PERRY-JUDDS INC - 10-Q Quarterly Report

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, 2004

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]

PERRY JUDD’S HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		51-0365965
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

575 WEST MADISON STREET, WATERLOO, WISCONSIN		53594
(Address of principal executive offices)		(Zip Code)

920-478-3551

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES o No ý

As of November 15, 2004 there were 891,998 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.

ITEM I. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2004 AND DECEMBER 31, 2003

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

	September 30, 2004			December 31, 2003
	(Unaudited)			(Note)
ASSETS
Current Assets:
Cash and cash equivalents	$	670		$	966
Accounts receivable - net of allowance for doubtful accounts of $1,256 and $1,200, respectively	38,290			43,197
Inventories	16,663			12,813
Prepaid expenses	2,165			2,150
Deferred income taxes	1,625			2,668

Total current assets	59,413			61,794

Property, plant and equipment, at cost	143,195			160,115
Less accumulated depreciation and amortization	67,813			84,958

Property, plant and equipment - net	75,382			75,157
Goodwill	29,431			29,431
Other assets	1,506			1,748

TOTAL ASSETS	$	165,732		$	168,130

LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable and accrued expenses	$	31,568		$	36,034
Short-term debt	14,343			11,206

Total current liabilities	45,911			47,240

Long-term debt	75,238			70,010
Deferred income taxes	10,968			14,807
Other noncurrent obligations	11,874			8,545

Total liabilities	143,991			140,602

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	4,220			4,006

STOCKHOLDERS’ EQUITY:
Preferred stock (Series A) - par value $0.001 per share, 775,000 shares authorized, 258,360 and 231,345 shares issued and outstanding, respectively	25,836			23,135
Common stock - par value $0.001 per share, 1,000,000 shares authorized, 891,998 and 897,918 shares issued and outstanding, respectively	1			1
Additional paid-in capital	21,802			22,421
Accumulated deficit	(30,118		)	(22,035		)

Total stockholders’ equity	17,521			23,522

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	165,732		$	168,130

Note:		Derived from audited financial statements.
		See notes to condensed consolidated financial statements.

PERRY JUDD’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(DOLLARS IN THOUSANDS)

	THREE MONTHS ENDED SEPTEMBER 30,						NINE MONTHS ENDED SEPTEMBER 30,
	2004			2003			2004			2003

NET SALES	$	65,296		$	73,782		$	192,031		$	218,673

OPERATING EXPENSES:
Costs of production and distribution	52,629			59,189			158,026			173,286
Selling, general and administrative	5,686			6,908			20,051			22,955
Depreciation	3,409			4,412			11,578			13,270
Amortization of intangibles	29			29			89			89
Gain on disposals of equipment	(58		)	(58		)	(170		)	(202		)
Restructuring charges	1,118			—			7,068			—

	62,813			70,480			196,642			209,398

INCOME (LOSS) FROM OPERATIONS	2,483			3,302			(4,611		)	9,275

OTHER (INCOME) EXPENSES:
Interest expense	1,657			2,044			5,495			6,664
Interest income	(29		)	(29		)	(97		)	(95		)
Loss (gain) on repurchases of senior subordinated notes	(1,749		)	635			(2,309		)	868
Amortization of deferred financing costs	83			79			237			261
Other financial expenses	47			38			118			101

	9			2,767			3,444			7,799

INCOME (LOSS) BEFORE INCOME TAXES	2,474			535			(8,055		)	1,476

PROVISION (BENEFIT) FOR INCOME TAXES	985			224			(3,011		)	601

INCOME (LOSS) BEFORE DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED STOCK	1,489			311			(5,044		)	875

DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED STOCK	116			107			338			322

NET INCOME (LOSS)	$	1,373		$	204		$	(5,382	)	$	553

See notes to condensed consolidated financial statements.

