## **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

# **Washington,D.C.  20549**

 

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### **FORM 10-K**

 

| **(Mark One)** |
|----------------|
| **ý**     |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           | **For the fiscal year ended December 31,  2003** |
|           |   |   |
|           | **OR** |
|           |   |   |
| **o**          |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number**

 

**333-45235**

 

**Perry Judd’s Holdings, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                      |   | **51-0365965**                       |
|---------------------------------------------------|--------|--------------------------------------|
| (State of Incorporation)                          |   | (IRS Employer Identification Number) |
|                                              |   |                                 |
| **575 West Madison Street, Waterloo,  Wisconsin** |   | **53594**                            |
| (Address of principal executive offices)          |   | (Zip Code)                           |

 

Registrant’stelephone number, including area code:  **920-478-3551**

 

Securities registered pursuant to Section 12(b)of the Act:                     **None**

 

Securities registered pursuant toSection 12(g) of the Act:                     **None**

 

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

 

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

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  o  No  ý

 

As of March 19, 2004 there were 897,918shares of Registrant’s Common Stock, par value $.001 per share outstanding.  There is no established public tradingmarket for the Registrant’s Common Stock. Therefore, an aggregate market value based on sales or bid and askprices is not determinable.

 

DocumentsIncorporated by Reference

 

None

 

 

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**TABLEOF CONTENTS**

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

 

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This Annual Report on Form 10-K includes forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of1995.  Forward-looking statementsgenerally can be identified by the use of forward-looking terminology such as“may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, or“continue” or the negative thereof or variations thereon or similarterminology.  Such forward-lookingstatements are based upon information currently available in which theCompany’s management shares its knowledge and judgement about factors that theybelieve may materially affect the Company’s performance.  The Company makes the forward-lookingstatements in good faith and believes them to have a reasonable basis.  However, such statements are speculative,speak only as of the date made and are subject to certain risks, uncertaintiesand assumptions.  Should one or more ofthese risks or uncertainties materialize, or should underlying assumptionsprove incorrect, actual results could vary materially from those anticipated,estimated or expected.  Factors thatmight cause actual results to differ materially from those in suchforward-looking statements include, but are not limited to, those discussed inItem 1. “Business—Risk Factors” and Item 7. “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”.  All subsequent written and oral statementsthat the Company makes are qualified in their entirety by these Risk Factors.

 

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

 

**PARTI**

 

###### **Item1.**            Business.

 

**General**

 

Unless the context otherwise provides, all references in this AnnualReport to the “Company” includes Perry Judd’s Holdings, Inc., (“Perry Judd’sHoldings”) its wholly-owned subsidiary, Perry Judd’s Incorporated (“PerryJudd’s”), Judd’s Online, Inc., (“Judd’s Online”) a wholly-owned subsidiary ofPerry Judd’s which was sold in October 2000, and Heartland Press, Inc.(“Heartland”) which was acquired by the Company in February, 1999.  All references to Perry Judd’s shall includeits 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.  Itsprinting facilities are strategically located in the Midwest and Mid-Atlanticregions, with each plant having state-of-the-art, integrated prepress, press,binding and distribution capabilities. The Company services regional and national customers through salesoffices in 15 cities nationwide. Management believes the Company has established a reputation for highquality products and superior customer service, which have resulted inlong-standing customer and supplier relationships.  The Company manages the total prepress, print, and distributionprocess to provide value-added solutions that reduce customer costs or assistcustomers in increasing revenues.

 

Effective April 28, 1995, the Company acquired certain net assetsof Perry Printing Corporation (“Perry Printing”).  Prior to April 28, 1995, the Company had no operatingactivities.

 

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

 

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

 

The Company operates primarily in one business segment - printingservices.  The following table presentsthe percentage of net sales contributed by each market sector during the pastthree fiscal years.

 
|      |   | **2003** |   | **2002** |   | **2001** |   |
|-----------|--------|----------|--------|----------|--------|----------|--------|
| Magazines |   | 62       | %      | 65       | %      | 63       | %      |
| Catalogs  |   | 33       | %      | 31       | %      | 32       | %      |
| Other     |   | 5        | %      | 4        | %      | 5        | %      |
| TOTAL     |   | 100      | %      | 100      | %      | 100      | %      |

 

Substantially all of the Company’s sales are based upon customerspecifications.  A significant amount ofthe 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 forapproximately 12%, 15%, and 14% of the Company’s consolidated net sales during2003, 2002 and 2001, respectively. Time, Inc., did not renew its monthlyprinting contract at its expiration on July 31, 2003 and its weeklycontract at its expiration on December 31, 2003.   Due to this loss of business, the Company announced onNovember 20, 2003 that it will be closing its Waterloo, Wisconsin plantand expects to close the facility by the end of April 2004. This actionwill result in the Company incurring an after tax charge of approximately$10-$12 million associated with employee restructuring benefits, assetwrite-downs and other closure related expenses during 2003 and 2004. No othercustomer accounted for more than 10% of the Company’s consolidated net salesfor 2003, 2002 and 2001.

 

1

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**Market Sectors**

 

***Magazines.***  The Company believes that it is one of theten largest printers of magazines in the United States.  The Company’s principal competitors inmagazines consist of four diversified printing companies.  The Company’s magazine customers includesome of the largest and most established publishers in a diverse range ofmarket categories.  The Company believesthat established publishers and their publications are most likely to have acontinuing and improving market presence.

 

Substantially all of the Company’s magazine printing is performed undercontracts, the majority of which have remaining terms ranging from one to fouryears.  The Company’s strongrelationships with its magazine customers have historically enabled it toextend most of its magazine contracts beyond their initial expirationdates.  The Company’s relationships withits top ten magazine customers average more than twenty years.

 

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

 

***Other CommercialPrinting.*** The Company also produces a variety of specialty commercial productssuch as magazine inserts, calendars, and general advertising products.  These commercial products enable the Companyto optimize capacity utilization by supplementing its magazine and catalogbusiness.

 

2

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**Prepress**

 

The Company provides a full range of prepress services and equipmentutilizing the latest technology, answering the demand for high quality, 24-hourpreparatory services.  The Company’sprepress services include conventional preparatory services, (such as colorseparation, digital page assembly, “preflighting” of digital files,computerized imposition, and laser platemaking) as well as state-of-the-artcomputer-to-plate technology.  TheCompany has made significant investments in transforming its prepressoperations from labor-intensive to equipment- and system-intensive processes,including the introduction of electronic prepress capabilities enabling theCompany to receive, create and process pages electronically and to utilizeautomated platemaking equipment.

 

**Press Room**

 

The Company offers its customers state-of-the-art heatset web offsetpress capabilities at each of its printing facilities.  The Company has invested in wide web presstechnology which represents a substantial capital commitment, which the Companybelieves is matched by only a small number of well-capitalized printers.  Wide web presses generate a significant costsavings on longer press runs.  Otherspecialized press capabilities include short cut-off and gapless presses, whichreduce paper waste.  The Company’spresses can print on lower-cost paper stocks and certain presses incorporatefolders to produce tabloid- and digest-size products.  The Company has both high-speed presses best suited for longerruns and other presses with shorter makeready times which are better suited forshort runs. Management believes its printing operations have the consistenthigh quality reproduction, low paper waste, flexibility, and dependability thatis 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-demographicselective binding (on both a regional and specific carrier route basis).  All of the Company’s magazine and catalogbinding equipment has ink-jet capabilities and partial or fully selectivesystems.  During the binding process, aproduct’s content can be modified to include or to exclude certain materialsusing technologies that enable a magazine publisher or catalog merchant tocustomize and personalize its market by sending the same basic magazine orcatalog to all consumers while inserting different advertisements, messages,prices or product offerings, depending upon the geographic and demographiccharacteristics of the individual customer or subscriber.

 

Ink-jet personalization is increasingly being used by many publishersand catalogers.  Ink-jet addressingeliminates the additional printing of paper labels and improves mailingaddressing efficiency, and allows both the cover and the order form to belabeled and to contain customer coding information.  Furthermore, as magazine and catalog publishers continue to lookfor methods to increase the level of personalization, the ink-jet process isbeing used more frequently to add personal messages, specific inserts tofrequent buyers, or unique coding information for order entry.

 

**Logistics**

 

Logistics is a key element of the service offering needed toeffectively manage distribution costs. The Company provides its customers withstate-of-the-art distribution and mail list services.  The distribution services provided by the Company include multipleentry point analysis, consolidation, pool shipping, drop shipping, loadplanning, over-the-road and rail services, mailing/distribution consultation,freight tracking, co-mailing analysis, mail tracking, ink-jet formatting andink-jet tape processing.

 

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

 

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

 

3

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**Competition**

 

The Company competes in each of its market segments on the basis ofprice, quality, range of services offered, distribution capabilities, abilityto service the specialized needs of customers, availability of printing time onappropriate equipment and use of state-of-the-art technology.

 

The Company’s competitors in the magazine and catalog printing marketconsist of diversified printing companies who have facilities sufficient tocompete in the national market, along with various local or regional printerswith less extensive facilities who compete for local or regional business.  The Company’s key competitors in thesemarkets include Quebecor/World, R.R. Donnelley & Sons, Quad/Graphics, BantaCorporation and Brown Printing.

 

**Raw Materials**

 

Paper and ink are the primary direct materials used by theCompany.  Generally, direct materialcosts are passed on to the customer.

 

The primary raw material used by the Company in its operation ispaper.  In 2003, the Company’s customerssupplied 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’smanufacturing costs and pricing to certain customers, and consequently the costof paper and the proportion of paper supplied by customers significantlyaffects the Company’s net sales and cost of sales.  The Company is generally able to pass on increases in the cost ofpaper to its customers, while declines in paper costs generally result in lowerprices to customers.  Fluctuations inpaper costs result in corresponding fluctuations in the Company’s net sales,but typical fluctuations generally have not affected production volumes orprofits to any significant extent. However, sharp increases in paper prices and related reduction in printadvertising programs are more likely to adversely affect volumes andprofits.  The Company believes that itsrelationships with its paper suppliers are strong, and that it has adequateallocations with its suppliers for its customers’ needs.

 

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

 

**Seasonality**

 

The Company experiences seasonal fluctuations, with generally highersales and working capital in the second half of the fiscal year.  The revolving credit facility under theCompany’s amended and restated credit agreement entered into in December, 2003(the “Credit Agreement”) has an aggregate commitment of $40.0 million, of which$28.0 million was available for future working capital and other generalcorporate purposes as of December 31, 2003.

 

**Regulatory Compliance**

 

The Company is subject to regulation under various federal, state, andlocal laws relating to the environment and to employee health and safety.  These environmental regulations relate tothe generation, storage, transportation, handling, disposal, and emission intothe environment of various substances. Permits are required for operation of the Company’s business and thesepermits are subject to renewal, modification and, in certain circumstances,revocation.  The Company is also subjectto regulation under various federal, state and local laws which allowregulatory authorities to compel (or seek reimbursement for) cleanup ofenvironmental contamination, if any, at the Company’s own sites and atfacilities where its waste is or has been disposed.  The Company has internal controls and personnel dedicated tocompliance with all applicable environmental and employee health and safety laws.  The Company expects to incur ongoing capitaland operating costs and administrative expenses to maintain compliance withapplicable environmental laws.  TheCompany cannot predict the environmental or employee health and safetylegislation or regulations that may be enacted in the future or how existing orfuture laws or regulations will be administered or interpreted.  Compliance with new laws or regulations, aswell as more vigorous enforcement policies of the regulatory agencies orstricter interpretation of existing laws, may require additional expendituresby the Company, some or all of which may be material; however the Company isnot currently aware of any environmental or employee health or safety matterwhich could have a material adverse effect upon the Company’s competitiveposition or consolidated financial statements.

 

**Trade Names and Trademarks**

 

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

 

4

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**Research and Development**

 

Suppliers of equipment and materials used by the Company perform mostof the research and development related to the printing industry.  Accordingly, the Company has not spent amaterial amount of resources for such purposes.  The Company does, however, dedicate significant resources toimproving its operating efficiencies and the services it provides to itscustomers.  In an effort to realizeincreased efficiencies in its printing processes, the Company has madesignificant investments in state-of-the-art equipment, including new press andbinding technology, computer-to-plate and digital processing technology, andreal-time product quality monitoring systems.

 

**Employees**

 

As of December 31, 2003, the Company had approximately 2,200employees, of which approximately 472 or 21% are represented by unions.  All of the union employees are employed atthe Company’s Waterloo, Wisconsin plant. On October 31, 2003 the Companyannounced that it would lay off 237 of its Waterloo, Wisconsin divisionemployees by January 21, 2004 resulting from the loss of its majorcustomer that represented a large percentage of the plant’s volume. OnNovember 20, 2003, the Company announced that it would be closing theWaterloo plant over the first four months of 2004.

 

**RiskFactors**

 

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 resultsof operations and business prospects. The risks set forth below and elsewhere in this Annual Report couldcause actual results to differ materially from those that the Company projects.

 

*Loss of Key Customer*

 

A significant portion of the Company’s net sales depended upon a singlecustomer whose contracts expired in 2003. For the years ended December 31,2003, 2002 and 2001, Time, Inc. comprised 12%, 15% and 14% of consolidated netsales, respectively. Time, Inc. did not renew its monthly printing contractthat expired on July 31, 2003 and its weekly printing contract thatexpired on December 31, 2003. If this loss of business is not replaced,the Company’s financial condition and results of operations would be materiallyaffected. The Company was not successful in replacing all of this loss ofbusiness. No other customer accounted for more than 10% of the business. OnOctober 31, 2003, the Company announced that it would lay-off 237 of itsWaterloo, Wisconsin division employees by January 21, 2004 resulting fromthe loss of this major customer that represented a large percentage of theplant’s volume.

 

*Closure of Waterloo Plant*

 

After careful analysis and consideration of all relevant factors, theCompany determined it would close its Waterloo division and transfer theremaining work to its other printing plants in Baraboo, Wisconsin, Strasburg,Virginia and Spencer, Iowa. Approximately 600 people are currently employed atthe Waterloo division. The Company expects to close the facility by the end ofApril 2004.

 

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

 

*High Level of Indebtedness*

 

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

 

The level of the Company’s indebtedness could have importantconsequences to holders of the Senior Notes, including: (i) a substantial portionof the Company’s cash flow from operations must be dedicated to debt serviceand will not be available for other purposes; (ii) the Company’s future abilityto obtain additional debt financing for working capital, capital expendituresor acquisitions may be limited; (iii) the Company’s level of indebtedness couldlimit its flexibility in reacting to changes in the printing industry andeconomic conditions generally, which could limit its ability to withstandcompetitive pressures or take advantage of business opportunities; (iv) theCompany’s borrowing under the Credit Agreement will be at variable rates ofinterest, which could cause the Company to be vulnerable to increases ininterest rates; and (v) all of the indebtedness incurred in connection with theCredit Agreement will become due prior to the time the principal payments onthe Senior Notes will become due. Certain of the Company’s competitors currently operate on a lessleveraged basis and are likely to have significantly greater operating and financingflexibility than the Company.

 

*Ability to Service Debt*

 

The Company’s ability to pay interest on the Senior Notes and tosatisfy its other debt obligations will depend upon its future operatingperformance, which will be affected by prevailing economic conditions andfinancial, business and other factors, certain of which are beyond itscontrol.  The Company anticipates thatits operating cash flow, together with available borrowings under the CreditAgreement, will be sufficient to meet its operating expenses, capitalexpenditure requirements and working capital needs and to service its debtrequirements as they become due. However, if the Company is unable to service its indebtedness, it willbe forced to adopt an alternative strategy that may include actions such asreducing or delaying capital expenditures, selling assets, restructuring orrefinancing its indebtedness or seeking additional equity capital.  There can be no assurance that any of thesestrategies could be effected on satisfactory terms, if at all, or that theywould enable the Company to continue to meet its debt service obligations orthat they would be permitted under the terms of the Credit Agreement orIndenture.

 

5

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*Subordination of the Senior Notes and Guarantees*

 

The Senior Notes are fully and unconditionally guaranteed, on a seniorsubordinated basis, jointly and severally, by all subsidiaries of the Company(the “Subsidiary Guarantors”) pursuant to guarantees (the “Guarantees”).  The Guarantees will be subordinated in rightof payment to all senior indebtedness of the Company and the SubsidiaryGuarantors.  In the event of bankruptcy,liquidation or reorganization of the Company, the assets of the Company or theSubsidiary Guarantors will be available to pay obligations on the Senior Notesonly 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 sufficientassets remaining to pay amounts due on any or all of the Senior Notes thenoutstanding.  Additional seniorindebtedness may be incurred by the Company and the Subsidiary Guarantors fromtime to time, subject to certain restrictions. The Indenture generally provides that a Restricted Subsidiary (asdefined in the Indenture) may incur indebtedness only if such Subsidiary agreesto guarantee the Senior Notes on a senior subordinated basis.  The holders of the Senior Notes have nodirect claim against the Subsidiary Guarantors other than claims created by theGuarantees, which may themselves be subject to legal challenge in the event ofthe bankruptcy or insolvency of a Subsidiary Guarantor.  If such a challenge were upheld, theGuarantees would be invalidated and unenforceable.  To the extent that the Guarantees are held to be unenforceable orhave been released pursuant to the terms of the Indenture, the rights ofholders of the Senior Notes to participate in any distribution of assets of anySubsidiary Guarantor upon liquidation, bankruptcy or reorganization may, as inthe case with other unsecured creditors of the Company, be subject to priorclaims against such Subsidiary Guarantor.

