**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**Form 10-K**

 

| **(MARK ONE)**                                         |
|--------------------------------------------------------|
| **ý**                                             | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                   |   |   |
| **For  the fiscal year ended September 24, 2005** |
|                                                   |   |   |
| **OR**                                                 |
|                                                   |   |   |
| **o**                                                  | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For thetransition period from                   to                  **

 

**Commissionfile number 0-7597**

 

**CourierCorporation**

 

**AMassachusetts corporation**

 

I.R.S.Employer Identification No. **04-2502514**

 

**15Wellman AvenueNorth Chelmsford, Massachusetts  01863**

**TelephoneNo. 978-251-6000**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock, $1 par value**

 

**Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes****ý No****o**

 

**Indicate by check mark if disclosureof delinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of the registrant’s knowledge,in definitive proxy or information statements incorporated by reference in Part IIIof this Form 10-K or any amendment to this Form 10-K. ****o**

 

**Indicate by check mark whether theregistrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes****ý No****o**

 

**Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  Yes****o No****ý**

 

**State the aggregate market value ofthe voting and non-voting common equity held by non-affiliates computed byreference to the price at which the common equity was last sold as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter.**

 

**CommonStock, $1 par value - $295,148,021**

 

**Indicate the number of sharesoutstanding of each of the registrant’s classes of common stock as of November 21,2005.**

 

**CommonStock, $1 par value - 12,314,764**

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

**Portions of the registrant’s proxystatement for the annual meeting of stockholders scheduled to be held on Jan. 18,2006 (Part III).**

 

 

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**PART I**

 

**Item 1.  Business.**

 

**INTRODUCTION**

 

CourierCorporation and its subsidiaries (“Courier” or the “Company”) are among America’sleading book manufacturers and specialty publishers. Courier Corporation,founded in 1824, was incorporated under the laws of Massachusetts on June 30,1972.  The Company has two businesssegments: book manufacturing and specialty book publishing.  In fiscal 2003, Courier sold all of theassets of Courier Custom Publishing, Inc. which comprised all of theremaining activities of the customized education segment.

 

The book manufacturingsegment focuses on streamlining and enhancing the process of bringing booksfrom the point of creation to the point of use. Based on sales, Courier is the fifth largest book manufacturer in theUnited States and largest in the Northeast, offering services from prepress andproduction through storage and distribution. Courier’s principal bookmanufacturing markets are religious, educational and specialty trade books withproducts including Bibles, educational texts and consumer books. Revenues fromthis segment accounted for approximately 85% of Courier’s consolidated revenuesin 2005.

 

Thespecialty publishing segment consists of Dover Publications, Inc. (“Dover”),acquired by Courier on September 22, 2000, as well as Research &Education Association, Inc. (“REA”), which was acquired on January 6,2004.  Dover publishes over 9,000 titlesin more than 30 specialty categories ranging from literature and poetryclassics to paper dolls, and from music scores to clip art. REA publishes testpreparation and study-guide books and software for high school, college andgraduate students and professionals.  Thecombination of Dover’s and REA’s publishing, sales and distribution skills withCourier’s book manufacturing, digital content conversion, and e-commerce skillsare providing a powerful end-to-end publishing solution for Courier.  Revenues in this segment were approximately18% of consolidated sales in 2005.

 
| **Sales  by segment  (in thousands)** | ** ** | **2005** | ** ** | **%**  | ** ** | **2004** | ** ** | **%**   | ** ** | **2003** | ** ** | **%**  | ** ** |
|---------------------------------------|------------|----------|------------|--------|------------|----------|------------|---------|------------|----------|------------|--------|------------|
|                                  |       |     |       |   |       |     |       |    |       |     |       |   |       |
| Book  Manufacturing                   |       | $        | 193,623    |   | 85         | %        | $          | 177,225 |       | 84       | %          | $      | 171,858    |   | 85 | % |
| Specialty  Publishing                 |       | 40,254   |       | 18     | %          | 40,787   |       | 19      | %          | 36,391   |       | 18     | %          |
| Intersegment  sales                   |       | (6,838   | )          | (3     | )%         | (6,833   | )          | (3      | )%         | (6,247   | )          | (3     | )%         |
| Total                                 |       | $        | 227,039    |   | 100        | %        | $          | 211,179 |       | 100      | %          | $      | 202,002    |   | 100 | % |

 

Additionalsegment information, including the amounts of earnings before taxes and totalassets, for each of the last three fiscal years, is contained in Note J in theNotes to Consolidated Financial Statements on pages F-18 to F-20 includedin this Annual Report on Form 10-K.

 

On December 17,2002, the Company sold the assets of its wholly owned subsidiary, CourierCustom Publishing, Inc.  CourierCustom Publishing provided customized coursepacks and textbooks.  The disposition was accounted for as adiscontinued operation.  Additionalinformation is contained in Note I in the Notes to Consolidated FinancialStatements on page F-17 included in this Annual Report on Form 10-K.  In March 2001, Courier soldsubstantially all of the assets of The Home School and ceased operating thisbusiness.  The Company had purchased theassets of The Home School Books & Supplies in September 1997.

 

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**BUSINESS SEGMENTS**

 

**BOOK MANUFACTURING SEGMENT**

 

Courier’sbook manufacturing segment produces hard and softcover books, as well asrelated services involved in managing the process of creating and distributingthese products for publishers, religious organizations and other informationproviders.  Courier provides bookmanufacturing and related services from six facilities in Westford, Stoughtonand North Chelmsford, Massachusetts; Philadelphia, Pennsylvania; North Bergen,New Jersey; and Kendallville, Indiana.

 

Earlyin fiscal 2006, the Company announced the acquisition of Moore-Langen PrintingCompany, Inc. (“Moore Langen”), an Indianapolis-based printer specializingin book covers and known for innovative production techniques. The acquisition,a $15 million cash transaction completed on October 17, 2005, will beaccounted for as a purchase and, accordingly, Moore Langen’s financial resultswill be included in the consolidated financial statements from the date of acquisition.

 

Courier’sbook manufacturing operations consist of both electronic and conventional filmprocessing, platemaking and printing and binding of soft and hard coverbooks.  Each of Courier’s six facilitieshave certain specialties adapted to the needs of the market niches Courierserves, such as short-run book manufacturing, printing on lightweight paper andfour-color book manufacturing.  Theseservices are primarily sold to publishers of educational, religious andconsumer books.  During 2004, the Companyexpanded its four-color book manufacturing capabilities with the addition of amajor new four-color press at its Kendallville, Indiana facility. A secondidentical press is scheduled for installation in the first quarter of fiscal2006.

 

Courier’sbook manufacturing sales force of 18****people isresponsible for all of the Company’s sales to over 400 book-manufacturingcustomers.  Courier’s salespeople operateout of sales offices located in New York, New York; Chicago, Illinois;Philadelphia, Pennsylvania; Hayward, California; North Chelmsford,Massachusetts; and North Bergen and North Caldwell, New Jersey.

 

Sales toThe Gideons International aggregated approximately 28%****ofconsolidated sales in 2005, 27% in 2004, and 28% in 2003.  Sales to Pearson plc aggregated approximately19% of consolidated sales in 2005 and 17% in both 2004 and 2003.  A significant reduction in order volumes orprice levels from either of these customers would have a material adverseeffect on the Company.  No other customeraccounted for more than 10% of consolidated sales.  The Company distributes products around theworld; export sales, as a percentage of consolidated sales, were approximately21% in both 2005 and 2004, and 22% in 2003. Approximately 90% of the export sales were in the book manufacturingsegment in each of these years.

 

Allphases of Courier’s business are highly competitive.  The printing industry, exclusive ofnewspapers, includes approximately 44,000 establishments.  While most of these establishments are relativelysmall, several of the Company’s competitors are considerably larger or areaffiliated with companies that are considerably larger and have greaterfinancial resources than Courier.  Inrecent years, consolidation of both customers and competitors within theCompany’s markets has increased pricing pressures.  The major competitive factors in Courier’sbook manufacturing business in addition to price are product quality, speed ofdelivery, customer service, availability of appropriate printing capacity,related services and technology support.

 

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**SPECIALTY BOOK PUBLISHING SEGMENT**

 

Dover,acquired by the Company in September 2000, is a publisher of books in over30 specialty categories, including fine and commercial arts, children’s books,crafts, music scores, graphic design, mathematics, physics and other areas ofscience, puzzles, games, social science, stationery items, and classics ofliterature for both juvenile and adult markets, including the Dover ThriftEditions.  In 2002, a new line ofscholarly hardcover books valuable to scientists and mathematicians waslaunched under the name of Dover Phoenix Editions.

 

Doversells its products through most American bookstore chains, independentbooksellers, children’s stores, craft stores and gift shops, as well as adiverse range of distributors around the world. Dover has also sold its books directly to consumers for over 50 yearsthrough its specialty catalogs and, since 2001, over the Internet at www.doverpublications.com.  Dover mails its proprietary catalogs to over500,000 consumers.  In 2002, Doverlaunched www.DoverDirect.com, which is a business-to-business site for its retailersand distributors*.*

 

REA,acquired by the Company in January 2004, publishes more than 800 testpreparation and study-guide titles. Product lines include Problem Solvers®, Essentials®, Super Reviews® andTest Preparation books.  REA sells itsproducts around the world through major bookseller chains, college bookstores,and teachers’ supply stores, as well as directly to teachers and otherconsumers through catalogs and over the Internet at www.REA.com.

 

The U.S.publishing market is comprised of over 80,000 publishers.  Many of these publishers are very small, buta few are much larger than Dover and REA or are part of organizations that aremuch larger.  In addition, newer sourcesof competition have emerged with large retailers launching or expandingpublishing operations and new web-based publishing businesses starting up, whichcompete in the specialty book publishing market, including publishing ofelectronic books.  Dover distinguishesits products by offering an extremely wide variety of high quality books atmodest prices.  REA offers high editorialquality study guides and test preparation books and software products in almostevery academic area including many specialized areas such as teachercertification, adult education, and professional licensing.

 

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**MATERIALS AND SUPPLIES**

 

Courierpurchases its principal raw materials, primarily paper, but also platematerials, ink, adhesives, cover stock, casebinding materials and cartons, fromnumerous suppliers, and is not dependent upon any one source for itsrequirements.  Many of Courier’s bookmanufacturing customers purchase their own paper and furnish it at no charge toCourier for book production.  Dover andREA purchase a significant portion of their books from Courier’s bookmanufacturing operations.  Paper pricesincreased slightly in both 2005 and 2004 after a slight decrease in 2003.

 

**ENVIRONMENTAL REGULATIONS**

 

TheCompany’s operations are subject to federal, state and local environmental lawsand regulations relating to, among other things: air emissions; waste generation,handling, management and disposal; wastewater treatment and discharge; andremediation of soil and groundwater contamination.  The Company periodically makes capitalexpenditures so that its operations comply, in all material respects, withapplicable environmental laws and regulations. No significant expenditures for this purpose are anticipated in2006.  The Company does not believe thatits compliance with applicable environmental laws and regulations will have amaterial impact on the Company’s earnings or competitive position.

 

**EMPLOYEES**

 

TheCompany employed 1,479 persons at September 24, 2005 compared to 1,465 ayear ago.

 

**OTHER**

 

Courier’soverall business is not significantly seasonal in nature, although demand isnormally highest in the Company’s fourth quarter.  Educational publishers in the bookmanufacturing segment and Dover’s business all contribute to this higher fourthquarter demand. There is no portion of Courier’s business subject tocancellation of government contracts or renegotiation of profits.

 

Courierholds no material patents, licenses, franchises or concessions that areimportant to its operations, but does have trademarks, service marks, andUniversal Resource Locators (URL’s) on the World Wide Web in connection witheach of its business segments. Substantially all of Dover’s and REA’s publications are protected bycopyright, either in its own name, in the name of the author of the work, or inthe name of a predecessor publisher from whom rights were acquired.

 

TheCompany makes available free of charge (as soon as reasonably practicable afterthey are filed or furnished to the SEC) copies of its Annual Report on Form 10-K,as well as all other reports required to be filed by Section 13(a) or15(d) of the Securities Exchange Act of 1934, via the Internet atwww.courier.com or upon written request to Robert P. Story, Jr., SeniorVice President and Chief Financial Officer, Courier Corporation, 15 WellmanAvenue, North Chelmsford, MA 01863.

 

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**Item 2.  Properties.**

 

**REAL PROPERTIES**

 

Thefollowing schedule lists the facilities owned or leased by Courier at September 24,2005. Courier considers its plants and other facilities to be well maintainedand suitable for the purposes intended.

 
| ** **                                                   | ** ** | **Owned/** | ** ** | ** **  | ** ** |
|--------------------------------------------------------------|------------|------------|------------|-------------|------------|
| **Principal  Activity and Location (Year Constructed)**      | ** ** | **Leased** | ** ** | **Sq. Ft.** | ** ** |
| **Corporate headquarters and  executive offices**            |       |       |       |        |       |
| North  Chelmsford, MA (1973, 1996)                           |       | Owned      |       | 69,000      | (1)        |
| **Book manufacturing and  warehousing**                      |       |       |       |        |       |
| Westford  plant, Westford, MA (1900, 1968, 1969, 1981, 1990) |       | Owned      |       | 393,000     | (2)        |
| Kendallville  plant, Kendallville, IN (1978, 2004)           |       | Owned      |       | 205,000     |       |
| National  plant, Philadelphia, PA (1975, 1997)               |       | Owned      |       | 229,000     |       |
| Stoughton  plant, Stoughton, MA (1980)                       |       | Leased     |       | 169,000     |       |
| Book-mart  plant, North Bergen, NJ (1917, 1935, 1997)        |       | Leased     |       | 75,000      |       |
| **Dover offices and warehouses**                             |       |       |       |        |       |
| Mineola,  New York (1948-1981)                               |       | Leased     |       | 106,000     |       |
| New  Hyde Park, NY (1949-1969)                               |       | Leased     |       | 78,000      |       |
| **REA offices and warehouse**                                |       |       |       |        |       |
| Piscataway,  New Jersey (1990)                               |       | Leased     |       | 39,000      |       |

 

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(1)                                  Also houseswarehousing and end-user fulfillment operations supporting the bookmanufacturing segment.

(2)                                  In May 2004,the Company completed the sale of approximately 200,000 square feet ofunoccupied and underutilized portions of its multi-building manufacturingcomplex in Westford, MA for $1.7 million. The Company will continue its current levels of book manufacturing atthe site.  Additional information iscontained in Note K on page F-20 of this Annual Report on Form 10-K.

 

**EQUIPMENT**

 

TheCompany’s products are manufactured on equipment that in most cases is owned bythe Company, although it leases computers, image setters and other electronicprepress equipment which are subject to more rapid obsolescence.  In addition, one printing press is leasedwhereby the lessor holds title and the Company has an option to purchase theequipment upon expiration of the lease in 2008 at a price of $161,658.  Capital expenditures amounted toapproximately $19.7 million in 2005, $13.4 million in 2004, and $10.9 millionin 2003. Capital expenditures in 2005 included approximately $11 million fordeposits on another four-color press and related equipment, installed in December 2005at the Kendallville, Indiana facility. Capital expenditures also included investments of approximately $3.5million in the specialty publishing segment for an integrated softwaresolution, as well as a program to relocate and improve warehousing operations.Fiscal 2006 capital expenditures are expected to increase to approximately $30million, including payments on another four-color press, which will furtherexpand the Company’s capacity to produce four-color textbooks.  This latest press is expected to be installedin early fiscal 2007 and is identical to the presses installed in April 2004and December 2005.  The fiscal 2006capital projections also include bindery and warehouse expansion to support theadditional four-color press capacity. Courier considers its equipment to be in good operating condition andadequate for its present needs.

 

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**ENCUMBRANCES AND RENTALOBLIGATIONS**

 

For adescription of encumbrances on certain properties and equipment, see Note D ofNotes to Consolidated Financial Statements on page F-11 of this AnnualReport on Form 10-K. Information concerning leased properties andequipment is disclosed in Note E of Notes to Consolidated Financial Statements,which appears on page F-12 of this Annual Report on Form 10-K.

 

**Item 3.  Legal Proceedings.**

 

In theordinary course of business, the Company is subject to various legalproceedings and claims.  The Companybelieves that the ultimate outcome of these matters will not have a materialadverse effect on its financial statements.

 

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

 

Therewere no matters submitted to a vote of security holders during the quarterended September 24, 2005.

 

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**PART II**

 

**Item 5.  Market for the Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.**

 

Theinformation required by this Item is contained in the section captioned “SelectedQuarterly Financial Data (Unaudited)” which appears on page F-22 of this AnnualReport on Form 10-K.

 

**Item 6.  Selected Financial Data.**

 

Theinformation required by this Item is contained in the section captioned “Five-YearFinancial Summary” appearing on page F-21 of this Annual Report on Form 10-K.

 

**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.**

 

Theinformation required by this Item is contained in the section captioned “Management’sDiscussion and Analysis” on pages F-23 through F-30 of this Annual Reporton Form 10-K.

