**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, 2002** |
|                                             |   |
| **OR**                                           |
|                                             |   |
| **o**                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                             |   |
| **Commission  file number**                      |
| **333-45235**                                    |
|                                                  |  |  |

 

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**PerryJudd’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’s telephone  number, including area code:  **920-478-3551** |
|                                                                             |     |                                  |
| Securities registered pursuant to Section 12(b) of  the Act:                     | **None** |
|                                                                             |     |                                  |
| Securities registered pursuant to Section 12(g) of  the Act:                     | **None** |

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý  No  o

 

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

 

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

 

Yes  o         No ý

 

As of March 25,2003 there were 897,918 shares of Registrant’s Common Stock, par value $.001per share outstanding.  There is noestablished public trading market for the Registrant’s Common Stock.  Therefore, an aggregate market value basedon sales or bid and ask prices is not determinable.

 

DocumentsIncorporated by Reference

 

**None**

 

 

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#### **INDEX**

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

 

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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, speakonly as of the date made and are subject to certain risks, uncertainties andassumptions.  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.

 

**PART I**

 

**Item 1.****                                        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 assets ofPerry Printing Corporation (“Perry Printing”). Prior to April 28, 1995, the Company had no operating activities.

 

On February 1, 1999, the Company completed the acquisition of Heartlandwhich 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 net assetsof its new media services subsidiary, Judd’s Online, to a subsidiary ofSusquehanna Media Corporation.

 

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

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

 

Substantially all of the Company’s sales are based upon 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 15%, 14% and 15% of the Company’s consolidated net sales during2002, 2001 and 2000, respectively. Time, Inc., has notified the Company that itwill not renew its weekly contract at its expiration on December 31, 2003 andits monthly printing contract at its expiration on July 31, 2003. If this lossof business is not replaced after 2003, the Company would experience a materialadverse effect on its financial condition and results of operations. No othercustomer accounted for more than 10% of the Company’s consolidated net salesfor 2002, 2001 and 2000.

 

1

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**MarketSectors**

 

***Magazines.***  The Company believes that it is the sixthlargest printer of magazines in the United States.  The Company’s principal competitors in magazines consist of fourdiversified printing companies.  TheCompany’s magazine customers include some of the largest and most establishedpublishers in a diverse range of market categories.  The Company believes that established publishers and theirpublications are the most likely to have a continuing and improving marketpresence.  Additionally, the popularityof these magazines makes them less susceptible to cyclical downturns inadvertising spending, which the Company believes provides it with an advantageover competitors whose customers may be more susceptible to such downturns.

 

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 expiration dates.  The Company’s relationships with its top tenmagazine 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 Commercial Printing.***  The Company also produces a variety ofspecialty commercial products such as magazine inserts, calendars, and generaladvertising products.  These commercialproducts enable the Company to optimize capacity utilization by supplementingits magazine and catalog business.

 

***New Media Services.***  From December 1997 through October 2000, theCompany developed a variety of multimedia, on-line and content repurposing****products and services (collectively, the“New Media Services”), as the Company became involved in the development andmanagement of Internet websites to enhance its traditional printingcapabilities and as a natural extension and expansion of its customerrelationships.  Judd’s Online providedinteractive web-site development, tracking, analysis and reporting services topublishers and direct-marketers desiring to complement ink-on-paper magazineproducts with on-line, brand-based products and services and to take advantageof marketing and sales opportunities in electronic commerce.  On October 19, 2000, the Company soldsubstantially all the net assets of Judd’s Online to a subsidiary ofSusquehanna Media Corporation.  See“Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Liquidity and Capital Resources.”

 

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 andgeo-demographic selective binding (on both a regional and specific carrierroute basis).  All of the Company’smagazine and catalog binding equipment has ink-jet capabilities and partial orfully selective systems.  During thebinding process, a product’s content can be modified to include or to excludecertain materials using technologies that enable a magazine publisher orcatalog merchant to customize and personalize its market by sending the samebasic magazine or catalog to all consumers while inserting differentadvertisements, messages, prices or product offerings, depending upon thegeographic and demographic characteristics of the individual customer orsubscriber.

 

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

 

**Distribution**

 

Distribution is a key element in the production process to effectivelymanage delivery costs, and the Company provides its customers withstate-of-the-art distribution and mail list services.  The distribution services provided by the Company includemultiple entry point analysis, consolidation, pool shipping, drop shipping,load planning, over-the-road and rail services, mailing/distributionconsultation, freight tracking, co-mailing analysis, mail tracking, ink-jetformatting and ink-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 multiple listsand purging duplication, formatting the tapes or optical disks which run thefinishing 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 2002, the Company’s customerssupplied approximately 70% of the paper used in the printing process, and theCompany supplied approximately 30%.  Thecost of paper is a principal factor in the Company’s manufacturing costs andpricing to certain customers, and consequently the cost of paper and theproportion of paper supplied by customers significantly affects the Company’snet sales and cost of sales.  TheCompany is generally able to pass on increases in the cost of paper to itscustomers, while declines in paper costs generally result in lower prices tocustomers.  Fluctuations in paper costsresult in corresponding fluctuations in the Company’s net sales, but typicalfluctuations generally have not affected production volumes or profits to anysignificant extent.  However, sharpincreases in paper prices and related reduction in print advertising programsare more likely to adversely affect volumes and profits.  The Company believes that its relationshipswith its paper suppliers are strong, and that it has adequate allocations withits 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, withgenerally higher sales and working capital in the second half of the fiscalyear.  The revolving credit facilityunder the Company’s amended and restated credit agreement entered into inAugust, 2002 (the “Credit Agreement”) has an aggregate commitment of $25.0million, of which $16.3 million was available for future working capital andother general corporate purposes as of December 31, 2002.

 

**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 safetylaws.  The Company expects to incurongoing capital and operating costs and administrative expenses to maintaincompliance with applicable environmental laws. The Company cannot predict the environmental or employee health andsafety legislation or regulations that may be enacted in the future or howexisting or future laws or regulations will be administered orinterpreted.  Compliance with new lawsor regulations, as well as more vigorous enforcement policies of the regulatoryagencies or stricter interpretation of existing laws, may require additionalexpenditures by the Company, some or all of which may be material; however theCompany is not currently aware of any environmental or employee health orsafety matter which could have a material adverse effect upon the Company’scompetitive position 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, 2002, the Company had approximately 2,305 employees,of which approximately 519 or 23% are represented by unions.  All of the union employees are employed atthe Company’s Waterloo plant. Approximately 180 of such union employees arecovered under a labor contract which expires in June 2007, and approximately339 of such union employees are covered under a labor contract which expires inApril 2008. The Company believes that it has satisfactory employee and laborrelations.

 

**RiskFactors**

 

In addition to other information in this Annual Reporton Form 10-K, the following risk factors for the Company should be carefullyconsidered.  These risks may impair theCompany’s results of operations and business prospects.  The risks set forth below and elsewhere inthis Annual Report could cause actual results to differ materially from thosethat the Company projects.

 

*ASignificant Portion of the Company’s Revenue depends on a Single Customer*

 

For the years ended December 31, 2002, 2001 and 2000,Time, Inc. comprised 15%, 14%, and 15% of consolidated net revenue,respectively. Time, Inc. has notified the Company that it will not renew itsweekly contract at its expiration on December 31, 2003, and its monthlyprinting contract on its expiration on July 31, 2003. If this loss of businessis not replaced after 2003, the Company’s financial condition and results ofoperations would be materially effected. The Company has not yet beensuccessful in replacing this loss of business. No other customer accounted for more than 10% of the business.

 

*HighLevel 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 substantialportion of the Company’s cash flow from operations must be dedicated to debtservice and will not be available for other purposes; (ii) the Company’s futureability to 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 andfinancing flexibility than the Company.

 

*Abilityto Service Debt*

 

The Company’s ability to pay interest on the SeniorNotes and to satisfy its other debt obligations will depend upon its futureoperating performance, which will be affected by prevailing economic conditionsand financial, 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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*Subordinationof the Senior Notes and Guarantees*

 

The Senior Notes are fully and unconditionallyguaranteed, on a senior subordinated basis, jointly and severally, by allsubsidiaries of the Company (the “Subsidiary Guarantors”) pursuant to guarantees(the “Guarantees”).  The Guarantees willbe subordinated in right of payment to all senior indebtedness of the Companyand the Subsidiary Guarantors.  In theevent of bankruptcy, liquidation or reorganization of the Company, the assetsof the Company or the Subsidiary Guarantors will be available to payobligations on the Senior Notes only after all senior indebtedness of theCompany or the Subsidiary Guarantors, as the case may be, has been paid infull, and there may not be sufficient assets remaining to pay amounts due onany or all of the Senior Notes then outstanding.  Additional senior indebtedness may be incurred by the Company andthe Subsidiary Guarantors from time to time, subject to certain restrictions.  The Indenture generally provides that aRestricted Subsidiary (as defined in the Indenture) may incur indebtedness onlyif such Subsidiary agrees to guarantee the Senior Notes on a seniorsubordinated basis.  The holders of theSenior Notes have no direct claim against the Subsidiary Guarantors other thanclaims created by the Guarantees, which may themselves be subject to legalchallenge in the event of the bankruptcy or insolvency of a SubsidiaryGuarantor.  If such a challenge wereupheld, the Guarantees would be invalidated and unenforceable.  To the extent that the Guarantees are heldto be unenforceable or have been released pursuant to the terms of theIndenture, the rights of holders of the Senior Notes to participate in anydistribution of assets of any Subsidiary Guarantor upon liquidation, bankruptcyor reorganization may, as in the case with other unsecured creditors of theCompany, be subject to prior claims against such Subsidiary Guarantor.

 

*HoldingCompany Structure*

 

Perry Judd’s Holdings is a holding company, theprincipal assets of which 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.

 

*RestrictionsImposed by Terms of the Company’s Indebtedness*

 

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

 

6

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*Competition*

 

The commercial printing industry in the U.S. is highlycompetitive in most product categories and geographic regions.  Competition is largely based on price,quality, range of services offered, distribution capabilities, ability to servicethe specialized needs of customers, availability of printing time onappropriate equipment and use of state-of-the-art technology.  The Company competes for commercial businessnot only with large international and national printers, but also with smallerregional printers.  In certain circumstances,due primarily to factors such as freight rates and customer preference forlocal services, printers with better access to certain regions of the countrymay have a competitive 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 competesuccessfully against existing or new competitors, and the failure to do so mayhave a material adverse effect on the Company’s financial condition and resultsof operations.  See “Business—Competition”.

 

*TechnologicalChanges*

 

Technology in the printing industry has evolved andcontinues to evolve.  Since 1998, over$106 million of purchased and leased capital expenditures have been investedfor printing facilities and production equipment.  As technology continues to evolve and as its customers’ needsbecome more specialized and sophisticated in the future, the Company willlikely be required 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.

 

*RawMaterials - Paper*

 

The cost of paper is a principal factor in theCompany’s manufacturing costs and pricing to certain customers and,consequently, the cost of paper significantly affects the Company’s netsales.  The Company is generally able topass on increases in the cost of paper to its customers, while declines inpaper costs generally result in lower prices to customers.  Typical fluctuations in paper costs resultin corresponding fluctuations in the Company’s net sales, but typicalfluctuations generally have not affected production volumes or profits to anysignificant extent.  However, sharpincreases in paper prices and related reduction in print advertising programsare more likely to adversely affect volumes and profits.  To the extent that there are future papercosts increases and the Company is not able to pass such increases to itscustomers or its customers reduce their demand for the Company’s products andservices, the Company’s financial condition and results of operations could bematerially adversely affected.

 

Capacity in the paper industry has remained relativelystable in recent years.  Increases ordecreases in demand for paper have led to corresponding pricing changes and, inperiods of high demand, to limitations on the availability of certain grades ofpaper, including grades utilized by the Company.  Any loss of the sources for paper supply or any disruption insuch sources’ business or failure to meet the Company’s product needs on atimely basis could cause, at a minimum, temporary shortages in needed materialswhich could have a material adverse affect on the Company’s results ofoperations.  Although the Company activelymanages its paper supply and believes it has established strong relationshipswith its suppliers, there can be no assurance that the Company’s sources ofsupply for its paper will be adequate or, in the event that such sources arenot adequate, that alternative sources can be developed in a timelymanner.  If the Company is unable tosecure sufficient supplies of paper of appropriate quality, its financialcondition, results of operations and cash flows could be materially adverselyaffected.  See “Business—Raw Materials”.

 

*CertainCustomer Relationships*

 

The Company currently provides products and servicesto certain customers without a written contractual arrangement.  While the Company believes that itsrelationship with each of these customers is good, there can be no assurancethat such customers will continue to do business with the Company at currentlevels, if at all.

 

7

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*Environmentaland other Governmental Regulation*

 

The Company is subject to regulation under variousfederal, state and local laws relating to the environment and to employeehealth and safety.  These environmentalregulations relate to the generation, storage, transportation, handling,disposal and emission into the environment of various substances.  Permits are required for operation of theCompany’s business, and these permits are subject to renewal, modification and,in certain circumstances, revocation. The Company is also subject to regulation under various federal, stateand local laws which allow regulatory authority to compel (or seekreimbursement for) cleanup of environmental contamination at the Company’s ownsites and at facilities where its waste is or has been disposed.  The Company has internal controls andpersonnel dedicated to compliance with all applicable environmental andemployee health and safety laws.  TheCompany expects to incur ongoing capital and operating costs and administrativeexpenses to maintain compliance with applicable environmental laws.  The Company cannot predict the environmentalor employee health and safety legislation or regulations that may be enacted inthe future or how existing or future laws or regulations will be administeredor interpreted.  Compliance with newlaws or regulations, as well as more vigorous enforcement policies of theregulatory agencies or stricter interpretation of existing laws, may requireadditional expenditures by the Company, some or all of which may bematerial.  See “Business—RegulatoryCompliance”.

