**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| **x**                                                  | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                   |                                                                                                     |   |
| **For the quarterly period ended  June 28, 2008** | ** **                                                                                               |
|                                                   |                                                                                                     |   |
| **OR**                                                 | ** **                                                                                               | ** ** |
|                                                   |                                                                                                     |   |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thetransition periodfrom                                 to                          **

** **

**Commissionfile number 0-7597**

 

**COURIER CORPORATION**

(Exact name 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’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 filedby Section 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 requirementsfor the past 90 days.

 

Yes  x  No  o

 

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

or a smallerreporting company.  See the definitionsof “large accelerated filer,” “accelerated filer” and “smaller

reporting company”in Rule 12b-2 of 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 checkmark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

 

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 August 5, 2008** |
|-----------------------------|------------|-------------------------------------------------------|
| Common Stock, $1  par value |       | 12,076,120  shares                                    |

 

 

 

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COURIERCORPORATION

CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)

(Dollars inthousands except per share amounts)

 
| ** **                               | ** ** | **QUARTER ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|------------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **June 28,**      | ** ** | **June 30,**               | ** ** | **June 28,** | ** ** | **June 30,** | ** ** |
| ** **                               | ** ** | **2008**               | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Net sales                                |       | $                      | 73,378     |                            | $          | 73,411 |   | $ | 204,028 |   | $ | 214,059 |   |
| Cost of sales                            |       | 54,364                 |       | 48,986                          |       | 148,904 |   | 145,860 |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Gross profit                             |       | 19,014                 |       | 24,425                          |       | 55,124 |   | 68,199 |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Selling and  administrative expenses     |       | 13,600                 |       | 13,402                          |       | 41,490 |   | 41,106 |   |
| Impairment  charge (Note A)              |       | 23,850                 |       | —                          |       | 23,850 |   | — |   |
| Interest  expense, net                   |       | 322                    |       | 419                             |       | 889 |   | 1,117 |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Pretax (loss)  income                    |       | (18,758                | )          | 10,604                          |       | (11,105 | ) | 25,976 |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Income tax  (benefit) provision (Note C) |       | (6,386                 | )          | 3,923                           |       | (3,532 | ) | 9,663 |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Net (loss)  income                       |       | $                      | (12,372    | )                               | $          | 6,681 |   | $ | (7,573 | ) | $ | 16,313 |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Net (loss)  income per share (Note D):   |       |                   |       |                            |       |   |   |   |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Basic                                    |       | $                      | (1.01      | )                               | $          | 0.53 |   | $ | (0.61 | ) | $ | 1.31 |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Diluted                                  |       | $                      | (1.01      | )                               | $          | 0.53 |   | $ | (0.61 | ) | $ | 1.29 |   |
|                                     |       |                   |       |                            |       |   |   |   |   |
| Cash dividends  declared per share       |       | $                      | 0.20       |                            | $          | 0.18 |   | $ | 0.60 |   | $ | 0.54 |   |

 

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

 

2

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COURIERCORPORATION

CONSOLIDATEDCONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars inthousands)

 
| ** **                                                                                                                             | ** ** | **June 28,** | ** ** | **September 29,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                                             | ** ** | **2008**          | ** ** | **2007**               | ** ** |
| ASSETS                                                                                                                                 |       |              |       |                   |       |
|                                                                                                                                   |       |              |       |                   |       |
| Current assets:                                                                                                                        |       |              |       |                   |       |
| Cash and cash  equivalents                                                                                                             |       | $                 | 943        |                   | $          | 1,549 |   |
| Accounts  receivable, less allowance for uncollectible accounts of $1,737 at  June 28, 2008 and $1,531 at September 29, 2007 |       | 47,445            |       | 47,673                 |       |
| Inventories  (Note B)                                                                                                                  |       | 39,609            |       | 38,183                 |       |
| Deferred income  taxes                                                                                                                 |       | 3,450             |       | 3,469                  |       |
| Other current  assets                                                                                                                  |       | 2,884             |       | 1,550                  |       |
|                                                                                                                                   |       |              |       |                   |       |
| Total current  assets                                                                                                                  |       | 94,331            |       | 92,424                 |       |
|                                                                                                                                   |       |              |       |                   |       |
| Property, plant  and equipment, less accumulated depreciation: $152,588 at June 28, 2008  and $141,079 at September 29, 2007 |       | 93,954            |       | 97,778                 |       |
|                                                                                                                                   |       |              |       |                   |       |
| Goodwill (Note  A)                                                                                                                     |       | 41,705            |       | 55,199                 |       |
|                                                                                                                                   |       |              |       |                   |       |
| Other  intangibles, net (Note A)                                                                                                       |       | 1,956             |       | 12,904                 |       |
|                                                                                                                                   |       |              |       |                   |       |
| Prepublication  costs, net (Note A)                                                                                                    |       | 9,501             |       | 10,220                 |       |
|                                                                                                                                   |       |              |       |                   |       |
| Other assets                                                                                                                           |       | 1,424             |       | 1,310                  |       |
|                                                                                                                                   |       |              |       |                   |       |
| Total assets                                                                                                                           |       | $                 | 242,871    |                   | $          | 269,835 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

3

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COURIERCORPORATION

CONSOLIDATEDCONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars inthousands)

 
| ** **                                                                                                                                     | ** ** | **June 28,** | ** ** | **September 29,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2008**          | ** ** | **2007**               | ** ** |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                     |       |              |       |                   |       |
|                                                                                                                                           |       |              |       |                   |       |
| Current  liabilities:                                                                                                                          |       |              |       |                   |       |
| Current  maturities of long-term debt                                                                                                          |       | $                 | 91         |                   | $          | 91 |   |
| Accounts payable                                                                                                                               |       | 14,869            |       | 20,111                 |       |
| Accrued payroll                                                                                                                                |       | 6,818             |       | 7,409                  |       |
| Accrued taxes                                                                                                                                  |       | 963               |       | 2,129                  |       |
| Other current  liabilities                                                                                                                     |       | 6,602             |       | 6,652                  |       |
|                                                                                                                                           |       |              |       |                   |       |
| Total current  liabilities                                                                                                                     |       | 29,343            |       | 36,392                 |       |
|                                                                                                                                           |       |              |       |                   |       |
| Long-term debt                                                                                                                                 |       | 28,130            |       | 17,375                 |       |
| Deferred income  taxes                                                                                                                         |       | 4,329             |       | 9,446                  |       |
| Other  liabilities                                                                                                                             |       | 3,024             |       | 3,619                  |       |
|                                                                                                                                           |       |              |       |                   |       |
| Total  liabilities                                                                                                                             |       | 64,826            |       | 66,832                 |       |
|                                                                                                                                           |       |              |       |                   |       |
| Stockholders’  equity (Notes F and G):                                                                                                    |       |              |       |                   |       |
| Preferred stock,  $1 par value - authorized 1,000,000 shares; none issued                                                                      |       |              |       |                   |       |
| Common stock, $1  par value - authorized 18,000,000 shares; issued 12,220,000 at June 28,  2008 and 12,612,000 at September 29, 2007 |       | 12,220            |       | 12,612                 |       |
| Additional  paid-in capital                                                                                                                    |       | 3,453             |       | 12,977                 |       |
| Retained  earnings                                                                                                                             |       | 162,877           |       | 177,919                |       |
| Accumulated  other comprehensive loss                                                                                                          |       | (505              | )          | (505                   | )          |
|                                                                                                                                           |       |              |       |                   |       |
| Total  stockholders’ equity                                                                                                               |       | 178,045           |       | 203,003                |       |
|                                                                                                                                           |       |              |       |                   |       |
| Total liabilities  and stockholders’ equity                                                                                               |       | $                 | 242,871    |                   | $          | 269,835 |   |

 

The accompanying notesare an integral part of the consolidated financial statements.

 

4

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COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS(UNAUDITED)

(Dollars in thousands)

 
| ** **                                                                              | ** ** | **NINE MONTHS ENDED** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                              | ** ** | **June 28,**               | ** ** | **June 30,** | ** ** |
| ** **                                                                              | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                                                    |       |                            |       |   |   |
| Operating  Activities:                                                                  |       |                            |       |   |   |
| Net (loss)  income                                                                      |       | $                               | (7,573     | ) | $ | 16,313 |   |
| Adjustments to  reconcile net (loss) income to cash provided from operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                                          |       | 16,607                          |       | 14,201 |   |
| Impairment  charge                                                                      |       | 23,850                          |       | — |   |
| Stock-based  compensation                                                               |       | 955                             |       | 1,101 |   |
| Deferred income  taxes                                                                  |       | (5,098                          | )          | 1,351 |   |
| Changes in  assets and liabilities:                                                     |       |                            |       |   |   |
| Accounts  receivable                                                                    |       | 228                             |       | (830 | ) |
| Inventory                                                                               |       | (1,426                          | )          | (10,739 | ) |
| Accounts payable                                                                        |       | (5,242                          | )          | 1,125 |   |
| Accrued taxes                                                                           |       | (1,166                          | )          | (2,804 | ) |
| Other elements  of working capital                                                      |       | (1,975                          | )          | (3,057 | ) |
| Other long-term,  net                                                                   |       | (855                            | )          | (173 | ) |
|                                                                                    |       |                            |       |   |   |
| Cash provided  from operating activities                                                |       | 18,305                          |       | 16,488 |   |
|                                                                                    |       |                            |       |   |   |
| Investment  Activities:                                                                 |       |                            |       |   |   |
| Capital  expenditures                                                                   |       | (7,755                          | )          | (17,920 | ) |
| Prepublication  costs                                                                   |       | (3,689                          | )          | (4,327 | ) |
|                                                                                    |       |                            |       |   |   |
| Cash used for  investment activities                                                    |       | (11,444                         | )          | (22,247 | ) |
|                                                                                    |       |                            |       |   |   |
| Financing  Activities:                                                                  |       |                            |       |   |   |
| Long-term debt  borrowings, net                                                         |       | 10,755                          |       | 10,029 |   |
| Cash dividends                                                                          |       | (7,469                          | )          | (6,745 | ) |
| Proceeds from  stock plans                                                              |       | 1,269                           |       | 1,806 |   |
| Stock  repurchases                                                                      |       | (12,055                         | )          | — |   |
| Excess tax  benefits from stock-based compensation                                      |       | 33                              |       | 531 |   |
|                                                                                    |       |                            |       |   |   |
| Cash (used for)  provided from financing activities                                     |       | (7,467                          | )          | 5,621 |   |
|                                                                                    |       |                            |       |   |   |
| Decrease in cash  and cash equivalents                                                  |       | (606                            | )          | (138 | ) |
|                                                                                    |       |                            |       |   |   |
| Cash and cash  equivalents at the beginning of the period                               |       | 1,549                           |       | 1,483 |   |
|                                                                                    |       |                            |       |   |   |
| Cash and cash  equivalents at the end of the period                                     |       | $                               | 943        |   | $ | 1,345 |   |

