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 helps organizations manage the process of creating and distributing intellectual properties. It provides a variety of specialized services to publishers and other information providers, including the preparation, production, storage and distribution of information in a variety of formats from traditional books to CD-ROMs and online services. Courier is the sixth largest book manufacturer in the United States. Products include Bibles, reference texts, books, software kits and technical documentation.
In December 1994, the Company announced the formation of 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. Courier New Media includes two operating units, Courier EPIC and Copyright Management Services ("CMS"). Courier EPIC, which was launched in October 1992, provides complete turnkey services from project management through end-user distribution. CMS, established in December 1994, specializes in helping publishers and college bookstores manage the process of obtaining copyright permissions for products such as multiple-publisher college coursepacks.
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 (2); and Kendallville, Indiana.
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 four subsidiaries, Courier Westford, Inc. ("Westford"), Courier Stoughton, Inc. ("Stoughton"), Courier Kendallville, Inc. ("Kendallville"), and National Publishing Company ("National"). Each of these subsidiaries has certain specialties adapted to the needs of the selected market niches they serve. These specialties encompass 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, software developers and other information providers to develop new products from new and existing intellectual properties. Courier New Media includes two operating units, Courier EPIC and CMS. Courier EPIC conducts product assembly, packaging, diskette replication, fulfillment, distribution and project management services. CMS specializes in helping publishers and college bookstores manage the process of obtaining copyright permissions for products such as multiple-publisher college coursepacks and custom books.
MARKETING AND CUSTOMERS
Courier's products and services are primarily sold to publishers of educational, religious, consumer, professional and reference books and to computer software and hardware manufacturers. The Company distributes products around the world; export sales, as a percentage of consolidated sales, were approximately 17% in fiscal 1996 and 16% in both fiscal 1995 and fiscal 1994.
Courier's sales force of 22 people is responsible for all of the Company's sales to over 500 customers. Courier's salespeople operate out of sales offices located in New York, Chicago, Philadelphia, San Mateo, California, Orlando, Florida, and North Chelmsford, Massachusetts. Sales to one customer, the Gideon Society, aggregated approximately 27% of consolidated sales in fiscal 1996; the loss of this customer would have a material adverse effect on the Company. No other single customer accounted for more than 10% of fiscal 1996 consolidated sales.
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.
MATERIALS AND SUPPLIES
Courier purchases its principal raw materials, primarily paper, but also plate materials, ink and cover stock, from numerous suppliers, and is not dependent upon any one source for its requirements. Many customers of Westford, Stoughton, and Kendallville purchase their own paper and furnish it at no charge to these operations for book production purposes.
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 1,050 persons at September 28, 1996 compared to 1,103 a year ago.
OTHER
Courier's overall business is not significantly seasonal in nature, although sales are generally lower in the Company's second 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 EPIC, Courier New Media, Copyright Management Services, and CourieReader 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.
ITEM 2.
ITEM 2. PROPERTIES.
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. Capital expenditures amounted to approximately $7.3 million in 1996, $15.0 million in 1995 and $2.2 million in 1994. Capital expenditures in 1996 included additions and upgrades to binding equipment, continued improvements to Company communication and information systems and approximately $2.5 million to expand the Company's plant in Pennsylvania. Capital expenditures for fiscal 1997 are expected to approximate the fiscal 1996 level. Courier considers its equipment to be in good operating condition and adequate for its present needs.
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 of this Annual Report on Form 10-K. Information concerning leased properties and equipment is disclosed in Note F of Notes to Consolidated Financial Statements, which appears on page of this Annual Report on Form 10-K.
ITEM 3.
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 3A. 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 44 Chairman, President and Chief Executive Officer
George Q. Nichols 67 Senior Vice President and President of National Publishing Company
Robert P. Story, Jr. 45 Senior Vice President and Chief Financial Officer
Thomas G. Osenton 43 Senior Vice President and Chief Marketing Officer
Peter M. Folger 43 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.