PERRY JUDD’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF MINORITY INTERESTS, PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2004

(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, 2003	43,941	$	4,006	231,345	$	23,135	897,918		$	22,422		$	(22,035	)

Net loss	—	—		—	—		—		—			(5,382		)

Stock dividends	—	—		27,015	2,701		—		—			(2,701		)

Accretion on Series A redeemable preferred stock	—	214		—	—		—		—			—

Repurchase of common stock	—	—		—	—		(5,920	)	(627		)	—

Provision for non-cash compensation related to common stock options	—	—		—	—		—		8			—

September 30, 2004	43,941	$	4,220	258,360	$	25,836	891,998		$	21,803		$	(30,118	)

See notes to condensed consolidated financial statements.

PERRY JUDD’S HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(DOLLARS IN THOUSANDS)

	NINE MONTHS ENDED SEPTEMBER 30,
	2004			2003

OPERATING ACTIVITIES:

Net income (loss)	$	(5,382	)	$	553
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
Depreciation and amortization	11,904			13,620
Accretion on redeemable preferred stock	214			199
Compensation related to common stock options	8			33
Deferred income taxes	(2,796		)	(1,730		)
Gain on disposals of equipment	(170		)	(202		)
(Gain) loss on repurchases of senior subordinated notes	(2,309		)	868
Non cash restructuring charges	897			—
Changes in assets and liabilities:
Receivables	4,907			679
Inventories	(3,850		)	(711		)
Accounts payable and accrued expenses	(4,466		)	(1,840		)
Other assets and liabilities - net	3,488			(644		)

Net cash provided by operating activities	2,445			10,825

INVESTING ACTIVITIES:
Net proceeds from disposals of equipment	6,009			65
Additions to property, plant and equipment - net	(18,713		)	(4,632		)

Net cash used in investing activities	(12,704		)	(4,567		)

FINANCING ACTIVITIES:
Increase in revolving debt	9,423			10,312
Term debt and interim promissory notes	34,756			—
Financing costs incurred	(596		)	(66		)
Repurchase of senior subordinated notes	(32,993		)	(16,572		)
Repurchase of common stock	(627		)	(105		)

Net cash provided by (used in) financing activities	9,963			(6,431		)

NET DECREASE IN CASH AND CASH EQUIVALENTS	(296		)	(173		)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	966			970

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	670		$	797

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	4,807		$	4,856
Cash paid for income taxes	275			2,550

NON-CASH TRANSACTIONS:
Stock dividends on preferred stock	$	2,701		$	2,331

See notes to condensed consolidated financial statements.

PERRY JUDD’S HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(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, 2004 and December 31, 2003 and its related results of operations and cash flows for the three and nine month periods ended September 30, 2004 and 2003. 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, 2003 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, 2004		December 31, 2003

Raw materials	$	10,286	$	6,022
Work-in-process	4,334		4,529
Production supplies and maintenance parts	2,043		2,262

Total	$	16,663	$	12,813

3. LONG-TERM DEBT

Long-term debt consists of the following:

	September 30, 2004			December 31, 2003

Revolving credit facility	$	20,629		$	11,206
Term loan facility	25,690			—
Interim promissory notes	9,066			—
Senior subordinated notes	34,196			70,010
Total debt	89,581			81,216
Less current portion	(14,343		)	(11,206		)

Long-term debt	$	75,238		$	70,010

On August 10, 2004, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which expires on August 15, 2009. The Amended Credit Agreement is comprised of a $40 million revolving credit facility based upon a borrowing base of eligible accounts receivable and inventory and a $26 million term loan facility secured by substantially all fixed assets. The proceeds of the Amended Credit Agreement were used for debt refinancing and other general corporate purposes.

Revolving Credit Facility - - The Company has the ability to borrow, subject to certain terms and conditions, up to $40.0 million until August 15, 2009, at which time any outstanding borrowings become due and payable unless otherwise extended based upon mutual agreement of the Company and lenders. Borrowings against the line are either at the LIBOR rate plus 1.75% to 2.50%, or at the prime rate plus 0% to 0.25% based on the Company’s operating leverage ratio.

Term Loan Facility - - The term loan facility is due in installment amounts on the 10th day of each month until August 15, 2009, at which time any outstanding borrowings become due and payable. Repayments may not be reborrowed. Borrowings are either at the LIBOR rate plus 1.75% to 2.50%, or at the prime rate plus 0% to 0.25% based on the Company’s operating leverage ratio.

