UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-K

 

 

Perry Judd’s Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

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 for the past 90 days.  Yes  ý  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

Yes  o         No  ý

 

As of March 25, 2003 there were 897,918 shares of Registrant’s Common Stock, par value $.001 per share outstanding.  There is no established public trading market for the Registrant’s Common Stock.  Therefore, an aggregate market value based on sales or bid and ask prices is not determinable.

 

Documents Incorporated by Reference

 

None

 

 

INDEX

 

PART 1
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10.	Directors, Executive Officers and Key Management Employees of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Party Transactions
Item 14.	Controls and Procedures
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K
EXHIBIT INDEX
SIGNATURES
FINANCIAL STATEMENTS
CERTIFICATIONS

 

 

This Annual Report on Form 10-K 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 the 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, those discussed in Item 1. “Business—Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.  All subsequent written and oral statements that the Company makes are qualified in their entirety by these Risk Factors.

 

Readers are urged to carefully review and consider disclosures made in this and other reports that the Company files with the Securities and Exchange Commission that discuss factors germane to the Company’s business.

 

PART I

 

Item 1.                                        Business.

 

General

 

Unless the context otherwise provides, all references in this Annual Report to the “Company” includes Perry Judd’s Holdings, Inc., (“Perry Judd’s Holdings”) its wholly-owned subsidiary, Perry Judd’s Incorporated (“Perry Judd’s”), Judd’s Online, Inc., (“Judd’s Online”) a wholly-owned subsidiary of Perry Judd’s which was sold in October 2000, and Heartland Press, Inc. (“Heartland”) which was acquired by the Company in February, 1999.  All references to Perry Judd’s shall include its former consolidated subsidiaries: Judd’s Incorporated (“Judd’s”), Judd & Detweiler, Inc., Mount Jackson Press, Inc., Shenandoah Valley Press, Inc. (“Shenandoah Valley”), and Port City Press, Inc. (“Port City”).

 

The Company is a leading multi-regional printer of magazines, catalogs, and other commercial products.  Its printing facilities are strategically located in the Midwest and Mid-Atlantic regions, with each plant having state-of-the-art, integrated prepress, press, binding and distribution capabilities.  The Company services regional and national customers through sales offices in 15 cities nationwide.  Management believes the Company has established a reputation for high quality products and superior customer service, which have resulted in long-standing customer and supplier relationships.  The Company manages the total prepress, print, and distribution process to provide value-added solutions that reduce customer costs or assist customers in increasing revenues.

 

Effective April 28, 1995, the Company acquired certain net assets of Perry Printing Corporation (“Perry Printing”).  Prior to April 28, 1995, the Company had no operating activities.

 

On February 1, 1999, the Company completed the acquisition of Heartland which was a short-run printer servicing the magazine sector.  The financial and other information of the Company included in this Annual Report includes the operations of Heartland since the date of the acquisition.

 

On October 19, 2000, the Company sold substantially all the net assets of its new media services subsidiary, Judd’s Online, to a subsidiary of Susquehanna Media Corporation.

 

The Company operates primarily in one business segment - printing services.  The following table presents the percentage of net sales contributed by each market sector during the past three fiscal years.

 

		2002		2001		2000
Magazines		65	%	63	%	61	%
Catalogs		31	%	32	%	31	%
Other		4	%	5	%	8	%
TOTAL:		100	%	100	%	100	%

 

Substantially all of the Company’s sales are based upon customer specifications.  A significant amount of the Company’s sales are made pursuant to term contracts with its customers, with the remainder made on an order-by-order basis.  One of the Company’s customers, Time, Inc., accounted for approximately 15%, 14% and 15% of the Company’s consolidated net sales during 2002, 2001 and 2000, 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 would experience a material adverse effect on its financial condition and results of operations. No other customer accounted for more than 10% of the Company’s consolidated net sales for 2002, 2001 and 2000.

 

1

 

Market Sectors

 

Magazines.  The Company believes that it is the sixth largest printer of magazines in the United States.  The Company’s principal competitors in magazines consist of four diversified printing companies.  The Company’s magazine customers include some of the largest and most established publishers in a diverse range of market categories.  The Company believes that established publishers and their publications are the most likely to have a continuing and improving market presence.  Additionally, the popularity of these magazines makes them less susceptible to cyclical downturns in advertising spending, which the Company believes provides it with an advantage over competitors whose customers may be more susceptible to such downturns.

 

Substantially all of the Company’s magazine printing is performed under contracts, the majority of which have remaining terms ranging from one to four years.  The Company’s strong relationships with its magazine customers have historically enabled it to extend most of its magazine contracts beyond their initial expiration dates.  The Company’s relationships with its top ten magazine customers average more than twenty years.

