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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 26, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_______________
Commission file number 0-7597
Courier Corporation
A Massachusetts corporation
I.R.S. Employer Identification No. 04-2502514
15 Wellman Avenue
Chelmsford, Massachusetts 01863
Telephone No. 978-251-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant as of November 20, 1998
Common Stock, $1 par value - $54,648,144
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of November 20, 1998
Common Stock, $1 par value - 1,900,805
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the annual meeting of
stockholders scheduled to be held on January 21, 1999 (Part III).
PART I
Item 1. Business.
INTRODUCTION
Registrant, Courier Corporation ("Courier" or the "Company"), was
incorporated under the laws of Massachusetts on June 30, 1972. Courier owns all
of the capital stock of Courier-Citizen Company, a Massachusetts corporation
organized in 1894 as successor to a printing business which originated in 1824.
Courier Corporation helps organizations manage the process of creating
and distributing intellectual properties. Courier is the largest book
manufacturer in the Northeast offering services from preparation, production,
media replication, kitting and packaging through storage, and distribution.
Products include Bibles, reference texts, books, software kits and technical
documentation. Courier also operates businesses which respond to the need for
greater choice in education. Copyright Management Services provides
Internet-based solutions that enable educators to use coursepacks combining
materials from multiple publishers. The Home School is a direct marketer of
educational materials to families engaged in educating children at home.
In December 1994, the Company formed Courier New Media, Inc. ("Courier
New Media"), an information management services company which works with
publishers and other information developers to create new products from new and
existing intellectual properties. Simultaneously, Courier New Media launched a
new business, Copyright Management Services ("CMS"). CMS specializes in managing
the process of creating multiple-publisher college coursepacks for college
professors, enabling personalized course curriculum and 100% relevant materials
for students. CMS obtains copyright permissions and provides either
ready-to-print masters to a campus print shop, or high quality printed
coursepacks to college bookstores.
On July 21, 1997, the Company acquired all of the outstanding stock of
Book-mart Press, Inc. ("Book-mart"), a North Bergen, New Jersey book
manufacturer specializing in short to medium runs of softcover and hardcover
books. Founded in 1977, Book-mart has built a strong reputation and loyal
customer following in New York and the surrounding areas. Book-mart offers high
quality offset printing and binding for order quantities as low as 300 copies.
The acquisition complements the Company's existing range of services so that the
Company can offer its customers, and Book-mart customers, one-stop full-service
shopping for book production at any run length.
On September 30, 1997, the Company purchased the assets of The Home
School Books & Supplies ("The Home School"), based in Arlington, Washington. The
Home School markets curriculum and other learning materials direct to home
schoolers through retail and catalog businesses.
1
In May 1998, the Company restructured the Courier EPIC division located
in North Chelmsford, Massachusetts. Kitting, assembly, disk replication and
related services were consolidated into Courier Stoughton where similar
operations were performed. Simultaneously, North Chelmsford's end-user
fulfillment operation was expanded to handle The Home School's national catalog
roll out and other end-user fulfillment business.
PRODUCTS
Courier's products include the manufacture of books, manuals and
replicated diskettes and CD-ROMs for publishers, software developers and other
information providers as well as related services involved in managing the
process of creating and distributing these products. Courier provides
manufacturing and related services from six facilities in Westford, Stoughton
and North Chelmsford, Massachusetts; Philadelphia, Pennsylvania; Kendallville,
Indiana; and North Bergen, New Jersey.
Courier's book manufacturing operations consist of both electronic and
conventional film processing, platemaking, printing and binding of soft and hard
bound books and manuals. These book manufacturing operations are conducted
through five subsidiaries, Courier Westford, Inc. ("Westford"), Courier
Stoughton, Inc. ("Stoughton"), Courier Kendallville, Inc. ("Kendallville"),
National Publishing Company ("National"), and Book-mart. Each of these
subsidiaries has certain specialties adapted to the needs of the market niches
Courier serves, such as short-run book manufacturing capabilities, printing on
lightweight paper for medical and religious publishers and 4-color book
manufacturing for educational and trade publishers.
In December 1994, the Company formed Courier New Media to work with
publishers and other information providers to develop new products from new and
existing intellectual properties. Courier New Media includes two operating
units, CMS and end user fulfillment. In May 1998, Courier EPIC's project
management, product assembly, packaging, and diskette replication were
consolidated into Stoughton. CMS specializes in managing the process of creating
multiple-publisher college coursepacks for college professors by obtaining
copyright permissions and providing either ready-to-print masters to campus
print shops or printed coursepacks to college bookstores.
On September 30, 1997, the Company purchased the assets of The Home
School Books & Supplies, based in Arlington, Washington. The Home School markets
curriculum and other learning materials direct to home schoolers through retail
and catalog businesses. Retail operations are located in Arlington, Washington,
while catalog operations were transferred to North Chelmsford, Massachusetts.
2
MARKETING AND CUSTOMERS
Courier's book manufacturing services are primarily sold to publishers
of educational, religious, consumer, professional and reference books and to
computer software and hardware manufacturers.
Courier's book manufacturing sales force of 24 people is responsible
for all of the Company's sales to over 650 customers, excluding customers of The
Home School and CMS. Courier's salespeople operate out of sales offices located
in New York, Chicago, Philadelphia, Hayward, California, Orlando, Florida, North
Chelmsford, Massachusetts, and North Bergen, New Jersey.
Sales to one customer, the Gideon Society, aggregated approximately 26%
of consolidated sales in fiscal 1998 and sales to another customer, Simon &
Schuster, aggregated approximately 12% of consolidated 1998 sales. In November
1998, Pearson PLC, another customer of the Company, announced its acquisition of
The Simon & Schuster education, reference, and business and professional
publishing businesses from Viacom Inc. At this time, the Company has no basis
for determining the impact that the acquisition may have on its business
relationship with the combined entity. The loss of these customers would have a
material adverse effect on the Company. No other customer accounted for more
than 10% of fiscal 1998 consolidated sales. The Company distributes products
around the world; export sales, as a percentage of consolidated sales, were
approximately 17% in fiscal 1998, 18% in fiscal 1997 and 17% in fiscal 1996.
CMS markets its custom coursepack services to college bookstores,
campus print shops and direct to professors nationwide. It utilizes direct
marketing techniques including mailings and e-mail backed up by one sales person
and an internal direct response staff located in North Chelmsford,
Massachusetts. The Home School markets curriculum and other learning materials
direct to home schoolers through retail operations in Arlington, Washington, and
through catalog operations in North Chelmsford, Massachusetts.
COMPETITION
All phases of Courier's business are highly competitive. The printing
and publishing industries, exclusive of newspapers, include over 50,000
establishments. While most of these establishments are relatively small, several
of Courier's competitors are considerably larger or are affiliated with
companies which are considerably larger and have greater financial resources
than Courier. In recent years, consolidation of both customers and competitors
within the Company's markets has increased pricing pressures. The major
competitive factors in Courier's business in addition to price are product
quality, customer service, availability of appropriate printing capacity,
related services and technology support.
3
MATERIALS AND SUPPLIES
Courier purchases its principal raw materials, primarily paper, but
also plate materials, ink, cover stock and casebinding materials, from numerous
suppliers, and is not dependent upon any one source for its requirements. Many
of Courier's book manufacturing customers purchase their own paper and furnish
it at no charge to these operations for book production purposes. The Home
School purchases books and other learning materials from over 100 educational
publishers and it is not dependent upon any one source.
ENVIRONMENTAL REGULATIONS
The Company believes that its operations comply in all material
respects with applicable federal, state and local environmental laws and
regulations. Although the Company makes capital expenditures for environmental
protection, it does not anticipate any significant expenditures in order to
comply with such laws and regulations which would have a material impact on the
Company's capital expenditures, earnings or competitive position.
EMPLOYEES
The Company and its subsidiaries employed 1,254 persons at September
26, 1998 compared to 1,202 a year ago.
OTHER
Courier's overall business is not significantly seasonal in nature.
Although in prior years sales volume was generally lower in the Company's second
quarter, recent results have not reflected that seasonal trend due to changes in
the business, including acquisitions. In addition, market demand for CMS and The
Home School products and services is highest in the Company's fourth quarter.