 

**Item 7A.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

The Company does not holdany derivative financial instruments, derivative commodity instruments or otherfinancial instruments except as noted in Notes A and M of Notes to ConsolidatedFinancial Statements, which appear on pages F-7 through F-9 and F-20 ofthis Annual Report on Form 10-K. The Company engages neither in speculative nor derivative tradingactivities. The Company is exposed to market risk for changes in interest rateson invested funds as well as borrowed funds. The Company’s revolving bank credit facility bears interest at afloating rate.  There were no borrowingsunder this facility at any time during 2005.

 

**Item 8.  Financial Statements and Supplementary Data.**

 

Theinformation required by this Item is contained on pages F-1 through F-20of this Annual Report on Form 10-K.

 

**Item 9.  Changes in and Disagreements With Accountantson Accounting and Financial Disclosure.**

 

None.

 

**Item 9A.  Controls and Procedures**

 

**(a)****                                 ****Disclosure Controls and Procedures**

 

TheCompany maintains a system of disclosure controls and procedures that aredesigned to provide reasonable assurance that information, which is required tobe timely disclosed, is accumulated and communicated to the Company’s managementin a timely fashion.  An evaluation ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures (as defined in Rule 13a-15(e) of theSecurities Act of 1934, as amended (the “Exchange Act”)) (“Disclosure Controls”)was performed as of the end of the period covered by this report.  This evaluation was performed under thesupervision and with the participation of the Company’s

 

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management, including the Company’s ChiefExecutive Officer and Chief Financial Officer. Based upon that evaluation, the Company’s Chief Executive Officer andChief Financial Officer concluded that these Disclosure Controls are effectiveto provide reasonable assurance that information required to be disclosed bythe Company in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure and are effective to provide reasonableassurance that such information is recorded , processed, summarized andreported within the time periods specified by the SEC’s rules andforms.  The Company continually reviewsits disclosure controls and procedures, and its internal controls overfinancial reporting, and may from time to time make changes aimed at enhancingtheir effectiveness and to ensure that its systems evolve with its business. Indesigning and evaluating the disclosure controls and procedures, the Company’smanagement recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurances of achieving thedesired control objectives, and management necessarily was required to applyits judgment in designing and evaluating the controls and procedures.

 

**(b)****                                 ****Changes in Internal Controls over Financial Reporting**

 

Therewere no changes in the Company’s internal control over financial reportingduring the fourth quarter of fiscal year 2005 that have materially affected, orthat are reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

**(c)****                             ****Management’s Responsibility for Financial Statements**

 

Managementof the Company is responsible for the preparation, integrity and objectivity ofthe Company’s consolidated financial statements and other financial informationcontained in its Annual Report to Stockholders. Those consolidated financial statements were prepared in conformity withaccounting principles generally accepted in the United States.  In preparing those consolidated financialstatements, the Company’s management was required to make certain estimates andjudgments, which are based upon currently available information and management’sview of current conditions and circumstances.

 

TheAudit Committee of the Board of Directors, which consists solely of independentdirectors, oversees the Company’s process of reporting financial informationand the audit of its consolidated financial statements.  The Audit Committee stays informed of thefinancial condition of the Company and regularly reviews management’s financialpolicies and procedures, the independence of the independent auditors, theCompany’s internal control and the objectivity of its financial reporting. Theindependent registered public accounting firm has free access to the AuditCommittee and to meet with the Audit Committee periodically, both with andwithout management present.

 

TheCompany has retained Deloitte & Touche LLP, an independent registeredpublic accounting firm, to audit its consolidated financial statements found inthis Annual Report on Form 10-K for the year ended September 24,2005.  The Company has made available toDeloitte & Touche LLP all of its financial records and related data inconnection with their audit of the consolidated financial statements.

 

TheCompany has filed with the Securities and Exchange Commission the requiredcertifications related to its consolidated financial statements as of and forthe year ended September 24, 2005. These certifications are attached as exhibits to this Annual Report on Form 10-Kfor the year ended September 24, 2005.

 

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**(d)****                             ****Management’s Report on Internal Control Over Financial Reporting.**

 

Managementhas responsibility for establishing and maintaining adequate internal controlover financial reporting.  Internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external reporting purposes in accordance withaccounting principles generally accepted in the United States.  Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Management has assessed the effectiveness ofthe Company’s internal control over financial reporting as of September 24,2005.  In making its assessment, theCompany’s management has utilized the criteria set forth by the Committee ofSponsoring Organizations (“COSO”) of the Treadway Commission in InternalControl-Integrated Framework.  Managementconcluded that based on its assessment, the Company’s internal control overfinancial reporting was effective as of September 24, 2005.  Management’s assessment of the effectivenessof the Company’s internal control over financial reporting as of September 24,2005 has been audited by Deloitte & Touche LLP, an independentregistered public accounting firm, as stated in their report dated November 30,2005, which appears below in this Annual Report on Form 10-K.

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board ofDirectors and Stockholders of Courier CorporationNorth Chelmsford, Massachusetts

 

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that Courier Corporation and subsidiaries (the “Company”) maintainedeffective internal control over financial reporting as of**September 24,2005, based on criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects.  Our auditincluded obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we considered necessary in the circumstances.  Webelieve that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable

 

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assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the company are being made only in accordancewith authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis.  Also,projections of any evaluation of the effectiveness of the internal control overfinancial reporting to future periods are subject to the risk that the controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of September 24,2005, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of September 24,2005, based on the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated financial statements as of and for the year ended September 24,2005 of the Company and our report dated November 30, 2005 expressed anunqualified opinion on those financial statements.

 
| */s/ DELOITTE & TOUCHE LLP* |   |
|--------------------------------------|--------|
|                                 |
| Boston, Massachusetts                |
| November 30, 2005               |

 

**Item 9B.  Other Information**

 

Thefollowing table sets forth information concerning the granting on September 22,2005 of restricted stock awards and stock options under the Courier Corporation1993 Stock Incentive Plan to each of the Executive Officers.

 
| ** **              | ** ** | **Number of Shares Underlying** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| **Name**                | ** ** | **Options  Granted**            | ** ** | **Restricted  Stock Awards** | ** ** |
|                    |       |                            |       |   |   |
| J.  F. Conway, III |       | 5,627                           |       | 1,679 |   |
| R.  P. Story, Jr.  |       | 4,901                           |       | 1,462 |   |
| G.  Q. Nichols          |       | —                          |       | — |   |
| P.  D. Tobin            |       | 1,670                           |       | 498 |   |
| P.  M. Folger           |       | 1,089                           |       | 325 |   |
| E.  J. Zimmerman        |       | 2,033                           |       | 607 |   |

 

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**PART III**

 

**Item 10.  Directors and Executive Officers of theRegistrant.**

 

Courier’sexecutive officers, together with their ages and all positions and offices withthe Company presently held by each person named, are as follows:

 
| James F. Conway III       |   | 53     |   | Chairman, President and Chief  Executive Officer                                                            |
|---------------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------|
|                      |   |   |   |                                                                                                        |
| George Q. Nichols         |   | 76     |   | Corporate Senior Vice President and  Chairman of National Publishing Company                                |
|                      |   |   |   |                                                                                                        |
| Robert P. Story, Jr. |   | 54     |   | Senior Vice President and Chief  Financial Officer                                                          |
|                      |   |   |   |                                                                                                        |
| Peter M. Folger           |   | 52     |   | Vice President and Controller                                                                               |
|                      |   |   |   |                                                                                                        |
| Peter D. Tobin            |   | 50     |   | Corporate Vice President and  Executive Vice President of Courier Companies and National Publishing Company |
|                      |   |   |   |                                                                                                        |
| Eric J. Zimmerman         |   | 40     |   | Vice President, Publishing                                                                                  |

 

Theterms of office of all of the above executive officers continue until the firstmeeting of the Board of Directors following the next annual meeting ofstockholders and the election or appointment and qualification of theirsuccessors, unless any officer sooner dies, resigns, is removed or becomesdisqualified.

 

Mr. ConwayIII was elected Chairman of the Board in September 1994 after serving asacting Chairman since December 1992. He has been Chief Executive Officer since December 1992 andPresident since July 1988.

 

Mr. Nicholsbecame an executive officer of Courier in June 1989.  He was elected a Director of the Company in March 1995and became Senior Vice President of the Company in November 1996.  He became Chairman of National PublishingCompany in December 1999.  He hadpreviously been President of National Publishing Company since 1976.

 

Mr. Storybecame Senior Vice President and Chief Financial Officer in April 1989.  He joined Courier in November 1986 asVice President and Treasurer.  He waselected a Director of the Company in February 1995.

 

Mr. Folgerhas been Controller since 1982 and became Vice President in November 1992.

 

Mr. Tobinbecame Vice President of Courier Corporation and Executive Vice President ofCourier Companies in October 2000, and Executive Vice President of NationalPublishing Company in March 2002. He joined Courier Companies as National Sales Manager in 1994 and becameVice

 

11

----

 

President of Sales and Marketing in1997.

 

Mr. Zimmermanbecame Vice President, Publishing and an executive officer of CourierCorporation in October 2004.  Hejoined Courier in December 1994 as General Manager of its former CopyrightManagement Services operation and became Vice President of e-Commerce forCourier in September 2000.

 

TheCompany has adopted a code of ethics entitled “Courier Corporation BusinessConduct Guidelines,” which is applicable to all of the Company’s directors,officers, and employees.  These BusinessConduct Guidelines are available on the Company’s Internet website, located atwww.courier.com.

 

Allother information called for by Item 10 is contained in the definitive ProxyStatement, under the captions “Item 1: Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance,” to be delivered to stockholders in connectionwith the Annual Meeting of Stockholders scheduled to be held on Wednesday, January 18,2006.  Such information is incorporatedherein by reference.

 

**Item 11.  Executive Compensation.**

 

Informationcalled for by Item 11 is contained in the definitive Proxy Statement, under thecaption “Executive Compensation,” to be delivered to stockholders in connectionwith the Annual Meeting of Stockholders scheduled to be held on Wednesday, January 18,2006.  Such information is incorporatedherein by reference.

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

 

Informationcalled for by Item 12 is contained in the definitive Proxy Statement, under thecaptions “Security Ownership of Certain Beneficial Owners and Management” and “ExecutiveCompensation,” to be delivered to stockholders in connection with the AnnualMeeting of Stockholders scheduled to be held on Wednesday, January 18,2006.  Such information is incorporatedherein by reference.

 

**Item 13.  Certain Relationships and RelatedTransactions.**

 

Informationcalled for by Item 13 is contained in the definitive Proxy Statement to bedelivered to stockholders in connection with the Annual Meeting of Stockholdersscheduled to be held on Wednesday, January 18, 2006.  Such information is incorporated herein byreference.

 

**Item 14.  Principal Accounting Fees and Services**

 

Informationcalled for by Item 14 is contained in the definitive Proxy Statement, under thecaption “Item 2: Ratification and Approval of Selection of IndependentAuditors,” to be delivered to stockholders in connection with the AnnualMeeting of Stockholders scheduled to be held on Wednesday, January 18,2006.  Such information is incorporatedherein by reference.

 

12

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**PART IV**

 

**Item 15.  Exhibits and Financial Statement Schedules.**

 

 
| **(a)**    | **Documents filed as part of this  report** |                                |
|------------|---------------------------------------------|-------------------------------------|
| ** ** | ** **                                  | ** **                          |   |   |
| ** ** | **1.**                                      | ***Financial statements***          |   |
| ** ** | ** **                                  | ** **                          |   |   |
|       |                                        | •                              | Report of Independent  Registered Public Accounting Firm |   |
|       |                                        | •                              | Consolidated Statements of  Income for each of the three years in the period ended September 24,  2005 |   |
|       |                                        | •                              | Consolidated Balance Sheets as of September 24,  2005 and September 25, 2004 |   |
|       |                                        | •                              | Consolidated Statements of  Cash Flows for each of the three years in the period ended September 24,  2005 |   |
|       |                                        | •                              | Consolidated Statements of  Changes in Stockholders’ Equity for each of the three years in the period  ended September 24, 2005 |   |
|       |                                        | •                              | Notes to  Consolidated Financial Statements |   |
|       |                                        |                                |   |   |
|       | **2.**                                      | ***Financial  statement schedule*** |   |
|       |                                        |                                |   |   |
|       |                                        |                                | Schedule II - Consolidated  Valuation and Qualifying Accounts |   |
|       |                                        |                                |   |   |
|       | **3.**                                      | ***Exhibits***                      |   |
|            |                                             |                                     |  |  |  |

 
| **Exhibit No.** | ** ** | **Description of  Exhibit**                                                                                                                                                                                                                                                                                                |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                       |
| 3A-1                 |       | Articles of Organization of Courier  Corporation, as of June 29, 1972 (filed as Exhibit 3A-1 to the  Company’s Annual Report on Form 10-K for the fiscal year ended September 26,  1981, and incorporated herein by reference).                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                       |
| 3A-2                 |       | Articles of Amendment of Courier  Corporation (changing stockholder vote required for merger or consolidation),  as of January 20, 1977 (filed as Exhibit 3A-2 to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 26,  1981, and incorporated herein by reference). |
|                 |       |                                                                                                                                                                                                                                                                                                                       |
| 3A-3                 |       | Articles of Amendment of Courier  Corporation (providing for staggered election of directors), as of January 20,  1977 (filed as Exhibit 3A-3 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 26, 1981, and incorporated herein by  reference).                  |
|                 |       |                                                                                                                                                                                                                                                                                                                       |
| 3A-4                 |       | Articles of Amendment of Courier  Corporation (authorizing class of Preferred Stock), as of February 15,  1978 (filed as Exhibit 3A-4 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 26, 1981, and incorporated herein by  reference).                          |
|                 |       |                                                                                                                                                                                                                                                                                                                       |
| 3A-5                 |       | Articles of Amendment of Courier  Corporation (increasing number of shares of authorized Common Stock), as of January 16,  1986 (described in item #2 of the                                                                                                                                                          |
|                      |            |                                                                                                                                                                                                                                                                                                                            |  |

 

13

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|   |   | Company’s Proxy Statement for the  Annual Meeting of Stockholders held on January 16, 1986, and  incorporated herein by reference).                                                                                                                                                                                                                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3A-6   |   | Articles of Amendment of Courier  Corporation (providing for fair pricing procedures for stock to be sold in  certain business combinations), as of January 16, 1986 (filed as Exhibit A  to the Company’s Proxy Statement for the Annual Meeting of Stockholders held  on January 16, 1986, and incorporated herein by reference).                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3A-7   |   | Articles of Amendment of Courier  Corporation (limiting personal liability of directors to the Corporation or  to any of its stockholders for monetary damages for breach of fiduciary  duty), as of January 28, 1988 (filed as Exhibit 3A-7 to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 24,  1988, and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3A-8   |   | Articles of Amendment of Courier  Corporation (establishing Series A Preferred Stock), as of November 8,  1988 (filed as Exhibit 3A-8 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 24, 1988, and incorporated herein by  reference).                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3A-9   |   | Articles of Amendment of Courier  Corporation (increasing number of shares of authorized Common Stock), as of January 17,  2002 (filed as Exhibit 3 to the Company’s Quarterly Report on Form 10-Q  for the period ended March 30, 2002, and incorporated herein by  reference).                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 3B     |   | By-Laws of Courier Corporation,  amended and restated as of March 24, 2005 (filed as Exhibit 3 to  the Company’s Current Report on Form 8-K, dated March 24, 2005, and  incorporated herein by reference).                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1+* |   | Amendment, effective March 1,  2005, to the Courier Corporation 1999 Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10A-1+ |   | Courier Corporation Stock Grant  Plan (filed as Exhibit C to the Company’s Proxy Statement for the Annual  Meeting of Stockholders held on January 20, 1977, and incorporated  herein by reference).                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10A-2+ |   | Amendment, effective January 19,  1989, to the Courier Corporation Stock Grant Plan (described in Item 4 of the  Company’s Proxy Statement for the Annual Meeting of Stockholders held January 19,  1989, and incorporated herein by reference).                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10B+   |   | Letter Agreement, dated February 8,  1990, of Courier Corporation relating to supplemental retirement benefit and  consulting agreement with James F. Conway, Jr. (filed as Exhibit 10B  to the Company’s Annual Report on Form 10-K for the fiscal year ended September 29,  1990, and incorporated herein by reference).                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10C-1+ |   | Courier Corporation 1989 Deferred  Income Stock Option Plan for Non-employee Directors, effective September 28,  1989 (filed as Exhibit A to the Company’s Proxy Statement for the Annual  Meeting of Stockholders held January 18, 1990, and incorporated herein  by reference).                                                                                                    |

 