Interim Promissory Notes - - On June 29, 2004, the Company entered into a Master Lease Agreement and Interim Financing Agreement providing up to $15 million of equipment financing. This transaction qualifies and will be treated as a capitalized lease obligation. Pursuant to these lease agreements, the Company executed Interim Promissory Notes for $9.1 million to make installment payments on new equipment. Borrowings under the Interim Promissory Notes are at the LIBOR rate plus 2.50%.

Senior Subordinated Notes - The Company issued its 10-5/8% senior subordinated notes (“notes”) due December 15, 2007 in connection with an acquisition. Interest on the notes accrues from the date of original issuance and is payable semi-annually in arrears on June 15 and December 15 of each year. The notes are redeemable, in whole or in part, at the option of the Company at specified redemption prices plus accrued interest to the date of redemption. The notes impose certain restrictions on the Company’s ability to make certain distributions and restricts the payments of dividends by the Company in certain circumstances. During the nine months ended September 30, 2004, the Company repurchased $35.8 million of its senior subordinated notes at a discount. After giving effect to the write-off of related deferred financing costs, the Company recognized a pre-tax gain of $2.3 million on the repurchases.

4. RESTRUCTURING CHARGES AND ASSET IMPAIRMENT COSTS

Effective January 1, 2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires, among other things, that a liability for costs associated with an exit or disposal activity initiated after December 31, 2002 be recognized at fair value when the liability is incurred rather than at the commitment date of the exit or disposal plan.

On November 20, 2003, the Company announced the closure of its Waterloo plant following the loss of this plant’s key customer. The Company completed production at the facility on March 29, 2004 as part of its restructuring plan (the “Plan”). The Plan is expected to consolidate certain operations, leverage existing capacity, improve efficiencies and reduce costs. The Company originally estimated that implementation of the Plan would result in an after tax charge totaling approximately $10 million to $12 million, and the Company still considers this estimate to be appropriate. Through September 30, 2004, approximately $10.7 million of after tax charges have been recorded. Total expenses, net of tax, expected to be incurred (based on the high end of the range) are as follows: employee severance and benefits, $3,300,000; facility costs including lease terminations, $1,500,000; and fixed asset impairment costs and other closure related costs, $7,200,000; totaling $12,000,000.

A rollfoward of the restructuring account balances from December 31, 2003 through September 30, 2004 follows (in thousands):

	Balance at December 31, 2003		Charges/ Additions		Payments/ Reductions		Balance at September 30, 2004
Severance and other employee related costs	$	2,022	$	2,622	$	4,479	$	165
Facility costs	—		2,359		557		1,802
Non-cash fixed asset impairment costs	—		897		897		—
Other closure costs	19		1,190		859		350
	$	2,041	$	7,068	$	6,792	$	2,317

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with the condensed financial statements and the notes to condensed financial statements included elsewhere in this Form 10-Q. This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements, due to factors including, but not limited to, those set forth in the “Risk Factors” and “Quantitative and Qualitative Disclosure About Market Risk” sections of this Form 10-Q and the “Risk Factors” section of the Company’s annual report on Form 10-K for the year ended December 31, 2003. We undertake no obligation to update any forward-looking statements after the date of this Form 10-Q.

Nine Months ended September 30, 2004 versus Nine Months ended September 30, 2003.

Net sales decreased $26.7 million or 12.2% to $192.0 million for the nine months ended September 30, 2004 from $218.7 million for the nine months ended September 30, 2003. The decrease resulted primarily from lower production volumes associated with the loss of a key customer in 2003/2004 representing a $29.1 million reduction in net sales for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

Costs of production and distribution decreased $15.3 million or 8.8% to $158.0 million for the nine months ended September 30, 2004 from $173.3 million for the nine months ended September 30, 2003, principally related to lower production levels. Costs of production and distribution as a percent of net sales were 82.3% for the nine months ended September 30, 2004 as compared to 79.2% experienced in the nine months ended September 30, 2003 principally related to the fixed costs and lower volumes associated with the phase out of operations at the Waterloo, Wisconsin plant. Paper costs were 24.7% of net sales for the nine months ended September 30, 2004 versus 21.1% for the nine months ended September 30, 2003, due to increased paper prices.