There is no portion of Courier's business subject to cancellation of
government contracts or renegotiation of profits. Courier holds no patents,
licenses other than third-party software, franchises or concessions which are
important to its operations. The Company considers Courier, Courier New Media,
The Home School, Copyright Management Services, E-Master, CoursepackCounselors,
SmartMail, CampusPrint, Coursepack.com and SmartChoice to be proprietary
trademarks. In addition, www.coursepack.com and www.coursepak.com are
proprietary Universal Resource Locators (URL) on the World Wide Web for
Courier's coursepack business and are important to its operations.
4
Item 2. Properties.
REAL PROPERTIES
The following schedule lists the facilities occupied by Courier at
September 26, 1998. The list also includes real estate which is held for sale or
lease, as discussed in Note J to the Consolidated Financial Statements, which
appears on page F-14 of this Annual Report on Form 10-K. Courier considers its
plants and other facilities to be well maintained and suitable for the purpose
intended.
Owned/ Size in
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 593,000
Kendallville plant, Kendallville, IN (1978) Owned 155,000
National plant, Philadelphia, PA (1975, 1997) Owned 229,000 (2)
Stoughton plant, Stoughton, MA (1980) Leased 169,000
Book-mart plant, North Bergen, NJ (1917, 1935, 1997) Leased 75,000
Real estate held for sale or lease
Raymond, NH (1973) Owned 59,000 (3)
(1) In September 1996, the Company relocated its corporate headquarters into
approximately 17,000 square feet of an existing facility in North
Chelmsford, MA which also houses CMS, The Home School and end user
fulfillment operations..
(2) In December 1996, the Company completed construction of a 100,000 square
foot addition to its principle Philadelphia facility. The expansion
enabled the Company to consolidate operations located in an older
multistory facility to the newer, more efficient property. The older
multistory facility, which had been vacant, was sold in June 1998.
(3) This building, which had been leased through June 1996 to the purchaser
of the Company's former forms printing business, is now vacant pending
sale or lease.
EQUIPMENT
The Company's products are manufactured on equipment which in most cases
is owned by the Company, although it leases computers, image setters and
electronic printing systems which are subject to more rapid obsolescence. In
addition, it leases three printing presses where title is held by the lessor
including one new press installed in July 1998. Capital expenditures amounted to
approximately $4.1 in 1998, $6.7 million in 1997, and $7.3 million in 1996.
Capital expenditures in 1998 included $0.5 million for a computer-to-plate
system which eliminates the need to produce film prior to printing and $0.5
million to upgrade the Company's information systems and infrastructure. Capital
expenditures for fiscal 1999 are expected to be approximately $8-10 million,
including approximately $0.6 million related to Year 2000 issues. Courier
considers its equipment to be in good operating condition and adequate for its
present needs.
5
ENCUMBRANCES AND RENTAL OBLIGATIONS
For a description of encumbrances on certain properties and equipment,
see Note D of Notes to Consolidated Financial Statements on page F-10 of this
Annual Report on Form 10-K. Information concerning leased properties and
equipment is disclosed in Note E of Notes to Consolidated Financial Statements,
which appears on page F-10 of this Annual Report on Form 10-K.
Item 3. Legal Proceedings.
In the ordinary course of business, the Company is subject to various
legal proceedings and claims. The Company believes that the ultimate outcome of
these matters will not have a material adverse effect on its financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the
quarter ended September 26, 1998.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The information required by this Item is contained in the section
captioned "Selected Quarterly Financial Data (Unaudited)" which appears on page
F-15 of this Annual Report on Form 10-K.
Item 6. Selected Financial Data.
The information required by this Item is contained in the section
captioned "Five-Year Financial Summary" appearing on page F-16 of this Annual
Report on Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required by this Item is contained in the section
captioned "Management's Discussion and Analysis" appearing on pages F-17 through
F-20 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not hold any derivative financial instruments,
derivative commodity instruments or other financial instruments except as
noted in Note A to the financial statements. The Company engages neither in
speculative nor derivative trading activities. As of September 26, 1998, the
Company had $5.3 million of debt outstanding with a variable interest rate
(see Note D to the consolidated financial statements). A fluctuation in the
underlying interest rate on this debt at its current balance would not have a
material effect on the Company's financial results.
6
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is contained on pages F-1 through
F-14 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Courier's executive officers, together with their ages and all positions
and offices with the Company presently held by each person named, are as
follows:
James F. Conway III 46 Chairman, President and Chief
Executive Officer
George Q. Nichols 69 Corporate Senior Vice President
and President of National
Publishing Company
Robert P. Story, Jr. 47 Senior Vice President and
Chief Financial Officer
Thomas G. Osenton 45 Senior Vice President and
Chief Marketing Officer
Peter M. Folger 45 Vice President and
Controller
The terms of office of all of the above executive officers continue
until the first meeting of the Board of Directors following the next annual
meeting of stockholders and the election or appointment and qualification of
their successors, unless any officer sooner dies, resigns, is removed or becomes
disqualified.
Mr. Conway III was elected Chairman of the Board in September 1994 after
serving as acting Chairman since December 1992. He has been Chief Executive
Officer since December 1992 and President since July 1988.
7
Mr. Nichols became an executive officer of Courier in June 1989 while
retaining his position as President of National Publishing Company, a position
he has held since 1975. He was elected a Director of the Company in March 1995
and became Senior Vice President of the Company in November 1996.
Mr. Story became Senior Vice President and Chief Financial Officer in
April 1989. He joined Courier in November 1986 as Vice President and Treasurer.
He was elected a Director of the Company in February 1995.
Mr. Osenton joined Courier in October 1993 as Senior Vice President and
Chief Marketing Officer. He has been President of Courier New Media since
January 1996. He had previously served as President/Chief Executive Officer and
Publisher of The Sporting News Publishing Company, a subsidiary of the Times
Mirror Company.
Mr. Folger has been Controller since 1982 and became Vice President in
November 1992.
All other information called for by Item 10 is contained in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders scheduled to be held on Thursday, January 21,
1999. Such information is incorporated herein by reference.
Item 11. Executive Compensation.
and
Item 12. Security Ownership of Certain Beneficial Owners and Management.
and
Item 13. Certain Relationships and Related Transactions.
Information called for by Items 11, 12 and 13 is contained in the
definitive Proxy Statement to be delivered to stockholders in connection with
the Annual Meeting of Stockholders scheduled to be held on Thursday, January 21,
1999. Such information is incorporated herein by reference.
8
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report
1. Financial statements Page(s)
- Report of Independent Accountants F-1
- Consolidated Balance Sheets as of September 26, 1998
and September 27, 1997 F-2 to F-3
- Consolidated Statements of Income for each of the three
years in the period ended September 26, 1998 F-4
- Consolidated Statements of Cash Flows for each of the
three years in the period ended September 26, 1998 F-5
- Consolidated Statements of Changes in Stockholders' Equity
for each of the three years in the period ended
September 26, 1998 F-6
- Notes to Consolidated Financial Statements F-7 to F-14
2. Financial statement schedule
- Schedule II - Valuation and Qualifying Accounts S-1
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).
9
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 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).
3B By-Laws of Courier Corporation, as amended through April 28,
1988 (filed as Exhibit 3B to the Company's Annual Report on Form
10-K for the fiscal year ended September 24, 1988, and
incorporated herein by reference).
4 First Refusal Agreement, dated July 5, 1989, relating to stock
owned by the Estate of Dorothy F. French (filed as Exhibit 3 to
the Company's Current Report on Form 8-K, dated July 6, 1989,
and incorporated herein by reference).
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).
10
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).
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.
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+ Executive Incentive Compensation Program as amended and restated
effective December, 1987 (filed as Exhibit 10L-1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 24, 1988, and incorporated herein by reference).
10E-2+ The Courier Executive Compensation Program, effective October 4,
1993 (filed as Exhibit 10E-2 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 25, 1993, and
incorporated herein by reference).
10E-3+ 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).
11
10F+ Courier Corporation Senior Executive Severance Program and
Agreements, dated October 25, 1988 pursuant to the program with
Messrs. Conway III, Nichols, Story and Osenton (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 Rights Amendment between Courier Corporation and State Street
Bank and Trust Company dated October 25, 1988 (filed as Exhibit
1 to the Company's Current Report on Form 8-K, dated October 28,
1988, and incorporated herein by reference).
10H+ 1989 Incentive Program, as amended and restated on May 28, 1992
for the purchase of Courier Common Stock by Executive Officers
and Key Employees of the Corporation (filed as Exhibit 10H to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 24, 1994, and incorporated herein by reference).
10I+ Courier Corporation 1988 Employee Stock Purchase Plan (filed as
Exhibit A to the Company's Proxy Statement for the Annual
Meeting of Stockholders held on January 21, 1988, and
incorporated herein by reference).
