~ expense, depreciation expense, AGFA finance expenses’ and certain lease expenses to

achieve an adjusted gross profit.

“As a result of miy analysis, I identified an approximately 24% decline in CPC’s adjusted _ ,
. gTOss profit margin in 2000 relative. to the: prior five-year period. The adjusted gross
profit margin earned by CPC in 2000 was 26.6% as compared to the average adjusted
gross profit eamed by CPC in the five-year period ended December 31, 1999 of 35.1%.”
‘la a financial report ‘provided to Associated Bank, CPC attributed the decline in gross
profit for the first six months of. 2000. to, among other things, “{s]tart up and learning time
on the new presses causfing] excess Paper usage and time in running jobs.” (cP6 00026)

The “adjusted” gross. ‘profit margin * eamed by CPC. in. 2001, 31.8%, increased

“approximately 20% ‘compared to 2000 levels. The rise in adjusted gross profit margin is
consistent with cPrc’s representations, as. described in another financial report provided
to Associated Bank, that it had “learned how to work around [the problems with the Six-
Color Press] to minimize their effect” by April 2001. - (CP6 00024)

3... Anais of Printing Je Jobs Performed for a Sample of Customers

To analyze damages, which may have been caused by the alleged operational difficulties
with the Six-Color Press, T analyzed the available data for the jobs performed for CPC’s
15 largest customers. :

a) Sample of jobs

To select my sample, I reviewed the sales by customer as reported on CPC’s Sales-By-
Salesperson report to determine the 15 largest customers in each of the years ending
December 31, 1999, 2000 and 2001. A list of these customers is provided at Exhibit 4. I
then requested the job costing records for each project CPC performed on behalf of these
customers in from 1999 to 2001. However, CPC was unable to supply me with the job
costing records for all of the jobs performed for these customers because they did not

retain the requisite documents.

14


- 0 Rework caused by employee error; oF

0 The possibilty that the Six-Color Press Fequires more raw. materials than
. the Five Color Press,’ :

. Frail to consider that costs for ‘downtime may have been’ caused by reasons
elated to the initial ‘operational difficulties . with the Six-Color Press.
‘| \ccording to Mr. Outlaw” 's testimony the ‘claim for these costs is computed by

% |

_ multiplying the number of hours the press was down. by the hourly wages of the

rc There i is no indication that crc considered:

. The claim for overtime. re already encompasses the hours CPC’s employees
worked beyond the nomnal 40-hour week.

The 3 press is required to undergo 1 routine maintenance and : ariy downtime
related to those actions should not be included.

i
|
\

° Ll cm negotiations with prospective buyers of CPC. Mr. Outlaw claims
, that CPC would have been ; acquired i in 2001 for approximately $2.4 million, but
o ti i its ownership of the Six-Color Press, Stephen Richards, Vice President of
: Richards Graphic Communications (identified as the potential acquirer), testified
in, is deposition that there 4 ‘was a scenario proposed solely by CPC that. Richards
Graphic Communications acquire a 25 percent interest in CPC for $600,000
(which mathematically computes to a $2.4 million purchase price for the entire
busines). ‘While Mr. Richards’ company evaluated acquiring CPC, “there was

. nevi | a proposal made or offer made or a letter of intent” issued by’ Richards

Graphic Communications to CPC.

||

% Deposition oD Donald Outlaw, August 25, 2003, p. 240 lines 17-20.

* Depesion of Slephen Richard March 6, 2003, p. 32 lines 10-16,



financial : performance. Thus, the Six-Color: Press under performed reasonable -
expectations. *y 12.8% and 11.2% in 2000 and 2001, respectively. See ‘Exhibit 6a,

Applying the same index © the gross profit percentage, eared on 1 jobs performed ona
‘combination of. the “presses (Combination: Jobs” 5 in 1999 projects that CPC’s
: Combination Jobs should have earhed 12. 7% and 16.4% ji jin 2000 and 2001, respectively.
In actuality, the Combination ‘Jobs exceeded the projection by 10.7% in 2000 and under
performed the projection in 2001 by 2. 1%. See Exhibit 6a

T then used my exiapli to determine an allseation of sales ‘from the Six-Color Press and
the Combination Jobs for the entire Company i in 2000. and the first nine months of 2001.

I utilized these sales figures, the information about the performance of these jobs and the
period for damages to determine arange for CPC’s lost profits, if liability is found in this
_ matter, due to the performance of the Six-Color Press, Based upon this analysis,” if
liability is: found i in this matter, CPC i is entitled toa “denaages award of $237,516 (the

midpoint of the range). See Exhibit 6.
Vi. ‘Conclusion: fe

Based on my evaluation and analysis of the financial and operational data, testimony and
documents produced in this’ matter, I have reached the following opinions, assuming

liability

¢- CPC’s Amended Rule 26(a)(1)(c) Disclosure provides no. support or bases
whatsoever for the damages alleged by CPC and as a.result, does not represent a
reasonable estimate of damages in this matter;

e The proper period over which to measure damages is January 2000 through
September 2001; and ; :

«© CPC suffered $237,516 in damages.

