UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 26, 2011

OR

For the transition period from             to         

Commission file number  0-7597

COURIER CORPORATION

(Exact name of registrant as specified in its charter)

(978) 251-6000

(Registrant’s telephone number, including area code)

NO CHANGE

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

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 o

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

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

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

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

COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

(Dollars in thousands except per share amounts)

The accompanying notes are an integral part of the consolidated condensed financial statements.

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COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

The accompanying notes are an integral part of the consolidated condensed financial statements.

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COURIER CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands)

The accompanying notes are an integral part of the consolidated condensed financial statements.

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COURIER CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

The accompanying notes are an integral part of the consolidated condensed financial statements.

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COURIER CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

A.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Financial Statements

The consolidated condensed balance sheet as of March 26, 2011, and the consolidated condensed statements of operations for the three-month and six-month periods ended March 26, 2011 and March 27, 2010, and the statements of cash flows for the six-month periods ended March 26, 2011 and March 27, 2010 are unaudited.  In the opinion of management, all adjustments, consisting of normal recurring items, considered necessary for a fair presentation of such financial statements have been recorded.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) have been condensed or omitted.  The balance sheet data as of September 25, 2010 was derived from audited year-end financial statements, but does not include disclosures required by generally accepted accounting principles.  It is suggested that these interim financial statements be read in conjunction with the Company’s most recent Annual Report on Form 10-K for the year ended September 25, 2010.

Goodwill and Other Intangibles

The Company evaluates possible impairment annually at the end of its fiscal year or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. “Other intangibles” includes customer lists related to Moore-Langen Printing Company, Inc. (“Moore Langen”) as well as customer lists and technology related to Highcrest Media LLC (“Highcrest Media”), which are being amortized over 10-year and 5-year periods, respectively.  Amortization expense related to customer lists and technology was approximately $100,000 and $130,000 in the second quarters of fiscal 2011 and 2010, respectively. For the first six months, amortization expense was approximately $200,000 and $180,000 in fiscal years 2011 and 2010, respectively.

Fair Value Measurements

Certain assets and liabilities are required to be recorded at fair value on a recurring basis, while other assets and liabilities are recorded at fair value on a nonrecurring basis, generally as a result of impairment charges.  Fair value is determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Assets measured at fair value on a nonrecurring basis include long-lived assets and goodwill and other intangible assets. The three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies, is:

Level 1—Valuations based on quoted prices for identical assets and liabilities in active markets.

Level 2—Valuations based on observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Valuations based on unobservable inputs reflecting the Company’s own assumptions, consistent with reasonably available assumptions made by other market participants.

Fair Value of Financial Instruments

Financial instruments consist primarily of cash, investments in mutual funds (Level 1), accounts receivable, accounts payable, debt obligations and contingent consideration (Level 3 — see Note G).  At March 26, 2011 and September 25, 2010, the fair value of the Company’s financial instruments approximated their carrying values.  The fair value of the Company’s revolving credit facility approximates its carrying value due to the variable interest rate and the Company’s current rate standing.

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Prepublication Costs

Prepublication costs, associated with creating new titles in the specialty publishing segment, are amortized to cost of sales using the straight-line method over estimated useful lives of three to five years.

B.            INVENTORIES

Inventories are valued at the lower of cost or market.  Cost is determined using the last-in, first-out (“LIFO”) method for approximately 52% and 54% of the Company’s inventories at March 26, 2011 and September 25, 2010, respectively.  Other inventories, primarily in the specialty publishing segment, are determined on a first-in, first-out (“FIFO”) basis.  Inventories consisted of the following:

C.            INCOME TAXES

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

D.            BUSINESS SEGMENTS

The Company has two business segments: book manufacturing and specialty publishing. The book manufacturing segment offers a full range of services from production through storage and distribution for religious, educational and specialty trade book publishers. In January 2010, the Company acquired Highcrest Media, which has been included in the book manufacturing segment (see Note G).  The specialty publishing segment consists of Dover Publications, Inc., Federal Marketing Corporation, Inc., d/b/a Creative Homeowner, and Research & Education Association, Inc.

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Segment performance is evaluated based on several factors, of which the primary financial measure is operating income.  Operating income is defined as gross profit (sales less cost of sales) less selling and administrative expenses, and includes severance and other restructuring costs but excludes stock-based compensation.  As such, segment performance is evaluated exclusive of interest, income taxes, stock-based compensation, intersegment profit, and impairment charges.  The elimination of intersegment sales and related profit represents sales from the book manufacturing segment to the specialty publishing segment.

