UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number ____________
VON HOFFMANN HOLDINGS INC.
VON HOFFMANN CORPORATION*
(Exact name of registrants as specified in their charters)
DELAWARE 22-1661746
DELAWARE 43-0633003
------------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
1000 CAMERA AVENUE, ST. LOUIS, MISSOURI 63126
- ------------------------------------------- ---------------------------------
1000 CAMERA AVENUE, ST. LOUIS, MISSOURI 63126
(Address of principal executive offices) (Zip Code)
(314) 966-0909
(314) 966-0909
----------------------------------------------------------
Registrants' telephone number, including area code
Indicate by check mark whether the registrants (1) have 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 registrants were required to
file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Number of shares of common stock, par value $0.01 per share,
of Von Hoffmann Holdings Inc. outstanding at November 11, 2002: 71,594,444
* Von Hoffmann Corporation meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing with
the reduced disclosure format.
VON HOFFMAN HOLDINGS INC.
VON HOFFMANN CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements of Von Hoffmann Holdings Inc. and Subsidiaries:
Consolidated Balance Sheets as of December 31, 2001, September 30, 2001 and September 30, 2002..................3
Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2002...........5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2002.....................7
Notes to Consolidated Unaudited Financial Statements............................................................9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................15
Item 3. Quantitative and Qualitative Disclosure about Market Risk......................................................23
Item 4. Controls and Procedures........................................................................................23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................................24
Item 2. Changes in Securities..........................................................................................24
Item 3. Defaults Upon Senior Securities................................................................................24
Item 4. Submission of Matters to a Vote of Security Holders............................................................24
Item 5. Other Information..............................................................................................24
Item 6. Exhibits and Reports on Form 8-K...............................................................................24
SIGNATURES ..................................................................................................................25
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VON HOFFMANN HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 September 30, 2001 September 30, 2002
(Unaudited) (Unaudited)
----------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $18,319,923 $5,123,729 $7,110,150
Trade accounts receivable, less allowance for doubtful
accounts of $563,957 at December 31, 2001, $498,466 at
September 30, 2001 and $475,085 at September 30, 2002 46,750,791 51,821,193 51,694,107
Inventories 23,261,846 29,181,657 30,939,510
Income taxes refundable 2,456,573 316,583 1,451,211
Prepaid expenses 595,951 898,813 1,169,231
----------------------------------------------------------------
Total current assets 91,385,084 87,341,975 92,364,209
Deferred debt issuance cost, net of accumulated amortization
of $7,441,351 at December 31, 2001, $6,944,580
at September 30, 2001, and $2,747,540 at September 30, 2002 5,467,105 5,963,876 11,606,556
Property, plant, and equipment:
Buildings and improvements 46,467,711 46,437,003 47,027,635
Machinery and equipment 221,004,588 219,754,769 224,195,016
Transportation equipment 2,815,781 2,882,809 841,599
Furniture and fixtures 9,853,461 9,737,848 10,773,401
----------------------------------------------------------------
280,141,541 278,812,429 282,837,651
Allowance for depreciation and amortization (138,471,747) (129,254,202) (156,696,912)
----------------------------------------------------------------
141,669,794 149,558,227 126,140,739
Installation in process 1,912,618 6,020,411 1,677,345
Land 4,894,397 4,894,397 4,894,397
----------------------------------------------------------------
148,476,809 160,473,035 132,712,481
Goodwill, net of accumulated amortization of $38,805,103 at
December 31, 2001, $36,537,339 at September 30, 2001 and
$38,805,103 at September 30, 2002
183,200,984 185,468,748 189,854,558
Covenant not to compete, net of accumulated amortization of
$781,819 at December 31, 2001, $727,273 at September 30, 2001,
and $945,555 at September 30, 2002
218,181 272,727 54,546
----------------------------------------------------------------
$428,748,163 $439,520,361 $426,592,350
================================================================
See notes to consolidated unaudited financial statements.
3
December 31 September 30 September 30,
2001 2002 2002
(Unaudited) (Unaudited)
----------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $10,360,658 $8,139,713 $15,346,181
Other accrued expenses 4,088,933 10,055,720 11,884,266
Salaries and wages 9,257,062 10,507,389 8,859,326
Taxes, other than income taxes 681,215 1,556,458 1,602,100
Current portion of long-term debt 29,235,592 33,235,592 -
Deferred income taxes 1,161,582 665,752 1,161,582
----------------------------------------------------------------
Total current liabilities 54,785,042 64,160,624 38,853,455
Long-term liabilities and reserves:
Deferred income taxes 9,656,093 8,231,483 9,308,133
Senior secured credit agreement - revolving loan 23,000,000 12,000,000 4,000,000
Senior secured credit agreement - term loans 189,319,331 191,378,229 -
Senior notes - - 215,000,000
Senior subordinated notes 100,000,000 100,000,000 100,000,000
Subordinated exchange debentures 43,016,132 41,450,106 34,411,425
----------------------------------------------------------------
364,991,556 353,059,818 362,719,558
Stockholders' equity (deficit):
Common stock; $0.01 par value per share; 150,000,000 shares authorized;
51,594,444 shares issued at December 31, 2001 and September 30, 2001 and
71,594,444 shares issued at September 30, 2002
515,944 515,944 715,944
Additional paid-in capital 59,980,698 59,980,698 86,434,272
Accumulated deficit (49,943,911) (36,649,287) (53,219,471)
Treasury stock; at cost, 60,000 shares at December 31,
2001 and September 30, 2001 and 8,290,000 shares at
September 30, 2002 (90,000) (90,000) (8,320,000)
Notes receivable from the sale of stock and accrued interest
(1,491,166) (1,457,436) (591,408)
----------------------------------------------------------------
Total stockholders' equity 8,971,565 22,299,919 25,019,337
----------------------------------------------------------------
$ 428,748,163 $439,520,361 $426,592,350
================================================================
See notes to consolidated unaudited financial statements.