 

*Holding Company Structure*

 

Perry Judd’s Holdings is a holding company, the principal assets ofwhich consist of equity interests in its subsidiaries.  The Senior Notes are a direct obligation ofPerry Judd’s Holdings, which derives all of its revenues from the operations ofits subsidiaries.  As a result, PerryJudd’s Holdings will be dependent on the earnings and cash flow of, anddividends and distributions or advances from, its subsidiaries to provide thefunds necessary to meet its debt service obligations, including the payment ofprincipal and interest on the Senior Notes. Accordingly, Perry Judd’s Holdings’ ability to pay interest on theSenior Notes and otherwise to meet its liquidity requirements may be limited asa result of its dependence upon the distribution of earnings and advances offunds by its subsidiaries.  The paymentof dividends from the subsidiaries to Perry Judd’s Holdings and the payment ofany interest on or the repayment of any principal of any loans or advances madeby Perry Judd’s Holdings to any of its subsidiaries may be subject to statutoryrestrictions under corporate law limiting the payment of dividends and arecontingent upon the earnings of such subsidiaries.  The Company’s subsidiaries are guarantors of the indebtednessincurred under the Credit Agreement. The Senior Notes are not secured by liens against any of the Company’sor its subsidiaries’ assets, while the indebtedness incurred under the CreditAgreement is secured by liens against substantially all the Company’s and itssubsidiaries’ assets.

 

*Restrictions Imposed by Terms of the Company’s Indebtedness*

 

The Indenture restricts, among other things, the Company’s and itssubsidiaries’ ability to incur additional indebtedness, pay dividends or makecertain other restricted payments, consummate certain asset sales, enter intocertain transactions with affiliates, incur liens, incur indebtedness that issubordinate to Senior Indebtedness (as defined in the Indenture) but senior inright of payment to the Senior Notes, impose restrictions on the ability of asubsidiary to pay dividends or make certain payments to the Company and itssubsidiaries, merge or consolidate with any other persons or sell, assign,transfer, lease, convey or otherwise dispose of all or substantially all of theassets of the Company.  In addition, theCredit Agreement contains other and more restrictive covenants and prohibitsthe Company and its subsidiaries from prepaying other indebtedness (includingthe Senior Notes) unless certain financial ratios are met. The Credit Agreementalso requires the Company to maintain specified financial ratios and satisfy certainfinancial condition tests.  TheCompany’s ability to meet those tests and ratios can be affected by eventsbeyond its control, and there can be no assurance that it will meet thoseratios and tests.  A breach of any ofthese covenants could result in a default under the Credit Agreement and/or theIndenture.  Upon the occurrence of anevent of default under the Credit Agreement, the lender could elect to declareall amounts outstanding under the Credit Agreement, together with accruedinterest, to be immediately due and payable. If the Company were unable to repay those amounts, the lender couldproceed against the collateral granted to them to secure thatindebtedness.  If the SeniorIndebtedness under the Credit Agreement were to be accelerated, there can be noassurances that the assets of the Company would be sufficient to repay in fullthat indebtedness and the other indebtedness of the Company, including theSenior Notes.  The Company’s obligationsunder the Credit Agreement are secured by a security interest in all the assetsof the Company and its subsidiaries, excluding all assets relating to property,plant and equipment.

 

6

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*Competition*

 

The commercial printing industry in the U.S. is highly competitive inmost product categories and geographic regions.  Competition is largely based on price, quality, range of servicesoffered, distribution capabilities, ability to service the specialized needs ofcustomers, availability of printing time on appropriate equipment and use ofstate-of-the-art technology.  TheCompany competes for commercial business not only with large international andnational printers, but also with smaller regional printers.  In certain circumstances, due primarily tofactors such as freight rates and customer preference for local services,printers with better access to certain regions of the country may have acompetitive advantage in such regions. In addition, many of the Company’s competitors have substantiallygreater financial, marketing, distribution, management and other resources thanthe Company, and as the industry experiences continued consolidation, theCompany’s competitors may further enhance such resources.  The Company also believes that excesscapacity in the industry, especially during periods of economic downturn, wouldresult in downward pricing pressure and intensified competition in the printingindustry.  Given these factors, therecan be no assurance that the Company will be able to continue to compete successfullyagainst existing or new competitors, and the failure to do so may have amaterial adverse effect on the Company’s financial condition and results ofoperations.  See “Business—Competition”.

 

*Technological Changes*

 

Technology in the printing industry has evolved and continues toevolve.  Since 1999, approximately $95million of purchased and leased capital expenditures have been invested forprinting facilities and production equipment. As technology continues to evolve and as its customers’ needs becomemore specialized and sophisticated in the future, the Company will likely berequired to invest significant additional capital in new and improvedtechnology 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 productsand services, the Company’s financial condition, results of operations and cashflows could be materially adversely affected.

 

*Raw Materials - Paper*

 

The cost of paper is a principal factor in the Company’s manufacturingcosts and pricing to certain customers and, consequently, the cost of papersignificantly affects the Company’s net sales. The Company is generally able to pass on increases in the cost of paperto its customers, while declines in paper costs generally result in lowerprices to customers.  Typicalfluctuations in paper costs result in corresponding fluctuations in theCompany’s net sales, but typical fluctuations generally have not affectedproduction volumes or profits to any significant extent.  However, sharp increases in paper prices andrelated reduction in print advertising programs are more likely to adverselyaffect volumes and profits.  To theextent that there are future paper costs increases and the Company is not ableto pass such increases to its customers or its customers reduce their demandfor the Company’s products and services, the Company’s financial condition andresults of operations could be materially adversely affected.

 

Capacity in the paper industry has remained relatively stable in recentyears.  Increases or decreases in demandfor paper have led to corresponding pricing changes and, in periods of high demand,to limitations on the availability of certain grades of paper, including gradesutilized by the Company.  Any loss ofthe sources for paper supply or any disruption in such sources’ business orfailure to meet the Company’s product needs on a timely basis could cause, at aminimum, temporary shortages in needed materials which could have a materialadverse affect on the Company’s results of operations.  Although the Company actively manages itspaper supply and believes it has established strong relationships with itssuppliers, there can be no assurance that the Company’s sources of supply forits 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 securesufficient supplies of paper of appropriate quality, its financial condition,results of operations and cash flows could be materially adverselyaffected.  See “Business—Raw Materials”.

 

*Certain Customer Relationships*

 

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

 

7

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*Environmental and other Governmental Regulation*

 

The Company is subject to regulation under various federal, state andlocal laws relating to the environment and to employee health and safety.  These environmental regulations relate tothe generation, storage, transportation, handling, disposal and emission intothe environment of various substances. Permits are required for operation of the Company’s business, and thesepermits are subject to renewal, modification and, in certain circumstances,revocation.  The Company is also subjectto regulation under various federal, state and local laws which allow regulatoryauthority to compel (or seek reimbursement for) cleanup of environmentalcontamination at the Company’s own sites and at facilities where its waste isor has been disposed.  The Company hasinternal controls and personnel dedicated to compliance with all applicableenvironmental and employee health and safety laws.  The Company expects to incur ongoing capital and operating costsand administrative expenses to maintain compliance with applicableenvironmental laws.  The Company cannotpredict the environmental or employee health and safety legislation orregulations that may be enacted in the future or how existing or future laws orregulations will be administered or interpreted.  Compliance with new laws or regulations, as well as more vigorousenforcement policies of the regulatory agencies or stricter interpretation ofexisting laws, may require additional expenditures by the Company, some or allof which may be material.  See“Business—Regulatory Compliance”.

 

*Reliance on Key Personnel*

 

The Company’s success will continue to depend to a significant extenton its executive officers and other key management personnel.  There can be no assurance that the Companywill be able to retain its executive officers and key personnel or attractadditional 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 theacquired companies.  There can be noassurance that the Company will be able to retain such management personnel.

 

*Control by Principal Stockholders*

 

Robert E. Milhous and Paul B. Milhous, the Chairman and Vice Chairman,respectively, of the Company own together beneficially over 87% of theoutstanding capital stock of the Company. Accordingly, these stockholders have the ability, acting together, tocontrol fundamental corporate transactions requiring stockholder approval,including without limitation approval of merger transactions involving theCompany and sales of all or substantially all of the Company’s assets.  See Item 12 “Security Ownership of CertainBeneficial Owners and Management”.

 

*Purchase of Notes Upon Change of Control*

 

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

 

**Available Information**

 

We maintain a website with the address www.perryjudds.com. Theinformation contained on our website is not included as a part of, orincorporated by reference into, this Annual Report on Form 10-K. As a matter ofpractice, we do not post forms filed with the Securities and ExchangeCommission (SEC) on our website; however, this information may be obtainedthrough other sources, such as www.edgar-online.com.

 

8

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**Item 2.****            Properties**

 

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

 
| **Location**             |   | **Use**                         |   | **Owned/Leased** |   | **Square Feet** |   |
|--------------------------|--------|---------------------------------|--------|------------------|--------|-----------------|--------|
|                     |   |                            |   |             |   |            |   |
| Corporate Headquarters   |   |                            |   |             |   |            |   |
| Waterloo, WI             |   | Executive Offices and           |   |             |   |            |   |
|                     |   | Corporate Support Functions     |   | Leased           |   | 50,200          |   |
|                     |   |                            |   |             |   |            |   |
| Preproduction Facilities |   |                            |   |             |   |            |   |
| Madison, WI              |   | Digital Prepress Production     |   | Leased           |   | 7,100           |   |
|                     |   |                            |   |             |   |            |   |
| Printing Plants          |   |                            |   |             |   |            |   |
| Waterloo, WI             |   | Long- and medium-run magazines  |   | Leased           |   | 298,800         |   |
| Strasburg, VA            |   | Medium- and short-run magazines |   | Leased           |   | 353,400         |   |
| Baraboo, WI              |   | Consumer and business catalogs  |   | Leased           |   | 614,000         |   |
| Spencer, IA              |   | Short-run magazines             |   | Owned            |   | 127,000         |   |
|                     |   |                            |   |             |   |            |   |
| Warehouses               |   |                            |   |             |   |            |   |
| Waterloo, WI (3 sites)   |   | Paper storage                   |   | Leased           |   | 112,800         |   |
| Mt. Jackson, VA          |   | Customer supplied inserts       |   | Leased           |   | 61,700          |   |

 

In addition, the Company leases several salesoffices located throughout the United States. The Company believes that none of its leases are material to itsoperations and that such leases were entered into on market terms.

 

On November 20, 2003, the Companyannounced that it would close its Waterloo division and transfer the remainingwork to its other printing plants located in Baraboo, Wisconsin, Strasburg,Virginia and Spencer, Iowa. The Company expects to close the facility by theend of April 2004.

 

**Item 3.****            LegalProceedings**

 

There are no material pending legalproceedings to which the Company or any of its subsidiaries is a party or towhich any of their property is subject. Claims, suits, and complaints may arisein the ordinary course of the Company’s business.  The Company believes that any such pending matters are adequatelyreserved for, are covered by insurance, or would not have a material adverseeffect on the consolidated financial statements of the Company, taken as awhole, if determined adversely against the Company.

 

**Item4.****            Submissionof Matters to a Vote of Security Holders**

 

None.

 

9

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**PART II**

 

**Item 5.****            Marketfor Registrant’s Common Equity and Related Stockholder Matters**

 

###### **Market Information**

 

There is no established public trading market for the Company’s commonstock or other equity securities. As of December 31, 2003, there were 14holders of the common stock.

 

**Dividends**

 

The Company has never paid and has no present intention of paying cashdividends on its common stock.  Anydetermination in the future to pay dividends will depend on the Company’sfinancial condition, capital requirements, results of operations, contractuallimitations and any other factors deemed relevant by the Company’s Board ofDirectors.  In addition, the Indenturegoverning the Company’s Senior Notes due in 2007 imposes certain restrictionson the Company’s ability to make certain distributions and restricts thepayment of dividends by the Company in certain circumstances.

 

**Securities Authorized For Issuance UnderEquity Compensation Plans**

 

The following table summarizes the number of shares issuable under theCompany’s equity compensation plans, the weighted-average exercise price andthe number of shares available for issuance, as of December 31, 2003.

 
| **Plan Category**                                            |   | **Number of  securities to  be issued upon exercise  of outstanding options,  warrants and rights** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights** |   | **Number of  securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))** |   |
|--------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                         |   | **(a)**                                                                                             |   | **(b)**                                                                            |   | **(c)**                                                                                                                                               |   |
| Equity compensation  plans approved by  security holders     |   | None                                                                                                |   | None                                                                               |   | 33,693                                                                                                                                                |   |
|                                                         |   |                                                                                                |   |                                                                               |   |                                                                                                                                                  |   |
| Equity compensation  plans not approved by  security holders |   | None                                                                                                |   | None                                                                               |   | None                                                                                                                                                  |   |
|                                                         |   |                                                                                                |   |                                                                               |   |                                                                                                                                                  |   |
| Total                                                        |   | None                                                                                                |   | None                                                                               |   | 33,693                                                                                                                                                |   |

 

During 2000, all outstanding options were exercised.

 

10

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**Item6.****            SelectedFinancial Data**

 

The following table sets forth selectedconsolidated financial data for each of the last five fiscal years.  This information is qualified by referenceto, and should be read together with, the Consolidated Financial Statements andNotes thereto and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” included elsewhere in this Annual Report on Form10-K.  The statement of operations datafor the years ended December 31, 2003, 2002 and 2001 and the balance sheetdata as of December 31, 2003 and 2002 are derived from the Consolidated FinancialStatements of the Company included elsewhere in this Annual Report on Form10-K.  Information related to 2000 and1999 is derived from financial statements not included herein.

 

 

 

 
|                                                 |   | **Perry  Judd’s Holdings, Inc.**   |    |
|------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                 |   | **(dollars  in thousands)**             |    |
|                                                 |   |                                    |    |
|                                                 |   | **Year Ended  December 31,  2003** |    | **Year Ended  December 31,  2002 (1)** |   | **Year Ended  December 31,  2001** |   | **Year Ended  December 31,  2000 (2)** |   | **Year Ended  December 31,  1999 (3)** |   |
| Statement of Operations Data:                        |   |                                    |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Net Sales                                            |   | $                                       | 297,914 |   | $ | 290,928 |   | $ | 321,111 |   | $ | 342,869 |   | $ | 315,998 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Operating Expenses (5)                               |   | 295,716                                 |    | 269,031 |   | 300,612 |   | 321,408 |   | 305,679 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Income from Operations (5)                           |   | 2,198                                   |    | 21,897 |   | 20,499 |   | 21,461 |   | 10,319 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Net Income (Loss) (5)                                |   | (5,242                                  | )       | 5,620 |   | 2,792 |   | 60 |   | (4,464 | ) |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Balance Sheet Data (end of period):                  |   |                                    |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Working Capital                                      |   | $                                       | 14,554  |   | $ | 20,251 |   | $ | 36,386 |   | $ | 33,737 |   | $ | 31,085 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Total Assets                                         |   | 168,130                                 |    | 189,705 |   | 212,526 |   | 228,269 |   | 234,251 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Long Term Debt                                       |   | 70,010                                  |    | 86,010 |   | 115,000 |   | 122,800 |   | 128,818 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Minority Interests (4)                               |   | 4,006                                   |    | 3,738 |   | 3,488 |   | 3,254 |   | 9,340 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Stockholders’ Equity                            |   | 23,522                                  |    | 28,825 |   | 23,002 |   | 20,079 |   | 19,371 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Statement of Cash Flows Data:                        |   |                                    |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Net Cash Provided By (Used In) Operating  Activities |   | $                                       | 18,231  |   | $ | 39,924 |   | $ | 15,327 |   | $ | 20,869 |   | $ | 8,355 |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Net Cash Provided By (Used In) Investing  Activities |   | (3,989                                  | )       | (14,881 | ) | (10,110 | ) | (6,453 | ) | (38,583 | ) |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Net Cash Provided By (Used In) Financing  Activities |   | (14,246                                 | )       | (28,196 | ) | (6,018 | ) | (13,424 | ) | (8,284 | ) |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| Other Financial Data:                                |   |                                    |    |   |   |   |   |   |   |   |   |
|                                                 |   |                                    |    |   |   |   |   |   |   |   |   |
| EBITDA (6)                                           |   | $                                       | 25,857  |   | $ | 39,053 |   | $ | 35,396 |   | $ | 32,215 |   | $ | 23,920 |   |

 

11

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(1)   EffectiveJanuary 1, 2002, the Company changed its method of accounting forgoodwill. See Note 2 of Notes to Consolidated Financial Statements includedelsewhere herein.

 

(2)   OnOctober 19, 2000, the Company sold substantially all of the net assets ofits subsidiary Judd’s Online for $6.3 million.

 

(3)   OnFebruary 1, 1999, the Company acquired all of the issued and outstandingcapital stock of Heartland for $17.5 million.

 

(4)   Includesunpaid dividends on preferred stock at December 31, 1999.