10J-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).
10J-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).
.
10K Agreement, dated as of October 16, 1995, of Courier Corporation
relating to employment of John Pugsley (filed as Exhibit 10K to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995, and incorporated herein by reference).
10L-1 Revolving Credit Agreement, dated as of March 18, 1997, between
Courier Corporation, State Street Bank and Trust Company and
BankBoston, N.A., providing for a $20 million revolving credit
facility (filed as Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the period ended March 29, 1997, and
incorporated herein by reference).
10L-2 Amendment, dated July 22, 1997, to Note Agreement between
Courier Corporation, State Street Bank and Trust Company and
BankBoston, N.A., providing for a $30 million revolving credit
facility (filed as Exhibit 10L-2 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 27, 1997, and
incorporated herein by reference).
12
10L-3 Amendment, dated February 27, 1998, to Note Agreement between
Courier Corporation, State Street Bank and Trust Company and
BankBoston, N.A., providing for a $30 million revolving credit
facility (filed as Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the period ended March 28, 1998, and
incorporated herein by reference).
10M-1 Term Promissory Note, dated as of October 15, 1991, between
Courier Corporation and MetLife Capital Credit Corporation for
the principal sum of $2,000,000 at 9.5% due October 15, 2001
(filed as Exhibit 4F-1 to the Company's Annual Report on Form
10-K for the fiscal year ended September 28, 1991, and
incorporated herein by reference).
10M-2 Loan and Security Agreement, dated as of October 15, 1991,
between Courier Corporation and MetLife Capital Credit
Corporation (filed as Exhibit 4F-2 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 28,
1991, and incorporated herein by reference).
10N Master Lease Finance Agreement, dated as of July 27, 1994,
between Courier Corporation and BancBoston Leasing (filed as
Exhibit 10P to the Company's Annual Report on Form 10-K for the
fiscal year ended September 24, 1994, and incorporated herein by
reference).
10O-1+ Courier Corporation 1993 Stock Incentive Plan, as amended and
restated, effective May 6, 1996 (filed as Exhibit 10O to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1996, and incorporated herein by reference).
10O-2+* Amendment, effective September 24, 1998, to the Courier
Corporation 1993 Stock Incentive Plan.
10P 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).
10Q+ Courier Corporation Deferred Compensation Program dated November
6, 1997 with Messrs. Conway III, Nichols, Story and Osenton
(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).
13
10R* Master Lease Finance Agreement, dated as of September 23, 1998
between Courier Corporation and General Electric Capital Corporation.
21* Schedule of Subsidiaries.
23* Consent of Deloitte & Touche LLP, independent accountants.
27* Financial Data Schedule.
* Exhibit is furnished herewith.
+ Designates a Company compensation plan or arrangement.
(c) Reports on Form 8-K
None.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on December 3, 1998.
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
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated, on December 3, 1998.
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/Charles E. Otto
- ------------------------- ----------------------------
Kathleen Foley Curley Charles E. Otto
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
- -------------------------
Arnold S. Lerner
Director
15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Courier Corporation:
We have audited the accompanying consolidated balance sheets of Courier
Corporation and subsidiaries ("the Company") as of September 26, 1998 and
September 27, 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the
period ended September 26, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether 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 the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of September 26,
1998 and September 27, 1997, and the results of their operations and their cash
flows for each of the three years in the period ended September 26, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 5, 1998
F-1
COURIER CORPORATION
CONSOLIDATED BALANCE SHEETS
September 26, 1998 September 27, 1997
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents (Note A) $ 722,000 $ 27,000
Accounts receivable, less allowance for uncollectible
accounts of $1,078,000 in 1998 and $1,242,000 in 1997 27,941,000 25,919,000
Inventories (Note B) 10,828,000 9,695,000
Deferred income taxes (Note C) 1,758,000 1,642,000
Other current assets 847,000 780,000
------------ ------------
Total current assets 42,096,000 38,063,000
Property, plant and equipment (Notes A and D):
Land 1,059,000 1,059,000
Buildings and improvements 18,803,000 18,521,000
Favorable building lease 2,816,000 2,816,000
Machinery and equipment 77,490,000 74,422,000
Furniture and fixtures 1,668,000 1,681,000
Construction in progress 523,000 841,000
------------ ------------
102,359,000 99,340,000
Less-Accumulated depreciation and amortization (69,102,000) (62,398,000)
------------ ------------
Net property, plant and equipment 33,257,000 36,942,000
Real estate held for sale or lease, net (Note J) 336,000 2,459,000
Goodwill and other intangibles, net (Notes A and I) 11,421,000 11,618,000
Other assets 520,000 561,000
------------ ------------
Total assets $ 87,630,000 $ 89,643,000
------------ ------------
------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
COURIER CORPORATION
CONSOLIDATED BALANCE SHEETS
September 26, 1998 September 27, 1997
--------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note D) $ 312,000 $ 387,000
Accounts payable 9,294,000 9,557,000
Accrued payroll 4,319,000 3,644,000
Accrued taxes 4,935,000 4,961,000
Other current liabilities 6,709,000 5,426,000
------------ ------------
Total current liabilities 25,569,000 23,975,000
Long-term debt (Note D) 6,781,000 18,593,000
Deferred income taxes (Note C) 2,992,000 3,375,000
Other liabilities 2,498,000 1,952,000
------------ ------------
Total liabilities 37,840,000 47,895,000
------------ ------------
------------ ------------
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:
Shares 1998 1997
------ --------- ---------
Authorized 6,000,000 6,000,000
Issued 3,750,000 4,500,000
Outstanding 3,172,000 2,007,000
3,750,000 4,500,000
Additional paid-in capital 384,000 9,277,000
Retained earnings 49,464,000 52,060,000
Treasury stock, at cost: 578,000 shares in 1998 and 2,493,000 shares in 1997 (3,808,000) (24,089,000)
------------ ------------
Total stockholders' equity 49,790,000 41,748,000
------------ ------------
Total liabilities and stockholders' equity $ 87,630,000 $ 89,643,000
------------ ------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
COURIER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended
------------------------------------------------------------
September 26, 1998 September 27, 1997 September 28, 1996
------------------ ------------------ ------------------
Net sales $ 151,591,000 $ 131,433,000 $ 125,232,000
Cost of sales 113,937,000 103,342,000 102,594,000
------------- ------------- -------------
Gross profit 37,654,000 28,091,000 22,638,000
Selling and administrative expenses 26,653,000 20,945,000 18,647,000
Interest expense 1,303,000 867,000 840,000
Other income (expense) (Note J) 2,057,000 (275,000) (267,000)
------------- ------------- -------------
Income before taxes 11,755,000 6,004,000 2,884,000
Provision for income taxes (Note C) 4,030,000 1,688,000 334,000
------------- ------------- -------------
Net income $ 7,725,000 $ 4,316,000 $ 2,550,000
------------- ------------- -------------
------------- ------------- -------------
Net income per share (Notes A and H):
Basic $ 2.49 $ 1.44 $ .84
Diluted $ 2.37 $ 1.41 $ .82
Cash dividends declared per share $ .385 $ .32 $ .32
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
COURIER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
------------------------------------------------------------------
September 26, 1998 September 27, 1997 September 28, 1996
------------------ ------------------ ------------------
Operating Activities:
Net income $ 7,725,000 $ 4,316,000 $ 2,550,000
Adjustments to reconcile net income to
cash provided from operating activities:
Depreciation and amortization 8,541,000 7,237,000 6,534,000
Deferred income taxes (499,000) (812,000) (303,000)
Change in accounts receivable (2,022,000) 1,671,000 (4,916,000)
Change in inventory (1,010,000) (705,000) 1,271,000
Change in accounts payable (263,000) (472,000) 726,000
Change in accrued taxes (26,000) 364,000 (119,000)
Change in other elements of working capital 1,891,000 1,431,000 (561,000)
Other, net (1,695,000) 1,051,000 75,000
---------------- ----------------- -----------------
Cash provided from operating activities 12,642,000 14,081,000 5,257,000
---------------- ----------------- -----------------
Investment Activities:
Business acquisitions (Note I) (563,000) (12,701,000) -