 

Catalogs.  The Company believes that it is the sixth largest printer of catalogs in the United States.  The Company’s key competitors in the catalog market consist of four diversified commercial printers whose facilities enable them to compete in the national market and smaller local and regional printers who compete for regional business.  In addition, the Company’s business-to-business catalog printing work spans a broad range of industries, including the education, home and office furniture, office products and industrial safety products industries.  Consistent with industry practice, the Company performs most of its catalog printing under short-term (1 to 3 years) agreements with its customers.

 

Other Commercial Printing.  The Company also produces a variety of specialty commercial products such as magazine inserts, calendars, and general advertising products.  These commercial products enable the Company to optimize capacity utilization by supplementing its magazine and catalog business.

 

New Media Services.  From December 1997 through October 2000, the Company developed a variety of multimedia, on-line and content repurposing products and services (collectively, the “New Media Services”), as the Company became involved in the development and management of Internet websites to enhance its traditional printing capabilities and as a natural extension and expansion of its customer relationships.  Judd’s Online provided interactive web-site development, tracking, analysis and reporting services to publishers and direct-marketers desiring to complement ink-on-paper magazine products with on-line, brand-based products and services and to take advantage of marketing and sales opportunities in electronic commerce.  On October 19, 2000, the Company sold substantially all the net assets of Judd’s Online to a subsidiary of Susquehanna Media Corporation.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

 

2

 

Prepress

 

The Company provides a full range of prepress services and equipment utilizing the latest technology, answering the demand for high quality, 24-hour preparatory services.  The Company’s prepress services include conventional preparatory services, (such as color separation, digital page assembly, “preflighting” of digital files, computerized imposition, and laser platemaking) as well as state-of-the-art computer-to-plate technology.  The Company has made significant investments in transforming its prepress operations from labor-intensive to equipment- and system-intensive processes, including the introduction of electronic prepress capabilities enabling the Company to receive, create and process pages electronically and to utilize automated platemaking equipment.

 

Press Room

 

The Company offers its customers state-of-the-art heatset web offset press capabilities at each of its printing facilities.  The Company has invested in wide web press technology which represents a substantial capital commitment, which the Company believes is matched by only a small number of well-capitalized printers.  Wide web presses generate a significant cost savings on longer press runs.  Other specialized press capabilities include short cut-off and gapless presses, which reduce paper waste.  The Company’s presses can print on lower-cost paper stocks and certain presses incorporate folders to produce tabloid- and digest-size products.  The Company has both high-speed presses best suited for longer runs and other presses with shorter makeready times which are better suited for short runs. Management believes its printing operations have the consistent high quality reproduction, low paper waste, flexibility, and dependability that is required by the Company’s customers.

 

Binding and Finishing

 

The Company has invested significant capital to install high-speed, automated binding and finishing equipment.  Printed products requiring finishing are either saddle bound (stapled) or perfect bound (square back with adhesive).  The Company’s finishing services include blow-in-cards, polybagging, tipping, and tabbing.

 

The Company employs technological advances in ink-jet addressing and geo-demographic selective binding (on both a regional and specific carrier route basis).  All of the Company’s magazine and catalog binding equipment has ink-jet capabilities and partial or fully selective systems.  During the binding process, a product’s content can be modified to include or to exclude certain materials using technologies that enable a magazine publisher or catalog merchant to customize and personalize its market by sending the same basic magazine or catalog to all consumers while inserting different advertisements, messages, prices or product offerings, depending upon the geographic and demographic characteristics of the individual customer or subscriber.

 

Ink-jet personalizing is increasingly being used by many publishers and catalogers.  Ink-jet addressing eliminates the additional printing of paper labels and improves mailing addressing efficiency, and allows both the cover and the order form to be labeled and to contain customer coding information.  Furthermore, as magazine and catalog publishers continue to look for methods to increase the level of personalization, the ink-jet process is being used more frequently to add personal messages, specific inserts to frequent buyers, or unique coding information for order entry.

 

Distribution

 

Distribution is a key element in the production process to effectively manage delivery costs, and the Company provides its customers with state-of-the-art distribution and mail list services.  The distribution services provided by the Company include multiple entry point analysis, consolidation, pool shipping, drop shipping, load planning, over-the-road and rail services, mailing/distribution consultation, freight tracking, co-mailing analysis, mail tracking, ink-jet formatting and ink-jet tape processing.

 

The Company provides a number of mail list services which are designed to improve deliverability and minimize shipping costs.  Many mail list services are integrated into the finishing operation, reducing the need for redundant handling.  These services include merging multiple lists and purging duplication, formatting the tapes or optical disks which run the finishing controller, isolating undeliverable addresses due to faulty zip codes, correcting zip codes, creating postnet barcoding, and sorting files to support customers’ mailing strategies.  Additionally, the mail list services can be used to select names to target a specific audience for a particular publication or catalog.  The Company is also able to merge lists of names for the same customer or to co-mail catalogs and magazines of different customers to achieve increased postal presort discounts.  Management believes smaller competitors either cannot offer these services or can only offer them in a more limited way.