Selling, general and administrative expenses decreased $2.9 million or 12.6% to $20.1 million for the nine months ended September 30, 2004 compared to $23.0 million for the nine months ended September 30, 2003, principally related to cost savings associated with the closure of the Waterloo plant. Selling, general and administrative expenses as a percent of net sales were 10.5% in the 2004 period and in the 2003 period.

Depreciation expense decreased $1.7 million or 12.8% to $11.6 million for the nine months ended September 30, 2004 from $13.3 million for the nine months ended September 30, 2003 as a result of removing out of service assets in connection with the phase out of Waterloo operations or sale of equipment.

During the nine months ended September 30, 2004, the Company incurred $7.1 million of restructuring charges associated with its decision to close the Waterloo plant, consisting of severance and other employee related costs, facility closure charges and other closure-related costs.

Income (loss) from operations decreased $13.9 million to a loss of $4.6 million for the nine months ended September 30, 2004 from income of $9.3 million for the nine months ended September 30, 2003, due to the factors discussed in the preceding paragraphs.

Interest expense decreased $1.2 million or 17.9% to $5.5 million for the nine months ended September 30, 2004 from $6.7 million for the nine months ended September 30, 2003 as a result of reduced debt levels during the 2004 period compared to the 2003 period.

During the nine months ended September 30, 2004, the Company realized a gain of $2.3 million resulting from the repurchase of $35.8 million of its senior subordinated notes at a discount, net of the write-off of deferred financing costs. During the nine months ended September 30, 2003, the Company recognized a loss of $868,000 resulting from the repurchasing of $16.0 million of its senior subordinated notes, net of the write-off of deferred financing costs.

Three Months ended September 30, 2004 versus Three Months ended September 30, 2003.

Net sales decreased $8.5 million or 11.5% to $65.3 million for the three months ended September 30, 2004 from $73.8 million for the three months ended September 30, 2003. The decrease resulted primarily from lower production volumes associated with the loss of a key customer in 2003/2004 representing a $9.1 million reduction in net sales for the three months ended September 30, 2004 compared to the three months ended September 30, 2003.

Costs of production and distribution decreased $6.6 million or 11.1% to $52.6 million for the three months ended September 30, 2004 from $59.2 million for the three months ended September 30, 2003, principally due to lower production volumes. Costs of production and distribution as a percent of net sales were 80.6% for the three months ended September 30, 2004 as compared to 80.2% experienced in the three months ended September 30, 2003 principally related to the fixed costs and lower volumes associated with the phase out of operations at the Waterloo, Wisconsin plant. Paper costs were 25.0% of net sales for the three months ended September 30, 2004 versus 21.5% for the three months ended September 30, 2003, due to increased paper prices.

Selling, general and administrative expenses decreased $1.2 million or 17.4% to $5.7 million for the three months ended September 30, 2004 compared to $6.9 million for the three months ended September 30, 2003, principally related to cost savings associated with the closure of the Waterloo plant. Selling, general and administrative expenses decreased as a percent of net sales to 8.7% in the 2004 period compared to 9.3% in the 2003 period.

Depreciation expense decreased $1.0 million or 22.7% to $3.4 million for the three months ended September 30, 2004 from $4.4 million for the three months ended September 30, 2003 as a result of removing out of service assets in connection with the phase out of Waterloo operations or sale of equipment.

During the three months ended September 30, 2004, the Company incurred $1.1 million of restructuring charges associated with its decision to close the Waterloo plant, consisting of severance and other employee related costs, facility closure charges, and other closure-related costs.

Income from operations decreased $0.8 million or 24.2% to $2.5 million for the three months ended September 30, 2004 from $3.3 million for the three months ended September 30, 2003, due to the factors discussed in the preceding paragraphs.

Interest expense decreased $0.3 million or 15.0% to $1.7 million for the three months ended September 30, 2004 from $2.0 million for the three months ended September 30, 2003 as a result of reduced debt levels during the 2004 period compared to the 2003 period.

