UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

ý	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
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE TRANSITION PERIOD FROM                  TO

 

333 - 45235

COMMISSION FILE NUMBER

 

[GRAPHIC OMITTED]

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements in the past 90 days.  YES ý   No o

 

As of November 12, 2002 there were 901,317 shares of Registrant’s Common Stock outstanding, par value $.001 per share.  There is no established public trading market for the Registrant’s Common Stock.

 

 

PERRY JUDD’S HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

INDEX

 

PART I.			FINANCIAL INFORMATION
	ITEM I.		Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001
		Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2002 and 2001
		Unaudited Condensed Consolidated Statements of Minority Interests, Preferred Stock and Stockholders’ Equity for the Nine Months ended September 30, 2002
		Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2002 and 2001
		Unaudited Notes to Condensed Consolidated Financial Statements September 30, 2002
	ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3.		Quantitative and Qualitative Disclosure About Market Risk
	ITEM 4.		Controls and Procedures
PART II.			OTHER INFORMATION
	ITEM 6.		Exhibits and Reports on Form 8-K

 

2

 

PERRY JUDD’S HOLDINGS, INC.

ITEM I.  FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2002 AND DECEMBER 31, 2001

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)

 

		September 30, 2002			December 31, 2001
		(Unaudited)			(Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	8,704		$	4,123
Accounts receivable - net of allowance for doubtful accounts of $1,919 and $1,236, respectively		51,696			59,353
Inventories		14,498			14,624
Prepaid expenses		2,220			1,801
Deferred income taxes		777			1,079
Total current assets		77,895			80,980
Property, plant and equipment, at cost		156,513			148,694
Less accumulated depreciation and amortization		58,117			51,219
Property, plant and equipment - net		98,396			97,475
Goodwill - net		29,431			29,431
Other assets - net		3,331			4,640
TOTAL ASSETS		$	209,053		$	212,526
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	36,716		$	36,794
Current maturities of long-term debt		—			7,800
Total current liabilities		36,716			44,594
Long-term debt (less current portion)		115,000			115,000
Deferred income taxes		18,476			17,014
Other noncurrent obligations		9,345			9,428
Total liabilities		179,537			186,036
MINORITY INTERESTS:
Series A redeemable preferred stock, 43,941 shares outstanding with a stated redemption value of $100 per share, aggregate liquidation value of $4,394		3,674			3,488
STOCKHOLDERS’ EQUITY:
Preferred stock (Series A) - par value $0.001 per share, 775,000 shares authorized, 192,451 and 172,328 shares issued and outstanding, respectively		19,245			17,233
Common stock - par value $0.001 per share, 1,000,000 shares authorized, 901,317 shares issued and outstanding, respectively		1			1
Additional paid-in capital		22,414			22,279
Accumulated deficit		(15,818		)	(16,511		)
Total stockholders’ equity		25,842			23,002
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	209,053		$	212,526

 

Note:      Derived from audited financial statements.

See notes to condensed consolidated financial statements.

 

3

 

PERRY JUDD’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

(DOLLARS IN THOUSANDS)

 

		THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
		2002			2001			2002			2001
NET SALES		$	76,438		$	86,975		$	212,348		$	243,345
OPERATING EXPENSES:
Costs of production and distribution		57,033			68,436			160,520			192,906
Selling, general and administrative		8,157			7,816			23,546			23,643
Depreciation		4,223			3,622			12,894			10,890
Amortization of intangibles		76			312			227			938
Gain on disposals of equipment		(59		)	(58		)	(298		)	(439		)
		69,430			80,128			196,889			227,938
INCOME FROM OPERATIONS		7,008			6,847			15,459			15,407
OTHER (INCOME) EXPENSES:
Interest expense		3,088			3,281			9,034			9,922
Interest income		(30		)	(15		)	(89		)	(107		)
Amortization of deferred financing costs		533			300			1,189			900
Other financial expenses		91			106			299			325
		3,682			3,672			10,433			11,040
INCOME BEFORE INCOME TAXES		3,326			3,175			5,026			4,367
PROVISION FOR INCOME TAXES		1,305			1,351			1,995			2,066
INCOME BEFORE DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED STOCK		2,021			1,824			3,031			2,301
DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED STOCK		110			123			326			395
NET INCOME		$	1,911		$	1,701		$	2,705		$	1,906

 

See notes to condensed consolidated financial statements.