18 -


Cole & Staes

321 South Plymouth Court
Suite 1150

Chicago, IL 60604.
312-697-0200

Respectfully submitted,

fibre

ANDREW STAES
STEPHEN SCALLAN


The following chart identifies the sales for which job costing records were requested as a :
% of total sales‘and the records actually received. - :

Total Sales’ - Total Sales " %ofSales$s ~~ Total Sales % of Sales $s

Records Records °° - Records.Received . “_ forthe -- Records Requested ©

. __ Received Requested of Requested Year =. of Total Sales
1999 -$.-1,368,727 3 2,050,108 : . . 66.8% ~'.$.2,946,751.0 - . 70.3%
2000 . $ 1,884,113 $2,059,106 . 91.5% © $ 2,986,474.0 68.9%

2001 $ 2,023,811... $ 2,204,600. - ..,- 91.8%  $ 3,074,668.0 1%

~ Therefore, my sample size included 47.0%, 63.0 % and 65.8% of the total sales dollars in _

cach of the years ended December 31; 1999, 2000 and 2001, respectively.”*

Based upon my review of certain of these records and the deposition testimony provided’
in this matter, I noted’ that. estimates. of the ‘sales price and costs of the job are
memorialized on tlie Combination Estimate Print. The actual sales price.and costs of the

, project are recorded on the Detail Cost Sheet and the Final Cost Sheet

I reviewed each of the three documents for jobs wihose records were provided to evaluate
the actual sales and gross profits earned for jobs performed on each press.

b) Sales Te
To determine the concentration’ of sales by press+ type for. the sample documents, I
reviewed all of the costs sheets in the sample. In doing so, 1 identified the press that the
individual jobs were performed upon and the ultimate sales value. The sales information *
by press type is summarized as follows: _ ;

*5 Percentages are calculated by multiplying column four of the chart above by columm six of the same
chart to’provide the percentage of CPC total sales dollars that are in the sample.

15


d) Rework ©

T also reviewed the rework performed by CPC for its Six-Color Press jobs compared to
rework performed for its Five-Color Press jobs. Jt doing so, I found that the jobs run on
the two presses were fairly comparable. Rework for the F ive-Color Press amounted to
3.9% of. the cost of sales ‘for Five- Color Press jobs while rework for the Six-Color Press
amounted to 3.9% and 3. 5% of the cost of sales for Six- Color Press jobs-in 2000 and
2001, respectively. ° Therefore, the amount of rework on the. two presses was consistent
as the data provides no indication that the Six-Color Press created additional rework costs

for | CPC.

‘As discussed above, I reviewed the gross profit margin that was eamed on the three types
of presses in 1999, 2000 and 2001. -In doing so, I identified that the Six-Color Press did
not perform as well as the Five-Color Press and that the gross profit eaméd on the Two-

_ Color Press in 2000 and 2001 relative to 1999 had also declined. also identified that, on

a per job basis, CPC had a similar distribution of favorable, and unfavorable variances

(actual costs vs. estimated costs) for the Six-Color Press as the Two-Color Press in 2000
-and 2001. :

The decline in profits ‘experienced on the Two-Color Press. and the economic climate of
the printing industry, as described above, indicate that factors.in addition to the alleged
problems with the Six-Color Press contributed to the gross profit erosion when
comparing the Six-Color Press to the Five-Color Press. As I evaluated damages, Tused
the historical performance of the Two-Color Press to establish an index to apply to the
gross profit percentage earned in 1999 for the jobs performed on the Five-Color Press and
a combination of presses to create a more accurate comparison of the performance of the -

Six-Color Press.

Based upon an application of this index, I estimated that the Six-Color Press would have
achieved a 24.1% and 31.0% gross profit percentage in 2000 and 2001, respectively, had
it performed similarly to the Five-Color Press in terms of overall margin and the Two-
Color Press in terms of reactions to other factors (e.g., macroeconomic) affecting CPC’s

17


2. Damages Were Mitigated

a © Steve Poplin, printing press iepairman for Druck-Tech Inc., ‘visited CPC on
September 12, 2001 to diagnose the problem with the Six-Color Press. Mr.
Poplin gave Don Outlaw ‘an overview of the parts that he. was going to have to
order and the amount of time it was probably going to take” to replace the

grippers and perform a gear alignment to put the Six-Color Press i in proper"
working order. The, price quote to perform the proposed maintenance was
$10,000 to $15,000. At that time Mr. Outlaw refused the service, citing cash
_ constraints. Mr. Outlaw waited until August 2002 to authorize Mr. Poplin to
~ perform the service: 2 Subsequent to replacing the grippers and performing the’
gear alignment Mr. Poplin thought “that there [was] a general consensus that the
performance of that [Six-Color P)ress and the printing quality [was] much