4
VON HOFFMANN HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
2001 2002
-------------------------------------------
Net sales $107,451,937 $108,054,283
Cost of products and services 91,607,002 91,743,442
-------------------------------------------
Gross profit 15,844,935 16,310,841
Operating expenses:
Selling and administrative expenses 7,590,442 5,864,034
Noncompete and special consulting expenses 403,565 518,469
Restructuring charges 802,915 -
-------------------------------------------
8,796,922 6,382,503
-------------------------------------------
Income from operations 7,048,013 9,928,338
Interest income 73,223 66,417
Loss on disposal of depreciable assets (97,038) (423,525)
Gain on debt extinguishment - 3,404,466
Interest expense - subsidiary 7,513,092 9,043,234
Interest expense - subordinated exchange debentures 1,516,924 981,562
-------------------------------------------
9,053,831 6,977,438
-------------------------------------------
Income (loss) before income taxes (2,005,818) 2,950,900
Income tax provision (benefit) (220,956) 2,701,454
-------------------------------------------
Net income (loss) $(1,784,862) $249,446
===========================================
Net income (loss) per common share:
Basic $(0.03) -
===========================================
Diluted $(0.03) -
===========================================
Average number of shares outstanding:
Basic 51,534,444 63,750,488
===========================================
Diluted 51,534,444 68,700,488
===========================================
See notes to consolidated unaudited financial statements.
5
VON HOFFMANN HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2002
--------------------------------------------
Net sales $ 334,193,177 $ 302,745,750
Cost of products and services 281,174,108 257,194,450
--------------------------------------------
Gross profit 53,019,069 45,551,300
Operating expenses:
Selling and administrative expenses 24,821,098 20,028,719
Noncompete and special consulting expenses 622,568 2,231,441
Restructuring charges 1,252,915 -
--------------------------------------------
26,696,581 22,260,160
--------------------------------------------
Income from operations 26,322,488 23,291,140
Interest income 199,286 430,298
Gain (loss) on disposal of depreciable assets (254,221) 2,587,903
Gain on debt extinguishment, net - 279,818
Interest expense - subsidiary 25,653,572 24,893,229
Interest expense - subordinated exchange debentures 4,416,775 4,259,968
--------------------------------------------
30,125,282 25,855,178
--------------------------------------------
Loss before income taxes (3,802,794) (2,564,038)
Income tax provision (benefit) (418,916) 711,523
--------------------------------------------
Net loss $ (3,383,878) $(3,275,561)
============================================
Net loss per common share:
Basic $ (0.07) $ (0.05)
============================================
Diluted $ (0.07) $ (0.05)
============================================
Average number of shares outstanding:
Basic 51,574,444 62,701,697
============================================
Diluted 51,574,444 62,701,697
============================================
See notes to consolidated unaudited financial statements.
6
VON HOFFMANN HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2002
--------------------------------------------------------
OPERATING ACTIVITIES
Net loss $(3,383,878) $(3,275,561)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation 28,276,296 23,631,094
Amortization of intangibles 6,966,924 163,636
Amortization of debt issuance costs 1,490,313 1,517,701
Loss (gain) on sale of equipment 254,221 (2,587,903)
Gain on debt extinguishment, net - (279,818)
Provision for deferred income taxes (4,757,121) (401,267)
Accrued interest on subordinated exchange debentures 4,416,775 4,259,968
Accrued interest on notes from the sale of stock (55,350) (81,489)
Changes in operating assets and liabilities:
Trade accounts receivable 6,078,041 (4,943,316)
Inventories 6,935,462 (7,677,664)
Income taxes refundable and income taxes payable 722,027 1,058,669
Prepaid expenses 145,453 (573,280)
Trade accounts payable (6,551,889) 4,985,523
Other accrued expenses 6,410,772 7,795,334
Salaries and wages 1,986,899 (397,736)
Taxes, other than income taxes 717,883 920,885
---------------------------------------------------------
Net cash provided by operating activities 49,652,828 24,114,776
See notes to consolidated unaudited financial statements.
7
VON HOFFMANN HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2002
-----------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (22,057,945) (10,201,555)
Proceeds from sale of equipment 107,932 4,922,692
-----------------------------------------------------
Net cash used in investing activities (21,950,013) (5,278,863)
FINANCING ACTIVITIES
Payments of debt issuance costs (13,563) (10,781,800)
Net payments - revolving loan (21,000,000) (19,000,000)
Net payments - acquisition loan - (21,000,000)
Payments on senior secured debt - term loans (7,161,179) (197,554,923)
Proceeds from issuance of senior notes - 215,000,000
Payments on subordinated exchange debentures - (9,460,210)
Purchase of treasury stock (90,000) (8,230,000)
Repayment of notes on sale of stock - 981,247
Issuance of common stock - 20,000,000
-----------------------------------------------------
Net cash used in financing activities (28,264,742) (30,045,686)
-----------------------------------------------------
Net decrease in cash and cash equivalents (561,927) (11,209,773)
Cash and cash equivalents at beginning
of period 5,685,656 18,319,923
-----------------------------------------------------
Cash and cash equivalents at end of period $5,123,729 $7,110,150
=====================================================
See notes to consolidated unaudited financial statements.
8
VON HOFFMANN HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of Von Hoffmann
Holdings Inc. (formerly known as Von Hoffmann Corporation) and its wholly owned
subsidiaries (the "Company") have been prepared in accordance with instructions
to Form 10-Q and reflect all adjustments which management believes necessary
(which include only normal recurring accruals and the effect on LIFO inventory
valuations of estimated inflationary cost increases and year-end inventory
levels) to present fairly the results of operations. These statements, however,
do not include all information and footnotes necessary for a complete
presentation of the Company's financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in the United
States. The consolidated unaudited financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Registration Statement on Form S-1, as filed with the Securities
and Exchange Commission on June 21, 2002 relating to the Company's 13 1/2%
Subordinated Exchange Debentures due 2009, 10 1/4% Senior Notes due 2009 and the
related guarantees and 10 3/8% Senior Subordinated Notes due 2007 and the
related guarantees.
Diluted earnings per share for the three-month period ended September
30, 2001 do not include 6,400,139 common stock equivalents because they were
anti-dilutive. Diluted earnings per share for the nine-month periods ended
September 30, 2001 and September 30, 2002 do not include 6,556,498 and 4,950,000
common stock equivalents, respectively, because they were anti-dilutive.