 

4

 

PERRY JUDD’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF MINORITY INTERESTS, PREFERRED STOCK

AND STOCKHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2002

(DOLLARS IN THOUSANDS)

 

		Minority Interests					Preferred Stock					Common Stock and Additional Paid-in Capital
		Shares		Carrying Value			Shares		Carrying Value			Shares		Carrying Value			Accumulated Deficit
December 31, 2001		43,941		$	3,488		172,328		$	17,233		901,317		$	22,280		$	(16,511	)
Net income		—		—			—		—			—		—			2,705
Stock dividends		—		—			20,123		2,012			—		—			(2,012		)
Accretion on Series A redeemable preferred stock		—		186			—		—			—		—			—
Provision for non-cash compensation related to common stock options		—		—			—		—			—		135			—
September 30, 2002		43,941		$	3,674		192,451		$	19,245		901,317		$	22,415		$	(15,818	)

 

See notes to condensed consolidated financial statements.

 

5

 

PERRY JUDD’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2002 and 2001

(DOLLARS IN THOUSANDS)

 

		NINE MONTHS ENDED SEPTEMBER 30,
		2002			2001
OPERATING ACTIVITIES:
Net income		$	2,705		$	1,906
Adjustments to reconcile net income to net cash flows provided by operating activities:
Depreciation and amortization		14,310			12,728
Accretion on redeemable preferred stock		186			174
Compensation related to common stock options		135			92
Deferred income tax provision		1,764			(169		)
Gain on disposals of equipment		(298		)	(439		)
Changes in assets and liabilities:
Receivables		7,657			7,047
Inventories		126			790
Accounts payable and accrued expenses		(78		)	(9,075		)
Other assets and liabilities - net		(321		)	(312		)
Net cash provided by operating activities		26,186			12,742
INVESTING ACTIVITIES:
Proceeds from disposal of equipment		260			637
Additions to property, plant and equipment - net		(13,952		)	(13,691		)
Net cash used in investing activities		(13,692		)	(13,054		)
FINANCING ACTIVITIES:
Increase in revolving debt		—			2,330
Debt repayments		(7,800		)	(4,518		)
Financing costs incurred		(113		)	—
Net cash used in financing activities		(7,913		)	(2,188		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		4,581			(2,500		)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		4,123			4,924
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	8,704		$	2,424
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	6,285		$	6,791
Cash paid for income taxes		263			193
NON-CASH TRANSACTIONS:
Stock dividends on preferred stock		$	2,012		$	1,737

 

See notes to condensed consolidated financial statements.

 

6

 

PERRY JUDD’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEPTEMBER 30, 2002

(DOLLARS IN THOUSANDS)

 

1.             BASIS OF PRESENTATION

 

The accompanying condensed consolidated financial statements have been prepared by Perry Judd’s Holdings, Inc. (collectively with its subsidiaries, the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission and reflect normal and recurring adjustments, which are, in the opinion of the Company, considered necessary to present fairly the consolidated financial position of the Company as of September 30, 2002 and December 31, 2001 and its related results of operations and cash flows for the three and nine month periods ended September 30, 2002 and 2001. As permitted by these regulations, these condensed consolidated financial statements do not include all information required by accounting principles generally accepted in the United States to be included in an annual set of financial statements; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The Company’s condensed consolidated balance sheet as of December 31, 2001 was derived from the Company’s latest audited consolidated financial statements. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the latest audited consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

 

2.             INVENTORIES

 

Inventories are summarized as follows:

 