 

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**

 

The balance sheet of Courier Corporation (the “Company”) as of June 28,2008, the statements of income for the three-month and nine-month periods endedJune 28, 2008 and June 30, 2007, and the statements of cash flows forthe nine-month periods ended June 28, 2008 and June 30, 2007 areunaudited.  In the opinion of management,all adjustments, consisting of normal recurring items, considered necessary fora fair presentation of such financial statements have been recorded.

 

Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States (“generally accepted accountingprinciples”) have been condensed or omitted. The balance sheet data as of September 29, 2007 was derived fromaudited year-end financial statements, but does not include disclosuresrequired by generally accepted accounting principles.  It is suggested that these interim financialstatements be read in conjunction with the Company’s most recent Form 10-Kand Annual Report for the year ended September 29, 2007.

 

**Goodwill and Other Intangibles**

 

The Companyevaluates possible impairment annually at the end of its fiscal year orwhenever events or circumstances indicate that the carrying value of the assetsmay not be recoverable. These tests are performed at the reporting unit level,or one level below the operating segment. As a result of a precipitous decline in sales and profits at FederalMarketing Corporation, d/b/a Creative Homeowner (“Creative Homeowner”) in thethird quarter, due in large part to the continued downturn in the housingmarket and reduction in store traffic at home improvement centers and otherlarge retail chain stores, the Company performed an interim test of goodwilland other intangible assets for Creative Homeowner, one of the companies in itsspecialty publishing segment.

 

The impairmenttest for goodwill is a two-step test.  Ifthe fair value of the reporting unit exceeds the carrying value of its netassets, then goodwill is not impaired and the Company is not required toperform further testing.  If the carryingvalue of the net assets of the reporting unit exceeds its fair value, then theCompany must perform the second step in order to determine the implied fairvalue of the reporting unit’s goodwill and compare it to the carrying value ofits goodwill.  The evaluation of goodwillrequires the Company to use significant judgments and estimates, including butnot limited to, projected future revenues, cash flows, and discount rates.  The Company used a valuation methodology toestimate the fair value of Creative Homeowner based primarily on the discountedcash flow approach.  Key assumptionsincluded revenue and operating income forecasts, the assessed growth rate afterthe forecast period, and a discount rate of 15%.  After performing the step-one test, theCompany determined that the fair value of Creative Homeowner at the end of thethird quarter was below its carrying value and as such the second step wasrequired.  The second step of theimpairment test includes valuing the tangible and intangible assets andliabilities of the impaired reporting unit based on their fair value anddetermining the fair value of the impaired reporting unit’s impliedgoodwill.  The implied goodwill is theresidual of the total fair value of the reporting unit less the accumulatedfair value of identified tangible and intangible assets and liabilities.  If the second step is not completed by thetime financial statements are issued and a goodwill impairment charge isprobable and can be reasonably estimated, accounting rules require anestimate of that loss to be recognized in the financial statements.  Based on an initial estimate of the secondstep valuations, the Company recorded an estimated pre-tax impairment charge of$13.5 million relating to goodwill in the third quarter.

 

Trade names withindefinite lives are also not subject to amortization and are reviewed at leastannually for potential impairment at the end of the fiscal year or wheneverevents or circumstances indicate that the carrying value of the assets may notbe recoverable.  As a result of theimpairment analysis performed for Creative Homeowner, the Company determinedthat the carrying value of Creative Homeowner’s trade name exceeded itsestimated fair value.  Accordingly, theCompany recorded an estimated pre-tax impairment charge of $0.5 millionrelating to Creative Homeowner’s trade names in the third quarter.

 

6

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**COURIER CORPORATION**

** **

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

 

“Other intangibles”includes customer lists related to Creative Homeowner and Moore-Langen PrintingCompany, Inc. (“Moore Langen”).  Asa result of the impairment analysis performed for Creative Homeowner, theCompany determined that the carrying value of Creative Homeowner’s customerlist exceeded its estimated fair value. Accordingly, the Company recorded an estimated pre-tax impairment chargein the third quarter of $9.8 million for the full carrying value of CreativeHomeowner’s customer list.

 

The totalestimated impairment charge recorded in the third quarter related to thegoodwill, trade name, and customer list intangible assets of Creative Homeownerwas $23.9 million.  The Company willadjust the amount of the impairment charge, as necessary, in the fourth quarterof its fiscal year 2008 based upon the completion of its fair valuedetermination of the tangible and intangible assets and liabilities of CreativeHomeowner.

 

In addition to the$9.8 million estimated impairment charge, amortization related to customerlists for Moore Langen and Creative Homeowner was approximately $600,000 forthe first nine months of both fiscal 2008 and 2007.  Moore Langen’s customer list is beingamortized over a ten-year period. There was no unamortized balance remainingfor Creative Homeowner’s customer list after the estimated impairmentcharge.  As such, annual amortizationexpense for the next five years will be reduced to approximately $23,000compared to $800,000 annually, prior to the impairment charge.

 

**PrepublicationCosts**

 

Prepublication costs,associated with creating new titles in the specialty publishing segment, areamortized to cost of sales using the straight-line method over estimated usefullives of three to five years.  In thethird quarter of fiscal 2008, such amortization includes approximately $0.5million to writedown the investment in underperforming titles.

 

**Recent****Accounting Pronouncements**

 

At the beginningof fiscal 2008, the Company adopted the provisions of the Financial AccountingStandards Board (“FASB”) Interpretation No. 48, “Accounting forUncertainty in Income Taxes – an interpretation of FASB Statement No. 109”(“FIN 48”), which is more fully discussed in Note C below.

 

In December 2007,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141(revised 2007), “Business Combinations,” (“SFAS No. 141R”), which replacesSFAS No. 141. This statement retains the purchase method of accounting forbusiness acquisitions, but requires a number of changes in the recognition ofassets acquired and liabilities assumed as well as the treatment ofacquisition-related costs.  SFAS No. 141Rwill be effective at the beginning of the Company’s fiscal year 2010 and willapply prospectively to business combinations completed on or after thatdate.  In March 2008, the FASBissued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities,” an amendment of FASB Statement No. 133 (“SFAS No. 161”).SFAS No. 161 changes the disclosure requirements for derivative instrumentsand hedging activities and will also be effective at the beginning of theCompany’s fiscal year 2010.  In April 2008,the FASB issued FSP 142-3, *Determining theUseful Life of Intangible Assets* (“FSP 142-3”). FSP 142-3 amends thefactors to be considered in determining the useful life of intangible assets.Its intent is to improve the consistency between the useful life of anintangible asset and the period of expected cash flows used to measure its fairvalue. FSP 142-3 will be effective at the beginning of the Company’s fiscalyear 2010. The Company is currently assessing the impact of FSP 142-3 on itsconsolidated financial statements.

 

7

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# **COURIER CORPORATION**

# ** **

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

 

# **B.            INVENTORIES**

# ** **

Inventories are valued at the lower of cost or market.  Cost is determined using the last-in,first-out (LIFO) method for approximately 45% of the Company’s inventories atboth June 28, 2008 and September 29, 2007.  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 28,  2008**       | ** ** | **September 29,  2007** | ** ** |
| Raw materials   |       | $                             | 6,098      |   | $ | 5,295 |   |
| Work in process |       | 9,448                         |       | 8,274 |   |
| Finished goods  |       | 24,063                        |       | 24,614 |   |
| Total           |       | $                             | 39,609     |   | $ | 38,183 |   |

 

# **C.            INCOME TAXES**

# ** **

At the beginningof fiscal 2008, the Company adopted the provisions of FIN 48, which contains a two-step approach to recognizing andmeasuring uncertain tax positions accounted for in accordance with SFAS No. 109,“Accounting for Income Taxes.”  The firststep is to evaluate the tax position for recognition by determining if theweight of available evidence indicates that it is more likely than not that theposition will be sustained on audit, including resolution of related appeals orlitigation processes, if any.  The secondstep is to measure the tax benefit, quantified as the largest amount that iscumulatively more than 50% likely to be realized upon ultimate settlement.  The Company recognizes interest and penaltiesrelated to unrecognized tax benefits in income tax expense.  The cumulative effect of adopting FIN 48 atthe beginning of fiscal 2008 was $108,000 and was recorded as a reduction inretained earnings with a corresponding liability included under the caption “OtherLiabilities” in the accompanying consolidated condensed balance sheet as of September 29,2007. During the third quarter, certain federal and state statutes of limitationsexpired. As such, at June 28, 2008, the unrecognized tax benefits andaccrued interest were reduced to approximately $65,000 and the impact, ifrecognized, would favorably affect the Company’s effective income tax rate infuture periods. The Company does not anticipate any significant changes in theamount of unrecognized tax benefits over the next twelve months.