The following table provides segment information for the three-month and six-month periods ended March 26, 2011 and March 27, 2010.

E.         NET INCOME PER SHARE

The following is a reconciliation of the outstanding 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 plans. In the second quarter and first six months of fiscal 2011, approximately 37,000 and 31,000 potentially dilutive shares, respectively, were excluded due to the Company incurring a loss in those periods.

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F.             STOCK-BASED COMPENSATION

The Company records stock-based compensation expense for the cost of stock options and stock grants as well as shares issued under the Company’s 1999 Employee Stock Purchase Plan, as amended. The fair value of each option awarded is calculated on the date of grant using the Black-Scholes option-pricing model. Stock-based compensation recognized in selling and administrative expenses in the accompanying financial statements in the second quarters of fiscal 2011 and 2010 was $368,000 and $334,000, respectively.  The related tax benefit recognized in the second quarters of fiscal 2011 and 2010 was $132,000 and $120,000, respectively.  For the first six months of fiscal 2011 and 2010, stock-based compensation was $706,000 and $683,000, respectively, and the related tax benefit recognized was $253,000 and $244,000, respectively.  Unrecognized stock-based compensation cost at March 26, 2011 was $2.3 million, to be recognized over a weighted-average period of 2.1 years.

Stock Incentive Plan: In January 2011, stockholders approved the adoption of the Courier Corporation 2011 Stock Option and Incentive Plan (the “2011 Plan”).  Under the plan provisions, stock grants as well as both non-qualified and incentive stock options to purchase shares of the Company’s common stock may be granted to key employees up to a total of 600,000 shares.  The 2011 Plan replaced the Company’s Amended and Restated 1993 Stock Incentive Plan (the “1993 Plan”).  No further options will be granted under the 1993 Plan.  Under the 2011 Plan, 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.  The Company annually issues a combination of stock options and stock grants to its key employees. Stock options and stock grants generally vest over three years.

The following is a summary of option activity under the 2011 Plan and the 1993 Plan in the first six months of fiscal 2011:

During the second quarter of fiscal 2011, 1,000 stock grants vested with a weighted-average fair value of $38.44 per share. At March 26, 2011, there were 82,274 non-vested stock grants outstanding with a weighted-average fair value of $16.51.

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

During the second quarter of fiscal 2011, 43,477 options were granted under the 2010 Plan.  The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model.  The key assumptions used to value the options granted were a risk-free interest rate of 2.0%, expected volatility of 48%, a dividend yield of 5.7%, and an expected life of five years, resulting in a weighted average fair value of $3.98 per share.

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The following is a summary of option activity under the 2010 Plan and the 2005 Plan in the first six months of fiscal 2011:

During the second quarter of fiscal 2011, 11,767 stock awards were granted to non-employee directors with a weighted-average fair value of $14.76 per share.  During the second quarter of fiscal 2011, 4,396 stock grants vested with a weighted-average fair value of $13.71 per share. At March 26, 2011, there were 20,552 non-vested stock grants outstanding with a weighted-average fair value of $14.31. Directors may also elect to receive their annual retainer and committee chair fees as shares of stock in lieu of cash; 11,520 such shares were issued in the second quarter of fiscal 2011.

Employee Stock Purchase Plan: The Company’s 1999 Employee Stock Purchase Plan (“ESPP”), as amended, covers an aggregate of 637,500 shares of Company common stock for issuance under the plan.  Eligible employees may purchase shares of Company common stock at not less than 85% of fair market value at the end of the grant period.  During the second quarter of fiscal 2011, 18,089 shares were issued under the ESPP at a price of $12.13 per share. At March 26, 2011, there were 254,414 shares available for future issuances.

G.            BUSINESS ACQUISITION

On January 15, 2010, the Company acquired the assets of Highcrest Media, a Massachusetts-based provider of solutions that streamline the production of customized textbooks and other materials for use in colleges, universities and businesses.  The $3 million cash acquisition, which also had additional future “earn out” potential payments of up to $1.2 million, was accounted for as a purchase, and accordingly, Highcrest Media’s financial results are included in the book manufacturing segment in the consolidated financial statements from the date of acquisition.