		September 30, 2002			December 31, 2001
Raw materials		$	6,193		$	6,803
Work-in-process		4,657			4,161
Production supplies and maintenance parts		3,648			3,660
Total		$	14,498		$	14,624

 

3.                                       GOODWILL

 

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, effective January 1, 2002. Under SFAS No. 142, goodwill and certain other intangible assets are no longer amortized but are reviewed for impairment. In connection with the adoption of SFAS No. 142, the Company has completed the transitional goodwill impairment test, which requires the Company to compare its fair value to the carrying value of its net assets as of January 1, 2002. Based on this analysis, the Company has concluded that no impairment existed at the time of adoption, and, accordingly, the Company has not recognized any transitional impairment loss.

 

As required by SFAS No. 142, the results of operations for periods prior to its adoption have not been restated. The following table summarizes the pro forma income before income taxes and net income for the three and nine month periods ended September 30, 2001 had SFAS No. 142 been adopted at January 1, 2001:

 

		Three Months Ended September 30, 2001			Nine Months Ended September 31, 2001
Income before income taxes		$	3,412		$	5,078
Net income		1,938			2,617

 

7

 

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Results of operations

 

Nine Months ended September 30, 2002 versus Nine Months ended September 30, 2001.

 

Net sales decreased $31.0 million or 12.7% to $212.3 million for the nine months ended September 30, 2002 from $243.3 million for the nine months ended September 30, 2001. The decrease resulted primarily from lower volume of production units from new and existing customers, a reduction in the amount of paper the Company furnished to its customers, and a 16.9% reduction in paper prices.

 

Costs of production and distribution decreased $32.4 million or 16.8% to $160.5 million for the nine months ended September 30, 2002 from $192.9 million for the nine months ended September 30, 2001, principally due to lower operating expenses resulting from reduced production levels. Costs of production as a percent of net sales were 75.6% for the nine months ended September 30, 2002 as compared to 79.3% experienced in the nine months ended September 30, 2001. Paper costs were 19.3% of net sales for the nine months ended September 30, 2002 versus 23.9% for the nine months ended September 30, 2001.

 

Selling, general and administrative expenses decreased $0.1 million or 0.4% to $23.5 million for the nine months ended September 30, 2002 compared to $23.6 million for the nine months ended September 30, 2001.  Selling, general and administrative expenses increased as a percent of net sales to 11.1% in the 2002 period compared to 9.7% in the 2001 period.

 

Depreciation expense increased $2.0 million or 18.3% to $12.9 million for the nine months ended September 30, 2002 from $10.9 million for the nine months ended September 30, 2001 as a result of new assets placed in service within the past twelve months.

 

Income from operations increased $0.1 million or 0.6% to $15.5 million for the nine months ended September 30, 2002 from $15.4 million for the nine months ended September 30, 2001, due to the factors discussed in the preceding paragraphs.

 

Interest expense decreased $0.9 million or 9.1% to $9.0 million for the nine months ended September 30, 2002 from $9.9 million for the nine months ended September 30, 2001 due to reduced debt levels.

 

Three Months ended September 30, 2002 versus Three Months ended September 30, 2001.

 

Net sales decreased $10.6 million or 12.2% to $76.4 million for the three months ended September 30, 2002 from $87.0 million for the three months ended September 30, 2001.  The decrease resulted primarily from lower volume of production units from new and existing customers, a reduction in the amount of paper the Company furnished to its customers, and a 21.4% reduction in paper prices.

 

Costs of production and distribution decreased $11.4 million or 16.7% to $57.0 million for the three months ended September 30, 2002 from $68.4 million for the three months ended September 30, 2001, principally from the overall decreased volume of production.  Costs of production as a percent of net sales were 74.6% for the three months ended September 30, 2002 as compared to 78.6% experienced in the three months ended September 30, 2001. Paper costs were 19.3% of net sales for the three months ended September 30, 2002 versus 23.2% for the three months ended September 30, 2001.