Capital expenditures (4,147,000) (6,732,000) (7,335,000)
Proceeds from sale of assets (Note J) 4,600,000 - 1,792,000
---------------- ----------------- -----------------
Cash used for investment activities (110,000) (19,433,000) (5,543,000)
---------------- ----------------- -----------------
Financing Activities:
Scheduled long-term debt repayments (387,000) (466,000) (409,000)
Other long-term borrowings (repayments) (11,500,000) 7,404,000 282,000
Cash dividends (1,205,000) (969,000) (970,000)
Stock repurchase program - (882,000) -
Proceeds from stock plans 1,255,000 259,000 269,000
---------------- ----------------- -----------------
Cash provided from (used for) financing activities (11,837,000) 5,346,000 (828,000)
---------------- ----------------- -----------------
Increase (decrease) in cash and cash equivalents 695,000 (6,000) (1,114,000)
Cash at the beginning of the period 27,000 33,000 1,147,000
---------------- ----------------- -----------------
Cash at the end of the period $ 722,000 $ 27,000 $ 33,000
---------------- ----------------- -----------------
---------------- ----------------- -----------------
Supplemental cash flow information:
Interest paid $ 1,243,000 $ 774,000 $ 724,000
Income taxes paid (net of receipts) $ 4,498,000 $ 2,060,000 $ 739,000
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
COURIER CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Additional Retained Treasury Stockholders'
Stock Paid-in Capital Earnings Stock Equity
------------ --------------- -------------- ------------- ------------
Balance, September 30, 1995 $ 4,500,000 $ 8,884,000 $ 47,133,000 $(23,691,000) $ 36,826,000
Net income -- -- 2,550,000 -- 2,550,000
Cash dividends -- -- (970,000) -- (970,000)
Shares issued under stock plans -- 171,000 -- 187,000 358,000
------------ --------------- -------------- ------------- ------------
Balance, September 28, 1996 4,500,000 9,055,000 48,713,000 (23,504,000) 38,764,000
Net income -- -- 4,316,000 -- 4,316,000
Cash dividends -- -- (969,000) -- (969,000)
Stock repurchase program -- -- -- (882,000) (882,000)
Shares issued under stock plans -- 125,000 -- 194,000 319,000
Shares issued in connection with
business acquisition (Note I) -- 97,000 -- 103,000 200,000
------------ --------------- -------------- ------------- ------------
Balance, September 27, 1997 4,500,000 9,277,000 52,060,000 (24,089,000) 41,748,000
Net income -- -- 7,725,000 -- 7,725,000
Cash dividends -- -- (1,205,000) -- (1,205,000)
Shares issued under stock plans -- 734,000 -- 788,000 1,522,000
Convert treasury shares (Note A) (2,000,000) (9,627,000) (7,866,000) 19,493,000 --
Stock dividend (Note A) 1,250,000 -- (1,250,000) -- --
------------ --------------- -------------- ------------- ------------
Balance, September 26, 1998 $ 3,750,000 $ 384,000 $ 49,464,000 $ (3,808,000) $ 49,790,000
------------ --------------- -------------- ------------- ------------
------------ --------------- -------------- ------------- ------------
The accompanying notes are an integral part of the consolidated financial
statements
F-6
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: Courier Corporation ("Courier" or the "Company") helps organizations
manage the process of creating and distributing intellectual properties.
Courier's book manufacturing business offers services from preparation,
production, media replication, kitting and packaging through storage, and
distribution. Products include Bibles, reference texts, books, software kits and
technical documentation. Courier also operates businesses which respond to the
need for greater choice in education, providing Internet-based solutions for
custom coursepacks, as well as direct marketing of educational materials to
families engaged in educating children at home.
Principles of Consolidation: The consolidated financial statements, prepared
on a fiscal year basis, include the accounts of Courier Corporation and its
subsidiaries after elimination of all significant intercompany transactions.
Such financial statements have been prepared in conformity with 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 cash equivalents amounts on deposit in banks and cash
invested temporarily in various instruments with maturities of three months
or less at time of purchase. The Company estimates the fair value of
financial instruments based on interest rates available to the Company and by
comparison to quoted market prices. At September 26, 1998 and September 27,
1997, the fair value of the Company's financial instruments approximated
their carrying values.
Property, Plant and Equipment: Property, plant and equipment are recorded at
cost, including interest on funds borrowed to finance the acquisition or
construction of major capital additions. Capitalized interest was
approximately $34,000 in fiscal 1997 and $15,000 in fiscal 1996. No interest
was capitalized in fiscal 1998. The Company provides for depreciation of
plant and equipment on a straight-line basis over periods ranging from 3 to
11 years, except for depreciation on buildings and improvements which is
based on estimated useful lives ranging from 10 to 40 years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the useful life of the improvement or the term of the lease. A favorable
building lease is being amortized over the life of the lease, which expires in
2005. Expenditures for maintenance and repairs are charged against income as
incurred; betterments which increase the value or materially extend the life of
the related assets are capitalized. When assets are sold or retired, the cost
and accumulated depreciation are removed from the accounts and any gain or loss
is included in income.
Goodwill: Goodwill arising from recent business acquisitions, which are
discussed more fully in Note I, is being amortized using the straight-line
method over periods ranging from 5 to 20 years. Amortization expense was
$597,000 and $97,000 for fiscal 1998 and fiscal 1997, respectively. The
Company continues to carry goodwill of approximately $1.2 million arising
from the purchase of a company prior to October 31, 1970; such amount is not
being amortized because management believes that the value has not
diminished.
Income Taxes: The provision for income taxes is determined as required by
SFAS No. 109, "Accounting for Income Taxes", issued by the Financial
Accounting Standards Board (FASB). Under SFAS No. 109, deferred income taxes
are recorded based upon the differences between the financial statement and
tax bases of assets and liabilities, and are measured by applying enacted tax
rates and laws for the taxable years in which these differences are expected
to reverse.
Revenue Recognition: Revenue is recognized upon shipment of goods to
customers or upon the transfer of ownership interest.
F-7
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates: The process of preparing financial statements in conformity
with generally accepted accounting principles requires management to make
estimates that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as revenues and expenses during the
reporting period. Actual results may differ from these estimates.
Net Income per Share: Basic net income per share is based on the weighted
average number of common shares outstanding each period. Diluted net income
per share also includes potentially dilutive items such as options (see
Note H).
Stock Split: On April 16, 1998, the Company announced a three-for-two stock
split effected in the form of a 50% stock dividend which was distributed on
June 1, 1998 to stockholders of record on May 15, 1998. Per share amounts for
each period presented in the accompanying financial statements have been
restated to give effect to the stock split. In addition, related to this
stock split, the Company converted 2,000,000 shares of treasury stock to
authorized but unissued shares.
New Accounting Pronouncements: The FASB recently issued SFAS No. 130,
"Reporting Comprehensive Income", SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information", SFAS No. 132, "Employer Disclosures
about Pensions and Other Postretirement Benefits" and SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". These new
standards will be effective in the Company's fiscal year ending September 25,
1999, with the exception of SFAS No. 133 which will be effective in the
Company's fiscal year ending September 30, 2000. The Company does not expect
that the implementation of these new standards will be material to the
consolidated financial statements.
B. INVENTORIES
Inventories are valued at the lower of cost or market using the last-in,
first-out (LIFO) method for most inventories. Inventories as of September 26,
1998 and September 27, 1997 consisted of the following:
1998 1997
----------- ------------
Raw materials $ 3,171,000 $ 3,912,000
Work in process 4,903,000 4,108,000
Finished goods 2,754,000 1,675,000
----------- ------------
Total $10,828,000 $ 9,695,000
----------- ------------
----------- ------------
On a first-in, first-out (FIFO) basis, reported year-end inventories would have
increased by $5.3 million in fiscal 1998 and $5.7 million in fiscal 1997.