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.
ITEM 4.
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 28, 1996.
PART II
ITEM 5.
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 of this Annual Report on Form 10-K.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is contained in the section captioned "Five-Year Financial Summary" appearing on page of this Annual Report on Form 10-K.
ITEM 7.
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 through of this Annual Report on Form 10-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is contained on pages through of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The information called for by this Item 9 was previously reported in a current report on Form 8-K filed with the SEC on December 4, 1995. Such filing is incorporated herein by reference.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
and
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
and
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
and
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding executive officers called for by paragraph (b) of Item 401 of Regulation S-K for inclusion in answer to Item 10 is furnished in Part I of this report under Item 3A, Executive Officers of the Registrant. All other information called for by Items 10, 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 16, 1997. Such information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
3. EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ----------------------
3A-1 Articles of Organization of Courier Corporation, as of June 29, 1972 (filed as Exhibit 3A-1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1981, and incorporated herein by reference).
3A-2 Articles of Amendment of Courier Corporation (changing stockholder vote required for merger or consolidation), as of January 20, 1977 (filed as Exhibit 3A-2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1981, and incorporated herein by reference).
3A-3 Articles of Amendment of Courier Corporation (providing for staggered election of directors), as of January 20, 1977 (filed as Exhibit 3A-3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1981, and incorporated herein by reference).
3A-4 Articles of Amendment of Courier Corporation (authorizing class of Preferred Stock), as of February 15, 1978 (filed as Exhibit 3A-4 to the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1981, and incorporated herein by reference).
3A-5 Articles of Amendment of Courier Corporation (increasing number of shares of authorized Common Stock), as of January 16, 1986 (described in item #2 of the 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).
4A-1 Mortgage and Indenture of Trust and Agreement between Courier Westford, Inc., Massachusetts Industrial Finance Agency, and related trustee, dated as of December 22, 1980 (filed as Exhibit 4 (a) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1980, and incorporated herein by reference).
4A-2 Bond Purchase Agreement between Massachusetts Industrial Finance Agency and participating bank, dated as of December 22, 1980 (filed as Exhibit 4 (b) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1980, and incorporated herein by reference).
4A-3 Guaranty Agreement of Courier Corporation, dated as of December 22, 1980 (filed as Exhibit 4 (c) to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 27, 1980, and incorporated herein by reference).
4B 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).
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).
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).
10F+ Courier Corporation Senior Executive Severance Program and Agreements, dated October 25, 1988 pursuant to the program with Messrs. Conway III, Nichols and Story (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+ 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).
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 September 26, 1991, between Courier Corporation and the First National Bank of Boston, providing for an $11,000,000 revolving credit facility (filed as Exhibit 4E to the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1991, and incorporated herein by reference).
10L-2 Amendment, dated November 17, 1992, to Note Agreement between Courier Corporation and the First National Bank of Boston, providing for $11,000,000 revolving credit facility (filed as Exhibit 10L-2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1992, and incorporated herein by reference).
10L-3 Amendment, dated March 12, 1993, to Note Agreement between Courier Corporation and the First National Bank of Boston, providing for $11,000,000 revolving credit facility (filed as Exhibit 10L-3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 25, 1993, and incorporated herein by reference).
10L-4 Amendment, dated September 20, 1993, to Note Agreement between Courier Corporation and the First National Bank of Boston, providing for $11,000,000 revolving credit facility (filed as Exhibit 10L-4 to the Company's Annual Report on Form 10-K for the fiscal year ended September 25, 1993, and incorporated herein by reference).
10L-5 Amendment, dated March 31, 1994, to Note Agreement between Courier Corporation and the First National Bank of Boston, providing for $11,000,000 revolving credit facility (filed as Exhibit 10L-5 to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1994, and incorporated herein by reference).
10L-6 Amendment, dated January 26, 1995, to Note Agreement between Courier Corporation and the First National Bank of Boston, providing for $11,000,000 revolving credit facility (filed as Exhibit 10L-6 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference).