The acquisition of Highcrest Media was recorded by allocating the fair value of consideration of the acquisition to the identified assets acquired, including intangible assets and liabilities assumed, based on their estimated fair value at the acquisition date.  The excess of the fair value of consideration of the acquisition over the net amounts assigned to the fair value of the assets acquired and liabilities assumed was recorded as goodwill. Goodwill and other intangibles are tax deductible. The Company also assumed operating leases for some of Highcrest Media’s equipment.

The purchase price allocation was as follows:

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The future earn out potential payments were valued at acquisition at $850,000 using a probability weighted discounted cash flow model (Level 3 in the hierarchy) and may be paid out over three years based on achieving certain revenue targets. A fair value assessment of the contingent earn out consideration payable was performed at March 26, 2011 resulting in recognition of $20,000 of expense in the second quarter and totaling $80,000 for the first six months of fiscal 2011.  The first year’s revenue target was achieved and a resulting $400,000 payment was made in the second quarter of fiscal 2011, leaving a liability of $600,000 at March 26, 2011.

H.            Restructuring Costs

In the second quarter of fiscal 2011, the Company recorded restructuring costs of $7.5 million associated with closing and consolidating its Stoughton, Massachusetts manufacturing facility due to the impact of technology and competitive pressures affecting the one-color paperback books in which the plant specialized.  Restructuring costs included $2.3 million for employee severance and benefit costs, $2.1 million for an early withdrawal liability from a multi-employer pension plan, and $3.1 million for lease termination and other facility closure costs.  Of the total $7.5 million of restructuring costs in the book manufacturing segment, $7.1 million was included in cost of sales and $0.4 million was included in selling and administrative expenses. Annual savings from this plant closure are projected to be approximately $4.5 million. The Company anticipates that payments of approximately $3 million associated with closing the Stoughton facility will be made by the end of fiscal 2011.  The remaining payments will be made over periods ranging from 4 years for the building lease obligation to 20 years for the liability related to the multi-employer pension plan.  At March 26, 2011, approximately $3.0 million of the restructuring payments were included in “Other current liabilities” and $3.9 million were included in “Other liabilities” in the accompanying consolidated balance sheet.

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Critical Accounting Policies and Estimates:

The Company’s consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles.  The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes.  On an ongoing basis, management evaluates its estimates and judgments, including those related to collectibility of accounts receivable, recovery of inventories, impairment of goodwill and other intangibles, and prepublication costs.  Management bases its estimates and judgments on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.  Actual results may differ from these estimates.  The significant accounting policies which management believes are most critical to aid in fully understanding and evaluating the Company’s reported financial results include the following:

Accounts Receivable.   Management performs ongoing credit evaluations of the Company’s customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness.  Collections and payments from customers are continuously monitored.  A provision for estimated credit losses is determined based upon historical experience and any specific customer collection risks that have been identified.  If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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

Goodwill and Other Intangibles.  Other intangibles include customer lists, which are amortized on a straight-line basis over periods ranging from five to ten years. The Company evaluates possible impairment of goodwill and other intangibles at the reporting unit level, which is the operating segment or one level below the operating segment, on an annual basis or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.  The Company completed its annual impairment test at September 25, 2010, which resulted in no change to the nature or carrying amounts of its intangible assets in its book manufacturing segment.  However, the Company determined that the fair value of Creative Homeowner at the end of fiscal 2010 was below its carrying value and a pre-tax impairment charge of $4.7 million was recorded, which represented 100% of Creative Homeowner’s goodwill and other intangible assets as well as $0.5 million of prepublication costs.  Changes in market conditions or poor operating results could result in a decline in value of the Company’s goodwill and other intangible assets thereby potentially requiring an additional impairment charge in the future.

Prepublication Costs.   The Company capitalizes prepublication costs, which include the costs of acquiring rights to publish a work and costs associated with bringing a manuscript to publication such as artwork and editorial efforts. Prepublication costs are amortized on a straight-line basis over periods ranging from three to five years.  Management regularly evaluates the sales and profitability of the products based upon historical and forecasted demand.  If actual market conditions are less favorable than those projected by management, additional amortization expense may be required.