 

(5)   Thefollowing 2003 amounts have been adjusted after giving effect to therestructuring charges resulting from the Company’s 2003 decision to close itsWaterloo, Wisconsin plant: 
|                   |   | **Year Ended  December 31,** |    |
|------------------------|--------|-----------------------------------|---------|
|                   |   | **2003**                          |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Operating Expenses     |   | $                                 | 285,508 |   | $ | 269,031 |   | $ | 300,612 |   | $ | 321,408 |   | $ | 305,679 |   |
|                   |   |                              |    |   |   |   |   |   |   |   |   |
| Income from Operations |   | 12,406                            |    | 21,897 |   | 20,499 |   | 21,461 |   | 10,319 |   |
|                   |   |                              |    |   |   |   |   |   |   |   |   |
| Net Income (Loss)      |   | 1,088                             |    | 5,620 |   | 2,792 |   | 60 |   | (4,464 | ) |
|                        |        |                                   |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(6)   “EBITDA”represents earnings before interest, income taxes, depreciation, amortization,noncash fixed asset impairment costs, noncash compensation related to commonstock options, dividends and accretion on redeemable preferred stock, gains andlosses on dispositions of assets and repurchases of senior subordinatednotes.  While EBITDA should not beconstrued as a substitute for operating income or loss or a better indicator ofliquidity than cash flow from operating activities, which are determined inaccordance with accounting principles generally accepted in the United States,it is included herein to provide additional information with respect to theability of the Company to meet its future debt service, capital expenditure andworking capital requirements. EBITDA is also a key variable used in severaldebt covenant ratios. EBITDA is not necessarily a measure of the Company’sability to fund its cash needs, and items excluded from EBITDA (such as depreciationand amortization) are significant to an understanding of the Company’sfinancial results.  In addition, EBITDAas presented by the Company may not be directly comparable to similarly-titledmeasures presented by other companies. See the Company’s Consolidated Statements of Cash Flows and the relatednotes thereto included in this Form 10-K.

 

The following table sets forth the componentsof EBITDA reflected in the consolidated financial statements (in thousands):

 
|                                                   |   | **Year Ended  December 31,** |   |
|--------------------------------------------------------|--------|-----------------------------------|--------|
|                                                   |   | **2003**                          |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| Net income (loss)                                      |   | $                                 | (5,242 | ) | $ | 5,620 |   | $ | 2,792 |   | $ | 60 |   | $ | (4,464 | ) |
| Dividends and accretion on redeemable  preferred stock |   | 431                               |   | 435 |   | 507 |   | 3,245 |   | 1,074 |   |
| Provision (benefit) for income taxes                   |   | (2,931                            | )      | 1,858 |   | 2,909 |   | 3,320 |   | (1,226 | ) |
| Interest expense                                       |   | 8,666                             |   | 11,790 |   | 12,784 |   | 13,831 |   | 14,293 |   |
| Interest income                                        |   | (130                              | )      | (147 | ) | (127 | ) | (621 | ) | (980 | ) |
| Depreciation                                           |   | 17,735                            |   | 17,132 |   | 14,582 |   | 13,511 |   | 11,863 |   |
| Amortization                                           |   | 535                               |   | 1,597 |   | 2,451 |   | 2,641 |   | 3,224 |   |
| (Gain) loss on disposals of business and  equipment    |   | (516                              | )      | (27 | ) | (633 | ) | (4,420 | ) | 136 |   |
| Non cash compensation related to common  stock options |   | 44                                |   | 203 |   | 131 |   | 648 |   | — |   |
| Loss on repurchases of senior subordinated  notes      |   | 868                               |   | 592 |   | — |   | — |   | — |   |
| Non-cash fixed asset impairment costs                  |   | 6,397                             |   | — |   | — |   | — |   | — |   |
| EBITDA (as reported)                                   |   | 25,857                            |   | 39,053 |   | 35,396 |   | 32,215 |   | 23,920 |   |
| Other restructuring charges                            |   | 3,811                             |   | — |   | — |   | — |   | — |   |
| EBITDA (as adjusted)                                   |   | $                                 | 29,668 |   | $ | 39,053 |   | $ | 35,396 |   | $ | 32,215 |   | $ | 23,920 |   |

 

12

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**Item7.****            Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following discussion of our financialcondition and results of operations should be read in conjunction with ourfinancial statements and the related notes to such financial statementsincluded elsewhere in this Report beginning on page F-1.  The following discussion containsforward-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 tothe differences are discussed in “Business – Risk Factors” and elsewhere inthis Annual Report.

 

**Resultsof Operations**

 

**Comparisonof the year ended December 31, 2003 with the year ended December 31,2002**

 

Net sales increased $7.0 million or 2.4% to$297.9 million for the year ended December 31, 2003 from $290.9 millionfor the year ended December 31, 2002. The increase resulted primarily fromadditional production volume and a 12.9% increase in the amount of paper theCompany furnished to its customers during 2003 compared to 2002.

 

Costs of production and distributionincreased $18.0 million or 8.2% to $237.1 million for the year endedDecember 31, 2003 from $219.1 million for the year ended December 31,2002, principally related to higher production levels and the amount of paperthe company furnished its customers. Costs of production and distribution as apercentage of net sales were 79.6% for the year ended December 31, 2003,as compared to 75.3% for the year ended December 31, 2002 principallyrelated to proportionately higher paper costs, increased group medical andenergy costs and sales price declines stemming from overcapacity in thecommercial print markets. Paper costs were 21.4% of net sales for the yearended December 31, 2003, as compared to 19.3% for the year endedDecember 31, 2002.

 

Selling, general and administrative expensesdecreased $1.5 million or 4.6% to $31.0 million for the year endedDecember 31, 2003 as compared to $32.5 million for the year endedDecember 31, 2002. The decrease resulted from the incentive compensationtargets not being achieved by the Company during 2003. Selling, general and administrativeexpenses decreased as a percent of net sales to 10.4% in the 2003 period, ascompared to 11.2% in the 2002 period.

 

Depreciation expense increased $0.6 millionor 3.5% to $17.7 million for the year ended December 31, 2003 from $17.1million for the year ended December 31, 2002, due primarily from the fullyear effect of purchased assets placed in service from 2002 and 2003 additions.

 

During 2003, the Company incurred $10.2million of restructuring charges associated with its decision to close theWaterloo, Wisconsin plant, consisting of severance and other employee relatedcosts, non-cash fixed asset impairment charges, write-down of repair partinventories and other closure-related costs. See Note 12 to the consolidatedfinancial statements.

 

Income from operations decreased $19.7million or 90.0% to $2.2 million for the year ended December 31, 2003 from$21.9 million for the year ended December 31, 2002, due to the factorsdiscussed in the preceding paragraphs of this section. Excluding restructuringcharges, income from operations decreased $9.5 million or 43.4% to $12.4million from $21.9 million for the year ended December 31, 2002.

 

EBITDA (as defined in Item 6. “SelectedFinancial Data” above) decreased $13.2 million or 33.8% to $25.9 million forthe year ended December 31, 2003 from $39.1 million for the year endedDecember 31, 2002, principally due to the factors discussed in the secondand fifth paragraphs of this section. EBITDA decreased as a percent of netsales to 8.7% in the 2003 period, as compared to 13.4% in the 2002 period.Excluding restructuring charges, EBITDA decreased $9.4 million or 24.0% to$29.7 from $39.1 million for the year ended December 31, 2002.

 

Interest expense decreased $3.1 million or26.3% to $8.7 million for the year ended December 31, 2003 from $11.8million for the year ended December 31, 2002, as a result of reduced debtlevels and lower borrowing rates.

 

During 2003, the Company incurred a loss of$0.9 million resulting from the accelerated write-off of deferred financingcosts and premiums paid in connection with repurchasing $16.0 million of itssenior subordinated notes. During 2002, the Company incurred a loss of $0.6million resulting from the accelerated write-off of deferred financing costs inconnection with repurchasing $29.0 million of its senior subordinated notes.

 

13

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**Resultsof Operations**

 

**Comparisonof the year ended December 31, 2002 with the year ended December 31,2001**

 

Net sales decreased $30.2 million or 9.4% to$290.9 million for the year ended December 31, 2002 from $321.1 millionfor the year ended December 31, 2001. The decrease resulted primarily froma reduction in the amount of paper the Company furnished to its customers, a16.6% reduction in paper prices and a lower volume of production units from newand existing customers.

 

Costs of production and distributiondecreased $34.0 million or 13.4% to $219.1 million for the year endedDecember 31, 2002 from $253.1 million for the year ended December 31,2001, principally due to a reduction in paper costs, improved operatingefficiencies and lower operating expenses resulting from reduced productionlevels. Costs of production and distribution as a percentage of net sales were75.3% for the year ended December 31, 2002, as compared to 78.8% for theyear ended December 31, 2001. Paper costs were 19.3% of net sales for theyear ended December 31, 2002, as compared to 23.6% for the year endedDecember 31, 2001.

 

Selling, general and administrative expenses increased$0.2 million or 0.6% to $32.5 million for the year ended December 31, 2002as compared to $32.3 million for the year ended December 31, 2001.Selling, general and administrative expenses increased as a percent of netsales to 11.2% in the 2002 period, as compared to 10.1% in the 2001 period,primarily as a result of reduced level of sales created by lower paper salesvalue.

 

Depreciation expense increased $2.5 millionor 17.1% to $17.1 million for the year ended December 31, 2002 from $14.6million for the year ended December 31, 2001, due primarily from the fullyear effect of purchased assets placed in service from 2001 and 2002 additions.

 

Income from operations increased $1.4 millionor 6.8% to $21.9 million for the year ended December 31, 2002 from $20.5million for the year ended December 31, 2001, due to the factors discussedin the preceding paragraphs of this section.

 

EBITDA (as defined in Item 6. “SelectedFinancial Data” above) increased $3.7 million or 10.5% to $39.1 million for theyear ended December 31, 2002 from $35.4 million for the year endedDecember 31, 2001, principally due to the factors discussed in the secondparagraph of this section. EBITDA increased as a percent of net sales to 13.4%in the 2002 period, as compared to 11.0% in the 2001 period.

 

Interest expense decreased $1.0 million or7.8% to $11.8 million for the year ended December 31, 2002 from $12.8million for the year ended December 31, 2001, as a result of reduced debtlevels and lower borrowing rates.

 

During 2002, the Company incurred a loss of$0.6 million resulting from the accelerated write-off of deferred financingcosts in connection with repurchasing $29.0 million of its senior subordinatednotes.

 

14

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**Liquidity and CapitalResources**

 

Historically, the Company has funded its capital and operatingrequirements with a combination of cash flow from operations, borrowings, andexternal operating leases.  Earningsbefore interest, income taxes, depreciation, amortization, noncash fixed assetimpairment costs, noncash compensation related to common stock options,dividends and accretion on redeemable preferred stock, gains and losses ondispositions of assets and repurchases of senior subordinated notes was $25.9million, $39.1 million and $35.4 million for the years ended December 31,2003, 2002 and 2001, respectively.

 

Working capital was $14.6 million, $20.3 million and $36.4 million atDecember 31, 2003, 2002 and 2001, respectively. The decrease in workingcapital at December 31, 2003 as compared to December 31, 2002 wasattributable to an increase in accrued expenses of $3.3 million relatingprimarily to restructuring charges and an increase in revolving debt of $2.5million. The decrease in working capital at December 31, 2002, as comparedto December 31, 2001 was primarily attributable to the repurchase of $29.0million senior subordinated notes during 2002 offset by the increase inrevolving debt of approximately $8.7 million.

 

Capital expenditures for purchased assets and asset acquisitions fundedunder operating leases were as follows for the periods indicated (dollars inmillions):

 
|                          |   | **Year Ended  December 31,  2003** |   | **Year Ended  December 31,  2002** |   | **Year Ended  December 31,  2001** |   |
|-------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|
|                          |   |                                    |   |                                    |   |                                    |   |
| Purchased                     |   | $                                       | 4.3    |                                    | $      | 14.8                                    |   | $ | 11.0 |   |
| Funded under operating leases |   | 4.8                                     |   | 7.6                                     |   | 15.5                                    |   |
| Total                         |   | $                                       | 9.1    |                                    | $      | 22.4                                    |   | $ | 26.5 |   |

 

These capital expenditures reflect the purchase and lease of additionalprepress, press and bindery equipment. The purchased capital investments have been funded by internallygenerated funds and by borrowings under the Credit Agreement.  Generally, these capital expenditures haveincreased or will increase the Company’s production capacity and are part ofthe Company’s objective to maintain modern, efficient plants andtechnologically advanced equipment.  AtDecember 31, 2003, the Company had commitments to purchase or leaseapproximately $2.1 million of operating assets.

 

During 1997 and 1998, the Company entered into sale and leasebacktransactions for the majority of its real property located in Wisconsin andVirginia. Each of the sale and leaseback transactions has a 20-year term. Thefollowing table summarizes the initial annual lease expense and futureescalations resulting from the sale and leaseback transactions.

 
|      |   | **Current  Annual  Lease Expense** |        | **Escalations  Commencing  at the Start of Year** |   |
|-----------|--------|------------------------------------|-------------|---------------------------------------------------|--------|
|      |   | **2008**                           |        | **2013**                                          |   |
| Wisconsin |   | $                                  | 2.1 million |                                              | 10.0   | % | 10.0 | % |
| Virginia  |   | $                                  | 1.5 million |                                              | 14.5   | % | 14.5 | % |

 

In December 2003, the Company entered into a new five year agreement(the “Credit Agreement”) which expires on December 31, 2008. The CreditAgreement is comprised of a $40 million revolving credit facility based upon aborrowing base of eligible accounts receivable and inventory. Borrowings underthe Credit Agreement bear interest at rates that fluctuate with the prime rateand the Eurodollar rate. As of December 31, 2003, the Company hadborrowings of $11.2 million under the Credit Agreement.

 

Rentsand operating lease expense were $17.1 million, $15.8 million and $17.2 millionfor the years ended December 31, 2003, 2002 and 2001, respectively.

 

AtDecember 31, 2003, the Company had $0.8 million of state tax credits whichexpire in the years 2010 through 2017 and may be applied against regular tax inthe future.

 

TheCompany believes that cash generated from operations and available borrowingsunder the Credit Agreement will be sufficient to fund planned capitalexpenditures, working capital requirements, operating leases and interest andprincipal payments for the foreseeable future. The Credit Agreement has an aggregate commitment of $40.0 million, ofwhich $28.0 million was available for future working capital and other generalcorporate purposes as of December 31, 2003.

 

15

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*Disclosures about Contractual Obligations and CommercialCommitments*

 

Thefollowing table sets forth our contractual obligations and commercialcommitments as of December 31, 2003. See Notes 4 and 7 of the Notes toConsolidated Financial Statements for further information.

 
| **In thousands**          |   | **Total** |    | **Less than********1 year** |   | **1 – 3********years** |   | **4********years** |    | **5 years  and  thereafter** |   |
|---------------------------|--------|-----------|---------|-----------------------------|--------|-----------------------------|--------|--------------------|---------|------------------------------|--------|
| Senior subordinated notes |   | $         | 70,010  |                        | $      | —                      |   | $                  | 70,010  |                         | $      | — |   | $ | — |   |
| Revolving credit facility |   | 11,206    |    | 11,206                      |   | —                      |   | —             |    | —                       |   |
| Operating leases          |   | 103,861   |    | 16,675                      |   | 34,995                      |   | 7,388              |    | 44,803                       |   |
| Total                     |   | $         | 185,077 |                        | $      | 27,881                      |   | $                  | 105,005 |                         | $      | 7,388 |   | $ | 44,803 |   |

 

On October 31, 2003, the Company announced that it will be layingoff 237 of its Waterloo, Wisconsin division employees by January 21, 2004resulting from the loss of its major customer that represented a largepercentage of the plant’s volume. Due to the inability to replace the workquickly and the discouraging economic, marketplace and competitive environmentsthat persist, the Company began discussions immediately following thisannouncement with the Waterloo division’s employees and union representativesabout these circumstances and their effect on the future of the plant.

 

After careful analysis and consideration of all relevant factors, theCompany has determined to close its Waterloo division and transfer theremaining work to its other printing plants located in Baraboo, Wisconsin,Strasburg, Virginia and Spencer, Iowa. Approximately 600 people were employedin the Waterloo division as of December 31, 2003. The Company expects toclose the facility by the end of April 2004.

 

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

 

**Critical Accounting Policies**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations arebased upon the Company’s consolidated financial statements, which were preparedin accordance with accounting principles generally accepted in the UnitedStates. These principles require management to make estimates and assumptionsthat affect the reported amounts in the consolidated financial statements andnotes thereto. Actual results may differ from these estimates, and suchdifferences may be material to the consolidated financial statements.Management believes that the following significant accounting policies involvea higher degree of judgment or complexity.

 

Allowancefor doubtful accounts.Management must make estimates of the uncollectability of the Company’saccounts receivable. Management establishes a reserve for uncollectible tradeaccounts based on a range of percentages applied against accounts receivableaging categories. These percentages are based on historical collection andwrite-off experience. If circumstances change, management’s estimates of therecoverability of amounts due to the Company could change by a material amount.

 

Property,plant and equipment.Property, plant and equipment are depreciated on a straight-line basis over theestimated useful lives of the assets. The useful lives of the assets are basedupon management’s expectations for the period of time that the asset will beused for the generation of revenue. Management periodically reviews the assetsfor changes in circumstances that may impact their useful lives.

 

Impairmentof long-lived assets.Management periodically reviews property, plant and equipment for impairmentusing historical cash flows as well as current estimates of future cash flows.This assessment process requires the use of estimates and assumptions that aresubject to a high degree of judgment. In addition, management periodically assesses the recoverability ofgoodwill and other intangible assets which requires assumptions regarding thefuture cash flows and other factors to determine the fair value of the assets.If these assumptions change in the future, management may be required to recordimpairment charges for these assets.