10L-7 Amendment, dated March 31, 1995, to Note Agreement between Courier Corporation and the First National Bank of Boston, regarding $11,000,000 revolving credit facility (filed as Exhibit 10L-7 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995, and incorporated herein by reference).
10L-8 Amendment, dated December 29, 1995, to Note Agreement between Courier Corporation and the First National Bank of Boston, regarding $11,000,000 revolving credit facility (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 30, 1995, 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+* Courier Corporation 1993 Stock Incentive Plan, as amended and restated, effective May 6, 1996.
11* Computation of Per Share Earnings.
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
There were no reports on Form 8-K filed during the last quarter of the Company's fiscal year ended September 28, 1996.
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 5, 1996.
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 5, 1996.
/s/ James F. Conway III /s/ Charles E. Otto - ------------------------------- --------------------------------- James F. Conway III Charles E. Otto Chairman, President and Director Chief Executive Officer
/s/ Edward J. Hoff /s/ W. Nicholas Thorndike - ------------------------------- --------------------------------- Edward J. Hoff W. Nicholas Thorndike Director Director
/s/ Arnold S. Lerner /s/ Kathleen Foley Curley - ------------------------------- --------------------------------- Arnold S. Lerner Kathleen Foley Curley Director Director
/s/ George Q. Nichols /s/ Richard K. Donahue - ------------------------------- --------------------------------- George Q. Nichols Richard K. Donahue Director Director
/s/ Robert P. Story, Jr. - ------------------------------- Robert P. Story, Jr. Director
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Courier Corporation
We have audited the accompanying consolidated balance sheet of Courier Corporation and subsidiaries as of September 28, 1996, and the related consolidated statement of income, stockholders' equity, and cash flows for the fiscal year then ended. Our audit also included the financial statement schedule for the year ended September 28, 1996 listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Courier Corporation and subsidiaries at September 28, 1996, and the results of their operations and their cash flows for the fiscal year then ended in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule for the year ended September 28, 1996, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP Boston, Massachusetts November 7, 1996 (except for Note J as to which is dated November 22, 1996)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Courier Corporation:
We have audited the accompanying consolidated balance sheet of Courier Corporation as of September 30, 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the two years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Courier Corporation as of September 30, 1995, and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 30, 1995, in conformity with generally accepted accounting principles
As described in Note C of Notes to Consolidated Financial Statements, the Company changed its method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109 in 1994.
COOPERS & LYBRAND L.L.P. Boston, Massachusetts November 9, 1995
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS: Courier Corporation helps organizations manage the process of creating and distributing intellectual properties. Services include the preparation, production, storage and distribution of information in a variety of formats from traditional books to CD-ROMs and online services. Products include Bibles, reference texts, books, software kits and technical documentation.
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.
Fiscal years 1996 and 1994 were 52-week periods compared with fiscal year 1995 which was a 53-week period. Certain amounts for 1995 and 1994 have been reclassified in the accompanying financial statements in order to be consistent with the current year's classification.
CASH EQUIVALENTS: 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.
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. Interest of approximately $15,000 and $120,000 was capitalized in fiscal years 1996 and 1995, respectively. No interest was capitalized in fiscal 1994. 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 is stated at cost and represents the excess of the consideration paid over the estimated fair value of the net assets of a company purchased 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 includes federal and state taxes based on income. Deferred income taxes are recorded based upon the differences between the financial
statement and tax bases of assets and liabilities and available tax credit carryforwards.
REVENUE RECOGNITION: Revenue is recognized upon shipment of goods to customers or upon the transfer of ownership interest.
NET INCOME PER SHARE: Net income per share is based upon the weighted average number of common shares and equivalents outstanding during each period. Common share equivalents are attributable primarily to outstanding stock opions. The weighted average shares and equivalents were 2,072,000, 2,015,000 and 1,930,000 for fiscal 1996, 1995 and 1994, respectively. As there is not a material difference between primary and fully diluted net income per share, only primary net income per share is presented.