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Overview:

Courier Corporation, founded in 1824, is one of America’s leading book manufacturers and specialty publishers.  The Company has two business segments: book manufacturing and specialty publishing.  The book manufacturing segment streamlines the process of bringing books from the point of creation to the point of use.  Based on sales, Courier is the third largest book manufacturer in the United States, offering services from prepress and production, through storage and distribution, as well as state-of-the-art digital print capabilities.  The specialty publishing segment consists of Dover Publications, Inc. (“Dover”), Research & Education Association, Inc. (“REA”), and Federal Marketing Corporation, d/b/a Creative Homeowner (“Creative Homeowner”).  Dover publishes over 9,000 titles in more than 30 specialty categories ranging from literature to paper dolls, and from music scores to clip art.  REA publishes test preparation and study-guide books and software for students from elementary school to college as well as professionals seeking advanced education or career certification.  Creative Homeowner publishes books on home design, decorating, landscaping, and gardening, and sells home plans.

Results of Operations:

FINANCIAL HIGHLIGHTS

(dollars in thousands except per share amounts)

Revenues in the second quarter of fiscal 2011 were $62.7 million, 6% higher than the same period last year, while revenues for the first half of the year increased 2% to $123.8 million.  Book manufacturing segment revenues in the second quarter increased by 11% to $55.6 million compared to the same period last year, primarily from sales growth in the religious market.  For the first six months of fiscal 2011, book manufacturing segment sales increased by 4% to $108.6 million compared to the first half of fiscal 2010, reflecting continued growth in the four-color college textbook market as well as higher religious sales. In the specialty publishing segment, revenues were $10.1 million in the second quarter and $20.9 million for the first six months, down 14% and 10%, respectively, compared with the corresponding periods last year. In February 2011, Borders Group, Inc. (“Borders”) filed for Chapter 11 bankruptcy protection, which impacted sales in both of the Company’s business segments.  The Company expects that the Borders bankruptcy will continue to negatively impact sales for at least the remainder of its fiscal year, as the proposed Borders restructuring plan contemplates a smaller store network.  The Company will continue to closely monitor the Borders situation.

Net loss was $4.8 million and $3.2 million for the second quarter and first six months of fiscal 2011, respectively.  These results included pre-tax restructuring costs of $7.5 million, or $.39 per diluted share, associated with closing the Company’s smallest and least versatile manufacturing facility located in Stoughton, Massachusetts.  Results for the second quarter and first half of fiscal 2011 also included a bad-debt provision of $750,000 related to the Borders bankruptcy, fully reserving against the Borders receivable balance.

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Restructuring Costs

In the second quarter of fiscal 2011, the Company recorded restructuring costs of $7.5 million associated with closing and consolidating its Stoughton, Massachusetts manufacturing facility due to the impact of technology and competitive pressures affecting the one-color paperback books in which the plant specialized.  Restructuring costs included $2.3 million for employee severance and benefit costs, $2.1 million for an early withdrawal liability from a multi-employer pension plan, and $3.1 million for lease termination and other facility closure costs.  Of the total $7.5 million of restructuring costs in the book manufacturing segment, $7.1 million was included in cost of sales and $0.4 million was included in selling and administrative expenses. Annual savings from this plant closure are projected to be approximately $4.5 million. The Company anticipates that payments of approximately $3 million associated with closing the Stoughton facility will be made by the end of fiscal 2011.  The remaining payments will be made over periods ranging from 4 years for the building lease obligation to 20 years for the liability related to the multi-employer pension plan. At March 26, 2011, approximately $3.0 million of the restructuring payments were included in “Other current liabilities” and $3.9 million were included in “Other liabilities” in the accompanying consolidated balance sheet.

Business Acquisition

On January 15, 2010, the Company acquired the assets of Highcrest Media LLC (“Highcrest Media”), a Massachusetts-based provider of solutions that streamlines the production of customized textbooks for use in colleges, universities and businesses.  The acquisition has also complemented the Company’s investment during fiscal years 2010 and 2011 in digital printing technology. The $3 million cash acquisition, which also had additional future “earn out” potential payments of up to $1.2 million, was accounted for as a purchase, and accordingly, Highcrest Media’s financial results are included in the book manufacturing segment in the consolidated financial statements from the date of acquisition.