 

*Relianceon Key Personnel*

 

The Company’s success will continue to depend to asignificant extent on its executive officers and other key managementpersonnel.  There can be no assurancethat the Company will be able to retain its executive officers and keypersonnel or attract additional qualified management in the future.  In addition, the success of any acquisitionby the Company may depend, in part, on the Company’s ability to retainmanagement personnel of the acquired companies.  There can be no assurance that the Company will be able to retainsuch management personnel.

 

*Controlby Principal Stockholders*

 

Robert E. Milhous and Paul B. Milhous, the Chairmanand Vice Chairman, respectively, of the Company own together beneficially over86% of the outstanding capital stock of the Company.  Accordingly, these stockholders have the ability, actingtogether, to control fundamental corporate transactions requiring stockholderapproval, including without limitation approval of merger transactionsinvolving the Company and sales of all or substantially all of the Company’sassets.  See Item 12 “Security Ownershipof Certain Beneficial Owners and Management”.

 

*Purchaseof Notes Upon Change of Control*

 

Upon a Change of Control (as defined in the Indenture)the Company will be required to offer to purchase all outstanding Senior Notesat 101% of the principal amount thereof plus accrued and unpaid interest to therepurchase date.  A Change of Controlwill likely trigger an event of default under the Credit Agreement which will permitthe lenders 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**

 

The Company maintains a website with the address www.perryjudds.com.The information 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 the Company’sfacilities 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, theCompany leases several sales offices located throughout the United States.  The Company believes that none of its leasesare material to its operations and that such leases were entered into on marketterms.

 

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

 

On November 24,1999, Journal Communications, Inc. and Northstar Print Group, Inc. filed suitagainst the Company in the State of Wisconsin Circuit Court for JeffersonCounty, Case No. 99CV373, arising out of the Company’s redemption of its SeriesA redeemable preferred stock held by the plaintiffs due to the Company’soutstanding indemnity claims involving breaches of warranties andrepresentations made by the plaintiffs with respect to certain assets purchasedfrom the plaintiffs in connection with the acquisition of Perry PrintingCorporation in 1995.  Redemptionfeatures of the Series A redeemable preferred stock provide the Company withthe option to offset such claims as immediate redemption of the Series Aredeemable preferred stock up to a maximum redemption value of $5 million.  The complaint alleged that the Companywrongfully redeemed the preferred stock, refused to pay dividends on otherstock, and refused to pay for certain services allegedly rendered by theplaintiff to the Company.  On August 31,2000, the Company reached a settlement agreement, effective June 30, 2000, withthe former owner of Perry Printing concerning the indemnity claims.  Pursuant to this agreement, the Company paidthe former owner of Perry Printing the redemption value of Series B and Dredeemable preferred stock, including unpaid dividends of $2,545,000 throughJune 30, 2000, and dividends of $1,452,000 relating to Series A redeemablepreferred stock which was partially reinstated in the amount of 43,940.68shares.  These Series A shares wererecorded in the consolidated financial statements at their estimated fair valueas of the April 28, 1995 acquisition date of $2,197,000, plus an adjustment foraccretion through June 30, 2000 of $946,000.

 

Other claims,suits, and complaints may arise in the ordinary course of the Company’sbusiness.  The Company believes that anysuch pending matters are adequately reserved for, are covered by insurance, orwould not have a material adverse effect on the consolidated financial statementsof the Company, taken as a whole, 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, 2002, there were 15holders 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.

 

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

 

The following table sets forth selected consolidatedfinancial 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, 2002, 2001 and 2000 and the balance sheet dataas of December 31, 2002 and 2001 are derived from the Consolidated FinancialStatements of the Company included elsewhere in this Annual Report on Form10-K.  Information related to 1999 and1998 is derived from financial statements not included herein.

 
|                                                |   | **Perry  Judd’s Holdings, Inc.**     |    |
|-----------------------------------------------------|--------|-------------------------------------------|---------|
|                                                |   | **Year Ended  December 31,  2002****(6)** |    | **Year Ended  December 31,  2001** |   | **Year Ended  December 31,  2000(5)** |   | **Year Ended  December 31,  1999****(4)** |   | **Year Ended  December 31,  1998****(3)** |   |
|                                                |   | **(dollars  in thousands)**               |    |
| Statement of Operations Data:                       |   |                                      |    |   |   |   |   |   |   |   |   |
| Net Sales                                           |   | $                                         | 290,928 |   | $ | 321,111 |   | $ | 342,869 |   | $ | 315,998 |   | $ | 309,367 |   |
| Operating Expenses                                  |   | 269,031                                   |    | 300,612 |   | 321,408 |   | 305,679 |   | 295,981 |   |
| Income from Operations                              |   | 21,897                                    |    | 20,499 |   | 21,461 |   | 10,319 |   | 13,386 |   |
| Net Income (Loss)                                   |   | 5,620                                     |    | 2,792 |   | 60 |   | (4,464 | ) | (2,539 | ) |
| Balance Sheet Data (end of  period):                |   |                                      |    |   |   |   |   |   |   |   |   |
| Working Capital                                     |   | $                                         | 20,251  |   | $ | 36,386 |   | $ | 33,737 |   | $ | 31,085 |   | $ | 73,579 |   |
| Total Assets                                        |   | 189,705                                   |    | 212,526 |   | 228,269 |   | 234,251 |   | 231,320 |   |
| Long Term Debt                                      |   | 86,010                                    |    | 115,000 |   | 122,800 |   | 128,818 |   | 139,101 |   |
| Minority Interests(1)                               |   | 3,738                                     |    | 3,488 |   | 3,254 |   | 9,340 |   | 8,267 |   |
| Stockholders’ Equity                           |   | 28,825                                    |    | 23,002 |   | 20,079 |   | 19,371 |   | 23,835 |   |
| Other Financial Data:                               |   |                                      |    |   |   |   |   |   |   |   |   |
| EBITDA(2)                                           |   | $                                         | 39,053  |   | $ | 35,396 |   | $ | 32,215 |   | $ | 23,920 |   | $ | 26,020 |   |
| Statement of Cash Flows Data:                       |   |                                      |    |   |   |   |   |   |   |   |   |
| Net Cash Provided By (Used In) Operating Activities |   | $                                         | 39,924  |   | $ | 15,327 |   | $ | 20,869 |   | $ | 8,355 |   | $ | (5,336 | ) |
| Net Cash Provided By (Used In) Investing Activities |   | (14,881                                   | )       | (10,110 | ) | (6,453 | ) | (38,583 | ) | 46,384 |   |
| Net Cash Provided By (Used In) Financing Activities |   | (28,196                                   | )       | (6,018 | ) | (13,424 | ) | (8,284 | ) | (2,383 | ) |
|                                                |   |                                      |    |   |   |   |   |   |   |   |   |

 

10

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(1)          Includes unpaiddividends on preferred stock in the two years ended December 31, 1999.

 

(2)          “EBITDA” representsearnings before interest, income taxes, depreciation, amortization, noncashcompensation related to common stock options, dividends and accretion onredeemable preferred stock, and gains and losses on dispositions of assets andrepurchases of senior subordinated notes. While EBITDA should not be construed as a substitute for operatingincome or loss or a better indicator of liquidity than cash flow from operatingactivities, which are determined in accordance with accounting principlesgenerally accepted in the United States, it is included herein to provideadditional information with respect to the ability of the Company to meet itsfuture debt service, capital expenditure and working capital requirements.  EBITDA is not necessarily a measure of theCompany’s ability to fund its cash needs, and items excluded from EBITDA (suchas depreciation and amortization) are significant to an understanding of theCompany’s financial results.  Inaddition, EBITDA as presented by the Company may not be directly comparable tosimilarly-titled measures presented by other companies.  See the Company’s Consolidated Statements ofCash Flows and the related notes thereto included in this Form 10-K.

 

(3)          On September 2, 1998,the Company sold all the outstanding shares of capital stock of its subsidiaryPort City for $29.4 million.

 

(4)          On February 1, 1999, theCompany acquired all of the issued and outstanding capital stock of Heartlandfor $17.5 million.

 

(5)          On October 19, 2000, theCompany sold substantially all of the net assets of its subsidiary Judd’sOnline for $6.3 million.

 

(6)          Effective January 1,2002, the Company changed its method of accounting for goodwill. See Note 2 ofNotes to Consolidated Financial Statements included elsewhere herein.

 

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

 

The following discussion of our financial condition and results ofoperations should be read in conjunction with our financial statements and therelated notes to such financial statements included elsewhere in this Reportbeginning on page F-1.  The followingdiscussion contains forward-looking statements that involve risks anduncertainties.  The statements are basedon current expectations, and actual results could differ materially from thosediscussed herein.  Factors that couldcause or contribute to the differences are discussed in “Business – RiskFactors” and elsewhere in this Annual Report.

 

11

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**Results of 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 theyear ended December 31, 2002 from $321.1 million for the year ended December31, 2001. The decrease resulted primarily from a reduction in the amount ofpaper the Company furnished to its customers, a 16.6% reduction in paper pricesand a lower volume of production units from new and existing customers.

 

Costs of production and distribution decreased $34.0 million or 13.4%to $219.1 million for the year ended December 31, 2002 from $253.1 million forthe year ended December 31, 2001, principally due to a reduction in papercosts, improved operating efficiencies and lower operating expenses resultingfrom reduced production levels. Costs of production and distribution as apercentage of net sales were 75.3% for the year ended December 31, 2002, ascompared to 78.8% for the year ended December 31, 2001. Paper costs were 19.3%of net sales for the year ended December 31, 2002, as compared to 23.6% for theyear ended December 31, 2001.

 

Selling, general and administrative expenses increased $0.2 million or0.6% to $32.5 million for the year ended December 31, 2002 as compared to $32.3million for the year ended December 31, 2001. Selling, general andadministrative expenses increased as a percent of net sales to 11.2% in the2002 period, as compared to 10.1% in the 2001 period, primarily as a result ofreduced level of sales created by lower paper sales value.

 

Depreciation expense increased $2.5 million or 17.1% to $17.1 millionfor the year ended December 31, 2002 from $14.6 million for the year endedDecember 31, 2001, due primarily from the full year effect of purchased assetsplaced in service from 2001 and 2002 additions.

 

Income from operations increased $1.4 million or 6.8% to $21.9 millionfor the year ended December 31, 2002 from $20.5 million for the year endedDecember 31, 2001, due to the factors discussed in the preceding paragraphs ofthis section.

 

EBITDA (as defined in Item 6. “Selected Financial Data” above)increased $3.7 million or 10.5% to $39.1 million for the year ended December31, 2002 from $35.4 million for the year ended December 31, 2001, principallydue to the factors discussed in the second paragraph of this section. EBITDAincreased as a percent of net sales to 13.4% in the 2002 period, as compared to11.0% in the 2001 period.

 

Interest expense decreased $1.0 million or 7.8% to $11.8 million forthe year ended December 31, 2002 from $12.8 million for the year ended December31, 2001, as a result of reduced debt levels and lower borrowing rates.

 

During 2002, the Company incurred a loss of $0.6 million resulting fromthe accelerated write-off of deferred financing costs in connection withrepurchasing approximately $29.0 million of its senior subordinated notes.

 

12

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**Resultof Operations**

 

**Comparison of the year ended December 31, 2001 with the yearended December 31, 2000**

 

Net sales decreased $21.8 million or 6.4% to $321.1 million for theyear ended December 31, 2001 from $342.9 million for the year ended December31, 2000.  The decrease resultedprimarily from a lower volume of production units from new and existingcustomers and from the sale of Judd’s Online on October 19, 2000, whose netsales of $4.4 million are included in the 2000 results.

 

Costs of production and distribution decreased $22.8 million or 8.3% to$253.1 million for the year ended December 31, 2001 from $275.9 million for theyear ended December 31, 2000, principally due to lower operating expensesresulting from reduced production levels, the sale of Judd’s Online, and thetermination of a defined benefit pension plan. Costs of production and distribution as a percentage of net sales were78.8% for the year ended December 31, 2001, as compared to 80.5% for the yearended December 31, 2000.  Paper costswere 23.6% of net sales for the year ended December 31, 2001, as compared to23.5% for the year ended December 31, 2000.

 

Selling, general and administrative expenses decreased $2.6 million or7.4% to $32.3 million for the year ended December 31, 2001, as compared to$34.9 million for the year ended December 31, 2000, principally related to thesale of Judd’s Online.  Selling, generaland administrative expenses decreased as a percent of net sales to 10.1% in the2001 period, as compared to 10.2% in the 2000 period.

 

Depreciation expense increased $1.1 million or 8.1% to $14.6 millionfor the year ended December 31, 2001 from $13.5 million for the year endedDecember 31, 2000, primarily from the full year effect of purchased assetsplaced in service from 2000.

 

Gains or losses on disposals of business and equipment decreased $3.8million for the year ended December 31, 2001, as compared to the year endedDecember 31, 2000 related principally to the gain recognized on the sale ofsubstantially all of the net assets of Judd’s Online on October 19, 2000.

 

Income from operations decreased $1.0 million or 4.7% to $20.5 millionfor the year ended December 31, 2001 from $21.5 million for the year endedDecember 31, 2000, due to the factors discussed in the preceding paragraphs ofthis section.

 

EBITDA (as defined in Item 6. “Selected Financial Data” above) increased $3.2 million or 9.9% to $35.4million for the year ended December 31, 2001 from $32.2 million for the yearended December 31, 2000, principally due to the factors discussed in the firsttwo paragraphs of this section.  EBITDAincreased as a percent of net sales to 11.0% in the 2001 period, as compared to9.4% in the 2000 period.

 

Interest expense decreased $1.0 million to $12.8 million for the yearended December 31, 2001 from $13.8 million for the year ended December 31,2000, as a result of reduced debt levels and lower borrowing rates.