C. INCOME TAXES
The statutory federal tax rate is 34%. The total provision differs from that
computed using the statutory federal income tax rate for the following reasons:
1998 1997 1996
----------- ----------- -----------
Federal income taxes at statutory rate $ 3,997,000 $ 2,041,000 $ 980,000
State income taxes, net of federal income tax benefit 428,000 189,000 143,000
Export related income (310,000) (288,000) (279,000)
Donation of real estate -- (300,000) (500,000)
Other (85,000) 46,000 (10,000)
----------- ----------- -----------
Total $ 4,030,000 $ 1,688,000 $ 334,000
----------- ----------- -----------
F-8
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes consisted of the following:
1998 1997 1996
----------- ----------- -----------
Currently payable:
Federal $ 3,697,000 $ 2,040,000 $ 343,000
State 832,000 460,000 294,000
----------- ----------- -----------
4,529,000 2,500,000 637,000
----------- ----------- -----------
Deferred:
Federal (315,000) (638,000) (225,000)
State (184,000) (174,000) (78,000)
----------- ----------- -----------
(499,000) (812,000) (303,000)
----------- ----------- -----------
Total $ 4,030,000 $ 1,688,000 $ 334,000
----------- ----------- -----------
----------- ----------- -----------
The deferred income tax net benefit arose from the following temporary
differences:
1998 1997 1996
--------- ---------- ---------
Accelerated depreciation $(549,000) $(648,000) $ 605,000
Non-deductible accruals and reserves (144,000) (238,000) (363,000)
Retirement plan contributions (77,000) 51,000 (69,000)
Charitable contributions carryforward 379,000 47,000 (500,000)
Other (108,000) (24,000) 24,000
--------- ---------- ---------
Total $(499,000) $(812,000) $(303,000)
--------- ---------- ---------
--------- ---------- ---------
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of September 26, 1998 and September 27,
1997:
1998 1997
---------- ----------
Deferred tax assets:
Vacation accrual not currently deductible $ 444,000 $ 433,000
Other accruals not currently deductible 375,000 436,000
Non-deductible reserves 881,000 686,000
Other 58,000 87,000
---------- ----------
Classified as current 1,758,000 1,642,000
Deferred compensation arrangements 1,058,000 915,000
Charitable contributions carryforward 74,000 453,000
Other 75,000 5,000
---------- ----------
Total deferred tax assets $2,965,000 $3,015,000
---------- ----------
---------- ----------
Deferred tax liabilities:
Accelerated depreciation $4,199,000 $4,748,000
-----------------------
Non-current deferred tax assets have been netted against non-current deferred
tax liabilities for balance sheet classification purposes.
F-9
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D. LONG-TERM DEBT
Long-term debt of the Company and its consolidated subsidiaries consisted of the
following:
1998 1997
----------- -----------
Obligation under revolving bank credit facility at 6.2% as of
September 26, 1998 $ 5,250,000 $16,750,000
Obligation under industrial development bond arrangement
at 3%, payable in monthly installments through May 2011 1,041,000 1,108,000
9.5% secured promissory note, payable in monthly installments
through October 2001 802,000 1,022,000
Other -- 100,000
----------- -----------
7,093,000 18,980,000
Less: Current maturities 312,000 387,000
----------- -----------
Total $ 6,781,000 $18,593,000
----------- -----------
----------- -----------
Scheduled aggregate principal payments of long-term debt are $312,000 in fiscal
1999, $5,588,000 in fiscal 2000, $366,000 in fiscal 2001, $76,000 in fiscal
2002, $78,000 in fiscal 2003 and $673,000 thereafter.
In March 1997, the Company replaced its $11 million long-term revolving credit
facility with BankBoston, N.A. and $10 million informal bank credit line with
State Street Bank and Trust Company with a $20 million long-term revolving
credit facility involving both banks. In July 1997, this facility was extended
from $20 million to $30 million in contemplation of the acquisition of Book-mart
Press, Inc. (see Note I). Under this credit facility, the Company can borrow at
either LIBOR plus 3/4% or the bank's money market rates. The revolving credit
facility matures in February 2000 and borrowings of $5,250,000 at September 26,
1998 are included in scheduled aggregate principal payments due in 2000; the
maturity date is expected to be extended in 1999. The Company has not had any
short-term borrowings during the three fiscal years ended September 26, 1998.
The revolving credit facility contains restrictive covenants including
provisions relating to the maintenance of working capital, the incurring of
additional indebtedness and a quarterly test of cash flow to debt service. It
also provides for a commitment fee of 1/4% per annum on the unused portion. The
industrial bond arrangement and the 9.5% promissory note provide for a lien on
the assets acquired with the proceeds.
E. COMMITMENTS AND CONTINGENCIES
The Company is committed under various operating leases to make annual rental
payments for certain buildings and equipment. Amounts charged against income
under such leases approximated $2,872,000 in fiscal 1998, $2,365,000 in fiscal
1997 and $2,370,000 in fiscal 1996. As of September 26, 1998, minimum annual
rental commitments under the Company's long-term operating leases are
approximately $3,064,000 in fiscal 1999, $2,680,000 in fiscal 2000, $2,390,000
in fiscal 2001, $1,964,000 in fiscal 2002, $1,664,000 in fiscal 2003 and
$4,580,000 in the aggregate thereafter.
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. The Company believes that the ultimate outcome of
these matters will not have a material adverse effect on its financial
statements.
F. STOCK ARRANGEMENTS
Stock Option/Incentive Plans: In January 1993, stockholders approved the Courier
Corporation 1993 Stock Incentive Plan to replace the expiring 1983 Stock Option
Plan. The 1993 Stock Incentive Plan was amended and restated, with stockholder
approval, in January 1996. The amendment provided for, among other things, an
increase in the number of shares available for granting of stock options and
stock grants under the plan by 150,000 shares to a total of 345,000 shares.
Under the provisions of each plan, both non-qualified and incentive stock
options to purchase shares of the Company's common stock may be granted to key
employees. The option price per share may not be less than the fair market value
of stock at the time the option is granted and incentive stock options must
expire not later than ten years from the date of grant.
F-10
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Directors' Option Plan: A 1989 plan, as amended in November
1993, allows members of the Company's Board of Directors to make an election to
apply either 50% or 100% of their annual retainer fee, including the committee
chair retainer, toward the annual grant of a stock option to be offered at a
price per share $5 below the fair market value of the Company's common stock at
the time the option is granted. Retainer fees for fiscal 1998 amounted to
$14,000 per director; in addition, the two committee chair fees amounted to a
total of $15,000 for fiscal 1998. The plan, as approved by stockholders,
provides that 150,000 shares be reserved for the granting of options.
The following is a summary of all option activity for these plans:
Stock Option/Incentive Plans Directors' Option Plan
------------------------------------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- -------- ---------
Outstanding at September 30, 1995 350,520 $ 9.65 18,600 $ 7.26
Issued during period 44,288 10.91 20,100 10.34
Exercised during period (19,673) 8.61 (3,600) 8.07
Canceled during period (12,357) 10.11 -- --
------- -------- -------- ---------
Outstanding at September 28, 1996 362,778 $ 9.85 35,100 $ 8.77
Issued during period 31,538 14.50 21,000 7.46
Exercised during period (5,250) 6.38 (13,200) 7.40
Canceled during period (2,250) 12.89 -- --
Expired during period (15,450) 13.25 -- --
------- -------- -------- ---------
Outstanding at September 27, 1997 371,366 $ 10.13 42,900 $ 8.69
Issued during period 35,300 21.46 24,000 11.29
Exercised during period (137,510) 8.69 (22,500) 9.43
Canceled during period (3,599) 10.11 -- --
------- -------- -------- ---------
Outstanding at September 26, 1998 265,557 $ 12.39 44,400 $ 9.72
------- -------- -------- ---------
------- -------- -------- ---------
Exercisable at September 26, 1998 187,584 $ 10.51 44,400 $ 9.72
Available for future grants 64,537 -- 28,500 --
The following table presents information with regard to all stock options
outstanding at September 26, 1998:
Directors'
Stock Option/Incentive Plans Option Plan
--------------------------------------------------------------
$ 8.83- $ 14.17- $ 22.83- $ 7.42-
Range of Exercise Prices $ 4.67 $ 13.17 $ 20.75 $ 27.25 $ 15.17
- ------------------------ -------- --------- -------- -------- --- ---------
Options outstanding 14,250 176,970 65,487 8,850 44,400
Weighted average exercise price of options outstanding $ 4.67 $ 10.63 $ 17.30 $ 23.58 $ 9.72
Weighted average remaining life 2.6 years 2.7 years 6.0 years 5.3 years 3.0 years
Options exercisable 14,250 157,821 15,513 -- 44,400
Weighted average exercise price of options exercisable $ 4.67 $ 10.57 $ 15.28 -- $ 9.72
Stock Grant Plan: The Company established a stock grant plan in 1977 entitling
key employees to receive shares of common stock of the Company. Shares granted
are either fully vested or vest over periods up to 5 years. The maximum number
of shares of common stock which may be awarded under the stock grant plan is
198,750 shares and no more than 33,750 shares may be awarded in any one fiscal
year. The number of shares granted under the plan were 2,000 in fiscal 1998,
3,000 in fiscal 1997 and 6,000 in fiscal 1996. The related compensation expense,
based on the amortization over the vesting period of the fair market value of
the shares on the date granted, was $52,000 in fiscal 1998, $22,000 in fiscal
1997 and $31,000 in fiscal 1996. As of September 26, 1998, there were 4,928
shares available for future grants under the plan.
