registrant)**

 
| *April 27, 2006* | * *     | By:      | * s/James  F. Conway III*  | * * |
|------------------|--------------|----------|---------------------------------|----------|
| Date             | * *     | * * | James F. Conway III             |
|             |         |     | Chairman, President and         |
|             |         |     | Chief Executive Officer         |
|             |         |     |                            |
|             |         |     |                            |
| *April 27, 2006* | * *     | By:      | * s/Robert  P. Story, Jr.* | * * |
| Date             | * *     |     | Robert P. Story, Jr.            |
|             |         |     | Senior Vice President and       |
|             |         |     | Chief Financial Officer         |
|             |         |     |                            |
|             |         |     |                            |
| *April 27, 2006* | * *     | By:      | * s/Peter  M. Folger*      | * * |
| Date             | *** *** |     | Peter M. Folger                 |
|             |         |     | Vice President and              |
|             |         |     | Chief Accounting Officer        |
|                  |              |          |                                 |          |  |  |

 

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