 

13

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**Liquidityand Capital Resources**

 

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 compensationrelated to common stock options, dividends and accretion on redeemablepreferred stock, and gains and losses on dispositions of assets and repurchasesof senior subordinated notes was $39.1 million, $35.4 million and $32.2 millionfor the years ended December 31, 2002, 2001 and 2000, respectively.

 

Working capital was $20.3 million, $36.4 million and $33.7 million atDecember 31, 2002, 2001 and 2000, respectively.  The decrease in working capital at December 31, 2002, as comparedto December 31, 2001 was primarily attributable to the repurchase ofapproximately $29.0 million senior subordinated notes during 2002 offset by theincrease in revolving debt of approximately $8.7 million.  The $2.7 million increase in working capitalat December 31, 2001, as compared to December 31, 2000 was primarilyattributable to a reduced level of accrued liabilities relating to capitalprojects in progress.

 

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

 
|                           |   | **Year Ended  December 31,  2002** |   | **Year Ended  December 31,  2001** |   | **Year Ended  December 31,  2000** |   |
|--------------------------------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                           |   |                               |   |                               |   |                               |   |
| Purchased                      |   | $                                  | 14.8   |                               | $      | 11.0                               |   | $ | 12.8 |   |
| Funded under  operating leases |   | 7.6                                |   | 15.5                               |   | 1.0                                |   |
| Total                          |   | $                                  | 22.4   |                               | $      | 26.5                               |   | $ | 13.8 |   |

 

These capital expenditures reflect the purchase andlease of additional prepress, press and bindery equipment.  The purchased capital investments have beenfunded by internally generated funds and by borrowings under the CreditAgreement.  Generally, these capitalexpenditures have increased or will increase the Company’s production capacityand are part of the Company’s objective to maintain modern, efficient plantsand technologically advanced equipment. At December 31, 2002, the Company had commitments to purchase or leaseapproximately $2.7 million of operating assets.

 

During 1997 and1998, the Company entered into sale and leaseback transactions for the majorityof its real property located in Wisconsin and Virginia. Each of the sale andleaseback transactions has a 20-year term. The following table summarizes theinitial annual lease expense and future escalations resulting from the sale andleaseback transactions.

 
|      |   | **Initial  Annual Lease Expense** |        | **Escalations  Commencing at the Start of Year** |   |
|-----------|--------|-----------------------------------|-------------|--------------------------------------------------|--------|
|      |   |                              |        | **6**                                            |   | **11** |   | **16** |   |
| Wisconsin |   | $                                 | 1.9 million |                                             | 10.0   | % | 10.0 | % | 10.0 | % |
| Virginia  |   | $                                 | 1.3 million |                                             | 14.5   | % | 14.5 | % | 14.5 | % |

 

In August 2002, the Company entered into a new threeyear agreement (the “Credit Agreement”) which expires on August 18, 2005. TheCredit Agreement is comprised of a $25.0 million revolving credit facilitybased upon a borrowing base of eligible accounts receivable. Borrowings underthe Credit Agreement bear interest at rates that fluctuate with the prime rateand the Eurodollar rate. As of December 31, 2002, the Company had borrowings of$8.7 million under the Credit Agreement.

 

On October 19, 2000, the Company sold substantiallyall of the net assets of its subsidiary, Judd’s Online, to a subsidiary ofSusquehanna Media Corporation for approximately $6.3 million, net of closingcosts.  Net sales and loss fromoperations for this subsidiary which are included in the consolidated resultsof operations are as follows:

 
|                 |   | **January 1,  2000  through  October 18, 2000** |
|----------------------|--------|-------------------------------------------------|
| Net sales            |   | $                                               | 4.4 |  million |
| Loss from operations |   | $                                               | (0.4 | ) million |

 

14

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Rents and operating lease expense were $15.8 million,$17.2 million and $17.8 million for the years ended December 31, 2002, 2001 and2000, respectively.

 

At December 31, 2002, the Company had $1.0 million ofstate tax credits which expire in the years 2010 through 2017 and may beapplied against regular tax in the future.

 

The Company plans to fund the majority of its majornew capital expenditures through operating leases for the foreseeablefuture.  The Company believes that cashgenerated from operations and available borrowings under the Credit Agreementwill be sufficient to fund planned capital expenditures, working capitalrequirements, operating leases and interest and principal payments for theforeseeable future.  The Credit Facilityhas an aggregate commitment of $25.0 million, of which $16.3 million wasavailable for future working capital and other general corporate purposes as ofDecember 31, 2002.

 

*Disclosures about ContractualObligations and Commercial Commitments*

 

The following table sets forth our contractual obligations andcommercial commitments as of December 31, 2002. See Notes 4 and 7 of the Notesto Consolidated Financial Statements for further information.

 
| **In thousands**          |   | **Total** |    | **Less than  1 year** |   | **1 – 3  years** |   | **4  years** |   | **5 years and  thereafter** |   |
|---------------------------|--------|-----------|---------|-----------------------|--------|-----------------------|--------|--------------|--------|-----------------------------|--------|
| Senior subordinated notes |   | $         | 86,010  |                  | $      | —                |   | $            | — |                        | $      | — |   | $ | 86,010 |   |
| Revolving credit facility |   | 8,706     |    | 8,706                 |   | —                |   |         |   | —                      |   |
| Operating leases          |   | 118,927   |    | 16,821                |   | 30,832                |   | 11,761       |   | 59,513                      |   |
| Total                     |   | $         | 213,643 |                  | $      | 25,527                |   | $            | 30,832 |                        | $      | 11,761 |   | $ | 145,523 |   |

 

**Critical Accounting Policies**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations are based upon the Company’s consolidated financial statements,which were prepared in accordance with accounting principles generally acceptedin the United States. These principles require management to make estimates andassumptions that affect the reported amounts in the consolidated financialstatements and notes thereto. Actual results may differ from these estimates,and such differences may be material to the consolidated financial statements.Management believes that the following significant account policies involve ahigher degree of judgment or complexity.

 

Allowance for 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.

 

Impairment of 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.

 

Income taxes. Deferred income taxesare determined utilizing an asset and liability approach. This method givesconsideration to the future tax consequences associated with differencesbetween financial accounting and tax bases of assets and liabilities. Thismethod gives immediate effect to changes in income tax laws upon enactment.

 

Other estimates. Management isrequired to make judgments and or estimates in the determination of several ofthe accruals that are reflected in the consolidated financial statements.Management believes that the following accruals are subject to a higher degreeof judgment.

 

Management uses estimates in the determination of the required accrualsfor general liability, workers’ compensation and health insurance. Theseestimates are based upon a detailed examination of historical and industryclaims experience. The claim experience may change in the future and mayrequire management to revise these accruals.

 

The Company is periodically involved in various legal actions arisingin the normal course of business. Management is required to assess theprobability of any adverse judgments as well as the potential ranges of anylosses. Management determines the required accruals after a careful review ofthe facts of each legal action. The accruals may change in the future due tonew developments in these matters.

 

Management continually reassesses its assumptions and judgments andmakes adjustments when significant facts and circumstances dictate.Historically, actual results have not been materially different than theestimates that are described above.

 

For an understanding of the significant factors that influenced theCompany’s performance during the past three fiscal years, the foregoingdiscussion should be read in conjunction with the consolidated financialstatements appearing elsewhere in this Annual Report.

 

15

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**Recently Issued Accounting Standards**

 

During 2002, the Financial Standards Accounting Board issued Statementof Financial Accounting Standards (SFAS) No. 143, “Accounting for AssetRetirement Obligations,” SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” SFAS No. 145, “Rescission of FASB StatementsNo. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Correctionsas of April 2002,” and SFAS No. 146, “Accounting for Costs Associated with Exitor Disposal Activities.”  SFAS No. 143 will become effective for theCompany on January 1, 2003.  Adoption of this statement is not expected tohave a material impact on the Company’s consolidated financial statements. SFAS No. 144, which was adopted on January 1, 2002, has not had amaterial impact on the Company’s consolidated financial statements.  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 is effective for fiscal years beginningafter May 15, 2002, but was adopted early by the Company resulting in the losson repurchase of senior subordinated notes being classified as other expense inthe consolidated statement of operations.  SFAS No. 146 will be effectivefor exit or disposal activities initiated after December 31, 2002.  Adoptionof this statement is not expected to have a material impact on the Company’sconsolidated financial statements.

 

**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.

 

**Item7A.****                               Quantitativeand Qualitative 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 of December 31,2002, an increase of 1.0% in interest rates would increase interest expense anddecrease income before income taxes by approximately $87,000. See Note 4 of theNotes to Consolidated Financial Statements.

 

**Item8:****                                       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.

 

**Item9:****                                       Changesin and Disagreements with Accountants on Accounting and Financial Disclosure**

 

Deloitte & Touche LLP was previously the independent auditors forPerry Judd’s Holdings.  On August 27,2001, that firm’s appointment as independent auditors was terminated and Ernst& Young LLP was engaged as independent auditors. The decision to changeaccountants was recommended by management and approved by the Board ofDirectors.

 

During the fiscal year ended December 31, 2000, andthe subsequent interim period through August 27, 2001, there were nodisagreements with Deloitte & Touche LLP on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure, which disagreements if not resolved to their satisfaction would havecaused them to make reference in connection with their opinions to the subjectmatter of the disagreement.

 

The Independent Auditors’ Reports of Deloitte &Touche LLP on the consolidated financial statements of Perry Judd’s Holdingsand subsidiaries as of and for the year ended December 31, 2000 did not containany adverse opinion or disclaimer of opinion, nor was it qualified or modifiedas to uncertainty, audit scope, or accounting principles.

 

16

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**PART III**

 

**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 1,2003.  All of the persons listed beloware U.S. citizens.

 

**Directors and SeniorExecutive Officers**

 
| **Name**           |   | **Age** |   | **Position**                                                            |
|--------------------|--------|---------|--------|-------------------------------------------------------------------------|
|               |   |    |   |                                                                    |
| Robert E. Milhous  |   | 66      |   | Chairman of the Board  of Directors                                     |
| Paul B. Milhous    |   | 64      |   | Vice-Chairman of the  Board of Directors                                |
| Craig A. Hutchison |   | 50      |   | Director, President and  Chief Executive Officer                        |
| David E. Glick     |   | 56      |   | Director and Executive  Vice President, Operations                      |
| Verne F. Schmidt   |   | 62      |   | Director, Secretary,  Senior Vice President and Chief Financial Officer |
| Beth A. Lindsay    |   | 48      |   | Senior Vice President,  Human Resources                                 |

 

**Executive Officers andKey Management Employees**

 
| **Name**              |   | **Age** |   | **Position**                                        |
|-----------------------|--------|---------|--------|-----------------------------------------------------|
|                  |   |    |   |                                                |
| Timothy M. Smith      |   | 45      |   | Vice President,  Publication Sales                  |
| Stephen M. Sanfelippo |   | 45      |   | Vice President,  Commercial and Catalog Sales       |
| Bradley J. Hoffman    |   | 41      |   | Vice President,  Corporate Controller               |
| Walter A. Edwards     |   | 52      |   | Vice President,  Division Manager - Baraboo Plant   |
| Larry C. Cole         |   | 59      |   | Vice President,  Division Manager - Waterloo Plant  |
| Daniel L. Leever      |   | 54      |   | Vice President,  Division Manager - Heartland Plant |

 

*Robert E. Milhous* has been Chairman of theBoard of Directors of Perry Judd’s Holdings and Perry Judd’s since December1994.  Mr. Milhous was Chairman of theBoard of Directors of Treasure Chest Advertising (“Treasure Chest”) and itspredecessor corporation from 1967 until the sale of Treasure Chest in1993.  Mr. Milhous is also the Chairmanof the Board of Directors of Novamil Corporation (“Novamil”), which managesvarious companies owned by affiliates controlled by himself and Paul B. Milhous.  Robert E. Milhous is the brother of Paul B.Milhous.

 

*Paul B. Milhous* has been Vice Chairman ofthe Board of Directors of Perry Judd’s Holdings and Perry Judd’s since December1994.  Mr. Milhous was Vice Chairman ofthe Board of Directors of Treasure Chest and its predecessor corporation from1967 until the sale of Treasure Chest in 1993. Mr. Milhous is also the Vice-Chairman of the Board of Directors ofNovamil, which manages various companies owned by affiliates controlled byhimself and Robert E. Milhous.  Paul B.Milhous is the brother of Robert E. Milhous.

 

*Craig A. Hutchison* has been the Presidentand CEO of Perry Judd’s since April 1995. Prior to that, Mr. Hutchison was President and CEO of Perry PrintingCorporation (“Perry Printing”), the predecessor of Perry Judd’s, since1990.  Mr. Hutchison has been a memberof the Board of Directors of Perry Judd’s Holdings and Perry Judd’s since April1995.

 

*David E. Glick* joined Perry Judd’s asExecutive Vice President of Operations in February 1998 and has been a memberof the Board 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, a subsidiaryof Big Flower Press Holdings, Inc., including Senior Vice President ofOperations, Senior Vice President and General Manager of Operations and Sales,and Senior Vice President of Operations and Technology.

 

17

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*Verne F. Schmidt* has been Senior Vice Presidentand Chief Financial Officer since he joined Perry Judd’s in January 1997 andwas elected to the Board of Directors of Perry Judd’s Holdings and Perry Judd’sin February 1998.  In July 2001, Mr.Schmidt was appointed as Secretary of the Company. From 1974 through 1996, Mr.Schmidt held various financial and accounting positions including Senior VicePresident and Chief Financial Officer of Ringier America and its predecessorcompanies.

 

*Beth A. Lindsay* has been Senior VicePresident of Human Resources since joining Perry Judd’s in March 1996.  From 1982 to 1996, Ms. Lindsay was employedwith World Color Press in various positions, including Human ResourcesDirector, Vice President Human Resources, Commercial Division, and RegionalVice President, Human Resources.