During the three months ended September 30, 2004, the Company realized a gain of $1.7 million resulting from the repurchase of $26.8 million of its senior subordinated notes at a discount, net of the write-off of deferred financing costs. During the three months ended September 30, 2003, the Company recognized a loss of $635,000 resulting from the repurchasing of $9.0 million of its senior subordinated notes, net of the write-off of deferred financing costs.

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, dividends and accretion on redeemable preferred stock, and gains and losses on disposition of assets and repurchases of senior subordinated notes (“EBITDA”) was $6.8 million for the nine months ended September 30, 2004 and $22.4 million for the nine months ended September 30, 2003. While EBITDA should not be construed as a substitute for operating income or loss or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with accounting principles generally accepted in the United States, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt covenant ratios. EBITDA is not necessarily a measure of the Company’s ability to fund its cash needs, and items excluded from EBITDA (such as depreciation and amortization) are significant to an understanding of the Company’s financial results. In addition, EBITDA as presented by the Company may not be directly comparable to similarly-titled measures presented by other companies. The following table sets forth the components of EBITDA reflected in the financial statements (in thousands):

	NINE MONTHS ENDED SEPTEMBER 30,
	2004			2003

Net income (loss)	$	(5,382	)	$	553
Dividends and accretion on redeemable preferred stock	338			322
Provision (benefit) for income taxes	(3,011		)	601
Interest expense	5,495			6,664
Interest income	(97		)	(95		)
Depreciation	11,578			13,270
Amortization	326			350
Gain on disposals of equipment	(170		)	(202		)
Non cash compensation related to common stock options	8			33
Loss (gain) on repurchases of senior subordinated notes	(2,309		)	868

EBITDA (as reported)	$	6,776		$	22,364

Working capital was $13.5 million and $14.6 million at September 30, 2004 and December 31, 2003, 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. On August 10, 2004, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”), which expires on August 15, 2009. The Amended Credit Agreement is comprised of a $40 million revolving credit facility based upon a borrowing base of eligible accounts receivable and inventory and a $26 million term loan facility payable in monthly installments. The proceeds of the Amended Credit Agreement were used for debt refinancing and other general corporate purposes. Borrowings under the Amended Credit Agreement bear interest at rates that fluctuate with the prime rate and the Eurodollar rate. As of September 30, 2004, the Company had borrowings of approximately $20.6 million under the revolving credit facility.

On June 29, 2004, the Company entered into a Master Lease Agreement and Interim Financing Agreement providing up to $15 million of equipment financing. This transaction qualifies and will be treated as a capitalized lease obligation. Pursuant to these agreements, the Company executed Interim Promissory Notes for $3.8 million on June 30, 2004, $2.6 million on July 15, 2004 and $2.6 million on August 17, 2004 to make installment payments on new equipment.

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, 2004, the Company had no significant concentrations of credit risk.

During the nine months ended September 30, 2004 the Company repurchased $35.8 million of its senior subordinated notes. After giving effect to the write-off of related deferred financing costs, the Company recognized a pre tax gain of $2.3 million on the repurchases.

On November 20, 2003, the Company announced the closure of its Waterloo, Wisconsin plant following the loss of this plant’s key customer. The Company completed production at the facility on March 29, 2004. This action will result in the Company incurring an after tax charge of approximately $10-$12 million associated with employee restructuring benefits, asset write-downs and other closure related expenses. During the fourth quarter of 2003 and first nine months of 2004, the Company recorded after tax charges of approximately $10.7 million and has terminated or transferred 99% of the approximately 600 employees of the Waterloo plant.

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.

Critical Accounting Policies

A summary of the Company’s significant accounting policies are included in Note 1 of the Notes to Consolidated Financial Statements and in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. 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. No significant changes have occurred to these policies since December 31, 2003.

For an understanding of the significant factors that influenced the Company’s performance during the nine months ended September 30, 2004, the foregoing discussion should be read in conjunction with the condensed consolidated financial statements appearing elsewhere in this Quarterly Report.

RISK FACTORS

You should carefully consider and evaluate all of the information in this Form 10-Q, including the risk factors listed below. The risks described below are not the only ones facing our Company. Additional risks not now known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business could be materially harmed. If our business is harmed, the market value of our common stock and senior subordinated notes could decline.

This Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Form 10-Q. We undertake no duty to update any of the forward-looking statements after the date of this Form 10-Q.