 

Selling, general and administrative expenses increased $0.4 million or 5.1% to $8.2 million for the three months ended September 30, 2002 compared to $7.8 million for the three months ended September 30, 2001. Selling, general and administrative expenses increased as a percent of net sales to 10.7% in the 2002 period compared to 9.0% in the 2001 period.

 

Depreciation expense increased $0.6 million or 16.7% to $4.2 million for the three months ended September 30, 2002 from $3.6 million for the three months ended September 30, 2001 as a result of new assets placed in service within the past twelve months.

 

Income from operations increased $0.2 million or 2.9% to $7.0 million for the three months ended September 30, 2002 from $6.8 million for the three months ended September 30, 2001, due to the factors discussed in the preceding paragraphs.

 

Interest expense decreased $0.2 million or 6.1% to $3.1 million for the three months ended September 30, 2002 from $3.3 million for the three months ended September 30, 2001 as a result of reduced debt levels during the period.

 

8

 

Commitments

 

As of September 30, 2002, the Company had commitments to purchase or lease approximately $2.7 million of operating assets.

 

Liquidity and Capital Resources

 

Historically, the Company has funded its capital and operating requirements with a combination of cash flow from operations, borrowings and external operating leases.  Earnings before interest, income taxes, depreciation, amortization, non-cash compensation related to common stock options and gains and losses on disposition of assets (“EBITDA”) was $28.1 million for the nine months ended September 30, 2002 and $26.6 million for the nine months ended September 30, 2001.

 

Working capital was $41.2 million and $36.4 million at September 30, 2002 and December 31, 2001, respectively.

 

Since the inception of operations on April 28, 1995, the Company has funded the majority of its needs for production equipment through operating leases and borrowings under its credit agreements. During the third quarter, the Company entered into a new three year credit agreement (the “Credit Agreement”) which expires on August 18, 2005. The Credit Agreement is comprised of a $25 million revolving credit facility based upon a borrowing base of eligible accounts receivable.  Borrowings under the Credit Agreement bear interest at rates that fluctuate with the prime rate and the Eurodollar rate. As of September 30, 2002, the Company had no borrowings under the Credit Agreement.

 

Concentrations of credit risk with respect to accounts receivable are limited due to the Company’s diverse operations and large customer base.  As of September 30, 2002, the Company had no significant concentrations of credit risk.

 

The Company believes that its liquidity, capital resources and cash flows are sufficient to fund planned capital expenditures, working capital requirements and interest and principal payments for the foreseeable future.

 

Seasonality

 

Results of operations for this interim period are not necessarily indicative of results for the full year.  The Company’s operations are seasonal.  Historically, approximately two-thirds of its income from operations has been generated in the second half of the fiscal year, primarily due to the higher number of magazine pages, new product launches and back-to-school and holiday catalog promotions.

 

Risk Factors

 

In addition to other information in this Quarterly Report on Form 10-Q, the following risk factors for the Company should be carefully considered. These risks may impair the Company’s results of operations and business prospects. The risks set forth below and elsewhere in this Quarterly Report could cause actual results to differ materially from those that the Company projects.

 

High Level of Indebtedness

 

In connection with prior transactions, the Company has incurred a significant amount of indebtedness and is highly leveraged. In addition, subject to the restrictions in the Credit Agreement and the Indenture (the “Indenture”) related to the outstanding 10-5/8% Senior Subordinated Notes (the “Senior Notes”), the Company may incur additional senior indebtedness to finance acquisitions and capital expenditures for other general corporate purposes.

 

The level of the Company’s indebtedness could have important consequences to holders of the Senior Notes, including: (i) a substantial portion of the Company’s cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company’s future ability to obtain additional debt financing for working capital, capital expenditures or acquisitions may be limited; (iii) the Company’s level of indebtedness could limit its flexibility in reacting to changes in the printing industry and economic conditions generally, which could limit its ability to withstand competitive pressures or take advantage of business opportunities; (iv) the Company’s borrowing under the Credit Agreement will be at variable rates of interest, which could cause the Company to be vulnerable to increases in interest rates; and (v) all of the indebtedness incurred in connection with the Credit Agreement will become due prior to the time the principal payments on the Senior Notes will become due. Certain of the Company’s competitors currently operate on a less leveraged basis and are likely to have significantly greater operating and financing flexibility than the Company.