 

*Timothy M. Smith* has been Vice Presidentof 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 been VicePresident, 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 Central Region Sales from 1994to October 1997.

 

*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. Hoffmanserved as Controller Web Division/Waterloo Plant.  From September 1989 to December 1992, Mr. Hoffman was ChiefFinancial Officer and Director of Operations at Putman Publishing Company.

 

*Walter A. Edwards* has been Vice President,Division Manager of the Baraboo Plant since joining Perry Judd’s in January1996.  From 1991 to 1995, Mr. Edwardswas employed by World Color Press as Vice President and Regional Manager.  From 1974 to 1991, Mr. Edwards held avariety of positions at R.R. Donnelley & Sons/Meredith-Burda, includingVice President, Manufacturing and Group Manufacturing Manager.

 

*Larry C. Cole* has been Vice President,Division Manager of the Waterloo Plant since March 1991.  From January 1990 to March 1991, Mr. Coleserved as Vice President of Operations of Perry Printing.  Mr. Cole joined Perry Printing in 1988 asDirector of Material Management.

 

*Daniel L. Leever* has been Vice President,Division Manager of the Heartland Plant since February 1999.  From January 1998 until February 1999 he wasManufacturing Manager of the Strasburg Division.  Prior to that he was Plant Manager at Wilcox Press from 1996 to1998.

 

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

 

**Director Compensation**

 

Non-employee directors are reimbursed for their out-of-pocket expensesincurred in attending meetings of the Board of Directors of the Company.  In addition, Robert E. Milhous and Paul B.Milhous currently receive $33,275 each in annual compensation for theirservices as Chairman and Vice Chairman, respectively, of the Board of Directorsof the Company.

 

**ExecutiveCompensation**

 

The following Summary Compensation Table sets forth certain informationwith respect to the compensation paid or accrued by the Company for servicesrendered during the years ended December 31, 2002, 2001 and 2000 by theCompany’s Chief Executive Officer and each of the four other most highlycompensated executive officers whose annual salary and bonus exceeded $100,000(collectively, the “Named Executive Officers”):

 

**SummaryCompensation Table**

 
|                            |   | **Annual  Compensation****(1)** |   | **Long-****Term  Compensation****(2)** |    |      |   |
|---------------------------------|--------|---------------------------------|--------|----------------------------------------|---------|-----------|--------|
| **Name and Principal Position** |   | **Year**                        |   | **Salary**                             |    | **Bonus** |   | **Other  Annual  Compensation** |   | **Securities  Underlying Options  (# of Shares)** |   | **All OtherCompensation****(1)** |   |
| Craig A. Hutchison,             |   | 2002                            |   | $                                      | 327,604 |      | $      | 214,908 |   | — |   | — |   | — |   |
| *President  and CEO*            |   | 2001                            |   | $                                      | 325,805 |      | $      | 156,386 |   | — |   | — |   | — |   |
|                            |   | 2000                            |   | $                                      | 316,486 |      | $      | 126,594 |   | — |   | — |   | — |   |
|                            |   |                            |   |                                   |    |      |   |   |   |   |   |   |   |
| David E. Glick,                 |   | 2002                            |   | $                                      | 296,399 |      | $      | 170,133 |   | — |   | — |   | — |   |
| *Executive  Vice President,*    |   | 2001                            |   | $                                      | 294,946 |      | $      | 123,877 |   | — |   | — |   | — |   |
| *Operations*                    |   | 2000                            |   | $                                      | 285,214 |      | $      | 99,825 |   | — |   | — |   | — |   |
|                            |   |                            |   |                                   |    |      |   |   |   |   |   |   |   |
| Verne F. Schmidt,               |   | 2002                            |   | $                                      | 255,652 |      | $      | 146,744 |   | — |   | — |   | — |   |
| *Senior  Vice President and*    |   | 2001                            |   | $                                      | 254,818 |      | $      | 107,024 |   | — |   | — |   | — |   |
| *Chief  Financial Officer*      |   | 2000                            |   | $                                      | 246,462 |      | $      | 86,262 |   | — |   | — |   | $ | 1,008 | (3) |
|                            |   |                            |   |                                   |    |      |   |   |   |   |   |   |   |
| Beth A. Lindsay                 |   | 2002                            |   | $                                      | 190,603 |      | $      | 109,406 |   | — |   | — |   | — |   |
| *Senior  Vice President,*       |   | 2001                            |   | $                                      | 189,458 |      | $      | 79,572 |   | — |   | — |   | — |   |
| *Human  Resources*              |   | 2000                            |   | $                                      | 182,846 |      | $      | 63,996 |   | — |   | — |   | — |   |
|                            |   |                            |   |                                   |    |      |   |   |   |   |   |   |   |
| Larry C. Cole                   |   | 2002                            |   | $                                      | 197,303 |      | $      | 108,438 |   | — |   | — |   | — |   |
| *Vice  President and Division*  |   | 2001                            |   | $                                      | 195,353 |      | $      | 30,849 |   | — |   | — |   | — |   |
| *Manager,  Waterloo Plant*      |   | 2000                            |   | $                                      | 189,949 |      | $      | 11,337 |   | — |   | — |   | — |   |
|                                 |        |                                 |        |                                        |         |           |        |  |  |  |  |  |  |  |  |  |

 

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(1)          The compensationdescribed in this table does not include medical, group life insurance or otherbenefits received by the Named Executive Officers which are available generallyto all salaried employees of the Company and certain perquisites and otherpersonal benefits, securities or property received by the Named ExecutiveOfficers which do not exceed the lesser of $50,000 or 10% of any such officer’ssalary and bonus disclosed in this table.

 

(2)          The Company did notgrant any restricted stock awards or stock appreciation rights or make anylong-term incentive plan payouts to the Named Executive Officers during 2002.

 

(3)          Consists of relocationexpenses paid by the Company.

 

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**Option Grants**

 

No stock options were granted to the Named Executive Officers during2002.

 

**Year-EndOption Table**

 

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

 

**EmploymentAgreement**

 

On April 28, 1995, Craig Hutchison entered into a three-year employmentagreement with Perry Judd’s (the “Employment Agreement”) to serve as Presidentand Chief Executive Officer of Perry Judd’s. The employment agreement was extended for three one-year periodscommencing April 1998 and unless terminated by written notice of either party,the Employment Agreement renews automatically for up to two additional one-yearperiods.  The Employment Agreementprovides for a base salary subject to adjustment upward at the discretion ofthe Board of Directors.  Mr. Hutchison’scurrent annual base salary is $327,604. Under the Employment Agreement, Mr. Hutchison is entitled to participatein the Incentive Compensation Plan (as defined below), the Stock Option Plan(as defined below) and in all other life, welfare and health plans and benefitprograms made available by the Company to the senior executive officers of theCompany.  The Employment Agreementprovides for severance pay in case of termination by Mr. Hutchison for goodcause, the expiration of the fifth term extension, or for termination otherthan for cause, death or permanent disability. The severance pay shall equal the aggregate salary which would bepayable to Mr. Hutchison during the period commencing on the effective date oftermination and ending one year thereafter. However, if such effective date shall be subsequent to the expiration ofa fourth term extension it shall be assumed that Mr. Hutchison would have beenentitled to salary at the rate in effect on the effective date of terminationduring such one year period after such date notwithstanding the expiration ofthe fifth term extension.

 

**Changein Control Severance Program**

 

Under the severance arrangement with Mr. Hutchison, (i) if there is achange in control, (ii) if the aggregate value of stock and stock options heldby Mr. Hutchison (“equity value”) is less than $2,000,000, and (iii) if (a) Mr.Hutchison’s employment is terminated as a result of the change of control, (b)Mr. Hutchison is asked to accept lesser responsibility but instead elects toleave the Company, or (c) Mr. Hutchison is asked to relocate and instead leavesthe Company, Mr. Hutchison’s salary will be continued at a rate of $333,000 peryear for up to three years or until new employment is commenced, whicheveroccurs first.  Furthermore, upon deathor if there is a change in control, and the equity value realized by Mr.Hutchison is less than $1,000,000, the Company will be obligated to pay Mr.Hutchison the amount of such difference.

 

The Company entered into severance arrangements with two of itsexecutive officers, Verne F. Schmidt and David E. Glick in December 1996 andJanuary 1998, respectively, under which each officer is entitled to certainbenefits 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.

 

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, 2002, 42,905 shares of common stock held by managementwere subject to put and call arrangements similar to the shares purchased underthe Stock Option Plan (see below) at the employee’s termination, retirementafter 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 millionhave been accrued under the Management Incentive Program to be 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 41,307, all of which have been granted and exercised.  The Stock Option Plan is currentlyadministered by the Board of Directors of the Company, but can be delegated toan 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 commencing withDecember 31 of the calendar year of the option grant; 15% on December 31 of thenext two calendar years; and the remaining 20% on December 31 of the eighthcalendar year from the issuance date. Accelerated vesting of Options can occur during the first five calendaryears after issuance upon the Company’s attainment of performance milestones,determined annually by the Board of Directors. For each year in which performance milestones are attained, 10% of theshares under the Options shall vest on an accelerated basis, with the installmentsthat would vest latest under the Options being accelerated first.  Outstanding Options also accelerate upon theoccurrence of a change of control of the Company.  During 2002, 2001 and 2000, the Company achieved certainfinancial performance targets accelerating the vesting of 10% each year ofcertain shares under the Options.  Theexercise price of Options under the Stock Option Plan is set at $0.01 pershare, and each Option has an 18-year term. During 2000, all outstanding options were exercised.

 

In addition to the right to repurchase unvested option shares 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 any proposeddisposition 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.

 

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**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 of compensation.  Each company participating in the 401(k) Planmakes contributions to the 401(k) Plan equal to 3% of eligible earnings of allqualified participating employees, as determined under the 401(k) Plan.  Participating employees are 100% vested inall 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 Beth A. Lindsay. Mr. Hutchisonis an executive officer of Perry Judd’s and a member of the Board of Directorsof Perry Judd’s Holdings.

 

**Item12.****                                 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, 2003 (i) by each personknown by the Company to own beneficially more than 5% of the outstanding sharesof Common Stock, (ii) by each director and Named Executive Officer and (iii) byall 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, 2003** |   |
|---------------------------------------------------------------|--------|---------------------------------------------------|--------|
| **Name**                                                      |   | **Number**                                        |   | **Percent** |   |
|                                                          |   |                                              |   |   |   |
| Ropamil Limited Partnership(1)                                |   | 782,775                                           |   | 87.2 |   |
| 791 Park of Commerce Drive                                    |   |                                              |   |   |   |
| Boca Raton, Florida 33487                                     |   |                                              |   |   |   |
|                                                          |   |                                              |   |   |   |
| Craig A. Hutchison                                            |   | 27,193                                            |   | 3.0 |   |
|                                                          |   |                                              |   |   |   |
| David E. Glick                                                |   | 20,392                                            |   | 2.3 |   |
|                                                          |   |                                              |   |   |   |
| Verne F. Schmidt                                              |   | 5,718                                             |   |   | * |
|                                                          |   |                                              |   |   |   |
| Beth A. Lindsay                                               |   | 5,718                                             |   |   | * |
|                                                          |   |                                              |   |   |   |
| All directors and executive officers as a group (13  persons) |   | 863,588                                           |   | 96.2 |   |

 

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*                               *Less than 1%*

 

(1)                        Robert E.Milhous, a director, and the Chairman of the Board of Directors of the Companyand Paul B. Milhous, a director and the Vice-Chairman of the Board of Directorsof the Company and certain affiliated entities beneficially own all of thepartnership interests in this partnership.

 

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**Item 13.****                                 CertainRelationships and Related Party Transactions.**

 

Perry Judd’s and Novamil Corporation (“Novamil”), a Californiacorporation owned beneficially by Robert E. Milhous, Chairman of the Companyand Paul B. Milhous, Vice Chairman of the Company, were parties to a ManagementAgreement dated as of April 28, 1995 which was subsequently assigned by PerryJudd’s to Perry Judd’s Holdings and amended by Perry Judd’s and Novamil as ofDecember 16, 1997 (the “Amended Management Agreement”).  Pursuant to the Amended ManagementAgreement, Novamil provides Perry Judd’s Holdings certain management servicesby agents and employees of Novamil other than Robert E. Milhous and Paul B.Milhous in connection with business strategy, operations and finance.  Under the Amended Management Agreement, asamended, Perry Judd’s Holdings pays to Novamil an annual management fee of$750,000 payable in equal monthly installments and subject to annual adjustmentfor increases in costs of living. During 2002, approximately $820,000 was paid under this agreement. TheAmended Management Agreement has a term of five years from December 16, 1997,subject to one-year extensions thereafter, unless earlier terminated upon theliquidation or dissolution of Perry Judd’s Holdings, or ten days after a partyhas received written notice of a material breach where such breach remainsuncured after such ten-day period.

 

Pursuant to a consulting agreement dated April 28, 1995 (the“Consulting Agreement”), Robert E. Milhous and Paul B. Milhous provideconsulting services to Perry Judd’s as principals of New House CapitalManagement Corp., a Delaware corporation (“New House”), for which Perry Judd’spays an annual consulting fee of $450,000 (subject to annual increases not toexceed 10%), payable in equal monthly installments.  During 2002, approximately $660,000 was paid under thisagreement. The Consulting Agreement has an initial term of five years, subjectto one-year extensions thereafter, unless earlier terminated upon theliquidation or dissolution of the Company or ten days after a party hasreceived written notice of a material breach where such breach remains uncuredafter such ten-day period.  On December16, 1997, the Consulting Agreement was assigned by Perry Judd’s to Perry Judd’sHoldings. During 2001, the Company approved an additional bonus of $500,000payable to New House which was accrued as of December 31, 2001 and paid during2002.  During 2002, the Company approvedan additional bonus of $600,000 payable to New House which has been accrued asof December 31, 2002.