 

The Company files federal and state income tax returns in variousjurisdictions of the United States. With few exceptions, the Company is no longersubject to income tax examinations for years prior to fiscal 2005.  Substantially all U.S. federal tax yearsprior to fiscal 2005 have been audited by the Internal Revenue Service andclosed.

 

8

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# **COURIER CORPORATION**

# ** **

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

 

The provision (benefit) forincome taxes differs from that computed using the statutory federal income taxrates for the following reasons:

 
| ** **                            | ** ** | **(000’s Omitted)**     | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **Quarter Ended**            | ** ** |
| ** **                            | ** ** | **June 28,****   2008** | ** ** | **June 30,   2007** | ** ** |
| Federal taxes at statutory rates      |       | $(6,565                           | )          | (35.0 | )% | $3,711 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 225                               |       | 1.2 |   | 329 |   | 3.1 |   |
| Federal manufacturers’ deduction |       | (61                               | )          | (0.3 | ) | (91 | ) | (0.9 | ) |
| Tax benefit of export related income  |       | —                            |       | — |   | (44 | ) | (0.4 | ) |
| Stock-based compensation (Note F)     |       | 12                                |       | — |   | 17 |   | 0.2 |   |
| Other                                 |       | 3                                 |       | 0.1 |   | 1 |   | — |   |
| Total (benefit) provision             |       | $(6,386                           | )          | (34.0 | )% | $3,923 |   | 37.0 | % |

 
| ** **                            | ** ** | **(000’s Omitted)**     | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **Nine Months Ended**   | ** ** |
| ** **                            | ** ** | **June 28,****   2008** | ** ** | **June 30,****   2007** | ** ** |
| Federal taxes at statutory rates      |       | $(3,887                           | )          | (35.0 | )% | $9,092 |   | 35.0 | % |
| State taxes, net of federal benefit   |       | 486                               |       | 4.4 |   | 828 |   | 3.2 |   |
| Federal manufacturers’ deduction |       | (155                              | )          | (1.4 | ) | (223 | ) | (0.9 | ) |
| Tax benefit of export related income  |       | —                            |       | — |   | (100 | ) | (0.4 | ) |
| Stock-based compensation (Note F)     |       | 13                                |       | 0.1 |   | 39 |   | 0.2 |   |
| Other                                 |       | 11                                |       | 0.1 |   | 27 |   | 0.1 |   |
| Total (benefit) provision             |       | $(3,532                           | )          | (31.8 | )% | $9,663 |   | 37.2 | % |

 

The tax benefit related to theimpairment charge for Creative Homeowner was recognized at 35% (see NoteA).  No state tax benefit was recognizedas the Company fully provided a valuation allowance on the related deferredstate tax asset.  Excluding the effect ofthe tax benefit of the impairment charge for Creative Homeowner, the effectivetax rate was 38.6% in the third quarter and 37.8% for the first nine months offiscal 2008 compared to 37.0% and 37.2% in the same periods last year,respectively, primarily because of a higher effective state tax rate.

 

# **D.            NET (LOSS) INCOME PER SHARE**

# ** **

The following is areconciliation of the shares used in the calculation of basic and diluted(loss) income per share.  Potentiallydilutive shares, calculated using the treasury stock method, consist of sharesissued under the Company’s stock option plans. No potentially dilutive shares are included in the computation inperiods when a loss is incurred.

 
| ** **                             | ** ** | **(000’s Omitted)** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                             | ** ** | **June 28,  2008**       | ** ** | **June 30,  2007** | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** |
|                                   |       |                          |       |   |   |   |   |   |   |
| Average shares outstanding for basic   |       | 12,252                        |       | 12,491 |   | 12,397 |   | 12,451 |   |
| Effect of potentially dilutive shares  |       | —                        |       | 217 |   | — |   | 233 |   |
| Average shares outstanding for diluted |       | 12,252                        |       | 12,708 |   | 12,397 |   | 12,684 |   |

 

9

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# **COURIER CORPORATION**

# ** **

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

#### ** **

# **E.             BUSINESS SEGMENTS**

# ** **

The Company has two businesssegments: book manufacturing and specialty publishing. The book manufacturingsegment offers a full range of services from production through storage anddistribution for religious, educational and specialty trade book publishers.The specialty publishing segment consists of Dover Publications, Inc. (“Dover”),Research & Education Association, Inc. (“REA”), and CreativeHomeowner.

 

# **In evaluating segment performance,management primarily focuses on income or loss before taxes, stock-basedcompensation and other income.  Theelimination of intersegment sales and related profit represents sales from thebook manufacturing segment to the specialty publishing segment.  Corporate expenses that are allocated to thesegments include various support functions such as information technologyservices, finance, legal, human resources and engineering, and includedepreciation and amortization expense related to corporate assets*.***

# ** **

The following table providessegment information for the quarter and nine-month periods ended June 28,2008 and June 30, 2007.  Theestimated impairment charge of $23.9 million recorded in the third quarter offiscal 2008 (discussed more fully in Note A) is included in the results of thespecialty publishing segment.

 
| ** **                                          | ** ** | **(000’s Omitted)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                          | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended** | ** ** |
| ** **                                          | ** ** | **June 28,   2008** | ** ** | **June 30,   2007** | ** ** | **June 28,   2008** | ** ** | **June 30,   2007** | ** ** |
|                                                |       |                          |       |   |   |   |   |   |   |
| Net sales:                                          |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                                  |       | $                             | 63,187     |   | $ | 58,497 |   | $ | 166,253 |   | $ | 168,923 |   |
| Specialty publishing                                |       | 13,362                        |       | 17,917 |   | 45,376 |   | 52,835 |   |
| Elimination of intersegment sales                   |       | (3,171                        | )          | (3,003 | ) | (7,601 | ) | (7,699 | ) |
| Total                                               |       | $                             | 73,378     |   | $ | 73,411 |   | $ | 204,028 |   | $ | 214,059 |   |
|                                                |       |                          |       |   |   |   |   |   |   |
| Income (loss) before taxes:                         |       |                          |       |   |   |   |   |   |   |
| Book manufacturing                                  |       | $                             | 8,228      |   | $ | 10,147 |   | $ | 16,234 |   | $ | 23,915 |   |
| Specialty publishing, including  impairment  charge |       | (26,812                       | )          | 844 |   | (26,561 | ) | 3,014 |   |
| Stock-based compensation                            |       | (213                          | )          | (375 | ) | (955 | ) | (1,101 | ) |
| Elimination of intersegment profit                  |       | 39                            |       | (12 | ) | 177 |   | 148 |   |
| Total                                               |       | $                             | (18,758    | ) | $ | 10,604 |   | $ | (11,105 | ) | $ | 25,976 |   |

 

**F.             STOCK-BASED COMPENSATION**

 

The Companyrecords stock-based compensation expense for the cost of stock options andstock grants as well as shares issued under the Company’s 1999 Employee StockPurchase Plan. The fair value of each option awarded is calculated on the dateof grant using the Black-Scholes option-pricing model. Stock-based compensationrecognized in selling and administrative expenses in the accompanying financialstatements in the third quarter of fiscal 2008 and 2007 was $213,000 and$375,000, respectively, and the related tax benefit recognized was $62,000 and$118,000, respectively. For the first nine months of 2008 and 2007, stock-basedcompensation was $955,000 and $1,101,000, respectively, and the related taxbenefit recognized was $293,000 and $342,000, respectively. Unrecognizedstock-based compensation cost at June 28, 2008 was $1.6 million, to berecognized over a weighted-average period of 1.8 years.

 

10

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# **COURIER CORPORATION**

# ** **

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

#### ** **

**StockIncentive Plan:** The Company’s 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 ofthe stock at the time the option is granted and incentive stock options mustexpire not 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 three years. The fair value of each option was estimated using the Black-Scholesoption-pricing model on the date of grant. The following table provides stockoption activity under this plan in the first nine months of fiscal 2008:

 
| ** **                             | ** ** | ** **                   | ** ** | **Weighted Average** | ** ** | **Aggregate**                        | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **Option****   Shares** | ** ** | **Exercise   Price** | ** ** | **Remaining   Term (yrs)** | ** ** | **Intrinsic   Value** | ** ** |
| Outstanding at September 29, 2007 |       | 387,511                      |       | $                         | 25.53      |                                 |       |   |   |   |
| Issued                                 |       | —                       |       | —                    |       |                                 |       |   |   |
| Exercised                              |       | (24,015                      | )          | 12.08                     |       |                                 |       | $ | 344,000 |   |
| Canceled                               |       | (6,048                       | )          | 36.52                     |       |                                 |       |   |   |
| Expired                                |       | (315                         | )          | 35.51                     |       |                                 |       |   |   |
| Outstanding at June 28, 2008      |       | 357,133                      |       | $                         | 26.24      |                                 | 2.5        |   | $ | 531,000 |   |
|                                   |       |                         |       |                      |       |                                 |       |   |   |
| Exercisable at June 28, 2008      |       | 261,922                      |       | $                         | 22.45      |                                 | 2.0        |   | $ | 531,000 |   |
| Available for  future grants           |       | 192,182                      |       |                      |       |                                 |       |   |   |

 

During the first nine months of fiscal 2008, 1,000 non-vested stockawards were granted with a weighted-average fair value of $26.86 per share,2,875 stock grants vested with a weighted-average fair value of $40.67 per share,and 1,893 stock grants were forfeited with a weighted-average fair value of$36.39 per share. At June 28, 2008, non-vested stock grants outstandingwere 38,984 shares with a weighted-average grant-date fair value of $36.96.