 

9

 

Ability to Service Debt

 

The Company’s ability to pay interest on the Senior Notes and to satisfy its other debt obligations will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control. The Company anticipates that its operating cash flow, together with available borrowings under the Credit Agreement, will be sufficient to meet its operating expenses, capital expenditure requirements and working capital needs and to service its debt requirements as they become due. However, if the Company is unable to service its indebtedness, it will be forced to adopt an alternative strategy that may include actions such as reducing or delaying capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all, or that they would enable the Company to continue to meet its debt service obligations or that they would be permitted under the terms of the Credit Agreement or Indenture.

 

Subordination of the Senior Notes and Guarantors

 

The Senior Notes are fully and unconditionally guaranteed, on a senior subordinated basis, jointly and severally, by all subsidiaries of the Company (the “Subsidiary Guarantors”) pursuant to guarantees (the “Guarantees”). The Guarantees are subordinated in right of payment to all senior indebtedness of the Company and the Subsidiary Guarantors. In the event of bankruptcy, liquidation or reorganization of the Company, the assets of the Company or the Subsidiary Guarantors will be available to pay obligations on the Senior Notes only after all senior indebtedness of the Company or the Subsidiary Guarantors, as the case may be, has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Senior Notes then outstanding. Additional senior indebtedness may be incurred by the Company and the Subsidiary Guarantors from time to time, subject to certain restrictions. The Indenture generally provides that a Restricted Subsidiary (as defined in the Indenture) may incur indebtedness only if such Subsidiary agrees to guarantee the Senior Notes on a senior subordinated basis. The holders of the Senior Notes have no direct claim against the Subsidiary Guarantors other than claims created by the Guarantees, which may themselves be subject to legal challenge in the event of the bankruptcy or insolvency of a Subsidiary Guarantor. If such a challenge were upheld, the Guarantees would be invalidated and unenforceable. To the extent that the Guarantees are held to be unenforceable or have been released pursuant to the terms of the Indenture, the rights of holders of the Senior Notes to participate in any distribution of assets of any Subsidiary Guarantor upon liquidation, bankruptcy or reorganization may, as in the case with other unsecured creditors of the Company, be subject to prior claims against such Subsidiary Guarantor.

 

Holding Company Structure

 

The Company is a holding company, the principal assets of which consist of equity interests in its subsidiaries. The Senior Notes are a direct obligation of the Company, which derives all of its revenues from the operations of its subsidiaries. As a result, the Company will be dependent on the earnings and cash flow of, and dividends and distributions or advances from, its subsidiaries to provide the funds necessary to meet its debt service obligations, including the payment of principal and interest on the Senior Notes. Accordingly, the Company’s ability to pay interest on the Senior Notes and otherwise to meet its liquidity requirements may be limited as a result of its dependence upon the distribution of earnings and advances of funds by its subsidiaries. The payment of dividends from the subsidiaries to the Company and the payment of any interest on or the repayment of any principal of any loans or advances made by the Company to any of its subsidiaries may be subject to statutory restrictions under corporate law limiting the payment of dividends and are contingent upon the earnings of such subsidiaries. The Company’s subsidiaries are guarantors of the indebtedness incurred under the Credit Agreement. The Senior Notes are not secured by liens against any of the Company’s or its subsidiaries’ assets, while the indebtedness incurred under the Credit Agreement is secured by liens against substantially all the Company’s and its subsidiaries’ assets.