 

Incometaxes. Deferredincome taxes are determined utilizing an asset and liability approach. Thismethod gives consideration to the future tax consequences associated withdifferences between financial accounting and tax bases of assets andliabilities. This method gives immediate effect to changes in income tax lawsupon enactment.

 

Otherestimates. Managementis required to make judgments and or estimates in the determination of severalof the accruals that are reflected in the consolidated financial statements.Management believes that the following accruals are subject to a higher degreeof judgment.

 

Managementuses estimates in the determination of the required accruals for generalliability, workers’ compensation and health insurance. These estimates arebased upon a detailed examination of historical and industry claims experience.The claim experience may change in the future and may require management torevise these accruals.

 

TheCompany is periodically involved in various legal actions arising in the normalcourse of business. Management is required to assess the probability of anyadverse judgments as well as the potential ranges of any losses. Managementdetermines the required accruals after a careful review of the facts of eachlegal action. The accruals may change in the future due to new developments inthese matters.

 

Managementcontinually reassesses its assumptions and judgments and makes adjustments whensignificant facts and circumstances dictate. Historically, actual results havenot been materially different than the estimates that are described above.

 

Foran understanding of the significant factors that influenced the Company’sperformance during the past three fiscal years, the foregoing discussion shouldbe read in conjunction with the consolidated financial statements appearingelsewhere in this Annual Report.

 

16

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**Recently Issued Accounting Standards**

 

During2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13 and Technical Corrections as of April 2002,” and SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.” A provisionof SFAS No. 145 rescinds FASB Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt,” and an amendment of that Statement.  Thisprovision of SFAS No. 145 is effective for fiscal years beginning after May 15,2002, but was adopted early by the Company resulting in the loss on repurchasesof senior subordinated notes being classified as other expense in theconsolidated statements of operations.  SFAS No. 146 is effective for exitor disposal activities initiated after December 31, 2002.  TheCompany complied with the requirements of this statement in its accounting forthe restructuring charges described in Note 12 to the Consolidated FinancialStatements.

 

**Impact of Inflation**

 

Management does not believe that inflation has had a material effect onthe Company’s operation during the past several years. Increases in labor,materials, and other operating costs could adversely affect the Company’soperations. In the past, however, the Company generally has been able to modifyits operating procedures to substantially offset increases in its operatingcosts.

 

**Item 7A.****                 Quantitative andQualitative Disclosures about Market Risk**

 

The Company generally does not enter into any material futures,forwards, swaps, options or other derivative financial instruments for tradingor other purposes.  The primary exposureto market risk relates to fluctuations in interest rates and the effects thosechanges may have on operating results due to long-term financingarrangements.  The Company manages itsexposure to this market risk by monitoring interest rates and possiblealternative means of financing. Operating results may be affected by changes in short-term interestrates under the revolving credit facility, pursuant to which borrowings bearinterest at a variable rate.  Based onthe Company’s debt outstanding under the Credit Agreement as ofDecember 31, 2003, an increase of 1.0% in interest rates would increaseinterest expense and decrease income before income taxes by approximately$112,000. See Note 4 of the Notes to Consolidated Financial Statements.

 

**Item 8.****                    FinancialStatements and Supplementary Data**

 

The financial statements and schedules listed in the accompanying Indexto consolidated financial statements and schedules on page F-1 are filed as apart of this report.

 

**Item 9.****                    Changes in andDisagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A.**                 **Controls andProcedures**

 

Disclosure Controls and Procedures

 

Based on their evaluation, as of the end of the period covered by thisannual report, the Company’s principal executive officer and principalfinancial officer have concluded that the Company’s disclosure controls andprocedures (as defined in Rules 13a-15(e) or 15d-15(e) under the SecuritiesExchange Act of 1934 (“Exchange Act”)) are effective based on their evaluationof these controls and procedures required by paragraph (b) of Rules 13a-15 or15d-15 under the Exchange Act.

 

Changes in Internal Control Over Financial Reporting

 

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

 

17

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**PARTIII**

 

**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 keymanagement employees of the Company and its subsidiaries as of March 1,2004.  All of the persons listed beloware U.S. citizens.

 

**Directorsand Senior Executive Officers**

 
| **Name**            |   | **Age** |   | **Position**                                                            |
|---------------------|--------|---------|--------|-------------------------------------------------------------------------|
|                |   |    |   |                                                                    |
| Robert  E. Milhous  |   | 67      |   | Chairman  of the Board of Directors                                     |
| Paul  B. Milhous    |   | 65      |   | Vice-Chairman  of the Board of Directors                                |
| Craig  A. Hutchison |   | 51      |   | Director,  President and Chief Executive Officer                        |
| David  E. Glick     |   | 57      |   | Director  and Executive Vice President, Operations                      |
| Verne  F. Schmidt   |   | 63      |   | Director,  Secretary, Senior Vice President and Chief Financial Officer |
| Joseph  E. Hansell  |   | 58      |   | Senior  Vice President, Human Resources                                 |

 

**ExecutiveOfficers and Key Management Employees**

 
| **Name**               |   | **Age** |   | **Position**                                        |
|------------------------|--------|---------|--------|-----------------------------------------------------|
|                   |   |    |   |                                                |
| Timothy  M. Smith      |   | 46      |   | Vice  President, Publication Sales                  |
| Stephen  M. Sanfelippo |   | 46      |   | Vice  President, Commercial and Catalog Sales       |
| William  K. Haynes     |   | 44      |   | Vice  President, Publications (Mid-Atlantic)        |
| James  F. Monti        |   | 42      |   | Vice  President, Publications (East Coast)          |
| Bradley  J. Hoffman    |   | 42      |   | Vice  President, Corporate Controller               |
| Walter  A. Edwards     |   | 53      |   | Vice  President, Division Manager - Strasburg Plant |
| Larry  C. Cole         |   | 60      |   | Vice  President, Division Manager - Waterloo Plant  |
| Daniel  L. Leever      |   | 55      |   | Vice  President, Division Manager - Heartland Plant |
| Steven  G. Timlin      |   | 45      |   | Vice  President, Division Manager - Baraboo Plant   |

 

*Robert E.Milhous* has beenChairman of the Board of Directors of Perry Judd’s Holdings and Perry Judd’ssince December 1994.  Mr. Milhouswas Chairman of the Board of Directors of Treasure Chest Advertising (“TreasureChest”) and its predecessor corporation from 1967 until the sale of TreasureChest in 1993.  Mr. Milhous is also theChairman of the Board of Directors of Novamil Corporation (“Novamil”), whichmanages various companies owned by affiliates controlled by himself and Paul B.Milhous.  Robert E. Milhous is thebrother of Paul B. Milhous.

 

*Paul B.Milhous* has been ViceChairman of the Board of Directors of Perry Judd’s Holdings and Perry Judd’s sinceDecember 1994.  Mr. Milhous wasVice Chairman of the Board of Directors of Treasure Chest and its predecessorcorporation from 1967 until the sale of Treasure Chest in 1993.  Mr. Milhous is also the Vice-Chairman of theBoard of Directors of Novamil, which manages various companies owned byaffiliates controlled by himself and Robert E. Milhous.  Paul B. Milhous is the brother of Robert E.Milhous.

 

*Craig A.Hutchison* has beenthe President and CEO of Perry Judd’s since April 1995.  Prior to that, Mr. Hutchison was Presidentand CEO of Perry Printing Corporation (“Perry Printing”), the predecessor ofPerry Judd’s, since 1990.  Mr. Hutchisonhas been a member of the Board of Directors of Perry Judd’s Holdings and PerryJudd’s since April 1995.

 

*David E. Glick* joined Perry Judd’s as Executive VicePresident of Operations in February 1998 and has been a member of theBoard of Directors of Perry Judd’s Holdings and Perry Judd’s since thattime.  From 1993 to January 1998,Mr. Glick served in various capacities at Treasure Chest Advertising, asubsidiary of Big Flower Press Holdings, Inc., including Senior Vice Presidentof Operations, Senior Vice President and General Manager of Operations andSales, and Senior Vice President of Operations and Technology.

 

*Verne F.Schmidt* has beenSenior Vice President and Chief Financial Officer since he joined Perry Judd’sin January 1997 and was elected to the Board of Directors of Perry Judd’sHoldings and Perry Judd’s in February 1998.  In July 2001, Mr. Schmidt was appointed as Secretary of theCompany. From 1974 through 1996, Mr. Schmidt held various financial andaccounting positions including Senior Vice President and Chief FinancialOfficer of Ringier America and its predecessor companies.

 

18

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*Joseph E.Hansell* has beenSenior Vice President, Human Resources since he joined Perry Judd’s inAugust 2003. From March 2000 until September 2000, Mr. Hansellwas Senior Vice President, Human Resources for Pratt Industries. FromSeptember 2000 until he joined Perry Judd’s, Mr. Hansell managed his ownHuman Resources Consulting Firm. From July 1989 until March 2000,Mr. Hansell served as Vice President, Human Resources for the MilhousGroup.

 

*Timothy M.Smith* has been VicePresident of Publication Sales of Perry Judd’s since January 1997.  Prior to assuming his currentresponsibilities, Mr. Smith was Vice President of National Accounts from 1994to 1997.  Mr. Smith served as VicePresident of Eastern Sales from May 1993 to 1994 and, before that, he wasDirector of Sales from 1990 to 1993.

 

*Stephen M.Sanfelippo* has beenVice President, Commercial and Catalog Sales since January 2000.  Prior to assuming his currentresponsibilities, Mr. Sanfelippo served as Vice President Central RegionCommercial Sales of Perry Judd’s since October 1997.  Prior to that, he was Director of CentralRegion Sales from 1994 to October 1997.

 

*William K. Haynes*has been Vice President, Publication Sales (Mid-Atlantic) since he joined PerryJudd’s Incorporated in September 2002. From December 2001 until May 2002 Mr. Haynes served as ExecutiveVice President for Sunbelt Sportswear. Mr. Haynes was Executive Vice President of Sales for Xyan fromMarch 2000 until March 2001 and President from March 2001 untilOctober 2001.  From June 1983until February 2000, Mr. Haynes held various sales positions with R. R.Donnelley & Sons.

 

*James F.Monti* has been VicePresident, Publications (East Coast) since March 26, 2003. FromJuly 8, 2002 until March 26, 2003, Mr. Monti was New England CatalogSales Manager for Commercial/Catalogs for Perry Judd’s Incorporated. FromMarch 2001 until July 1, 2002, Mr. Monti served as Vice President,Sales for Flower City Printing. From May 1998 until March 2001, Mr. Montiwas Vice President of Sales and Marketing for The Dingley Press. FromJuly 1985 until May 1998, Mr. Monti held various sales and customerservice positions.

 

*Bradley J.Hoffman* has been VicePresident, Corporate Controller of Perry Judd’s since May 1998 and previouslywas 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 toDecember 1992, Mr. Hoffman was Chief Financial Officer and Director ofOperations at Putman Publishing Company.

 

*Walter A.Edwards* has been VicePresident, Division Manager of the Strasburg Plant since April 2003. FromJanuary 1996 to April 2003, Mr. Edwards was Vice President, DivisionManager of the Baraboo Division.  From1991 to 1995, Mr. Edwards was employed by World Color Press as Vice Presidentand Regional Manager.  From 1974 to1991, Mr. Edwards held a variety of positions at R.R. Donnelley &Sons/Meredith-Burda, including Vice President, Manufacturing and GroupManufacturing Manager.

 

*Larry C.Cole* has been VicePresident, 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 Directorof Material Management.

 

*Daniel L.Leever* has been VicePresident, Division Manager of the Heartland Plant sinceFebruary 1999.  FromJanuary 1998 until February 1999 he was Manufacturing Manager of theStrasburg Division.  Prior to that hewas Plant Manager at Wilcox Press from 1996 to 1998.

 

*Steven G.Timlin* has been VicePresident, Division Manager of the Baraboo Plant since April 2003. From1987 until April 2003, Mr. Timlin held various manufacturing positionsincluding General Manager positions from 1997 to April 2003 at BantaCorporation’s Catalog Group St. Paul, Minnesota plant.

 

The Company’s board of directors has determined that the board ofdirectors does not have a “financial expert” as that term is defined in Item401(h) of Regulation S-K adopted pursuant to the Exchange Act because theCompany’s board of directors did not believe that any of the directors met thequalifications of a “financial expert.”

 

The Company continues to evaluate the adoption of a code of ethics forits principal executive officer and principal financial officer, but has notyet adopted such a code.

 

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**Item 11.****                 ExecutiveCompensation**

 

**DirectorCompensation**

 

Non-employee directors are reimbursed fortheir out-of-pocket expenses incurred in attending meetings of the Board ofDirectors of the Company.  In addition,Robert E. Milhous and Paul B. Milhous currently receive $33,275 each in annualcompensation for their services as Chairman and Vice Chairman, respectively, ofthe Board of Directors of the Company.

 

**ExecutiveCompensation**

 

The following Summary Compensation Table setsforth certain information with respect to the compensation paid or accrued bythe Company for services rendered during the years ended December 31,2003, 2002 and 2001 by the Company’s Chief Executive Officer and each of thefour other most highly compensated executive officers whose annual salary andbonus exceeded $100,000 (collectively, the “Named Executive Officers”):

 

**Summary CompensationTable**

 
|                            |   | **Annual  Compensation (1)** |   | **Long-Term  Compensation (2)** |    |      |   |
|---------------------------------|--------|------------------------------|--------|---------------------------------|---------|-----------|--------|
| **Name and Principal Position** |   | **Year**                     |   | **Salary**                      |    | **Bonus** |   | **Other  Annual  Compensation** |   | **Securities  Underlying Options  (# of Shares)** |   | **All Other  Compensation (1)** |   |
| Craig A. Hutchison,             |   | 2003                         |   | $                               | 365,762 |      | — |   | — |   | — |   | — |   |
| *President and CEO*             |   | 2002                         |   | $                               | 327,604 |      | $      | 214,908 |   | — |   | — |   | — |   |
|                            |   | 2001                         |   | $                               | 325,805 |      | $      | 156,386 |   | — |   | — |   | — |   |
|                            |   |                         |   |                            |    |      |   |   |   |   |   |   |   |
| David E. Glick,                 |   | 2003                         |   | $                               | 320,931 |      | — |   | — |   | — |   | — |   |
| *Executive Vice President,*     |   | 2002                         |   | $                               | 296,399 |      | $      | 170,133 |   | — |   | — |   | — |   |
| *Operations*                    |   | 2001                         |   | $                               | 294,946 |      | $      | 123,877 |   | — |   | — |   | — |   |
|                            |   |                         |   |                            |    |      |   |   |   |   |   |   |   |
| Verne F. Schmidt,               |   | 2003                         |   | $                               | 272,236 |      | — |   | — |   | — |   | — |   |
| *Senior Vice President and*     |   | 2002                         |   | $                               | 255,652 |      | $      | 146,744 |   | — |   | — |   | — |   |
| *Chief Financial Officer*       |   | 2001                         |   | $                               | 254,818 |      | $      | 107,024 |   | — |   | — |   | — |   |
|                            |   |                         |   |                            |    |      |   |   |   |   |   |   |   |
| Walter A. Edwards               |   | 2003                         |   | $                               | 219,431 |      | — |   | — |   | — |   | $ | 54,459 | (3) |
| *Vice President and Division*   |   | 2002                         |   | $                               | 205,216 |      | $      | 87,176 |   | — |   | — |   | — |   |
| *Manager, Strasburg Plant*      |   | 2001                         |   | $                               | 204,948 |      | $      | 75,749 |   | — |   | — |   | — |   |
|                            |   |                         |   |                            |    |      |   |   |   |   |   |   |   |
| Stephen M. Sanfelippo           |   | 2003                         |   | $                               | 223,258 |      | — |   | — |   | — |   | — |   |
| *Vice President, Commercial*    |   | 2002                         |   | $                               | 207,252 |      | $      | 72,372 |   | — |   | — |   | — |   |
| *And Catalog Sales*             |   | 2001                         |   | $                               | 193,404 |      | $      | 55,314 |   | — |   | — |   | — |   |
|                                 |        |                              |        |                                 |         |           |        |  |  |  |  |  |  |  |  |  |

 

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(1)     The compensation described in this tabledoes not include medical, group life insurance or other benefits received bythe Named Executive Officers which are available generally to all salariedemployees of the Company and certain perquisites and other personal benefits,securities or property received by the Named Executive Officers which do notexceed the lesser of $50,000 or 10% of any such officer’s salary and bonusdisclosed in this table.

 

(2)     The Company did not grant any restrictedstock awards or stock appreciation rights or make any long-term incentive planpayouts to the Named Executive Officers during 2003.

 

(3)     Consists of relocation costs paid by theCompany.

 

20

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**OptionGrants**

 

No stock options were granted to the Named Executive Officers during2003.

 

**Year-EndOption Table**

 

All stock options held by Named Executive Officers were exercised in2000.