The Company's business is subject to seasonal influences, therefore,
interim results may not necessarily be indicative of results which may be
expected for any other interim period or for the year as a whole.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Von Hoffmann Corporation (formerly
known as Von Hoffmann Press, Inc.) (the "Subsidiary"), and its wholly owned
subsidiaries: Von Hoffmann Graphics, Inc., H&S Graphics, Inc., Preface, Inc.,
One Thousand Realty and Investment Company, and Precision Offset Printing
Company, Inc. Effective February 25, 2002, Von Hoffmann Graphics, Inc. was
merged into the Subsidiary. Intercompany accounts and transactions have been
eliminated.
2. RECAPITALIZATION RESTATED TO A PURCHASE
Effective May 22, 1997, a leverage recapitalization of the Company
took place (the "Recapitalization") pursuant to which:
1. The Company executed a credit agreement with a syndicate of
financial institutions representing the senior secured credit
9
facility (the "Credit Agreement") in an aggregate amount of $200
million. Initial proceeds from the senior secured credit facility
were $125 million.
2. The Company issued $100 million of senior subordinated notes.
3. In exchange for $67.1 million, DLJ Merchant Banking Partners II
acquired approximately 84% of the new common stock of the
Company, redeemable preferred stock, and warrants to purchase
additional shares of new common stock of the Company. On November
16, 1998, the preferred stock was converted into 13.5 percent
subordinated exchange debentures at the then accreted value of
$30.4 million.
4. The Company redeemed/exchanged the existing common stock of the
Company owned by ZS VH L.P. ("ZS") for (a) cash of $288.8 million
and (b) 10% of the new common stock of the Company.
5. The Company exchanged the existing common stock of the company
owned by Robert A. Uhlenhop (Uhlenhop), the Company's former
president and chief executive officer, for approximately 2.5% of
the new common stock of the Company. In exchange for $0.3 million
in cash and $0.5 million of notes receivable, Uhlenhop acquired
an additional 1.5% of the new common stock in the Company.
6. In exchange for $0.4 million in cash and $0.4 million of notes
receivable, certain other management personnel acquired the
remaining 2.0% of the new common stock in the Company.
7. Costs incurred by the Company related to the recapitalization
were approximately $5.9 million and were expressed in the
predecessor financial statements.
Through June 20, 2002, the Company accounted for the May 22, 1997
Recapitalization transaction using the historical basis of the Company's
existing assets and liabilities (i.e., "recapitalization accounting") because
there was substantive continuing voting ownership by ZS. Because of the events
described below and the rules in SEC Staff Accounting Bulletin 54 ("SAB 54"),
the Company was required to retroactively pushdown the new owners' basis to the
Company's separate financial statements - as if it were a new entity as of May
22, 1997.
During 2002, the Company had the following equity transactions:
o On March 26, 2002, the Company issued 20 million shares of its
common stock to its majority shareholder for $20 million in cash.
o On June 21, 2002, the Company purchased all 5 million shares of
common stock owned by ZS for $5.0 million in cash.
o On June 21, 2002, the Company purchased all 2 million shares of
common stock owned by Uhlenhop for $2.0 million, consisting of
approximately $1.2 million in cash and settlement of a note
receivable of approximately $0.8 million.
10
o During the third quarter of 2002, the Company purchased
approximately 1.2 million shares of common stock, owned by former
employees for approximately $1.2 million in cash.
As a result of the March 26, 2002 transaction, the majority owners of
the company owned approximately 89% of the Company's common stock. In accordance
with SAB 54, recapitalization accounting could no longer be used and the new
owners' "purchase accounting" basis had to be pushed-down to the Company's
financial statements as if it had occurred May 22, 1997. The accompanying
financial statements reflect this retroactive application and, accordingly, the
2001 balances have been restated from their recapitalization accounting
presentation in past financial statements issued by the Company.
The application of purchase accounting for the May 22, 1997 partial
purchase by the new owners and the March 26, 2002 purchase by the majority
stockholder resulted in the following adjustments as of December 31, 2001 and
September 30, 2001 and for the three and nine months ended September 30, 2001:
DECEMBER 31, 2001 SEPTEMBER 30, 2001
PREVIOUSLY RESTATED PREVIOUSLY RESTATED
REPORTED BALANCE REPORTED BALANCE
BALANCE SHEETS:
Inventories $15,789,157 $23,261,846 $21,713,463 $29,181,657
Property, plant and equipment, net 137,709,574 148,476,809 142,571,912 160,473,035
Goodwill, net 39,267,433 183,200,984 39,772,745 185,468,748
Net deferred income tax liability 4,116,548 10,817,675 5,225,246 8,897,235
Total stockholders' equity (deficit) (146,550,783) 8,971,565 (145,093,412) 22,299,919
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
PREVIOUSLY RESTATED PREVIOUSLY RESTATED
REPORTED BALANCE REPORTED BALANCE
STATEMENT OF OPERATIONS:
Cost of products andf services $88,414,954 $91,607,002 $271,721,515 $281,174,108
Selling and administrative
expenses 5,663,446 7,590,442 18,923,114 24,821,098
Loss on disposal of depreciable
assets (97,038) (97,038) (237,259) (254,221)
Income tax provision (benefit) 1,335,858 (220,956) 4,847,580 (418,916)
Net income (loss) 1,777,347 (1,784,862) 6,717,165 (3,383,878)
Basic earnings (loss) per share $0.03 $(0.03) $0.12 $(0.07)
Diluted earnings (loss) per share $0.03 $(0.03) $0.12 $(0.07)
The March 26, 2002 acquisition by the majority stockholder of the
newly issued shares, the June 21, 2002 acquisitions by the Company of all shares
of common stock held by ZS and Uhlenhop and the third quarter common stock
repurchases resulted in additional purchase accounting basis being pushed down
to the Company. Such push-down resulted in additional goodwill of approximately
11
$6.7 million being recorded by the Company in 2002, of which approximately $2.5
million was recorded in March 2002, $3.6 million was recorded in June 2002 and
$0.6 million was recorded in third quarter of 2002.