Book Manufacturing Segment

SEGMENT HIGHLIGHTS

(dollars in thousands)

Within the book manufacturing segment, the Company focuses on three key markets: education, religious and specialty trade.  Sales to the education market rose 2% to $22 million in the second quarter and 3% to $42 million for the first six months, compared to the same periods in fiscal 2010, primarily from sales of four-color college textbooks. This improvement included sales growth from the Company’s new digital print facility and from the acquisition of Highcrest Media.  Sales of elementary and high school books declined in the quarter and first six months compared to the same periods last year reflecting continued budget pressures on school systems nationwide resulting in many publishers electing to defer orders until closer to the elementary and high school textbook season.  Sales to the religious market were up 50% in the quarter to $19 million compared to the prior year’s second quarter, reflecting a large increase in orders from the Company’s largest religious customer. During the first quarter of fiscal 2011, the Company entered into a multi-year agreement with its largest religious customer, a leading global missionary organization, which provides incentives for additional growth.  For the first six months of fiscal 2011, religious sales increased 7% to $33 million compared to the same period last year, which included sales growth with this customer at a higher than average long-term growth rate.  Sales to the specialty trade market decreased 9% to $13 million in the quarter and were down 2% to $28 million for the first six months, compared with the corresponding periods last year, reflecting the industry-wide reaction to Borders’ Chapter 11 bankruptcy filing, including reduced orders from the Company’s specialty publishing segment.

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In October 2010, the Company installed a second HP digital inkjet press at its North Chelmsford, Massachusetts facility to provide needed capacity for demand of four-color custom textbooks and one-color trade books.  In addition, at the end of the first quarter, installation was completed on a fourth high-speed four-color manroland press at the Company’s Kendallville, Indiana facility.  Both presses experienced smooth startups.  In January 2011, the Company reached a multi-year book manufacturing arrangement with Pearson Education, the world’s largest educational publisher. This arrangement reflects the value of the Company’s investments in digital inkjet technology and continued expansion of its four-color capacity.  A third HP digital press is scheduled to be installed during the Company’s third quarter in order to meet expected growth in demand during the upcoming textbook season.

Cost of sales in the book manufacturing segment increased by 33% to $53.7 million in the second quarter and by 16% to $95.4 million in the first six months of fiscal 2011 compared with the same periods last year.  Cost of sales in the second quarter and first six months of fiscal 2011 included $7.1 million of restructuring costs associated with closing and consolidating the one-color printing facility in Stoughton.  Also, $1.1 million of increased depreciation expense was recorded in this year’s second quarter related to the addition of four-color offset and digital press capacity.  Gross profit decreased by 81% to $1.9 million for the quarter and by 42% to $13.3 million for the first half of fiscal 2011, compared with the corresponding periods last year.  Excluding the impact of the restructuring costs, gross profit as a percentage of sales was 16.1% compared to 19.5% in fiscal 2010’s second quarter and 18.7% for the year to date compared to 21.8% for the first half of fiscal 2010.  The decline in gross profit for the quarter and year to date reflects the impact of increased depreciation expense related to added capacity and frictional costs related to closing the Stoughton facility and transferring existing one-color jobs to other Company facilities, as well as continued industry-wide competitive pricing pressures.

Selling and administrative expenses for the segment increased slightly in the second quarter and the first six months of fiscal 2011 compared to the same periods last year; each period of fiscal 2011 included $0.4 million of restructuring costs related to closing the Stoughton facility.

The operating loss in the book manufacturing segment was $5.1 million and $1.3 million in the second quarter and first six months of fiscal 2011, respectively, compared with operating income of $2.8 million and $8.5 million in the corresponding periods last year, respectively.  Second-quarter and year-to-date results for fiscal 2011 included restructuring costs of $7.5 million associated with closing the one-color printing facility in Stoughton.

Specialty Publishing Segment

SEGMENT HIGHLIGHTS

(dollars in thousands)

Within the Company’s specialty publishing segment, sales in the second quarter were down 14% to $10.1 million and down 10% for the first six months to $20.9 million, compared to the corresponding periods in fiscal 2010, primarily due to lower sales to Borders. Sales to Borders in the first half of fiscal 2011 represented 2% of this segment’s sales versus 9% in the first six months of last year, with the largest impact on sales at REA.  As a result, sales at REA decreased 33% in the quarter to $1.5 million and were down 32% for the year to date to $2.8 million, compared to the same periods last year.  At Dover, sales were down 5% to $6.5 million for the quarter and decreased 4% to $14.7 million for the first half of fiscal

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2011 compared with the same periods last year.  The reduction in Dover’s sales also reflects the impact of the decline in sales to Borders, which more than offset growth in both international sales and sales to online retailers.  Sales at Creative Homeowner were down 20% in the second quarter to $2.1 million and down 11% to $3.4 million for the first six months of this year compared to the same periods last year.  These decreases were attributable in part to the decline in sales to Borders as well as other bookstores and specialty retailers, which offset improving sales to home-centers, Creative Homeowner’s largest sales channel.