Loss of Key Customer

A significant portion of the Company’s revenue depended on a single customer whose contracts expired in 2003. For the years ended December 31, 2003, 2002 and 2001, Time, Inc. comprised 12%, 15%, and 14% of consolidated net sales, respectively. Time, Inc. did not renew its monthly printing contract that expired on July 31, 2003 and its weekly contract that expired on December 31, 2003. If this loss of business is not replaced, the Company’s financial condition and results of operations would be materially effected. The Company was not successful in replacing all of this loss of business. No other customer accounted for more than 10% of the business.

Closure of Waterloo Plant

After careful analysis and consideration of all relevant factors, the Company determined it would close its Waterloo Division and transfer the remaining work to its other printing plants in Baraboo, Wisconsin, Strasburg, Virginia and Spencer, Iowa. Approximately 600 people were employed at the Waterloo Division as of December 31, 2003. The Company completed production at the facility on March 29, 2004.

This action will result in the Company incurring an after tax charge of approximately $10-$12 million associated with employee restructuring benefits, asset write-downs and other closure-related expenses.

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; and (iv) the Company’s borrowing under its Amended Credit Agreement will be at variable rates of interest, which could cause the Company to be vulnerable to increases in interest rates. 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.

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 Amended 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 Amended Credit Agreement or the Indenture.

Subordination of the Senior Notes and Guarantees

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 will be 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

Perry Judd’s Holdings is a holding company, the principal assets of which consist of equity interests in its subsidiaries. The Senior Notes are a direct obligation of Perry Judd’s Holdings, which derives all of its revenues from the operations of its subsidiaries. As a result, Perry Judd’s Holdings 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, Perry Judd’s Holdings’ 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 Perry Judd’s Holdings and the payment of any interest on or the repayment of any principal of any loans or advances made by Perry Judd’s Holdings 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 Amended 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 Amended Credit Agreement is secured by liens against substantially all the Company’s and its subsidiaries’ assets.

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 Amended Credit Agreement contains other and more restrictive covenants and prohibits the Company and its subsidiaries from prepaying other indebtedness (including the Senior Notes) unless certain financial ratios are met. The Amended 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 Amended Credit Agreement and/or the Indenture. Upon the occurrence of an event of default under the Amended Credit Agreement, the lender could elect to declare all amounts outstanding under the Amended 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 Amended Credit Agreement were to be accelerated, there can be no assurances that the assets of the Company would be sufficient to repay in full that indebtedness and the other indebtedness of the Company, including the Senior Notes. The Company’s obligations under the Amended Credit Agreement are secured by a security interest in all the assets of the Company and its subsidiaries, excluding all 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 1998, over $106 million of purchased and leased capital expenditures have been invested 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.

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 on 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 production volumes 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.

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.

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 of 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 87% 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 Amended Credit Agreement which will permit the lenders thereunder to accelerate the debt under the Amended 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 Amended Credit Agreement will allow the Company to make such required repurchases.

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 facility, 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, 2003.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Based on their evaluation as of the end of the period covered by this Quarterly Report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) are effective based on their evaluation of these controls and procedures required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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 judgment 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, 2003 filed with the Securities and Exchange Commission on March 22, 2004. The Company does not undertake any obligation to update any forward-looking statements.

PART I.				FINANCIAL INFORMATION

		ITEM 1. Financial Statements

			Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003

			Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2004 and 2003

			Condensed Consolidated Statements of Minority Interests, Preferred Stock and Stockholders’ Equity for the Nine Months ended September 30, 2004

			Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2004 and 2003

			Notes to Condensed Consolidated Financial Statements

		ITEM 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations

		ITEM 3.			Quantitative and Qualitative Disclosures About Market Risk

		ITEM 4.			Controls and Procedures

PART II.				OTHER INFORMATION

	ITEM 6.				Exhibits

31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		PERRY JUDD’S HOLDINGS, INC.


Date:	November 15, 2004	/s/ Verne F. Schmidt
		Verne F. Schmidt
		Senior Vice President and Chief Financial Officer, acting in both his capacity as authorized signatory on behalf of the registrant and as principal financial officer

31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.