3. INVENTORIES
Inventories are priced at cost using the last-in, first-out (LIFO)
method that does not exceed market, for the year-end period reported. The
Company does not anticipate a material adjustment to the year-end LIFO reserve
and thus, no quarterly LIFO adjustment has been made.
Inventories are comprised of the following amounts:
DECEMBER, 2001 SEPTEMBER 30, 2001 SEPTEMBER 30, 2002
Raw Materials $18,504,261 $22,762,948 $18,620,709
Work In Process 6,549,530 7,952,855 14,110,746
----------- ----------- -----------
25,053,791 30,715,803 32,731,455
Less: LIFO Reserve 1,791,945 1,534,146 1,791,945
----------- ----------- -----------
$23,261,846 $29,181,657 $30,939,510
=========== =========== ===========
4. RESTRUCTURING CHARGE
During 2001, the Company closed the sheet-fed printing, stripping,
and platemaking operations of its St. Louis, Missouri manufacturing location.
The majority of these operations were transferred to the Owensville, Missouri
manufacturing location of Von Hoffmann Graphics, Inc. Additionally, the Company
reduced the workforce at the Company's St. Louis, Missouri manufacturing
location. Lastly, the Company closed its Owensville, Missouri manufacturing
location. These operations and certain related assets were consolidated into the
Company's Jefferson City, Missouri manufacturing locations. As a result of these
restructurings, the Company recorded total restructuring expenses of
approximately $1,476,000 ($802,915 reflected in the third quarter of 2001)
consisting mainly of employee severance and equipment relocation costs in 2001.
The Company utilized approximately $1,370,000 in 2001 and $106,000 in the first
quarter of 2002. We have no remaining liability associated with the
restructuring.
5. LONG TERM DEBT
On March 26, 2002, the Subsidiary entered into a Senior Secured
Credit Agreement (the "New Credit Agreement") that includes a revolving loan
commitment of $90,000,000. The New Credit Agreement is secured by accounts
receivable and inventory as well as by property, plant and equipment. At the
Company's one-time option, the available borrowing base may be increased to
provide borrowings of up to $100,000,000, subject to finding lenders to provide
such increase. The New Credit Agreement expires November 15, 2006.
In addition, on March 26, 2002, the Subsidiary issued $215 million
Senior Notes, due March 15, 2009 (the "2009 Senior Notes") at an interest rate
of 10.25 percent. The proceeds from the New Credit Agreement and the 2009 Senior
Notes were used to pay off all outstanding balances under the Company's prior
credit agreement.
12
As a result of the extinguishment of the prior credit agreement in
the first quarter, the Company recognized a loss of $3.1 million, reflected
within the gain on debt extinguishment. The loss represents the write-off of
deferred debt issuance costs associated with the prior credit agreement.
During the third quarter of 2002, the Company purchased approximately
28.3% of its outstanding subordinated exchange debentures for approximately $9.5
million. The purchase price of these debt instruments was less than the carrying
value, resulting in a gain on the transaction of $3.4 million.
6. ACCOUNTING CHANGES
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"), which addressed
financial accounting and reporting for the impairment or disposal of long-lived
assets and superceded SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations" for a disposal of a segment of a business. FAS 144 became effective
for fiscal years beginning after December 15, 2001. We adopted FAS 144 as of
January 1, 2002 and the adoption of the statement has not had a material effect
on our financial position and results operations.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 requires business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method. SFAS No. 141 also further clarifies the criteria for
recognition of intangible assets separately from goodwill. The adoption of this
standard did not have any effect on the Company's accounting for prior business
acquisitions.
Under SFAS No. 142 goodwill is no longer amortized, but is subject to
annual impairment tests. Accordingly, as of January 1, 2002, the Company no
longer amortizes goodwill. The Company performed a transitional impairment test
of our existing goodwill during the second quarter of 2002. The Company did not
recognize any impairment of goodwill in connection with the initial transitional
impairment test.
If goodwill amortization was not recorded in the three month period
ended September 30, 2001, third quarter fiscal 2001 adjusted net loss and basic
and diluted adjusted loss per share would be net income of approximately $0.4
million and basic and diluted income per share of $0.01 and $0.01 per share,
respectively. For the nine-month period ended September 30, 2001, adjusted net
loss and basic and diluted adjusted loss per share would be net income of
approximately $3.3 million and basic and diluted earnings per share of $0.06 and
$0.06 per share, respectively.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB statement No. 13, and Technical Corrections" ("SFAS 145"). Under SFAS 145,
gains and losses on extinguishments of debt are to be classified as income or
loss from continuing operations rather than extraordinary items. Adoption of
13
this Statement is required for fiscal years beginning after May 15, 2002. We
adopted SFAS 145 effective for interim periods subsequent to June 30, 2002,
which required restatement of all comparative periods presented. The Statement
of Operations for the nine-months ended September 30, 2002 reflects the
restatement of previously recorded extraordinary loss of approximately $2.0
million, net of tax benefit of approximately $1.2 million, classified as gain on
debt extinguishment, net. Adoption of this new accounting standard did not have
impact on net income (loss) during the current reported periods and is not
expected to significantly impact net income in the future.
7. RELATED PARTY TRANSACTION
As part of the financing activity in 2002 discussed in Note 5, the
Company paid consulting fees associated with formulation of financial
strategies, as reflected in non-compete and special consulting expenses for the
nine-month period ended September 30, 2002, to Credit Suisse First Boston
Corporation ("Credit Suisse"), an affiliate of the majority stockholder in the
Company, of approximately $1.0 million. In addition, the Company paid fees
associated with the 2009 Senior Notes and New Credit Agreement, as reflected in
deferred debt issuance cost at September 30, 2002, to Credit Suisse of
approximately $8.2 million. The Company believes the compensation received by
Credit Suisse in these transactions was no less favorable than what could have
been obtained from independent third parties.