Cost of sales in the specialty publishing segment decreased 4% to $6.9 million for the second quarter and decreased 3% to $13.8 million for the first half of fiscal 2011, compared to the same periods last year, reflecting lower sales and an improved cost structure in the segment.  Gross profit in this segment decreased 29% to $3.3 million in the second quarter and, as a percentage of sales, decreased to 32.3% from 39.1% in the corresponding period last year.  For the first six months of fiscal 2011, gross profit decreased 21% to $7.1 million and, as a percentage of sales, decreased to 34.0% from 38.6% in the first half of last year.  These declines in gross profit resulted from the lower sales volume as well as changes in product and sales mix.

Selling and administrative expenses in this segment increased $683,000 to $5.3 million in the second quarter and were up $391,000 to $9.9 million for the first six months compared to the same periods last year.  These increases in selling and administrative expenses in the second quarter and first half of fiscal 2011 were the result of an additional bad-debt provision of $750,000 for Borders as well as $125,000 attributable to the bankruptcy of Creative Homeowner’s Canadian distributor.

The operating loss for the specialty publishing segment for the quarter was $2.0 million, compared to breakeven in last year’s second quarter.  For the first six months of fiscal 2011, the operating loss was $2.8 million compared with $0.5 million in the first half of last year.   Segment results for the quarter and year to date reflect the impact of the $0.9 million receivables write-down as well as the decline in sales.

Total Consolidated Company

Interest expense, net of interest income, was $248,000 in the second quarter of fiscal 2011, compared to $119,000 of net interest expense in the same period last year.  For the first six months, interest expense, net of interest income, was $451,000, compared to $237,000 of net interest expense in the first half of last year.   Average debt under the revolving credit facility in the second quarter of fiscal 2011 was approximately $21.6 million at an average annual interest rate of 0.8%, generating interest expense of approximately $41,000.  Average debt under the revolving credit facility in the second quarter of last year was approximately $11.9 million at an average annual interest rate of 0.7%, generating interest expense of approximately $22,000.  Average debt under the revolving credit facility in the first six months of fiscal 2011 was approximately $21.1 million at an average annual interest rate of 0.8%, generating interest expense of approximately $81,000.  Average debt under the revolving credit facility in the first half of last year was approximately $11.9 million at an average annual interest rate of 0.7%, generating interest expense of approximately $44,000. Interest expense also includes commitment fees and other costs associated with maintaining the Company’s $100 million revolving credit facility.  In addition, the Company entered into a four-year term loan in March 2010 providing up to $8 million to finance the purchase of digital print assets.  At March 26, 2011, $5.7 million was borrowed under this term loan, which added $54,000 of interest expense in the second quarter and $107,000 in the first half of fiscal 2011.  Interest capitalized in the first quarter of this year was approximately $26,000; no interest was capitalized in the second quarter of fiscal 2011 or in the corresponding periods of fiscal 2010.

The income tax benefit in the second quarter was $2.9 million compared to income tax expense in the corresponding period last year of $0.9 million.  On a year-to-date basis, the income tax benefit was $1.9 million compared with income tax expense of $2.6 million in the same period last year. The Company’s effective tax rate for the first six months of fiscal 2011 was 38.0% compared with 38.5% in the first half of last year, reflecting an increased benefit from the Federal manufacturer’s deduction offset in part by a higher effective state tax rate attributable to the restructuring costs.

For purposes of computing net income or loss per diluted share, weighted average shares outstanding increased by approximately 37,000 shares and 44,000 shares from last year’s second quarter and first six month’s, respectively. The increase in weighted average shares outstanding for the quarter and year to date reflects shares issued under the Company’s stock plans.  In the second quarter and first six months

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of fiscal 2011, approximately 37,000 and 31,000 potentially dilutive shares, respectively, were excluded due to the Company incurring a loss in those periods.