14

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| 10C-2+ |   | Amendment, effective November 4,  1993, to the 1989 Deferred Income Stock Option Plan for Non-employee  Directors (filed as Exhibit 10C-2 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 25, 1993, and incorporated herein by  reference).                                                               |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10C-3+ |   | Amendment, effective September 24,  1998, to the 1989 Deferred Income Stock Option Plan for Non-employee  Directors (filed as Exhibit 10C-3 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 26, 1998, and incorporated herein by  reference).                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10C-4+ |   | Amendment, effective January 21,  1999, to the 1989 Deferred Income Stock Option Plan for Non-employee  Directors (described in Item 3 of the Company’s Proxy Statement for the  Annual Meeting of Stockholders held January 21, 1999, and incorporated  herein by reference).                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10D-1+ |   | Courier Corporation 1983 Stock  Option Plan (filed as Exhibit A to the Company’s Proxy Statement for the  Annual Meeting of Stockholders held on January 20, 1983, and  incorporated herein by reference).                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10D-2+ |   | Amendment, effective January 17,  1985, to the Courier Corporation 1983 Stock Option Plan (described in Item 2  of the Company’s Proxy Statement for the Annual Meeting of Stockholders held  on January 17, 1985, and incorporated herein by reference).                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10D-3+ |   | Amendment, effective January 19,  1989, to the Courier Corporation 1983 Stock Option Plan (described in Item 3  of the Company’s Proxy Statement for the Annual Meeting of Stockholders held January 19,  1989, and incorporated herein by reference).                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10E-1+ |   | The Courier Executive Compensation  Program, as amended and restated on December 2, 2004 (filed as Exhibit 10  to the Company’s Current Report on Form 8-K dated December 2, 2004,  and incorporated herein by reference).                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10E-2+ |   | The Management Incentive  Compensation Program, effective October 4, 1993 (filed as Exhibit 10E-3  to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  1993, and incorporated herein by reference).                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10F+   |   | Courier Corporation Senior  Executive Severance Program and Agreements, dated October 25, 1988  pursuant to the program with Messrs. Conway III, Nichols, Story, and  Folger (filed as Exhibit 10P to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 24, 1988, and incorporated herein by  reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10G-1  |   | Rights Agreement between Courier  Corporation and State Street Bank and Trust Company dated March 18, 1999  (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K,  dated March 18, 1999, and incorporated herein by reference).                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                |
| 10G-2  |   | Amendment, dated November 8,  2001, to Rights Agreement between Courier Corporation and EquiServe Trust  Company NA dated March 18, 1999 (filed as Exhibit 10.2 to the  Company’s Quarterly Report on Form 10-Q for the period ended March 26,  2005, and incorporated herein by reference).                                          |

 

15

----

 
| 10H+   |   | Courier Corporation 1999 Employee  Stock Purchase Plan (filed as Exhibit A to the Company’s Proxy Statement  for the Annual Meeting of Stockholders held on January 21, 1999, and  incorporated herein by reference).                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10I-1+ |   | Agreement, as of March 3,  1993, of Courier Corporation relating to employment contract and supplemental  retirement benefit with George Q. Nichols (filed as Exhibit 10J to the  Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  1993, and incorporated herein by reference).                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10I-2+ |   | Amendment, as of April 16,  1997, to supplemental retirement benefit agreement with George Q. Nichols  (filed as Exhibit 10J-2 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 27, 1997, and incorporated herein by  reference).                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10I-3+ |   | Amendment, as of November 9,  2000, to supplemental retirement benefit agreement with George Q. Nichols  (filed as Exhibit 10I-3 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 29, 2001, and incorporated herein by  reference).                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10J-1  |   | Amended and Restated Revolving  Credit Agreement, dated as of March 31, 2003, between Courier Corporation,  Fleet National Bank, KeyBank National Association, Citizens Bank of  Massachusetts and Sovereign Bank, providing for a $60 million revolving  credit facility (filed as Exhibit 10 to the Company’s Quarterly Report  on Form 10-Q for the period ended June 28, 2003, and incorporated  herein by reference).                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10J-2  |   | Amendment, dated March 31,  2004, to Amended and Restated Revolving Credit Agreement, dated as of March 31,  2003, between Courier Corporation, Fleet National Bank, KeyBank National  Association, Citizens Bank of Massachusetts and Sovereign Bank, providing for  a $60 million revolving credit facility (filed as Exhibit 10 to the  Company’s Quarterly Report on Form 10-Q for the period ended March 27,  2004, and incorporated herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10J-3  |   | Amendment, dated April 29,  2005, to Amended and Restated Revolving Credit Agreement, dated as of March 31,  2003, between Courier Corporation, KeyBank National Association, Citizens  Bank of Massachusetts and Sovereign Bank, providing for a $45 million revolving  credit facility (filed as Exhibit 10.1 to the Company’s Quarterly Report  on Form 10-Q for the period ended March 26, 2005, and incorporated  herein by reference).                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10K-1+ |   | Courier Corporation Amended and  Restated 1993 Stock Incentive Plan (filed January 19, 2005 as  Exhibit 10.5 to the Company’s Registration Statement No. 333-122136  and incorporated herein by reference).                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10K-2+ |   | Form of Incentive Stock Option  Agreement for the Courier Corporation 1993 Stock Incentive Plan (filed as Exhibit 10.1  to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10K-3+ |   | Form of Non-Qualified Stock  Option Agreement for the Courier Corporation 1993 Stock Incentive Plan (filed  as Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the  fiscal year ended September 25, 2004, and incorporated herein by  reference).                                                                                                                                                                                                       |

 

16

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| 10K-4+  |   | Form of Stock Grant Agreement  for the Courier Corporation 1993 Stock Incentive Plan (filed as Exhibit 10.3  to the Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).                                                             |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-5+  |   | Non-Qualified Stock Option  Agreement for the Courier Corporation 1993 Stock Incentive Plan for J. F.  Conway, III dated September 23, 2004 (filed as Exhibit 10.4 to  the Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference). |
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-6+  |   | Stock Grant Agreement for the  Courier Corporation 1993 Stock Incentive Plan for J. F. Conway, III  dated September 23, 2004 (filed as Exhibit 10.5 to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).                |
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-7+  |   | Non-Qualified Stock Option  Agreement for the Courier Corporation 1993 Stock Incentive Plan for R. P.  Story, Jr. dated September 23, 2004 (filed as Exhibit 10.6 to  the Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).  |
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-8+  |   | Stock Grant Agreement for the  Courier Corporation 1993 Stock Incentive Plan for R. P. Story, Jr. dated  September 23, 2004 (filed as Exhibit 10.7 to the Company’s Annual  Report on Form 10-K for the fiscal year ended September 25, 2004,  and incorporated herein by reference).                 |
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-9+  |   | Non-Qualified Stock Option  Agreement for the Courier Corporation 1993 Stock Incentive Plan for P. D.  Tobin dated September 23, 2004 (filed as Exhibit 10.8 to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).            |
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-10+ |   | Stock Grant Agreement for the  Courier Corporation 1993 Stock Incentive Plan for P. D. Tobin dated September 23,  2004 (filed as Exhibit 10.9 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 25, 2004, and incorporated herein by  reference).                           |
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-11+ |   | Non-Qualified Stock Option  Agreement for the Courier Corporation 1993 Stock Incentive Plan for P. M.  Folger dated September 23, 2004 (filed as Exhibit 10.10 to the  Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).          |
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-12+ |   | Stock Grant Agreement for the  Courier Corporation 1993 Stock Incentive Plan for P. M. Folger dated September 23,  2004 (filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 25, 2004, and incorporated herein by  reference).                         |
|    |   |                                                                                                                                                                                                                                                                                                                                |
| 10K-13+ |   | Non-Qualified Stock Option  Agreement for the Courier Corporation 1993 Stock Incentive Plan for E. J.  Zimmerman dated September 23, 2004 (filed as Exhibit 10.12 to the  Company’s Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).       |

 

17

----

 
| 10K-14+ |   | Stock Grant Agreement for the  Courier Corporation 1993 Stock Incentive Plan for E. J. Zimmerman dated September 23,  2004 (filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 25, 2004, and incorporated herein by  reference).                                                                                                                                                                              |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10K-15+ |   | Incentive Stock Option Agreement  for the Courier Corporation 1993 Stock Incentive Plan for E. J. Zimmerman  dated September 23, 2004 (filed as Exhibit 10.14 to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 25,  2004, and incorporated herein by reference).                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10L-1+  |   | Courier Corporation  2005 Stock Equity Plan for Non-Employee Directors (filed January 19,  2005 as Exhibit 10.1 to the Company’s Registration Statement No. 333-122137  and incorporated herein by reference).                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10L-2+  |   | Form of Non-Qualified Stock  Option Agreement for the Courier Corporation 2005 Stock Equity Plan for  Non-employee Directors (filed as Exhibit 10.15 to the Company’s Annual  Report on Form 10-K for the fiscal year ended September 25, 2004,  and incorporated herein by reference).                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10L-3+  |   | Form of Stock Unit Agreement  for the Courier Corporation 2005 Stock Equity Plan for Non-employee Directors  (filed as Exhibit 10.16 to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 25, 2004, and incorporated herein by  reference).                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10M     |   | Stock Purchase Agreement by and  among Courier Corporation and the stockholders of Book-mart Press, Inc.,  dated as of July 21, 1997 (filed as Exhibit 2.1 to the Company’s  Current Report on Form 8-K dated July 21, 1997, and incorporated  herein by reference).                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10N+    |   | Courier Corporation Deferred  Compensation Program dated November 6, 1997 including Messrs. Conway  III, Nichols, and Story (filed as Exhibit 10 to the Company’s Quarterly  Report on Form 10-Q for the period ended December 27, 1997, and  incorporated herein by reference).                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10O     |   | Master Lease Finance Agreement,  dated as of September 23, 1998 between Courier Corporation and General  Electric Capital Corporation (filed as Exhibit 10R to the Company’s  Annual Report on Form 10-K for the fiscal year ended September 26,  1998, and incorporated herein by reference).                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10P     |   | Stock Purchase Agreement by and  among Courier Corporation, Mrs. Blanche Cirker, individually, the Estate  of Hayward Francis Cirker, by Blanche Cirker, executrix, and each of the  stockholders of Dover Publications, Inc., Dover Book Store Inc. and  Transfolio Express, Inc. dated as of August 14, 2000 (filed as Exhibit 2.1  to the Company’s Current Report on Form 8-K dated September 22,  2000, and incorporated herein by reference). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10Q     |   | Master Lease Finance Agreement,  dated as of September 25, 2000 between Courier Corporation and Eastern  Bank (filed as Exhibit 10T to the Company’s Annual Report on Form 10-K  for the fiscal year ended September 30, 2000, and incorporated herein by  reference).                                                                                                                                                                                             |

 

18

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| 21*    |   | Schedule of Subsidiaries.                                                                                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                           |
| 23*    |   | Consent of Deloitte &  Touche LLP, independent registered public accounting firm.                                                                     |
|   |   |                                                                                                                                                           |
| 31.1*  |   | Certification of Chief Executive  Officer pursuant to 15 U.S.C. Section 10A, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.  |
|   |   |                                                                                                                                                           |
| 31.2*  |   | Certification of Chief Financial  Officer pursuant to 15 U.S.C. Section 10A, 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. |

 

----

* Exhibit is furnished herewith.

+ Designates a Company compensation plan or arrangement.

 

19

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Company has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized, on November 30, 2005.

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

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities indicated, on November 30, 2005.

 
| *s/James F. Conway III*   |                      | *s/George Q. Nichols*         |     |
|---------------------------|---------------------------|-------------------------------|----------|
| James F. Conway III       | George Q. Nichols         |
| Chairman, President and   | Director                  |
| Chief Executive Officer   |                      |
|                      |                      |
| *s/Kathleen Foley Curley* |                      | *s/Ronald L. Skates*          | * * |
| Kathleen Foley Curley     | Ronald L. Skates          |
| Director                  | Director                  |
|                      |                      |
| *s/Richard K. Donahue*    |                      | *s/Robert P. Story, Jr.* | * * |
| Richard K. Donahue        | Robert P. Story, Jr. |
| Director                  | Director                  |
|                      |                      |
| *s/Edward J. Hoff*        | * *                  | *s/W. Nicholas Thorndike*     | * * |
| Edward J. Hoff            | W. Nicholas Thorndike     |
| Director                  | Director                  |
|                      |                      |
| *s/Arnold S. Lerner*      | * *                  | *s/Susan L. Wagner*           | * * |
| Arnold S. Lerner          | Susan L. Wagner           |
| Director                  | Director                  |
|                      |                      |
| *s/Peter K. Markell*      | * *                  | * *                      |
| Peter K. Markell          |                      |
| Director                  |                      |
|                           |                           |                               |          |  |  |  |  |

 

20

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders of Courier Corporation

North Chelmsford,Massachusetts

 

We have audited theaccompanying consolidated balance sheets of Courier Corporation and subsidiaries(the “Company”) as of September 24, 2005 and September 25, 2004, andthe related consolidated statements of income, stockholders’ equity, and cashflows for each of the three years in the period ended September 24,2005.  Our audits also included thefinancial statement schedule in Item 15(a)2. These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on the financial statementsand financial statement schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Courier Corporation and subsidiaries as of September 24,2005 and September 25, 2004, and the results of their operations and theircash flows for each of the three years in the period ended September 24,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in our opinion,such financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, present fairly, in allmaterial respects, the information set forth therein.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of the Company’s internal control over financialreporting as of September 24, 2005, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated November 30,2005 expressed an unqualified opinion on management’s assessment of theeffectiveness of the Company’s internal control over financial reporting and anunqualified opinion on the effectiveness of the Company’s internal control overfinancial reporting.

 

DELOITTE &TOUCHE LLP

Boston, Massachusetts

November 30, 2005

 

F-1

----

 

**COURIER CORPORATION**

**CONSOLIDATED STATEMENTS OF INCOME**

 
| ** **                                 | ** ** | **For the Years Ended**     | ** **  |
|--------------------------------------------|------------|-----------------------------|-------------|
| ** **                                 | ** ** | **September 24, 2005** | ** **  | **September 25, 2004** | ** ** | **September 27, 2003** | ** ** |
|                                       |       |                        |        |   |   |   |   |
| Net  sales (Note A)                        |       | $                           | 227,039,000 |   | $ | 211,179,000 |   | $ | 202,002,000 |   |
| Cost  of sales                             |       | 151,853,000                 |        | 142,609,000 |   | 134,630,000 |   |
|                                       |       |                        |        |   |   |   |   |
| Gross  profit                              |       | 75,186,000                  |        | 68,570,000 |   | 67,372,000 |   |
|                                       |       |                        |        |   |   |   |   |
| Selling  and administrative expenses       |       | 41,338,000                  |        | 37,292,000 |   | 37,794,000 |   |
| Interest  (income) expense, net            |       | (388,000                    | )           | (23,000 | ) | 52,000 |   |
| Other  income (Note K)                     |       | —                      |        | 250,000 |   | — |   |
|                                       |       |                        |        |   |   |   |   |
| Pretax  income                             |       | 34,236,000                  |        | 31,551,000 |   | 29,526,000 |   |
|                                       |       |                        |        |   |   |   |   |
| Provision  for income taxes (Note C)       |       | 12,102,000                  |        | 11,011,000 |   | 10,254,000 |   |
|                                       |       |                        |        |   |   |   |   |
| Income  from continuing operations         |       | $                           | 22,134,000  |   | $ | 20,540,000 |   | $ | 19,272,000 |   |
|                                       |       |                        |        |   |   |   |   |
| Discontinued  operations:                  |       |                        |        |   |   |   |   |
| Loss  from operations, net of tax          |       | —                      |        | — |   | (65,000 | ) |
| Gain  on disposal, net of tax              |       | —                      |        | — |   | 913,000 |   |
|                                       |       |                        |        |   |   |   |   |
| Net  income                                |       | $                           | 22,134,000  |   | $ | 20,540,000 |   | $ | 20,120,000 |   |
|                                       |       |                        |        |   |   |   |   |
| Income  per basic share (Notes A and L):   |       |                        |        |   |   |   |   |
| Continuing  operations                     |       | $                           | 1.82        |   | $ | 1.72 |   | $ | 1.64 |   |
| Discontinued  operations (Note I):         |       |                        |        |   |   |   |   |
| Loss  from operations                      |       | —                      |        | — |   | (0.01 | ) |
| Gain  on disposal                          |       | —                      |        | — |   | 0.08 |   |
| Net  income per basic share                |       | $                           | 1.82        |   | $ | 1.72 |   | $ | 1.71 |   |
|                                       |       |                        |        |   |   |   |   |
| Income  per diluted share (Notes A and L): |       |                        |        |   |   |   |   |
| Continuing  operations                     |       | $                           | 1.77        |   | $ | 1.67 |   | $ | 1.58 |   |
| Discontinued  operations (Note I):         |       |                        |        |   |   |   |   |
| Loss  from operations                      |       | —                      |        | — |   | (0.01 | ) |
| Gain  on disposal                          |       | —                      |        | — |   | 0.08 |   |
| Net  income per diluted share              |       | $                           | 1.77        |   | $ | 1.67 |   | $ | 1.65 |   |
|                                       |       |                        |        |   |   |   |   |
| Cash  dividends declared per share         |       | $                           | 0.33        |   | $ | 0.23 |   | $ | 0.20 |   |

 

*The accompanying notes are an integralpart of the consolidated financial statements.*

 

F-2

----

 