 

**Directors’ Option Plan:** In January 2005,stockholders approved the Courier Corporation 2005 Stock Equity Plan forNon-Employee Directors (the “2005 Plan”). Under the 2005 Plan, non-qualifiedstock options to purchase up to a total of 225,000 shares of the Company’scommon stock may be granted to non-employee directors.  The option price per share is the fair marketvalue of stock at the time the option is granted.  The options are immediately exercisable andhave a term of five years. The 2005 Plan replaced the previous non-employeedirectors’ plan, which had been adopted in 1989.  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 valueoptions issued in fiscal 2008 were a risk-free interest rate of 3.14%, expectedvolatility of 26.6%, a dividend yield of 2.59%, and an expected life of fiveyears.  Thefollowing table provides activity under the directors’ option plans in thefirst nine months of fiscal 2008:

 
| ** **                             | ** ** | ** **                   | ** ** | **Weighted Average** | ** ** | **Aggregate**                        | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **Option****   Shares** | ** ** | **Exercise   Price** | ** ** | **Remaining   Term (yrs)** | ** ** | **Intrinsic   Value** | ** ** |
| Outstanding at September 29, 2007 |       | 167,097                      |       | $                         | 31.36      |                                 |       |   |   |   |
| Issued                                 |       | 42,000                       |       | 26.86                     |       |                                 |       |   |   |
| Exercised                              |       | (30,750                      | )          | 21.26                     |       |                                 |       | $ | 121,000 |   |
| Canceled                               |       | (14,727                      | )          | 36.69                     |       |                                 |       |   |   |
| Outstanding at June 28, 2008      |       | 163,620                      |       | $                         | 31.63      |                                 | 2.7        |   | $ | 0 |   |
|                                   |       |                         |       |                      |       |                                 |       |   |   |
| Exercisable at June 28, 2008      |       | 163,620                      |       | $                         | 31.63      |                                 | 2.7        |   | $ | 0 |   |
| Available for future grants            |       | 60,610                       |       |                      |       |                                 |       |   |   |

 

11

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# **COURIER CORPORATION**

# ** **

**NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)**

 

Directors may also elect to receive their annual retainer and committeechair fees as shares of stock in lieu of cash; 5,399 such shares were issued infiscal 2008 with a fair market value of $26.86 per share.

 

**Employee Stock Purchase Plan:** The Company’s 1999 EmployeeStock Purchase Plan (“ESPP”), as amended, authorizes the issuance of up to anaggregate of 337,500 shares of the Company’s common stock.  Eligible employees may purchase shares of theCompany’s common stock at not less than 85% of fair market value at the end ofthe grant period.  On March 1, 2008,13,120 shares were issued under the ESPP at a price of $23.13 per share.  At June 28, 2008, there were 67,990shares available for future issuances.

 

**G.        SHARE REPURCHASE PLAN**

 

On May 8, 2008, theBoard of Directors of the Company expanded the Company’s Share Repurchase Planand authorized the repurchase of up to an additional $5 million of the Company’soutstanding common stock, bringing the total amount authorized under the planto $15 million since its commencement in November 2007.  Share repurchases occur from time to time atmanagement’s discretion either through the open market or privately negotiatedtransactions.  From the inception of theshare repurchase program through June 28, 2008, the Company hasrepurchased approximately 457,000 shares ofcommon stock for approximately $12.1 million. As such, at June 28, 2008, the Company had approximately $2.9million of remaining authorization available for future share repurchases.Subsequently, on August 6, 2008, the Company’s Board of Directors furtherexpanded the share repurchase program and authorized the repurchase of up to anadditional $5 million of the Company’s common stock.

 

12

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| **Item 2.** | **COURIER CORPORATION** |
|-------------|-------------------------|

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF**

**FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Critical Accounting Policies and Estimates:**

 

The Company’s consolidatedcondensed financial statements have been prepared in accordance with generallyaccepted accounting principles.  Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the amounts reported in these financial statementsand accompanying notes.  On an ongoingbasis, management evaluates its estimates and judgments, including thoserelated to collectibility of accounts receivable, recovery of inventories,impairment of goodwill, prepublication costs and income taxes.  Management bases its estimates and judgmentson historical experience and various other factors it believes 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:

 

# **AccountsReceivable**   Management performs ongoing creditevaluations of the Company’s customers and adjusts credit limits based uponpayment 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, resulting in an impairment of their ability tomake payments, 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 intangibles include customer lists,which are amortized on a straight-line basis over periods ranging from ten tofifteen years. The Company evaluates possible impairment of goodwill and otherintangibles at the reporting unit level, or one level below an operatingsegment, on an annual basis or whenever events or circumstances indicate thatthe carrying value of the assets may not be recoverable.  The Company completed the annual impairmenttest at September 29, 2007 which resulted in no change to the nature orcarrying amounts of its intangible assets. In the third quarter of fiscal 2008, the Company performed an interimimpairment test for Federal Marketing Corporation d/b/a Creative Homeowner (“CreativeHomeowner”) due to a precipitous decline in sales and profits at Creative Homeownerin the quarter.  As a result of theimpairment tests, the Company concluded that the carrying value of CreativeHomeowner’s goodwill and other intangible assets exceeded their estimated fairvalue. The total estimated pre-tax impairment charge recorded in the thirdquarter related to the goodwill, trade name, and customer list intangibleassets of Creative Homeowner was $23.9 million. The Company will adjust the amount of the impairment charge, asnecessary, in the fourth quarter of fiscal 2008 based upon the completion ofits fair value determination of the tangible and intangible assets andliabilities of Creative Homeowner. Changes in market conditions or poor operating results could result in adecline in value of the Company’s goodwill and other intangible assets therebypotentially requiring an additional 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 five years. Management regularly evaluates the sales and profitability of theproducts based upon historical and forecasted demand.  Based upon this evaluation, adjustments maybe required to amortization expense.  Inthe third quarter of fiscal 2008, such an adjustment was made for $0.5 millionto write down the investment in underperforming titles at Creative Homeowner.

 

13

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Income Taxes   The income tax provision and related accruedtaxes are based on amounts reported on the Company’s tax returns and changes indeferred taxes.  Deferred income tax liabilities and assets are determined based uponthe differences between the financial statement and tax bases of assets andliabilities.  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.

 

**Overview:**

 

Courier Corporation, founded in1824, is one of America’s leading book manufacturers and specialtypublishers.  The Company has two businesssegments: book manufacturing and specialty publishing.  The book manufacturing segment streamlinesthe process of bringing books from the point of creation to the point ofuse.  Based on sales, Courier is thethird largest book manufacturer in the United States, offering services fromprepress and production, through storage and distribution.  The specialty publishing segment consists ofDover Publications, Inc. (“Dover”), Research & EducationAssociation, Inc. (“REA”), and 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 and distributesbooks on home design, decorating, landscaping, gardening and crafts, and sellshome plans.

 

**Results of Operations:**

 
| ** **                            | ** ** | **FINANCIAL HIGHLIGHTS**                                                     | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                            | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                            | ** ** | **June 28,  2008**                                                           | ** ** | **June 30,  2007** | ** ** | **%  Change** | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** | **%  Change** | ** ** |
|                                  |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                             |       | $                                                                                 | 73,378     |   | $ | 73,411 |   | 0 | % | $ | 204,028 |   | $ | 214,059 |   | -4.7 | % |
| Cost of sales                         |       | 54,364                                                                            |       | 48,986 |   | 11.0 | % | 148,904 |   | 145,860 |   | 2.1 | % |
| Gross profit                          |       | 19,014                                                                            |       | 24,425 |   | -22.2 | % | 55,124 |   | 68,199 |   | -19.2 | % |
| As a percentage of sales              |       | 25.9                                                                              | %          | 33.3 | % |   |   | 27.0 | % | 31.9 | % |   |   |
| Selling and administrative  expenses  |       | 13,600                                                                            |       | 13,402 |   | 1.5 | % | 41,490 |   | 41,106 |   | 0.9 | % |
| Impairment charge                     |       | 23,850                                                                            |       | — |   | 100.0 | % | 23,850 |   | — |   | 100.0 | % |
| Interest expense, net                 |       | 322                                                                               |       | 419 |   | -23.2 | % | 889 |   | 1,117 |   | -20.4 | % |
| Pretax (loss) income                  |       | (18,758                                                                           | )          | 10,604 |   |   |   | (11,105 | ) | 25,976 |   |   |   |
| Income tax (benefit) provision        |       | (6,386                                                                            | )          | 3,923 |   |   |   | (3,532 | ) | 9,663 |   |   |   |
| Net (loss) income                     |       | $                                                                                 | (12,372    | ) | $ | 6,681 |   |   |   | $ | (7,573 | ) | $ | 16,313 |   |   |   |
| Net (loss) income per  diluted  share |       | $                                                                                 | (1.01      | ) | $ | 0.53 |   |   |   | $ | (0.61 | ) | $ | 1.29 |   |   |   |