 

**Item 14.****                                 Controlsand Procedures**

 

*Evaluation of disclosure controlsand procedures*

 

Based on their evaluation as of a date within 90 daysof the filing date of the Annual Report on Form 10-K, the Company’s chiefexecutive officer and chief financial officer have concluded that the Company’sdisclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-1(c)under the Securities Exchange Act of 1934 (the “Exchange Act”) are effective toensure that information required to be disclosed by the Company in the reportsthat it files is effective within the time periods specified in Securities andExchange Commission rules and forms.

 

*Changes in internal controls*

 

There were no significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of their evaluation.

 

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**PART IV**

 

**Item15.****                                 Exhibits,Financial Statement Schedules, and Reports on Form 8-K.**

 

(a)               The followingdocuments are included in this report at the page numbers indicated.

 
| Financial Statements:                                                                                                                               |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|
| Report of Ernst & Young LLP,  Independent Auditors                                                                                              |
|                                                                                                                                                |
| Independent Auditors’  Report                                                                                                                  |
|                                                                                                                                                |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                                       |
|                                                                                                                                                |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and 2000                                                         |
|                                                                                                                                                |
| Consolidated  Statements of Minority Interests, Preferred Stock and Stockholders’ Equity  for the years ended December 31, 2002, 2001 and 2000 |
|                                                                                                                                                |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                                                         |
|                                                                                                                                                |
| Notes to  Consolidated Financial Statements                                                                                                         |
|                                                                                                                                                |
| Schedules:                                                                                                                                          |
|                                                                                                                                                |
| Schedule II - Valuation and Qualifying  Accounts                                                                                                    |

 

(b)              Reports on Form 8-K

 

The Company did not fileany reports on Form 8-K in the fourth quarter ended December 31, 2002.

 

(c)               Exhibits

 

Included at the end ofthis Annual Report on Form 10-K.

 

24

----

 

**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 +†       |   | Employment Agreement by and between the Company and  Craig A. Hutchison dated April 28, 1995.   Incorporated by reference to Exhibit 10.4 to the Registration  Statement.                                                                                                                                  |
| 10.4(a)†      |   | Employment Offer Letter from the Company to David E.  Glick dated January 16, 1998.   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.                                                                                              |
| 16.0               |   | Letter regarding change in certifying accountant.                                                                                                                                                                                                                                                               |
| 21.0*              |   | Subsidiary Listing                                                                                                                                                                                                                                                                                              |

 

----

*           Filed herewith

+           Confidentialtreatment has been requested and received as to portions of this agreement.†            Indicates a managementcontract or compensatory arrangement.

 

25

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, on the 25th day of March,2003.

 

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

 

**POWER OFATTORNEY**

 

[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 allintents and purposes as he might or could do in person, hereby ratifying andconfirming all that said attorney-in-fact and agent, or his substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.]

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed by the following persons on behalf of theRegistrant in the capacities and on the dates indicated.

 
| **SIGNATURE**          |   | **TITLE**                                    |   | **DATE**       |
|------------------------|--------|----------------------------------------------|--------|----------------|
|                   |   |                                         |   |           |
| /s/ Craig A. Hutchison |   | President, Chief Executive Officer, and      |   | March 25, 2003 |
| Craig A. Hutchison     |   | Director (Principal Executive Officer)       |   |           |
|                   |   |                                         |   |           |
| /s/ David E. Glick     |   | Executive Vice President,                    |   | March 25, 2003 |
| David E. Glick         |   | Operations, and Director                     |   |           |
|                   |   |                                         |   |           |
| /s/ Verne F. Schmidt   |   | Senior Vice President, Chief Financial       |   | March 25, 2003 |
| Verne F. Schmidt       |   | Officer, Secretary and Director              |   |           |
|                   |   | (Principal Financial and Accounting Officer) |   |           |
|                   |   |                                         |   |           |
| /s/ Robert E. Milhous  |   | Director                                     |   | March 25, 2003 |
| Robert E. Milhous      |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ Paul B. Milhous    |   | Director                                     |   | March 25, 2003 |
| Paul B. Milhous        |   |                                         |   |           |

 

26

----

 

**PERRY JUDD’S HOLDINGS, INC.**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES**

 

 
| Financial Statements:                                                                                                                               |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                |
| Report of Ernst & Young LLP,  Independent Auditors                                                                                              |
|                                                                                                                                                |
| Independent Auditors’  Report                                                                                                                  |
|                                                                                                                                                |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                                       |
|                                                                                                                                                |
| Consolidated  Statements of Operations for the years ended December 31, 2002, 2001 and 2000                                                         |
|                                                                                                                                                |
| Consolidated  Statements of Minority Interests, Preferred Stock and Stockholders’ Equity  for the years ended December 31, 2002, 2001 and 2000 |
|                                                                                                                                                |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000                                                         |
|                                                                                                                                                |
| Notes to  Consolidated Financial Statements                                                                                                         |
|                                                                                                                                                |
| Schedules:                                                                                                                                          |
|                                                                                                                                                |
| For the years ended December 31, 2002, 2001 and  2000:                                                                                              |
|                                                                                                                                                |
| 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, 2002 and 2001, and therelated consolidated statements of operations, minority interests, preferredstock and stockholders’ equity, and cash flows for the years then ended.  Our audits also included the financialstatement schedule for the years ended December 31, 2002 and 2001 listed in theindex at Item 15(a). These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements 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, 2002 and 2001, and the consolidated results of itsoperations and its cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States.  Also, in our opinion, the related financialstatement schedule for the years ended December 31, 2002 and 2001, whenconsidered in relation 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 21, 2003

 

F-2

----

 

**Independent Auditors’ Report**

 

To the Board of Directors and Stockholders of

Perry Judd’s Holdings, Inc.:

 

We have audited the accompanying consolidated statements of operations,minority interests, preferred stock and stockholders’ equity, and cash flows ofPerry Judd’s Holdings, Inc. and subsidiaries for the year ended December 31,2000.  Our audit also included theconsolidated financial statement schedule for the year ended December 31, 2000listed in the Index at Item 15.  Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on the 2000 financial statements andfinancial statement schedule based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, such 2000 consolidated financial statements presentfairly, in all material respects, the results of operations and cash flows ofPerry Judd’s Holdings, Inc. and subsidiaries for the year ended December 31,2000, in conformity with accounting principles generally accepted in the UnitedStates of America.  Also, in ouropinion, such consolidated financial statement schedule for the year endedDecember 31, 2000, when considered in relation to the basic 2000 consolidatedfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

 

DELOITTE & TOUCHE LLP

 

Milwaukee, Wisconsin

March 16, 2001

 

F-3

----

 

**PERRYJUDD’S HOLDINGS, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in thousands, except pershare)**

 

 

**ASSETS**

 

 
|                                            |   | **December  31,** |    |
|-------------------------------------------------|--------|-------------------|---------|
|                                            |   | **2002**          |    | **2001** |   |
|                                            |   |              |    |   |   |
| CURRENT ASSETS:                                 |   |              |    |   |   |
| Cash and cash  equivalents                      |   | $                 | 970     |   | $ | 4,123 |   |
| Accounts  receivable, net                       |   | 43,689            |    | 59,353 |   |
| Inventories                                     |   | 14,750            |    | 14,624 |   |
| Prepaid expenses                                |   | 1,401             |    | 1,801 |   |
| Deferred income  taxes                          |   | 1,904             |    | 1,079 |   |
| Total current  assets                           |   | 62,714            |    | 80,980 |   |
|                                            |   |              |    |   |   |
| PROPERTY, PLANT  AND EQUIPMENT:                 |   |              |    |   |   |
| Machinery and  equipment                        |   | 132,403           |    | 127,498 |   |
| Office  furniture, equipment and vehicles       |   | 11,409            |    | 10,197 |   |
| Buildings and  improvements                     |   | 3,191             |    | 3,166 |   |
| Leasehold  improvements                         |   | 4,743             |    | 4,504 |   |
| Land and land  improvements                     |   | 618               |    | 607 |   |
| Projects in  progress                           |   | 3,885             |    | 2,722 |   |
|                                            |   | 156,249           |    | 148,694 |   |
| Less accumulated  depreciation and amortization |   | 61,232            |    | 51,219 |   |
| Property, plant  and equipment, net             |   | 95,017            |    | 97,475 |   |
|                                            |   |              |    |   |   |
| INTANGIBLE  ASSETS:                             |   |              |    |   |   |
| Goodwill                                        |   | 29,431            |    | 29,431 |   |
| Deferred  financing costs, net                  |   | 1,878             |    | 3,673 |   |
| Other intangible  assets, net                   |   | 665               |    | 967 |   |
| Intangible  assets, net                         |   | 31,974            |    | 34,071 |   |
| TOTAL                                           |   | $                 | 189,705 |   | $ | 212,526 |   |

 

See notes to consolidatedfinancial statements.

 

F-4

----

 

**PERRY JUDD’S HOLDINGS, INC.**

 

**CONSOLIDATED BALANCE SHEETS**

**(Dollars in thousands, except per share)**

 

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

 
|                                                                                                                                                                          |   | **December  31,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                                          |   | **2002**          |    | **2001** |   |
| CURRENT  LIABILITIES:                                                                                                                                                         |   |              |    |   |   |
| Accounts payable                                                                                                                                                              |   | $                 | 15,018  |   | $ | 18,323 |   |
| Accrued expenses                                                                                                                                                              |   | 18,043            |    | 17,502 |   |
| Accrued interest  and dividends                                                                                                                                               |   | 464               |    | 663 |   |
| Income taxes  payable                                                                                                                                                         |   | 232               |    | 306 |   |
| Current portion  of long-term debt                                                                                                                                            |   | 8,706             |    | 7,800 |   |
| Total current  liabilities                                                                                                                                                    |   | 42,463            |    | 44,594 |   |
|                                                                                                                                                                          |   |              |    |   |   |
| LONG-TERM DEBT  (less current portion)                                                                                                                                        |   | 86,010            |    | 115,000 |   |
|                                                                                                                                                                          |   |              |    |   |   |
| DEFERRED INCOME  TAXES                                                                                                                                                        |   | 19,374            |    | 17,014 |   |
|                                                                                                                                                                          |   |              |    |   |   |
| OTHER NONCURRENT  OBLIGATIONS                                                                                                                                                 |   | 9,295             |    | 9,428 |   |
|                                                                                                                                                                          |   |              |    |   |   |
| MINORITY  INTERESTS, Series A redeemable preferred stock, 43,941 shares outstanding  with a stated redemption value of $100 per share, aggregate liquidation value  of $4,394 |   | 3,738             |    | 3,488 |   |
|                                                                                                                                                                          |   |              |    |   |   |
| COMMITMENTS AND CONTINGENCIES (Notes 7 and 11)                                                                                                                                |   | —            |    | — |   |
|                                                                                                                                                                          |   |              |    |   |   |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                    |   |              |    |   |   |
| Preferred stock  (Series A)-par value $0.001 per share, 775,000 shares authorized, 199,668 and  172,328 shares issued and outstanding, respectively                           |   | 19,967            |    | 17,233 |   |
| Common stock-par  value $0.001 per share, 1,000,000 shares authorized, 901,317 shares issued  and outstanding                                                                 |   | 1                 |    | 1 |   |
| Additional  paid-in capital                                                                                                                                                   |   | 22,482            |    | 22,279 |   |
| Accumulated  deficit                                                                                                                                                          |   | (13,625           | )       | (16,511 | ) |
| Total  stockholders’ equity                                                                                                                                              |   | 28,825            |    | 23,002 |   |
| TOTAL                                                                                                                                                                         |   | $                 | 189,705 |   | $ | 212,526 |   |

 

See notes to consolidatedfinancial statements.

 

F-5

----

 

**PERRY JUDD’S HOLDINGS, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollars in thousands)**

 
|                                                                 |   | **Year Ended  December 31,** |       |
|----------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                 |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                                                 |   |                         |       |   |   |   |   |
| NET SALES                                                            |   | $                            | 290,928    |   | $ | 321,111 |   | $ | 342,869 |   |
|                                                                 |   |                         | ** ** |   | ** ** |   | ** ** |
| OPERATING EXPENSES:                                                  |   |                         |       |   |   |   |   |
| Costs of  production and distribution                                |   | 219,117                      |       | 253,074 |   | 275,931 |   |
| Selling, general  and administrative                                 |   | 32,507                       |       | 32,338 |   | 34,945 |   |
| Depreciation                                                         |   | 17,132                       |       | 14,582 |   | 13,511 |   |
| Amortization of  intangibles                                         |   | 302                          |       | 1,251 |   | 1,441 |   |
| Gain on  disposals of business and equipment                         |   | (27                          | )          | (633 | ) | (4,420 | ) |
|                                                                 |   | 269,031                      |       | 300,612 |   | 321,408 |   |
|                                                                 |   |                         |       |   |   |   |   |
| INCOME FROM  OPERATIONS                                              |   | 21,897                       |       | 20,499 |   | 21,461 |   |
|                                                                 |   |                         |       |   |   |   |   |
| OTHER (INCOME)  EXPENSES:                                            |   |                         |       |   |   |   |   |
| Interest expense                                                     |   | 11,790                       |       | 12,784 |   | 13,831 |   |
| Interest income                                                      |   | (147                         | )          | (127 | ) | (621 | ) |
| Amortization of  deferred financing costs                            |   | 1,295                        |       | 1,200 |   | 1,200 |   |
| Loss on repurchases of senior subordinated notes                     |   | 592                          |       | — |   | — |   |
| Other expenses                                                       |   | 454                          |       | 434 |   | 426 |   |
|                                                                 |   | 13,984                       |       | 14,291 |   | 14,836 |   |
|                                                                 |   |                         |       |   |   |   |   |
| INCOME BEFORE INCOME  TAXES                                          |   | 7,913                        |       | 6,208 |   | 6,625 |   |
|                                                                 |   |                         |       |   |   |   |   |
| PROVISION FOR  INCOME TAXES                                          |   | 1,858                        |       | 2,909 |   | 3,320 |   |
|                                                                 |   |                         |       |   |   |   |   |
| INCOME BEFORE DIVIDENDS AND ACCRETION ON REDEEMABLE PREFERRED  STOCK |   | 6,055                        |       | 3,299 |   | 3,305 |   |
|                                                                 |   |                         |       |   |   |   |   |
| DIVIDENDS AND  ACCRETION ON REDEEMABLE PREFERRED STOCK               |   | 435                          |       | 507 |   | 3,245 |   |
|                                                                 |   |                         |       |   |   |   |   |
| NET INCOME                                                           |   | $                            | 5,620      |   | $ | 2,792 |   | $ | 60 |   |

 

See notes to consolidatedfinancial statements.