**COURIER CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                             | ** ** | **September 24, 2005** | ** **  | **September 25, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| ASSETS                                                                                                                 |       |                        |        |                        |       |
|                                                                                                                   |       |                        |        |                        |       |
| Current  assets:                                                                                                       |       |                        |        |                        |       |
| Cash  and cash equivalents (Note A)                                                                                    |       | $                           | 34,038,000  |                        | $          | 23,965,000 |   |
| Accounts  receivable, less allowance for uncollectible accounts of $1,139,000 in 2005  and $1,630,000 in 2004 (Note A) |       | 34,207,000                  |        | 34,072,000                  |       |
| Inventories  (Note B)                                                                                                  |       | 25,451,000                  |        | 25,108,000                  |       |
| Deferred  income taxes (Note C)                                                                                        |       | 2,945,000                   |        | 2,852,000                   |       |
| Other  current assets                                                                                                  |       | 962,000                     |        | 840,000                     |       |
|                                                                                                                   |       |                        |        |                        |       |
| Total  current assets                                                                                                  |       | 97,603,000                  |        | 86,837,000                  |       |
|                                                                                                                   |       |                        |        |                        |       |
| Property,  plant and equipment (Note A):                                                                               |       |                        |        |                        |       |
| Land                                                                                                                   |       | 1,059,000                   |        | 1,059,000                   |       |
| Buildings  and improvements                                                                                            |       | 26,877,000                  |        | 25,781,000                  |       |
| Machinery  and equipment                                                                                               |       | 134,222,000                 |        | 128,484,000                 |       |
| Furniture  and fixtures                                                                                                |       | 1,850,000                   |        | 1,468,000                   |       |
| Construction  in progress                                                                                              |       | 13,392,000                  |        | 1,073,000                   |       |
|                                                                                                                   |       |                        |        |                        |       |
|                                                                                                                   |       | 177,400,000                 |        | 157,865,000                 |       |
|                                                                                                                   |       |                        |        |                        |       |
| Less-Accumulated  depreciation and amortization                                                                        |       | (118,285,000                | )           | (109,383,000                | )          |
|                                                                                                                   |       |                        |        |                        |       |
| Property,  plant and equipment, net                                                                                    |       | 59,115,000                  |        | 48,482,000                  |       |
|                                                                                                                   |       |                        |        |                        |       |
| Goodwill  (Notes A, H and J)                                                                                           |       | 33,255,000                  |        | 33,255,000                  |       |
| Prepublication  costs (Note A)                                                                                         |       | 5,399,000                   |        | 5,127,000                   |       |
| Other  assets                                                                                                          |       | 1,593,000                   |        | 1,498,000                   |       |
|                                                                                                                   |       |                        |        |                        |       |
| Total  assets                                                                                                          |       | $                           | 196,965,000 |                        | $          | 175,199,000 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

F-3

----

 
| ** **                                                                                                          | ** ** | **September 24, 2005** | ** **  | **September 25, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                          |       |                        |        |                        |       |
|                                                                                                                |       |                        |        |                        |       |
| Current  liabilities:                                                                                               |       |                        |        |                        |       |
| Current  maturities of long-term debt (Note D)                                                                      |       | $                           | 85,000      |                        | $          | 83,000 |   |
| Accounts  payable (Note A)                                                                                          |       | 10,534,000                  |        | 10,059,000                  |       |
| Accrued  payroll                                                                                                    |       | 7,799,000                   |        | 6,470,000                   |       |
| Accrued  taxes                                                                                                      |       | 5,770,000                   |        | 5,735,000                   |       |
| Other  current liabilities                                                                                          |       | 6,474,000                   |        | 7,194,000                   |       |
|                                                                                                                |       |                        |        |                        |       |
| Total  current liabilities                                                                                          |       | 30,662,000                  |        | 29,541,000                  |       |
|                                                                                                                |       |                        |        |                        |       |
| Long-term  debt (Notes A and D)                                                                                     |       | 425,000                     |        | 510,000                     |       |
| Deferred  income taxes (Note C)                                                                                     |       | 6,924,000                   |        | 7,528,000                   |       |
| Other  liabilities                                                                                                  |       | 3,020,000                   |        | 2,630,000                   |       |
|                                                                                                                |       |                        |        |                        |       |
| Total  liabilities                                                                                                  |       | 41,031,000                  |        | 40,209,000                  |       |
|                                                                                                                |       |                        |        |                        |       |
| Commitments  and contingencies (Note E)                                                                             |       |                        |        |                        |       |
|                                                                                                                |       |                        |        |                        |       |
| Stockholders’  equity (Notes A and F):                                                                         |       |                        |        |                        |       |
|                                                                                                                |       |                        |        |                        |       |
| Preferred  stock, $1 par value - authorized 1,000,000 shares; none issued                                           |       |                        |        |                        |       |
| Common  stock, $1 par value - authorized 18,000,000 shares; issued 12,313,000 shares in  2005 and 8,031,000 in 2004 |       | 12,313,000                  |        | 8,031,000                   |       |
| Additional  paid-in capital                                                                                         |       | 1,453,000                   |        | 869,000                     |       |
| Retained  earnings                                                                                                  |       | 142,745,000                 |        | 126,573,000                 |       |
| Unearned  compensation                                                                                              |       | (577,000                    | )           | (483,000                    | )          |
|                                                                                                                |       |                        |        |                        |       |
| Total  stockholders’ equity                                                                                    |       | 155,934,000                 |        | 134,990,000                 |       |
|                                                                                                                |       |                        |        |                        |       |
| Total  liabilities and stockholders’ equity                                                                    |       | $                           | 196,965,000 |                        | $          | 175,199,000 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

F-4

----

 

**COURIER CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                       | ** ** | **For the Years Ended**     | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                       | ** ** | **September 24, 2005** | ** ** | **September 25, 2004** | ** ** | **September 27, 2003** | ** ** |
|                                                                             |       |                        |       |   |   |   |   |
| Operating  Activities:                                                           |       |                        |       |   |   |   |   |
| Net  income                                                                      |       | $                           | 22,134,000 |   | $ | 20,540,000 |   | $ | 20,120,000 |   |
| Adjustments  to reconcile net income to cash provided from operating activities: |       |                        |       |   |   |   |   |
| Depreciation  and amortization                                                   |       | 11,660,000                  |       | 10,929,000 |   | 9,798,000 |   |
| Deferred  income taxes (Note C)                                                  |       | (697,000                    | )          | 2,293,000 |   | 938,000 |   |
| Gain  on sale of assets (Notes I and K)                                          |       | —                      |       | (163,000 | ) | (913,000 | ) |
| Changes  in assets and liabilities:                                              |       |                        |       |   |   |   |   |
| Accounts  receivable                                                             |       | (135,000                    | )          | (3,843,000 | ) | 1,718,000 |   |
| Inventory                                                                        |       | (343,000                    | )          | (2,459,000 | ) | 731,000 |   |
| Accounts  payable                                                                |       | 475,000                     |       | 2,775,000 |   | (214,000 | ) |
| Accrued  taxes                                                                   |       | 35,000                      |       | (786,000 | ) | (444,000 | ) |
| Other  elements of working capital                                               |       | 486,000                     |       | (245,000 | ) | (492,000 | ) |
| Tax  benefits of stock option activity                                           |       | 1,064,000                   |       | 562,000 |   | 470,000 |   |
| Other  long-term, net                                                            |       | 321,000                     |       | (1,271,000 | ) | (575,000 | ) |
|                                                                             |       |                        |       |   |   |   |   |
| Cash  provided from operating activities                                         |       | 35,000,000                  |       | 28,332,000 |   | 31,137,000 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Investment  Activities:                                                          |       |                        |       |   |   |   |   |
| Capital  expenditures                                                            |       | (19,683,000                 | )          | (13,416,000 | ) | (10,885,000 | ) |
| Business  acquisition (Note H)                                                   |       | —                      |       | (11,850,000 | ) | — |   |
| Prepublication  costs (Note A)                                                   |       | (2,867,000                  | )          | (2,818,000 | ) | (2,232,000 | ) |
| Proceeds  from sale of assets (Notes I and K)                                    |       | —                      |       | 1,664,000 |   | 1,500,000 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Cash  used for investment activities                                             |       | (22,550,000                 | )          | (26,420,000 | ) | (11,617,000 | ) |
|                                                                             |       |                        |       |   |   |   |   |
| Financing  Activities:                                                           |       |                        |       |   |   |   |   |
| Long-term  debt repayments                                                       |       | (83,000                     | )          | (81,000 | ) | (78,000 | ) |
| Cash  dividends                                                                  |       | (4,066,000                  | )          | (2,794,000 | ) | (2,354,000 | ) |
| Proceeds  from stock plans                                                       |       | 1,772,000                   |       | 1,104,000 |   | 1,106,000 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Cash  used for financing activities                                              |       | (2,377,000                  | )          | (1,771,000 | ) | (1,326,000 | ) |
|                                                                             |       |                        |       |   |   |   |   |
| Increase  in cash and cash equivalents                                           |       | 10,073,000                  |       | 141,000 |   | 18,194,000 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Cash  and cash equivalents at the beginning of the period                        |       | 23,965,000                  |       | 23,824,000 |   | 5,630,000 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Cash  and cash equivalents at the end of the period                              |       | $                           | 34,038,000 |   | $ | 23,965,000 |   | $ | 23,824,000 |   |
|                                                                             |       |                        |       |   |   |   |   |
| Supplemental  cash flow information:                                             |       |                        |       |   |   |   |   |
| Interest  paid                                                                   |       | $                           | 219,000    |   | $ | 249,000 |   | $ | 245,000 |   |
| Income  taxes paid (net of receipts)                                             |       | $                           | 11,707,000 |   | $ | 8,935,000 |   | $ | 9,697,000 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

F-5

----

 

**COURIER CORPORATION**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

 
| ** **                                                  | ** ** | **Total**              | ** **  | ** ** | ** ** | ** **          | ** ** | ** **   | ** ** | ** **       | ** ** | ** **   | ** ** |
|-------------------------------------------------------------|------------|------------------------|-------------|------------|------------|---------------------|------------|--------------|------------|------------------|------------|--------------|------------|
| ** **                                                  | ** ** | **Stockholders’** | ** **  | **Common** | ** ** | **Additional**      | ** ** | **Retained** | ** ** | **Unearned**     | ** ** | **Treasury** | ** ** |
| ** **                                                  | ** ** | **Equity**             | ** **  | **Stock**  | ** ** | **Paid-In Capital** | ** ** | **Earnings** | ** ** | **Compensation** | ** ** | **Stock**    | ** ** |
|                                                        |       |                   |        |       |       |                |       |         |       |             |       |         |       |
| Balance,  September 28, 2002                           |       | $                      | 95,919,000  |       | $          | 5,445,000           |       | $            | 2,246,000  |             | $          | 91,061,000   |       | $ | (509,000 | ) | $ | (2,324,000 | ) |
|                                                        |       |                   |        |       |       |                |       |         |       |             |       |         |       |
| Net  income                                                 |       | 20,120,000             |        | —     |       | —              |       | 20,120,000   |       | —           |       | —       |       |
| Cash  dividends                                             |       | (2,354,000             | )           | —     |       | —              |       | (2,354,000   | )          | —           |       | —       |       |
| Stock  dividend (Note A)                                    |       | —                 |        | 2,643,000  |       | (2,643,000          | )          | —       |       | —           |       | —       |       |
| Restricted  stock grant/amortization activity, net (Note F) |       | 159,000                |        | —     |       | —              |       | —       |       | 159,000          |       | —       |       |
| Other  stock plan activity                                  |       | 1,576,000              |        | —     |       | 1,047,000           |       | —       |       | —           |       | 529,000      |       |
|                                                        |       |                   |        |       |       |                |       |         |       |             |       |         |       |
| Balance,  September 27, 2003                           |       | 115,420,000            |        | 8,088,000  |       | 650,000             |       | 108,827,000  |       | (350,000         | )          | (1,795,000   | )          |
|                                                        |       |                   |        |       |       |                |       |         |       |             |       |         |       |
| Net  income                                                 |       | 20,540,000             |        | —     |       | —              |       | 20,540,000   |       | —           |       | —       |       |
| Cash  dividends                                             |       | (2,794,000             | )           | —     |       | —              |       | (2,794,000   | )          | —           |       | —       |       |
| Restricted  stock grant/amortization activity, net (Note F) |       | 160,000                |        | —     |       | 200,000             |       | —       |       | (133,000         | )          | 93,000       |       |
| Other  stock plan activity                                  |       | 1,664,000              |        | —     |       | 772,000             |       | —       |       | —           |       | 892,000      |       |
| Retire  treasury stock (Note A)                        |       | —                 |        | (57,000    | )          | (753,000            | )          | —       |       | —           |       | 810,000      |       |
|                                                        |       |                   |        |       |       |                |       |         |       |             |       |         |       |
| Balance,  September 25, 2004                           |       | 134,990,000            |        | 8,031,000  |       | 869,000             |       | 126,573,000  |       | (483,000         | )          | —       |       |
|                                                        |       |                   |        |       |       |                |       |         |       |             |       |         |       |
| Net  income                                                 |       | 22,134,000             |        |       |       |                |       | 22,134,000   |       |             |       |         |       |
| Cash  dividends                                             |       | (4,066,000             | )           |       |       |                |       | (4,066,000   | )          |             |       |         |       |
| Stock  dividend (Note A)                                    |       | —                 |        | 4,061,000  |       | (2,165,000          | )          | (1,896,000   | )          |             |       |         |       |
| Restricted  stock grant/amortization activity, net (Note F) |       | 214,000                |        | 8,000      |       | 300,000             |       |         |       | (94,000          | )          |         |       |
| Other  stock plan activity                                  |       | 2,662,000              |        | 213,000    |       | 2,449,000           |       |         |       |             |       |         |       |
|                                                        |       |                   |        |       |       |                |       |         |       |             |       |         |       |
| Balance,  September 24, 2005                           |       | $                      | 155,934,000 |       | $          | 12,313,000          |       | $            | 1,453,000  |             | $          | 142,745,000  |       | $ | (577,000 | ) | $ | — |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

F-6

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**A.  Summary of SignificantAccounting Policies**

 

**Business:**  Courier Corporation and its subsidiaries (“Courier”or the “Company”) print, publish and sell books.  Courier has two business segments: bookmanufacturing and specialty book publishing. On January 6, 2004, Courier purchased substantially all of theassets of Research & Education Association, Inc. (“REA”) which isincluded in the specialty publishing segment (see Note H).  On December 17, 2002, the Company soldthe assets of Courier Custom Publishing, Inc., which comprised all of theactivities of the customized education segment (see Note I).

 

**Principles of Consolidation and Presentation:** The consolidated financial statements, preparedon a fiscal year basis, include the accounts of Courier Corporation and itssubsidiaries after elimination of all significant intercompanytransactions.  Such financial statementshave been prepared in conformity with accounting principles generally acceptedin the United States of America (“generally accepted accounting principles”),which require the use of certain estimates and assumptions.

 

**Financial Instruments:** Financial instruments consist primarily of cash, accounts receivable,accounts payable and debt obligations.  The Company classifies as cash and cashequivalents amounts on deposit in banks and cash invested temporarily invarious instruments with maturities of three months or less at time ofpurchase.  At September 24, 2005 andSeptember 25, 2004, the fair market value of the Company’s financialinstruments approximated their carrying values.

 

Interestincome from these instruments was $666,000 in 2005, $230,000 in 2004, and$200,000 in 2003 and is included in the caption “Interest (income) expense, net”in the accompanying Consolidated Statements of Income.

 

**Property, Plant and Equipment:** Property, plant and equipment are recorded at cost, including intereston funds borrowed to finance the acquisition or construction of major capitaladditions. Interest capitalized in 2004 was $74,000.   No interest was capitalized in 2005 and2003.  The Company provides fordepreciation of property, plant and equipment on a straight-line basis over periodsranging from 10 to 40 years on buildings and improvements and from 3 to 11years on equipment and furnishings.

 

Leaseholdimprovements are amortized on a straight-line basis over the shorter of theiruseful life or the term of the lease. Expenditures for maintenance and repairs are charged against income asincurred; betterments that increase the value or materially extend the life ofthe related assets are capitalized.  Whenassets are sold or retired, the cost and accumulated depreciation are removedfrom the accounts and any gain or loss is included in income.

 

**Goodwill:** TheCompany evaluates possible impairment annually or whenever events orcircumstances indicate that the carrying value of the assets may not berecoverable. Goodwill has been allocated$9.2 million and $24.0 million, net of accumulated amortization of $2.1 millionand $0.9 million, to the book manufacturing and specialty publishing segments,respectively.  There has been no changein the carrying amount of goodwill during the year or in the allocation ofgoodwill by reportable segment.

 

F-7

----

 

**Long-Lived Assets:**Management periodically reviews long-lived assets for impairment and doesnot believe that there is any material impairment of any asset of the Companyas measured in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.”

 

**Prepublication Costs:**Prepublication costs, associated with the specialty publishing segment,are amortized to cost of sales using the straight-line method over estimateduseful lives of three years for REA and four years for Dover Publications.

 

**Income Taxes:**Deferred income tax liabilities and assets are determined based upon thedifferences between the financial statement and tax bases of assets andliabilities, and are measured by applying enacted tax rates and laws for thetaxable years in which these differences are expected to reverse.

 

**Revenue Recognition:**Revenue is recognized upon shipment of goods to customers or upon thetransfer of ownership for those customers for whom the Company providesmanufacturing and distribution services. Revenue for distribution services is recognized as services areprovided.  Shipping and handling feesbilled to customers are classified as revenue.