8. UHLENHOP AGREEMENT
On June 21, 2002, the Company and Uhlenhop amended his employment
agreement and at that time the Company paid Uhlenhop a one-time cash payment on
an after tax basis of $1.0 million. The Company recorded an expense, as
reflected in selling and administrative expense in the nine-month period ended
September 30, 2002, of approximately $1.8 million.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
This discussion and analysis of our financial condition and results
of operations should be read in conjunction with the consolidated financial
statements, including the notes thereto, included elsewhere in this quarterly
report. Certain statements in this section are forward-looking statements. See
"Forward-Looking Statements."
GENERAL
We manufacture case-bound and soft-cover instructional materials in
the United States. Our products are sold principally to educational publishers
who, in turn, sell them into the elementary and high school ("ELHI") and college
instructional materials markets. In addition to instructional materials
manufacturing, we provide our customers with a full range of value-added
printing and design services from early design processes to final manufacture
and distribution of our products. We additionally manufacture products sold to
the commercial market place where we target business-to-business catalog
manufacturers, the federal government printing office, trade publishers,
health-care catalog manufacturers, the financial services industry and numerous
other small niches.
Our sales of products and services are affected by a number of
factors, including the ELHI textbook adoption process, general economic
conditions and market seasonality. Our sales of instructional materials, from
which we derived 68% of our net sales in 2001, are also affected over the long
term by demographic trends in ELHI and college enrollment.
The textbook adoption process, around which ELHI book publishers
schedule the timing of new textbook introductions, is typically limited to a
small number of disciplines in any state in any given year. Adoptions in core
disciplines such as reading, mathematics or science in larger states such as
California, Texas or Florida, however, can lead to significant increases in net
sales in a given year. Additionally, orders for reprints associated with a
textbook awarded through the adoption process can generate significant revenues
during the adoption cycle, which can range from four to eight years, depending
on the subject matter and the state. Non-adoption, or open territory states,
tend to follow the lead provided by adoption states as many new titles are
brought to the market in specific response to the adoption schedule.
Our net sales of products and services are also affected by general
economic conditions. In particular, net sales to the instructional materials
market are affected as the majority of public funding for education comes from
state and local tax revenues, which have a direct correlation with prevailing
economic activity levels. Product demand and our sales in the segments of the
commercial market we serve is also sensitive to economic conditions
We experience seasonal market fluctuations in our net sales and
production for the educational textbook and commercial markets. State and local
textbook purchasing and delivery schedules significantly influence the
seasonality of the demand for our products in these areas. The purchasing
schedule for the ELHI markets usually starts in the spring and peaks in the
summer months preceding the start of the school year. The majority of college
textbook sales occur from June through August and November through January. Our
net sales to the commercial market tend to peak in the third and fourth
15
quarters, with the fourth quarter representing the strongest quarter. Net sales
of our digital pre-press and composition businesses tend to precede the peak
production periods for textbook manufacturing by a quarter with our business
peaking in the first and second quarters of our calendar fiscal year.
During 2001, we reduced the workforce and closed, transferred and
consolidated certain manufacturing locations (the "Restructuring"). In
particular, we closed the sheet-fed printing, striping, and platemaking
operations of our St. Louis, Missouri, manufacturing locations, transferring a
majority of those operations to the Owensville, Missouri manufacturing location.
Additionally, we reduced the workforce within our St. Louis, Missouri
manufacturing location. We also closed our Owensville, Missouri manufacturing
location, consolidating these operations and certain related assets into our
Jefferson City, Missouri, manufacturing locations. As a result of the
Restructuring, we recorded total restructuring expenses of approximately
$1,476,000 consisting mainly of employee severance and equipment relocation
costs in 2001. We have no remaining liability associated with the Restructuring.
The comparability of our results of operations have been affected
during the last two years by the June 2001 pronouncements by the Financial
Accounting Standards Board (FASB) of SFAS No. 141, Business Combinations and No.
142, Goodwill and Other Intangible Assets. Under these pronouncements, effective
for fiscal years beginning after December 15, 2001, goodwill will no longer been
amortized but will be subject to annual impairment tests. Other intangible
assets will continue to be amortized over their useful lives.
We began applying the new rules on accounting for goodwill and other
intangible assets in the first quarter of 2002. As a result, we no longer
amortize goodwill for acquisitions, including our acquisition by our majority
stockholder. Accordingly, we did not record any amortization for goodwill for
the nine-month period ended September 30, 2002 as compared to the $6.8 million
recorded for the nine-month period ended September 30, 2001.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001
Net Sales. Net sales increased $0.6 million, or 0.6%, from $107.5
million for the quarter ended September 30, 2001 to $108.1 million for the
quarter ended September 30, 2002. The increase was primarily attributable to
growth within the printing portions of the instructional materials and
commercial markets.
Cost of Products and Services. Costs of products and services
increased $0.1 million from $91.6 million for the quarter ended September 30,
2001 to $91.7 million for the quarter ended September 30, 2002. As a percentage
of net sales, costs of products and services decreased slightly from 85.3% for
the quarter ended September 30, 2001 to 84.9% for the quarter ended September
30, 2002. The decrease in costs of products and services as a percentage of net
sales represents the impact of cost initiatives of the Restructuring as well as
due to the mix of sales recognized during the quarter.
Gross Profit. Gross profit increased $0.5 million, or 2.9%, from
$15.8 million for the quarter ended September 30, 2001 to $16.3 million for the
quarter ended September 30, 2002. As a percentage of net sales, gross margins
16
was 14.7% for the third quarter of 2001 as compared to 15.1% for the
corresponding period in 2002. The increase in gross margin is the result of the
factors discussed above in net sales and costs of products and services.
Operating Expenses. Operating expenses decreased $2.4 million, or
27.4%, from $8.8 million for the quarter ended September 30, 2001 to $6.4
million for the quarter ended September 30, 2002. The decrease was primarily
attributable to the reduction of amortization expense by $2.3 million related to
the adoption of SFAS No. 142, Goodwill and Other Intangibles, under which
goodwill related to business acquisitions is no longer amortized. In addition,
we recognized $0.8 million associated with the Restructuring. These decreases
were offset by increased selling costs in an effort to promote growth in
targeted markets.
Gain on Debt Extinguishment. During the third quarter of 2002, our
holding company, Von Hoffmann Holdings Inc,. ("Holdings"), purchased
approximately 28.3% of its outstanding subordinated exchange debentures for
approximately $9.5 million. Holdings was able to purchase these debt instruments
at a value less than their carrying value and consequently recognized a gain on
the transaction of $3.4 million.