NOTE B. INVENTORIES
On a first-in, first-out (FIFO) basis, reported year-end inventories would have increased by $6.0 million in 1996 and $5.9 million in 1995.
NOTE C. INCOME TAXES
Non-current deferred tax assets have been netted against non-current deferred tax liabilities for balance sheet classification purposes.
Effective September 26, 1993, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the use of the liability method of accounting for deferred income taxes. This method utilizes current tax rates, whereas much of the Company's deferred tax liabilities had been determined in past years when the liabilities arose and when tax rates were higher. As a result, the cumulative effect on prior years relating to the adoption of this required accounting change was an increase in net income of $1,525,000 or $.79 per share, reported in the first quarter of fiscal year 1994.
NOTE D. LONG-TERM DEBT
Scheduled aggregate principal payments of long-term debt are $466,000 in fiscal 1997, $7,435,000 in fiscal 1998, $311,000 in fiscal 1999, $338,000 in fiscal 2000, $366,000 in fiscal 2001 and $827,000 thereafter.
The Company maintains an $11 million long-term revolving credit agreement at an interest rate not to exceed the lender's prime interest rate. Borrowings under this facility amounted to approximately $7.0 million at September 28, 1996. The Company also maintains an informal line of credit providing for aggregate borrowings of $10 million at an interest rate not to exceed the lender's prime rate. There have been no short-term borrowings against the Company's line during the three fiscal years ended September 28, 1996.
The revolving credit facility matures in January 1998 and is included in scheduled aggregate principal payments due in 1998. This facility and the Company's informal bank credit line are expected to be replaced with a new $20 million revolving credit facility in 1997.
In April 1996, the Company received $1.2 million of industrial development bond financing at a 3% interest rate in connection with the fiscal 1995 purchase of a formerly leased facility in Pennsylvania.
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 1/2% per annum on the unused portion. The industrial bond arrangements and the 9.5% promissory note provide for a lien on the assets acquired with the proceeds.
NOTE E. 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 and the Courier Employee Stock Ownership Plan (ESOP). Effective February 1, 1996, the assets of the ESOP were merged and consolidated with the assets of the Courier Profit Sharing and Savings Plan. Non-union employees become participants in these retirement plans after completing at least one year of eligible service. Retirement costs for the Company's principal plans amounted to $1,063,000 in fiscal 1996, $1,328,000 in fiscal 1995 and $1,338,000 in fiscal 1994.
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 based on profits each year for the benefit of all eligible employees under the plan.
The ESOP may allocate shares of Company common stock to participants annually based on their compensation as defined in the plan. During fiscal 1996, 8,798 shares were allocated to eligible participants for the plan year ended December 31, 1995. Such shares were available within the ESOP as a result of previous forfeitures. At September 28, 1996, the ESOP held 147,208 shares on behalf of the participants.
NOTE F. 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 $2,370,000 in fiscal 1996, $2,428,000 in fiscal 1995 and $1,681,000 in fiscal 1994. As of September 28, 1996, minimum annual rental commitments under the Company's long-term operating leases are approximately $1,763,000 in fiscal 1997, $1,358,000 in fiscal 1998, $1,117,000 in fiscal 1999, $ 1,103,000 in fiscal 2000, $1,100,000 in fiscal 2001 and $3,645,000 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.
NOTE G. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
The Company is engaged in one industry, the manufacture 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 1996 and 16% in fiscal 1995 and fiscal 1994. Sales to a religious book customer amounted to approximately 27% of consolidated sales in fiscal 1996 and fiscal 1995 and 25% in fiscal 1994. No other customer accounted for more than 10% of consolidated sales.
NOTE H. 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 100,000 shares to a total of 230,000 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.