 

**Use of Estimates:**Theprocess of preparing financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date of thefinancial statements, as well as revenues and expenses during the reportingperiod.  Actual results may differ fromthese estimates.

 

**Net Income per Share:** Basic net income per share is based on the weighted average number ofcommon shares outstanding each period. Diluted net income per share also includes potentially dilutive itemssuch as stock options (see Note L).

 

**Treasury Stock:**Pursuantto a 2004 change in state law, the Company’s treasury stock was reclassified tothe status of authorized but unissued shares.** **The Company had historically usedtreasury stock for stock options exercised and stock grants.

 

**Stock Splits:**On May 27,2005 and December 5, 2003, the Company distributed three-for-two stocksplits, effected in the form of 50% stock dividends.  Previously authorized but unissued shareswere used to effect these dividends. Weighted average shares outstanding and per share amounts presented inthe accompanying financial statements for periods prior to the stock splitshave been restated to give effect to these stock splits.

 

**Stock-BasedCompensation:** Pursuant to SFAS No. 123, “Accounting forStock-Based Compensation,” as amended by SFAS No. 148, the Company appliesthe recognition and measurement principles of APB Opinion No. 25, “Accountingfor Stock Issued to Employees” and related interpretations.  Accordingly, because the number of shares isfixed and the exercise price of the stock options granted equals the marketprice of the underlying stock on the date of grant, no compensation expense hasbeen recognized. Had compensation cost for stock options and for grants underthe Employee Stock Purchase Plan been determined under the fair valueprovisions of

 

F-8

----

 

SFAS No. 123, theCompany’s net income would have been as follows: 

 
| ** **                                                                                               | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net income as reported                                                                                   |       | $          | 22,134,000 |       | $          | 20,540,000 |       | $ | 20,120,000 |   |
| Deduct: Stock-based compensation expense determined  under SFAS No. 123, net of related tax effects |       | (1,266,000 | )          | (1,306,000 | )          | (965,000   | )          |
| Pro forma net income                                                                                     |       | $          | 20,868,000 |       | $          | 19,234,000 |       | $ | 19,155,000 |   |
|                                                                                                     |       |       |       |       |       |       |       |
| Net income per share as reported:                                                                        |       |       |       |       |       |       |       |
| Basic                                                                                                    |       | $          | 1.82       |       | $          | 1.72       |       | $ | 1.71 |   |
| Diluted                                                                                                  |       | 1.77       |       | 1.67       |       | 1.65       |       |
|                                                                                                     |       |       |       |       |       |       |       |
| Pro forma net income per share:                                                                          |       |       |       |       |       |       |       |
| Basic                                                                                                    |       | $          | 1.72       |       | $          | 1.61       |       | $ | 1.63 |   |
| Diluted                                                                                                  |       | 1.67       |       | 1.56       |       | 1.57       |       |

 

Forpurposes of pro forma disclosures, the fair value of each option grant wasestimated on the date of grant using the Black-Scholes option-pricing model(see Note F).

 

**New Accounting Pronouncements:** In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayment” (“SFAS 123R”).  Under this newstandard, companies will no longer be able to account for share-basedcompensation transactions using the intrinsic method in accordance with APB 25.Instead, companies will be required to account for such transactions using afair-value method and to recognize the expense over the service period.  SFAS 123R allows for several alternativetransition methods. On April 14, 2005, the Securities and ExchangeCommission announced the adoption of a rule that defers the requiredeffective date of SFAS 123R for registrants to the beginning of the firstfiscal year beginning after June 15, 2005. Accordingly the Company will implement this new standard in the firstquarter of its fiscal year 2006 and will restate all prior periods on aretrospective basis.  The Companybelieves that the pro forma disclosures in this Note A under Stock-BasedCompensation appropriately reflect the anticipated impact this standard wouldhave had on reported net income if adopted in the periods presented and willprovide the basis for the retrospective restatement of such periods.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), an amendmentof ARB No. 43, Chapter 4.  SFAS 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material. SFAS 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005.  TheCompany does not believe the adoption of SFAS 151 will have a material effecton its consolidated financial position, results of operations or cash flows.

 

F-9

----

 

## **B. Inventories**

## ** **

Inventoriesare valued at the lower of cost or market. Cost is determined using thelast-in, first-out (LIFO) method for approximately 41% and 37% of the Company’sinventories at September 24, 2005 and September 25, 2004,respectively.  Other inventories,primarily in the specialty publishing segment, are determined on a first-in,first-out (FIFO) basis.  Inventoriesconsisted of the following at September 24, 2005 and September 25,2004: 

 
| ** **      | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------|------------|------------|------------|------------|------------|
|            |       |       |       |       |       |
| Raw materials   |       | $          | 2,319,000  |       | $          | 3,338,000 |   |
| Work in process |       | 6,276,000  |       | 5,317,000  |       |
| Finished goods  |       | 16,856,000 |       | 16,453,000 |       |
| Total           |       | $          | 25,451,000 |       | $          | 25,108,000 |   |

 

On aFIFO basis, reported year-end inventories would have been higher by $5.4million in fiscal 2005 and $5.5 million in fiscal 2004.

 

**C.  Income Taxes**

 

Theprovision for income taxes from continuing operations differs from thatcomputed using the statutory federal income tax rates for the followingreasons:

 
| ** **                               | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal taxes at statutory  rate         |       | $          | 11,983,000 |       | $          | 11,043,000 |       | $ | 10,334,000 |   |
| State taxes, net of federal  tax benefit |       | 947,000    |       | 837,000    |       | 701,000    |       |
| Tax benefit of export related  income    |       | (805,000   | )          | (882,000   | )          | (823,000   | )          |
| Other                                    |       | (23,000    | )          | 13,000     |       | 42,000     |       |
| Total                                    |       | $          | 12,102,000 |       | $          | 11,011,000 |       | $ | 10,254,000 |   |

 

Theprovision for income taxes from continuing operations consisted of thefollowing:

 
| ** **         | ** ** | **2005**   | ** ** | **2004**  | ** ** | **2003**   | ** ** |
|--------------------|------------|------------|------------|-----------|------------|------------|------------|
| Currently payable: |       |       |       |      |       |       |       |
| Federal            |       | $          | 11,457,000 |      | $          | 7,503,000  |       | $ | 8,238,000 |   |
| State              |       | 1,342,000  |       | 1,215,000 |       | 1,078,000  |       |
|               |       | 12,799,000 |       | 8,718,000 |       | 9,316,000  |       |
| Deferred:          |       |       |       |      |       |       |       |
| Federal            |       | (812,000   | )          | 2,220,000 |       | 870,000    |       |
| State              |       | 115,000    |       | 73,000    |       | 68,000     |       |
|               |       | (697,000   | )          | 2,293,000 |       | 938,000    |       |
| Total              |       | $          | 12,102,000 |      | $          | 11,011,000 |       | $ | 10,254,000 |   |

 

F-10

----

 

Thefollowing is a summary of the significant components of the Company’s deferredtax assets and liabilities as of September 24, 2005 and September 25,2004:

 
| ** **                                 | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|--------------------------------------------|------------|-----------|------------|-----------|------------|
| Deferred tax assets:                       |       |      |       |      |       |
| Vacation accrual not currently  deductible |       | $         | 732,000    |      | $          | 719,000 |   |
| Other accruals not currently  deductible   |       | 516,000   |       | 689,000   |       |
| Non-deductible reserves                    |       | 1,110,000 |       | 1,387,000 |       |
| Other                                      |       | 587,000   |       | 57,000    |       |
| Classified as current                      |       | 2,945,000 |       | 2,852,000 |       |
| Deferred compensation  arrangements        |       | 1,123,000 |       | 1,041,000 |       |
| Tax benefits of stock option  activity     |       | 826,000   |       | 178,000   |       |
| Other                                      |       | 152,000   |       | 171,000   |       |
| Total deferred tax assets                  |       | $         | 5,046,000  |      | $          | 4,242,000 |   |
|                                       |       |      |       |      |       |
| Deferred tax liabilities:                  |       |      |       |      |       |
| Accelerated depreciation                   |       | 6,595,000 |       | 7,220,000 |       |
| Goodwill amortization                      |       | 2,430,000 |       | 1,698,000 |       |
| Total deferred tax liabilities             |       | $         | 9,025,000  |      | $          | 8,918,000 |   |

 

Non-currentdeferred tax assets have been netted against non-current deferred taxliabilities for balance sheet classification purposes.

 

**D.  Long-Term Debt**

 

At September 24,2005 and September 25, 2004, long-term debt consisted of an obligationunder an industrial development bond arrangement totaling $510,000 and$593,000, respectively, including current maturities of $85,000 and $83,000,respectively.  This industrial bondarrangement bears interest at a 3% rate. Scheduled aggregate principal payments of this obligation are $85,000 in2006, $88,000 in 2007, $91,000 in 2008, $93,000 in 2009, $96,000 in 2010, and$57,000 thereafter.  The industrial bondarrangement provides for a lien on the assets acquired with the proceeds.

 

TheCompany has a $45 million long-term revolving credit facility in place underwhich the Company can borrow at a rate not to exceed LIBOR plus 1.5%. During2005, the Company extended the maturity date of this facility to March 2008and amended certain provisions, including reducing the amount of the facilityfrom $60 million to $45 million to reduce the cost of the commitment fee.  The revolving credit facility is available tothe Company for both its long-term and short-term financing needs.

 

Therevolving credit facility contains restrictive covenants including provisionsrelating to the maintenance of working capital, the level of capitalexpenditures, the incurring of additional indebtedness and a quarterly test ofEBITDA to debt service.  It also providesfor a commitment fee not to exceed 3/8% per annum on the unused portion.  These fees are included in the caption “Interest(income) expense, net” in the accompanying Consolidated Statements of Income.

 

F-11

----

 

**E.  Commitments and Contingencies**

 

TheCompany is committed under various operating leases to make annual rentalpayments for certain buildings and equipment. Amounts charged to operationsunder such leases approximated $3,363,000 in 2005, $3,902,000 in 2004 and$4,103,000 in 2003.  As of September 24,2005, minimum annual rental commitments under the Company’s long-term operatingleases are approximately $2,836,000 in 2006, $2,536,000 in 2007, $1,875,000 in2008, $1,145,000 in 2009, $1,146,000 in 2010, and $1,998,000 in the aggregatethereafter.  The Company leases one ofits facilities from a corporation owned in part by an executive of one of theCompany’s subsidiaries.  The leaseagreement requires annual payments of approximately $276,000 through July 2007.  At September 24, 2005 and September 25,2004, the Company had letters of credit outstanding of $1,318,000 and$1,250,000, respectively.

 

Inthe ordinary course of business, the Company is subject to various legalproceedings and claims.  The Companybelieves that the ultimate outcome of these matters will not have a materialadverse effect on its consolidated financial statements.

 

## **F.  Stock Arrangements**

 

**Stock Incentive Plans:** The Company’s stock incentive plans provide for the granting of stockoptions and stock grants up to a total of 2,064,375 shares.  Under the plan provisions, both non-qualifiedand incentive stock options to purchase shares of the Company’s common stockmay be granted to key employees.  Theoption price per share may not be less than the fair market value of stock atthe time the option is granted and incentive stock options must expire notlater than ten years from the date of grant. Additionally, during 2005 and 2004, 8,943 and 10,788 shares ofrestricted stock, respectively, with values of $319,000 and $293,000,respectively, were granted which vest in three years. No such shares weregranted in 2003.  Amortization expenserelating to restricted stock grants was $214,000, $160,000 and $159,000 for2005, 2004 and 2003, respectively.

 

**Directors’ Option Plan:** In January 2005, stockholders approved the Courier Corporation 2005Stock Equity Plan for Non-Employee Directors (the “2005 Plan”). Under the planprovisions, non-qualified stock options to purchase shares of the Company’scommon stock may be granted to non-employee directors up to a total of 225,000shares.  The option price per share isthe fair market value of stock at the time the option is granted.  The options are immediately exercisable andhave a term of five years. During 2005, 36,000 options were granted under the2005 Plan. The 2005 Plan replaced the previous non-employee directors’ planwhich had been adopted in 1989 (the “1989 Plan”). In the first quarter offiscal 2005, 9,000 options were granted under the 1989 Plan. No further optionswill be granted under the 1989 Plan.

 

F-12

----

 

Thefollowing is a summary of all option activity for these plans:

 
| ** **                              | ** ** | **Stock Option/Incentive Plans** | ** ** | **Directors’ Option Plans** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                              | ** ** | **Shares**                       | ** ** | **Average  Exercise  Price**     | ** ** | **Shares** | ** ** | **Average  Exercise  Price** | ** ** |
| Outstanding at September 28,  2002 |       | 660,620                          |       | $                                | 9.48       |   | 150,638 |   | $ | 6.33 |   |
| Issued                                  |       | 129,993                          |       | 23.47                            |       | 54,000 |   | 14.47 |   |
| Exercised                               |       | (105,612                         | )          | 5.35                             |       | (45,000 | ) | 6.82 |   |
| Cancelled                               |       | (2,624                           | )          | 9.11                             |       | — |   | — |   |
| Outstanding at September 27,  2003 |       | 682,377                          |       | $                                | 12.79      |   | 159,638 |   | $ | 8.94 |   |
| Issued                                  |       | 40,949                           |       | 27.30                            |       | 60,750 |   | 21.03 |   |
| Exercised                               |       | (93,564                          | )          | 6.92                             |       | (31,100 | ) | 5.83 |   |
| Cancelled                               |       | (4,500                           | )          | 19.57                            |       | — |   | — |   |
| Outstanding at September 25,  2004 |       | 625,262                          |       | $                                | 14.57      |   | 189,288 |   | $ | 13.33 |   |
| Issued                                  |       | 30,131                           |       | 35.61                            |       | 45,000 |   | 32.47 |   |
| Exercised                               |       | (222,252                         | )          | 9.32                             |       | (60,112 | ) | 9.39 |   |
| Cancelled                               |       | (7,104                           | )          | 22.38                            |       | — |   | — |   |
| Outstanding at September 24,  2005 |       | 426,037                          |       | $                                | 18.66      |   | 174,176 |   | $ | 19.64 |   |
|                                    |       |                             |       |                             |       |   |   |   |   |
| Exercisable at September 24,  2005 |       | 271,700                          |       | $                                | 15.48      |   | 174,176 |   | $ | 19.64 |   |
| Available for future grants             |       | 327,878                          |       |                             |       | 184,940 |   |   |   |

 

Thefollowing tables present information with regards to stock options outstandingat September 24, 2005:

 
| ** **                                              | ** ** | **Stock Incentive Plan** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|
| ** **                                              | ** ** | **$7.11 -**              | ** ** | **$13.75 -** | ** ** | **$18.59 -** | ** ** | **$25.60 -** | ** ** | **$35.51 -** | ** ** |
| **Range of Exercise Prices**                            | ** ** | **$10.55**               | ** ** | **$16.91** | ** ** | **$23.27** | ** ** | **$29.57** | ** ** | **$39.50** | ** ** |
| Options outstanding                                     |       | 126,154                  |       | 99,202 |   | 119,582 |   | 50,968 |   | 30,131 |   |
| Weighted average exercise  price of options outstanding |       | $                        | 8.82       |   | $ | 16.83 |   | $ | 22.78 |   | $ | 26.92 |   | $ | 35.61 |   |
| Weighted average remaining  life                        |       | 2.2 years                |       | 4.0 years |   | 4.7 years |   | 5.3 years |   | 7.0 years |   |
| Options exercisable                                     |       | 126,154                  |       | 65,324 |   | 40,652 |   | 39,570 |   | — |   |
| Weighted average exercise  price of options exercisable |       | $                        | 8.82       |   | $ | 16.81 |   | $ | 22.67 |   | $ | 27.15 |   | — |   |
|                                                         |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                              | ** ** | **Directors’ Option Plans** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | ** **                       | ** ** | **$14.47 -** | ** ** | **$20.97 -** | ** ** | ** ** | ** ** |
| **Range of Exercise Prices**                            | ** ** | **$7.23**                        | ** ** | **$16.65** | ** ** | **24.39** | ** ** | **$34.49** | ** ** |
| Options outstanding                                     |       | 32,801                           |       | 46,125 |   | 59,250 |   | 36,000 |   |
| Weighted average exercise  price of options outstanding |       | $                                | 7.23       |   | $ | 14.52 |   | $ | 21.47 |   | $ | 34.49 |   |
| Weighted average remaining  life                        |       | 1.0 years                        |       | 2.0 years |   | 3.2 years |   | 4.3 years |   |
| Options exercisable                                     |       | 32,801                           |       | 46,125 |   | 59,250 |   | 36,000 |   |
| Weighted average exercise  price of options exercisable |       | $                                | 7.23       |   | $ | 14.52 |   | $ | 21.47 |   | $ | 34.49 |   |

 

F-13

----

 

**Employee Stock Purchase Plan:** The Company’s 1999 Employee Stock Purchase Plan (“ESPP”), as amended,covers an aggregate of 337,500 shares of Company common stock for issuanceunder the plan.  Eligible employees maypurchase shares of Company common stock at not less than 85% of fair marketvalue at the end of the grant period. During 2005, 2004, and 2003, 21,439 shares, 26,184 shares, and 27,486shares, respectively, were issued under the plan at an average price of $26.49per share, $21.25 per share, and $16.01 per share, respectively.  Since inception, 217,891****shareshave been issued.  At September 24,2005, an additional 119,609 shares were reserved for future issuances.