Interest Expense - Subsidiary. Interest expense - Subsidiary, which
reflects interest incurred by Holdings' wholly owned subsidiary, Von Hoffmann
Corporation (the "Company) and the Company's consolidated subsidiaries,
increased $1.5 million, or 20.4%, from $7.5 million for the quarter ended
September 30, 2001 to $9.0 million for the quarter ended September 30, 2002. The
increase was primarily attributable to a higher average borrowing rate of 9.94%
in the 2002 period as compared to our average borrowing rate of 7.98% in the
2001 period. The higher average borrowing rate reflected the Company's issuance
in March 2002 of $215.0 million in senior notes at a fixed interest rate of
10.25%. The proceeds of this debt were used to repay our prior credit facility
which was advanced principally on a floating LIBOR rate basis.
Interest Expense - Subordinated Exchange Debentures. Interest expense
- -Subordinated Exchange Debentures decreased $0.5 million, or 35.3%, from $1.5
million for the quarter ended September 30, 2001 to $1.0 million for the quarter
ended September 30, 2002. The decrease resulted from Holdings' repurchase of
approximately 28.3% of its outstanding subordinated exchange debentures which
was partially offset by a period to period increase arising from the interest
compounding effect on the accretion of the debenture.
Income Tax Provision (Benefit). During the third quarter of 2002, the
Company recorded a $2.7 million tax provision due to positive income before
income taxes. As part of this provision, the Company recognized approximately
$1.3 million in additional tax provision as a result of the determination that
certain interest expense associated with Holdings' subordinated exchange
debentures will not be deductible. In 2001, the Company recorded a $0.2 million
tax benefit from a loss before income taxes. The 2001 results were impacted by
certain amortization of goodwill related to acquisitions which are
non-deductible for tax purposes. With the adoption of SFAS No. 142, Goodwill and
Other Intangibles in 2002, the Company no longer amortizes goodwill for
accounting purposes.
Net Income (Loss). Net income for the quarter ended September 30,
2002 was $0.2 million compared to net loss of $1.8 million for the quarter ended
September 30, 2001. The increase in net income was primarily attributable to
17
improved operating results and the gain recognized on the repurchase of
subordinated exchange debentures offset by higher interest costs.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2002 COMPARED TO NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 2001
Net Sales. Net sales decreased $31.5 million, or 9.4%, from $334.2
million for the nine-month period ended September 30, 2001 to $302.7 million for
the nine-month period ended September 30, 2002. The decrease was primarily
attributable to decreased volume in sales to the instructional materials market,
particularly during the first quarter of 2002. The overall decrease in sales
throughout the instructional materials industry was caused by a softening
economy, reduced budgets at the state and local levels as well as a reduction in
textbook adoption activity in the major adoption states in 2002. The decrease
was partially offset by growth within the one and two-color commercial market.
Cost of Products and Services. Costs of products and services
decreased $24.0 million, or 8.5%, from $281.2 million for the nine-month period
ended September 30, 2001 to $257.2 million for the nine-month period ended
September 30, 2002. As a percentage of sales, costs of products and services
increased from 84.1% during the nine-month period ended September 30, 2001 to
85.0% for the nine-month ended September 30, 2002. The increase as a percentage
of net sales was a result of lower sales volumes and the semi-fixed nature in
the labor component. While initiatives continue to be taken to improve our cost
position, they were not sufficient to fully offset the impact of lower sales
volumes on our operations, primarily occurring during the first quarter of 2002.
Gross Profit. Gross profit decreased $7.4 million, or 14.1%, from
$53.0 million for the nine-month period ended September 30, 2001 to $45.6
million for the nine-month period ended September 30, 2002. As a percentage of
net sales, gross margin was 15.9% for the nine-month period ended September 30,
2001 as compared to 15.0% for the corresponding period in 2002. The decrease in
gross margin resulted from the factors noted above in net sales and costs of
products and services.
Operating Expenses. Operating expenses decreased $4.4 million, or
16.6%, from $26.7 million for the nine-month period ended September 30, 2001 to
$22.3 million for the nine-month period ended September 30, 2002. The decrease
was primarily attributable to a decrease in amortization expense of
approximately $6.8 million related to the adoption of SFAS No. 142, Goodwill and
Other Intangibles, under which goodwill related to business acquisitions is no
longer amortized. In addition, the Company recognized approximately $1.3 million
in restructuring charges in the first nine months of 2001 as discussed above.
The overall decrease was offset by a $1.8 million payment made to Robert
Uhlenhop, former president and chief executive officer, as part of an amendment
made to his employment agreement in March 2002. The overall decrease was also
offset by special consulting expenses of $1.0 million paid to an affiliate of
our principal stockholder in connection with the formulation of financial
strategies, including securing our New Credit Agreement and the issuance of our
senior notes, in March 2002.
Gain (Loss) on Disposal of Depreciable Assets. During the nine-month
period ended September 30, 2002, the Company reflected a gain on disposal of
18
depreciable assets of $2.6 million as compared to a loss on disposal of $0.3
million during the nine-month period ended September 30, 2001. The 2002 gain
reflected the disposition of the Company's aircraft which resulted in a gain of
approximately $4.2 million.
Gain on Debt Extinguishment, Net. On March 26, 2002, the Company
entered into a new revolving credit facility which provides for loans of up to
$90.0 million. In addition, the Company issued $215.0 million of senior notes
due 2009 which bear interest at a rate of 10.25%. The proceeds from these
transactions were used to pay off all outstanding balances under our prior
credit agreement. As a result of these transactions, we incurred a loss from the
write-off of deferred debt issuance costs of $3.1 million. This loss was a
offset by gain recognized on our purchase of Holdings' subordinated exchange
debentures of $3.4 million.
Interest Expense - Subsidiary. Interest expense - Subsidiary
decreased $0.8 million, or 3.0%, from $25.7 million for the nine-month period
ended September 30, 2001 to $24.9 million for the nine-month period ended
September 30, 2002. The decrease was a result of decreased borrowing levels as
well as lower interest rates on the floating rate component of our borrowings
during the first quarter of 2002 which was partially offset by increased
interest as a result of a higher average borrowing rate after the March 2002
debt transactions.