 

**EmploymentAgreement**

 

On April 28, 2003, Craig Hutchison entered into a restated andamended employment agreement with Perry Judd’s (the “Employment Agreement”) toserve as President and Chief Executive Officer of Perry Judd’s for oneyear.  The Employment Agreement providesfor successive one-year extensions commencing April 2004 unless terminatedby written notice of either party.  TheEmployment Agreement provides for a base salary subject to adjustment upward atthe discretion of the Board of Directors. Mr. Hutchison’s current annual base salary is $376,000.  Under the Employment Agreement, Mr.Hutchison is entitled to participate in the Incentive Compensation Plan (asdefined below), the Stock Option Plan (as defined below) and in all otherbenefit programs made available by the Company to the senior executive officersof the Company.  The EmploymentAgreement provides for severance pay in case of termination by Mr. Hutchisonfor good cause, or for termination other than for cause, death or permanentdisability.  The severance pay shallequal the aggregate salary which would be payable to Mr. Hutchison during theperiod commencing on the effective date of termination and ending one yearthereafter.

 

**Changein Control Severance Program**

 

Under the severance arrangement with Mr. Hutchison entered into inApril 2003, (i) if there is a change in control, (ii) if the aggregatevalue of stock and stock options held by Mr. Hutchison (“equity value”) is lessthan $2,000,000, and (iii) if (a) Mr. Hutchison’s employment is terminated as aresult of the change of control, (b) Mr. Hutchison is asked to accept lesserresponsibility but instead elects to leave the Company, or (c) Mr. Hutchison isasked to relocate and instead leaves the Company, Mr. Hutchison’s salary willbe continued at a rate of $333,000 per year for up to three years or until newemployment is commenced, whichever occurs first.  Furthermore, upon death or if there is a change in control, andthe equity value realized by Mr. Hutchison is less than $1,000,000, the Companywill be obligated to pay Mr. Hutchison the amount of such difference.

 

The Company entered into severance arrangements with two of itsexecutive officers, Verne F. Schmidt and David E. Glick in December 1996and January 1998, respectively, under which each officer is entitled tocertain benefits in the event of a change in control of the Company.

 

Under the severance arrangement with Verne F. Schmidt, (i) if there isa 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 positionwith a successor entity after a change of control, Mr. Schmidt will receive hiscurrent salary and benefits for up to one year or until he accepts anotherposition, whichever occurs first. Additionally, Mr. Schmidt is entitled toreceive a fixed dollar per share on the shares of company stock he owns should hecontinue his employment with the Company through December 31, 2005. In theevent a change in control event occurs before this date, Mr. Schmidt willreceive the greater of the selling price per share or the fixed price pershare.

 

Under the severance arrangement with David E. Glick, (i) if there is achange in control, (ii) if the aggregate value of stock and stock options heldby 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 theCompany, 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 tothree years or until new employment is commenced, whichever occurs first.  Furthermore, upon death or if there is achange 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 suchdifference.

 

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**StockholderAgreements**

 

Certain agreements among the stockholders of the Company, to which theCompany is also a party, provide majority stockholders proposing to sell sharesin a change of control transaction with the right to require the otherstockholders to include their shares in such sale.  Conversely, minority stockholders have the right to sell shareson a sale by majority stockholders on a pro rata basis.  In addition, the agreements provide theCompany with rights of first refusal on proposed transfers of shares by certainother stockholders.

 

At December 31, 2003, 81,273 shares of common stock were subjectto put and call arrangements at fair value similar to the shares purchasedunder the Stock Option Plan (see below) at the employee’s termination,retirement after attaining age 62, permanent disability or death.

 

**ManagementIncentive Compensation Plan**

 

The Company’s management employees, including the Named ExecutiveOfficers, are eligible to participate in the Company’s Management IncentiveCompensation Program (the “Management Incentive Program”).  Under the Management Incentive Program,management employees are eligible to receive an annual cash bonus based on theCompany’s achievement of financial performance targets that are based on theCompany’s annual budget as approved by the Board of Directors.  During 2002, the Company achieved certainfinancial performance targets and bonus payments of approximately $1.8 millionwere accrued under the Management Incentive Program and paid in 2003.

 

**1995Stock Option Plan**

 

On May 6, 1995, the Board of Directors adopted and the stockholdersapproved the 1995 Stock Option Plan (the “Stock Option Plan”), which providesfor the grant of non-statutory stock options (“Options”) for the purchase ofcommon stock of the Company to officers and employees of the Company.  The Stock Option Plan was subsequentlyamended by the Board of Directors in 1995 and 2000.  The maximum number of shares of common stock issuable under theStock Option Plan is 75,000, of which 41,307 have been granted andexercised.  The Stock Option Plan iscurrently administered by the Board of Directors of the Company, but can bedelegated to an authorized committee thereof.

 

Options granted under the Stock Option Plan are “hybrid” performanceoptions.  Options are immediatelyexercisable, but option shares issuable are subject to repurchase by theCompany on termination of employment at the $0.01 original exercise price untilvested.  Options vest as follows: 10% onDecember 31 of each of the first five calendar years of service commencingwith December 31 of the calendar year of the option grant; 15% on December 31of the next two calendar years; and the remaining 20% on December 31 ofthe eighth calendar year from the issuance date.  Accelerated vesting of Options can occur during the first fivecalendar years after issuance upon the Company’s attainment of performancemilestones, determined annually by the Board of Directors.  For each year in which performancemilestones are attained, 10% of the shares under the Options shall vest on anaccelerated basis, with the installments that would vest latest under theOptions being accelerated first. Outstanding Options also accelerate upon the occurrence of a change ofcontrol of the Company.  The exerciseprice of Options under the Stock Option Plan is set at $0.01 per share, andeach Option has an 18-year term.  During2000, all outstanding options were exercised.

 

In addition to the right to repurchase unvested option shares describedabove, under the Stock Option Plan, vested option shares are subject to a callby the Company and a put by the employee in the event the option shareholderretires 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 ordeath, vested option shares are subject to a call by the Company, at fairvalue.   In addition, the Company has aright to call and the option shareholder has a right to put any vested optionshares issued or issuable under outstanding Options at the end of their 18-yearterm at fair value.  The Stock OptionPlan also provides that the Company has a right of first refusal on anyproposed disposition of shares acquired under an Option by sale, transfer or inconnection with a marital dissolution, which right shall lapse upon the initialpublic offering of the Company’s common stock.

 

22

----

 

**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 olderemployed by Perry Judd’s and any affiliated company who adopts the plan are orwill be eligible to participate in the 401(k) Plan.  Participants in the 401(k) Plan may not contribute more thancertain specified amounts depending upon the employee’s level ofcompensation.  Each companyparticipating in the 401(k) Plan makes contributions to the 401(k) Plan equalto 3% of eligible earnings of all qualified participating employees, asdetermined under the 401(k) Plan. Participating employees are 100% vested in all contributions.

 

**CompensationCommittee Interlocks and Insider Participation**

 

The Company does not have a compensation committee.  The following officers and employeesparticipated in deliberations concerning executive compensation: Robert E.Milhous, Paul B. Milhous, Craig A. Hutchison and Joseph E. Hansell. Mr.Hutchison is an executive officer of Perry Judd’s and a member of the Board ofDirectors of Perry Judd’s Holdings.

 

**Item 12.****                 SecurityOwnership of Certain Beneficial Owners and Management.**

 

The following table sets forth certain information regarding beneficialownership of the Company’s common stock as of March 1, 2004 (i) by eachperson known by the Company to own beneficially more than 5% of the outstandingshares 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, theaddress of each person listed is c/o Perry Judd’s Incorporated, 575 WestMadison Street, Waterloo, Wisconsin 53594.

 
|                                                                                   |   | **Shares  Beneficially  Owned at  March 1, 2004** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
| **Name**                                                                               |   | **Number**                                             |   | **Percent** |   |
|                                                                                   |   |                                                   |   |   |   |
| Ropamil Limited Partnership (1)  791 Park of Commerce Drive  Boca Raton, Florida 33487 |   | 782,775                                                |   | 87.2 |   |
|                                                                                   |   |                                                   |   |   |   |
| Craig A. Hutchison                                                                     |   | 27,193                                                 |   | 3.0 |   |
|                                                                                   |   |                                                   |   |   |   |
| David E. Glick                                                                         |   | 20,392                                                 |   | 2.3 |   |
|                                                                                   |   |                                                   |   |   |   |
| Verne F. Schmidt                                                                       |   | 5,718                                                  |   |   | * |
|                                                                                   |   |                                                   |   |   |   |
| Walter A. Edwards                                                                      |   | 4,630                                                  |   |   | * |
|                                                                                   |   |                                                   |   |   |   |
| Stephen M. Sanfelippo                                                                  |   | 972                                                    |   |   | * |
|                                                                                   |   |                                                   |   |   |   |
| All directors and executive officers as a  group (11 persons)                          |   | 857,870                                                |   | 95.5 |   |

 

----

*          *Less than 1%*

 

(1)       Robert E. Milhous, adirector, 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 theCompany and certain affiliated entities beneficially own all of the partnershipinterests in this partnership.

 

23

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**Item 13.****                 CertainRelationships 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, wereparties to a Management Agreement dated as of April 28, 1995 which wassubsequently assigned by Perry Judd’s to Perry Judd’s Holdings and amended byPerry Judd’s and Novamil as of December 16, 1997 (the “Amended ManagementAgreement”).  Pursuant to the AmendedManagement Agreement, Novamil provides Perry Judd’s Holdings certain managementservices by agents and employees of Novamil other than Robert E. Milhous andPaul B. Milhous in connection with business strategy, operations andfinance.  Under the Amended ManagementAgreement, as amended, Perry Judd’s Holdings pays to Novamil an annualmanagement fee payable in equal monthly installments and is subject to anannual adjustment for increases in costs of living.  During 2003, approximately $840,000 was paid under thisagreement. The Amended Management Agreement has a term of five years fromDecember 16, 1997, subject to one-year extensions thereafter, unlessearlier terminated upon the liquidation or dissolution of Perry Judd’sHoldings, or ten days after a party has received written notice of a materialbreach where such breach remains uncured after such ten-day period.

 

Pursuant to a consulting agreement datedApril 28, 1995 (the “Consulting Agreement”), Robert E. Milhous and Paul B.Milhous provide consulting services to Perry Judd’s as principals of New HouseCapital Management Corp., a Delaware corporation (“New House”), for which PerryJudd’s pays an annual consulting fee (subject to annual increases not to exceed10%), payable in equal monthly installments. During 2003, approximately $725,000 was paid under this agreement. TheConsulting Agreement has an initial term of five years, subject to one-yearextensions thereafter, unless earlier terminated upon the liquidation ordissolution of the Company or ten days after a party has received writtennotice of a material breach where such breach remains uncured after suchten-day period.  On December 16,1997, the Consulting Agreement was assigned by Perry Judd’s to Perry Judd’sHoldings.   During 2003, 2002 and 2001,the Company approved additional bonuses of $600,000, $600,000 and $500,000payable to New House which were accrued as of December 31, 2003, 2002 and2001, respectively.

 

**Item14.****                 PrincipalAccountant Fees and Services**

 

*Audit Fees.* Fees for audit services wereapproximately $137,000 and $122,000 for the years ended December 31, 2003and 2002, respectively, which included fees associated with the annual auditand reviews of the Company’s quarterly reports on Form 10-Q.

 

*Audit-Related Fees*. Fees for audit-relatedservices were approximately $14,000 and $11,000 for the years endedDecember 31, 2003 and 2002, respectively, and related to the audit of theCompany’s 401(k) plan.

 

*Tax Fees*. Fees for tax compliance and advisoryservices were approximately $49,000 and $267,000 for the years endedDecember 31, 2003 and 2002, respectively. Advisory services were used forstate and local tax issues and research related to various tax planning strategies.

 

There were no other fees incurred by theCompany during the years ended December 31, 2003 and 2002. The Company’sBoard of Directors appoints the independent auditors and approves the feearrangements with respect to the annual audit, quarterly reviews of theCompany’s Form 10-Q filings, audit of the Company’s 401(k) plan and taxcompliance services and other services as required. The Company’s Board ofDirectors approved all the above audit and non-audit services provided by theindependent auditors.

 

24

----

 

**PART IV**

 

**Item 15.****                 Exhibits,Financial Statement Schedules, and Reports on Form 8-K.**

 

(a)   The following documents areincluded in this report at the page numbers indicated.

 
|   | Financial Statements:                                                                                                                                     |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | Report of Ernst & Young LLP,  Independent Auditors                                                                                                    |   |
|   |                                                                                                                                                      |   |
|   | Consolidated Balance Sheets as of  December 31, 2003 and 2002                                                                                        |   |
|   |                                                                                                                                                      |   |
|   | Consolidated Statements of Operations for  the  years ended December 31, 2003, 2002 and 2001                                                         |   |
|   |                                                                                                                                                      |   |
|   | Consolidated Statements of Minority  Interests,  Preferred Stock and Stockholders’ Equity for the  years ended December 31, 2003, 2002 and 2001 |   |
|   |                                                                                                                                                      |   |
|   | Consolidated Statements of Cash Flows for  the years ended  December 31, 2003, 2002 and 2001                                                         |   |
|   |                                                                                                                                                      |   |
|   | Notes to Consolidated Financial Statements                                                                                                                |   |
|   |                                                                                                                                                      |   |
|   | Schedule:                                                                                                                                                 |   |
|   |                                                                                                                                                      |   |
|   | Schedule II - Valuation and Qualifying  Accounts for the years ended December 31, 2003, 2002 and 2001                                                |   |

 

(b)   Reports on Form 8-K

Current report on Form 8-K filed with theSecurities and Exchange Commission on November 25, 2003.

 

(c)   Exhibits

 

Included at the end of this Annual Report onForm 10-K.

 

25

----

 

**EXHIBIT INDEX**

 

The following exhibits are filed as a part of this report orincorporated by reference and will be furnished to any security holder uponrequest for such exhibit and payment of any reasonable expenses incurred by theCompany.  Send any such request to theCompany 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.  Incorporated by reference to Exhibit 3.1 to the 10-K dated as of  March 29, 2002.                                                                                                                                                           |
| 3.2                |   | Amended and Restated By-laws of the Company.  Incorporated by reference to Exhibit 3.2  to the Company’s Registration Statement on Form S-4 No. 333-45235 declared  effective on June 12, 1998 (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.                                                        |
| 10.3               |   | 1995 Stock Option Plan, as amended. Incorporated by reference to  Exhibit 10.3 to the Registration Statement.                                                                                                                                                                                                       |
| 10.4 † *      |   | Restated and Amended Employment Agreement by and between the Company  and Craig A. Hutchison dated April 28, 2003.                                                                                                                                                                                             |
| 10.4(a) †     |   | Employment Offer Letter from the Company to David E. Glick dated  January 16, 1998.  Incorporated  by reference to Exhibit 10.4(a) to the 10-K dated as of March 31, 1999.                                                                                                                           |
| 10.4(b) †     |   | Employment Offer Letter from the Company to Verne F. Schmidt dated  December 26, 1996.  Incorporated  by reference to Exhibit 10.4(b) to the 10-K dated as of March 31, 1999.                                                                                                                        |
| 10.4(c) †     |   | Severance Agreement Letter from the Company to Howard D. Sullivan  dated March 24, 2000. Incorporated by reference to Exhibit 10.4(c) to  the 10-K dated as of April 2, 2001.                                                                                                                             |
| 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.                                                                                              |
| 10.7 *             |   | Amendment to Stock Restriction and Repurchase Agreement and Stock  Purchase Agreement dated May 30, 2003 by and between the Company and Verne F.  Schmidt.                                                                                                                                                          |
| 10.8 *             |   | Supplemental Agreement dated August 14, 2003 by and between the  Company and Craig A. Hutchison.                                                                                                                                                                                                               |
| 10.9               |   | Loan and Security Agreement dated August 19, 2002 between LaSalle  Business Credit, Inc., as Lender and Perry Judd’s Incorporated, as Borrower.                                                                                                                                                                |
| 11.0*              |   | First Amendment to the Loan and Security Agreement dated December 10,  2003 between LaSalle Business Credit, Inc., as Lender and Perry Judd’s  Incorporated, as Borrower.                                                                                                                                      |
| 21.0 *             |   | Subsidiary Listing                                                                                                                                                                                                                                                                                                  |
| 31.1 *             |   | Certification of Chief Executive Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                      |
| 31.2 *             |   | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                      |
| 32.1 *             |   | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                          |

 

----

*    Filedherewith

†    Indicatesa management contract or compensatory arrangement.

 

26

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized, on the19th day of March, 2004.