 

**Stockholders’ Rights Plan:** In March 1999, the Board of Directors adopted a ten-yearstockholders’ rights plan.  Under theplan, the Company’s stockholders of record at March 19, 1999 received aright to purchase a unit (“Unit”) comprised of one one-thousandth of a share ofpreferred stock for each share of common stock held on that date at a price of$100, subject to adjustment.  Until suchrights become exercisable, one such right will also attach to subsequentlyissued shares of common stock.  Therights become exercisable if a person or group acquires 15% or more of theCompany’s common stock or after commencement of a tender or exchange offerwhich would result in a person or group beneficially owning 15% or more of theCompany’s common stock.  Whenexercisable, under certain conditions, each right entitles the holder thereofto purchase Units of the Company’s preferred stock or shares of common stock ofthe acquirer, in each case having a market value at that time of twice theright’s exercise price.  The Board ofDirectors will be entitled to redeem the rights at one cent per right, undercertain circumstances.  The rights expirein 2009.

 

**Stock-Based Compensation:** For purposes of pro-forma disclosures presented in Note A, the fairvalue of each option grant was estimated on the date of the grant using theBlack-Scholes option-pricing model.

 

Thefollowing key assumptions were used to value options issued:

 
| ** **                        | ** ** | **2005**  | ** ** | **2004**    | ** ** | **2003**    | ** ** |
|-----------------------------------|------------|-----------|------------|-------------|------------|-------------|------------|
| Risk-free interest rate           |       | 4.1       | %          | 3.8         | %          | 3.9         | %          |
| Expected volatility               |       | 22        | %          | 30          | %          | 32          | %          |
| Expected dividend yield           |       | 1.1       | %          | 0.9         | %          | 0.8         | %          |
| Estimated life for grants  under: |       |      |       |        |       |        |       |
| Stock Incentive Plans             |       | 7 years   |       | 5 - 7 years |       | 5 - 7 years |       |
| Directors’ Option Plans      |       | 5 years   |       | 5 years     |       | 5 years     |       |
| ESPP                              |       | 0.5 years |       | 0.5 years   |       | 0.5 years   |       |

 

Thefollowing is a summary of the weighted average fair value per share of optionsgranted during each of the past three fiscal years, based on the Black-Scholesoption-pricing model.

 
| ** **                                   | ** ** | **Stock  Incentive Plan** | ** ** | **Directors’  Option Plans** | ** ** |
|----------------------------------------------|------------|---------------------------|------------|-----------------------------------|------------|
|                                         | ** ** | **2005**                  | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| On grant date:                               | ** ** | ** **                | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Exercise price was equal to  stock price     |       | $                         | 10.43      |                              | $          | 9.81 |   | $ | 8.91 |   | $ | 10.17 |   | — |   | — |   |
| Exercise price was in excess  of stock price |       | —                    |       | —                            |       | $ | 6.47 |   | — |   | — |   | — |   |
| Exercise price was less than  stock price    |       | —                    |       | —                            |       | — |   | $ | 10.03 |   | $ | 8.52 |   | $ | 5.91 |   |
|                                              |            |                           |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-14

----

 

**G.  Retirement Plans**

 

TheCompany and its consolidated subsidiaries maintain various defined contributionretirement plans covering substantially all of its employees.  Dover, acquired in September 2000, alsoprovides retirement benefits through a defined benefit plan (“the Dover plan”)as described below.

 

Retirementcosts of multi-employer union plans consist of contributions determined inaccordance with the respective collective bargaining agreements.  Retirement benefits for non-union employeesare provided through the Courier Profit Sharing and Savings Plan, whichincludes an Employee Stock Ownership Plan (“ESOP”).  Retirement costs included in the accompanyingfinancial statements amounted to approximately $3,820,000 in 2005, $3,300,000in 2004 and $3,200,000 in 2003.

 

TheCourier Profit Sharing and Savings Plan (“PSSP”) is qualified under Section 401(k)of the Internal Revenue Code.  The planallows eligible employees to contribute up to 100% of their compensation,subject to IRS limitations, with the Company matching 25% of the first 6% ofpay contributed by the employee.  TheCompany also makes contributions to the plan annually based on profits eachyear for the benefit of all eligible non-union employees.

 

Sharesof Company common stock may be allocated to participants’ ESOP accountsannually based on their compensation as defined in the plan.  During 2005,****2004and 2003, no such shares were allocated to eligible participants.  At September 24, 2005, the ESOP held419,918****shares on behalf of the participants.

 

Doverhas a noncontributory, defined benefit pension plan covering substantially allof its employees. As of December 31, 2001, Dover employees became eligibleto participate in the PSSP.  As such,plan benefits under the Dover defined benefit plan were frozen as of that date.No contributions have been made to the Dover plan for any of the past threeyears and none are expected to be made in 2006.

 

Thefollowing tables provide information regarding the Dover plan for the yearsended September 24, 2005 and September 25, 2004.

 

Changein projected benefit obligation:

 
| ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Obligation at beginning of year |       | $        | 3,339,000  |     | $          | 3,127,000 |   |
| Service cost                    |       | 8,000    |       | 7,000    |       |
| Interest cost                   |       | 185,000  |       | 193,000  |       |
| Actuarial loss                  |       | 186,000  |       | 230,000  |       |
| Benefits paid                   |       | (254,000 | )          | (218,000 | )          |
| Obligation at end of year       |       | $        | 3,464,000  |     | $          | 3,339,000 |   |

 

Benefitpayments in each of the next five years are projected to be $251,000, $258,000,$250,000, $241,000 and $263,000. Aggregate payments for the 2010-2014 periodare estimated

 

F-15

----

 

to be$1,296,000.

 

Changein plan assets:

 
| ** **                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Fair value of plan assets at beginning of year |       | $        | 3,633,000  |     | $          | 3,708,000 |   |
| Actual return on plan assets                   |       | 180,000  |       | 143,000  |       |
| Benefits paid                                  |       | (254,000 | )          | (218,000 | )          |
| Fair value of plan assets at end of year       |       | $        | 3,559,000  |     | $          | 3,633,000 |   |

 

Planassets were invested entirely in Guaranteed Insurance Contracts in 2005 and2004.

 

Reconciliationof funded status:

 
| ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Funded status at end of year               |       | $        | 94,000     |     | $          | 294,000 |   |
| Unrecognized net actuarial  loss and other |       | 595,000  |       | 344,000  |       |
| Prepaid pension cost                       |       | $        | 689,000    |     | $          | 638,000 |   |

 

Componentsof the net periodic benefit cost:

 
| ** **                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
| Service cost                   |       | $        | 8,000      |     | $          | 7,000 |   |
| Interest cost                  |       | 185,000  |       | 193,000  |       |
| Expected return on plan assets |       | (244,000 | )          | (251,000 | )          |
| Net periodic benefit income    |       | $        | (51,000    | )        | $          | (51,000 | ) |

 

Actuarial assumptionsused to determine costs and benefit obligations:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Discount rate                 |       | 5.3      | %          | 5.8      | %          |
| Compensation increases        |       | None     |       | None     |       |
| Return on assets for the year |       | 7.0      | %          | 7.0      | %          |

 

The Company’s strategy is to achievea long-term rate of return sufficient to satisfy plan liabilities whileminimizing plan expenses and mitigating downside risks. Assets are currentlyallocated 100% to Guaranteed Insurance Contracts, however the Company reviewsthis weighting from time to time in order to achieve overall objectives inlight of current circumstances.

 

Theexpected long-term rate of return on assets of 7% was determined based onhistorical returns for investments consistent with Plan objectives, butweighted primarily towards investments in debt securities. While actual returnsin 2005 and 2004 were below the assumed rate of return, the assumed rate givesconsideration to historical longer-term rates.

 

Prepaidpension cost at September 24, 2005 and September 25, 2004 is includedin the accompanying consolidated balance sheet under the caption “Other assets.”

 

F-16

----

 

**H. Business Acquisition**

 

On January 6, 2004, the Company purchased substantially all of theassets of Research & Education Association (“REA”), a publisher oftest preparation and study guide books and software for high school, college,and graduate students, and professionals. The acquisition was accounted for as a purchase, and accordingly, REA’sfinancial results were included in the specialty publishing segment in theconsolidated financial statements from the date of acquisition.  The purchase price was approximately $12million, with an allocation of approximately $8.4 million to goodwill and $0.7million to prepublication costs in the accompanying financial statements. Inaddition, a required purchase accounting adjustment was made to write upinventory by approximately $1 million to fair market value when REA wasacquired.

 

**I.  Discontinued Operations**

 

On December 17,2002, the Company sold the assets of its wholly owned subsidiary, CourierCustom Publishing, Inc., which comprised all of the activities of thecustomized education segment.  Inaccordance with the provisions of SFAS No. 144, the disposition wasaccounted for as a discontinued operation in the accompanying financialstatements.  The customized educationsegment provided customized coursepacks and textbooks.  Financial results of this discontinuedoperation for the periods presented are:

 
| ** **                            | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|
| Net sales                             |       | $        | 142,000    |   |
|                                  |       |     |       |
| Pretax loss                           |       | $        | (100,000   | ) |
| Income tax benefit                    |       | (35,000  | )          |
| Loss after tax                        |       | $        | (65,000    | ) |
|                                  |       |     |       |
| Proceeds from sale                    |       | $        | 1,500,000  |   |
| Net assets sold and costs of disposal |       | 68,000   |       |
| Pretax gain                           |       | $        | 1,432,000  |   |
| Income tax provision                  |       | 519,000  |       |
| Gain on disposal, net of tax          |       | $        | 913,000    |   |

 

F-17

----

 

**J.  Business Segments**

 

TheCompany has two business segments: book manufacturing and specialty publishing.The book manufacturing segment offers a full range of services from productionthrough storage and distribution for religious, educational and specialty tradebook publishers.  The Company hasaggregated its book manufacturing business into one segment because of strong similaritiesin the economic characteristics, the nature of products and services,production processes, class of customer and distribution methods used. Thespecialty publishing segment consists of Dover Publications, Inc. andbeginning with the second quarter of fiscal 2004, REA (see Note H).

 

On December 17,2002, the Company sold the assets of Courier Custom Publishing, Inc., aprovider of customized college coursepacks and textbooks, which comprised allof the activities of the customized education segment in 2003 (see NoteI).  Information related to thisdiscontinued operation is not included in the segment table below for 2003.

 

Theaccounting policies of the segments are the same as those described in NoteA.  In evaluating segment performance,management primarily focuses on income or loss before taxes and other income.The elimination of intersegment sales and related profit represents sales fromthe book manufacturing segment to the specialty publishing segment.  Interest is allocated to the specialtypublishing segment based on the acquisition costs of Dover and REA, reduced bycash generated by each business since acquisition.  Other income, discussed in Note K, isreflected as “unallocated” in the following table.  Corporate expenses that are allocated to thesegments include various support functions such as information technologyservices, finance, human resources and engineering, and include depreciationand amortization expense related to corporate assets.  The corresponding corporate asset balancesare not allocated to the segments. Unallocated corporate assets consist primarily of cash and cashequivalents and fixed assets used by the corporate support functions.

 

F-18

----

 

Thefollowing table provides segment information for continuing operations asrequired under SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information.”

 

 
| ** **                                     | ** ** | **Total****Company** | ** **  | **Book  Manufacturing** | ** ** | **Specialty****Publishing** | ** ** | **Unallocated** | ** ** | **Intersegment****Elimination** | ** ** |
|------------------------------------------------|------------|----------------------|-------------|-------------------------|------------|-----------------------------|------------|-----------------|------------|---------------------------------|------------|
| Fiscal 2005                                    |       |                 |        |                    |       |                        |       |            |       |                            |       |
| Net sales                                      |       | $                    | 227,039,000 |                    | $          | 193,623,000                 |       | $               | 40,254,000 |                            | —     |   | $ | (6,838,000 | ) |
| Earnings before income taxes                   |       | 34,236,000           |        | 30,812,000              |       | 3,836,000                   |       | —          |       | (412,000                        | )          |
| Total assets                                   |       | 196,965,000          |        | 99,449,000              |       | 59,160,000                  |       | $               | 38,356,000 |                            | —     |   |
| Goodwill, net                                  |       | 33,255,000           |        | 9,240,000               |       | 24,015,000                  |       | —          |       | —                          |       |
| Depreciation and amortization                  |       | 11,660,000           |        | 8,263,000               |       | 3,029,000                   |       | 368,000         |       | —                          |       |
| Capital expenditures and prepublication costs  |       | 22,550,000           |        | 15,689,000              |       | 6,489,000                   |       | 372,000         |       | —                          |       |
| Interest (income)/expense                      |       | (388,000             | )           | (700,000                | )          | 312,000                     |       | —          |       | —                          |       |
|                                           |       |                 |        |                    |       |                        |       |            |       |                            |       |
| Fiscal 2004                                    |       |                 |        |                    |       |                        |       |            |       |                            |       |
| Net sales                                      |       | $                    | 211,179,000 |                    | $          | 177,225,000                 |       | $               | 40,787,000 |                            | —     |   | $ | (6,833,000 | ) |
| Earnings before income taxes                   |       | 31,551,000           |        | 25,186,000              |       | 6,475,000                   |       | $               | 250,000    |                            | (360,000   | ) |
| Total assets                                   |       | 175,199,000          |        | 92,004,000              |       | 55,727,000                  |       | 27,468,000      |       | —                          |       |
| Goodwill, net                                  |       | 33,255,000           |        | 9,240,000               |       | 24,015,000                  |       | —          |       | —                          |       |
| Depreciation and amortization                  |       | 10,929,000           |        | 7,911,000               |       | 2,568,000                   |       | 450,000         |       | —                          |       |
| Capital expenditures and  prepublication costs |       | 16,234,000           |        | 12,725,000              |       | 2,917,000                   |       | 592,000         |       | —                          |       |
| Interest (income)/expense                      |       | (23,000              | )           | (330,000                | )          | 307,000                     |       | —          |       | —                          |       |
|                                           |       |                 |        |                    |       |                        |       |            |       |                            |       |
| Fiscal 2003                                    |       |                 |        |                    |       |                        |       |            |       |                            |       |
| Net sales                                      |       | $                    | 202,002,000 |                    | $          | 171,858,000                 |       | $               | 36,391,000 |                            | $          | — |   | $ | (6,247,000 | ) |
| Earnings before income taxes                   |       | 29,526,000           |        | 24,171,000              |       | 5,855,000                   |       | —          |       | (500,000                        | )          |
| Total assets                                   |       | 151,485,000          |        | 76,766,000              |       | 42,737,000                  |       | 31,982,000      |       | —                          |       |
| Goodwill, net                                  |       | 24,847,000           |        | 9,240,000               |       | 15,607,000                  |       | —          |       | —                          |       |
| Depreciation and amortization                  |       | 9,798,000            |        | 7,863,000               |       | 1,935,000                   |       | —          |       | —                          |       |
| Capital expenditures and  prepublication costs |       | 13,117,000           |        | 10,641,000              |       | 2,372,000                   |       | 104,000         |       | —                          |       |
| Interest (income)/Expense                      |       | 52,000               |        | (281,000                | )          | 333,000                     |       | —          |       | —                          |       |

 

Exportsales as a percentage of consolidated sales were approximately 21% in both 2005and 2004, and 22% in 2003.  Approximately90% of export sales were in the book manufacturing segment in fiscal years2005, 2004, and 2003.  Sales to theCompany’s largest customer amounted to approximately 28%****ofconsolidated sales in 2005, 27% in 2004 and 28% in 2003. In addition, sales toanother customer amounted to 19% of consolidated sales in 2005 and 17% in both2004 and 2003.  Both of these customersare in the book manufacturing segment and no other customer accounted for morethan 10% of consolidated sales. Customers are granted credit

 

F-19

----

 

on an unsecured basis.  Receivables for the two largest customers, asa percentage of consolidated accounts receivable, were 23% at September 24,2005 and 28% at September 25, 2004.

 

**K.  Other Income**

 

On May 26,2004, the Company completed the sale of approximately 200,000 squarefeet of unoccupied and unutilized portions of its multi-building manufacturingcomplex in Westford, Massachusetts for $1.7 million, resulting in a pretax gainof $250,000, or $.01 per diluted share.