Interest Expense - Subordinated Exchange Debentures. Interest expense
- - Subordinated Exchange Debentures decreased $0.1 million, or 3.6%, from $4.4
million for the nine-month period ended September 30, 2001 to $4.3 million for
the nine-month period ended September 30, 2002. The decrease resulted from a
decrease in the amount of outstanding subordinated exchange debentures as a
result of the third quarter repurchase of 28.3% of the debentures offset by an
increase in interest resulting from the interest compounding effect on the
accretion of the debentures.
Income Tax Benefit. For the nine months ended September 30, 2002, the
Company recorded a $0.7 million tax provision despite a loss before income
taxes. The Company recognized approximately $1.3 million in additional tax
provision in the third quarter as a result of the determination that certain
interest expense associated with the subordinated exchange debentures will not
be deductible. In 2001, the Company recorded a $0.4 million tax benefit from a
loss before income taxes. The 2001 results were impacted by certain amortization
of goodwill related to acquisitions which are non-deductible for tax purposes.
With the adoption of SFAS No. 142, Goodwill and Other Intangibles in 2002, the
Company no longer amortizes goodwill for accounting purposes.
Net Loss. Net loss for the nine-month period ended September 30, 2002
was $3.3 million compared to a net loss of $3.4 million for the nine-month
period ended September 30, 2001. The change in net loss was primarily
attributable to the reduced operating performance in 2002 partially offset by
the gain recognized on the sale of the Company's aircraft and reduction in
amortization expense related to the adoption of SFAS No. 142, Goodwill and Other
Intangibles.
19
LIQUIDITY AND CAPITAL RESOURCES
Cash Provided by Operating Activities.
Cash provided by operations for the nine-month period ended September
30, 2002 was $24.1 million compared to $49.7 million for the nine-month period
ended September 30, 2001, a decrease of 51.4%. In 2001, the Company reduced its
net investment in working capital to lower levels as a result of reduced
activity levels. The reduced cash flow reflects the cash requirements to produce
at more typical levels in 2002. With the third quarter being the historically
peak production period, cash requirements for working capital are typically
high. Cash requirements to produce at typical levels were impacted from the
positive cash flow produced in 2001 as working capital was reduced.
Cash Used in Investing Activities
Net cash used in investing activities for the nine-month period ended
September 30, 2002 was $5.3 million, compared to $22.0 million for the
nine-month period of 2001. The reduction was primarily driven by reduced capital
expenditures as the Company shifted its focus to achieving manufacturing
efficiencies as opposed to capacity enhancement. In addition, the Company
reflected proceeds from the sale of the Company's aircraft of approximately $4.0
million in the second quarter of 2002.
Cash Used in Financing Activities
Net cash used in financing activities for the nine-month period ended
September 30, 2002 was $30.0 million compared to $28.3 million for the
nine-month period of 2001. The cash used in financing activities during the
nine-month period of 2002 primarily resulted from certain debt and equity
transactions while cash used in financing activities for the nine month period
ended September 30, 2001 was restricted principally to revolver borrowings and
senior debt amortization.
On March 26, 2002, we entered into a new revolving credit facility,
which incorporates a revolving loan commitment of $90.0 million. At our one-time
option, the available borrowings may be increased to provide for borrowings of
up to $100.0 million, subject to finding lenders to provide such increase and
available borrowing base. On March 26, 2002, we also issued the Senior Notes Due
in 2009 with proceeds of $215.0 million. The proceeds from the revolving credit
facility and the 2009 Senior Notes were used to pay off all outstanding balances
under the previous senior credit facility. In addition, the Company issued
20,000,000 shares of common stock to its majority stockholder for $20.0 million
on March 26, 2002. During the third quarter, the Company also repurchased a
certain portion of the outstanding subordinated exchange debentures for
approximately $9.5 million.
CAPITAL EXPENDITURE REQUIREMENTS
Capital expenditures for the nine months ended September 30, 2002
were $10.2 million compared to $22.1 million for the nine months ended September
30, 2001. These capital expenditures focused on manufacturing efficiencies in
order to improve operating performance. We expect our capital expenditures for
2002 to be approximately $15.0 million, based on a capital expenditure program
directed at continued efficiency gains and will include material handling
20
systems and equipment upgrades. We believe that current capacity is adequate in
the near term based on anticipated utilization rates. Accordingly, our focus is
directed at capital expenditures that will improve our cost position.
DEBT SERVICE REQUIREMENTS
Our revolving credit facility provides for revolving loans of up to
$90.0 million. The facility is secured by accounts receivable, inventory and
property, plant and equipment and at our option, may be increased to provide for
borrowings of up to $100.0 million, subject to finding lenders to provide such
increase. The facility is subject to borrowing base availability and includes
covenants restricting the incurrence of additional indebtedness, liens, certain
payments and the sale of assets. We also have $215.0 million aggregate principal
amount of senior notes and $100.0 million aggregate principal amount of senior
subordinated notes outstanding. As of September 30, 2002, we had total
indebtedness of $353.4 million and had $70.6 million of additional borrowings
available under our revolving credit facility, after excluding $1.3 million of
letters of credit outstanding under that facility.