 

 
|   | **PERRY JUDD’S  HOLDINGS, INC.** |
|--------|---------------------------------------|
|   |                                  |
|   |                                  |
|   | By:                                   |   | /s/ Craig A. Hutchison |   |
|   |                                  |   | Craig A. Hutchison |
|   |                                  |   | President and Chief Executive Officer |

 

#### **POWEROF ATTORNEY**

 

KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute andappoint Craig A. Hutchison and Verne F. Schmidt, and each of them, as his trueand lawful attorney-in-fact and agent, with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this Report, and to file thesame, with exhibits thereto, and other documents in connection therewith, withthe Securities and Exchange Commission, granting unto said attorney-in-fact andagent, full power and authority to do and perform each and every act and thingrequisite or necessary to be done in connection therewith, as fully to all intentsand purposes as he might or could do in person, hereby ratifying and confirmingall that said attorney-in-fact and agent, or his substitute or substitutes, maylawfully 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 theRegistrant in the capacities and on the dates indicated.

 
| **SIGNATURE**          |   | **TITLE**                                                                                                              |   | **DATE**            |
|------------------------|--------|------------------------------------------------------------------------------------------------------------------------|--------|---------------------|
|                   |   |                                                                                                                   |   |                |
| /s/ Craig A. Hutchison |   | President, Chief Executive Officer, and  Director (Principal Executive Officer)                                        |   | March 19, 2004 |
| Craig A. Hutchison     |   |                                                                                                                   |   |
|                   |   |                                                                                                                   |   |                |
| /s/ David E. Glick     |   | Executive Vice President,  Operations, and Director                                                                    |   | March 19, 2004 |
| David E. Glick         |   |                                                                                                                   |   |
|                   |   |                                                                                                                   |   |                |
| /s/ Verne F. Schmidt   |   | Senior Vice President, Chief Financial  Officer, Secretary and Director  (Principal Financial and Accounting  Officer) |   | March 19, 2004 |
| Verne F. Schmidt       |   |                                                                                                                   |   |
|                   |   |                                                                                                                   |   |
|                   |   |                                                                                                                   |   |                |
| /s/ Robert E. Milhous  |   | Chairman and Director                                                                                                  |   | March 19, 2004 |
| Robert E. Milhous      |   |                                                                                                                   |   |                |
|                   |   |                                                                                                                   |   |                |
| /s/ Paul B. Milhous    |   | Vice Chairman and Director                                                                                             |   | March 19, 2004 |
| Paul B. Milhous        |   |                                                                                                                   |   |                |

 

27

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**PERRYJUDD’S HOLDINGS, INC.**

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**

 
| Financial Statements:                                                                                                                                    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                     |   |
| Report of Ernst & Young LLP,  Independent Auditors                                                                                                   |   |
|                                                                                                                                                     |   |
| Consolidated Balance Sheets as of December 31, 2003 and 2002                                                                                        |   |
|                                                                                                                                                     |   |
| Consolidated Statements of Operations for  the years ended December 31, 2003, 2002 and 2001                                                         |   |
|                                                                                                                                                     |   |
| Consolidated Statements of Minority  Interests, Preferred Stock and Stockholders’ Equity for the years ended  December 31, 2003, 2002 and 2001 |   |
|                                                                                                                                                     |   |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2003, 2002 and 2001                                                         |   |
|                                                                                                                                                     |   |
| Notes to Consolidated Financial Statements                                                                                                               |   |
|                                                                                                                                                     |   |
| Schedule:                                                                                                                                                |   |
|                                                                                                                                                     |   |
| For the years ended December 31, 2003,  2002 and 2001:                                                                                              |   |
|                                                                                                                                                     |   |
| II       Valuation and  Qualifying Accounts                                                                                |   |

 

All other schedules are omitted because they are not applicable or therequired information is shown in the consolidated financial statements or notesthereto.

 

F-1

----

 

**Report of Ernst****& YoungLLP, Independent Auditors**

 

The Board of Directors and Stockholders

Perry Judd’s Holdings, Inc.

 

We have audited the accompanying consolidated balance sheets of PerryJudd’s Holdings, Inc. (the Company) as of December 31, 2003 and 2002, andthe related consolidated statements of operations, minority interests,preferred stock and stockholders’ equity, and cash flows for each of the threeyears in the period ended December 31, 2003.  Our audits also included the financial statementschedule listed in the index at Item 15(a). These financial statements andschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of theCompany at December 31, 2003 and 2002, and the consolidated results of itsoperations and its cash flows for each of the three years in the period endedDecember 31, 2003, in conformity with accounting principles generallyaccepted in the United States.  Also, inour opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

As discussed in Note 2 to the consolidated financial statements,effective January 1, 2002 the Company changed its method of accounting forgoodwill.

 

# **ERNST & YOUNG LLP**

 

Milwaukee, Wisconsin

February 20, 2004

 

F-2

----

 

**PERRYJUDD’S HOLDINGS, INC.**

 

**CONSOLIDATED BALANCESHEETS**

**(Dollarsin thousands, except per share)**

 

**ASSETS**

 
|                                            |   | **December 31,** |    |
|-------------------------------------------------|--------|-----------------------|---------|
|                                            |   | **2003**              |    | **2002** |   |
|                                            |   |                  |    |   |   |
| CURRENT ASSETS:                                 |   |                  |    |   |   |
| Cash and cash equivalents                       |   | $                     | 966     |   | $ | 970 |   |
| Accounts receivable, net                        |   | 43,197                |    | 43,689 |   |
| Inventories                                     |   | 12,813                |    | 14,750 |   |
| Prepaid expenses                                |   | 2,150                 |    | 1,401 |   |
| Deferred income taxes                           |   | 2,668                 |    | 1,904 |   |
| Total current assets                            |   | 61,794                |    | 62,714 |   |
|                                            |   |                  |    |   |   |
| PROPERTY, PLANT AND EQUIPMENT:                  |   |                  |    |   |   |
| Machinery and equipment                         |   | 136,323               |    | 132,403 |   |
| Office furniture, equipment and vehicles        |   | 11,784                |    | 11,409 |   |
| Buildings and improvements                      |   | 3,194                 |    | 3,191 |   |
| Leasehold improvements                          |   | 5,149                 |    | 4,743 |   |
| Land and land improvements                      |   | 638                   |    | 618 |   |
| Projects in progress                            |   | 3,027                 |    | 3,885 |   |
|                                            |   | 160,115               |    | 156,249 |   |
| Less accumulated depreciation and  amortization |   | 84,958                |    | 61,232 |   |
| Property, plant and equipment, net              |   | 75,157                |    | 95,017 |   |
|                                            |   |                  |    |   |   |
| INTANGIBLE ASSETS:                              |   |                  |    |   |   |
| Goodwill                                        |   | 29,431                |    | 29,431 |   |
| Deferred financing costs, net                   |   | 1,202                 |    | 1,878 |   |
| Other intangible assets, net                    |   | 546                   |    | 665 |   |
| Intangible assets, net                          |   | 31,179                |    | 31,974 |   |
| TOTAL                                           |   | $                     | 168,130 |   | $ | 189,705 |   |

 

See notes to consolidated financialstatements.

 

F-3

----

 

**PERRYJUDD’S HOLDINGS, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(Dollarsin thousands, except per share)**

 

**LIABILITIES,MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY**

 

 
|                                                                                                                                                                         |   | **December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|
|                                                                                                                                                                         |   | **2003**              |    | **2002** |   |
| CURRENT LIABILITIES:                                                                                                                                                         |   |                  |    |   |   |
| Accounts payable                                                                                                                                                             |   | $                     | 14,271  |   | $ | 15,018 |   |
| Accrued expenses                                                                                                                                                             |   | 21,297                |    | 18,043 |   |
| Accrued interest                                                                                                                                                             |   | 388                   |    | 464 |   |
| Income taxes payable                                                                                                                                                         |   | 78                    |    | 232 |   |
| Revolving credit facility                                                                                                                                                    |   | 11,206                |    | 8,706 |   |
| Total current liabilities                                                                                                                                                    |   | 47,240                |    | 42,463 |   |
|                                                                                                                                                                         |   |                  |    |   |   |
| LONG-TERM DEBT                                                                                                                                                               |   | 70,010                |    | 86,010 |   |
|                                                                                                                                                                         |   |                  |    |   |   |
| DEFERRED INCOME TAXES                                                                                                                                                        |   | 14,807                |    | 19,374 |   |
|                                                                                                                                                                         |   |                  |    |   |   |
| OTHER NONCURRENT OBLIGATIONS                                                                                                                                                 |   | 8,545                 |    | 9,295 |   |
|                                                                                                                                                                         |   |                  |    |   |   |
| MINORITY INTERESTS, Series A redeemable  preferred stock, 43,941 shares outstanding with a stated redemption value of  $100 per share, aggregate liquidation value of $4,394 |   | 4,006                 |    | 3,738 |   |
|                                                                                                                                                                         |   |                  |    |   |   |
| COMMITMENTS AND CONTINGENCIES (Notes 7 and  11)                                                                                                                              |   | —                |    | — |   |
|                                                                                                                                                                         |   |                  |    |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                   |   |                  |    |   |   |
| Preferred stock (Series A)-par value $0.001  per share, 775,000 shares authorized, 231,345 and 199,668 shares issued and  outstanding, respectively                          |   | 23,135                |    | 19,967 |   |
| Common stock-par value $0.001 per share,  1,000,000 shares authorized, 897,918 and 901,317 shares issued and  outstanding, respectively                                      |   | 1                     |    | 1 |   |
| Additional paid-in capital                                                                                                                                                   |   | 22,421                |    | 22,482 |   |
| Accumulated deficit                                                                                                                                                          |   | (22,035               | )       | (13,625 | ) |
| Total stockholders’ equity                                                                                                                                              |   | 23,522                |    | 28,825 |   |
| TOTAL                                                                                                                                                                        |   | $                     | 168,130 |   | $ | 189,705 |   |

 

See notes to consolidated financialstatements.

 

F-4

----

 

**PERRYJUDD’S HOLDINGS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Dollarsin thousands)**

 
|                                                                        |   | **Year Ended  December 31,** |       |
|-----------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                        |   | **2003**                          |       | **2002** |   | **2001** |   |
|                                                                        |   |                              |       |   |   |   |   |
| NET SALES                                                                   |   | $                                 | 297,914    |   | $ | 290,928 |   | $ | 321,111 |   |
|                                                                        |   |                              | ** ** |   | ** ** |   | ** ** |
| OPERATING EXPENSES:                                                         |   |                              |       |   |   |   |   |
| Costs of production and distribution                                        |   | 237,145                           |       | 219,117 |   | 253,074 |   |
| Selling, general and administrative                                         |   | 31,025                            |       | 32,507 |   | 32,338 |   |
| Depreciation                                                                |   | 17,735                            |       | 17,132 |   | 14,582 |   |
| Amortization of intangibles                                                 |   | 119                               |       | 302 |   | 1,251 |   |
| Gain on disposals of equipment                                              |   | (516                              | )          | (27 | ) | (633 | ) |
| Restructuring charges                                                       |   | 10,208                            |       | — |   | — |   |
|                                                                        |   | 295,716                           |       | 269,031 |   | 300,612 |   |
|                                                                        |   |                              |       |   |   |   |   |
| INCOME FROM OPERATIONS                                                      |   | 2,198                             |       | 21,897 |   | 20,499 |   |
|                                                                        |   |                              |       |   |   |   |   |
| OTHER (INCOME) EXPENSES:                                                    |   |                              |       |   |   |   |   |
| Interest expense                                                            |   | 8,666                             |       | 11,790 |   | 12,784 |   |
| Interest income                                                             |   | (130                              | )          | (147 | ) | (127 | ) |
| Amortization of deferred financing costs                                    |   | 416                               |       | 1,295 |   | 1,200 |   |
| Loss on repurchases of senior subordinated  notes                           |   | 868                               |       | 592 |   | — |   |
| Other expenses                                                              |   | 120                               |       | 454 |   | 434 |   |
|                                                                        |   | 9,940                             |       | 13,984 |   | 14,291 |   |
|                                                                        |   |                              |       |   |   |   |   |
| INCOME   (LOSS) BEFORE INCOME TAXES                                    |   | (7,742                            | )          | 7,913 |   | 6,208 |   |
|                                                                        |   |                              |       |   |   |   |   |
| PROVISION (BENEFIT) FOR INCOME TAXES                                        |   | (2,931                            | )          | 1,858 |   | 2,909 |   |
|                                                                        |   |                              |       |   |   |   |   |
| INCOME (LOSS) BEFORE DIVIDENDS AND  ACCRETION ON REDEEMABLE PREFERRED STOCK |   | (4,811                            | )          | 6,055 |   | 3,299 |   |
|                                                                        |   |                              |       |   |   |   |   |
| DIVIDENDS AND ACCRETION ON REDEEMABLE  PREFERRED STOCK                      |   | 431                               |       | 435 |   | 507 |   |
|                                                                        |   |                              |       |   |   |   |   |
| NET INCOME (LOSS)                                                           |   | $                                 | (5,242     | ) | $ | 5,620 |   | $ | 2,792 |   |

 

See notes to consolidated financialstatements.

 

F-5

----

 

**PERRYJUDD’S HOLDINGS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF MINORITY INTERESTS,**

**PREFERREDSTOCK AND STOCKHOLDERS’ EQUITY**

**(Dollarsin thousands)**

 
|                                                                |   | **Minority  Interests** |   | **Preferred  Stock** |   | **Common  Stock and  Additional Paid-In  Capital** |    |                |   |
|---------------------------------------------------------------------|--------|-------------------------|--------|----------------------|--------|----------------------------------------------------|---------|---------------------|--------|
|                                                                |   | **Shares**              |   | **Carrying  Value**  |   | **Shares**                                         |    | **Carrying  Value** |   | **Shares** |   | **Carrying  Value** |   | **Accumulated  Deficit** |   |
| December 31, 2000                                              |   | 43,941                  |   | $                    | 3,254  |                                               | 148,731 |                | $      | 14,873 |   | 901,317 |   | $ | 22,149 |   | $ | (16,943 | ) |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Net income                                                          |   | —                  |   | —               |   | —                                             |    | —              |   | — |   | — |   | 2,792 |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Stock dividends                                                     |   | —                  |   | —               |   | 23,597                                             |    | 2,360               |   | — |   | — |   | (2,360 | ) |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Accretion on Series A redeemable preferred  stock                   |   | —                  |   | 234                  |   | —                                             |    | —              |   | — |   | — |   | — |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Provision for noncash compensation related  to common stock options |   | —                  |   | —               |   | —                                             |    | —              |   | — |   | 131 |   | — |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| December 31, 2001                                              |   | 43,941                  |   | 3,488                |   | 172,328                                            |    | 17,233              |   | 901,317 |   | 22,280 |   | (16,511 | ) |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Net income                                                          |   | —                  |   | —               |   | —                                             |    | —              |   | — |   | — |   | 5,620 |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Stock dividends                                                     |   | —                  |   | —               |   | 27,340                                             |    | 2,734               |   | — |   | — |   | (2,734 | ) |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Accretion on  Series A redeemable preferred stock              |   | —                  |   | 250                  |   | —                                             |    | —              |   | — |   | — |   | — |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Provision for noncash compensation related  to common stock options |   | —                  |   | —               |   | —                                             |    | —              |   | — |   | 203 |   | — |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| December 31, 2002                                              |   | 43,941                  |   | 3,738                |   | 199,668                                            |    | 19,967              |   | 901,317 |   | 22,483 |   | (13,625 | ) |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Net loss                                                            |   | —                  |   | —               |   | —                                             |    | —              |   | — |   | — |   | (5,242 | ) |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Stock dividends                                                     |   | —                  |   | —               |   | 31,677                                             |    | 3,168               |   | — |   | — |   | (3,168 | ) |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Accretion on Series A redeemable preferred  stock                   |   | —                  |   | 268                  |   | —                                             |    | —              |   | — |   | — |   | — |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Repurchase of common stock                                          |   | —                  |   | —               |   | —                                             |    | —              |   | (3,399 | ) | (105 | ) | — |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| Provision for noncash compensation related  to common stock options |   | —                  |   | —               |   | —                                             |    | —              |   | — |   | 44 |   | — |   |
|                                                                |   |                    |   |                 |   |                                               |    |                |   |   |   |   |   |   |   |
| December 31, 2003                                              |   | 43,941                  |   | $                    | 4,006  |                                               | 231,345 |                | $      | 23,135 |   | 897,918 |   | $ | 22,422 |   | $ | (22,035 | ) |

 

See notes to consolidated financialstatements.