F-11
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plan: Under the Company's Employee Stock Purchase
Plan ("ESPP") adopted in fiscal 1988, eligible employees may purchase shares
of Company common stock at not less than 85% of fair market value at the
beginning or end of the grant period. During fiscal 1998, 8,077 shares were
issued under the plan. At September 26, 1998, 92,712 shares had been issued
under the plan since inception at an average price of $8.40 per share, with
an additional 42,288 shares reserved for future issuances.
Stock Repurchase Program: In November 1996, the Company announced a program
to repurchase up to $3 million of its common stock because the Company
believed the stock was attractively priced. When the program ended in October
1997, the Company had acquired 81,273 shares of common stock at an average
cost of $10.85 per share. These shares were included in treasury stock which
the Company has historically used for stock options and grants; the Company
intends to continue to use treasury stock for such purposes.
Stockholders' Rights Plan: In October 1988, the Board of Directors adopted a
ten-year stockholders' rights plan. Under the plan, the Company's
stockholders of record at November 4, 1988 received rights to purchase one
one-hundredth of a share of preferred stock for each share of common stock
held on that date. The rights are not exercisable, or transferable apart from
the common stock, until certain events occur.
Pro forma Disclosures: The Company accounts for its stock option plans under
APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Had compensation cost for stock options granted after 1995
and for grants under the ESPP during fiscal 1998 been determined under the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net income would have been $7,524,000, or $2.31 per diluted share,
for fiscal 1998; $4,250,000, or $1.39 per diluted share, for fiscal 1997; and
$2,519,000, or $.81 per diluted share, for fiscal 1996. The pro forma effect
on net income and net income per share for fiscal 1998, fiscal 1997 and
fiscal 1996 is not representative of the pro forma effect on net income in
future years, because it does not take into consideration pro forma
compensation expense related to options granted prior to fiscal 1996 or ESPP
grants prior to fiscal 1998.
For purposes of pro forma disclosures, the fair value of each grant was
estimated on the date of grant using the Black-Scholes option pricing model. The
following key assumptions were used to value grants issued:
1998 1997 1996
--------- -------- -------
Risk-free interest rate 4.9% 6.2% 6.3%
Expected volatility 35% 34% 24%
Expected dividend yields 2.0% 2.3% 3.4%
Estimated life for grants under:
1993 Stock Incentive Plan 7 years 7 years 7 years
Directors' Option Plan 5 years 5 years 5 years
Employee Stock Purchase Plan 6 months
--------- -------- -------
--------- -------- -------
Following is a summary of the weighted average fair value per share of options
granted during 1998, 1997 and 1996:
1993 Stock Incentive Plan Directors' Option Plan
------------------------------------------------------
On grant date: 1998 1997 1996 1998 1997 1996
-------- ----- ----- ------- ----- -------
Exercise price was equal to stock price $7.74 $5.29 $2.87 - - -
Exercise price was in excess of stock price $5.98 $4.16 $1.84 - - -
Exercise price was less than stock price - - - $5.79 $3.73 $4.49
-------- ----- ----- ------- ----- -------
F-12
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
G. RETIREMENT PLANS
The Company and its consolidated subsidiaries maintain various retirement plans
covering substantially all of its employees. Pension costs of multi-employer
union plans consist of defined contributions determined in accordance with the
respective collective bargaining agreements. Retirement benefits for non-union
employees are provided through the Courier Profit Sharing and Savings Plan,
which includes an Employee Stock Ownership Plan ("ESOP"). Retirement costs for
the Company's principal plans amounted to $1,934,000 in fiscal 1998, $1,466,000
in fiscal 1997 and $1,063,000 in fiscal 1996.
The Profit Sharing and Savings Plan is qualified under Section 401(k) of the
Internal Revenue Code. The plan allows eligible employees to contribute up to
16% of their compensation, with the Company matching 25% of the first 6% of
employee contributions. The Company also makes contributions to the plan
annually based on profits each year for the benefit of all eligible non-union
employees.
Shares of Company common stock may be allocated to participants' ESOP accounts
annually based on their compensation as defined in the plan. During fiscal 1998,
no such shares were allocated to eligible participants. At September 26, 1998,
the ESOP held 188,847 shares on behalf of the participants.
H. NET INCOME PER SHARE
During the first quarter of fiscal 1998, the Company adopted SFAS No. 128,
"Earnings per Share". Prior period net income per share has been restated to
reflect current presentation. Following is a reconciliation of the shares used
in the calculation of basic and diluted net income per share. Potentially
dilutive shares, calculated using the treasury stock method, consist of shares
issued under the Company's stock option and stock grant plans. Shares and per
share amounts have been adjusted to reflect a three-for-two stock split effected
in the form of a dividend distributed on June 1, 1998 (see Note A).
1998 1997 1996
------------------------------------
Average shares outstanding for basic 3,100,000 3,007,000 3,031,000
Effect of potentially dilutive shares 154,000 60,000 75,000
--------- --------- ----------
Average shares outstanding for diluted 3,254,000 3,067,000 3,106,000
--------- --------- ----------
--------- --------- ----------
I. BUSINESS ACQUISITIONS
On July 21, 1997, the Company acquired all of the outstanding capital stock of
Book-mart Press, Inc. ("Book-mart"), a North Bergen, New Jersey book
manufacturer specializing in short to medium runs of softcover and hardcover
books. The Company paid approximately $12.7 million in cash to the former
stockholders of Book-mart for their shares of capital stock. At the time of the
closing, Book-mart had approximately $2.3 million of outstanding bank
indebtedness which was subsequently paid in full. In connection with the
acquisition, 16,667 shares of Courier common stock (based upon a valuation of
$12 per share) were issued to two key executives of Book-mart for non-compete
agreements.
In addition, one of such executives was issued 25,000 shares (subject to a
four-year vesting schedule) in connection with an employment agreement. The
acquisition was accounted for as a purchase and, accordingly, Book-mart's
results of operations have been included in the consolidated financial
statements from July 21, 1997 forward. The excess of the purchase price over the
fair value of net assets acquired amounted to approximately $10 million, which
has been accounted for as goodwill and is being amortized on a straight-line
basis over twenty years. Book-mart leases its office and plant facility from a
corporation owned by two of the former stockholders of Book-mart, one of whom
remains as a key executive of Book-mart. The lease agreement requires annual
payments of approximately $216,000 and expires five years from the date of
acquisition.
On September 30, 1997, the Company purchased The Home School Books & Supplies
("The Home School"), based in Arlington, Washington. The Home School is a direct
marketer of educational materials to families engaged in educating children at
home. The purchase price was approximately $0.5 million.
F-13
COURIER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J. OTHER INCOME (EXPENSE)
Other income (expense) as reported in the accompanying income statements
consisted of the following:
1998 1997 1996
-------------- --------------- ---------------
Net rental income $ 14,000 $ 31,000 $ 99,000
Gain (loss) on sale/donation of real estate 2,043,000 (306,000) (366,000)
-------------- --------------- ---------------
Total $ 2,057,000 $ (275,000) $ (267,000)
-------------- --------------- ---------------
-------------- --------------- ---------------
In June 1998, the Company completed the sale of a former industrial facility in
Philadelphia which had been vacant. During fiscal 1997, the Company had
consolidated its operations in Philadelphia from this older, multistory facility
to a recently expanded, more efficient manufacturing facility also in
Philadelphia. The selling price of the property was $4.6 million, resulting in a
pretax gain of approximately $2.0 million. The after-tax gain of approximately
$1.1 million, or $.34 per diluted share, generated approximately $3.2 million of
cash after taxes.
In September 1996, the Company relocated its corporate headquarters into an
existing facility in North Chelmsford, Massachusetts. In August 1997, the
Company finalized the donation of its former corporate headquarters in Lowell,
Massachusetts. The donation had no impact on 1997 earnings as a pretax loss of
approximately $300,000 was offset by a comparable tax benefit.
In March 1996, the Company completed the sale and donation of its former
telephone directory manufacturing facility which had been vacant. Sales proceeds
of $1.8 million for approximately half the facility resulted in a pretax loss of
$366,000. Tax benefits from the donation of the remainder of the facility
resulted in an after-tax gain on the overall transaction of approximately
$250,000, or $.08 per diluted share.