Based on our current level of operations, we believe our cash flows
from operations, available cash and available borrowings under our revolving
credit facility will be adequate to meet our liquidity needs for the foreseeable
future, including scheduled payments of interest on the securities and payments
of interest on the borrowings under our revolving credit facility. Our ability
to make payments on and to refinance our indebtedness, including our revolving
credit facility, the securities, and to fund our business initiatives, however,
will depend on our ability to generate cash in the future. This, to a certain
extent, is subject to general economic, financial, competitive, legislative, and
other factors that are beyond our control. We cannot assure you that our
business will generate sufficient cash flow from operations or that future
borrowings will be available to us under our revolving credit facility in an
amount sufficient to enable us to pay our indebtedness, including our senior
credit facility, the securities, or to fund our other liquidity needs.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The preparation of
these financial statements requires our management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. On an ongoing basis, management evaluates its estimates and
judgments, including those related to the recovery of inventories, property,
plant and equipment and goodwill. Management bases its estimates and judgments
on historical experience, current and expected economic conditions and other
factors believed to be reasonable under the circumstances, the results of which
form the basis of 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 our
reported financial results include the following:
21
INVENTORIES
We value substantially all of the Company's inventory at the lower of
cost, as determined using the last-in, first-out (LIFO) method, or market. The
remainder of inventory is valued at the lower of cost, as determined using the
first-in, first-out (FIFO) method, or market. Inventories include material,
labor and manufacturing overhead. We record a reserve for excess and obsolete
inventory based primarily upon historical and forecasted demand. If actual
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
REVENUE RECOGNITION
We recognize revenue when the specific project is complete as
determined by the contractual agreement. The Securities and Exchange
Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition,"
provides guidance on the application of accounting principles generally accepted
in the United States to selected revenue recognition issues. The policy is
consistent with trade practice within the printing industry.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. We capitalize all
repair and maintenance costs which result in significant increases in the useful
life of the underlying asset. All other repair and maintenance costs are
expensed. Depreciation is computed using straight-line or accelerated methods
over various lives, dependent on the asset. Management assesses long-lived
assets for impairment under Statement of Financial Accounting Standards (SFAS)
No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets."
Changes in market conditions or poor operating results could result in a decline
in value thereby potentially requiring an impairment charge in the future.
FORWARD-LOOKING STATEMENTS
From time to time, we make forward-looking statements.
Forward-looking statements include financial projections, statements of plans
and objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto.
We may include forward-looking statements in this and our other
periodic reports to the Securities and Exchange Commission on Forms 10-K, 10-Q,
and 8-K, in our press releases, in other written materials, and in statements
made by employees to analysts, investors, representatives of the media, and
others.
By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that prediction,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors,
including without limitation those discussed elsewhere in this report. Investors
and others should carefully consider these and other uncertainties and events,
whether or not the statements are described as forward-looking.
Forward-looking statements made by us are intended to apply only at
the time they are made, unless explicitly stated to the contrary. Moreover,
whether or not stated in connection with a forward-looking statement, we
undertake no obligation to correct or update a forward-looking statement should
we later become aware that it is not likely to be achieved. If we were in any
22
particular instance to update or correct a forward-looking statement, investors
and others should not conclude that we would make additional updates or
corrections thereafter.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
We are exposed to market risk from changes in interest rates. At
December 31, 2001, we had approximately $241.6 million outstanding borrowings
against our senior secured credit agreement at variable rates. As of September
30, 2002, we had approximately $4.0 million of borrowings at variable rates.
Substantially all of our outstanding long term debt is at fixed interest rates.
Therefore, our exposure to interest rate fluctuations is immaterial.
Two customers and their affiliates accounted approximately 32.0% of
2001 net sales, and approximately 28.1% of December 31, 2001 accounts
receivable, respectively. For the nine months ended September 30, 2002, these
two customers and their affiliates continued to account for a significant amount
of our net sales and accounts receivable. The loss of either of these customers
or a significant reduction in order volumes from them would have a material
adverse effect on us. We manage credit risk by continually reviewing
creditworthiness of our customer base as well as thoroughly analyzing new
accounts to effectively manage our exposure.
ITEM 4. CONTROLS AND PROCEDURES.
a. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
(a) Based on their evaluation of our disclosure controls and
procedures conducted within 90 days of the date of filing this report on Form
10-Q, our Chief Executive Officer and our Chief Financial Officer have concluded
that, as of the date of their evaluation, our disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities
Exchange Act of 1934, as amended) are effective.
(b) There have been no significant changes in our internal controls
or in other factors that could significantly affect the internal controls
subsequent to the date of their evaluation in connection with the preparation of
this quarterly report on Form 10-Q.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any material lawsuit or proceeding.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit 10.1 - Employment Agreement between Gary C. Wetzel and Von Hoffmann
Corporation dated as of October 31, 2002.
Exhibit 99.1 - Certification by Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 - Certification by Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
No reports on Form 8-K have been filed during the three-month period ended
September 30, 2002.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Date: November 12, 2002
VON HOFFMANN HOLDINGS INC.
By: /s/ Robert S. Mathews
--------------------------------------------------------------
Name: Robert S. Mathews
Title: Chief Executive Officer, President and Director
By: /s/ Gary Wetzel
--------------------------------------------------------------
Name: Gary Wetzel
Title: Executive Vice President, Chief Financial Officer
and Treasurer
VON HOFFMANN CORPORATION
By: /s/ Robert S. Mathews
--------------------------------------------------------------
Name: Robert S. Mathews
Title: Chief Executive Officer, President, Chief
Operating Officer and Director
By: /s/ Gary Wetzel
--------------------------------------------------------------
Name: Gary Wetzel
Title: Vice Chairman of the Board, Vice President, Chief
Financial Officer and Treasurer
25
CERTIFICATION
I, Robert S. Matthews, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Von Hoffmann Holdings
Inc. and Von Hoffman Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrants as of, and for, the periods presented in this quarterly report;
4. The registrants' other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrants and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrants, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrants' disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrants' other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrants' auditors and the audit committee of
registrants' board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants' internal controls; and
26
6. The registrants' other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Robert S. Mathews
-------------------------------------------
Name: Robert S. Mathews
Title: Chief Executive Officer
27
CERTIFICATION
I, Gary Wetzel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Von Hoffmann Holdings
Inc. and Von Hoffman Corporation.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrants as of, and for, the periods presented in this quarterly report;
4. The registrants' other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrants and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrants, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrants' disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrants' other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrants' auditors and the audit committee of
registrants' board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants' ability to record,
process, summarize and report financial data and have identified for the
registrants' auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants' internal controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Gary Wetzel
------------------------------------------
Name: Gary Wetzel
Title: Chief Financial Officer
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EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
10.1 -Employment Agreement between Gary C. Wetzel and Von Hoffmann Corporation
dated as of October 31, 2002.
99.1 - Certification by Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 - Certification
by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
30