 

F-6

----

 

**PERRYJUDD’S HOLDINGS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Dollarsin thousands)**

 
|                                                                                      |   | **Year Ended  December 31,** |       |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                      |   | **2003**                          |       | **2002** |   | **2001** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |   |                              | ** ** |   | ** ** |   | ** ** |
| Net income (loss)                                                                         |   | $                                 | (5,242     | ) | $ | 5,620 |   | $ | 2,792 |   |
|                                                                                      |   |                              | ** ** |   | ** ** |   | ** ** |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |   |                              | ** ** |   | ** ** |   | ** ** |
| Depreciation and amortization                                                             |   | 17,854                            |       | 17,434 |   | 15,833 |   |
| Amortization of deferred financing costs                                                  |   | 416                               |       | 1,295 |   | 1,200 |   |
| Accretion on redeemable preferred stock                                                   |   | 268                               |       | 250 |   | 234 |   |
| Compensation related to common stock  options                                             |   | 44                                |       | 203 |   | 131 |   |
| Deferred income taxes                                                                     |   | (5,446                            | )          | (222 | ) | 1,176 |   |
| Gain on disposals of equipment                                                            |   | (516                              | )          | (27 | ) | (633 | ) |
| Loss on repurchases of senior subordinated  notes                                         |   | 868                               |       | 592 |   | — |   |
| Non-cash fixed asset impairment costs                                                     |   | 6,397                             |       | — |   | — |   |
| Changes in assets and liabilities excluding  effect of businesses acquired or disposed:   |   |                              |       |   |   |   |   |
| Receivables                                                                               |   | 492                               |       | 15,664 |   | 3,770 |   |
| Inventories                                                                               |   | 1,937                             |       | (126 | ) | 4,750 |   |
| Prepaid expenses                                                                          |   | (749                              | )          | 400 |   | (156 | ) |
| Accounts payable                                                                          |   | (747                              | )          | (3,305 | ) | (4,432 | ) |
| Accrued expenses                                                                          |   | 3,254                             |       | 541 |   | (9,439 | ) |
| Accrued interest                                                                          |   | (76                               | )          | (199 | ) | 14 |   |
| Income taxes, net                                                                         |   | (38                               | )          | 1,683 |   | 283 |   |
| Other liabilities                                                                         |   | (485                              | )          | 121 |   | (196 | ) |
| Net cash provided by operating activities                                                 |   | 18,231                            |       | 39,924 |   | 15,327 |   |
|                                                                                      |   |                              |       |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |   |                              |       |   |   |   |   |
| Expenditures for property, plant and  equipment                                           |   | (9,088                            | )          | (22,415 | ) | (26,531 | ) |
| Capital projects converted to operating  leases                                           |   | 4,778                             |       | 7,584 |   | 15,533 |   |
| Proceeds from sale of property, plant and  equipment, net of disposition costs            |   | 321                               |       | (50 | ) | 888 |   |
| Net cash used in investing activities                                                     |   | (3,989                            | )          | (14,881 | ) | (10,110 | ) |
|                                                                                      |   |                              |       |   |   |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |   |                              |       |   |   |   |   |
| Repayment of term debt                                                                    |   | —                            |       | (7,800 | ) | (6,018 | ) |
| Repurchases of senior subordinated notes                                                  |   | (16,573                           | )          | (28,990 | ) | — |   |
| Increase in revolving debt                                                                |   | 2,500                             |       | 8,706 |   | — |   |
| Financing costs incurred                                                                  |   | (68                               | )          | (112 | ) | — |   |
| Repurchase of common stock                                                                |   | (105                              | )          | — |   | — |   |
| Net cash used in financing activities                                                     |   | (14,246                           | )          | (28,196 | ) | (6,018 | ) |
|                                                                                      |   |                              |       |   |   |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |   | (4                                | )          | (3,153 | ) | (801 | ) |
| BALANCE AT BEGINNING OF YEAR                                                              |   | 970                               |       | 4,123 |   | 4,924 |   |
| BALANCE AT END OF YEAR                                                                    |   | $                                 | 966        |   | $ | 970 |   | $ | 4,123 |   |

 

(CONTINUED)

 

F-7

----

 

**SUPPLEMENTAL CASHFLOW INFORMATION:**

 

Cash paid during the year (in thousands):

 
|         |   | **Year Ended  December 31,** |   |
|--------------|--------|-----------------------------------|--------|
|         |   | **2003**                          |   | **2002** |   | **2001** |   |
|         |   |                              |   |   |   |   |   |
| Interest     |   | $                                 | 8,742  |   | $ | 11,989 |   | $ | 12,769 |   |
|         |   |                              |   |   |   |   |   |
| Income taxes |   | $                                 | 2,549  |   | $ | 463 |   | $ | 1,450 |   |

 

**NON-CASHTRANSACTIONS:**

 

On December 16, 1997, the Company issued 95,000 shares of Series Apreferred stock to the majority stockholders in exchange for a note payableplus accrued and unpaid interest.  Stockdividends issued on this stock approximated $3,168,000, $2,734,000 and$2,360,000 for the years ended December 31, 2003, 2002 and 2001,respectively.  See Note 6.

 

See notes to consolidated financialstatements.

 

F-8

----

 

**PERRYJUDD’S HOLDINGS, INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

** **

**1.****   GENERALINFORMATION**

 

*Nature of Business -*The Company is a fullservice heatset web offset printer of magazines, catalogs, and other commercialproducts.  The Company serves a nationaldomestic market in the printing of weekly and monthly consumer, specialinterest and trade magazines, business-to-business and consumer catalogs, and avariety of other direct advertising products. The Company operates principally in one business segment, printingservices.

 

*Principles of Consolidation* - The consolidatedfinancial statements include the accounts of Perry Judd’s Holdings, Inc., andits wholly-owned subsidiary, Perry Judd’s Incorporated, (Perry Judd’s)(collectively hereafter referred to as the “Company”).  All significant intercompany balances andtransactions have been eliminated.

 

**2.****   SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Cash and Cash Equivalents -*The Companyconsiders all highly liquid debt instruments purchased with a maturity of threemonths or less to be cash equivalents.

 

*Credit Risk Considerations* - The Company hadone customer which consisted of six publication titles comprising approximately12%, 15% and 14% of total net sales for the years ended December 31, 2003,2002 and 2001, respectively.  Thevarious titles for this customer were under contracts that expired onJuly 31, 2003 and December 31, 2003. See Note 12.

 

The Company has recorded an allowance for doubtful accounts to estimatethe difference between recorded receivables and ultimate collections.  The allowance and provision for bad debtsare adjusted periodically based upon the Company’s evaluation of historicalcollection experience, industry trends and other relevant factors.  The allowance for doubtful accounts was$1,200,000 at December 31, 2003 and 2002, respectively.

 

*Inventory Valuation* - Inventories are statedat the lower of cost (first-in, first-out method) or market and are summarizedas follows (in thousands):

 

|                         |   | **December 31,** |   |
|------------------------------|--------|-----------------------|--------|
|                         |   | **2003**              |   | **2002** |   |
|                         |   |                  |   |   |   |
| Raw materials                |   | $                     | 6,022  |   | $ | 6,036 |   |
| Work in process              |   | 4,529                 |   | 4,940 |   |
| Production supplies          |   | 815                   |   | 863 |   |
| Repair and maintenance parts |   | 1,447                 |   | 2,911 |   |
|                         |   | $                     | 12,813 |   | $ | 14,750 |   |

 

F-9

----

 

*Property, Plant and Equipment* - Property, plant and equipment are statedat cost.  Assets are depreciated on thestraight-line basis over estimated useful lives which range from three to fortyyears.

 
|                                     |   | **Estimated  useful life**                               |   |
|------------------------------------------|--------|----------------------------------------------------------|--------|
|                                     |   | **(In years)**                                           |   |
| Machinery and equipment                  |   | 3-15                                                     |   |
| Office furniture, equipment and vehicles |   | 3-10                                                     |   |
| Buildings and improvements               |   | 7-40                                                     |   |
| Land improvements                        |   | 25-40                                                    |   |
| Leasehold improvements                   |   | Lesser of estimated useful life  or remaining lease term |   |

 

Capitalizedinterest on borrowed funds during construction was $235,000 and $310,000 forthe years ended December 31, 2002 and 2001, respectively. There was nocapitalized interest in 2003.

 

*Long-lived Assets -*In August 2001, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.” The Company adopted the provisions of SFAS No. 144 as ofJanuary 1, 2001, establishing procedures for review of recoverability, andmeasurement of impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. SFAS No. 144 alsorequires that long-lived assets to be disposed of other than by sale (forexample, abandonments, exchanges for similar productive assets or in adistribution to owners in a spinoff) shall continue to be classified as heldand used until disposal. Further, SFAS No. 144 specifies the criteria for classifyinglong-lived assets as “held for sale” and requires that long-lived assets to bedisposed of by sale be reported at the lower of carrying amount or fair valueless estimated selling costs. As of December 31, 2003, management believesthat there has not been any impairment of the Company’s long-lived assets,except as outlined in Note 12.

 

*Goodwill and Other IntangibleAssets* – ThroughDecember 31, 2001, goodwill was amortized on a straight-line basis over 35years. The Company adopted SFAS No. 142, “Goodwill and Other IntangibleAssets”, effective January 1, 2002. Under SFAS No. 142, goodwill andcertain other intangible assets are no longer amortized but are reviewed forimpairment. In connection with the adoption of SFAS No. 142, the Company completedthe transitional goodwill impairment test, which required the Company tocompare its fair value to the carrying value of its net assets as ofJanuary 1, 2002. Based on this analysis, the Company concluded that noimpairment existed at the time of adoption, and, accordingly, the Company didnot recognize any transitional impairment loss. Additionally, the Companyconcluded that no impairment existed at the time of the annual impairment testwhich was performed in the fourth quarter of 2002 and 2003.

 

Asrequired by SFAS No. 142, the results of operations for periods prior to itsadoption have not been restated. The following table summarizes the pro formaincome before income taxes and net income for the year ended December 31,2001 had SFAS No. 142 been adopted at January 1, 2001 (in thousands):

 
| Income before income taxes |   | $ | 7,157 |   |
|----------------------------|--------|---|-------|--------|
| Net income                 |   | $ | 3,741 |   |

 

Deferredfinancing costs are being amortized over the lives of the applicable debtagreements. Accumulated amortization on these costs was $7,119,000 and$7,023,000 at December 31, 2003 and 2002, respectively.  Other intangible assets identified inconnection with certain acquisitions are being amortized over the estimateduseful lives of the assets which range from five to fifteen years.  Accumulated amortization on these costs was$3,643,000 and $3,523,000 at December 31, 2003 and 2002, respectively.

 

F-10

----

 

Futureamortization expense for deferred financing costs and other intangible assetsare estimated as follows (in thousands):

 
| **Year Ending December 31,** |   | **Deferred  Financing  Costs** |   | **Other  Intangible  Assets** |   |
|-----------------------------------|--------|--------------------------------|--------|-------------------------------|--------|
| 2004                              |   | $                              | 297    |                          | $      | 119 |   |
| 2005                              |   | 297                            |   | 97                            |   |
| 2006                              |   | 297                            |   | 73                            |   |
| 2007                              |   | 297                            |   | 73                            |   |
| 2008                              |   | 14                             |   | 73                            |   |
| Thereafter                        |   | —                         |   | 111                           |   |
| Total                             |   | $                              | 1,202  |                          | $      | 546 |   |

 

*RevenueRecognition* - Revenueis recognized when complete orders are shipped.

 

*Shippingand Handling -*Amountsbilled to a customer in a sale transaction related to shipping and handling arereported as net sales, and the related costs incurred for shipping and handlingare reported as costs of production and distribution.

 

*IncomeTaxes* - Deferredincome taxes are determined utilizing an asset and liability approach. Thismethod gives consideration to the future tax consequences associated withdifferences between financial accounting and tax bases of assets andliabilities.  This method givesimmediate effect to changes in income tax laws upon enactment.

 

*Estimates-*The preparation ofthe Company’s consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makecertain estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities as ofthe balance sheet date and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

*FairValues -*The Companybelieves that the carrying amount of its cash and cash equivalents, accountsreceivable, accounts payable, accrued expenses and borrowings under itsrevolving credit facility approximate fair value due to the short maturity ofthese instruments.  The estimated fairvalue of the Company’s publicly traded debt (senior subordinated notes), basedon quoted market prices, was approximately $66.5 million and $87.9 million asof December 31, 2003 and 2002, respectively.

 

*New Accounting Pronouncements -*During 2002, the FASB issued SFAS No. 145,“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13 and Technical Corrections as of April 2002,” and SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities.” Aprovision of SFAS No. 145 rescinds FASB Statement No. 4, “Reporting Gains andLosses from Extinguishment of Debt,” and an amendment of that Statement. This provision of SFAS No. 145 was effective for fiscal years beginningafter May 15, 2002, but was adopted early by the Company resulting in the losson repurchases of senior subordinated notes in 2002 being classified as otherexpense in the consolidated statements of operations.  SFAS No. 146 iseffective for exit or disposal activities initiated after December 31,2002.  The Company complied with the requirements of this statement in itsaccounting for the restructuring charges described in Note 12.

 

F-11

----

 

**3.****   BALANCESHEET INFORMATION**

 

Accounts receivable, net, consists of the following (in thousands):

 
|                            |   | **December 31,** |   |
|---------------------------------|--------|-----------------------|--------|
|                            |   | **2003**              |   | **2002** |   |
| Trade receivables               |   | $                     | 41,986 |   | $ | 42,794 |   |
| Other receivables               |   | 2,411                 |   | 2,095 |   |
| Allowance for doubtful accounts |   | (1,200                | )      | (1,200 | ) |
|                            |   | $                     | 43,197 |   | $ | 43,689 |   |

 

Accrued expenses consist of the following (in thousands):

 
|                      |   | **December 31,** |   |
|---------------------------|--------|-----------------------|--------|
|                      |   | **2003**              |   | **2002** |   |
| Employee related expenses |   | $                     | 11,791 |   | $ | 10,630 |   |
| Accrued paper costs       |   | 3,486                 |   | 2,617 |   |
| Taxes other than income   |   | 532                   |   | 359 |   |
| Other accrued expenses    |   | 5,488                 |   | 4,437 |   |
|                      |   | $                     | 21,297 |   | $ | 18,043 |   |

 

**4.****   LONG-TERMDEBT**

 

Long-term debt consists of the following (in thousands):

 
|                      |   | **December 31,** |   |
|---------------------------|--------|-----------------------|--------|
|                      |   | **2003**              |   | **2002** |   |
| Revolving credit facility |   | $                     | 11,206 |   | $ | 8,706 |   |
| Senior subordinated notes |   | 70,010                |   | 86,010 |   |
| Total debt                |   | 81,216                |   | 94,716 |   |
| Less current portion      |   | (11,206               | )      | (8,706 | ) |
| Long-term debt            |   | $                     | 70,010 |   | $ | 86,010 |   |

 

*Revolving Credit Facility*- In December 2003, the Company entered into a five year credit agreement(the “Credit Agreement”) which expires on December 31, 2008, unlessotherwise extended based upon mutual agreement of the Company and thelender.  The Credit Agreement iscomprised of a $40.0 million revolving credit facility based upon a borrowingbase of eligible accounts receivable and inventory. At December 31, 2003,the available borrowing base was $39.2 million. The Company’s obligations underthe Credit Agreement are secured by a security interest in all the assets ofthe Company and its subsidiaries, excluding all assets relating to property,plant and equipment. Borrowings under the Credit Agreement bear interest atrates that fluctuate with the prime rate and the Eurodollar rate and applicablemargin rates as defined by the Credit Agreement which fluctuate based on theCompany’s leverage ratio. The Credit Agreement requires the Company to maintainand meet certain minimum operating ratios. Additionally, the Credit Agreementrestricts payments of dividends on the Company’s common stock.  At December 31, 2003, the Company wasin compliance with these requirements. Borrowings against the line are eitherat a Eurodollar rate plus 2.25%, (2.66% with $5,000,000 outstanding atDecember 31, 2003) fixed for periods up to 180 days, or at the prime rate(4.0% with $6,206,000 outstanding at December 31, 2003). AtDecember 31, 2003, $28.0 million of the revolving credit facility wasavailable for future working capital and other general corporate purposes.

 

F-12

----

 

*Senior Subordinated Notes*- The Company issuedits 10 5/8% senior subordinated notes due December 15, 2007 in connectionwith a 1997 acquisition.  Interest onthe notes is payable semi-annually in arrears on June 15 andDecember 15 of each year.  Thenotes are redeemable, in whole or in part, at the option of the Company atspecified redemption prices plus accrued interest to the date of redemption.  The notes impose certain restrictions on theCompany’s ability to make certain distributions and restricts the payments ofdividends by the Company in certain circumstances. The following tablesummarizes the Company’s repurchases of its senior subordinated notes and theloss recognized on the repurchases after giving effect to the write-off ofrelated deferred financing costs (in thousands):

 
|                                                  |   | **Year Ended  December 31** |   |
|-------------------------------------------------------|--------|----------------------------------|--------|
|                                                  |   | **2003**                         |   | **2002** |   |
| Repurchases of senior subordinated notes  (principal) |   | $                                | 16,000 |   | $ | 28,990 |   |
| Loss on repurchases                                   |   | $                                | 868    |   | $ | 592 |   |

 

On January 15, 2004, the Company repurchased an additional$4,015,000 of its senior subordinated notes and recognized a gain on thetransaction of approximately $136,000 after giving effect to the write-off ofrelated deferred financing costs.

 

**5.****   MINORITYINTERESTS**

 

In connection with a 1995 acquisition of certain net assets, asubsidiary of the company (Perry Judd’s) issued the following redeemablepreferred stock:

 

*Series A Redeemable Preferred Stock -* AtApril 28, 1995, Series A redeemable preferred stock issued in the amountof $5.0 million reflected an original issue discount of $2.5 million which wasthe difference between the fair value at the time of issuance and theApril 28, 2005 redemption value. The difference is being accreted by charging operations untilredemption.  Each share of redeemableSeries A, $0.001 par value, $100 redemption value, nonconvertible, non-votingpreferred stock entitles its holder to receive an annual cash dividendequivalent to the redemption value times 90% of the prime interest rate.  At December 31, 1995, 50,000 shareswere authorized and 47,350 shares were issued and outstanding.  During 1996, the carrying value of theSeries A redeemable preferred stock was written down to zero to offset certainpurchase accounting adjustments and no accretion was recorded.  During the third quarter endedSeptember 30, 2000, the Company reached a settlement with the former ownerof Perry Printing resulting in a partial reinstatement of Series A redeemablepreferred stock.  Pursuant to thesettlement agreement dated August 31, 2000, effective June 30, 2000,43,940.68 shares of Series A redeemable preferred stock were reinstated at anaccreted value of $3,143,000 and $1,452,000 of accumulated dividends were paid.Dividends of $163,000, $185,000 and $273,000 were paid during the years endedDecember 31, 2003, 2002 and 2001, respectively.

 

F-13

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**6.****   STOCKHOLDERS’EQUITY AND STOCK OPTION PLAN**

 

*Preferred Stock (Series A)* – Holders of thenon-voting preferred stock are entitled to a 15% stock dividend, payable inpreferred shares on a quarterly basis. A California corporation owned beneficially by the Company’s majoritycommon stockholders owns the majority of the preferred stock.  The preferred stock has a liquidationpreference above the common stock.