 

F-6

----

 

**PERRY JUDD’S HOLDINGS, INC.**

 

**CONSOLIDATED STATEMENTS OF MINORITY INTERESTS,**

**PREFERRED STOCK AND STOCKHOLDERS’ EQUITY**

**(Dollars in thousands)**

 
|                                                                |   | **Minority  Interests** |   | **Preferred  Stock** |   | **Common  Stock and  Additional Paid-****In  Capital** |    |                |   |
|---------------------------------------------------------------------|--------|-------------------------|--------|----------------------|--------|--------------------------------------------------------|---------|---------------------|--------|
|                                                                |   | **Shares**              |   | **Carrying  Value**  |   | **Shares**                                             |    | **Carrying  Value** |   | **Shares** |   | **Carrying  Value** |   | **Accumulated  Deficit** |   |
| December 31,  1999                                                  |   | 72,598                  |   | $                    | 7,260  |                                                   | 128,366 |                | $      | 12,837 |   | 860,010 |   | $ | 21,501 |   | $ | (14,967 | ) |
|                                                                |   |                    |   |                 |   |                                                   |    |                |   |   |   |   |   |   |   |
| Net income                                                          |   | —                  |   | —               |   | —                                                 |    | —              |   | — |   | — |   | 60 |   |
|                                                                |   |                    |   |                 |   |                                                   |    |                |   |   |   |   |   |   |   |
| Stock dividends                                                     |   | 813                     |   | 81                   |   | 20,365                                                 |    | 2,036               |   | — |   | — |   | (2,036 | ) |
|                                                                |   |                    |   |                 |   |                                                   |    |                |   |   |   |   |   |   |   |
| Redemption of  Series B and D redeemable preferred stock            |   | (73,411                 | )      | (7,341               | )      | —                                                 |    | —              |   | — |   | — |   | — |   |
|                                                                |   |                    |   |                 |   |                                                   |    |                |   |   |   |   |   |   |   |
| Reinstatement of  Series A redeemable preferred stock               |   | 43,941                  |   | 3,143                |   | —                                                 |    | —              |   | — |   | — |   | — |   |
|                                                                |   |                    |   |                 |   |                                                   |    |                |   |   |   |   |   |   |   |
| Accretion on  Series A redeemable preferred stock                   |   | —                  |   | 111                  |   | —                                                 |    | —              |   | — |   | — |   | — |   |
|                                                                |   |                    |   |                 |   |                                                   |    |                |   |   |   |   |   |   |   |
| Stock options  exercised at $0.01 per share                         |   | —                  |   | —               |   | —                                                 |    | —              |   | 41,307 |   | — |   | — |   |
|                                                                |   |                    |   |                 |   |                                                   |    |                |   |   |   |   |   |   |   |
| Provision for  noncash compensation related to common stock options |   | —                  |   | —               |   | —                                                 |    | —              |   | — |   | 648 |   | — |   |
|                                                                |   |                    |   |                 |   |                                                   |    |                |   |   |   |   |   |   |   |
| 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 | ) |

 

See notes to consolidatedfinancial statements.

 

F-7

----

 

**PERRY JUDD’S HOLDINGS, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in thousands)**

** **
|                                                                                    |   | **Year Ended  December 31,** |       |
|-----------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                    |   | **2002**                     |       | **2001** |   | **2000** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                  |   |                         | ** ** |   | ** ** |   | ** ** |
| Net income                                                                              |   | $                            | 5,620      |   | $ | 2,792 |   | $ | 60 |   |
|                                                                                    |   |                         | ** ** |   | ** ** |   | ** ** |
| Adjustments to  reconcile net income to net cash provided by operating activities:      |   |                         | ** ** |   | ** ** |   | ** ** |
| Depreciation and  amortization                                                          |   | 17,434                       |       | 15,833 |   | 14,952 |   |
| Amortization of  deferred financing costs                                               |   | 1,295                        |       | 1,200 |   | 1,200 |   |
| Reinstatement  and accretion on redeemable preferred stock                              |   | 250                          |       | 234 |   | 3,254 |   |
| Compensation  related to common stock options                                           |   | 203                          |       | 131 |   | 648 |   |
| Deferred income  taxes                                                                  |   | (222                         | )          | 1,176 |   | 1,531 |   |
| Gain on  disposals of business and equipment                                            |   | (27                          | )          | (633 | ) | (4,420 | ) |
| Loss on  repurchases of senior subordinated notes                                       |   | 592                          |       | — |   | — |   |
| Changes in  assets and liabilities excluding effect of businesses acquired or disposed: |   |                         |       |   |   |   |   |
| Receivables                                                                             |   | 15,664                       |       | 3,770 |   | 2,062 |   |
| Inventories                                                                             |   | (126                         | )          | 4,750 |   | (568 | ) |
| Prepaid expenses                                                                        |   | 400                          |       | (156 | ) | 158 |   |
| Accounts payable                                                                        |   | (3,305                       | )          | (4,432 | ) | (4,696 | ) |
| Accrued expenses                                                                        |   | 541                          |       | (9,439 | ) | 9,826 |   |
| Accrued interest  and dividends                                                         |   | (199                         | )          | 14 |   | (3,020 | ) |
| Income taxes,  net                                                                      |   | 1,683                        |       | 283 |   | (77 | ) |
| Other  liabilities                                                                      |   | 121                          |       | (196 | ) | (41 | ) |
| Net cash  provided by operating activities                                              |   | 39,924                       |       | 15,327 |   | 20,869 |   |
|                                                                                    |   |                         |       |   |   |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                  |   |                         |       |   |   |   |   |
| Proceeds from  sale of business                                                         |   | —                       |       | — |   | 6,268 |   |
| Expenditures for  property, plant and equipment                                         |   | (22,415                      | )          | (26,531 | ) | (13,788 | ) |
| Capital projects  converted to operating leases                                         |   | 7,584                        |       | 15,533 |   | 1,038 |   |
| Proceeds from  sale of property, plant and equipment, net of disposition costs          |   | (50                          | )          | 888 |   | 29 |   |
| Net cash used in  investing activities                                                  |   | (14,881                      | )          | (10,110 | ) | (6,453 | ) |
|                                                                                    |   |                         |       |   |   |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                  |   |                         |       |   |   |   |   |
| Redemption of  Series B and D redeemable preferred stock                                |   | —                       |       | — |   | (7,341 | ) |
| Repayment of  term debt                                                                 |   | (7,800                       | )          | (6,018 | ) | (6,083 | ) |
| Repurchases of  senior subordinated notes                                               |   | (28,990                      | )          | — |   | — |   |
| Increase in  revolving debt                                                             |   | 8,706                        |       | — |   | — |   |
| Financing costs  incurred                                                               |   | (112                         | )          | — |   | — |   |
| Net cash used in  financing activities                                                  |   | (28,196                      | )          | (6,018 | ) | (13,424 | ) |
|                                                                                    |   |                         |       |   |   |   |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                   |   | (3,153                       | )          | (801 | ) | 992 |   |
| BALANCE AT  BEGINNING OF YEAR                                                           |   | 4,123                        |       | 4,924 |   | 3,932 |   |
| BALANCE AT END  OF YEAR                                                                 |   | $                            | 970        |   | $ | 4,123 |   | $ | 4,924 |   |

 

F-8

----

 

**SUPPLEMENTAL CASH FLOW INFORMATION:**

 

 

Cash paid during the year (in thousands):

 
|         |   | **Year Ended  December 31,** |   |
|--------------|--------|------------------------------|--------|
|         |   | **2002**                     |   | **2001** |   | **2000** |   |
|         |   |                         |   |   |   |   |   |
| Interest     |   | $                            | 11,989 |   | $ | 12,769 |   | $ | 13,869 |   |
|         |   |                         |   |   |   |   |   |
| Income taxes |   | $                            | 463    |   | $ | 1,450 |   | $ | 1,830 |   |

 

**NON-CASHTRANSACTIONS:**

 

Stock dividends issued to minority interestsapproximated $81,000 based on their estimated value at the time of issuance forthe year ended December 31, 2000 and were paid effective June 30, 2000.

 

On December 16, 1997, the Company issued 95,000 sharesof Series A preferred stock to the majority stockholders in exchange for a notepayable plus accrued and unpaid interest. Stock dividends issued on this stock approximated $2,734,000, $2,360,000and $2,036,000 for the years ended December 31, 2002, 2001 and 2000,respectively.  See Note 6.

 

See notes to consolidatedfinancial statements.

 

F-9

----

 

**PERRY JUDD’S HOLDINGS, INC.**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****         GENERALINFORMATION**

 

*Natureof Business -*The Company is a full service heatset weboffset printer of magazines, catalogs, and other commercial products.  The Company serves a national domesticmarket in the printing of weekly and monthly consumer, special interest andtrade magazines, business-to-business and consumer catalogs, and a variety ofother direct advertising products.  TheCompany operates principally in one business segment, printing services.

 

*Principlesof Consolidation* - The consolidated financial statementsinclude the accounts of Perry Judd’s Holdings, Inc., its wholly-ownedsubsidiary, Perry Judd’s Incorporated, (Perry Judd’s) and Judd’s Online, Inc.(Judd’s Online), a wholly-owned subsidiary of Perry Judd’s (collectively hereafterreferred to as the “Company”).  Allsignificant intercompany balances and transactions have been eliminated.

 

Effective April 28, 1995, the Company acquired certainnet assets of Perry Printing Corporation (“Perry Printing”).  Prior to April 28, 1995, the Company had nooperating activities.  On December 16,1997 the Company acquired all of the outstanding capital stock of Judd’sIncorporated (Judd’s).  Judd’s wassubsequently merged into Perry Judd’s.

 

*Asset Dispositions*

 

On October 19, 2000, the Company sold substantiallyall of the net assets of its subsidiary, Judd’s Online, to a subsidiary ofSusquehanna Media Corporation for $6.3 million, net of closing costs.  The after-tax gain resulting from this saleapproximated $2.6 million (approximately $4.2 million on a pre-tax basis).  Net sales of Judd’s Online were $4.4 millionfor the period from January 1, 2000 through October 18, 2000.  The business incurred a loss from operationsof $0.4 million for the period from January 1, 2000 through October 18,2000.  Concurrent with the sale ofJudd’s Online, a one-time fee of $300,000 was paid to a company ownedbeneficially by the majority stockholders of the Company for services relatedto the disposition.

 

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

 

*Cashand Cash Equivalents -*The Company considers all highlyliquid debt instruments purchased with a maturity of three months or less to becash equivalents.

 

*CreditRisk Considerations* - The Company has one customer whichconsists of six publication titles comprising approximately 15%, 14% and 15% oftotal net sales volume for the years ended December 31, 2002, 2001 and 2000,respectively.  The various titles forthis customer are under contracts expiring between July 31, 2003 and December31, 2003.

 

The Company has recorded an allowance for doubtfulaccounts to estimate the difference between recorded receivables and ultimatecollections.  The allowance andprovision for bad debts are adjusted periodically based upon the Company’sevaluation of historical collection experience, industry trends and otherrelevant factors.  The allowance fordoubtful accounts was $1,200,000 and $1,236,000 at December 31, 2002 and 2001,respectively.

 

F-10

----

 

*InventoryValuation* - Inventories are stated at the lower of cost(first-in, first-out method) or market and are summarized as follows (inthousands):

 
|                          |   | **December 31,** |   |
|-------------------------------|--------|------------------|--------|
|                          |   | **2002**         |   | **2001** |   |
|                          |   |             |   |   |   |
| Raw materials                 |   | $                | 6,036  |   | $ | 6,803 |   |
| Work in process               |   | 4,940            |   | 4,161 |   |
| Production supplies           |   | 863              |   | 881 |   |
| Repair and  maintenance parts |   | 2,911            |   | 2,779 |   |
|                          |   | $                | 14,750 |   | $ | 14,624 |   |

 

*Property,Plant and Equipment* - Property, plant and equipment arestated at cost.  Assets are depreciatedon the straight-line basis over estimated useful lives which range from threeto forty years.

 

** **
|                                      |   | **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 |   |

 

Capitalized interest on borrowed funds during construction was$235,000, $310,000 and $0 for the years ended December 31, 2002, 2001 and 2000,respectively.

 

F-11

----

 

*Long-livedAssets -*In August 2001, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” The Companyadopted the provisions of SFAS No. 144 as of January 1, 2001, establishingprocedures for review of recoverability, and measurement of impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. SFAS No. 144 also requires that long-lived assetsto be disposed of other than by sale (for example, abandonments, exchanges forsimilar productive assets or in a distribution to owners in a spinoff) shallcontinue to be classified as held and used until disposal. Further, SFAS No.144 specifies the criteria for classifying long-lived assets as “held for sale”and requires that long-lived assets to be disposed of by sale be reported atthe lower of carrying amount or fair value less estimated selling costs. As ofDecember 31, 2002, management believes that there has not been any impairmentof the Company’s long-lived assets.