 

10

 

Restrictions Imposed by Terms of the Company’s Indebtedness

 

The Indenture restricts, among other things, the Company’s and its subsidiaries’ ability to incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur liens, incur indebtedness that is subordinate to Senior Indebtedness (as defined in the Indenture) but senior in right of payment to the Senior Notes, impose restrictions on the ability of a subsidiary to pay dividends or make certain payments to the Company and its subsidiaries, merge or consolidate with any other persons or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company. In addition, the Credit Agreement contains other and more restrictive covenants and prohibits the Company and its subsidiaries from prepaying other indebtedness (including the Senior Notes). The Credit Agreement also requires the Company to maintain specified financial ratios and satisfy certain financial condition tests. The Company’s ability to meet those tests and ratios can be affected by events beyond its control, and there can be no assurance that it will meet those ratios and tests. A breach of any of these covenants could result in a default under the Credit Agreement and/or the Indenture. Upon the occurrence of an event of default under the Credit Agreement, the lender could elect to declare all amounts outstanding under the Credit Agreement, together with accrued interest, to be immediately due and payable. If the Company were unable to repay those amounts, the lender could proceed against the collateral granted to them to secure that indebtedness. If the Senior Indebtedness under the Credit Agreement were to be accelerated, there can be no assurances that the assets of the Company would be sufficient to repay in full the indebtedness and the other indebtedness of the Company, including the Senior Notes. The Company’s obligations under the Credit Agreement are secured by a security interest in all assets of the Company and its subsidiaries, excluding all of their assets relating to inventory and property, plant and equipment.

 

Competition

 

The commercial printing industry in the U.S. is highly competitive in most product categories and geographic regions. Competition is largely based on price, quality, range of services offered, distribution capabilities, ability to service the specialized needs of customers, availability of printing time on appropriate equipment and use of state-of-the-art technology. The Company competes for commercial business not only with large international and national printers, but also with smaller regional printers. In certain circumstances, due primarily to factors such as freight rates and customer preference for local services, printers with better access to certain regions of the country may have a competitive advantage in such regions. In addition, many of the Company’s competitors have substantially greater financial, marketing, distribution, management and other resources than the Company, and as the industry experiences continued consolidation, the Company’s competitors may further enhance such resources. The Company also believes that excess capacity in the industry, especially during periods of economic downturn, would result in downward pricing pressure and intensified competition in the printing industry. Given these factors, there can be no assurance that the Company will be able to continue to compete successfully against existing or new competitors, and the failure to do so may have a material adverse effect on the Company’s financial condition and results of operations.

 

Technological Changes

 

Technology in the printing industry has evolved and continues to evolve. Since 1997, approximately $130.0 million of purchased and leased capital expenditures have been invested by the Company for printing facilities and production equipment. As technology continues to evolve and as its customers’ needs become more specialized and sophisticated in the future, the Company will likely be required to invest significant additional capital in new and improved technology in order to maintain and enhance the quality and competitiveness of, and to expand, its products and services. If the Company is unable to acquire new and improved technology, facilities and equipment or to develop and introduce enhanced or new products and services, the Company’s financial condition, results of operations and cash flows could be materially adversely affected.

 

11

 

Raw Materials – Paper

 

The cost of paper is a principal factor in the Company’s manufacturing costs and pricing to certain customers and consequently the cost of paper significantly affects the Company’s net sales. The Company is generally able to pass increases in the cost of paper to its customers, while declines in paper costs generally result in lower prices to customers. Typical fluctuations in paper costs result in corresponding fluctuations in the Company’s net sales, but typical fluctuations generally have not affected volume or profits to any significant extent. However, sharp increases in paper prices and related reduction in print advertising programs are more likely to adversely affect volumes and profits. To the extent that there are future paper costs increases and the Company is not able to pass such increases to its customers or its customers reduce their demand for the Company’s products and services, the Company’s financial condition and results of operations could be materially adversely affected.

