Sales in fiscal 1999 increased 8% to $164.0 million compared to $151.6 million in fiscal 1998. Sales from the Company's core book manufacturing segment were also up 8% for the year reflecting increased sales across all of the Company's major publishing markets. The Company's customized education segment consists of The Home School and Copyright Management Services (CMS). The Home School, which was acquired on September 30, 1997, is a direct marketer of books and other educational products for supplementing or replacing traditional education with home-based learning. CMS provides customized coursepacks and copyright clearance services primarily to colleges and universities. Revenues from these two newer businesses grew by 37% in fiscal 1999 to $2.8 million. Total sales in fiscal 1998 increased 15% to $151.6 million compared to $131.4 million in fiscal 1997. Sales from the Company's core book manufacturing segment increased 14% over fiscal 1997. Strong sales to educational and religious publishers provided much of the growth, while sales to software customers continued to drop, reflecting a reduction in the use of printed instruction manuals. The acquisition in July 1997 of Book-mart Press, Inc. ("Book-mart"), a short-run book manufacturer, accounted for approximately half of the fiscal 1998 sales increase. Sales from the Company's two newer businesses, The Home School and CMS, added approximately $1.6 million in revenues in fiscal 1998.

Gross profit increased to $40.8 million in fiscal 1999, up 8% from $37.7 million in fiscal 1998. The increase in gross profit reflects the impact of the increased sales volume. As a percentage of sales, gross profit was comparable to fiscal 1998 at 25% of sales. Gross profits in fiscal 1998 increased by $9.6 million or 34% and, as a percentage of sales, increased to 25% from 21% in fiscal 1997. The improvement in gross profits in fiscal 1997 resulted from increased sales volume and an improved mix of sales combined with productivity gains and cost savings. Inflation has not had a significant impact on the Company's gross profits, nor on its overall operations, during the past three years.

Selling and administrative expenses increased to $27.7 million in fiscal 1999, up 4% from $26.7 million in fiscal 1998. The increase was due to costs associated with improvements to the Company's information systems and to expenses which relate directly to the increase in profitability. As a percentage of sales, selling and administrative expenses decreased to 17% from 18% last year. Selling and administrative expenses increased to $26.7 million in 1998 from $20.9 million in 1997 and, as a percentage of sales, were 18% in 1998 compared to 16% in 1997. The increase as a percentage of sales resulted from increased expenses of approximately $1 million for improvements to the Company's information systems and infrastructure, including expenses related to "Year 2000" remediation efforts, incremental selling and marketing expenses of approximately $1 million associated with the Company's newer businesses, The Home School and CMS, goodwill amortization of approximately $0.5 million related to the acquisition of Book-mart, and other expenses that relate directly to the increase in profitability.

Interest expense was $0.5 million in fiscal 1999 compared to $1.3 million in fiscal 1998, reflecting a reduction in average borrowings of $13 million due to cash generated from operations as well as a slightly lower average interest rate in fiscal 1999. Interest expense was $1.3 million in fiscal 1998 compared to $0.9 million in fiscal 1997, reflecting increased average borrowings of approximately $6 million. Increased borrowings of approximately $16 million to finance the acquisitions of Book-mart and The Home School were offset by cash generated from operations which reduced borrowings by approximately $12 million during fiscal 1998.

Other income (expense) in fiscal 1998 resulted from a gain on the sale of a former manufacturing facility in Philadelphia. During fiscal 1997, the Company had completed the consolidation of its operations in Philadelphia from this older facility to a recently expanded, more efficient manufacturing facility also in Philadelphia. The selling price of the facility was $4.6 million, resulting in a pretax gain of approximately $2.0 million and an after-tax gain of approximately $1.1 million, or $.34 per diluted share. In fiscal 1997, other income (expense) resulted from a pretax loss of approximately $0.3 million from the Company's donation of its former corporate headquarters. The donation had no impact on fiscal 1997 net income as the pretax loss was offset by a comparable tax benefit.

The Company's effective tax rate for fiscal 1999 was 33% compared to 34% for fiscal 1998. The decrease was due to higher state and local taxes in the prior year related to the sale of the Philadelphia real estate, as well as an increased benefit from export related income in fiscal 1999. The Company's effective tax rate for fiscal 1998 was 34% compared to 33% for fiscal 1997, exclusive of the $0.3 million tax benefit related to the donation of property in fiscal 1997. The 1998 tax rate was higher than fiscal 1997 primarily due to nondeductible goodwill related to the acquisition of Book-mart.

Net income was $8.4 million in fiscal 1999, up 27% over last year's net income of approximately $6.6 million, when adjusted to exclude the after-tax gain from the sale of real estate of approximately $1.1 million. Net income per share on a diluted basis increased 24% to $2.52 per share compared to $2.03 per diluted share in fiscal 1998, after adjusting to exclude the real estate gain of $.34 per share. Pretax earnings from the Company's core book manufacturing operations increased to $15.2 million, a 19% increase over last year, reflecting increased sales volume. The Company's newer businesses, CMS and The Home School, reduced fiscal 1999 pretax earnings by $2.6 million, or $.52 per diluted share, compared to a reduction of $3.1 million pretax, or $.62 per diluted share, last year. Net income for fiscal 1998, including the real estate gain, was $7.7 million or $2.37 per diluted share, compared to $4.3 million, or $1.41 per diluted share, for fiscal 1997. The increase in net income in fiscal 1998, in addition to the real estate gain, was due to a significant increase in sales and gross profits. Pretax earnings from the Company's core book manufacturing operations increased to $12.8 million in fiscal 1998, a 62% increase over fiscal 1997. The customized education segment, CMS and The Home School, reduced fiscal 1998 pretax earnings by $3.1 million, or $.62 per diluted share, compared to a reduction of $1.6 million in pretax earnings, or $.33 per diluted share, in fiscal 1997.