The Company's Raymond, New Hampshire facility, which had been leased through
June 1996, is now vacant pending sale or lease and is included in the September
26, 1998 balance sheet as "Real estate held for sale or lease, net." Management
does not believe that there is any material impairment of this or any other
asset of the Company as measured in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of".
K. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company is engaged principally in one industry, the manufacture and
distribution of printed products. Customers, which consist primarily of
publishers, are granted credit on an unsecured basis.
Export sales as a percentage of consolidated sales were approximately 17% in
fiscal 1998, 18% in fiscal 1997 and 17% in fiscal 1996. Sales to the Company's
largest customer amounted to approximately 26% of consolidated sales in fiscal
1998, 28% in fiscal 1997 and 27% in fiscal 1996. In addition, sales to another
customer amounted to 12% of consolidated sales in fiscal 1998 and 11% in fiscal
1997. No other customer accounted for more than 10% of consolidated sales.
F-14
COURIER CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1998 (Dollars in thousands except per share amounts) First Second Third Fourth
------- -------- -------- --------
Operating Results:
Net sales $35,306 $39,136 $36,903 $40,246
Gross profit 8,789 9,227 9,308 10,330
Net income 1,210 1,358 2,572 2,585
Net income per diluted share .38 .42 .79 .78
Dividends declared per share .093 .093 .093 .105
Stock Price:
Highest bid 20 3/8 19 3/8 30 29
Lowest bid 13 7/8 17 3/8 17 3/4 20 3/4
------- -------- -------- --------
------- -------- -------- --------
Fiscal 1997 (Dollars in thousands except per share amounts) First Second Third Fourth
------- -------- -------- --------
Operating Results:
Net sales $30,539 $32,011 $32,721 $36,162
Gross profit 6,321 6,769 6,509 8,492
Net income 929 828 815 1,744
Net income per diluted share .30 .27 .27 .57
Dividends declared per share .08 .08 .08 .08
Stock Price:
Highest bid 10 1/2 11 5/8 12 1/4 14 1/2
Lowest bid 8 7/8 9 5/8 11 3/8 11 1/2
------- -------- -------- --------
------- -------- -------- --------
Common shares of the Company are traded over-the-counter on the Nasdaq National
Market - symbol "CRRC".
There were approximately 680 stockholders of record as of September 26, 1998.
F-15
COURIER CORPORATION
FIVE-YEAR FINANCIAL SUMMARY
(Dollar amounts in millions except per share data) 1998 1997 1996 1995* 1994**
------- ------- ------- ------- -------
Net sales $ 151.6 $ 131.4 $ 125.2 $ 120.7 $ 122.7
Gross profit 37.7 28.1 22.6 26.3 24.8
Net income 7.7 4.3 2.6 5.2 3.7
Net income per diluted share 2.37 1.41 .82 1.73 1.28
Dividends per share .385 .32 .32 .267 .133
Working capital 16.5 14.1 13.7 11.0 10.8
LIFO reserve 5.3 5.7 6.0 5.9 5.1
Current ratio (FIFO basis) 1.9 1.8 1.9 1.8 1.7
Total assets 87.6 89.6 74.8 73.0 64.4
Long-term debt 6.8 18.6 9.3 9.5 5.8
Long-term debt as a percentage of capitalization 12.0% 30.8% 19.3% 20.5% 15.6%
Depreciation and amortization 8.5 7.2 6.5 6.0 5.8
Capital expenditures 4.1 6.7 7.3 15.0 2.2
Stockholders' equity 49.8 41.7 38.8 36.8 31.6
Return on stockholders' equity 15.5% 10.3% 6.6% 14.2% 16.6%
Stockholders' equity per share 15.70 13.87 12.74 12.23 10.75
Shares outstanding (000's omitted) 3,172 3,011 3,044 3,011 2,936
Number of employees 1,254 1,202 1,050 1,103 1,093
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income per share is based on weighted average shares outstanding;
stockholders' equity per share is based on shares outstanding at year end.
Shares outstanding and per share amounts have been retroactively adjusted to
reflect a three-for-two stock split effected on June 1, 1998 (see Notes A and
H).
*Fiscal 1995 included 53 weeks.
**Fiscal 1994 net income and net income per diluted share above are before the
cumulative effect of an accounting change related to the adoption of SFAS No.
109, "Accounting for Income Taxes." After the cumulative effect of the
accounting change, net income was $5.2 million, or $1.81 per diluted share.
F-16
COURIER CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales in fiscal 1998 increased 15% to $151.6 million compared to $131.4 million
in fiscal 1997. Strong sales to educational and religious publishers continued
to provide much of the growth, while sales to software customers continued to
drop, reflecting a reduction in the use of printed instruction manuals. The
acquisition in July 1997 of Book-mart Press, Inc. ("Book-mart"), a short-run
book manufacturer, accounted for approximately half of the 1998 sales increase.
Sales from the Company's two newer businesses, The Home School and Copyright
Management Services ("CMS"), which address the growing demand for choice in
education, added $2 million in incremental revenues in 1998. The Home School,
which was acquired on September 30, 1997, is a direct marketer of books and
other educational products for supplementing or replacing traditional education
with home-based learning. CMS provides customized coursepacks and copyright
clearance services primarily to colleges and universities. Sales in fiscal 1997
increased 5% to $131.4 million compared to $125.2 million in fiscal 1996,
despite a drop in paper prices and highly competitive market conditions. Growth
came primarily from educational and religious markets while sales to software
customers continued to fall sharply as printed manuals are replaced by CD-ROM
and on-line services. In July 1997, the Company acquired Book-mart which added
sales from the date of acquisition of approximately $2 million to 1997 sales.
Gross profits increased by $9.6 million or 34% and, as a percentage of sales,
increased to 24.8% from 21.4% in 1997. The improvement in gross profits resulted
from increased sales volume and an improved mix of sales combined with
productivity gains and cost savings. Gross profits in 1997 increased by $5.5
million or 24% and, as a percentage of sales, increased to 21.4% from 18.1% in
1996. The improvement reflects the benefits of increased sales volume, lower
costs primarily from consolidation of two facilities in 1997 and from the
streamlining of software documentation operations, and gains in productivity
resulting from investments in new equipment and processes. Inflation has not had
a significant impact on the Company's gross profits, nor on its overall
operations, during the past three years.
Selling and administrative expenses increased to $26.7 million in 1998 from
$20.9 million in 1997 and, as a percentage of sales, were 17.6% in 1998 compared
to 15.9% in 1997. The increase as a percentage of sales resulted from increased
expenses of approximately $1 million for improvements to the Company's
information systems and infrastructure, including expenses related to "Year
2000" remediation efforts, incremental selling and marketing expenses of
approximately $1 million associated with the Company's newer businesses, The
Home School and CMS, goodwill amortization of approximately $0.5 million related
to the acquisition of Book-mart, and other expenses that relate directly to the
increase in profitability. Selling and administrative expenses in 1997 increased
by approximately $2.3 million over 1996. As a percentage of sales, selling and
administrative expenses increased to 15.9% in 1997 from 14.9% in 1996. The
increase resulted from the acquisition of Book-mart, expansion of CMS and
expenses that relate directly to the increase in profitability.
Interest expense was $1.3 million in 1998 compared to $0.9 million in 1997,
reflecting increased average borrowings of approximately $6 million. Increased
borrowings of approximately $16 million to finance the acquisitions of Book-mart
and The Home School were offset by cash generated from operations which reduced
borrowings by approximately $12 million during 1998. Interest expense for fiscal
1997 was $27,000 higher than fiscal 1996. Interest on debt of approximately $15
million related to the July 21, 1997 acquisition of Book-mart was approximately
$175,000. Offsetting this was a drop in interest expense from a reduction in
average (non-acquisition) borrowings of approximately $2.2 million.
Other income (expense) in 1998 includes a gain from the sale of a former
industrial facility in Philadelphia which had been vacant. During fiscal 1997,
the Company had completed the consolidation of its operations in Philadelphia
from this older facility to a recently expanded, more efficient manufacturing
facility also in Philadelphia. The selling price of the facility was $4.6
million, resulting in a pretax gain of approximately $2.0 million and an
after-tax gain of approximately $1.1 million, or $.34 per diluted share. In
1997, other income (expense) included a pretax loss of approximately $300,000
from the Company's donation of its former corporate headquarters. The donation
had no impact on 1997 net income as the pretax loss was offset by a comparable
tax benefit. In 1996, other income (expense) included a pretax loss from the
Company's sale and donation of its former telephone directory manufacturing
facility.