Liquidity and Capital Resources:

During the first six months of fiscal 2011, operations provided $11.8 million of cash, compared to $13.7 million in the first half of last year.  The net loss was $3.2 million and depreciation and amortization were $11.6 million.  The net loss included after-tax restructuring costs of $4.7 million associated with the Stoughton plant closing.  As the plant closing occurred near the end of the second quarter, these costs had minimal impact on the Company’s cash flow from operations for the first six months of fiscal 2011.

Investment activities in the first six months of fiscal 2011 used $8.4 million of cash. Capital expenditures were $6.1 million, primarily related to the Company’s investment in a second HP digital inkjet press at its North Chelmsford, Massachusetts facility and its fourth four-color manroland press at the Kendallville, Indiana facility.  For the entire fiscal year, capital expenditures are expected to be approximately $23 to $25 million, including installation of a third HP digital inkjet press scheduled for the third quarter.  Prepublication costs were $2.2 million, comparable to the first six months of last year.  For the full fiscal year, prepublication costs are projected to be approximately $4 million.

Financing activities for the first six months of fiscal 2011 used approximately $3.1 million of cash.  Cash dividends of $5.1 million were paid and borrowings increased by $1.8 million for the year to date.  At March 26, 2011, borrowings under a term loan used to finance the purchase of the Company’s new digital print assets were $5.7 million, with $2.3 million at a fixed annual interest rate of 3.9% and $3.4 million at a fixed annual interest rate of 3.6%.  The Company also has a $100 million long-term revolving credit facility in place under which the Company can borrow at a rate not to exceed LIBOR plus 1.5%.  At March 26, 2011, the Company had $19.8 million in borrowings under this facility at an interest rate of 0.8%.  The revolving credit facility, which matures in 2013, contains restrictive covenants including provisions relating to the maintenance of working capital, the incurrence of additional indebtedness and a quarterly test of EBITDA to debt service.  The Company was in compliance with all such covenants at March 26, 2011.  The facility also provides for a commitment fee not to exceed 3/8% per annum on the unused portion.  The revolving credit facility is used by the Company for both its long-term and short-term financing needs.  The Company believes that its cash on hand, cash from operations and the available credit facility will be sufficient to meet its cash requirements through 2011.

The following table summarizes the Company’s contractual obligations and commitments at March 26, 2011 to make future payments as well as its existing commercial commitments.

(1) Amounts do not include interest expense.

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

(3) Represents amounts at September 25, 2010, except for the Stoughton, Massachusetts building lease obligation, which was included in “Other liabilities” at March 26, 2011.

(4) Represents capital commitments.

(5) Includes approximately $3.9 million of restructuring costs related to closing the Stoughton, Massachusetts facility.

Forward-Looking Information:

This Quarterly Report on Form 10-Q includes forward-looking statements.  Statements that describe future expectations, plans or strategies are considered “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995 and releases issued by the Securities and Exchange Commission.  The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements.  Such statements are subject to risks and

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uncertainties that could cause actual results to differ materially from those currently anticipated.  Some of the factors that could affect actual results are discussed in Item 1A of this Form 10-Q and include, among others, changes in customers’ demand for the Company’s products, including seasonal changes in customer orders and shifting orders to lower cost regions, changes in market growth rates, changes in raw material costs and availability, pricing actions by competitors and other competitive pressures in the markets in which the Company competes, consolidation among customers and competitors, insolvency of key customers or vendors, changes in the Company’s labor relations, success in the execution of acquisitions and the performance and integration of acquired businesses including carrying value of intangible assets, restructuring and impairment charges required under generally accepted accounting principles, changes in operating expenses including medical and energy costs, changes in technology including migration from paper-based books to digital, difficulties in the start up of new equipment or information technology systems, changes in copyright laws, changes in consumer product safety regulations, changes in environmental regulations, changes in tax regulations, changes in the Company’s effective income tax rate and general changes in economic conditions, including currency fluctuations, changes in interest rates, changes in consumer confidence, changes in the housing market, and tightness in the credit markets.  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.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes from the information concerning the Company’s “Quantitative and Qualitative Disclosures About Market Risk” as previously reported in the Company’s Annual Report on Form 10-K for the year ended September 25, 2010.

Item 4.    CONTROLS AND PROCEDURES

(a)       Evaluation of disclosure controls and procedures

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

(b)       Changes in internal controls over financial reporting

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

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PART II.  OTHER INFORMATION