 

Capacity in the paper industry has remained relatively stable in recent years. Increases or decreases in demand for paper have led to corresponding pricing changes and, in periods of high demand, to limitations on the availability of certain grades of paper, including grades utilized by the Company. Any loss of the sources for paper supply or any disruption in such sources’ business or failure to meet the Company’s product needs on a timely basis could cause, at a minimum, temporary shortages in needed materials which could have a material adverse affect on the Company’s results of operations. Although the Company actively manages its paper supply and believes it has established strong relationships with its suppliers, there can be no assurance that the Company’s sources of supply for its paper will be adequate or, in the event that such sources are not adequate, that alternative sources can be developed in a timely manner. If the Company is unable to secure sufficient supplies of paper of appropriate quality, its financial condition, results of operations and cash flows could be materially adversely affected.

 

Certain Customer Relationships

 

The Company currently provides products and services to certain customers without a written contractual arrangement. While the Company believes that its relationship with each of these customers is good, there can be no assurance that such customers will continue to do business with the Company at current levels, if at all.

 

A Significant Portion of the Company’s Revenue depends on a Single Customer

 

For the years ended December 31, 2001, 2000 and 1999, Time, Inc. comprised 14%, 15% and 16% of consolidated net revenue, respectively. Time, Inc. has notified the Company that it will not renew its weekly contract at its expiration on December 31, 2003 and its monthly printing contract at its expiration on July 31, 2003. If this loss of business is not replaced after 2003, the Company’s financial condition and results of operations would be materially affected. No other customer accounted for more than 10% of the business.

 

Environmental and other Governmental Regulation

 

The Company is subject to regulation under various federal, state and local laws relating to the environment and to employee health and safety. These environmental regulations relate to the generation, storage, transportation, handling, disposal and emission into the environment of various substances. Permits are required for operation of the Company’s business, and these permits are subject to renewal, modification and, in certain circumstances, revocation. The Company is also subject to regulation under various federal, state and local laws which allow regulatory authority to compel (or seek reimbursement for) cleanup of environmental contamination at the Company’s own sites and at facilities where its waste is or has been disposed. The Company has internal controls and personnel dedicated to compliance with all applicable environmental and employee health and safety laws. The Company expects to incur ongoing capital and operating costs and administrative expenses to maintain compliance with applicable environmental laws. The Company cannot predict the environmental or employee health and safety legislation or regulations that may be enacted in the future or how existing or future laws or regulations will be administered or interpreted. Compliance with new laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies or stricter interpretation of existing laws, may require additional expenditures by the Company, some or all of which may be material.

 

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Reliance on Key Personnel

 

The Company’s success will continue to depend to a significant extent on its executive officers and other key management personnel. There can be no assurance that the Company will be able to retain its executive officers and key personnel or attract additional qualified management in the future. In addition, the success of any acquisition by the Company may depend, in part, on the Company’s ability to retain management personnel on the acquired companies. There can be no assurance that the Company will be able to retain such management personnel.

 

Control by Principal Stockholders

 

Robert E. Milhous and Paul B. Milhous, the Chairman and Vice Chairman, respectively, of the Company own together beneficially over 86% of the outstanding capital stock of the Company. Accordingly, these stockholders have the ability, acting together, to control fundamental corporate transactions requiring stockholder approval, including without limitation approval of merger transactions involving the Company and sales of all or substantially all of the Company’s assets.

 

Purchase of Notes Upon Change of Control

 

Upon a Change of Control (as defined in the Indenture) the Company will be required to offer to purchase all outstanding Senior Notes at 101% of the principal amount thereof plus accrued and unpaid interest to the repurchase date. A Change of Control will likely trigger an event of default under the Credit Agreement which will permit the lenders thereunder to accelerate the debt under the Credit Agreement. However, there can be no assurance that sufficient funds will be available at the time of any Change of Control to make any required repurchases of Senior Notes tendered, or that, if applicable, restrictions in the Credit Agreement will allow the Company to make such required repurchases.