# ** **

# **Revenues in the thirdquarter of fiscal 2008 were $73.4 million, unchanged from last year’s thirdquarter.  For the first nine months,revenues were $204.0 million, down 5% from the same period last year,reflecting the impact of industry consolidation and the sluggish nationaleconomy. Third quarter results include a non-cash, pretax impairment charge of$23.9 million ($15.5 million after tax or $1.27 per diluted share) related topoor financial performance at Creative Homeowner as discussed below.  As a result, the Company reported a net lossof $12.4 million, or $1.01 per diluted share, for the third quarter and a netloss of $7.6 million, or $0.61 per diluted share, for the first nine months offiscal 2008.**

# ** **

*Impairment Charge*

 

The Companyevaluates possible impairment of goodwill and other intangibles at thereporting unit level, or one level below an operating segment, on an annualbasis or whenever events or circumstances indicate that the carrying value ofthe assets may not be recoverable. In the third quarter of fiscal 2008, theCompany performed an additional test of goodwill and other intangible assetsfor Creative Homeowner as a result of a precipitous decline in sales andprofits at Creative Homeowner in the quarter, due in large part to thecontinued downturn in the housing market and reduction in store traffic at home

 

14

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# ** **

improvementcenters and other large retail chain stores. As a result of the impairment tests, the Company concluded that thecarrying value of Creative Homeowner’s goodwill and other intangible assetsexceeded their estimated fair value. The total estimated pre-tax impairmentcharge recorded in the third quarter related to the goodwill, trade name, andcustomer list intangible assets of Creative Homeowner was $23.9 million, or$15.5 million on an after-tax basis.  TheCompany will adjust the amount of the impairment charge, as necessary, basedupon the completion of its fair value determination of the tangible andintangible assets and liabilities of Creative Homeowner in the fourth quarterof fiscal 2008.

 

The following tablesummarizes the impact of the impairment charge on net income:

 
| ** **                                            | ** ** | **(dollars in thousands except per share amount)** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Quarter Ended**                                                           | ** ** | **Nine Months Ended** | ** ** |
| ** **                                            | ** ** | **June 28,  2008**                                                          | ** ** | **June 30,  2007** | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** |
|                                                  |       |                                                                             |       |   |   |   |   |   |   |
| Net (loss) income as reported                         |       | $                                                                                | (12,372    | ) | $ | 6,681 |   | $ | (7,573 | ) | $ | 16,313 |   |
| Impairment charge, after tax benefit                  |       | (15,500                                                                          | )          | — |   | (15,500 | ) | — |   |
| Net income before impairment charge                   |       | $                                                                                | 3,128      |   | $ | 6,681 |   | $ | 7,927 |   | $ | 16,313 |   |
| Net income per diluted share before impairment charge |       | $                                                                                | 0.26       |   | $ | 0.53 |   | $ | 0.64 |   | $ | 1.29 |   |

 

*Book Manufacturing Segment*

 
| ** **                           | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                           | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                           | ** ** | **June 28,  2008**                                                           | ** ** | **June 30,  2007** | ** ** | **%  Change** | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** | **%  Change** | ** ** |
|                                 |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                            |       | $                                                                                 | 63,187     |   | $ | 58,497 |   | 8.0 | % | $ | 166,253 |   | $ | 168,923 |   | -1.6 | % |
| Cost of sales                        |       | 47,536                                                                            |       | 41,254 |   | 15.2 | % | 127,415 |   | 122,951 |   | 3.6 | % |
| Gross profit                         |       | 15,651                                                                            |       | 17,243 |   | -9.2 | % | 38,838 |   | 45,972 |   | -15.5 | % |
| As a percentage of sales             |       | 24.8                                                                              | %          | 29.5 | % |   |   | 23.4 | % | 27.2 | % |   |   |
| Selling and administrative  expenses |       | 7,548                                                                             |       | 7,144 |   | 5.7 | % | 23,037 |   | 22,318 |   | 3.2 | % |
| Interest income                      |       | (125                                                                              | )          | (48 | ) |   |   | (433 | ) | (261 | ) |   |   |
| Pretax income                        |       | $                                                                                 | 8,228      |   | $ | 10,147 |   | -18.9 | % | $ | 16,234 |   | $ | 23,915 |   | -32.1 | % |

 

Within this segment, theCompany focuses on three key markets: education, religious and specialtytrade.  Revenues for this segment were up8% in the third quarter compared to the same period last year with growth inreligious and specialty trade sales offset in part by a decrease in educationsales.  Sales to the education marketwere $27.6 million in the third quarter, a decrease of 7% compared to last year’sthird quarter.  For the first ninemonths, education sales were $66.6 million, down 8% from the correspondingperiod in fiscal 2007.  During this year,a variety of industry factors have significantly delayed or eliminated textbookreprint orders and publishers continue to manage inventories closely. Sales tothe religious market were up 39% from last year’s third quarter to $18.4million, following a 15% drop in sales in the second quarter.  For the first nine months, sales to thismarket were up 7% from the prior year to $49 million.  For the full year, religious sales areexpected to be up 5% to 6%.  Sales to thespecialty trade market increased 18% in the third quarter to $14.4 million and2% for the first nine months to $41.4 million, compared to the same periodslast year, reflecting share gains with existing customers as well as severalnew accounts.

 

15

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Cost of sales in this segment increased by 15% to $47.5 million for thequarter and increased by 4% to $127.4 million year to date compared to thecorresponding periods of fiscal 2007. Gross profit in this segment decreased by 9% to $15.7 million for thequarter, and as a percentage of sales decreased to 24.8% from 29.5% in lastyear’s third quarter.  Gross profit forthe first nine months of fiscal 2008 decreased 16% to $38.8 million anddecreased as a percentage of sales to 23.4% from 27.2% in the correspondingperiod last year.  These decreases ingross profit reflect lower capacity utilization and increased depreciationexpense as well as continued pricing pressures. Depreciation expense increased by approximately $0.5 million and $1.0million for the third quarter and first nine months, respectively, reflectinglast year’s investments in expanded four-color capacity at the Kendallville,Indiana facility as well as the new press and binding line installed this yearat the Philadelphia facility to serve the religious market.

 

Selling and administrative expenses for the segment increased 6% in thethird quarter to $7.5 million and, as a percentage of sales, decreased to 11.9%from 12.2% in last year’s third quarter. On a year-to-date basis, such expenses increased 3% to $23.0 millionand, as a percentage of sales, increased to 13.9% from 13.2% for the sameperiod last year.  These increases inselling and administrative expenses include additions to the segment’s salesforce in the fourth quarter of last year to target specific markets andcustomers, as well as inflationary cost increases combined with a reduction inincentive compensation.

 

Intercompany interest income allocated to the book manufacturing segmentwas $125,000 in the third quarter compared to $48,000 in the same period lastyear.  For the first nine months offiscal 2008, intercompany interest income allocated to this segment increasedto $433,000 compared to $261,000 in the same period last year.

 

Pretax income in the book manufacturing segment was down 19% to $8.2million in the third quarter and down 32% for the first nine months to $16.2million, compared to the corresponding periods of fiscal 2007, due primarily tolower capacity utilization combined with higher depreciation expense andpricing pressures, which resulted in a drop in gross profit.

 

*Specialty Publishing Segment*

 
| ** **                                     | ** ** | **SEGMENT HIGHLIGHTS**                                                       | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **(dollars in thousands except per share amounts)** | ** ** |
| ** **                                     | ** ** | **Quarter Ended**                                                            | ** ** | **Nine Months Ended** | ** ** |
| ** **                                     | ** ** | **June 28,  2008**                                                           | ** ** | **June 30,  2007** | ** ** | **%  Change** | ** ** | **June 28,  2008** | ** ** | **June 30,  2007** | ** ** | **%  Change** | ** ** |
|                                           |       |                                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                      |       | $                                                                                 | 13,362     |   | $ | 17,917 |   | -25.4 | % | $ | 45,376 |   | $ | 52,835 |   | -14.1 | % |
| Cost of sales                                  |       | 10,041                                                                            |       | 10,725 |   | -6.4 | % | 29,268 |   | 30,758 |   | -4.8 | % |
| Gross profit                                   |       | 3,321                                                                             |       | 7,192 |   | -53.8 | % | 16,108 |   | 22,077 |   | -27.0 | % |
| As a percentage of sales                       |       | 24.9                                                                              | %          | 40.1 | % |   |   | 35.5 | % | 41.8 | % |   |   |
| Selling and administrative  expenses           |       | 5,837                                                                             |       | 5,880 |   | -0.7 | % | 17,497 |   | 17,685 |   | -1.1 | % |
| Interest expense                               |       | 446                                                                               |       | 468 |   |   |   | 1,322 |   | 1,378 |   |   |   |
| (Loss) income before tax and impairment charge |       | $                                                                                 | (2,962     | ) | $ | 844 |   |   |   | $ | (2,711 | ) | $ | 3,014 |   |   |   |
| Impairment charge                              |       | (23,850                                                                           | )          | — |   |   |   | (23,850 | ) | — |   |   |   |
| Pretax (loss) income                           |       | $                                                                                 | (26,812    | ) | $ | 844 |   |   |   | $ | (26,561 | ) | $ | 3,014 |   |   |   |

 

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Sales in the Company’sspecialty publishing segment were down 25% in the third quarter to $13.4million and down 14% year to date to $45.4 million, compared to the sameperiods last year.  These salesshortfalls were largely due to Creative Homeowner where sales decreased 45% to$3.7 million in the third quarter and 25% to $15.7 million for the first ninemonths, compared to the corresponding periods last year.  The continued slowdown in the housing markethas reduced store traffic and sales in the home center market, which isCreative Homeowner’s largest channel.  Inaddition, Creative Homeowner experienced unusually high returns in all retailchannels in the third quarter and, as a result, increased its returns reserveby approximately $1 million over historical levels.  Sales at Dover decreased 15% in the thirdquarter to $7.9 million and 9% to $24.1 million for the first nine months offiscal 2008, during a period of slow market growth.  Sales were down across most of Dover’s saleschannels as retailers ordered cautiously and managed inventoriescarefully.  Sales at REA were down 7% to$1.7 million in the third quarter, reflecting a general reduction in consumerspending at book retailers nationwide. REA’s year-to-date sales increased 4% to $5.5 million over the sameperiod last year.