F-17
COURIER CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The sale of approximately half of the facility resulted in a pretax
loss of $366,000. Tax benefits of approximately $500,000 from the donation of
the remainder of the facility resulted in an after-tax gain on the overall
transaction of approximately $250,000.
The Company's effective tax rate for 1998 was 34% compared to 33% for 1997,
exclusive of the $300,000 tax benefit related to the donation of property in
1997. The 1998 tax rate was higher than 1997 primarily due to nondeductible
goodwill related to the acquisition of Book-mart. The Company's effective tax
rate for 1997 was 33% compared to 29% for 1996, exclusive of the tax benefits
derived from property donations in both 1997 and 1996. The 1996 tax rate was
lower than 1997 primarily due to benefits from export related income in 1996.
Net income was $7.7 million or $2.37 per diluted share in 1998, up 79% from $4.3
million or $1.41 per diluted share in 1997. The increase in net income in 1998
was from a $1.1 million gain on the sale of Philadelphia real estate and from a
significant increase in sales and gross profits. Net income was $4.3 million or
$1.41 per diluted share for fiscal 1997, up 69% from $2.6 million or $.82 per
diluted share in fiscal 1996. The improvement in gross profit margins was the
primary factor contributing to the increase in earnings.
Weighted average shares outstanding increased approximately 187,000 shares in
1998. The increase was due to shares exercised under the Company's stock option
plans, shares issued as compensation for noncompetition agreements pursuant to a
business acquisition, and the impact of potentially dilutive shares which
increased primarily due to the increase in the price per share of the Company's
stock. Weighted average shares outstanding decreased approximately 39,000 shares
from 1996 to 1997. The Company repurchased approximately 81,000 shares of its
common stock in 1997 and common stock equivalents decreased by approximately
14,000 shares.
On April 16, 1998, the Company announced a three-for-two stock split effected in
the form of a 50% stock dividend which was distributed on June 1, 1998 to
stockholders of record on May 15, 1998. Weighted average shares outstanding and
net income per share amounts have been restated to give effect to the stock
split.
The Financial Accounting Standards Board recently issued SFAS No. 130,
"Reporting Comprehensive Income", SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", SFAS No. 132, "Employer Disclosures about
Pensions and Other Postretirement Benefits" and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". These new standards will be
effective in the Company's fiscal year ending September 25, 1999, with the
exception of SFAS No. 133 which will be effective in the Company's fiscal year
ending September 30, 2000. The Company does not expect that the implementation
of these new standards will be material to the consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1998, operations provided approximately $12.6 million in cash. Net
income for the year was $7.7 million and depreciation and amortization were $8.5
million. Working capital utilized approximately $1.4 million of cash, primarily
from an increase in accounts receivable.
Investment activities in 1998 used approximately $100,000 in cash. The
acquisition of The Home School on September 30, 1997 used $0.6 million of cash.
Proceeds from the sale of the Philadelphia real estate were $4.6 million,
resulting in an after-tax gain of approximately $1.1 million. The sale generated
$3.2 million of cash after taxes. Capital expenditures were $4.1 million,
including $0.5 million for a computer-to-plate system which eliminates the need
to produce film prior to printing and $0.5 million to upgrade the Company's
information systems and infrastructure. The balance of 1998 capital expenditures
were for improvements to increase productivity, lower costs and improve quality.
A web press installed late in fiscal 1998 was financed under a $4.5 million
operating lease. Fiscal 1999 capital expenditures are expected to be
approximately $8-10 million, including $0.6 million related to Year 2000 issues.
The Company's Raymond, New Hampshire facility, which had been leased through
June 1996, continues to be vacant pending sale or lease.
F-18
COURIER CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financing activities used approximately $11.8 million of cash to reduce
long-term debt. Dividend payments were $1.2 million and proceeds from the
Company's stock plans were $1.3 million, primarily from the exercise of stock
options. At September 26, 1998, the Company utilized $5.3 million of its
borrowing capacity available under a $30 million long-term revolving credit
facility, which expires in February 2000. The Company intends to extend the
maturity of this revolving credit facility in 1999.
The Company does not hold any derivative financial instruments, derivative
commodity instruments or other financial instruments except as noted in Note A
to the financial statements. The Company engages neither in speculative nor
derivative trading activities.
The Company expects that its cash from operations and available credit
facilities will be sufficient to meet its cash requirements through 1999.
YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
Historically, many computer programs were written using two digits rather than
four to specify the year. Such software may recognize the year 2000 as "00"
which could result in computer system failures or miscalculations, commonly
referred to as the Year 2000 ("Y2K") issue. The Company recognizes the need to
ensure that its operations will not be adversely impacted by a Year 2000
software failure. Incomplete or untimely resolution of the Y2K issue by the
Company, key suppliers, customers and other parties could have a material
adverse effect on the Company's results of operations, financial condition and
cash flows. The Company established a Year 2000 Management Task Force to address
the Y2K issue. This Task Force is coordinating efforts to identify, assess and
implement changes to information technology ("IT") systems and operational
systems such as presses and binders, telecommunications equipment, building
security and environmental controls, and is evaluating the Y2K readiness of key
suppliers, customers and other parties.
Operational systems have been inventoried and assessment of Y2K compliance is
approximately 60% complete. No instances of non-compliance have been found to
date, indicating a low overall risk of non-compliance. Assessment, remediation
and testing is expected to be completed for operational systems by March 31,
1999.
The Company has substantially completed inventories and assessments of its IT
systems in use at each of its locations. Many of the IT systems are not
compliant. The Company is in the process of replacing or upgrading these systems
with enterprise-wide systems across all of the Company's operations, utilizing a
common IT infrastructure which collectively is designed to give the Company the
benefit of new technology with enhanced functionality and resultant improvements
in service and productivity. The replacement of non-compliant systems at the
Company's largest, most complex operation was completed on schedule in October
1998. Progress on upgrading all remaining operations is in process. The Company
anticipates the implementation and testing of these IT systems will be completed
at all of the Company's operations before the end of fiscal 1999.
The Company is actively assessing the Y2K readiness of third parties (including
suppliers, financial institutions and customers) with which it has a material
relationship to identify potentially non-compliant parties. The Company has
performed site visits and is actively working with the key suppliers of raw
materials, such as paper mills and film and plate manufacturers. The Company
believes that its most reasonably likely, worst-case Y2K scenario may involve
non-compliant third parties, including suppliers of energy. The Company is
assessing the degree of exposure and risk of non-compliance by such third
parties which could include possible consequences such as temporary plant
disruptions, delays in the receipt of key materials, delays in receiving orders,
delivering finished products, or receiving payments. The Company will be
developing contingency plans specific to these risks during 1999 as it works
with its key suppliers, customers and other parties. The Year 2000 Task Force
will be continually monitoring the Y2K risks and related contingency plans
throughout 1999.
F-19
COURIER CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company estimates the cost of achieving Y2K compliance to be approximately
$2 million of which approximately half will be capital expenditures, primarily
for new IT systems. Costs incurred through September 26, 1998 directly related
to Y2K remediation were approximately $0.8 million, of which approximately $0.4
million was expensed. The remainder of the Y2K costs are expected to be incurred
in fiscal 1999. The Y2K costs are expected to be funded through operating cash
flows and available credit facilities.
FORWARD-LOOKING INFORMATION
Statements that describe future expectations, plans or strategies are considered
forward-looking. Such statements are subject to risks and uncertainties which
could cause actual results to differ materially from those currently
anticipated. Factors that could affect actual results include, among others,
changes in customers' demand for the Company's products, changes in raw material
costs and availability, seasonal changes in customer orders, pricing actions by
competitors, consolidation among customers, success in the integration of
acquired businesses, Year 2000 glitches, and general changes in economic
conditions. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements will prove to be accurate. The forward-looking statements included
herein are made as of the date hereof, and the Company undertakes no obligation
to update publicly such statements to reflect subsequent events or
circumstances.
F-20
COURIER CORPORATION
SCHEDULE II
CONSOLIDATED VALUATION 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 26, 1998
Allowance for uncollectible accounts $1,242,000 $178,000 $342,000 - $1,078,000
Fiscal year ended September 27, 1997
Allowance for uncollectible accounts $829,000 $242,000 $79,000 $250,000 $1,242,000
Fiscal year ended September 28, 1996
Allowance for uncollectible accounts $564,000 $313,000 $48,000 - $829,000
(1) Other changes reflects amount related to a business acquisition.
S-1