 

## **L.  Net Income per Share**

 

Followingis a reconciliation of the shares used in the calculation of basic and dilutednet income per share.  Potentiallydilutive shares, calculated using the treasury stock method, consist of sharesissued under the Company’s stock option plans. These shares have been adjusted to reflect the three-for-two stocksplits effected in the form of dividends distributed on May 27, 2005 and December 5,2003 (see Note A).

 
| ** **                               | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Average shares outstanding for  basic    |       | 12,157,000 |       | 11,940,000 |       | 11,772,000 |       |
| Effect of potentially dilutive  shares   |       | 333,000    |       | 392,000    |       | 407,000    |       |
| Average shares outstanding for  dilutive |       | 12,490,000 |       | 12,332,000 |       | 12,179,000 |       |

 

**M.  Derivative Financial Instruments**

** **

At theend of fiscal 2003, the Company had two forward exchange contracts to purchaseapproximately 3,000,000 euros as a hedge against a foreign currency equipmentpurchase commitment, designated as a fair value hedge. The Company had recordeda $180,000 addition to its property, plant and machinery accounts with acorresponding $180,000 addition to long term liabilities, with no effect onearnings.  The equipment was deliveredand the forward exchange contracts settled in fiscal 2004. During fiscal 2005,a similar forward exchange contract was entered into as a hedge against anotherforeign currency equipment purchase commitment and was settled prior to the endof the year. The Company does not use financial instruments for trading orspeculative purposes.

 

**N.  Subsequent Events**

 

On October 17,2005, the Company announced the acquisition of Moore-Langen Printing Company, Inc.(“Moore Langen”), an Indianapolis-based printer specializing in book covers,for $15 million in a cash transaction. The acquisition will be accounted for asa purchase, and accordingly, Moore Langen’s financial results will be includedin the consolidated financial statements from the date of acquisition.  Moore Langen will be included in the bookmanufacturing segment.

 

On November 14,2005, the Company announced an agreement to purchase a third four-color pressas part of a $21 million expansion of its book manufacturing facility inKendallville, Indiana.

 

F-20

----

 

COURIERCORPORATION

 

FIVE-YEARFINANCIAL SUMMARY

 
| **(Dollar amounts in millions  except per share data)** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Net sales                                               |       | $        | 227.0      |     | $          | 211.2    |       | $        | 202.0      |     | $          | 201.0 |   | $ | 210.8 |   |
| Gross profit                                            |       | 75.2     |       | 68.6     |       | 67.4     |       | 62.6     |       | 60.1     |       |
| Income from continuing operations                       |       | 22.1     |       | 20.5     |       | 19.3     |       | 16.3     |       | 13.6     |       |
| Income per diluted share from continuing operations     |       | 1.77     |       | 1.67     |       | 1.58     |       | 1.36     |       | 1.16     |       |
| Dividends per share                                     |       | 0.33     |       | 0.23     |       | 0.20     |       | 0.18     |       | 0.16     |       |
| Working capital                                         |       | 66.9     |       | 57.3     |       | 50.9     |       | 34.0     |       | 28.2     |       |
| Current ratio                                           |       | 3.2      |       | 2.9      |       | 2.9      |       | 2.2      |       | 1.9      |       |
| Capital expenditures                                    |       | 19.7     |       | 13.4     |       | 10.9     |       | 4.9      |       | 12.8     |       |
| Depreciation and amortization                           |       | 11.7     |       | 10.9     |       | 9.8      |       | 10.7     |       | 11.8     |       |
| Total assets                                            |       | 197.0    |       | 175.2    |       | 151.5    |       | 131.8    |       | 133.6    |       |
| Long-term debt                                          |       | 0.4      |       | 0.5      |       | 0.6      |       | 0.7      |       | 16.5     |       |
| Long-term debt as a percentage of capitalization        |       | 0.3      | %          | 0.4      | %          | 0.5      | %          | 0.7      | %          | 17.0     | %          |
| Stockholders’ equity                               |       | 155.9    |       | 135.0    |       | 115.4    |       | 95.9     |       | 80.3     |       |
| Return on stockholders’ equity                     |       | 15.2     | %          | 16.4     | %          | 18.2     | %          | 18.5     | %          | 18.4     | %          |
| Stockholders’ equity per share                     |       | 12.66    |       | 11.21    |       | 9.70     |       | 8.18     |       | 6.98     |       |
| Shares outstanding (in 000’s)                      |       | 12,313   |       | 12,047   |       | 11,897   |       | 11,732   |       | 11,502   |       |
| Number of employees                                     |       | 1,479    |       | 1,465    |       | 1,420    |       | 1,455    |       | 1,504    |       |
|                                                         |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

*Net sales,gross profit, income, income per diluted share and return on stockholders’equity reflect continuing operations (see Note I).*

 

*Income perdiluted share from continuing operations is based on weighted average sharesoutstanding; stockholders’ equity per share is based on shares outstanding atyear end. Shares outstanding and per share amounts have been retroactivelyadjusted to reflect three-for-two stock splits distributed on May 27,2005, December 5, 2003 and August 31, 2001 (see Notes A and L).*

 

F-21

----

 

COURIERCORPORATION

 

SELECTED QUARTERLYFINANCIAL DATA (UNAUDITED)

 

**Fiscal 2005**

 
| **(Dollars in thousands except per share amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
|                                                |       |      |       |       |       |      |       |       |       |
| Operating Results:                                  |       |      |       |       |       |      |       |       |       |
| Net sales                                           |       | $         | 51,269     |       | $          | 53,495    |       | $          | 58,758     |   | $ | 63,517 |   |
| Gross profit                                        |       | 16,700    |       | 16,354     |       | 19,415    |       | 22,717     |       |
| Net income                                          |       | 4,131     |       | 4,154      |       | 5,853     |       | 7,996      |       |
| Net income per diluted share                        |       | 0.33      |       | 0.33       |       | 0.47      |       | 0.64       |       |
| Dividends declared per share (1)                    |       | 0.0667    |       | 0.1667     |       | —    |       | 0.10       |       |
| Stock price:                                        |       |      |       |       |       |      |       |       |       |
| Highest                                             |       | 35.29     |       | 37.05      |       | 38.56     |       | 41.96      |       |
| Lowest                                              |       | 27.55     |       | 32.82      |       | 31.24     |       | 34.80      |       |
|                                                     |            |           |            |            |            |           |            |            |            |  |  |  |  |

 

**Fiscal 2004**

 
| **(Dollars in thousands except per share amounts)** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|-----------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
|                                                |       |      |       |       |       |      |       |       |       |
| Operating Results:                                  |       |      |       |       |       |      |       |       |       |
| Net sales                                           |       | $         | 46,819     |       | $          | 49,663    |       | $          | 55,489     |   | $ | 59,208 |   |
| Gross profit                                        |       | 15,629    |       | 15,527     |       | 17,349    |       | 20,065     |       |
| Net income                                          |       | 3,912     |       | 3,851      |       | 5,194     |       | 7,583      |       |
| Net income per diluted share                        |       | 0.32      |       | 0.31       |       | 0.42      |       | 0.61       |       |
| Dividends declared per share                        |       | 0.0583    |       | 0.0583     |       | 0.0583    |       | 0.0583     |       |
| Stock price:                                        |       |      |       |       |       |      |       |       |       |
| Highest                                             |       | 26.34     |       | 30.41      |       | 30.40     |       | 27.90      |       |
| Lowest                                              |       | 24.77     |       | 25.65      |       | 25.46     |       | 26.13      |       |
|                                                     |            |           |            |            |            |           |            |            |            |  |  |  |  |

 

*Dilutedshare amounts are based on weighted average shares outstanding.  Per share amounts and stock prices have beenretroactively adjusted to reflect a three-for-two stock split distributed on May 27,2005 (see Notes A and L).*

 

*Commonshares of the Company are traded over-the-counter on the Nasdaq National Market- symbol “CRRC.”*

 

*There were1,044 stockholders of record as of September 24, 2005.*

 

----

(1)          Two cash dividends weredeclared in the second quarter of fiscal 2005. The second dividend, declared inMarch 2005, was announced in conjunction with a three-for-two stock split(see Notes A and L).  As such, no cashdividend was declared in the third quarter of fiscal 2005.

 

F-22

----

 

###### **MANAGEMENT’S DISCUSSION AND ANALYSIS**

######  

#### ***FORWARD-LOOKINGINFORMATION***

####  

*The Annual Report to shareholders includes forward-lookingstatements.  Statements that describefuture expectations, plans or strategies are considered “forward-lookingstatements” as that term is defined under the Private Securities LitigationReform Act of 1995 and releases issued by the Securities and ExchangeCommission.  The words “believe”, “expect”,“anticipate”, “intend”, “estimate” and other expressions which are predictionsof or indicate future events and trends and which do not relate to historicalmatters identify forward-looking statements. Such statements are subject to risks and uncertainties that could causeactual results 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, changes in raw material costs,pricing actions by competitors, consolidation among customers and competitors,success in the integration of acquired businesses, unanticipated changes inoperating expenses, changes in technology, difficulties in the start up of newequipment or information technology systems, changes in copyright laws, changesin tax regulations, and general changes in economic conditions, includingcurrency fluctuations and changes in interest rates.  Although the Company believes that theassumptions underlying the forward-looking statements are reasonable, any ofthe assumptions could be inaccurate, and therefore, there can be no assurancethat the forward-looking statements will prove to be accurate.  The forward-looking statements includedherein are made as of the date hereof, and the Company undertakes no obligationto update publicly such statements to reflect subsequent events orcircumstances.*

 

## **OVERVIEW**

 

Courier Corporation,founded in 1824, is one of America’s leading book manufacturers and specialtypublishers.  Courier’s nine straightyears of earnings growth was achieved through a strong focus on growth markets,technological innovation and outstanding customer service.

 

The Company has twobusiness segments: book manufacturing and specialty publishing.  In fiscal 2003, the Company sold the assetsof Courier Custom Publishing, Inc., which comprised all of the activitiesof the customized education segment (see “Discontinued Operation” below).

 

Book Manufacturing– streamlines the process of bringing books from the point of creation to thepoint of use.  Based on sales, Courier isthe fifth largest book manufacturer in the United States and largest in theNortheast, offering services from prepress and production through storage anddistribution.  Courier’s principalmarkets include religious, educational and specialty trade books.

 

SpecialtyPublishing – consists of Dover Publications, Inc.(Dover), acquired by Courier on September 22, 2000, as well as Research &Education Association, Inc. (REA), which was acquired on January 6,2004.  Dover publishes over 9,000 titlesin more than 30 specialty categories ranging from literature and poetryclassics to paper dolls, and from music scores to clip art.  Dover sells its products through mostAmerican bookstore chains, independent booksellers, children’s stores, craftstores and gift shops, as well as a diverse range of distributors around theworld.  Dover also sells its booksdirectly to customers through its specialty catalogs and over the Internet atwww.doverpublications.com.  REA publishestest preparation and study-guide books and software for high school, college andgraduate students, and professionals, which it sells through book retailers andwholesalers around the world and directly to consumers over the Internet atwww.REA.com.

 

F-23

----

 

**RESULTSOF OPERATIONS**

 

**FINANCIAL HIGHLIGHTS**

(dollars in thousands except per share amounts)

 

**ContinuingOperations**

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|--------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005 vs.**       | ** ** | **2004 vs.** | ** ** |
| ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2004**           | ** ** | **2003** | ** ** |
| Net sales                            |       | $          | 227,039    |       | $          | 211,179    |       | $                  | 202,002    |   | 7.5 | % | 4.5 | % |
| Gross profit                         |       | 75,186     |       | 68,570     |       | 67,372     |       | 9.6                | %          | 1.8 | % |
| As a percentage of sales             |       | 33.1       | %          | 32.5       | %          | 33.4       | %          |               |       |   |   |
| Selling and  administrative expenses |       | 41,338     |       | 37,292     |       | 37,794     |       | 10.8               | %          | -1.3 | % |
| Interest (income)/expense, net       |       | (388       | )          | (23        | )          | 52         |       |               |       |   |   |
| Gain on real estate sale             |       | —     |       | 250        |       | —     |       |               |       |   |   |
| Pretax income                        |       | 34,236     |       | 31,551     |       | 29,526     |       | 8.5                | %          | 6.9 | % |
| Income                               |       | 22,134     |       | 20,540     |       | 19,272     |       | 7.8                | %          | 6.6 | % |
| Income per diluted share             |       | $          | 1.77       |       | $          | 1.67       |       | $                  | 1.58       |   | 6.0 | % | 5.7 | % |

 

On January 6,2004, the Company purchased substantially all of the assets of REA, a publisherof test preparation and study-guide books and software for high school, collegeand graduate students, and professionals. The acquisition was accounted for as a purchase, and accordingly, REA’sfinancial results were included in the specialty publishing segment in theconsolidated financial statements from the date of acquisition.

 

Theamounts presented above do not include the results of a discontinued operation,Courier Custom Publishing, a provider of customized teaching materials whichwas sold on December 17, 2002 (see “Discontinued Operation” below).  Courier Custom Publishing comprised all ofthe activities of the customized education segment in fiscal 2003.

 

*Book Manufacturing Segment*

 

SEGMENT HIGHLIGHTS

(dollars in thousands)

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|--------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005 vs.**       | ** ** | **2004 vs.** | ** ** |
| ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2004**           | ** ** | **2003** | ** ** |
|                                 |       |       |       |       |       |       |       |               |       |   |   |
| Net sales                            |       | $          | 193,623    |       | $          | 177,225    |       | $                  | 171,858    |   | 9.3 | % | 3.1 | % |
| Gross profit                         |       | 57,110     |       | 49,385     |       | 50,678     |       | 15.6               | %          | -2.6 | % |
| As a percentage of sales             |       | 29.5       | %          | 27.9       | %          | 29.5       | %          |               |       |   |   |
| Selling and  administrative expenses |       | 26,998     |       | 24,529     |       | 26,788     |       | 10.1               | %          | -8.4 | % |
| Interest income, net                 |       | (700       | )          | (330       | )          | (281       | )          | 112.1              | %          | 17.4 | % |
| Pretax income                        |       | 30,812     |       | 25,186     |       | 24,171     |       | 22.3               | %          | 4.2 | % |
|                                      |            |            |            |            |            |            |            |                    |            |  |  |  |  |  |

 

F-24

----

 

Withinthis segment, the Company focuses on three key publishing markets: education,religious and specialty trade.  Sales tothe education market rose 15% in fiscal 2005, with gains achieved at alllevels, from elementary and high school through college.  Growth in four-color textbooks to theeducation market was particularly strong in fiscal 2005, enabled by a newfour-color press installed in April 2004. In the religious market, sales were flat in 2005 compared to 2004,reflecting a decision to discontinue manufacturing certain low-priced work thisyear.  Sales to the specialty trademarket were up 7% in fiscal 2005 as a result of strong demand late in theyear.  In 2004, compared to 2003, salesto educational publishers increased approximately 13%.  Sales to educational publishers of elementaryand high school textbooks were the primary source of growth, with sales upapproximately 30% over 2003.  Sales tothe college market, which represents the largest portion of the Company’seducation sales, were up 4% in 2004. Sales to the religious market increased 3%.  Sales to customers in the specialty trademarket were down 8% in 2004, in part due to a large drop in the sale ofcomputer game books, particularly during the first half of the fiscalyear.  During 2004, the Company expandedits four-color capabilities with the addition of a major new four-color pressat its Kendallville, Indiana facility. The press became operational in April 2004.

 

Grossprofit in this segment increased by 16% in 2005.  Gross profit also increased as a percentageof sales to 29.5% in 2005 from 27.9% last year. Growing volume, especially in four-color textbooks, and continuedproductivity gains, more than offset the effects of increased energy andmedical costs.  For fiscal 2004, grossprofit as a percent of sales in the Company’s book manufacturing segmentdecreased to 27.9% from 29.5% in 2003. Productivity gains were offset by a combination of selectively loweredprices and start-up costs related to the new four-color press.

 

Sellingand administrative expenses for the segment were $27.0 million for 2005, 10%higher than the prior year, and as a percentage of sales increased slightly to13.9% in 2005 from 13.8% last year.  Theincrease reflects higher compensation costs of approximately $1.5 millionassociated with increased sales and profitability, as well as audit, legal andother expenses related to compliance with the provisions ofSarbanes-Oxley.  In 2004, selling andadministrative expenses of $24.5 million were down by 8% from 2003, and as apercentage of sales, decreased to 13.8% compared to 15.6% in the prior year.  The reductions were due primarily to adecrease in bad debt expense of approximately $600,000 as well as reductions inincentive compensation of approximately $1.6 million.

 

Intercompanyinterest income allocated to the book manufacturing segment was approximately$700,000 in fiscal 2005 compared to $330,000 in 2004 and $281,000 in 2003.  The increases in both 2005 and 2004 comparedto the corresponding prior years reflect cash generated within the segment.  Fiscal 2005 interest income also benefited fromhigher interest rates.

 

Pretaxincome in the Company’s book manufacturing segment in 2005 increased 22% to$30.8 million, or, on an after-tax basis, $1.60 per diluted share, compared to$25.2 million, or $1.34 per diluted share, in 2004.  Fiscal 2004 pretax income in this segment was$25.2 million, up 4% compared to 2003, and net income per diluted share was$1.34, an increase of 3% over the prior year.