 

Cost of sales in the specialtypublishing segment decreased 6% to $10.0 million in the quarter and 5% to $29.3million year to date, compared to the same periods in fiscal 2007, reflectingthe lower sales volume which was offset in part by additional charges atCreative Homeowner. Creative Homeowner incurred costs of approximately $1million to increase inventory reserves and to write down its investment intitles that have not performed up to expectations.  During the second quarter, the Company’s bookmanufacturing segment took over manufacturing of Creative Homeowner’sbooks.  Gross profit as a percentage ofsales for the segment decreased in the quarter to 24.9% from 40.1% in thecorresponding period last year.  CreativeHomeowner reduced the overall gross profit percentage in the segment because oftheir lower-margin distribution business and the previously discussedthird-quarter charges.  Gross profit as apercentage of sales for Dover and REA combined was 45% compared to 47% in theprior year’s third quarter as the benefit of productivity gains and costreductions were reduced by the impact of lower sales in the quarter.  As a percentage of sales, gross profit forthe specialty publishing segment for the first nine months of fiscal 2008 was35.5% compared to 41.8% in the corresponding period last year, primarily due tothe impact of Creative Homeowner’s issues.

 

Selling and administrativeexpenses in this segment were down slightly both in the quarter and the firstnine months of fiscal 2008 at $5.8 million and $17.5 million, respectively,compared to the same periods in fiscal 2007 in part due to initial steps takenat Creative Homeowner to reduce costs.

 

Intercompanyinterest expense is allocated to the specialty publishing segment based onacquisition costs, reduced by cash generated by each business sinceacquisition.  Interest expense for thethird quarter of fiscal 2008 was $446,000compared to $468,000 last year and for the first nine months was $1.3 millionversus $1.4 million in the corresponding period of fiscal 2007.

 

The pretax loss in the specialty publishing segment for the thirdquarter, excluding the impairment charge, was $3.0 million, including a loss atCreative Homeowner of $3.6 million, compared to pretax income of $0.8 millionfor this segment in last year’s third quarter. For the first nine months of fiscal 2008, the pretax loss, excluding theimpairment charge, was $2.7 million compared to pretax income of $3.0 millionfor the first nine months of fiscal 2007, with $5 million of the changeattributable to Creative Homeowner.

 

*Total Consolidated Company*

 

Interest expense, net of interest income, was $322,000 in the thirdquarter of fiscal 2008, compared to net interest expense of $419,000 in thesame period of fiscal 2007.  For the firstnine months of fiscal 2008, interest expense, net of interest income, was$889,000 compared to net interest expense of $1,117,000 for the first ninemonths of fiscal 2007. Average debt under the revolving credit facility in thethird quarter of fiscal 2008 was approximately $29.8 million at an averageannual interest rate of 3.2%, generating interest expense of approximately$240,000.  In the third quarter of lastyear, average debt under this facility was approximately $25.3 million at anaverage annual interest rate of 5.8%, generating interest

 

17

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expense of approximately $370,000. Average debt under the revolving credit facility for the first ninemonths of fiscal 2008 was approximately $24.0 million at an average annualinterest rate of 4.3%, generating interest expense of approximately$770,000.  For the first nine months offiscal 2007, average debt under this facility was approximately $23.4 millionat an average annual interest rate of 5.8%, generating interest expense ofapproximately $1.0 million.  Interestexpense also includes commitment fees and other costs associated withmaintaining this credit facility. Interest capitalized in the first nine months of fiscal 2008 wasapproximately $123,000, related primarily to the new press at the Philadelphiafacility.  Interest capitalized in thefirst nine months of fiscal 2007 was approximately $140,000, related primarilyto the expansion of the Kendallville facility.

 

The income tax benefit for thethird quarter was $6.4 million compared to income tax expense of $3.9 millionin the same quarter last year.  On ayear-to-date basis, the income tax benefit was $3.5 million compared to incometax expense of $9.7 million for the first nine months of fiscal 2007. The taxbenefit related to the impairment charge for Creative Homeowner was recognizedat 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 Creative Homeowner, theeffective tax rate was 38.6% in the third quarter and 37.8% for the first ninemonths of fiscal 2008 compared to 37.0% and 37.2% in the same periods lastyear, respectively, primarily because of a higher effective state tax rate.

 

At the beginningof fiscal 2008, the Company adopted the provisions of the Financial AccountingStandards Board (“FASB”) Interpretation No. 48, “Accounting forUncertainty in Income Taxes – an interpretation of FASB Statement No. 109”(“FIN 48”).  FIN 48 contains a two-step approach to recognizing andmeasuring uncertain tax positions.  Thefirst step is to evaluate the tax position for recognition by determining ifthe weight of available evidence indicates that it is more likely than not thatthe position will be sustained on audit, including resolution of relatedappeals or litigation processes, if any. The second step is to measure the tax benefit, quantified as the largestamount that is cumulatively more than 50% likely to be realized upon ultimatesettlement.  The cumulative effect ofadopting FIN 48 at the beginning of fiscal 2008 was $108,000 and was recordedas a reduction in retained earnings with a corresponding liability includedunder the caption “Other Liabilities” in the accompanying consolidatedcondensed balance sheet at September 29, 2007.  During the third quarter, certain federal andstate statutes of limitations expired. As such, at June 28, 2008, unrecognized tax benefits and accruedinterest were reduced to approximately $65,000 and the impact, if recognized,would favorably affect the Company’s effective income tax rate in futureperiods. The Company does not anticipate any significant changes in the amountof unrecognized tax benefits over the next twelve months.

 

For purposes ofcomputing net income or loss per diluted share, weighted average sharesoutstanding decreased by approximately 456,000 shares and 287,000 sharescompared to last year’s third quarter and first nine months, respectively.  These decreases reflect the Company’srepurchase of approximately 207,000 sharesof its common stock in the third quarter and approximately 457,000 shares inthe first nine months of fiscal 2008. Weighted average shares outstanding in the third quarter and first ninemonths of fiscal 2008 exclude potentially dilutive shares because a loss wasincurred in those periods.

 

**Liquidity and Capital Resources:**

 

During the first nine months offiscal 2008, operations provided approximately $18.3 million of cash.  A net loss of $7.6 million included thenon-cash after-tax impairment charge of $15.5 million, as well as depreciationand amortization of $16.6 million. Working capital used approximately $9.6 million, compared to $16.3million in the same period last year.

 

Investment activities through the third quarter of fiscal 2008 usedapproximately $11.4 million of cash. Capital expenditures were approximately$7.8 million, compared to $17.9 million for the same period last year.  For the entire fiscal year, capitalexpenditures are expected to be approximately $13 to $17 million. This amountincludes completion of the expansion of printing and binding capacity in thereligious book manufacturing operation in Philadelphia and approximately halfthe costs of construction, starting in the

 

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###### ** **

fourth quarter of fiscal 2008, of a 150,000 square foot warehouse tosupport the expanded capacity at the Kendallville, Indiana facility.  Prepublication costs in the publishingsegment were $3.7 million compared to $4.3 million in the first nine monthslast year.  For the full fiscal year,prepublication costs are projected to be approximately $4.4 to $4.7 millioncompared to $5.4 million for fiscal year 2007. The decrease in 2008 is due to narrowing the focus of Creative Homeowner’spublishing program, which is expected to reduce prepublication spending byapproximately $1 million annually.

 

Financing activities for the first nine months of fiscal 2008 usedapproximately $7.5 million of cash.  Cashdividends used $7.5 million while $12.1 million was used to repurchaseapproximately 457,000 shares of common stock under the Company’s sharerepurchase program authorized in November 2007 and expanded in May 2008.  At June 28, 2008, the Company hadapproximately $2.9 million of remaining authorization available for futurestock repurchases. Subsequently, on August 6, 2008, the Company’s Board ofDirectors further expanded the share repurchase program and authorized therepurchase of up to an additional $5 million of the Company’s commonstock.  Borrowings increased by $10.8million during the first nine months of fiscal 2008.  At June 28, 2008, the Company had $28.0million in borrowings under its $100 million long-term revolving creditfacility, which bears interest at a floating rate.  In May 2008, the revolving creditagreement was amended and restated, including reducing the bank group from fiveto four banks and extending the maturity date by two years to March 2013.  The revolving credit facility is used by theCompany for both its long-term and short-term financing needs.  The Company believes that its cash on hand,cash from operations and the available credit facility will be sufficient tomeet its cash requirements through fiscal 2009.