For purposes of computing diluted net income per share, weighted average shares outstanding increased by approximately 65,000 shares in fiscal 1999, primarily due to shares exercised under the Company's stock option plans. Similarly, weighted average shares outstanding increased by approximately 187,000 shares in fiscal 1998. The increase was due to shares exercised under the stock option plans, shares issued as compensation for noncompetition agreements pursuant to a business acquisition, and the impact of potentially dilutive shares which increased primarily due to the increase in the price per share of the Company's stock.

On April 16, 1998, the Company announced a three-for-two stock split effected in the form of a 50% stock dividend, which was distributed on June 1, 1998 to stockholders of record on May 15, 1998. Weighted average shares outstanding and net income per share amounts have been restated to give effect to the stock split.

Effective September 27, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." Comprehensive income and net income were the same for each of the three years ended September 25, 1999. The Financial Accounting Standards Board has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as amended by SFAS No. 137 in June 1999), which will be effective in the Company's fiscal year ending September 29, 2001. The Company is currently evaluating the impact, if any, that the adoption of this new standard will have on the consolidated financial statements.

In fiscal 1999, operations provided approximately $14.4 million of cash. Net income for the year was approximately $8.4 million and depreciation and amortization were $8.3 million. Working capital utilized approximately $2.5 million of cash, primarily from an increase in accounts receivable related to the increase in sales volume.

Investment activities in 1999 used approximately $5.0 million in cash for capital expenditures for new binding equipment, computer-to-plate equipment, information systems improvements and other equipment to lower costs and improve throughput. Fiscal 2000 capital expenditures are expected to be approximately $12 million. The Company's Raymond, New Hampshire facility, which had been leased through June 1996, continues to be vacant pending sale or lease. In addition, the Company intends to sell the old, unoccupied and underutilized portions of its multi-building manufacturing complex in Westford, Massachusetts, which would result in reductions in building operating costs while maintaining current levels of book manufacturing at the site.

Financing activities used approximately $6.6 million of cash, $5.6 million of which was used to reduce long-term debt. Dividend payments were $1.4 million and proceeds from the Company's stock plans were $0.7 million, primarily from the exercise of stock options. During 1999, the Company repurchased a block of 20,000 shares of its common stock for $0.5 million because the Company believed the stock was attractively priced. At September 25, 1999, the Company had no borrowings under its $30 million long-term revolving credit facility. During 1999, the maturity of this revolving credit facility was extended to March 2002.

The Company does not hold any derivative financial instruments, derivative commodity instruments or other financial instruments except as noted in Note A to the financial statements. The Company engages neither in speculative nor derivative trading activities.

The Company expects that its cash from operations and available credit facilities will be sufficient to meet its cash requirements through 2000.

The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act.

Historically, many computer programs were written using two digits rather than four to specify the year. Such software may recognize the year 2000 as "00" which could result in computer system failures or miscalculations, commonly referred to as the Year 2000 (Y2K) issue. The Company recognizes the need to ensure that its operations will not be adversely impacted by a Year 2000 software failure. Incomplete or untimely resolution of the Y2K issue by the Company, key suppliers, customers and other parties could have a material adverse effect on the Company's results of operations, financial condition and cash flows. The Company established a Year 2000 Management Task Force to address the Y2K issue. This Task Force is coordinating efforts to identify, assess and implement changes to information technology ("IT") systems and operational systems such as presses and binders, telecommunications equipment, building security and environmental controls, and is evaluating the Y2K readiness of key suppliers, customers and other parties.

Operational systems have been inventoried and assessment and testing have been completed. Less than 2% of operational systems were found to be non-compliant. Remediation has been completed.

The Company completed inventories and assessments of its IT systems in use at each of its locations and determined that many of the IT systems were not compliant. The Company has replaced or upgraded these systems with enterprise-wide systems across all of the Company's operations, utilizing a common IT infrastructure which collectively is designed to give the Company the benefit of new technology with enhanced functionality and resultant improvements in service and productivity. Implementation and testing to verify compliance of the IT systems has been completed.

The Company has assessed the Y2K readiness of third parties (including suppliers, financial institutions and customers) with which it has a material relationship to identify potentially non-compliant parties. The Company has performed site visits and continues to actively work with the key suppliers of raw materials, such as paper mills and film and plate manufacturers. The Company believes that its most reasonably likely, worst-case Y2K scenario may involve non-compliant third parties, including suppliers of utilities. The Company is continually assessing the degree of exposure and risk of non-compliance by such third parties, which could include possible consequences such as temporary plant disruptions and delays in the receipt of key materials, the receipt of orders, the delivery of finished products and the preparation of invoices. The Company has developed contingency plans to establish processes and procedures for responding to potential Y2K-related disruptions.

The Company estimates the cost of achieving Y2K compliance to be approximately $1.8 million of which approximately half will be capital expenditures, primarily for new IT systems. Costs incurred in fiscal 1999 directly related to Y2K remediation were approximately $0.8 million bringing total costs to date to approximately $1.6 million, of which approximately $0.7 million was expensed. The Y2K costs have been funded through operating cash flows. The Company does not separately track internal costs incurred for the Y2K project, particularly the payroll costs of its engineering and information technology groups.

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 certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated. Factors that could affect actual results include, among others, changes in customers' demand for the Company's products, changes in raw material costs and availability, seasonal changes in customer orders, pricing actions by competitors, consolidation among customers, success in the integration of acquired businesses, Year 2000 issues, and general changes in economic conditions. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements will prove to be accurate. The forward-looking statements included herein are made as of the date hereof, and the Company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances.