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”) and Judd’s
Online, Inc., (“Judd’s Online”) a wholly-owned subsidiary of Perry Judd’s which
was sold in October 2000. 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 13 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 December 16, 1997, the
Company completed the acquisition of Judd’s, which was a short-to-medium run
printer servicing the magazine, commercial and technical books sectors. The financial and other information included
in this Annual Report includes the operations of Judd’s since the date of the
acquisition.
On February 1, 1999, the
Company completed the acquisition of Heartland Press, Inc. (“Heartland”) which
was a short-run printer servicing the magazine sector. The financial and other information 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
subsidary, 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.
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 14%, 15% and 16%
of the Company’s consolidated net sales during 2001, 2000
and 1999,
respectively. In June 2001, Time, Inc.,
notified the Company that it would not renew its printing contract for the
production of three weekly publications at its expiration on December 31, 2003.
The production that is the subject of the contract amounted to approximately
7.8% of the Company’s consolidated net sales for 2001. If this loss of business
is not replaced, the Company would experience a material adverse effect on its
financial condition and results of operations. However, the Company believes
that this lost business will be replaced and, therefore, does not expect 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 2001, 2000 and 1999.
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 18 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 computer,
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”), which began 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.”
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 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.
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 2001, the
Company’s customers supplied approximately two-thirds of the paper used in the
printing process, and the Company supplied approximately one-third. 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
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
volume or profits to any significant extent.
However, sharp increases in paper prices and related reduction in print
advertising programs are more likely to adversely affect volumes and
profits. 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 yield improved quality, pricing and overall services to its
customers. See “Certain Relationships
and Related Party Transactions”.
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 has
an aggregate commitment of $45.0 million, $41.4 million of which was available
for future working capital and other general corporate purposes as of December
31, 2001.
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 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.
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, 2001,
the Company had approximately 2,389 employees, of which approximately 572 or
24% are represented by unions. All of
the union employees are employed at the Company’s Waterloo plant. Approximately
209 of such union employees are covered under a labor contract which expires in
June 2007, and approximately 363 of such union employees are covered under a
labor contract which expires in April 2002.
The Company is currently engaged in contract negotiations with this
union and 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.
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 Company’s Amended and
Restated Credit Agreement with its banks (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.
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
The Company is a holding company, the principal assets
of which consist of equity interests in its subsidiaries. The Senior Notes are a direct obligation of
the Company, which derives all of its revenues from the operations of its
subsidiaries. As a result, the Company
will be dependent on the earnings and cash flow of, and dividends and distributions
or advances from, its subsidiaries to provide the funds necessary to meet its
debt service obligations, including the payment of principal and interest on
the Senior Notes. Accordingly, the
Company’s ability to pay interest on the Senior Notes and otherwise to meet its
liquidity requirements may be limited as a result of its dependence upon the
distribution of earnings and advances of funds by its subsidiaries. The payment of dividends from the
subsidiaries to the Company and the payment of any interest on or the repayment
of any principal of any loans or advances made by the Company to any of its
subsidiaries may be subject to statutory restrictions under corporate law
limiting the payment of dividends and are contingent upon the earnings of such
subsidiaries. The Company’s
subsidiaries are guarantors of the indebtedness incurred under the Credit
Agreement. The Senior Notes are not
secured by liens against any of the Company’s or its subsidiaries’ assets,
while the indebtedness incurred under the Credit Agreement is secured by liens
against substantially all the Company’s and its subsidiaries’ assets.
Restrictions
Imposed by Terms of the Company’s Indebtedness
The Indenture restricts, among other things, the
Company’s and its subsidiaries’ ability to incur additional indebtedness, pay
dividends or make certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur liens, incur
indebtedness that is subordinate to Senior Indebtedness (as defined in the
Indenture) but senior in right of payment to the Senior Notes, impose
restrictions on the ability of a subsidiary to pay dividends or make certain
payments to the Company and its subsidiaries, merge or consolidate with any
other persons or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of the assets of the Company. In addition, the Credit Agreement contains
other and more restrictive covenants and prohibits the Company and its
subsidiaries from prepaying other indebtedness (including the Senior Notes). The Credit Agreement also requires the
Company to maintain specified financial ratios and satisfy certain financial
condition tests. The Company’s ability
to meet those tests and ratios can be affected by events beyond its control,
and there can be no assurance that it will meet those ratios and tests. A breach of any of these covenants could
result in a default under the Credit Agreement and/or the Indenture. Upon the occurrence of an event of default
under the Credit Agreement, the lenders 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 lenders could proceed against
the collateral granted to them to secure that indebtedness. If the Senior Indebtedness under the Credit
Agreement were to be accelerated, there can be no assurances that the assets of
the Company would be sufficient to repay in full the indebtedness and the other
indebtedness of the Company, including the Senior Notes. The Company’s obligations under the Credit
Agreement are secured by a security interest in substantially all the assets of
the Company and its subsidiaries, including all of their cash and other
tangible and intangible assets, and all real property. In addition, the Company and Perry Judd’s
pledged as collateral all of their shares of capital stock in each of their
subsidiaries.
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 1997, over
$115.0 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
increases in the cost of paper to its customers, while declines in paper costs
generally result in lower prices to customers.
Typical fluctuations in paper costs result in corresponding fluctuations
in the Company’s net sales, but typical fluctuations generally have not
affected volume or profits to any significant extent. However, sharp increases in paper prices and related reduction in
print advertising programs are more likely to adversely affect volumes and
profits. To the extent that there are
future paper costs increases and the Company is not able to pass such increases
to its customers or its customers reduce their demand for the Company’s
products and services, the Company’s financial condition and results of
operations could be materially adversely affected.
Capacity in the paper industry has remained relatively
stable in recent years. Increases or
decreases in demand for paper have led to corresponding pricing changes and, in
periods of high demand, to limitations on the availability of certain grades of
paper, including grades utilized by the Company. Any loss of the sources for paper supply or any disruption in
such sources’ business or failure to meet the Company’s product needs on a timely
basis could cause, at a minimum, temporary shortages in needed materials which
could have a material adverse affect on the Company’s results of
operations. Although the Company
actively manages its paper supply and believes it has established strong
relationships with its suppliers, there can be no assurance that the Company’s
sources of supply for its paper will be adequate or, in the event that such
sources are not adequate, that alternative sources can be developed in a timely
manner. If the Company is unable to
secure sufficient supplies of paper of appropriate quality, its financial
condition, results of operations and cash flows could be materially adversely
affected. 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.
A
Significant Portion of the Company’s Revenue depends on a Single Customer
For the years ended December 31, 2001, 2000 and 1999,
Time, Inc. comprised 14%, 15% and 16% of consolidated net revenue,
respectively. Time, Inc. has notified the Company that it will not renew its
printing contract at its expiration on December 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. However, the Company
believes that this lost business will be replaced and therefore, does not
expect a material adverse effect on its financial condition and results of
operations. No other customer accounted for more than 10% of the business.
Environmental
and other Governmental Regulation
The Company is subject to regulation under various
federal, state and local laws relating to the environment and to employee
health and safety. These environmental
regulations relate to the generation, storage, transportation, handling,
disposal and emission into the environment of various substances. Permits are required for operation of the
Company’s business, and these permits are subject to renewal, modification and,
in certain circumstances, revocation.
The Company is also subject to regulation under various federal, state
and local laws which allow regulatory authority to compel (or seek reimbursement
for) cleanup of environmental contamination at the Company’s own sites and at
facilities where its waste is or has been disposed. The Company has internal controls and personnel dedicated to
compliance with all applicable environmental and employee health and safety
laws. The Company expects to incur
ongoing capital and operating costs and administrative expenses to maintain
compliance with applicable environmental laws.
The Company cannot predict the environmental or employee health and
safety legislation or regulations that may be enacted in the future or how
existing or future laws or regulations will be administered or
interpreted. Compliance with new laws
or regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, may require additional
expenditures by the Company, some or all of which may be material. 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 on the acquired companies. There can be no assurance that the Company will be able to retain
such management personnel.
Control
by Principal Stockholders
Robert E. Milhous and Paul B. Milhous, the Chairman
and Vice Chairman, respectively, of the Company own together beneficially over
86% of the outstanding capital stock of the Company. Accordingly, these stockholders have the ability, acting
together, to control fundamental corporate transactions requiring stockholder
approval, including without limitation approval of merger transactions
involving the Company and sales of all or substantially all of the Company’s
assets. 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.
Item 2.
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:
In addition, the
Company leases several sales offices located throughout the United States. The Company believes that none of its leases
are material to its operations and that such leases were entered into on market
terms.
Item
3.
Item
3. Legal Proceedings
On November 24, 1999, Journal Communications, Inc. and Northstar Print
Group, Inc. filed suit against the Company in the State of Wisconsin Circuit
Court for Jefferson County, Case No. 99CV373, arising out of the Company’s
redemption of its Series A redeemable preferred stock held by the plaintiffs
due to the Company’s outstanding indemnity claims involving breaches of
warranties and representations made by the plaintiffs on certain assets
purchased from the plaintiffs in connection with the acquisition of Perry
Printing Corporation in 1995.
Redemption features of the Series A redeemable preferred stock provide
the Company with the option to offset such claims as immediate redemption of
the Series A redeemable preferred stock up to a maximum redemption value of $5
million. The complaint alleged that the
Company wrongfully redeemed the preferred stock, refused to pay dividends on
other stock, and refused to pay for certain services allegedly rendered by the
plaintiff to the Company. On August 31,
2000, the Company reached a settlement agreement, effective June 30, 2000, with
the former owner of Perry Printing concerning the two indemnity claims and the
employee benefit obligation claim.
Pursuant to this agreement, the Company paid the former owner of Perry
Printing the redemption value of Series B and D redeemable preferred stock
including unpaid dividends of $2,545,000 through June 30, 2000, and dividends
of $1,452,000 relating to Series A redeemable preferred stock which was
partially reinstated in the amount of 43,940.68 shares. These Series A shares were recorded in the
consolidated financial statements at their estimated fair value as of the April
28, 1995 acquisition date of $2,197,000, plus an adjustment for accretion
through June 30, 2000 of $946,000.
Other claims,
suits, and complaints may arise in the ordinary course of the Company’s
business. The Company believes that any
such pending matters are adequately reserved for, are covered by insurance, or
would not have a material adverse effect on the consolidated financial
statements of the Company, taken as a whole, if determined adversely against
the Company.
Item
4.
Item
4. Submission of Matters to a
Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant’s Common
Equity and Related Stockholder Matters
Market Information
There is no established public trading market for the Company’s common
stock or other equity securities. As of December 31, 2001, there were 15
holders of the common stock.
Dividends
The Company has never paid and has no present
intention of paying cash dividends on its common stock. Any determination in the future to pay
dividends will depend on the Company’s financial condition, capital requirements,
results of operations, contractual limitations and any other factors deemed
relevant by the Company’s Board of Directors.
In addition, the Indenture governing the Company’s Senior Notes due in
2007 imposes certain restrictions on the Company’s ability to make certain
distributions and restricts the payment of dividends by the Company in certain
circumstances.
Item 6.
Item 6. Selected
Financial Data
The following table sets
forth selected consolidated financial data for each of the last five fiscal
years. This information is qualified by
reference to, and should be read together with, the Consolidated Financial
Statements and Notes thereto and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this
Annual Report on Form 10-K. The statement
of operations data for the years ended December 31, 2001, 2000 and 1999 and the
balance sheet data as of December 31, 2001 and 2000 are derived from the
Consolidated Financial Statements of the Company included elsewhere in this
Annual Report on Form 10-K. Information
related to 1998 and 1997 is derived from financial statements not included
herein.
(1) Includes unpaid dividends in the three years
ended December 31, 1999.
(2) “EBITDA” represents earnings before interest,
income taxes, depreciation, amortization, noncash compensation related to
common stock options, and gains and losses on dispositions of assets. 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
generally accepted accounting principles, it is included herein to provide
additional information with respect to the ability of the Company to meet its
future debt service, capital expenditure and working capital requirements. 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. See the Company’s Consolidated Statements of
Cash Flows and the related notes thereto included in this Form 10K.
(3) On December 16, 1997, the Company acquired
the assets of Judd’s Incorporated for $102.0 million less outstanding
indebtedness.
(4) On September 2, 1998, the Company sold all
the outstanding shares of capital stock of its subsidiary, Port City for $29.4
million.
(5) On February 1, 1999, the Company acquired all
of the issued and outstanding capital stock of Heartland for $17.5 million.
(6) On October 19, 2000, the Company sold
substantially all of the net assets of its subsidiary Judd’s Online, for $6.3
million.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following
discussion of our financial condition and results of operations should be read
in conjunction with our financial statements and the related notes to such
financial statements included elsewhere in this Report beginning on page. The following discussion contains
forward-looking statements that involve risks and uncertainties. The statements are based on current
expectations, and actual results could differ materially from those discussed
herein. Factors that could cause or contribute
to the differences are discussed in “Business - Risk Factors” and elsewhere in
this Annual Report.
Results of Operations
Comparison of the year ended December
31, 2001 with the year ended December 31, 2000
Net sales
decreased $21.8 million or 6.4% to $321.1 million for the year ended December
31, 2001 from $342.9 million for the year ended December 31, 2000. The decrease
resulted primarily from a lower volume of production units from new and
existing customers and from the sale of Judd’s Online on October 19, 2000,
whose net sales of $4.4 million are included in the 2000 results.
Costs of
production and distribution decreased $22.8 million or 8.3% to $253.1 million
for the year ended December 31, 2001 from $275.9 million for the year ended December
31, 2000, principally due to lower operating expenses resulting from reduced
production levels, the sale of Judd’s Online, and the termination of a defined
benefit pension plan. Costs of production and distribution as a percentage of
net sales were 78.8% for the year ended December 31, 2001 as compared to 80.5%
for the year ended December 31, 2000. Paper costs were 23.6% of net sales for
the year ended December 31, 2001 versus 23.5% for the year ended December 31,
2000.
Selling, general
and administrative expenses decreased $2.6 million or 7.4% to $32.3 million for
the year ended December 31, 2001 compared to $34.9 million for the year ended
December 31, 2000 principally related to the sale of Judd’s Online. Selling,
general and administrative expenses decreased as a percent of net sales to
10.1% in the 2001 period compared to 10.2% in the 2000 period.
Depreciation
expense increased $1.1 million or 8.1% to $14.6 million for the year ended
December 31, 2001 from $13.5 million for the year ended December 31, 2000 due
primarily from the full year effect of purchased assets placed in service from
2000.
Gains or losses on
disposals of business and equipment decreased $3.8 million for the year ended
December 31, 2001 compared to the year ended December 31, 2000 related
principally to the gain recognized on the sale of substantially all of the net
assets of Judd’s Online on October 19, 2000.
Income from
operations decreased $1.0 million or 4.7% to $20.5 million for the year ended
December 31, 2001 from $21.5 million for the year ended December 31, 2000, due
to the factors discussed in the preceding paragraphs.
EBITDA (as defined
in Item 6. “Selected Financial Data” above) increased $3.2 million or 9.9% to
$35.4 million for the year ended December 31, 2001 from $32.2 million for the
year ended December 31, 2000 principally due to the factors discussed in the
first two paragraphs of this section. EBITDA increased as a percent of net
sales from 9.4% to 11.0%.
Interest expense
decreased $1.0 million to $12.8 million for the year ended December 31, 2001
from $13.8 million for the year ended December 31, 2000 as a result of reduced
debt levels and lower borrowing rates.
Comparison of the year ended December
31, 2000 with the year ended December 31, 1999
Net sales
increased $26.9 million or 8.5% to $342.9 million for the year ended December
31, 2000 from $316.0 million for the year ended December 31, 1999. The increase resulted primarily from the
return of work at the Waterloo Plant which was temporarily displaced during the
second quarter of 1999 due to labor negotiations which were unresolved at the
time, an additional month of activity related to Heartland which was acquired
on February 1, 1999 and an overall increase in volume from new and existing
customers.
Costs of
production and distribution increased $16.6 million or 6.4% to $275.9 million
for the year ended December 31, 2000 from $259.3 million for the year ended
December 31, 1999, principally due to increases in production related to the
factors mentioned in the preceding paragraph.
Costs of production and distribution as a percentage of net sales were
80.5% for the year ended December 31, 2000 as compared to 82.1% for the year
ended December 31, 1999, principally from improved operating efficiencies and
lower net material costs incurred during the 2000 year. Paper costs were 23.5%
of net sales for the year ended December 31, 2000 versus 24.1% for the year
ended December 31, 1999.
Selling, general
and administrative expenses increased $2.5 million or 7.7% to $34.9 million for
the year ended December 31, 2000 compared to $32.4 million for the year ended
December 31, 1999 principally as a result of increased sales. Selling, general and administrative expenses
decreased as a percent of net sales to 10.2% in the 2000 period compared to
10.3% in the 1999 period.
Depreciation
expense increased $1.6 million or 13.4% to $13.5 million for the year ended
December 31, 2000 from $11.9 million for the year ended December 31, 1999 due
primarily from the full year effect of purchased assets placed in service from
1999.
Gains or losses on
disposals of business and equipment increased $4.6 million for the year ended
December 31, 2000 compared to the year ended December 31, 1999 related
principally to the gain recognized on the sale of substantially all of the net
assets of Judd’s Online on October 19, 2000.
Income from
operations increased $11.2 million or 108.7% to $21.5 million for the year
ended December 31, 2000 from $10.3 million for the year ended December 31,
1999, due to the factors discussed in the preceding paragraphs.
EBITDA (as defined
in Item 6. “Selected Financial Data”
above) increased $8.3 million or 34.7% to $32.2 million for the year ended
December 31, 2000 from $23.9 million for the year ended December 31, 1999
principally due to the factors discussed in the first two paragraphs of this
section. EBITDA increased as a percent
of net sales from 7.6% to 9.4%.
Interest expense
decreased $0.5 million to $13.8 million for the year ended December 31, 2000
from $14.3 million for the year ended December 31, 1999 as a result of reduced
debt levels during the 2000 period compared to the 1999 period.
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, noncash compensation related to common stock
options and gains and losses on dispositions of assets (“EBITDA”) was $35.4
million, $32.2 million and $23.9 million for the years ended December 31, 2001,
2000 and 1999, respectively.
Working capital was $36.4 million, $33.7 million and $31.1 million at
December 31, 2001, 2000 and 1999, respectively.
The $2.7 million increase in working capital at December 31, 2001 versus
December 31, 2000 was primarily attributable to a reduced level of accrued
liabilities relating to capital projects in progress. The $2.6 million increase
in working capital at December 31, 2000 versus December 31, 1999 was primarily
attributable to the redemption of preferred stock held by the former owner of
Perry Printing (see legal proceedings) and the sale of Judd’s Online resulting
in net proceeds of $6.3 million.
Capital expenditures for
purchased assets and asset acquisitions funded under operating leases were as
follows for the periods indicated (dollars in millions):
These capital expenditures reflect the purchase and
lease of additional prepress, press and bindery equipment. The purchased capital investments have been
funded by internally generated funds and by borrowings under the Credit
Agreement. Generally, these capital
expenditures have increased or will increase the Company’s production capacity
and are part of the Company’s objective to maintain modern, efficient plants
and technologically advanced equipment.
At December 31, 2001, the Company had commitments to purchase or lease
approximately $14.1 million of operating assets.
During 1997 and
1998, the Company entered into sale and leaseback transactions for the majority
of its real property located in Wisconsin and Virginia. Each of the sale and
leaseback transactions has a 20-year term. The following table summarizes the
initial annual lease expense and future escalations resulting from the sale and
leaseback transactions.
On December 16, 1997, concurrent with the consummation
of the Judd’s acquisition and the issuance of the 10-5/8% senior subordinated
debt, the Company amended and restated its existing term loan and revolving
credit facility to provide a $45 million Revolving Credit Facility (based upon
a borrowing base) and a $30 million Term Loan Facility. The scheduled amortization of the Term Loan Facility
is payable in monthly installments. In
addition to the scheduled amortization under the Term Loan Facility, additional
payments are required equal to 75% of the annual excess cash flow, as defined,
with payments to be applied in inverse order for amortization purposes. The
initial five-year term of the Amended and Restated Credit Agreement expires on
December 15, 2002 and Company management intends to negotiate a new credit
agreement.
On February 1,
1999, the Company acquired all of the issued and outstanding capital stock of
Heartland for $17.5 million in cash, including acquisition costs. In addition, the Company assumed $6.6
million of Heartland’s indebtedness, all of which was paid in full upon
consummation of the acquisition.
On October 19, 2000, the Company sold substantially
all of the net assets of its subsidiary, Judd’s Online, to a subsidiary of
Susquehanna Media Corporation for approximately $6.3 million, net of closing
costs. Net sales and loss from
operations for this subsidiary which are included in the consolidated results
of operations are as follows:
Rents and operating lease expense were $17.2 million,
$17.8 million and $16.5 million for the years ended December 31, 2001, 2000 and
1999, respectively.
At December 31, 2001, the Company has approximately
$2.8 million of net operating loss carryforwards for state income tax purposes. The Company has alternative minimum tax
credits of approximately $2.3 million as of December 31, 2001, which do not
expire and may be applied against regular tax in the future, in the event
regular tax expense exceeds alternative minimum tax.
The Company plans to fund the majority of its major
new capital expenditures through operating leases for the foreseeable
future. The Company believes that cash
generated from operations and available borrowings under the Amended and
Restated Credit Agreement will be sufficient to fund planned capital
expenditures, working capital requirements, operating leases and interest and
principal payments for the foreseeable future.
The Revolving Credit Facility has an aggregate commitment of $45.0
million, $41.4 million of which was available for future working capital and
other general corporate purposes as of December 31, 2001.
For information
related to future commitments of the Company, see Notes 4, 7 and 11 of the
Notes to Consolidated Financial Statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company
generally does not enter into any material futures, forwards, swaps, options or
other derivative financial instruments for trading or other purposes. The primary exposure to market risk relates
to fluctuations in interest rates and the effects those changes may have on
operating results due to long-term financing arrangements. The Company manages its exposure to this
market risk by monitoring interest rates and possible alternative means of
financing. Operating results may be
affected by changes in short-term interest rates under the revolving credit and
term loan facilities, pursuant to which borrowings bear interest at a variable rate. Based on our debt outstanding under the
revolving credit and term loan facilities as of December 31, 2001, an increase
of 1.0% in interest rates would increase interest expense and decrease income
before income taxes by approximately $78,000. See Note 4 of the Notes to
Consolidated Financial Statements.
Item 8:
Item 8: Financial Statements and Supplementary Data
The financial
statements and schedules listed in the accompanying Index to consolidated
financial statements and schedules on page are filed as a part of this
report.
Item 9:
Item 9: Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure
Deloitte &
Touche LLP was previously the independent auditors for Perry Judd’s Holdings,
Inc. On August 27, 2001, that firm’s appointment as independent auditors was
terminated and Ernst & Young LLP was engaged as independent auditors. The
decision to change accountants was recommended by management and approved by
the Board of Directors.
During the two
fiscal years ended December 31, 2000, and the subsequent interim period through
August 27, 2001, there were no disagreements with Deloitte & Touche LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to their satisfaction would have caused them to make reference in connection
with their opinions to the subject matter of the disagreement.
The Independent
Auditors’ Reports of Deloitte & Touche LLP on the consolidated financial
statements of Perry Judd’s Holdings, Inc. and subsidiaries as of and for the
years ended December 31, 2000 and 1999 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope, or accounting principles.
PART III
Item
10.
Item
10. Directors,
Executive Officers and Key Management Employees
The table below
sets forth certain information regarding the directors, senior executive
officers, and certain other executive officers and key management employees of
the Company and its subsidiaries as of March 1, 2002. All of the persons listed below are U.S. citizens.
Directors and Senior
Executive Officers
Executive Officers and
Key Management Employees
Robert E. Milhous has been Chairman of the Board of Perry Judd’s
Holdings, Inc. and Perry Judd’s since December 1994. Mr. Milhous was Chairman of the Board of Treasure Chest and its
predecessor corporation from 1967 until the sale of Treasure Chest in
1993. Mr. Milhous is also the Chairman
of the Board of Directors of Novamil Corporation (“Novamil”), which manages
various companies owned by affiliates controlled by himself and Paul B.
Milhous. Robert E. Milhous is the
brother of Paul B. Milhous.
Paul B. Milhous has been Vice Chairman of the Board of Perry Judd’s
Holdings, Inc. and Perry Judd’s since December 1994. Mr. Milhous was Vice Chairman of the Board of Treasure Chest and
its predecessor corporation from 1967 until the sale of Treasure Chest in
1993. Mr. Milhous is also the
Vice-Chairman of the Board of Directors of Novamil, which manages various
companies owned by affiliates controlled by himself and Robert E. Milhous. Paul B. Milhous is the brother of Robert E.
Milhous.
Craig A. Hutchison has been the President and CEO of Perry Judd’s since
April 1995. Prior to that, Mr.
Hutchison was President and CEO of Perry Printing Corporation (“Perry
Printing”), the predecessor of Perry Judd’s, since 1990. Mr. Hutchison has been a member of the Board
of Directors of Perry Judd’s Holdings, Inc. and Perry Judd’s since April 1995.
David E. Glick joined Perry Judd’s as Executive Vice President of
Operations in February 1998 and has been a member of the Board of Directors of
Perry Judd’s Holdings, Inc. and Perry Judd’s since that time. From 1993 to January 1998, Mr. Glick served
in various capacities at Treasure Chest Advertising, a subsidiary of Big Flower
Press Holdings, Inc., including Senior Vice President of Operations, Senior
Vice President and General Manager of Operations and Sales and Senior Vice
President of Operations and Technology.
Verne F. Schmidt has been Senior Vice President and Chief Financial
Officer since he joined Perry Judd’s in January 1997 and was elected to the
Board of Directors of Perry Judd’s Holdings, Inc. and Perry Judd’s in February
1998. In July 2001, Mr. Schmidt was
appointed as Secretary of the Company. From 1974 through 1996, Mr. Schmidt held
various financial and accounting positions including Senior Vice President and
Chief Financial Officer of Ringier America and its predecessor companies.
Beth A. Lindsay has been Senior Vice President of Human Resources
since joining Perry Judd’s in March 1996.
From 1982 to 1996, Ms. Lindsay was employed with World Color Press in
various positions, including Human Resources Director, Vice President Human
Resources, Commercial Division, and Regional Vice President, Human Resources.
Howard D. Sullivan has been Senior Vice President, Publication Sales
since December 1997. Prior to this
date, Mr. Sullivan served as Vice President of Sales and Customer Service,
Shenandoah Valley. Mr. Sullivan joined
Judd & Detweiler in 1958 and rose to the position of Executive Vice
President by 1979. He left Judd’s in
1988 to serve as President and CEO of Holliday-Tyler Printing Corporation. He returned to Shenandoah Valley as Vice
President and Regional Sales Manager in 1992.
Timothy M. Smith has been Vice President of Publication Sales of Perry
Judd’s since January 1997. Prior to
assuming his current responsibilities, Mr. Smith was Vice President of National
Accounts from 1994 to 1997. Mr. Smith
served as Vice President of Eastern Sales from May 1993 to 1994 and, before
that, he was Director of Sales from 1990 to 1993.
Stephen M. Sanfelippo has been Vice President, Commercial and Catalog Sales
since January 2000. Prior to assuming
his current responsibilities, Mr. Sanfelippo served as Vice President Central
Region Commercial Sales of Perry Judd’s since October 1997. Prior to that, he was Director of Central
Region Sales from 1994 to October 1997.
Bradley J. Hoffman has been Vice President, Corporate Controller of
Perry Judd’s since May 1998 and previously was Vice President, Finance of Perry
Printing from July 1994. From December
1992 to July 1994, Mr. Hoffman served as Controller Web Division/Waterloo
Plant. From September 1989 to December
1992, Mr. Hoffman was Chief Financial Officer and Director of Operations at
Putman Publishing Company.
Walter A. Edwards has been Vice President, Division Manager of the
Baraboo Plant since joining Perry Judd’s in January 1996. From 1991 to 1995, Mr. Edwards was employed
by World Color Press as Vice President and Regional Manager. From 1974 to 1991, Mr. Edwards held a
variety of positions at R.R. Donnelley & Sons/Meredith-Burda, including
Vice President, Manufacturing and Group Manufacturing Manager.
Larry C. Cole has been Vice President, Division Manager of the
Waterloo Plant since March 1991. From
January 1990 to March 1991, Mr. Cole served as Vice President of Operations of
Perry Printing. Mr. Cole joined Perry
Printing in 1988 as Director of Material Management.
Allen C. Briggs has been Vice President, Division Manager of the
Strasburg Plant since May 1998. From
February 1994 until May 1998, he was employed at Treasure Chest Advertising as
Vice President, Division Manager. From
January 1993 until February 1994, he held various positions at Ringier America,
including Vice President, Division Manager.
From October 1988 to January 1993, Mr. Briggs was employed as Vice
President of Manufacturing at Shenandoah Valley.
Daniel L. Leever has been Vice President, Division Manager of the
Heartland Plant since February 1999.
From January 1998 until February 1999 he was Manufacturing Manager of
the Strasburg Division. Prior to that
he was Plant Manager at Wilcox Press from 1996 to 1998.
Item
11.
Item
11. Executive
Compensation
Director Compensation
Non-employee
directors are reimbursed for their out-of-pocket expenses incurred in attending
meetings of the Board of Directors of the Company. In addition, Robert E. Milhous and Paul B. Milhous currently
receive $33,275 each in annual compensation for their services as Chairman and
Vice Chairman, respectively, of the Board of Directors of the Company.
Executive Compensation
The following
Summary Compensation Table sets forth certain information with respect to the
compensation paid or accrued by the Company for services rendered during the
years ended December 31, 2001, 2000 and 1999 by the Company’s Chief Executive
Officer and each of the four other most highly compensated executive officers
whose annual salary and bonus exceeded $100,000 (collectively, the “Named
Executive Officers”):
Summary Compensation Table
(1) The
compensation described in this table does not include medical, group life
insurance or other benefits received by the Named Executive Officers which are
available generally to all salaried employees of the Company and certain
perquisites and other personal benefits, securities or property received by the
Named Executive Officers which do not exceed the lesser of $50,000 or 10% of
any such officer’s salary and bonus disclosed in this table.
(2) The Company did
not grant any restricted stock awards or stock appreciation rights or make any
long-term incentive plan payouts to the Named Executive Officers during 2001.
(3) Consists of
relocation expenses paid by the Company.
(4) Consists of
auto lease payments paid by the Company.
(5) Consists of
amounts accrued under a severance agreement.
Option Grants
No stock options
were granted to the Named Executive Officers during 2001.
Year-End Option Table
All stock options
held by Named Executive Officers were exercised in 2000.
Employment Agreement
On April 28, 1995,
Craig Hutchison entered into a three-year employment agreement with Perry
Judd’s (the “Employment Agreement”) to serve as President and Chief Executive
Officer of Perry Judd’s. The employment
agreement was extended for three one-year periods commencing April 1998 and
unless terminated by written notice of either party, the Employment Agreement
renews automatically for up to two additional one-year periods. The Employment Agreement provides for a base
salary of $235,000, subject to adjustment upward at the discretion of the Board
of Directors. Mr. Hutchison’s current
annual base salary is $327,600. Under
the Employment Agreement, Mr. Hutchison is entitled to participate in the
Incentive Compensation Plan (as defined below), the Stock Option Plan (as
defined below) and in all other life, welfare and health plans and benefit
programs made available by the Company to the senior executive officers of the
Company. The Employment Agreement
provides for severance pay in case of termination by Mr. Hutchison for good
cause, the expiration of the fifth term extension, or for termination other
than for cause, death or permanent disability.
The severance pay shall equal the aggregate salary which would be
payable to Mr. Hutchison during the period commencing on the effective date of
termination and ending one year thereafter.
However, if such effective date shall be subsequent to the expiration of
a fourth term extension it shall be assumed that Mr. Hutchison would have been
entitled to salary at the rate in effect on the effective date of termination
during such one year period after such date notwithstanding the expiration of
the fifth term extension.
Change in Control Severance Program
Under the
severance arrangement with Mr. Hutchison, dated April 28, 1995, (i) if there is
a change in control (ii) if the aggregate value of stock and stock options held
by Mr. Hutchison (“equity value”) is less than $2,000,000 and (iii) if (a) Mr.
Hutchison’s employment is terminated as a result of the change of control, (b)
Mr. Hutchison is asked to accept lesser responsibility but instead elects to
leave the Company, or (c) Mr. Hutchison is asked to relocate and instead leaves
the Company, Mr. Hutchison’s salary will be continued at a rate of $333,000 per
year for up to three years or until new employment is commenced, whichever
occurs first. Furthermore, upon death
or if there is a change in control, and the equity value realized by Mr.
Hutchison is less than $1,000,000, the Company will be obligated to pay Mr.
Hutchison the amount of such difference.
The Company
entered into three severance arrangements with three of its executive officers,
Verne F. Schmidt, David E. Glick and Howard D. Sullivan in December 1996,
January 1998, and March 2000, respectively, under which each officer is
entitled to certain benefits in the event of a change in control of the
Company.
Under the
severance arrangement with Verne F. Schmidt, (i) if there is a change in
control and (ii) if (a) Mr. Schmidt’s employment is terminated or (b) Mr.
Schmidt does not have the opportunity to accept a comparable position with a
successor entity after a change of control, Mr. Schmidt will receive his
current salary and benefits for up to one year or until he accepts another
position, whichever occurs first.
Under the
severance arrangement with David E. Glick, (i) if there is a change in control
(ii) if the aggregate value of stock and stock options held by Mr. Glick
(“equity value”) is less than $2,000,000 and (iii) if (a) Mr. Glick’s
employment is terminated as a result of the change of control, (b) Mr. Glick is
asked to accept lesser responsibility but instead elects to leave the Company,
or (c) Mr. Glick is asked to relocate and instead leaves the Company, Mr.
Glick’s salary will be continued at a rate of $333,000 per year for up to three
years or until new employment is commenced, whichever occurs first. Furthermore, upon death or if there is a
change in control, and the equity value realized by Mr. Glick is less than
$1,000,000, the Company will be obligated to pay Mr. Glick the amount of such
difference.
Under the
severance arrangement with Howard D. Sullivan, Mr. Sullivan is entitled to a
payment of $200,000 if (i) there is a change of control or (ii) if Mr. Sullivan
remains active and effective in his current capacity as Senior Vice President
of Publication Sales through March 31, 2002.
If Mr. Sullivan leaves the employ of the Company before March 31, 2002
for any reason other than a good cause termination, Mr. Sullivan will be
entitled to a pro rata payment through the last day of his employment.
Stockholder Agreements
Certain agreements
among the stockholders of the Company, to which the Company is also a party,
provide majority stockholders proposing to sell shares in a change of control
transaction with the right to require the other stockholders to include their
shares in such sale. Conversely,
minority stockholders have the right to sell shares on a sale by majority
stockholders on a pro rata basis. In
addition, the agreements provide the Company with rights of first refusal on
proposed transfers of shares by certain other stockholders.
At December 31,
2001, 42,905 shares of common stock held by management are subject to put and
call arrangements similar to the shares purchased under the Stock Option Plan
(see below) at the employee’s termination, retirement after attaining age 62,
permanent disability or death.
Management Incentive Compensation
Plan
The Company’s
management employees, including the Named Executive Officers, are eligible to
participate in the Company’s Management Incentive Compensation Program (the
“Management Incentive Program”). Under
the Management Incentive Program, management employees are eligible to receive
an annual cash bonus based on the Company’s achievement of financial
performance targets that are based on the Company’s annual budget as approved
by the Board of Directors. During 2001,
the Company achieved certain financial performance targets and bonus payments
of approximately $1.5 million have been accrued under the Management Incentive
Program to be paid in 2002.
1995 Stock Option Plan
On May 6, 1995,
the Board of Directors adopted and the stockholders approved the 1995 Stock
Option Plan (the “Stock Option Plan”), which provides for the grant of
non-statutory stock options (“Options”) for the purchase of common stock of the
Company to officers and employees of the Company. The Stock Option Plan was subsequently amended by the Board of
Directors in 1995 and 2000. The maximum
number of shares of common stock issuable under the Stock Option Plan is
41,307, all of which have been granted and exercised. The Stock Option Plan is currently administered by the Board of
Directors of the Company, but can be delegated to an authorized committee
thereof.
Options granted
under the Stock Option Plan are “hybrid” performance options. Options are immediately exercisable, but
option shares issuable are subject to repurchase by the Company on termination
of employment at the $0.01 original exercise price until vested. Options vest as follows: 10% on December 31
of each of the first five calendar years of service commencing with December 31
of the calendar year of the option grant; 15% on December 31 of the next two
calendar years; and the remaining 20% on December 31 of the eighth calendar
year from the issuance date.
Accelerated vesting of Options can occur during the first five calendar
years after issuance upon the Company’s attainment of performance milestones,
determined annually by the Board of Directors.
For each year in which performance milestones are attained, 10% of the
shares under the Options shall vest on an accelerated basis, with the
installments that would vest latest under the Options being accelerated
first. Outstanding Options also
accelerate upon the occurrence of a change of control of the Company. During 2001, 2000 and 1999, the Company
achieved certain financial performance targets accelerating the vesting of 10%
each year of certain shares under the Options.
The exercise price of Options under the Stock Option Plan is set at
$0.01 per share, and each Option has an 18-year term. During 2000, all outstanding options were exercised.
In addition to the
right to repurchase unvested option shares described above, under the Stock
Option Plan, vested option shares are subject to a call by the Company and a
put by the employee in the event the option shareholder retires after attaining
age 62, becomes permanently disabled or dies.
The put and call options are at fair value. Upon termination of service
for reasons other than retirement, disability or death, vested option shares
are subject to a call by the Company, at fair value. In addition, the Company has a right to call and the option
shareholder has a right to put any vested option shares issued or issuable
under outstanding Options at the end of their 18-year term at fair value. The Stock Option Plan also provides that the
Company has a right of first refusal on any proposed disposition of shares
acquired under an Option by sale, transfer or in connection with a marital dissolution,
which right shall lapse upon the initial public offering of the Company’s
common stock.
401(k) Plan
The Company’s
operating subsidiary, Perry Judd’s, implemented a 401(k) Retirement Savings
Plan effective April 28, 1995 (the “401(k) Plan”). All employees 21 years of age or older employed by Perry Judd’s
and any affiliated company who adopts the plan are or will be eligible to
participate in the 401(k) Plan.
Participants in the 401(k) Plan may not contribute more than certain
specified amounts depending upon the employee’s level of compensation. Each company participating in the 401(k)
Plan makes contributions to the 401(k) Plan equal to 3% of eligible earnings of
all qualified participating employees, as determined under the 401(k)
Plan. Participating employees are 100%
vested in all contributions.
Compensation Committee Interlocks and
Insider Participation
The Company does
not have a compensation committee. The
following officers and employees participated in deliberations concerning
executive compensation: Robert E. Milhous, Paul B. Milhous, Craig A. Hutchison
and Beth A. Lindsay. Mr. Hutchison is an executive officer of Perry Judd’s and
a member of the Board of Directors of Perry Judd’s Holdings, Inc.
Item
12.
Item
12. Security
Ownership of Certain Beneficial Owners and Management.
The following table sets
forth certain information regarding beneficial ownership of the Company’s
common stock as of March 1, 2002 (i) by each person known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (ii) by
each director and Named Executive Officer and (iii) by all directors and
executive officers of the Company as a group.
Except as otherwise listed below, the address of each person listed is
c/o Perry Judd’s Incorporated, 575 West Madison Street, Waterloo, Wisconsin
53594.
* Less than 1%
(1) Robert E. Milhous, a
director, and the Chairman of the Board of Directors of the Company and Paul B.
Milhous, a director and the Vice-Chairman of the Board of Directors of the
Company and certain affiliated entities beneficially own the partnership
interests in this partnership.
Item
13.
Item
13. Certain
Relationships and Related Party Transactions.
Perry Judd’s and
Novamil Corporation (“Novamil”), a California corporation owned beneficially by
Robert E. Milhous, Chairman of the Company and Paul B. Milhous, Vice Chairman
of the Company, were parties to a Management Agreement dated as of April 28,
1995 which was subsequently assigned by Perry Judd’s to Perry Judd’s Holdings
and amended by Perry Judd’s and Novamil as of December 16, 1997 (the “Amended
Management Agreement”). Pursuant to the
Amended Management Agreement, Novamil provides Perry Judd’s Holdings certain
management services by agents and employees of Novamil other than Robert E.
Milhous and Paul B. Milhous in connection with business strategy, operations
and finance. Under the Amended
Management Agreement, as amended, Perry Judd’s Holdings pays to Novamil an
annual management fee of $750,000 payable in equal monthly installments and subject
to annual adjustment for increases in costs of living. The Amended Management Agreement has a term
of five years from December 16, 1997, subject to one-year extensions
thereafter, unless earlier terminated upon the liquidation or dissolution of
Perry Judd’s Holdings, or ten days after a party has received written notice of
a material breach where such breach remains uncured after such ten-day period.
Pursuant to a
consulting agreement dated April 28, 1995 (the “Consulting Agreement”), Robert
E. Milhous and Paul B. Milhous provide consulting services to Perry Judd’s as
principals of New House Capital Management Corp., (“New House”) a Delaware
corporation, for which Perry Judd’s pays an annual consulting fee of $450,000
(subject to annual increases not to exceed 10%), payable in equal monthly
installments. The Consulting Agreement
has an initial term of five years, subject to one-year extensions thereafter,
unless earlier terminated upon the liquidation or dissolution of the Company or
ten days after a party has received written notice of a material breach where
such breach remains uncured after such ten-day period. On December 16, 1997, the Consulting
Agreement was assigned by Perry Judd’s to the Company. During 2001, the Company
approved an additional bonus of $500,000 payable to New House which has been
accrued as of December 31, 2001.
Pursuant to a
promissory note dated November 15, 1996, PPC Holdings loaned to Thomas V.
Bressan, a former Director of the Company, the principal amount of $175,000 at an
interest rate of 7% per annum.
Principal and interest was payable in four annual installments of
$26,100 with final payment of all principal and interest outstanding thereafter
due and payable on November 15, 2001. On November 15, 2001, the Company extended
and replaced the initial promissory note with an amended promissory note which
is due on November 15, 2008. Under the amended promissory note of $122,154, an
initial payment of $26,100 was due on February 15, 2002. On November 15, 2002
and on each November 15 thereafter, all accrued and unpaid interest is due and
payable. On November 15, 2008, the principal balance and accrued and unpaid
interest is due and payable in full.
Pursuant to a
consulting agreement dated as of January 10, 1997, Thomas V. Bressan, a former
Director of the Company, provided consulting services to Perry Judd’s regarding
strategic planning, acquisition analysis and structuring, financing and other
significant corporate transactions, and other business strategies. The agreement had a term of five years, with
a total consulting fee payable under
the agreement of $225,000, payable in five equal annual installments of
$45,000. On November 15, 2001, the Company extended and modified the consulting
agreement through November 15, 2003 with an additional consulting fee payable
under the agreement of $13,450 payable in two annual installments of $6,725.
The agreement may be extended on annual basis without notification by mutual
consent provided that the services performed comply with the agreement.
PART IV
Item
14.
Item
14. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are included in this report at
the page numbers indicated.
(b) Reports on Form 8-K
The Company did
not file any reports on Form 8-K in the fourth quarter ended December 31, 2001.
(c) Exhibits
Included at the
end of this Annual Report on Form 10-K.
EXHIBIT
INDEX
The following exhibits are filed as a part of this report or incorporated
by reference and will be furnished to any security holder upon request for such
exhibit and payment of any reasonable expenses incurred by the Company. Send any such request to the Company at 575
West Madison Street, Waterloo, WI 53594.
Exhibit
Number
Description
2.2
Stock Purchase Agreement dated as of July 31, 1998
by and among Mack Printing Company, Port City Press, Inc. and Perry Judd’s
Incorporated. Incorporated by reference to Exhibit 2.2 to the 8-K dated as of
September 17, 1998.
3.1 *
Amended and Restated Certificate of Incorporation of
the Company.
3.2
Amended and Restated By-laws of the Company. Incorporated by reference to Exhibit 3.2
to the Registration Statement.
4.1
Indenture dated as of December 16, 1997 between the
Company and U.S. Trust Company of California, N.A., as Trustee, including
forms of Senior Notes. Incorporated by reference to Exhibit 4.1 to the
Registration Statement.
4.1(a)
First Supplemental
Indenture dated as of June 10, 1998 among the Company, the Subsidiary Guarantors
named therein, the Additional Subsidiary Guarantor named therein and U.S.
Trust Company of California N.A. as Trustee.
Incorporated by reference to Exhibit 4.1(a) to the Registration
Statement.
4.2
Registration Rights Agreement dated as of December
16, 1997 between the Company and BT Alex. Brown as Initial Purchaser. Incorporated by reference to Perry Judd’s
Incorporated by reference to Exhibit 4.2 to the Registration Statement.
10.2
Amended and Restated
Credit Agreement dated as of December 16, 1997, among Perry Graphic
Communications, Inc., Shenandoah Valley Press, Inc., and Port City Press,
Inc., as Borrowers, the Lenders (as defined therein) and BT Commercial.
Incorporated by reference to Exhibit 10.2 to the Registration Statement.
10.3
1995 Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10.3 to the Registration Statement.
10.4 + 
Employment Agreement by and between the Company and
Craig A. Hutchison dated April 28, 1995.
Incorporated by reference to Exhibit 10.4 to the Registration
Statement.
10.4(a) 
Employment Offer Letter from the Company to David E.
Glick dated January 16, 1998.
10.4(b) 
Employment Offer Letter from the Company to Verne F.
Schmidt dated December 26, 1996.
10.4(c) 
Severance Agreement Letter from the Company to
Howard D. Sullivan dated March 24, 2000.
10.5
Stockholders Agreement by and among the stockholders
of the Company named therein dated as of July 1, 1996. Incorporated by reference to Exhibit 10.5
to the Registration Statement.
10.6
Amended and Restated Co-Sale Agreement by and among
the stockholders of the Company named therein dated as of December 30,
1996. Incorporated by reference to
Exhibit 10.6 to the Registration Statement.
16.0
Letter regarding change in certifying accountant.
21.0 *
Subsidiary Listing
* Filed herewith
+ Confidential treatment has been requested and received as to
portions of this agreement.
 Indicates a management contract or compensatory arrangement.
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 29th day of March,
2002.
POWER OF
ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and
appoint Craig A. Hutchison and Verne F. Schmidt, and each of them, as his true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the
same, with exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
PERRY JUDD’S HOLDINGS, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or notes
thereto.
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Perry Judd’s Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Perry
Judd’s Holdings, Inc. (the Company) as of December 31, 2001, and the related
consolidated statements of operations, minority interests, preferred stock and
stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial
statement schedule for the year ended December 31, 2001. These financial
statements and schedule are the responsibility of the Company’s
management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 2001, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States. Also, in our opinion, the related financial
statement schedule for the year ended December 31, 2001, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
ERNST
& YOUNG LLP
Milwaukee, Wisconsin
February 22, 2002
Independent Auditors’ Report
To the Board of
Directors and Stockholders of
Perry Judd’s
Holdings, Inc.:
We have audited
the accompanying consolidated balance sheet of Perry Judd’s Holdings, Inc. and
subsidiaries as of December 31, 2000, and the related consolidated statements
of operations, minority interests, preferred stock and stockholders’ equity,
and cash flows for each of the two years in the period ended December 31,
2000. Our audits also included the
consolidated financial statement schedule for each of the two years in the
period ended December 31, 2000 listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the 2000 and 1999 financial statements and financial statement schedule
based on our audits.
We conducted our
audits in accordance with auditing standards generally accepted in the United
States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion,
such consolidated financial statements present fairly, in all material
respects, the financial position of Perry Judd’s Holdings, Inc. and
subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. Also, in our
opinion, such consolidated financial statement schedule for each of the two
years in the period ended December 31, 2000, when considered in relation to the
basic 2000 and 1999 consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE &
TOUCHE LLP
Milwaukee,
Wisconsin
March 16, 2001
PERRY JUDD’S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per
share)
ASSETS
See notes to consolidated
financial statements.
PERRY JUDD’S HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share)
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY
See notes to consolidated
financial statements.
PERRY JUDD’S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
See notes to consolidated
financial statements.
PERRY JUDD’S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF MINORITY INTERESTS,
PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(Dollars in thousands)
See notes to consolidated
financial statements.
PERRY JUDD’S HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
SUPPLEMENTAL
CASH FLOW INFORMATION:
Cash paid during the year
(in thousands):
NON-CASH
TRANSACTIONS:
Stock dividends issued to minority interests
approximated $81,000 and $163,000 based on their estimated value at the time of
issuance for the years ended December 31, 2000 and 1999, respectively. Such amounts were paid effective June 30,
2000.
On December 16, 1997, the Company issued 95,000 shares
of Series A preferred stock to the majority stockholders in exchange for a note
payable plus accrued and unpaid interest.
Stock dividends issued on this stock approximated $2,360,000, $2,036,000
and $1,758,000 for the years ended December 31, 2001, 2000 and 1999,
respectively. See Note 9.
See notes to consolidated
financial statements.
PERRY JUDD’S HOLDINGS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
INFORMATION
Nature of Business - The Company is a full service heatset web offset
printer of magazines, catalogs, and other commercial products. The Company serves a national domestic
market in the printing of weekly and monthly consumer, special interest and
trade magazines, business-to-business and consumer catalogs, and a variety of
other direct advertising products. The
Company operates principally in one business segment, printing services.
Principles of Consolidation - The consolidated financial statements include the
accounts of Perry Judd’s Holdings, Inc., its wholly-owned subsidiary, Perry
Judd’s Incorporated, (Perry Judd’s) and Judd’s Online, Inc. (Judd’s Online), a
wholly-owned subsidiary of Perry Judd’s (collectively hereafter referred to as
the “Company”). All significant
intercompany balances and transactions have been eliminated.
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 December 16,
1997 the Company acquired all of the outstanding capital stock of Judd’s
Incorporated (Judd’s). Judd’s was
subsequently merged into Perry Judd’s.
Effective February 1, 1999, the Company acquired all
of the outstanding capital stock of Heartland Press, Inc. (“Heartland”) for
$17.5 million, including acquisition costs.
Heartland was subsequently merged with and into Perry Judd’s. In addition, the Company assumed $6.6
million of Heartland’s indebtedness, all of which was paid in full upon
consummation of the acquisition. The
acquisition was accounted for under the purchase method of accounting and, accordingly,
the results of operations are included in the accompanying financial statements
since the acquisition date. The final
allocation of the purchase price was based upon the estimated fair value of the
assets acquired and liabilities assumed as follows (in thousands):
Asset
Dispositions
On October 19,
2000, the Company sold substantially all of the net assets of its subsidiary,
Judd’s Online, to a subsidiary of Susquehanna Media Corporation for $6.3
million, net of closing costs. The
after-tax gain resulting from this sale approximated $2.6 million (approximately
$4.2 million on a pre-tax basis). Net
sales of Judd’s Online were $4.4 million for the period from January 1, 2000
through October 18, 2000, and $3.4 million for the year ended December 31,
1999. The business incurred a loss from
operations of $0.4 million for the period from January 1, 2000 through October
18, 2000, and $0.1 million for the year ended December 31, 1999. Concurrent with the sale of Judd’s Online, a
one-time fee of $300,000 was paid to a company owned beneficially by the
majority stockholders of the Company for services related to the disposition.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Cash
and Cash Equivalents - The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
Credit
Risk Considerations
- The Company has one customer which consists of six publication titles
comprising approximately 14%, 15% and 16% of total net sales volume for the
years ended December 31, 2001, 2000 and 1999, respectively. The various titles for this customer are
under contracts expiring between December 31, 2002 and December 31, 2003.
The Company has recorded an allowance for doubtful accounts to estimate
the difference between recorded receivables and ultimate collections. The allowance and provision for bad debts
are adjusted periodically based upon the Company’s evaluation of historical
collection experience, industry trends and other relevant factors. The allowance for doubtful accounts was
$1,236,000 and $1,239,000 at December 31, 2001 and 2000, respectively.
Inventory
Valuation -
Inventories are stated at the lower of cost (first-in, first-out method) or
market and are summarized as follows (in thousands):
Property,
Plant and Equipment
- Property, plant and equipment are stated at cost. Assets are depreciated on the straight-line basis over estimated
useful lives which range from three to forty years.
Capitalized interest on
borrowed funds during construction was $310,000, $0 and $238,000 for the years
ended December 31, 2001, 2000, and 1999, respectively.
Long-lived
Assets - In
August 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”, which supersedes SFAS No. 121,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of,” and certain provisions of APB Opinion No. 30, “Reporting
the Results of Operations,” relating to a disposal of a segment of a business.
The Company adopted the provisions of SFAS No. 144 as of January 1, 2001.
Similar to SFAS No. 121, SFAS No. 144 establishes procedures for review of
recoverability, and measurement of impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS No. 144 also requires that long-lived assets to be disposed
of other than by sale (for example, abandonments, exchanges for similar
productive assets or in a distribution to owners in a spinoff) shall continue
to be classified as held and used until disposal. Further, SFAS No. 144
specifies the criteria for classifying long-lived assets as “held for sale” and
requires that long-lived assets to be disposed of by sale be reported as the
lower of carrying amount or fair value less estimated selling costs. As of
December 31, 2001, management believes that there has not been any impairment
of the Company’s long-lived assets.
Goodwill
and Other Intangible Assets - Cost in excess of net assets of businesses acquired
(“goodwill”) is amortized and charged against operations on a straight-line
method over 35 years. Accumulated
amortization on these costs was $3,526,000 and $2,577,000 at December 31, 2001
and 2000, respectively. Deferred
financing costs are being amortized over the lives of the applicable debt
agreements. Accumulated amortization on these costs was $6,290,000 and $5,082,000
at December 31, 2001 and 2000, respectively.
Other intangible assets identified in connection with certain
acquisitions are being amortized over the estimated useful lives of the assets
which range from five to fifteen years.
Accumulated amortization on these costs was $3,221,000 and $2,919,000 at
December 31, 2001 and 2000, respectively.
Revenue
Recognition -
Revenue is recognized when complete orders are shipped.
Shipping
and Handling - Amounts billed to a customer in a sale
transaction related to shipping and handling are reported as net sales, and the
related costs incurred for shipping and handling are reported as costs of
production and distribution.
Income
Taxes - Deferred
income taxes are determined utilizing an asset and liability approach. This
method gives consideration to the future tax consequences associated with
differences between financial accounting and tax bases of assets and
liabilities. This method gives
immediate effect to changes in income tax laws upon enactment.
Estimates
- The preparation
of the Company’s consolidated financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as of the balance sheet
date and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ
from those estimates.
Fair
Values - The
Company believes that the carrying amount of its cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities and borrowings under
its term loan facility approximate fair value due to the short maturity of
these instruments. The estimated fair
value of the Company’s publicly traded debt (senior subordinated notes), based
on quoted market prices, was approximately $108.8 million and $96.6 million as
of December 31, 2001 and 2000, respectively.
New
Accounting Standards - In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other
Intangible Assets.” SFAS No. 142 is effective for the Company beginning January
1, 2002, and applies to goodwill and other intangible assets recognized in the
Company’s consolidated balance sheet at that date. The Company will implement
the provisions of SFAS No. 142 beginning January 1, 2002 and anticipates that
all goodwill amortization will be eliminated as a charge to operating expenses
in 2002. In connection with the adoption of SFAS No. 142, the Company will be
required to perform a transitional impairment test for recorded goodwill as of
January 1, 2002. The Company does not expect that the transitional impairment
test will result in any significant impairment losses.
3. BALANCE
SHEET INFORMATION
Accounts receivable, net,
consists of the following (in thousands):
Accrued expenses consist
of the following (in thousands):
4. LONG-TERM
DEBT
Long-term debt consists
of the following (in thousands):
On April 28, 1995, the
Company entered into a five year Credit Agreement with a commercial bank
consortium that provides a revolving credit and term loan facility. These loans are collateralized by
substantially all assets of the Company.
Concurrent with the acquisition of Judd’s, the Company entered into an
Amended and Restated Credit Agreement extending the maturity to December 15,
2002. The Credit Agreement requires the
Company to maintain and meet certain minimum operating ratios and limits
expenditures for property and equipment, investments, other indebtedness,
commitments, guarantees and contingent liabilities. Additionally, the credit agreement restricts payments of
dividends on the Company’s common stock.
At December 31, 2001, the Company was in compliance with these
requirements.
Revolving Credit Facility - The Company has the ability to
borrow, subject to certain terms and conditions, up to $45.0 million until
December 15, 2002, 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 a Eurodollar rate plus 2.00%, (3.94% at December 31, 2001)
fixed for periods up to 180 days, or at the prime rate plus 0.50% (5.25% at
December 31, 2001). At December 31, 2001, $41.4 million of the revolving credit
facility was available for future working capital and other general corporate
purposes.
Term Loan Facility - The term loan facility is due in
installment amounts at the last day of each month until December 15, 2002, at
which time any outstanding borrowings become due and payable. Repayments may not be reborrowed. Borrowings are either at a Eurodollar rate
plus 2.25%, (4.19% at December 31, 2001) fixed for periods of up to 180 days,
or at the prime rate plus 0.75% (5.50% at December 31, 2001). The term loan facility ranks equally in
right of payment with other existing and future senior indebtedness of the
Company and senior in right of payment to the
senior subordinated notes.
Senior Subordinated Notes - The Company issued $115,000,000 aggregate principal
amount of its 10 5/8% senior subordinated notes due December 15, 2007 in
connection with its acquisition of Judd’s.
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 on or after December 15, 2002 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.
5. MINORITY
INTERESTS
In connection with the
acquisition of certain net assets of Perry Printing, a subsidiary of the
company (Perry Judd’s) issued the following redeemable preferred stock:
Series A Redeemable Preferred Stock - At April 28, 1995, Series A redeemable
preferred stock issued in the amount of $5.0 million reflected an original
issue discount of $2.5 million which was the difference between the fair value
at the time of issuance and the April 28, 2005 redemption value. The difference is being accreted by charging
operations until redemption. Each share
of redeemable Series A, $0.001 par value, $100 redemption value,
nonconvertible, non-voting preferred stock entitles its holder to receive an
annual cash dividend equivalent to redemption value times 90% of the prime
interest rate. At December 31, 1995,
50,000 shares were authorized and 47,350 shares were issued and
outstanding. During 1996, the carrying
value of the Series A redeemable preferred stock was written down to $-0- to
offset certain purchase accounting adjustments and no accretion was recorded. During the third quarter ended September 30,
2000, the Company reached a settlement with the former owner of Perry Printing
resulting in a partial reinstatement of Series A redeemable preferred stock. Pursuant to the settlement agreement dated
August 31, 2000, effective June 30, 2000, 43,940.68 shares of Series A
redeemable preferred stock were reinstated at an accreted value of $3,143,000
and $1,452,000 of accumulated dividends were paid. Additional dividends of approximately $189,000 were paid during
the year ended December 31, 2000. (See
Note 11.) Dividends of $273,000 were paid during the year ended December 31,
2001.
Series B Redeemable Preferred Stock - Effective June 30, 2000, the outstanding
shares of Series B redeemable preferred stock were redeemed on September 6,
2000. Each share of Series B, $0.001
par value, $100 redemption value, nonconvertible, non-voting preferred stock
entitled its holder to receive cash dividends of 12.5% of redemption value and
stock dividends of 2.5% of redemption value (issued in Series D redeemable
preferred shares). At June 30, 2000 and
December 31, 1999, 65,000 shares were authorized, issued and outstanding and
were mandatorily redeemable on November 1, 2000. Accrued and unpaid dividends were approximately $2.2 million and
$1.8 million at June 30, 2000 and December 31, 1999, respectively. (See Note
11.)
Series D Redeemable Preferred Stock - Effective June 30, 2000, the outstanding
shares of Series D redeemable preferred stock were redeemed on September 6, 2000. Each share of Series D, $0.001 par value,
$100 redemption value, nonconvertible, non-voting preferred stock entitled its
holder to receive cash dividends equivalent to 15% of carrying value. At June 30, 2000 and December 31, 1999,
100,000 shares were authorized with 8,411 and 7,598 shares issued and
outstanding, respectively. Series D
preferred shares were mandatorily redeemable on November 1, 2000. Accrued and unpaid dividends were
approximately $0.3 million at June 30, 2000 and December 31, 1999,
respectively. (See Note 11.)
6. STOCKHOLDERS’
EQUITY AND STOCK OPTION PLAN
Preferred Stock (Series A) - Holders of the non-voting preferred stock are
entitled to a 15% stock dividend, payable in preferred shares on a quarterly
basis. A California corporation owned
beneficially by the Company’s majority common stockholders owns the majority of
the preferred stock. The preferred
stock has a liquidation preference above the common stock. The Company amended
its Certificate of Incorporation eliminating the requirement to redeem the
preferred stock for $100 per share in the event of a sale or exchange of all
the common stock of the Company.
Common Stock - In 1995, stockholders of the Company
approved the adoption of a stock option plan (the “Stock Option Plan”). The Stock Option Plan was subsequently
amended in 1995 and 2000. Under the
terms of the Stock Option Plan, options may be granted to officers and key
employees. Options have terms of
eighteen years and an exercise price of $.01 per share. Options are immediately exercisable, but
option shares issuable are subject to repurchase by the Company on termination
of employment at the original exercise price until vested. Option shares vest in gradual increments
over an eight year period. As of
December 31, 2001, 8,192 option shares were unvested. The vested option shares are subject to a call by the Company and
a put by the employee in the event the option shareholder retires after
attaining age 62, becomes permanently disabled or dies. Upon termination of service for reasons
other than retirement, disability or death, vested option shares are subject to
a call by the Company. The put and call
options are at fair value.
A summary of option activity
under the Stock Option Plan is as follows:
The Company applies
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees”, and related interpretation in accounting for its employee stock
option plan. Accordingly, compensation
expense has been recorded for the difference between the estimated fair value
of the common stock and the exercise price of the option at the date of grant
as the shares vest. Compensation
expense of $131,000 and $648,000 was recognized during the years ended December
31, 2001 and 2000, respectively. The pro forma effect on reported net income
(loss) for the years ended December 31, 2001, 2000 and 1999 of using the fair
value method under SFAS No. 123, “Accounting for Stock-Based Compensation”, is
not significant.
Stockholder Agreements - At December 31, 2001, 42,905 shares of
common stock held by management are subject to
put and call arrangements similar to the shares purchased under the
Stock Option Plan at the employee’s termination, retirement after attaining age
62, permanent disability or death.
7. OPERATING
LEASES
The Company leases
certain equipment and office space under non-cancelable operating lease
agreements. Lease expense under such
agreements was $17.2 million, $17.8 million, and $16.5 million for the years
ended December 31, 2001, 2000 and 1999 respectively.
Concurrent with the
acquisition of Judd’s, the Company entered into a sale and leaseback
transaction whereby the Wisconsin printing plants and warehouse facilities, and
the Company’s corporate headquarters were sold to a third party for the
aggregate purchase price (exclusive of fees and costs) of $18.25 million and
immediately leased back to the Company.