 

*Common Stock*– Under the terms of theCompany’s stock option plan (the “Stock Option Plan”), options may be grantedto officers and key employees.  Optionshave terms of eighteen years and an exercise price of $.01 per share.  Options are immediately exercisable, butoption shares issuable are subject to repurchase by the Company on terminationof employment at the original exercise price until vested.  Option shares vest in gradual incrementsover an eight year period.  As ofDecember 31, 2003, 225 option shares were unvested.  The vested option shares are subject to acall by the Company and a put by the employee in the event the optionshareholder retires after attaining age 62, becomes permanently disabled ordies.  Upon termination of service forreasons other than retirement, disability or death, vested option shares aresubject to a call by the Company.  Theput and call options are at fair value.

 

As of December 31, 2003, the Stock Option Plan had 33,693 optionsavailable for grant.

 

The Company applies Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations inaccounting for the Stock Option Plan. Accordingly, compensation expense has been recorded for the differencebetween the estimated fair value of the common stock and the exercise price ofthe option at the date of grant as the shares vest.  Compensation expense of $44,000, $203,000 and $131,000 wasrecognized during the years ended December 31, 2003, 2002 and 2001,respectively. The pro forma effect on reported net income (loss) for the yearsended December 31, 2003, 2002 and 2001 of using the fair value methodunder SFAS No. 123, “Accounting for Stock-Based Compensation,” is notsignificant.

 

*Stockholder Agreements* – At December 31,2003, 81,273 shares of common stock were subject to put and call arrangementsat fair value, similar to the shares purchased under the Stock Option Plan, atthe employee’s termination, retirement after attaining age 62, permanentdisability or death. In addition, the Company has guaranteed a minimum fixeddollar per share upon exercise of one executive with 5,718 shares.

 

F-14

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**7.****   OPERATINGLEASES**

 

The Company leases certain equipment and office space undernon-cancelable operating lease agreements. Lease expense under such agreements was $17.1 million, $15.8 million and$17.2 million for the years ended December 31, 2003, 2002 and 2001respectively.

 

In 1997, the Company entered into a sale and leaseback transactionwhereby the Wisconsin printing plants and warehouse facilities, and theCompany’s corporate headquarters were sold to a third party for the aggregatepurchase price (exclusive of fees and costs) of $18.25 million and immediatelyleased back to the Company.  The saleand 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 Companyafter five years, and may be extended for three additional five-year terms atthe Company’s option.  Annual rent underthe lease is currently $2.1 million payable quarterly in advance with 10%escalations scheduled in 2008 and 2013 (and a corresponding 10% increase at thebeginning of any option term).  Through2007, the Company has a right of first refusal on any proposed sale of all ofthe leased properties by the lessor to a third party, exercisable within 30days of receipt of the proposed sale contract.

 

The Company entered into a 20 year sale and leaseback transaction forthe majority of its real property located in Virginia in 1998. Annual rentunder the lease is currently $1.5 million with 14.5% escalations scheduled in2008 and 2013.

 

Future minimum annual lease payments required under the operating leaseagreements are as follows (in thousands):

 

| **Year Ending December 31,** |   |   |    |
|-----------------------------------|--------|--------|---------|
| 2004                              |   | $      | 16,675  |   |
| 2005                              |   | 14,899 |    |
| 2006                              |   | 12,163 |    |
| 2007                              |   | 7,933  |    |
| 2008                              |   | 7,388  |    |
| Thereafter                        |   | 44,803 |    |
| Total minimum lease payments      |   | $      | 103,861 |   |

 

F-15

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**8.****   INCOMETAXES**

 

The provision (benefit) for income taxes consists of the following components(in thousands):

 
|                                 |   | **Year Ended  December 31,** |   |
|--------------------------------------|--------|-----------------------------------|--------|
|                                 |   | **2003**                          |   | **2002** |   | **2001** |   |
| Current                              |   |                              |   |   |   |   |   |
| Federal                              |   | $                                 | 2,418  |   | $ | 1,875 |   | $ | 1,612 |   |
| State                                |   | 97                                |   | 205 |   | 121 |   |
|                                 |   | 2,515                             |   | 2,080 |   | 1,733 |   |
| Deferred                             |   |                              |   |   |   |   |   |
| Federal                              |   |                              | (4,951 | ) | (202 | ) | 848 |   |
| State                                |   | (495                              | )      | (20 | ) | 328 |   |
|                                 |   | (5,446                            | )      | (222 | ) | 1,176 |   |
| Provision (benefit) for income taxes |   | $                                 | (2,931 | ) | $ | 1,858 |   | $ | 2,909 |   |

 

Following is a reconciliation of the U.S. statutory federal income taxrate to the effective rate (in thousands):

 
|                                                  |   | **Year Ended  December 31,** |   |
|-------------------------------------------------------|--------|-----------------------------------|--------|
|                                                  |   | **2003**                          |   | **2002** |   | **2001** |   |
|                                                  |   |                              |   |   |   |   |   |
| Federal statutory rate                                |   | 34                                | %      | 34 | % | 35 | % |
| Tax provision (benefit) at federal  statutory rate    |   | $                                 | (2,632 | ) | $ | 2,690 |   | $ | 2,173 |   |
| State income taxes net of federal income  tax benefit |   | (384                              | )      | 249 |   | 291 |   |
| Goodwill amortization                                 |   | —                            |   | — |   | 332 |   |
| Other permanent differences                           |   | 85                                |   | 123 |   | 113 |   |
| Impact of rate change                                 |   | —                            |   | (1,204 | ) | — |   |
| Provision (benefit) for income taxes                  |   | $                                 | (2,931 | ) | $ | 1,858 |   | $ | 2,909 |   |

 

In 2002, the Company reduced its effectivetax rate, including the rate used for recording the net deferred tax liability,from 40.0% in prior years to 37.4%. The reduction in the net deferred taxliability from this rate change generated a deferred income tax benefit ofapproximately $1.2 million in 2002. The effective rate was reduced to reflect areduction in the anticipated applicable federal tax rate for future years from35% to 34%, reflective of lower taxable income generated in recent andprojected years. In addition, prior corporate restructurings and changes inbusiness operations, including levels of profitability by state, have reducedthe Company’s overall effective state tax rate.

 

Significant components of deferred tax assets and deferred taxliabilities are as follows (in thousands):

 
|                          |   | **December 31,** |    |
|-------------------------------|--------|-----------------------|---------|
|                          |   | **2003**              |    | **2002** |   |
| Deferred Tax Assets:          |   |                  |    |   |   |
| Accounts receivable items     |   | $                     | 449     |   | $ | 449 |   |
| Inventory items               |   | 823                   |    | 200 |   |
| Employee benefit accruals     |   | 1,736                 |    | 1,333 |   |
| Other accrued expenses        |   | 399                   |    | 601 |   |
| Sale and leaseback            |   | 2,262                 |    | 2,373 |   |
| Tax credit carryforwards      |   | 723                   |    | 627 |   |
| Other items                   |   | 626                   |    | 725 |   |
|                          |   | 7,018                 |    | 6,308 |   |
| Deferred Tax Liabilities:     |   |                  |    |   |   |
| Prepaid items                 |   | (400                  | )       | (306 | ) |
| Property, plant and equipment |   | (17,335               | )       | (22,102 | ) |
| Other                         |   | (1,422                | )       | (1,370 | ) |
|                          |   | (19,157               | )       | (23,778 | ) |
|                          |   |                  |    |   |   |
| Net deferred income taxes     |   | $                     | (12,139 | ) | $ | (17,470 | ) |

 

F-16

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The net deferred income tax liability is classified in the balancesheets as follows (in thousands):

 
|                              |   | **December 31,** |    |
|-----------------------------------|--------|-----------------------|---------|
|                              |   | **2003**              |    | **2002** |   |
| Current deferred income taxes     |   | $                     | 2,668   |   | $ | 1,904 |   |
| Non-current deferred income taxes |   | (14,807               | )       | (19,374 | ) |
| Net deferred income taxes         |   | $                     | (12,139 | ) | $ | (17,470 | ) |

 

At December 31, 2003, the Company has state tax credits ofapproximately $800,000 which expire in the years 2010 through 2017 and can beused to offset future regular tax.

 

**9.****     RELATEDPARTY TRANSACTIONS**

 

In 1995, the Company entered into management agreements (the“Agreements”) with two companies owned beneficially by the majoritystockholders of the Company.  TheAgreements, as well as subsequent revisions, provide for certain management andconsulting services in connection with business strategy, operations andfinance.  The Agreements have initialterms of five years, subject to one-year extensions thereafter and require theCompany to currently pay annual management fees totaling $1,565,000 per yearplus reimbursement of certain expenses. During 2001 the Company approved abonus of $500,000 which was accrued at December 31, 2001 and paid during2002. During 2002 and 2003, the Company approved bonus payments of $600,000which were accrued during the years ended December 31, 2002 and 2003,respectively. Management fees paid and reimbursements expensed in conjunctionwith the Agreements and bonuses accrued totaled $2,253,000, $2,294,000 and$2,316,000 for the years ended December 31, 2003, 2002 and 2001,respectively.

 

**10.****  RETIREMENTPLANS**

 

The Company has a defined contribution plan referred to as the PerryJudd’s Incorporated Retirement Savings Plan (the “Plan”).  The Plan covers substantially all employeeswho have attained 21 years of age and are credited with twelve months ofservice on their enrollment date.  TheCompany contributed approximately $1,987,000, $1,857,000 and $1,662,000 for theyears ended December 31, 2003, 2002 and 2001, respectively, to the Planrepresenting 3% of eligible employee wages.

 

Effective December 31, 1997, benefits payable under a definedbenefit pension plan existing at the time of a December 16, 1997acquisition were frozen.  InJune 2001, the Company received a favorable advance termination letterfrom the Internal Revenue Service and completed the termination of the planthrough lump sum payments and the purchase of annuity contracts. During theyear ended December 31, 2001, the Company recorded a gain on thetermination of the pension plan of approximately $1,633,000.

 

F-17

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**11.****  COMMITMENTSAND CONTINGENCIES**

 

*Purchase Commitments -*At December 31,2003, the Company had commitments to purchase or lease approximately $2.1million of operating assets.

 

*Other Contingencies* - The Company is involvedin various claims and litigation incidental to its operations.  In the opinion of management, the ultimateresolution of these actions will not have a material effect on the Company’sconsolidated financial statements.

 

**12.****  RESTRUCTURINGCHARGES AND ASSET IMPAIRMENT COSTS**

 

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

 

On November 20, 2003, the Company announced the closure of itsWaterloo, Wisconsin plant following the loss of this plant’s key customer. TheCompany expects to close the facility by the end of April 2004.

 

A reconciliation of the beginning and ending restructuring accountbalances as of December 31, 2003 are summarized as follows (in thousands):

 
|                                       |   | **Balance at  December 31, 2002** |   | **Charges/  Additions** |   | **Payments/  Reductions** |   | **Balance at  December 31, 2003** |   |
|--------------------------------------------|--------|----------------------------------------|--------|-------------------------|--------|---------------------------|--------|----------------------------------------|--------|
| Severance and other employee related costs |   | $                                      | — |                    | $      | 2,022                     |   | $                                      | — |   | $ | 2,022 |   |
| Non-cash fixed asset impairment costs      |   | —                                 |   | 6,397                   |   | 6,397                     |   | —                                 |   |
| Write down of repair parts inventories     |   | —                                 |   | 1,642                   |   | 1,642                     |   | —                                 |   |
| Other closure costs                        |   | —                                 |   | 147                     |   | 128                       |   | 19                                     |   |
|                                       |   | $                                      | — |                    | $      | 10,208                    |   | $                                      | 8,167  |   | $ | 2,041 |   |

 

Severance and other employee related costs represent 1) the Company’sliability pursuant to a Plant Closing Agreement executed on November 24,2003 between the Company and the Joint Union Bargaining committee representingall union employees and 2) similar liabilities for salaried personnel affectedby the closure of the Waterloo plant. Severance and other employee relatedcosts accrued during 2003 were calculated using a pro rata number of daysbetween the notice date and estimated termination date.

 

The non-cash fixed asset impairment costs and write down of repair partinventories represent the reduction in the asset carrying values of theequipment and repair parts at the Waterloo plant to management’s estimate ofnet realizable value following its decision to close the plant. Net realizablevalue has been determined based on the Company’s experience of selling similarassets.

 

The Company estimates that additional restructuring charges of$6,970,000 will be incurred during 2004 related to the following items (inthousands):

 
| Severance  and other employee related costs |   | $     | 2,648  |   |
|---------------------------------------------|--------|-------|--------|--------|
| Contractual lease obligations               |   | 3,812 |   |
| Other closure costs                         |   | 510   |   |
|                                        |   | $     | 6,970  |   |

 

The severance and other employee related costs are estimated to befully incurred by December 31, 2004.

 

Contractual lease obligations represent 1) remaining lease payments oncertain assets that the Company estimates will not be used afterApril 2004 and 2) remaining lease payments for the Waterloo, Wisconsinreal estate subject to the sale and lease back transaction described in Note 7which expires in 2017, offset by an estimate of sub lease rental incomediscounted at 8%.

 

The other closure costs relate primarily to costs associated withmoving employees to the Company’s other sites and legal costs associated withthe closure related activities.

 

F-18

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**PERRY JUDD’S HOLDINGS, INC.**

 

**Schedule II**

 

**Valuationand Qualifying Accounts**

**(InThousands)**

 
| **ALLOWANCE FOR UNCOLLECTIBLE  ACCOUNTS RECEIVABLE** |   | **Balance  Beginning  Of Year** |   | **Additions  Charged to  Costs and  Expenses** |   | **Deductions  -  Describe** |   | **Balance  End  of Year** |   |
|------------------------------------------------------|--------|---------------------------------|--------|------------------------------------------------|--------|-----------------------------|--------|---------------------------|--------|
|                                                 |   |                            |   |                                           |   |                        |   |                      |   |
| Year Ended December 31,                         |   |                            |   |                                           |   |                        |   |                      |   |
| 2003                                                 |   | $                               | 1,200  |                                           | $      | 381                         |   | $                         | 381    | (1) | $ | 1,200 |   |
|                                                 |   |                            |   |                                           |   |                        |   |                      |   |
| 2002                                                 |   | $                               | 1,236  |                                           | $      | 477                         |   | $                         | 513    | (1) | $ | 1,200 |   |
|                                                 |   |                            |   |                                           |   |                        |   |                      |   |
| 2001                                                 |   | $                               | 1,239  |                                           | $      | 1,089                       |   | $                         | 1,092  | (1) | $ | 1,236 |   |

 

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(1) Write-offs of receivables, net of recoveries.

 

F-19

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**EXHIBITINDEX**

 

The following exhibits are filed as a part of this report orincorporated by reference and will be furnished to any security holder uponrequest for such exhibit and payment of any reasonable expenses incurred by theCompany.  Send any such request to theCompany 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.  Incorporated by reference to Exhibit 3.1 to the 10-K dated as of  March 29, 2002.                                                                                                                                                            |
| 3.2                |   | Amended and Restated By-laws of the Company.  Incorporated by reference to Exhibit 3.2  to the Company’s Registration Statement on Form S-4 No. 333-45235 declared  effective on June 12, 1998 (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.                                                         |
| 10.3               |   | 1995 Stock Option Plan, as amended. Incorporated by reference to  Exhibit 10.3 to the Registration Statement.                                                                                                                                                                                                        |
| 10.4 † *      |   | Restated and Amended Employment Agreement by and between the Company  and Craig A. Hutchison dated April 28, 2003.                                                                                                                                                                                              |
| 10.4(a) †     |   | Employment Offer Letter from the Company to David E. Glick dated  January 16, 1998.  Incorporated  by reference to Exhibit 10.4(a) to the 10-K dated as of March 31, 1999.                                                                                                                            |
| 10.4(b) †     |   | Employment Offer Letter from the Company to Verne F. Schmidt dated  December 26, 1996.  Incorporated  by reference to Exhibit 10.4(b) to the 10-K dated as of March 31, 1999.                                                                                                                         |
| 10.4(c) †     |   | Severance Agreement Letter from the Company to Howard D. Sullivan  dated March 24, 2000. Incorporated by reference to Exhibit 10.4(c) to  the 10-K dated as of April 2, 2001.                                                                                                                              |
| 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.                                                                                               |
| 10.7 *             |   | Amendment to Stock Restriction and Repurchase Agreement and Stock  Purchase Agreement dated May 30, 2003 by and between the Company and Verne F.  Schmidt.                                                                                                                                                           |
| 10.8 *             |   | Supplemental Agreement dated August 14, 2003 by and between the  Company and Craig A. Hutchison.                                                                                                                                                                                                                |
| 10.9               |   | Loan and Security Agreement dated August 19, 2002 between LaSalle  Business Credit, Inc., as Lender and Perry Judd’s Incorporated, as Borrower.                                                                                                                                                                 |
| 11.0*              |   | First Amendment to the Loan and Security Agreement dated December 10,  2003 between LaSalle Business Credit, Inc., as Lender and Perry Judd’s  Incorporated, as Borrower.                                                                                                                                       |
| 21.0 *             |   | Subsidiary Listing                                                                                                                                                                                                                                                                                                   |
| 31.1 *             |   | Certification  of Chief  Executive Officer pursuant  to 18  U.S.C. Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                          |
| 31.2 *             |   | Certification of Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                       |
| 32.1 *             |   | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                           |

 

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*      Filed herewith

†      Indicates a management contract or compensatoryarrangement.

 

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