 

*Goodwilland Other Intangible Assets* – Through December 31, 2001,goodwill was amortized on a straight-line basis over 35 years. The Companyadopted SFAS No. 142, “Goodwill and Other Intangible Assets”, effective January1, 2002. Under SFAS No. 142, goodwill and certain other intangible assets areno longer amortized but are reviewed for impairment. In connection with theadoption of SFAS No. 142, the Company has completed the transitional goodwillimpairment test, which requires the Company to compare its fair value to thecarrying value of its net assets as of January 1, 2002. Based on this analysis,the Company has concluded that no impairment existed at the time of adoption,and, accordingly, the Company has not recognized any transitional impairmentloss. Additionally, the Company concluded that no impairment existed at thetime of the annual impairment test which was performed in the fourth quarter.

 

As required by SFAS No. 142, the results of operationsfor periods prior to its adoption have not been restated. The following tablesummarizes the pro forma income before income taxes and net income for theyears ended December 31, 2001 and 2000 had SFAS No. 142 been adopted at January1, 2000 (in thousands):

 

|                        |   | **Year Ended  December 312001** |   | **Year Ended  December 312000** |   |
|-----------------------------|--------|---------------------------------|--------|---------------------------------|--------|
| Income before  income taxes |   | $                               | 7,157  |                            | $      | 7,566 |   |
| Net income                  |   | $                               | 3,741  |                            | $      | 1,001 |   |

 

Deferred financing costs are being amortized over thelives of the applicable debt agreements. Accumulated amortization on thesecosts was $7,023,000 and $6,290,000 at December 31, 2002 and 2001,respectively.  Other intangible assetsidentified in connection with certain acquisitions are being amortized over theestimated useful lives of the assets which range from five to fifteenyears.  Accumulated amortization onthese costs was $3,523,000 and $3,221,000 at December 31, 2002 and 2001,respectively. Other intangible asset amortization expense is estimated to be$502,000 in 2003; $502,000 in 2004; $502,000 in 2005; $499,000 in 2006; and$468,000 in 2007.

 

*RevenueRecognition* - Revenue is recognized when complete orders areshipped.

 

*Shipping and Handling -*Amounts billed toa customer in a sale transaction related to shipping and handling are reportedas net sales, and the related costs incurred for shipping and handling arereported as costs of production and distribution.

 

*Income Taxes* - Deferred income taxes aredetermined utilizing an asset and liability approach. This method givesconsideration to the future tax consequences associated with differencesbetween financial accounting and tax bases of assets and liabilities.  This method gives immediate effect to changesin income tax laws upon enactment.

 

*Estimates-*The preparation of the Company’s consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make certain estimates and assumptionsthat affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities as of the balance sheet date and thereported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

*FairValues -*The Company believes that the carrying amount of itscash and cash equivalents, accounts receivable, accounts payable, accruedexpenses and borrowings under its revolving credit facility approximate fairvalue due to the short maturity of these instruments.  The estimated fair value of the Company’s publicly traded debt(senior subordinated notes), based on quoted market prices, was approximately$87.9 million and $108.8 million as of December 31, 2002 and 2001, respectively.

 

*NewAccounting Pronouncements -*During 2002, FASB issued SFAS No.143, “Accounting for Asset Retirement Obligations,” SFAS No. 145, “Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 andTechnical Corrections as of April 2002,” and SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities,” SFAS No. 143 will becomeeffective for the Company on January 1, 2003.  Adoption of this statementis not expected to have a material impact on the Company’s consolidatedfinancial statements. A provision of SFAS No. 145 rescinds FASB StatementNo. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and anamendment of that Statement.  This provision of SFAS No. 145 is effectivefor fiscal years beginning after May 15, 2002, but was adopted early by theCompany resulting in the loss on repurchases of senior subordinated notes beingclassified as other expense in the consolidated statements of operations. SFAS No. 146 will be effective for exit or disposal activities initiatedafter December 31, 2002.  Adoption of this statement is not expected tohave a material impact on the Company’s consolidated financial statements.

 

F-12

----

 

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

 

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

 

|                             |   | **December  31,** |       |
|----------------------------------|--------|-------------------|------------|
|                             |   | **2002**          | ** ** | **2001** | ** ** |
| Trade  receivables               |   | $                 | 42,794     |   | $ | 48,978 |   |
| Receivable from  lessor          |   | —            |       | 7,913 |   |
| Other  receivables               |   | 2,095             |       | 3,698 |   |
| Allowance for  doubtful accounts |   | (1,200            | )          | (1,236 | ) |
|                             |   | $                 | 43,689     |   | $ | 59,353 |   |

 

Accrued expenses consist of the following (inthousands):

 

|                       |   | **December  31,** |       |
|----------------------------|--------|-------------------|------------|
|                       |   | **2002**          | ** ** | **2001** | ** ** |
| Employee related  expenses |   | $                 | 10,630     |   | $ | 9,586 |   |
| Accrued paper  costs       |   | 2,617             |       | 2,226 |   |
| Taxes other than  income   |   | 359               |       | 1,504 |   |
| Other accrued  expenses    |   | 4,437             |       | 4,186 |   |
|                       |   | $                 | 18,043     |   | $ | 17,502 |   |

 

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

 

Long-term debt consists of the following (inthousands):

 

|                       |   | **December  31,** |       |
|----------------------------|--------|-------------------|------------|
|                       |   | **2002**          | ** ** | **2001** | ** ** |
| Revolving credit  facility |   | $                 | 8,706      |   | $ | — |   |
| Term loan  facility        |   | —            |       | 7,800 |   |
| Senior  subordinated notes |   | 86,010            |       | 115,000 |   |
| Total debt                 |   | 94,716            |       | 122,800 |   |
| Less current  portion      |   | (8,706            | )          | (7,800 | ) |
| Long-term debt             |   | $                 | 86,010     |   | $ | 115,000 |   |

 

*RevolvingCredit Facility* - In August 2002, the Company entered into athree year credit agreement (the “Credit Agreement”) which expires on August18, 2005, unless otherwise extended based upon mutual agreement of the Companyand the lender.  The Credit Agreement iscomprised of a $25.0 million revolving credit facility based upon a borrowingbase of eligible accounts receivable. The Company’s obligations under theCredit Agreement are secured by a security interest in all the assets of theCompany and its subsidiaries, excluding all assets relating to inventory andproperty, plant and equipment. Borrowings under the Credit Agreement bearinterest at rates that fluctuate with the prime rate and the Eurodollar rate.The Credit Agreement requires the Company to maintain and meet certain minimumoperating ratios. Additionally, the Credit Agreement restricts payments ofdividends on the Company’s common stock. At December 31, 2002, the Company was in compliance with theserequirements. Borrowings against the line are either at a Eurodollar rate plus1.50%, (2.92% at December 31, 2002) fixed for periods up to 180 days, or at theprime rate  (4.25% at December 31,2002). At December 31, 2002, $16.3 million of the revolving credit facility wasavailable for future working capital and other general corporate purposes.

 

F-13

----

 

*SeniorSubordinated Notes*- The Company issued $115,000,000aggregate principal amount of its 10 5/8% senior subordinated notes dueDecember 15, 2007 in connection with its acquisition of Judd’s.  Interest on the notes accrues from the date oforiginal issuance and is payable semi-annually in arrears on June 15 andDecember 15 of each year.  The notes areredeemable, in whole or in part, at the option of the Company at specifiedredemption 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. During 2002, the Companyrepurchased approximately $29 million of its senior subordinated notes.  After giving effect to the write-off ofrelated deferred financing costs, the Company recognized a loss of $592,000 onthe repurchases.

 

**5.****         MINORITYINTERESTS**

 

In connection with the acquisition of certain netassets of Perry Printing, a subsidiary of the company (Perry Judd’s) issued thefollowing redeemable preferred stock:

 

*SeriesA Redeemable Preferred Stock -* At April 28, 1995, Series Aredeemable preferred stock issued in the amount of $5.0 million reflected anoriginal issue discount of $2.5 million which was the difference between thefair value at the time of issuance and the April 28, 2005 redemptionvalue.  The difference is being accretedby charging operations until redemption. Each share of redeemable Series A, $0.001 par value, $100 redemptionvalue, nonconvertible, non-voting preferred stock entitles its holder toreceive an annual cash dividend equivalent to redemption value times 90% of theprime interest rate.  At December 31,1995, 50,000 shares were authorized and 47,350 shares were issued andoutstanding.  During 1996, the carryingvalue of the Series A redeemable preferred stock was written down to $-0- tooffset certain purchase accounting adjustments and no accretion was recorded.  During the third quarter ended September 30,2000, the Company reached a settlement with the former owner of Perry Printingresulting in a partial reinstatement of Series A redeemable preferredstock.  Pursuant to the settlementagreement dated August 31, 2000, effective June 30, 2000, 43,940.68 shares ofSeries A redeemable preferred stock were reinstated at an accreted value of$3,143,000 and $1,452,000 of accumulated dividends were paid.  Additional dividends of approximately$189,000 were paid during the year ended December 31, 2000.  (See Note 11.) Dividends of  $185,000 and $273,000 were paid during theyear ended December 31, 2002 and 2001, respectively.

 

*SeriesB Redeemable Preferred Stock -*Effective June 30, 2000, theoutstanding shares of Series B redeemable preferred stock were redeemed onSeptember 6, 2000.  Accrued and unpaiddividends were approximately $2.2 million at June 30, 2000. (See Note 11).

 

*SeriesD Redeemable Preferred Stock -*Effective June 30, 2000, theoutstanding shares of Series D redeemable preferred stock were redeemed onSeptember 6, 2000.  Accrued and unpaiddividends were approximately $0.3 million at June 30, 2000. (See Note 11).

 

F-14

----

 

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

 

*PreferredStock (Series A)* – Holders of the non-voting preferred stockare entitled to a 15% stock dividend, payable in preferred shares on aquarterly basis.  A Californiacorporation owned beneficially by the Company’s majority common stockholdersowns the majority of the preferred stock. The preferred stock has a liquidation preference above the common stock.The Company amended its Certificate of Incorporation eliminating therequirement to redeem the preferred stock for $100 per share in the event of asale or exchange of all the common stock of the Company.

 

*CommonStock –* In 1995, stockholders of the Company approved theadoption of a stock option plan (the “Stock Option Plan”).  The Stock Option Plan was subsequentlyamended in 1995 and 2000.  Under theterms of the Stock Option Plan, options may be granted to officers and keyemployees.  Options have terms ofeighteen 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, 2002, 1,968 option shares were unvested.  The vested option shares are subject to a call by the Company anda put by the employee in the event the option shareholder retires afterattaining age 62, becomes permanently disabled or dies.  Upon termination of service for reasonsother than retirement, disability or death, vested option shares are subject toa call by the Company.  The put and calloptions are at fair value.

 

The 41,307 of stock options outstanding under theStock Option Plan were exercised in 2000.

 

The Company applies Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees”, and relatedinterpretations in accounting for its employee stock option plan.  Accordingly, compensation expense has beenrecorded for the difference between the estimated fair value of the commonstock and the exercise price of the option at the date of grant as the sharesvest.  Compensation expense of $203,000,$131,000 and $648,000 was recognized during the years ended December 31, 2002,2001 and 2000, respectively. The pro forma effect on reported net income forthe years ended December 31, 2002, 2001 and 2000 of using the fair value methodunder SFAS No. 123, “Accounting for Stock-Based Compensation”, is notsignificant.

 

*StockholderAgreements* – At December 31, 2002, 42,905 shares of commonstock held by management are subject to put and call arrangements similar tothe shares purchased under the Stock Option Plan at the employee’s termination,retirement after attaining age 62, permanent disability or death.

 

F-15

----

 

**7.****         OPERATINGLEASES**

 

The Company leases certain equipment and office spaceunder non-cancelable operating lease agreements.  Lease expense under such agreements was $15.8 million, $17.2million, and $17.8 million for the years ended December 31, 2002, 2001 and 2000respectively.

 

Concurrent with the acquisition of Judd’s, the Companyentered into a sale and leaseback transaction whereby the Wisconsin printingplants and warehouse facilities, and the Company’s corporate headquarters weresold to a third party for the aggregate purchase price (exclusive of fees andcosts) of $18.25 million and immediately leased back to the Company.  The sale and leaseback of the real propertyresulted in a deferred gain of $2.8 million, net of taxes, and is beingamortized over the initial term of the lease. The lease has an initial term of 20 years, with an economic abandonmentbuyout for one property selected by the Company after five years, and may beextended for three additional five-year terms at the Company’s option.  Initial annual rent under the lease isapproximately $1.9 million payable quarterly in advance with 10% escalationsscheduled at the start of the sixth, eleventh and sixteenth years of the 20year term (and a corresponding 10% increase at the beginning of any optionterm).  For the first ten years of thelease, 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.

 

On August 17, 1998, the Company entered into a saleand leaseback transaction for the majority of the Judd’s real property locatedin Virginia. The initial annual lease expense incurred under the operatinglease was $1.3 million with 14.5% escalations scheduled at the start of thesixth, eleventh and sixteenth years of the 20 year term.