 

Critical Accounting Policies

 

A summary of the Company’s critical accounting policies are included in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. Management believes that the consistent application of these policies enables the Company to provide readers of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

The Company generally does not enter into any material futures, forwards, swaps, options or other derivative financial instruments for trading or other purposes. The primary exposure to market risk relates to fluctuations in interest rates and the effects those changes may have on operating results due to long-term financing arrangements. The Company manages its exposure to this market risk by monitoring interest rates and possible alternative means of financing. Operating results may be affected by changes in short-term interest rates under the revolving credit and term loan facilities, pursuant to which borrowings bear interest at a variable rate. See Notes 4, 7 and 11 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

Changes in internal controls

 

There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses. As a result, no corrective actions were undertaken.

 

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Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

 

The quarterly report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” or “continue,” or the negative thereof or variations thereon or similar terminology. Such forward-looking statements are based upon information currently available in which the Company’s management shares its knowledge and judgement about factors that they believe may materially affect the Company’s performance. The Company makes forward-looking statements in good faith and believes them to have a reasonable basis. However, such statements are speculative, speak only as of the date made and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results could vary materially from those anticipated, estimated or expected. Factors that might cause actual results to differ materially from those in such forward-looking statements include, but are not limited to, statements in this Report and in our Annual Report on Form 10-K for the year-ended December 31, 2001 filed with the Securities and Exchange Commission on March 29, 2002. The Company does not undertake any obligation to update any forward-looking statements.

 

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PART II.  OTHER INFORMATION

 

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

 

(a)	Exhibits
	Exhibit 10.7	Loan and Security Agreement dated August 19, 2002 between LaSalle Business Credit, Inc., as Lender and Perry Judd’s Incorporated, as Borrower.
	Exhibit 99.1	Certifications pursuant to the Sarbanes-Oxley Act of 2002.
(b)	Reports on Form 8-K
	There were no reports on Form 8-K filed during the quarterly period ended September 30, 2002.

 

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PERRY JUDD’S HOLDINGS, INC.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	PERRY JUDD’S HOLDINGS, INC.
Date:     November 12, 2002	/s/ Verne F. Schmidt
	Verne F. Schmidt
	Senior Vice President and Chief Financial Officer

 

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CERTIFICATION

 

I, Craig A. Hutchison, Chief Executive Officer of Perry Judd’s Holdings, Inc., certify, pursuant to §302 of the Sarbanes-Oxley Act of 2002, that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Perry Judd's Holdings, Inc.;

 

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 registrant as of, and for, the periods presented in this quarterly report;

 

4.     The registrant’s 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 registrant and have:

 

(i)     designed such disclosure controls and procedures to ensure that material information relating to the registrant, 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;

 

(ii)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (“Evaluation Date”); and

 

(iii)   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 registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

 

(i)     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

 

(ii)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

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.

 

 

	/s/ Craig A. Hutchison
	Craig A. Hutchison
	Chief Executive Officer (Principal Executive Officer)
	November 12, 2002

 

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CERTIFICATION

 

I, Verne F. Schmidt, Chief Financial Officer of Perry Judd’s Holdings, Inc., certify, pursuant to §302 of the Sarbanes-Oxley Act of 2002, that:

 

1.     I have reviewed this quarterly report on Form 10-Q of Perry Judd's Holdings, Inc.;

 

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 registrant as of, and for, the periods presented in this quarterly report;

 

4.     The registrant’s 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 registrant and have:

 

(i)     designed such disclosure controls and procedures to ensure that material information relating to the registrant, 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;

 

(ii)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (“Evaluation Date”); and

 

(iii)   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 registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

 

(i)     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

 

(ii)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

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.

 

	/s/ Verne F. Schmidt
	Verne F. Schmidt
	Chief Financial Officer (Principal Financial Officer)
	November 12, 2002

 

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Exhibit Index

 

Exhibit 10.7		Loan and Security Agreement dated August 19, 2002 between LaSalle Business Credit, Inc., as Lender, and Perry Judd’s Incorporated, as Borrower.
Exhibit 99.1		Certifications pursuant to the Sarbanes-Oxley Act of 2002.

 

 

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