 

The following table summarizesthe Company’s contractual obligations and commitments at June 28, 2008 tomake future payments as well 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)          |       | $                                                  | 28,221     |   | $ | 91 |   | $ | 178 |   | $ | 27,952 |   | $ | — |   |
| Operating Leases (3)        |       | 8,998                                              |       | 2,676 |   | 3,572 |   | 1,654 |   | 1,096 |   |
| Purchase Obligations (4)    |       | 649                                                |       | 649 |   | — |   | — |   | — |   |
| Other Long-Term Liabilities |       | 3,024                                              |       | — |   | 1,006 |   | 311 |   | 1,707 |   |
| Total                       |       | $                                                  | 40,892     |   | $ | 3,416 |   | $ | 4,756 |   | $ | 29,917 |   | $ | 2,803 |   |

 

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(1) Amounts do not include interest expense.

(2) Includes the Company’s revolving credit facility, which has amaturity date of March 2013.

(3) Represents amounts at September 29, 2007.

(4) Represents capital commitments.

 

**RecentAccounting Pronouncements:**

 

In December 2007,the FASB issued Statement of Financial Accounting Standards No. 141(revised 2007), “Business Combinations,” (“SFAS No. 141R”), which replacesSFAS No. 141. This statement retains the purchase method of accounting forbusiness acquisitions, but requires a number of changes in the recognition ofassets acquired and liabilities assumed as well as in the treatment ofacquisition-related costs.  SFAS No. 141Ris effective at the beginning of the Company’s fiscal year 2010 and will applyprospectively to business combinations completed on or after that date.  In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities,” an amendmentof FASB Statement No. 133 (“SFAS No. 161”). SFAS No. 161 changesthe disclosure requirements for derivative instruments and hedging activitiesand will also be effective at the beginning of the Company’s fiscal year 2010.In April 2008, the FASB issued FSP 142-3, *Determiningthe Useful Life of Intangible Assets* (“FSP 142-3”). FSP 142-3 amendsthe factors to be considered in determining the useful life of intangibleassets. Its intent is to improve the consistency between the useful life of anintangible asset and the period of expected cash flows used to measure its fairvalue. FSP 142-3 will be effective at the beginning of the Company’s fiscalyear 2010. The Company is currently assessing the impact of FSP 142-3 on itsconsolidated financial statements.

 

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**Forward-Looking Information:**

 

ThisQuarterly Report on Form 10-Q includes forward-looking statements.  Statements that describe future expectations,plans or strategies are considered “forward-looking statements” as that term isdefined under the Private Securities Litigation Reform Act of 1995 and releasesissued by the Securities and Exchange Commission.  The words “believe,” “expect,” “anticipate,” “intend,”“estimate” and other expressions which are predictions of or indicate futureevents and trends and which do not relate to historical matters identifyforward-looking statements.  Suchstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those currently anticipated.  Factors that could affect actual resultsinclude, among others, changes in customers’ demand for the Company’s products,including seasonal changes in customer orders and shifting orders to lower costregions, changes in market growth rates such as the housing market, changes inraw material costs and availability, pricing actions by competitors and othercompetitive pressures in the markets in which the Company competes,consolidation among customers and competitors, success in the execution ofacquisitions and the performance and integration of acquired businesses,changes in operating expenses including medical and energy costs, changes intechnology including migration from paper-based books to digital, difficultiesin the start up of new equipment or information technology systems, changes incopyright laws, changes in tax regulations, changes in environmentalregulations, changes in the Company’s effective income tax rate, generalchanges in economic conditions, including currency fluctuations, changes ininterest rates, and tightness in the credit markets, and the other factors setforth below under Item 1A, “Risk Factors.” 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**.                                                           QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes from the information concerning theCompany’s “Quantitative and Qualitative Disclosures About Market Risk” aspreviously reported in the Company’s Annual Report on Form 10-K for theyear ended September 29, 2007.

 

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

#### ** **

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

 

As required by Rule 13a-15under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), asof the end of the period covered by this Quarterly Report, the Company carriedout an evaluation under the supervision and with the participation of theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial 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.

 

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#### ** **

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

#### ** **

**Item 1. Legal Proceedings**

 

None.

 

**Item 1A. Risk Factors**

 

TheCompany’s consolidated results of operations, financial condition and cashflows can be adversely affected by various risks.  Our business is influenced by many factorsthat are difficult to predict, involve uncertainties that may materially affectactual 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 this quarterlyreport on Form 10-Q.  You shouldcarefully 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*.

 

**Highlycompetitive markets for our products and industry consolidation may createincreased pricing pressures.**

 

Thebook industry is extremely competitive.  Inthe book manufacturing segment, consolidation over the past few years of bothcustomers and competitors within the markets 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 and others, particularly those in foreign countries,may derive significant advantages from local governmental regulation, includingtax holidays and other subsidies.  All orany of these competitive pressures could affect prices or customers’ demand forour products, impacting our profit margins and/or resulting in a loss ofcustomers and market share.

 

**Wehave a high degree of customer concentration.**

 

We derived approximately 35% ofour 2007 revenues, 40% of our 2006 revenues, and 47% of our 2005 revenues fromtwo major customers.  A significantreduction in order volumes or price levels from either of them could have amaterial adverse effect on the Company.

 

**Weneed to keep pace with rapid industry and technological change.**

 

Theprinting industry is in a period of rapid technological evolution.  Our future financial performance will depend,in part, upon the ability to anticipate and adapt to rapid industry andtechnological changes occurring in the industry and upon the ability to offer,on a timely basis, services that meet evolving industry standards.  We cannot assure investors that we will beable to adapt to such technological changes or offer these services on a timelybasis or establish or maintain a competitive position.  We are unable to predict which of the manypossible future product and service offerings will be important to establishand maintain competitive position or what expenditures will be required todevelop 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.

 

**Our operatingresults are dependent in part on unpredictable order patterns.**

 

Our quarterly and annualoperating results have fluctuated in the past and are likely to fluctuate inthe future due to a variety of factors, some of which are outside of ourcontrol. Factors that may affect 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 andsuccess in shifting orders from the busy textbook season to even out our pressload over the year;

 

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·                  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 entities or the inability toachieve expected results from such acquisitions; and

 

·                  tightnessin credit markets affecting the availability of capital for our customers.

 

As a result of these andother factors, period-to-period comparisons of our operating results are notnecessarily meaningful or indicative of future performance. In addition, thefactors noted above may make it difficult for us to forecast and provide in atimely manner public guidance (including updates to prior guidance) related toour projected financial performance. Furthermore, it is possible that in somefuture quarters our operating results will fall below the expectations ofsecurities analysts or investors. If this occurs, the trading price of ourcommon stock could decline.

 

**Fluctuationsin the cost and availability of paper and other raw materials may causedisruption and impact margins.**

 

Purchasesof paper and other raw 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.

 

Availabilityof paper is important to both the book manufacturing and specialty publishingsegments of the Company.  Although wegenerally have not experienced difficulty in obtaining adequate supplies ofpaper, unexpected changes in the paper markets could result in a shortage ofsupply.  If this were to occur in thefuture, it could cause disruption to the business or increase paper costs,adversely impacting either or both net sales or profits.

 

Fluctuationsin the costs and availability of other raw materials could adversely affectoperating costs or customer demand and thereby negatively impact our operatingresults, financial condition or cash flows.

 

**Energycosts and availability may negatively impact our financial results.**

 

Energycosts are incurred directly to run production equipment and facilities andindirectly through expenses 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.

 

**Wemay not be able to continue to improve our operating efficiencies.**

 

Becausethe markets in which we operate are highly competitive, we must continue toimprove our operating efficiency in order to maintain or improve ourprofitability.  Although we have beenable to expand our capacity, improve our productivity and reduce costs in the past,there is no assurance that we will continue to be able to do so in thefuture.  In addition, reducing operatingcosts in the future may require significant initial costs to reduce headcount,close or consolidate operations, or upgrade equipment and technology.

 

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

 

Certain of our publications areprotected by copyright, primarily held in the Company’s name.  Such copyrights protect our exclusive rightto publish the work in the United States and in many other countries forspecified periods.  Our ability tocontinue to achieve anticipated results depends in part on our ability todefend 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.

 

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**Declinesin general economic conditions may adversely impact our business.**

 

Economicconditions have the potential to impact our financial resultssignificantly.  Within the bookmanufacturing and specialty publishing segments, a change in economicconditions can impact many areas of spending, including government, businessand consumer spending.  Examples of thechanges in spending that could affect and potentially impact our financialresults include:

 

·                  Fluctuations in federal orstate government spending on education could lead to a corresponding decreaseor increase in the demand for educational materials, which are produced in ourbook manufacturing segment and comprise a portion of our publishing products.

 

·                  Consumer demand for books canbe impacted by reductions in disposable income when costs such as electricityand gasoline reduce discretionary spending.

 

·                  Tightness in credit markets mayimpact customer order patterns and inventory levels.

 

·                  Changes in the housing marketmay impact the sale of Creative Homeowner’s products.

 

·                  Fundraising by religiousorganizations.

 

**Thesubstitution of electronic delivery for printed materials may adversely affectour business.**

 

Electronicdelivery of documents and data, including the online distribution and hostingof media content, offers alternatives to traditional delivery of printeddocuments.  Consumer acceptance ofelectronic delivery of books is uncertain, as is the extent to which consumersare replacing print materials with online hosted media content.  To the extent that our customers accept theseelectronic alternatives, demand for our printed products may be adverselyaffected.

 

**Changesin postal rates and postal regulations may adversely impact our business.**

 

Postalcosts are a significant component of our direct marketing cost structure andpostal rate changes 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.