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 132,500 shares and no more than 22,500 shares may be awarded in any one fiscal year. During fiscal 1996, 4,000 shares were granted under the plan; no shares were granted in either fiscal 1995 or 1994. 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 $31,000 in 1996, $39,000 in 1995 and $63,000 in 1994. As of September 28, 1996, there were 6,719 shares available for future grants under the plan.
EMPLOYEE STOCK PURCHASE PLAN: Under the Company's Employee Stock Purchase Plan 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. At September 28, 1996, 50,146 shares had been issued under the plan at an average price of $11.67 per share, with an additional 39,854 shares reserved for future issuances.
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 director's fee and committee chair fee 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. The annual director's fee for 1996 was $12,000; the two committee chair fees amounted to a total of $15,000 for 1996. The plan, as approved by stockholders, provides that 100,000 shares be reserved for the granting of options.
STOCKHOLDERS' RIGHTS PLAN: In October 1988, the Board of Directors adopted a 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, at an exercise price of $75 per one-hundredth of a share. The rights will be exercised only if a person or group either acquires or announces a proposal to acquire 20% or more of the Company's outstanding stock. In addition, if a large holder of the Company's stock merges with the Company or acquires a substantial part of the Company's assets, the rights will entitle holders to purchase stock in the surviving Company at half of its then-current market price. If there is no merger, but a large stockholder engages in one of a number of specified self-dealing transactions involving the Company, the rights will entitle holders to purchase stock in the Company at half of its then-current market price. The rights may also be redeemed by the Company at $.01 per right for up to ten business days after the time any person or group has acquired 20% or more of the Company's shares. The rights expire in 1998.
STOCK-BASED COMPENSATION: In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes accounting and reporting standards for stock-based employee compensation plans. This pronouncement will apply to options granted in fiscal 1996 and thereafter. The Company has until fiscal 1997 to adopt SFAS No. 123 and is evaluating whether or not it will change to the recognition provisions of this pronouncement.
NOTE I. OTHER INCOME (EXPENSE)
Net rental income is derived from two buildings which are separately reported in the accompanying balance sheets as "Real estate held for sale or lease, net." One of these properties was the Company's former telephone directory manufacturing facility in Lowell, Massachusetts, the lease on which expired September 30, 1994. On March 1, 1996, the Company completed the sale and donation of this vacant facility. Sales proceeds of $1.8 million for approximately half the facility resulted in a pretax loss of $366,000. The donation of the remainder of the facility generated a tax benefit of approximately $500,000 resulting in an after-tax gain on the overall transaction of approximately $250,000. The lease on the second building expired June 30, 1996 and the facility is currently vacant pending sale or lease.
In September 1996, the Company relocated its corporate headquarters into an existing facility in North Chelmsford, Massachusetts. The former site in Lowell, Massachusetts is vacant pending sale or lease and is included in the September 28, 1996 balance sheet as "Real estate held for sale or lease, net." Management does not believe that there is any material impairment of these 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."
On September 29, 1995, AlphaGraphics repurchased the Company's investment interest and paid related cumulative dividends. The Company received $953,000 for its investment in AlphaGraphics resulting in a gain of $329,000. In addition, the Company received $347,000 in past cumulative dividends.
NOTE J - SUBSEQUENT EVENT
In November 1996, the Company announced that its Board of Directors authorized the repurchase of common shares with an aggregate purchase price of up to $3 million.
Common shares of the Company are traded over-the-counter on the Nasdaq national market system - symbol "CRRC".
There were approximately 640 stockholders of record as of September 28, 1996.
Net income per share is based on weighted average shares outstanding; stockholders' equity per share is based on shares outstanding at year end.
* Fiscal 1995 included 53 weeks.
** Fiscal 1994 net income includes non-cash income of $1.5 million from the adoption of SFAS No. 109, "Accounting for Income Taxes," resulting in net income per share of $2.71 (Note C).