 

Future minimum annual lease payments required underthe operating lease agreements are as follows (in thousands):

 

 

| **Year Ending  December 31,** |   |   |    |
|-------------------------------|--------|--------|---------|
| 2003                          |   | $      | 16,821  |   |
| 2004                          |   | 16,343 |    |
| 2005                          |   | 14,489 |    |
| 2006                          |   | 11,761 |    |
| 2007                          |   | 7,800  |    |
| Thereafter                    |   | 51,713 |    |
| Total minimum  lease payments |   | $      | 118,927 |   |

 

F-16

----

 

**8.****         INCOMETAXES**

 

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

 
|                        |   | **Year Ended  December 31,** |       |
|-----------------------------|--------|------------------------------|------------|
|                        |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** |
| Current                     |   |                         |       |   |   |   |   |
| Federal                     |   | $                            | 1,875      |   | $ | 1,612 |   | $ | 1,542 |   |
| State                       |   | 205                          |       | 121 |   | 247 |   |
|                        |   | 2,080                        |       | 1,733 |   | 1,789 |   |
| Deferred                    |   |                         |       |   |   |   |   |
| Federal                     |   | (202                         | )          | 848 |   | 1,259 |   |
| State                       |   | (20                          | )          | 328 |   | 272 |   |
|                        |   | (222                         | )          | 1,176 |   | 1,531 |   |
| Provision for  income taxes |   | $                            | 1,858      |   | $ | 2,909 |   | $ | 3,320 |   |

 

Following is a reconciliation of the U.S. statutoryfederal income tax rate to the effective rate (in thousands):

** **
|                                                        |   | **Year Ended  December 31,** |       |
|-------------------------------------------------------------|--------|------------------------------|------------|
|                                                        |   | **2002**                     | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                                        |   |                         | ** ** |   | ** ** |   | ** ** |
| Tax provision at  federal statutory rate (34%, 35% and 35%) |   | $                            | 2,690      |   | $ | 2,173 |   | $ | 2,319 |   |
| State income taxes net of federal income tax benefit        |   | 249                          |       | 291 |   | 337 |   |
| Goodwill  amortization                                      |   | —                       |       | 332 |   | 286 |   |
| Other permanent  differences                                |   | 123                          |       | 113 |   | 378 |   |
| Impact of rate  change                                      |   | (1,204                       | )          | — |   | — |   |
| Provision for  income taxes                                 |   | $                            | 1,858      |   | $ | 2,909 |   | $ | 3,320 |   |

 

The Companyhas reduced its effective tax rate, including the rate used for recording thenet deferred tax liability, from 40.0% in prior years to 37.4% in 2002. Thereduction in the net deferred tax liability from this rate change generated adeferred income tax benefit of approximately $1.2 million in the current year.The effective rate was reduced to reflect a reduction in the anticipatedapplicable federal tax rate for future years from 35% to 34%, reflective oflower taxable income generated in recent and projected years. In addition,prior corporate restructurings and changes in business operations, includinglevels of profitability by state, have reduced the Company’s overall effectivestate tax rate.

 

Significant components of deferred tax assets anddeferred tax liabilities are as follows (in thousands):

 

|                       |   | **December  31,** |       |
|----------------------------|--------|-------------------|------------|
|                       |   | **2002**          | ** ** | **2001** | ** ** |
| Deferred Tax  Assets:      |   |              |       |   |   |
| Accounts  receivable items |   | $                 | 449        |   | $ | 495 |   |
| Inventory items            |   | 200               |       | 234 |   |
| Employee benefit  accruals |   | 1,333             |       | 862 |   |
| Other accrued  expenses    |   | 601               |       | 551 |   |
| Sale and  leaseback        |   | 2,373             |       | 2,387 |   |
| Tax loss  carryforwards    |   | —            |       | 172 |   |
| Tax credit  carryforwards  |   | 627               |       | 3,031 |   |
| Other items                |   | 725               |       | 79 |   |
|                       |   | 6,308             |       | 7,811 |   |
| Deferred Tax  Liabilities: |   |              |       |   |   |
| Prepaid items              |   | (306              | )          | (512 | ) |
| Non current  assets        |   | (22,102           | )          | (23,175 | ) |
| Other                      |   | (1,370            | )          | (59 | ) |
|                       |   | (23,778           | )          | (23,746 | ) |
|                       |   |              |       |   |   |
| Net deferred  income taxes |   | $                 | (17,470    | ) | $ | (15,935 | ) |

 

F-17

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The net deferred income tax liability is classified inthe balance sheets as follows (in thousands):

 

|                               |   | **December  31,** |       |
|------------------------------------|--------|-------------------|------------|
|                               |   | **2002**          | ** ** | **2001** | ** ** |
| Current deferred  income taxes     |   | $                 | 1,904      |   | $ | 1,079 |   |
| Non-current  deferred income taxes |   | (19,374           | )          | (17,014 | ) |
| Net deferred  income taxes         |   | $                 | (17,470    | ) | $ | (15,935 | ) |

 

Included in tax assets at December 31, 2002 are statetax credits of approximately $1.0 million which expire in the years 2010through 2017 and can be used to offset future regular tax.

 

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

 

On April 28, 1995, theCompany entered into management agreements (the “Agreements”) with twocompanies owned beneficially by the majority stockholders of the Company.  The Agreements, as well as subsequentrevisions, provide for certain management and consulting services in connectionwith business strategy, operations and finance.  The Agreements have initial terms of five years, subject toone-year extensions thereafter and require the Company to currently pay annualmanagement fees totaling $1,480,000 per year plus reimbursement of certainexpenses. During 2001 the Company approved a bonus of $500,000 which wasaccrued at December 31, 2001 and paid during 2002. During 2002, the Companyapproved a bonus of $600,000 which has been accrued at December 31, 2002.Management fees paid and reimbursements expensed in conjunction with theAgreements and bonuses accrued totaled $2,294,000, $2,316,000 and $1,446,000for the years ended December 31, 2002, 2001 and 2000, respectively.

 

Concurrent with the saleof Judd’s Online on October 19, 2000, a one-time fee of $300,000 was paid to acompany owned beneficially by the majority stockholders of the Company fordivestiture services related to the disposition.

 

**10.****       RETIREMENTPLANS**

 

The Company has a definedcontribution plan referred to as the Perry Graphic Communications RetirementSavings Plan (the “Plan”).  The Plancovers substantially all employees who have attained 21 years of age and arecredited with twelve months of service on their enrollment date.  The Company contributed approximately$1,857,000 $1,662,000, and $1,775,000 for the years ended December 31, 2002,2001 and 2000, respectively, to the Plan representing 3% of eligible employeewages.

 

Effective December 31,1997, benefits payable under a Judd’s defined benefit pension plan existing atthe time of the Company’s December 16, 1997 acquisition of Judd’s werefrozen.  In June 2001, the Companyreceived a favorable advance termination letter from the Internal RevenueService and completed the termination of the plan through lump sum payments andthe purchase of annuity contracts. During the year ended December 31, 2001, theCompany recorded a gain on the termination of the pension plan of approximately$1,633,000.

 

F-18

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

 

*Purchase Commitments -*AtDecember 31, 2002, the Company had commitments to purchase or leaseapproximately $2.7 million of operating assets.

 

*Indemnification -*Inconnection with the acquisition of certain net assets of Perry Printing, asubsidiary of the Company issued 50,000 and 65,000 shares of Series A and Bredeemable preferred stock, respectively, to the former owner of PerryPrinting.  During 1996, the Company madetwo indemnity claims against the former owner of Perry Printing, principallyinvolving breaches of warranties and representations made with respect tocertain assets under its Asset Purchase Agreement.  Redemption features of the Series A redeemable preferred stockprovided the Company with the option to offset such claims as immediateredemption of the Series A redeemable preferred stock up to the maximumredemption value of $5 million. Accordingly, the carrying value of the Series A redeemable preferredstock was reduced to $-0- in the financial statements at December 31,1996.  The former owner of PerryPrinting objected to these claims. Additionally, the Company asserted a claim against the former owner ofPerry Printing for an approximate $1.8 million employee benefit obligation incurredprior to April 28, 1995, which is now an obligation of the Company to itsemployees covered by collective bargaining agreements.

 

On November 24, 1999, theformer owner of Perry Printing filed a complaint against the Company seekingdamages of approximately $3,000,000 and the payment of certain preferred stockdividends.  On January 6, 2000, theCompany

answered by denying theformer owner’s allegations and asserted counter claims in an aggregate amountof approximately $7,000,000.

 

On August 31, 2000, theCompany reached a settlement agreement, effective June 30, 2000, with theformer owner of Perry Printing concerning the two indemnity claims and theemployee benefit obligation claim. Pursuant to this agreement, the Company paid the former owner of PerryPrinting the redemption value of Series B and D redeemable preferred stockincluding unpaid dividends of $2,545,000 through June 30, 2000, and dividendsof $1,452,000 relating to Series A redeemable preferred stock which waspartially reinstated in the amount of 43,940.68 shares.  These Series A shares were recorded in theconsolidated financial statements at their estimated fair value as of the April28, 1995 acquisition date of $2,197,000 plus an adjustment for accretionthrough June 30, 2000 of $946,000.

 

*Other Contingencies*- The Company is involved in various claims and litigation incidental to itsoperations.  In the opinion ofmanagement, the ultimate resolution of these actions will not have a materialeffect on the Company’s consolidated financial statements.

 

F-19

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**Schedule II**

 

**PERRYJUDD’S HOLDINGS, INC.**

** **

**Valuation and Qualifying Accounts**

**(InThousands)**

 
|                                             |   | **Balance  Beginning  Of Year** |   | **Additions  Charged to  Costs and  Expenses** |   | **Deductions  -****Describe** |   | **Other  Additions  (Deductions)  Describe** |   | **Balance  End  of Year** |   |
|--------------------------------------------------|--------|---------------------------------|--------|------------------------------------------------|--------|-------------------------------|--------|----------------------------------------------|--------|---------------------------|--------|
| ALLOWANCE FOR UNCOLLECTIBLE  ACCOUNTS RECEIVABLE |   |                            |   |                                           |   |                          |   |                                         |   |                      |   |
|                                             |   |                            |   |                                           |   |                          |   |                                         |   |                      |   |
| Year Ended December 31                           |   |                            |   |                                           |   |                          |   |                                         |   |                      |   |
| 2002                                             |   | $                               | 1,236  |                                           | $      | 477                           |   | $                                            | 513    | (1)                       | — |   | $ | 1,200 |   |
|                                             |   |                            |   |                                           |   |                          |   |                                         |   |                      |   |
| 2001                                             |   | $                               | 1,239  |                                           | $      | 1,089                         |   | $                                            | 1,092  | (1)                       | — |   | $ | 1,236 |   |
|                                             |   |                            |   |                                           |   |                          |   |                                         |   |                      |   |
| 2000                                             |   | $                               | 1,020  |                                           | $      | 1,076                         |   | $                                            | 839    | (1)                       | $      | (18 | )(2) | $ | 1,239 |   |
|                                                  |        |                                 |        |                                                |        |                               |        |                                              |        |                           |        |  |  |  |  |  |

 

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

(2) Balance of business sold at disposition date.

 

F-20

----

 

**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 +†       |   | Employment Agreement by and between the Company and  Craig A. Hutchison dated April 28, 1995.   Incorporated by reference to Exhibit 10.4 to the Registration  Statement.                                                                                                                                  |
| 10.4(a)†      |   | Employment Offer Letter from the Company to David E.  Glick dated January 16, 1998.   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.                                                                                              |
| 16.0               |   | Letter regarding change in certifying accountant.                                                                                                                                                                                                                                                               |
| 21.0*              |   | Subsidiary Listing                                                                                                                                                                                                                                                                                              |

 

----

*                      Filedherewith

+                      Confidentialtreatment has been requested and received as to portions of this agreement.

†                       Indicatesa management contract or compensatory arrangement.

 

----

 

CERTIFICATION

 

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

 

1.                                       Ihave reviewed this annual report on Form 10-K of Perry Judd’s Holdings, Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report.

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(i)                                     designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(ii)                                  evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of the annual report(“Evaluation Date”); and

 

(iii)                               presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions);

 

(i)                                     allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(ii)                                  anyfraud, whether or not material, that involved management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal control subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   |   /s/ Craig  A. Hutchison        |   |   |
|--------|--------------------------------------------|--------|--------|
|   |   Craig A.  Hutchison            |
|   |   Chief  Executive Officer       |
|   |   (Principal  Executive Officer) |
|   |   March 25,  2003                |

 

----

 

CERTIFICATION

 

I, Verne F. Schmidt, Chief Financial Officer of PerryJudd’s Holdings, Inc., certify, pursuant to §302 of the Sarbanes-Oxley Act of2002, that:

 

1.                                       Ihave reviewed this annual report on Form 10-K of Perry Judd’s Holdings, Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report.

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(iii)                               designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

(iv)                              evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of the annual report(“Evaluation Date”); and

 

(v)                                 presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunctions);

 

(vi)                              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(vii)                           anyfraud, whether or not material, that involved management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal control subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
|   |   /s/ Verne  F. Schmidt          |   |   |
|--------|--------------------------------------------|--------|--------|
|   |   Verne F.  Schmidt              |
|   |   Chief  Financial Officer       |
|   |   (Principal  Financial Officer) |
|   |   March 25,  2003                |

 

----

 

**Certificationpursuant to the Sarbanes-Oxley Act of 2002**

 

I, Craig A.Hutchison, Chief Executive Officer of Perry Judd’s Holdings, Inc. (the“Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1)          the Report of theCompany on Form 10-K for the annual period ending December 31, 2002, as filedwith the Securities and Exchange Commission (the “Report) fully complies withthe requirements of section 13(a) or 15(d) of the Securities Exchange Act of1934; and

(2)          the informationcontained in the Report fairly presents, in all material respects, thefinancial condition and results of operations of the Company.

 
| Date March 25, 2003 | By                                     | /s/ Craig A. Hutchison |
|---------------------|----------------------------------------|------------------------|
|                | President and Chief  Executive Officer |

 

 

**Certificationpursuant to the Sarbanes-Oxley Act of 2002**

 

I, Verne F.Schmidt, Chief Financial Officer of Perry Judd’s Holdings, Inc. (the“Company”), certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1) the Report ofthe Company on Form 10-K for the annual period ending December 31, 2002, asfiled with the Securities and Exchange Commission (the “Report) fully complieswith the requirements of section 13(a) or 15(d) of the Securities Exchange Actof 1934; and

(2) theinformation contained in the Report fairly presents, in all material respects,the financial condition and results of operations of the Company.

 
| Date March 25, 2003 | By                      | /s/ Verne F. Schmidt |
|---------------------|-------------------------|----------------------|
|                | Chief Financial Officer |

 

----