 

**Ourfacilities are subject to stringent environmental laws and regulations, whichmay subject us to liability or increase costs.**

 

We usevarious materials in our operations that contain substances considered hazardousor toxic under environmental laws.  Inaddition, our operations are subject to federal, state, and local environmentallaws relating to, among other things, air emissions, waste generation,handling, management and disposal, waste water treatment and discharge andremediation of soil and groundwater contamination.  Permits are required for the operation ofcertain of our businesses and these permits are subject 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 our ownfacilities.  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.

 

**Wemay not be able to successfully integrate acquired businesses.**

 

Inrecent years, we have completed three acquisitions, including Moore Langen andCreative Homeowner in fiscal year 2006 and REA in fiscal 2004, and may continueto make acquisitions in the future.  Webelieve that these acquisitions provide strategic growth opportunities for theCompany.  Achieving the anticipatedbenefits of these acquisitions will depend in part upon our ability tointegrate these businesses in an efficient and effective manner.  The challenges involved in successfullyintegrating acquisitions include:

 

·                  we may findthat the acquired company or assets do not further our business strategy, orthat we overpaid for the company or assets, or that economic conditions havechanged, all of which may result in a future impairment charge;

 

·                  we may havedifficulty integrating the operations and personnel of the acquired businessand may have difficulty retaining the customers and/or the key personnel of theacquired business;

 

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·                  we may havedifficulty incorporating and integrating acquired technologies into ourbusiness;

 

·                  our ongoingbusiness and management’s attention may be disrupted or diverted by transitionor integration issues and the complexity of managing diverse locations;

 

·                  we may havedifficulty maintaining uniform standards, controls, procedures and policiesacross locations;

 

·                  anacquisition may result in litigation from terminated employees of the acquiredbusiness or third parties; and

 

·                  we mayexperience significant problems or liabilities associated with technology andlegal contingencies of the acquired business.

 

These factors could havea material adverse effect on our business, results of operations and financialcondition or cash flows, particularly in the case of a larger acquisition or multipleacquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions thatare not ultimately consummated.  Suchnegotiations could result in significant diversion of management time from ourbusiness as well as significant out-of-pocket costs. Tightness in creditmarkets may also affect our ability to consummate such acquisitions.

 

The consideration that wepay in connection with an acquisition could affect our financial results.  If we were to proceed with one or moresignificant acquisitions in which the consideration included cash, we could berequired 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.

 

**Ourability to hire and train key executives and other qualified employees iscrucial.**

 

Oursuccess depends, in part, on our ability to continue to retain our executiveofficers and key management personnel. Our business strategy also depends on our ability to attract, develop,motivate and retain employees who have relevant experience in the printing andpublishing industries.  There can be noassurance that we can continue to attract and retain the necessary talentedemployees, including executive officers and other key members ofmanagement.  If that were to occur, itcould adversely affect our business.

 

**We needskilled employees to manufacture our products.**

 

If we experience problemshiring and retaining skilled employees, our business may be negativelyaffected.  The timely manufacture anddelivery of our products requires an adequate supply of skilled employees, andthe operating costs of our manufacturing facilities can be adversely affectedby high turnover in skilled positions. Accordingly, our ability to increase sales, productivity and netearnings will be limited to a degree by our ability to employ the skilledemployees necessary to meet our requirements. Although our book manufacturing locations are geographically dispersed,individual locations may encounter strong competition with other manufacturersfor skilled employees.  There can be noassurance that we will be able to maintain an adequate skilled labor forcenecessary to efficiently operate our facilities.  In addition, unions represent certain groupsof employees at several of our locations, and periodically, contracts withthose unions come up for renewal.  Theoutcome of those negotiations could have an adverse affect on our operations atthose locations.

 

**Compliancewith changing regulation of corporate governance, public disclosure andaccounting matters may result in additional expenses.**

 

##### Changing laws, regulations and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002 and new rules subsequently implemented by the Securities and ExchangeCommission and The NASDAQ Stock Market, as well as new accountingpronouncements, are creating uncertainty and additional complexities forcompanies.  To maintain high standards ofcorporate governance and public disclosure, we continue to invest resources tocomply with evolving standards.  Thisinvestment may result in increased general and administrative expenses and a diversionof management time and attention from revenue generating and cost managementactivities.

 

24

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

 

(a)          None

 

(b)         None

 

(c)          On November 8,2007, the Company’s Board of Directors authorized a share repurchase programwhereby the Company was authorized to purchase up to $10 million of the Company’soutstanding common stock either through the open market or privately negotiatedtransactions. On May 8, 2008, theBoard of Directors authorized the repurchase of up to an additional $5 millionof the Company’s common stock.  Inthe first nine months of fiscal 2008, approximately457,000 shares of common stock were repurchased for approximately $12.1million.  As such, at June 28, 2008,the Company had approximately $2.9 million of remaining authorization availablefor future stock repurchases. Subsequently, on August 6, 2008, the Company’s Board of Directorsfurther expanded the share repurchase program and authorized the repurchase ofup to an additional $5 million of the Company’s common stock.  Such purchases may be made from timeto time at management’s discretion and may be discontinued at any time.  The following table summarizes the purchasesunder this program during the third quarter of the Company’s fiscal year 2008.

 

###### **ISSUER PURCHASES OF EQUITY SECURITIES**

 
| ** **                                  | ** ** | ** **         | ** ** | ** **           | ** ** | **(c) Total Number of** | ** ** | **(d) Maximum Number (or**         | ** ** |
|---------------------------------------------|------------|--------------------|------------|----------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **(a) Total** | ** ** | ** **           | ** ** | **Shares Purchased as**      | ** ** | **Approximate Dollar**                       | ** ** |
| ** **                                  | ** ** | **Number of** | ** ** | **(b) Average** | ** ** | **Part of Publicly**         | ** ** | **Value) of Shares that May** | ** ** |
| ** **                                  | ** ** | **Shares**         | ** ** | **Price Paid**  | ** ** | **Announced Plans or**       | ** ** | **Yet Be Purchased Under**         | ** ** |
| **Fiscal Period**                      | ** ** | **Purchased**      | ** ** | **per Share**   | ** ** | **Programs**                           | ** ** | **the Plans or Programs**          | ** ** |
| March 30,  2008 -  April 26, 2008 |       | 14,300             |       | $                    | 21.979     |                                   | 14,300     |                                              | $          | 2,508,000 |   |
| April 27,  2008 -  May 24, 2008   |       | 124,994            |       | $                    | 23.311     |                                   | 124,994    |                                              | $          | 4,587,000 | (1) |
| May 25,  2008 -  June 28, 2008    |       | 67,821             |       | $                    | 24.146     |                                   | 67,821     |                                              | $          | 2,945,000 |   |
| Total                                       |       | 207,115            |       | $                    | 23.492     |                                   | 207,115    |                                              |       |   |

 

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(1) Includesadditional $5 million approved by the Company’s Board of Directors on May 8,2008.

 

### **Item 3.Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

None.

 

**Item 5. Other Information**

 

There have been no materialchanges to the procedures by which security holders may recommend nominees tothe Board of Directors.

 

25

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### **Item 6.Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Second Amended and  Restated Revolving Credit Agreement, dated May 23, 2008, between Courier  Corporation, RBS Citizens, KeyBank, Wells Fargo Bank, and J P Morgan Chase  Bank providing for a $100 million revolving credit facility (filed as  Exhibit 10 to the Company’s Current Report on Form 8-K on  May 29, 2008 and incorporated herein by reference). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1*                |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of  the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2*                |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of  the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| **32.1***            | ** ** | **Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the**Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                        |
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| **32.2***            | ** ** | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                           |

 

----

| ** ** | ** ** | * Filed herewith. |
|------------|------------|-------------------|

 

26

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theCompany has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 

**COURIER CORPORATION**

**(Registrant)**

 

 
| *   August 7, 2008*       |   | By:    | *  /s/James F. Conway III* |
|------------------------------------------|--------|--------|--------------------------------------|
| Date                                     |   |   |                                 |   | James F. Conway III |
|                                     |   |   |                                 |   | Chairman, President and |
|                                     |   |   |                                 |   | Chief Executive Officer |
|                                     |   |   |                                 |   |
|                                     |   |   |                                 |   |
| *   August 7,  2008* |   | By:    | *  /s/Peter M. Folger*     |
| Date                                     |   |   |                                 |   | Peter M. Folger |
|                                     |   |   |                                 |   | Senior Vice President and |
|                                     |   |   |                                 |   | Chief Financial Officer |
|                                     |   |   |                                 |   |
|                                     |   |   |                                 |   |
| *   August 7,  2008* |   | By:    | *  /s/Kathleen M. Leon*    |
| Date                                     |   |   |                                 |   | Kathleen M. Leon |
|                                     |   |   |                                 |   | Vice President and |
|                                     |   |   |                                 |   | Controller |
|                                          |        |        |                                      |  |  |  |

 

27

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Second Amended and  Restated Revolving Credit Agreement, dated May 23, 2008, between Courier  Corporation, RBS Citizens, KeyBank, Wells Fargo Bank, and J P Morgan Chase  Bank providing for a $100 million revolving credit facility (filed as Exhibit 10  to the Company’s Current Report on Form 8-K on May 29, 2008 and  incorporated herein by reference). |
| 31.1*                |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of  the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                       |
| 31.2*                |       | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of  the Exchange Act, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                       |
| **32.1***            | ** ** | **Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 906 of the**Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                        |
| **32.2***            | ** ** | **Certification  of Chief Financial Officer**pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                       |

 

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* Filed herewith.

 

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