 

F-25

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*Specialty Publishing Segment*

 

SEGMENT HIGHLIGHTS

(dollars in thousands)

 
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent Change** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|--------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2005 vs.**       | ** ** | **2004 vs.** | ** ** |
| ** **                           | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2004**           | ** ** | **2003** | ** ** |
|                                 |       |       |       |       |       |       |       |               |       |   |   |
| Net sales                            |       | $          | 40,254     |       | $          | 40,787     |       | $                  | 36,391     |   | -1.3 | % | 12.1 | % |
| Gross profit                         |       | 18,487     |       | 19,545     |       | 17,194     |       | -5.4               | %          | 13.7 | % |
| As a percentage of sales             |       | 45.9       | %          | 47.9       | %          | 47.2       | %          |               |       |   |   |
| Selling and  administrative expenses |       | 14,339     |       | 12,763     |       | 11,006     |       | 12.3               | %          | 16.0 | % |
| Interest expense, net                |       | 312        |       | 307        |       | 333        |       | 1.6                | %          | -7.8 | % |
| Pretax income                        |       | 3,836      |       | 6,475      |       | 5,855      |       | -40.8              | %          | 10.6 | % |
|                                      |            |            |            |            |            |            |            |                    |            |  |  |  |  |  |

 

TheCompany’s specialty publishing segment is comprised of Dover, as well as REAsince its acquisition on January 6, 2004. The segment reported fiscal 2005 sales of $40.3 million, down 1% from$40.8 million in fiscal 2004.  REA salestotaled $5.6 million in fiscal 2005 compared to $3.9 million in 2004.  The increase was due, in part, to $1.1million of REA sales in this year’s first quarter.  Excluding the first quarter sales, REA salesincreased by 15% compared to the same period last year.  Dover sales were down 6% in 2005 to $34.7million.  The decline at Dover reflectedsoft sales to trade retailers as well as fourth-quarter shipment delays and aresulting increase in order backlogs of approximately $600,000 in conjunctionwith a major warehouse relocation project and the implementation of anenterprise-wide information system.  Bothof these projects are scheduled for completion in early fiscal 2006 at whichtime the backlog of unshipped orders is expected to return to normal levels.  Despite these difficulties, Dover’s direct-to-consumersales for 2005 were up 12% over the prior year. Sales for this segment in fiscal 2004 were $40.8 million, an increase of$4.4 million or 12% over fiscal 2003 sales. REA contributed $3.9 million of sales in 2004.  Dover’s sales in 2004 were up 1% over theprior year to $36.9 million. Direct-to-consumer sales increased by 5% in 2004, while internationalsales rose 9% over the previous year. Sales in 2004 to U.S. retailers, which account for approximately 70% ofDover’s sales and include the major bookstore chains, were comparable to lastyear.

 

Grossprofit in this segment was $18.5 million in 2005 compared to $19.5 million lastyear.  Within this segment, Dover’s grossprofit as a percentage of sales decreased to 46.2% from 49.4% last year,reflecting the reduction in sales.  Inaddition, Dover incurred costs of approximately $500,000 in 2005 in connectionwith relocating a significant portion of Dover’s leased offsite warehousingspace to available warehouse space owned by the Company.  This project will be completed in earlyfiscal 2006 and we expect to generate annual savings in rent and real estatetaxes of approximately $800,000 beginning in fiscal 2006 with offsetting costincreases of approximately $200,000, primarily for depreciation expense.  REA’s gross profit percentage for fiscal 2005was 44.2% versus 34.4% last year.  Thisimprovement is due, in large part, to the expense related to a requiredpurchase accounting write up of inventory to fair market value when REA wasacquired.  The original inventory writeup was approximately $1 million and is being expensed as the acquired inventoryis sold.  Approximately $250,000 of theinventory write up was expensed in 2005 compared to $600,000 in 2004.  Gross profit as a percentage of sales in thesegment was 47.9% in 2004 compared to 47.2% in 2003.  Dover’s gross profit as a percentage of salescontinued to improve in 2004 to 49.4% from 47.2% in 2003.  REA’s gross profit percentage was 34.4%,which included approximately $600,000 of expense related to a required write upof inventory to fair market value when REA was acquired.

 

F-26

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Sellingand administrative expenses in the specialty publishing segment were $14.3million in 2005, an increase of 12% over last year, primarily as a result ofthe addition of REA to the segment in January 2004 and increases in salesand marketing activities at Dover.  Inaddition, a project is underway to replace information systems at Dover and REAwith a new fully integrated system.  Thesystems implementation began in July 2005 at Dover and added approximately$200,000 of expenses in 2005.  In 2004,selling and administrative expenses in this segment were $12.8 million, anincrease of $1.8 million or 16% over 2003. The acquisition of REA and increases in sales and marketing at Doveraccounted for the increase.

 

Intercompanyinterest expense is allocated to the specialty publishing segment based on theacquisition cost of Dover and REA, reduced by cash generated by each businesssince acquisition.  Such intercompanyinterest expense in 2005 was $312,000 compared to $307,000 in 2004 and $333,000in 2003.  Intercompany interest expensefor each of the past three years was relatively comparable as cash generated byDover was offset by the investment to acquire REA.

 

Pretaxincome in the specialty publishing segment in fiscal 2005 was $3.8 million, or,on an after-tax basis, $.19 per diluted share, compared to $6.5 million, or$.33 per diluted share in the prior year. In 2004, pretax income in thissegment was $6.5 million, or $.33 per diluted share, compared to $5.9 million,or $.31 per diluted share in the previous year. REA contributed approximately $170,000 to pretax income, or $.01 perdiluted share, in 2004.

 

*Total Consolidated Company*

 

Interestincome, net of interest expense, was $388,000 in 2005 and $23,000 in 2004compared to net interest expense of $52,000 in 2003.  During the past three years, there were noborrowings under the Company’s revolving credit facility; however, interestexpense includes commitment fees and other costs associated with maintainingthis credit facility.  Cash investmentsin 2005 averaged approximately $26.5 million at an average annual interest rateof 2.5%.  The Company’s average cashinvestments were approximately $17.7 million for 2004, earning a 1.3% averageannual interest rate, and approximately $17.5 million for 2003, earning at anaverage annual interest rate of 1.2%. These investments generated interest income of approximately $666,000 in2005, $230,000 in 2004 and $200,000 in 2003. Capitalized interest, related tothe new four-color press, was $74,000 in 2004. No interest was capitalized in 2005 or 2003.

 

Otherincome in 2004 is comprised of a pretax gain of approximately $250,000resulting from the sale of an unused portion of the Company’s multi-buildingmanufacturing complex in Westford, Massachusetts.

 

TheCompany’s effective tax rate for 2005 was 35.3% compared to 34.9% for 2004,reflecting a reduced federal tax benefit from export related income associatedwith the American Jobs Creation Act of 2004. The effective tax rate for 2004 was 34.9% compared to 34.7% in 2003 as aresult of a slightly higher effective state tax rate.

 

For purposes of computingnet income per diluted share, weighted average shares outstanding increased byapproximately 158,000 shares in 2005 and 153,000 shares in 2004.  These increases were primarily due to optionsexercised and shares issued under the Company’s stock plans and the impact ofpotentially dilutive shares.  On March 10,2005 and November 6, 2003, the Company announced three-for-two stocksplits effected in the form of 50% stock dividends, which were distributed tostockholders on May 27, 2005 and December 5, 2003, respectively.  Weighted average shares outstanding and netincome per share amounts have been restated to give effect to these stocksplits.

 

F-27

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**DiscontinuedOperation**

 

On December 17,2002, the Company sold the assets of its wholly owned subsidiary, CourierCustom Publishing, Inc., which comprised all of the activities of thecustomized education segment in 2003. The customized education segment provided customized coursepacks andtextbooks.  Fiscal 2003 results for thisoperation was a loss, net of tax, of $65,000. Proceeds from the sale of Courier Custom Publishing were $1.5 millionresulting in an after-tax gain of approximately $0.9 million, or $.08 perdiluted share. Courier Custom Publishing was accounted for as a discontinuedoperation in the accompanying financial statements.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Operatingactivities provided $35.0 million of cash in 2005 compared to $28.3 million in2004.  Income from continuing operationsfor 2005 was $22.1 million.  Depreciationwas $9.1 million and amortization of prepublication costs was $2.6million.  Working capital changesprovided approximately $0.5 million of cash.

 

Investmentactivities used $22.6 million of cash. Capital expenditures were approximately $19.7 million, includingapproximately $11 million for deposits on a four-color press and relatedequipment installed early in fiscal 2006. Capital also included investments of approximately $3.5 million in thespecialty publishing segment for an integrated software solution, as well as aprogram to relocate and improve warehousing operations.  For fiscal 2006, capital expenditures areexpected to increase to approximately $30 million.  This amount includes payments on anotherfour-color press, identical to the presses installed in April 2004 and December 2005.  This latest four-color press is expected tobe installed in early fiscal 2007.  Thefiscal 2006 capital projections also include bindery and warehousing expansionto support the additional four-color press capacity.  Prepublication costs in 2005 wereapproximately $2.9 million, reflecting increased investments in new titleofferings at Dover and REA.  These costsare expected to increase modestly in 2006 as publishing activity continues togrow.  On October 17, 2005, theCompany announced the acquisition of Moore-Langen Printing Company, Inc. (“MooreLangen”) for approximately $15 million in a cash transaction.  Moore Langen is an Indiana based companyspecializing in printing textbook covers.

 

Financing activities usedapproximately $2.4 million of cash in 2005. Cash dividends were $4.1 million while proceeds from stock plans were$1.8 million, primarily from the exercise of stock options.  On March 10, 2005, the Company announceda three-for-two stock split, and a 50% increase in its quarterly dividend.  At September 24, 2005, the Company had$34 million in cash and no borrowings under its long-term revolving creditfacility, which bears interest at a floating rate.  The revolving credit facility is available tothe Company for both its long-term and short-term financing needs.  On April 29, 2005, the Company extendedthe maturity date of this facility to March 2008 and amended certainprovisions, including increasing the level of capital expenditures and reducingthe amount of the facility to $45 million from $60 million to reduce the costof the commitment fee.  The Companybelieves that its cash on hand, cash from operations and the available creditfacility will be sufficient to meet its cash requirements through 2006,including the recent acquisition of Moore Langen.

 

F-28

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Thefollowing table summarizes the Company’s contractual obligations andcommitments at September 24, 2005 to make future payments as well as itsexisting commercial commitments.

 
| ** **                  | ** ** | ** ** | ** ** | **(000’s  omitted)  Payments due by period** | ** ** |
|-----------------------------|------------|------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Less than**                                     | ** ** | **1 to 3** | ** ** | **4 to 5** | ** ** | **After 5** | ** ** |
| ** **                  | ** ** | **Total**  | ** ** | **1 Year**                                        | ** ** | **Years** | ** ** | **Years** | ** ** | **Years** | ** ** |
| Contractual Payments:       |       |       |       |                                              |       |   |   |   |   |   |   |
| Long-Term Debt              |       | $          | 510        |                                              | $          | 85 |   | $ | 179 |   | $ | 189 |   | $ | 57 |   |
| Operating Leases            |       | 11,535     |       | 2,836                                             |       | 4,411 |   | 2,290 |   | 1,998 |   |
| Purchase Obligations        |       | 2,294      |       | 2,294                                             |       | — |   | — |   | — |   |
| Other Long-Term Liabilities |       | 3,020      |       | —                                            |       | 1,068 |   | 350 |   | 1,602 |   |
| Total                       |       | $          | 17,359     |                                              | $          | 5,215 |   | $ | 5,658 |   | $ | 2,829 |   | $ | 3,657 |   |

 

### **NEW ACCOUNTING PRONOUNCEMENTS**

###  

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayment” (“SFAS 123R”).  Under this newstandard, companies will no longer be able to account for share-basedcompensation transactions using the intrinsic method in accordance with APB 25.Instead, companies will be required to account for such transactions using afair-value method and to recognize the expense over the service period.  SFAS 123R allows for several alternativetransition methods. On April 14, 2005, the Securities and ExchangeCommission announced the adoption of a rule that defers the requiredeffective date of SFAS 123R for registrants to the beginning of the firstfiscal year beginning after June 15, 2005. Accordingly the Company will implement this new standard in the firstquarter of its fiscal year 2006 and will restate all prior periods on aretrospective basis.  The Companybelieves that the pro forma disclosures in Note A under Stock-BasedCompensation appropriately reflect the anticipated impact this standard wouldhave had on reported net income if adopted in the periods presented and willprovide the basis for the retrospective restatement of such periods.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs” (“SFAS 151”), an amendmentof ARB No. 43, Chapter 4.  SFAS 151clarifies the accounting for abnormal amounts of idle facility expense,freight, handling costs and wasted material. SFAS 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005.  TheCompany does not believe the adoption of SFAS 151 will have a material effecton its consolidated financial position, results of operations or cash flows.

 

### **RISKS**

###  

Our businesses operate inmarkets that are highly competitive, and the Company faces competition on thebasis of price, product quality, speed of delivery, customer service,availability of appropriate printing capacity, related services and technologysupport.  Some of our competitors havegreater sales, assets and financial resources than our company and others,particularly those in foreign countries, may derive significant advantages fromlocal governmental regulation, including tax holidays and other subsidies.These competitive pressures could affect prices or customers’ demand for ourproducts, impacting our profit margins and/or resulting in a loss of customersand market share. The Company derived approximately 47% of its 2005 revenues,44% of its 2004 revenues, and 45% of its 2003 revenues from two majorcustomers.  A significant reduction inorder volumes or price levels from either of them would have a material adverseeffect on the Company.

 

F-29

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**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

TheCompany’s consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the amounts reported in these financial statements and accompanyingnotes.   On an ongoing basis, managementevaluates its estimates and judgments, including those related tocollectibility of accounts receivable, recovery of inventories, impairment ofgoodwill, prepublication costs and income taxes.  Management bases its estimates and judgmentson historical experience and various other factors believed to be reasonableunder the circumstances, the results of which form the basis for making judgmentsabout the carrying value of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the periodspresented.  Actual results may differfrom these estimates.  The significantaccounting policies which management believes are most critical to aid in fullyunderstanding and evaluating the Company’s reported financial results includethe following:

 

# Accounts Receivable   Management performs ongoing credit evaluationsof the Company’s customers and adjusts credit limits based upon payment historyand the customer’s current credit worthiness. Collections and payments from customers are continuously monitored.  A provision for estimated credit losses isdetermined based upon historical experience and any specific customercollection issues that have been identified. If the financial condition of the Company’s customers were todeteriorate, resulting in an impairment of their ability to make 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   The Company evaluates possible impairmentannually or whenever events or circumstances indicate that the carrying valueof the assets may not be recoverable. The Company completed the annual impairment test at September 24,2005 resulting in no change to the nature or carrying amounts of its intangibleassets.  Changes in market conditions orpoor operating results could result in a decline in value thereby potentiallyrequiring an impairment charge in the future.

##### *** ***

PrepublicationCosts   The Companycapitalizes prepublication costs, which include the costs of acquiring rightsto publish a work and costs associated with bringing a manuscript topublication such as artwork and editorial efforts.  Prepublication costs are amortized on astraight-line basis over periods ranging from three to four years.  Management regularly evaluates the sales andprofitability of the products based upon historical and forecasted demand.  Based upon this evaluation, adjustments maybe required to amortization expense.

 

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 determinedbased upon the differences between the financial statement and tax bases ofassets and liabilities.  Changes in therecoverability of the Company’s deferred tax assets or audits by taxauthorities could result in future charges or credits to income tax expense,and related accrued and deferred taxes.

 

F-30

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COURIERCORPORATION

 

SCHEDULE II

 

CONSOLIDATEDVALUATION AND QUALIFYING ACCOUNTS

 
| ** **                                | ** ** | ** **     | ** ** | **ADDITIONS**  | ** ** | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** |
|-------------------------------------------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                | ** ** | **BALANCE AT** | ** ** | **CHARGED TO** | ** ** | ** **     | ** ** | ** **     | ** ** | **BALANCE**   | ** ** |
| ** **                                | ** ** | **BEGINNING**  | ** ** | **COSTS AND**  | ** ** | ** **     | ** ** | **OTHER**      | ** ** | **AT END**    | ** ** |
| ** **                                | ** ** | **OF PERIOD**  | ** ** | **EXPENSES**   | ** ** | **DEDUCTIONS** | ** ** | **CHANGES(1)** | ** ** | **OF PERIOD** | ** ** |
|                                      |       |           |       |           |       |           |       |           |       |          |       |
| Fiscal year ended September 24, 2005 |       |           |       |           |       |           |       |           |       |          |       |
| Allowance for uncollectible accounts      |       | $              | 1,630,000  |           | $          | 200,000        |       | $              | 691,000    |          |       |   | $ | 1,139,000 |   |
|                                      |       |           |       |           |       |           |       |           |       |          |       |
| Fiscal year ended September 25, 2004 |       |           |       |           |       |           |       |           |       |          |       |
| Allowance for uncollectible accounts      |       | $              | 1,741,000  |           | $          | 75,000         |       | $              | 236,000    |          | $          | 50,000 |   | $ | 1,630,000 |   |
|                                      |       |           |       |           |       |           |       |           |       |          |       |
| Fiscal year ended September 27, 2003 |       |           |       |           |       |           |       |           |       |          |       |
| Allowance for uncollectible accounts      |       | $              | 2,292,000  |           | $          | 723,000        |       | $              | 1,274,000  |          |       |   | $ | 1,741,000 |   |
|                                           |            |                |            |                |            |                |            |                |            |               |            |  |  |  |  |  |

 

----

(1)  Other changes reflects amount relatedto a business acquisition.

 

S-1

----