 

By integrating the mail list services with its consolidation and distribution services, the Company maximizes postal discounts for its customers through achieving optimum presort savings and automation discounts, as well as ensuring on-time delivery.  Due to its large shipping volume, the Company’s plants are designated postal distribution centers, each with full-time postal employees.  The Company’s volume and strategic locations enable it to ship directly to U.S. Postal Service sectional center facilities, thus providing postal discounts and more timely delivery for its customers.  The Company believes its distribution capabilities and favorable distribution locations provide a competitive advantage, especially as postal rates continue to rise.

 

3

 

Competition

 

The Company competes in each of its market segments on the basis of 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’s competitors in the magazine and catalog printing market consist of diversified printing companies who have facilities sufficient to compete in the national market, along with various local or regional printers with less extensive facilities who compete for local or regional business.  The Company’s key competitors in these markets include Quebecor/World, R.R. Donnelley & Sons, Quad/Graphics, Banta Corporation and Brown Printing.

 

Raw Materials

 

Paper and ink are the primary direct materials used by the Company.  Generally, direct material costs are passed on to the customer.

 

The primary raw material used by the Company in its operation is paper.  In 2002, the Company’s customers supplied approximately 70% of the paper used in the printing process, and the Company supplied approximately 30%.  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 and the proportion of paper supplied by customers significantly affects the Company’s net sales and cost of 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.  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.  The Company believes that its relationships with its paper suppliers are strong, and that it has adequate allocations with its suppliers for its customers’ needs.

 

The Company supplies all of the ink used by its customers and has strong relationships with its suppliers.  The Company believes that there are adequate sources of supply for ink and that its relationships with its suppliers help provide quality printing, competitive pricing and overall services to its customers.

 

Seasonality

 

The Company experiences seasonal fluctuations, with generally higher sales and working capital in the second half of the fiscal year.  The revolving credit facility under the Company’s amended and restated credit agreement entered into in August, 2002 (the “Credit Agreement”) has an aggregate commitment of $25.0 million, of which $16.3 million was available for future working capital and other general corporate purposes as of December 31, 2002.

 

Regulatory Compliance

 

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 authorities to compel (or seek reimbursement for) cleanup of environmental contamination, if any, 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; however the Company is not currently aware of any environmental or employee health or safety matter which could have a material adverse effect upon the Company’s competitive position or consolidated financial statements.

 

Trade Names and Trademarks

 

The Company owns certain trade names and trademarks used in its business, none of which it believes are material.

 

4

 

Research and Development

 

Suppliers of equipment and materials used by the Company perform most of the research and development related to the printing industry.  Accordingly, the Company has not spent a material amount of resources for such purposes.  The Company does, however, dedicate significant resources to improving its operating efficiencies and the services it provides to its customers.  In an effort to realize increased efficiencies in its printing processes, the Company has made significant investments in state-of-the-art equipment, including new press and binding technology, computer-to-plate and digital processing technology, and real-time product quality monitoring systems.

 

Employees

 

As of December 31, 2002, the Company had approximately 2,305 employees, of which approximately 519 or 23% are represented by unions.  All of the union employees are employed at the Company’s Waterloo plant. Approximately 180 of such union employees are covered under a labor contract which expires in June 2007, and approximately 339 of such union employees are covered under a labor contract which expires in April 2008. The Company believes that it has satisfactory employee and labor relations.

 

Risk Factors

 

In addition to other information in this Annual Report on Form 10-K, 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 Annual Report could cause actual results to differ materially from those that the Company projects.

 

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

 

For the years ended December 31, 2002, 2001 and 2000, Time, Inc. comprised 15%, 14%, and 15% 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 on 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 effected. The Company has not yet been successful in replacing this loss of business.  No other customer accounted for more than 10% of the business.

 

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.

 

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.

 

5

 

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 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.

 

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) unless certain financial ratios are met. 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 that 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 the assets of the Company and its subsidiaries, excluding all assets relating to inventory and property, plant and equipment.

 

6

 

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.  See “Business—Competition”.

 

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.  See “Business—Raw Materials”.

 

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.

 

7

 

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.  See “Business—Regulatory Compliance”.

 

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 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.  See Item 12 “Security Ownership of Certain Beneficial Owners and Management”.

 

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.

 

Available Information

 

The Company maintains a website with the address www.perryjudds.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. As a matter of practice, we do not post forms filed with the Securities and Exchange Commission (SEC) on our website; however, this information may be obtained through other sources, such as www.edgar-online.com.

 

8

 

Item 2.                                        Properties

 

Each of the Company’s printing plants has a primary product expertise which allows it to maximize the efficiency and responsiveness of its operations.  Information about the Company’s facilities are set forth below:

 

Location		Use		Owned/Leased		Square Feet
Corporate Headquarters
Waterloo, WI		Executive Offices and Corporate Support Functions		Leased		50,200
Preproduction Facilities
Madison, WI		Digital Prepress Production		Leased		7,100
Printing Plants