*** Fiscal 1992 results include a charge of $2.1 million or $1.18 per share for closing the Company's U.K. plant.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Sales in fiscal 1996 were $125.2 million compared to fiscal 1995 sales of $120.7 million. Fiscal 1995 included 53 weeks compared to 52 weeks in 1996. After adjusting for the extra week, 1996 sales increased 5.7 % over fiscal 1995 despite a difficult industry environment. The increase in sales reflects growing volume in the publishing and religious markets. Sales to software customers were down significantly reflecting lower demand for printed manuals and diskette replication as that market adopts alternative technologies such as CD-ROM and online services. Pricing competition increased in intensity in all markets this year. Sales in fiscal 1995 were $120.7 million, down from fiscal 1994 sales of $122.7 million. The decline in sales reflects the impact of a Company initiative designed to improve the quality of revenue by shifting the focus away from commodity-like business, adding new services enabling growth in higher value-added turnkey relationships and enhancing the skills of the sales and service teams to deliver these new services.
Gross profits in 1996 were approximately $3.6 million lower than 1995 and, as a percentage of sales, decreased from 21.8% to 18.1%. Margins were down because of sharply lower prices for recycled paper which lowered gross profits by $1.6 million, new equipment start-up costs, pricing pressures due to increased competition and a significant drop in volume from software customers. Operations involved in software manufacturing were significantly downsized in 1996 to adjust for reductions in printing and diskette replication sales. Gross profits increased by approximately $1.5 million from 1994 to 1995. As a percentage of sales, gross profit improved from 20.2% to 21.8%. The increase was attributable to improvement in the quality of revenue, increased recycling revenue and cost reductions and other benefits associated with manufacturing process improvements.
Selling and administrative expenses in 1996 were comparable to 1995. As a percentage of sales, selling and administrative expenses decreased from 15.4% to 14.9%. Increased costs related to enhancements to communication and information systems and expansion of the Company's Copyright Management Services (CMS) division were offset by lower administrative expenses. From 1994 to 1995, selling and administrative expenses increased by $0.4 million or 2.3%. As a percentage of sales, selling and administrative expenses were 14.8% in 1994 compared to 15.4% in 1995. The increase resulted from higher selling costs, the introduction of CMS, costs associated with improvements to the Company's communication and information systems, and the additional week in fiscal 1995. These factors more than offset a reduction in administrative expenses.
Interest expense for fiscal 1996 was $150,000 lower than fiscal 1995 as a lower average interest rate more than offset average borrowings that were approximately $0.3 million higher in fiscal 1996 than fiscal 1995. From 1994 to 1995, interest expense decreased by approximately $0.4 million due to a reduction in average borrowings of approximately $4.8 million during the year.
In 1996, other income (expense) included a pretax loss from the Company's sale and donation of its former telephone directory manufacturing facility. 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. Net rental income was $99,000 in 1996. In 1995, other income included a $329,000 gain on the sale of the Company's investment in AlphaGraphics and dividend income of approximately $400,000 related to that investment. Net rental income in 1995 was $335,000. In 1994, other income included approximately $65,000 in dividends received from AlphaGraphics, as well as $601,000 of net rental income. The 1994 net rental income included $425,000 from a building lease that expired on September 30, 1994. As mentioned above, the sale and donation of this facility was completed in 1996.
The Company's tax rate for 1996, exclusive of the $500,000 tax benefit related to the donation of property discussed above, was 29% compared to 33% for 1995. The lower tax rate was primarily due to benefits from export related income. The Company's tax rate of 33% for 1995 was lower than the 1994 rate of 37% because 1995 included a benefit from the tax exempt portion of dividend income and a lower effective state income tax rate.
Net income before the cumulative effect of an accounting change was $2.6 million or $1.23 per share for fiscal 1996 compared to $5.2 million or $2.60 per share for fiscal 1995. The lower earnings were primarily attributed to a reduction in gross profits and a decrease in other income related to non-recurring items. Net income before the cumulative effect of an accounting change was $5.2 million or $2.60 per share in fiscal 1995, up 41% from $3.7 million or $1.92 per share in fiscal 1994. The improvement in gross profit margins and income associated with the sale of the Company's investment in AlphaGraphics were the primary factors contributing to the improvement in earnings. Weighted average shares outstanding increased by 57,000 shares from 1995 to 1996 and 85,000 shares from 1994 to 1995 due to shares allocated under the Employee Stock Ownership Plan and additional equivalent shares for stock options.