The sale and leaseback of the real property resulted in a deferred gain
of $2.8 million net of taxes and is being amortized over the initial term of
the lease. The lease has an initial
term of 20 years, with an economic abandonment buyout for one property selected
by the Company after five years, and may be extended for three additional
five-year terms at the Company’s option.
Initial annual rent under the lease is approximately $1.9 million
payable quarterly in advance with 10% escalations scheduled at the start of the
sixth, eleventh and sixteenth years of the 20 year term (and a corresponding
10% increase at the beginning of any option term). For the first ten years of the lease, the Company has a right of
first refusal on any proposed sale of all of the leased properties by the
lessor to a third party, exercisable within 30 days of receipt of the proposed
sale contract.
On August 17, 1998, the
Company entered into a sale and leaseback transaction for the majority of the
Judd’s real property located in Virginia. The initial annual lease expense
incurred under the operating lease was $1.3 million with 14.5% escalations
scheduled at the start of the sixth, eleventh and sixteenth years of the 20
year term.
Future minimum annual
lease payments required under the operating lease agreements are as follows (in
thousands):
8. INCOME
TAXES
The provision (benefit)
for income taxes consists of the following components (in thousands):
Following is a reconciliation of the U.S. statutory
federal income tax rate to the effective rate (in thousands):
Significant components of deferred tax assets and
deferred tax liabilities are as follows (in thousands):
The net deferred income tax liability is classified in
the balance sheets as follows (in thousands):
Included in tax assets at December 31, 2001 are net
operating loss carryforwards of approximately $2.8 million for state income tax
purposes, which begin to expire in 2010, alternative minimum tax credits of
approximately $2.3 million and state tax credits of $1.1 million which can be
used to offset future regular tax and have no expiration date.
9. RELATED
PARTY TRANSACTIONS
On April 28, 1995, the
Company entered into management agreements (the “Agreements”) with two
companies owned beneficially by the majority stockholders of the Company. The Agreements, as well as subsequent
revisions, provide for certain management and consulting services in connection
with business strategy, operations and finance. The Agreements have initial terms of five years, subject to
one-year extensions thereafter and require the Company to currently pay annual
management fees totaling $1,200,000 per year plus reimbursement of certain
expenses. Additionally, the Company approved a $500,000 bonus which has been
accrued at December 31, 2001. Management fees and reimbursements expensed in
conjunction with the Agreements totaled $2,316,000, $1,446,000 and $1,469,000
for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company previously
purchased a substantial portion of its total ink requirements from a company
affiliated with the majority stockholders.
During 1999, the majority stockholders sold their interests in this
company. Net purchases for year ended
December 31, 1999, amounted to $13.9 million.
Concurrent with the sale
of Judd’s Online on October 19, 2000, a one-time fee of $300,000 was paid to a
company owned beneficially by the majority stockholders of the company for
divestiture services related to the disposition.
10. RETIREMENT
PLANS
The Company has a defined
contribution plan referred to as the Perry Graphic Communications Retirement
Savings Plan (the “Plan”). The Plan
covers substantially all employees who have attained 21 years of age and are
credited with twelve months of service on their enrollment date. The Company contributed approximately
$1,662,000 $1,775,000, and $1,659,000 for the years ended December 31, 2001,
2000 and 1999, respectively, to the Plan representing 3% of eligible employee
wages.
Effective December 31,
1997, benefits payable under a Judd’s defined benefit pension plan existing at
the time of the Company’s December 16, 1997 acquisition of Judd’s were
frozen. In June 2001, the Company
received a favorable advance termination letter from the Internal Revenue
Service and has completed the termination of the plan through lump sum payments
and the purchase of annuity contracts. During the year ended December 31, 2001,
the Company recorded a gain on the termination of the pension plan of
approximately $1,633,000.
11. COMMITMENTS
AND CONTINGENCIES
Purchase Commitments - At December 31, 2001, the Company had
commitments to purchase or lease approximately $14.1 million of operating
assets.
Indemnification - In connection with the acquisition of
certain net assets of Perry Printing, a subsidiary of the Company issued 50,000
and 65,000 shares of Series A and B redeemable preferred stock, respectively,
to the former owner of Perry Printing.
During 1996, the Company made two indemnity claims against the former
owner of Perry Printing, principally involving breaches of warranties and
representations made on certain assets under its Asset Purchase Agreement. Redemption features of the Series A
redeemable preferred stock provided the Company with the option to offset such
claims as immediate redemption of the Series A redeemable preferred stock up to
the maximum redemption value of $5 million.
Accordingly, the carrying value of the Series A redeemable preferred
stock was reduced to $-0- in the financial statements at December 31,
1996. The former owner of Perry
Printing objected to these claims.
Additionally, the Company asserted a claim against the former owner of
Perry Printing for an approximate $1.8 million employee benefit obligation
incurred prior to April 28, 1995, which is now an obligation of the Company to
its employees covered by collective bargaining agreements.
On November 24, 1999, the
former owner of Perry Printing filed a complaint against the Company seeking
damages of approximately $3,000,000 and the payment of certain preferred stock
dividends. On January 6, 2000, the
Company
answered by denying the
former owner’s allegations and asserted counter claims in an aggregate amount
of approximately $7,000,000.
On August 31, 2000, the
Company reached a settlement agreement, effective June 30, 2000, with the
former owner of Perry Printing concerning the two indemnity claims and the
employee benefit obligation claim.
Pursuant to this agreement, the Company paid the former owner of Perry
Printing the redemption value of Series B and D redeemable preferred stock
including unpaid dividends of $2,545,000 through June 30, 2000, and dividends
of $1,452,000 relating to Series A redeemable preferred stock which was
partially reinstated in the amount of 43,940.68 shares. These Series A shares were recorded in the
consolidated financial statements at their estimated fair value as of the April
28, 1995 acquisition date of $2,197,000 plus an adjustment for accretion
through June 30, 2000 of $946,000.
Other Contingencies - The Company is involved in various
claims and litigation incidental to its operations. In the opinion of management, the ultimate resolution of these
actions will not have a material effect on the Company’s consolidated financial
statements.
Schedule II
PERRY JUDD’S HOLDINGS, INC.
Valuation
and Qualifying Accounts
(In Thousands)
(1) Write-offs of
receivables, net of recoveries.
(2) Balance of
business sold at disposition date.
(3) Balance of
acquired business at acquisition date.
This page has been left blank intentionally.
EXHIBIT INDEX
The following exhibits are filed as a part of this report or
incorporated by reference and will be furnished to any security holder upon
request for such exhibit and payment of any reasonable expenses incurred by the
Company. Send any such request to the
Company at 575 West Madison Street, Waterloo, WI 53594.
Exhibit
Number
Description
2.2
Stock Purchase Agreement dated as of July 31, 1998
by and among Mack Printing Company, Port City Press, Inc. and Perry Judd’s
Incorporated. Incorporated by reference to Exhibit 2.2 to the 8-K dated as of
September 17, 1998.
3.1 *
Amended and Restated Certificate of Incorporation of
the Company.
3.2
Amended and Restated By-laws of the Company. Incorporated by reference to Exhibit 3.2
to the Registration Statement.
4.1
Indenture dated as of December 16, 1997 between the
Company and U.S. Trust Company of California, N.A., as Trustee, including
forms of Senior Notes. Incorporated by reference to Exhibit 4.1 to the
Registration Statement.
4.1(a)
First Supplemental
Indenture dated as of June 10, 1998 among the Company, the Subsidiary
Guarantors named therein, the Additional Subsidiary Guarantor named therein
and U.S. Trust Company of California N.A. as Trustee. Incorporated by reference to Exhibit
4.1(a) to the Registration Statement.
4.2
Registration Rights Agreement dated as of December
16, 1997 between the Company and BT Alex. Brown as Initial Purchaser. Incorporated by reference to Perry Judd’s
Incorporated by reference to Exhibit 4.2 to the Registration Statement.
10.2
Amended and Restated
Credit Agreement dated as of December 16, 1997, among Perry Graphic
Communications, Inc., Shenandoah Valley Press, Inc., and Port City Press,
Inc., as Borrowers, the Lenders (as defined therein) and BT Commercial.
Incorporated by reference to Exhibit 10.2 to the Registration Statement.
10.3
1995 Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10.3 to the Registration Statement.
10.4 + 
Employment Agreement by and between the Company and
Craig A. Hutchison dated April 28, 1995.
Incorporated by reference to Exhibit 10.4 to the Registration
Statement.
10.4(a) 
Employment Offer Letter from the Company to David E.
Glick dated January 16, 1998.
10.4(b) 
Employment Offer Letter from the Company to Verne F.
Schmidt dated December 26, 1996.
10.4(c) 
Severance Agreement Letter from the Company to
Howard D. Sullivan dated March 24, 2000.
10.5
Stockholders Agreement by and among the stockholders
of the Company named therein dated as of July 1, 1996. Incorporated by reference to Exhibit 10.5
to the Registration Statement.
10.6
Amended and Restated Co-Sale Agreement by and among
the stockholders of the Company named therein dated as of December 30,
1996. Incorporated by reference to
Exhibit 10.6 to the Registration Statement.
16.0
Letter regarding change in certifying accountant.
21.0 *
Subsidiary Listing
* Filed herewith
+ Confidential treatment has been requested and received as to
portions of this agreement.
 Indicates a management contract or compensatory arrangement.