At the beginning of fiscal 1994, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which requires companies to determine deferred income taxes under the liability method of accounting. The cumulative effect on prior years relating to the adoption of this required accounting change produced one-time, non-cash income of $1.5 million, increasing net income for fiscal 1994 to $5.2 million or $2.71 per share.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which establishes accounting and reporting standards for stock-based employee compensation plans. This pronouncement will apply to options granted in fiscal 1996 and thereafter. The Company has until fiscal 1997 to adopt SFAS No. 123 and is evaluating whether or not it will change to the recognition provisions of this pronouncement.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1996, operations provided approximately $5.3 million in cash. Net income for the year was $2.6 million and depreciation was $6.5 million. Working capital used approximately $3.9 million of cash. The major factors impacting working capital were a $4.9 million increase in accounts receivable partially offset by a $1.3 million decrease in inventories.
Investment activities in 1996 used approximately $5.5 million in cash. Capital expenditures for 1996 were approximately $7.3 million. This was offset, in part, by proceeds of approximately $1.8 million received in connection with the sale of approximately half of the Company's former telephone directory facility, which had been vacant; the Company donated the remainder of the facility. Capital expenditures included additions and upgrades to binding equipment, continued improvements to Company communication and information systems and approximately $2.5 million to expand the Company's plant in Pennsylvania. As discussed below, this project is scheduled to be completed in early fiscal 1997 with remaining costs of approximately $1 million. Fiscal 1997 capital expenditures are expected to approximate the fiscal 1996 level.
Financing activities utilized approximately $0.8 million of cash in 1996, primarily related to dividend payments of approximately $1.0 million. Proceeds received from Company stock plans were $0.3 million while aggregate long-term borrowings decreased by $0.1 million. In April 1996, the Company received $1.2 million of industrial development bond financing at a 3% interest rate in connection with the fiscal 1995 purchase of a formerly leased facility in Pennsylvania. In May 1996, the Company began construction of a 100,000 square foot addition to this facility. The expansion, scheduled for completion in early fiscal 1997, will enable the Company to consolidate operations currently located in an older, multi-story facility to the newer, more efficient property. The Company has signed an agreement to sell the multi-story facility to a developer for approximately $4.6 million. Closing is scheduled for March 1997, but a number of contingencies remain. The Company has two additional buildings for sale including its former headquarters building in Lowell, MA vacated in September and a building in Raymond, NH vacated by a tenant in June.
The Company maintains an $11 million long-term revolving credit facility which matures in January 1998. This revolving credit facility contains restrictive covenants, including provisions related to the maintenance of working capital, the incurring of additional indebtedness and a quarterly test of cash flow to debt service. In addition, the Company continues to maintain an informal bank credit line of $10 million. There were no short-term borrowings during 1996. In fiscal 1997, the Company intends to replace both the revolving credit facility and the informal bank credit line with a single $20 million long-term revolving credit facility. The Company expects that its cash from operations and available credit facilities will be sufficient to meet its cash requirements through 1997.
In November 1996, the Company announced that its Board of Directors authorized the repurchase of common shares with an aggregate purchase price of up to $3 million.
EFFECTS OF INFLATION
The Company attempts to minimize the impact of inflation on production and operating costs through cost control programs and productivity improvements. Over the past three years, the rate of inflation has remained moderate, which has allowed the Company to pass on to customers a significant portion of inflationary cost increases through price adjustments, except where otherwise dictated by competition. By accounting for most inventories on a LIFO basis, the earnings reported in the Company's financial statements more closely approximates the level of earnings which would be reported if measured in terms of constant, current value dollars.
COURIER CORPORATION
S-1