__ improved”. 22 . .

© In fact, prior to Mr. Poplin’s visit, on January 29, 2001, during a service cal at
CPC, Vincent Romano, Heidelberg’s service manager, and other Heidelberg
representatives explained that Heidelberg would like to.review the grippers and
pads and a possible gear ali, ignment to.determine if further mechanical adjustments
were required to ensure the Six-Color Press performed to CPC's satisfaction.”
However, Mr. Romano testified that, despite attempts to set up a time to perfonn
the work, on or before February 12, 2001, CPC declined to permit the Heidelberg

-emaployees to perform additional service work on the Six-Color Press because
“they felt as though we had our opportunities to address these problems and ...
allowing us to continue with any further mechanical repairs wasn’t an option.”

TM Deposition of Steven Poplin, July 11, 2003, p. 99 line 20 — p, 104 line 1.
” Deposition of Steven Poplin, July 11, 2003, p. 179 line 20 ~p. 180 line 1.
* Deposition of Vincent Romano, April 9, 2003, p.53, line 15~p. 54 line 3.
> Deposition of Vincent Romano, April 9, 2003, p. 54 lines 4-17.

2


Fails to provide any computation or methodology used by CPC to derive its

damage claim.

| Fails to identify the documents that were used to Prepare CPC’ s s computation of —

damages."

Fails to make the appropriate comparisons concerning the performance of the.‘
Six-Color Press from 2000 to 2002." In conducting its analyses, CPC compares
the performance of | ‘the Five-Color Press i in 1998 rather than 1999, the year prior’

_ to the installation of the Six-Color Press, to the Six-Color Press from 2000 to

2002.

Fails’ to use the appropriate period for damages. CPC extends’ its period for
damages through December 31, 2002 even though by September 2001 ‘it had
reduced to a minimum, if not completely mitigated, the effects of the problems

with the Six-Color Press. : See further discussion’ about the appropriate damage

period below.

Fails to consider that overtime may have been caused by reasons unrelated to the.
initial operational difficulties with the Six-Color Press.* CPC has claimed that it’
would not have incurred expenditures for overtinne pay had the Six-Color Press
been working properly. CPC: derived its damage figure by adding all'of the ..
overtime pay identified in the payroll records for each of the press people that
worked on the Six-Color Press 3 daring 2000, 2001 and 2002.> For example, CPC
did not consider: .

‘ On September 4, 2003 CPC provided certain documents as support for its Amended Rule 26(a)(1){c)
Disclosure. A preliminary analysis of these documents indicate that they form an insufficient bases for the
damages claimed by CPC. Due to the timing of the document production, I reserve the right to supplement
my report after further analysis of the documents is performed.

2 Deposition of Donald Outlaw, August 25, 2003, p. 226 lines 16-22.
|
3 Deposition of Donald Outlaw, August 25, 2003, p. 225 line 8 - p. 226 line 15.

4:


~_ INTHE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
. EASTERN DIVISION

CBICAGO PRINTING COMPANY. }
: Plaintiffs, } . * No.01C 325)
ve . . . } : Judge Jobn F. Grady
HEDELBERG USA;INC, - ; Magistrate Judge Arlander Keys
Defendants }

; Expert Rebuttal Report of Louis G. Dudney, CPA

SITION
ey

Supe! _

Exh, |



CERTIFICATE OF SERVICE

I, Jeffrey Cole, hereby certify that I have caused a copy of the foregoing Chicago

Printing’s Motion In Limine Regarding Expert Testimony of Louis G. Dudney, to be served on
Andrew Porter, Holland & Knight LLP, 131 S. Dearborn St, 30“ Floor Chicago, IL 60603 by

facsimile on December 22, 2003.

VL noc

Cnt.

wert c

tes


Based on (1) the representation CPC made in its financial report to its lenders that by
April 2001 it had “leamed how to work around” the problems experienced with the Six-
Color Press “to minimize their effect”, (2) the fact that all of CPC's subsequent reports: to
Associated Bank failed to identify any continued deterioration, in financial performance
attributable to the Six-Color Press, and (3) the fact that CPC had the opportunity to
substantially improve the performance of the press by expending $10, 000 to $15,000 in
September 2001 (if not before) supports the calculation | of damages, assuming Tabitity, :

, between January 1, 2000 and September 30, 2001.

B. Lost Profits Calculation Methodcoty

After establishing the appropriate period during ‘which to calculate damages, T next :
undertook an analysis of, CPC’: Ss historical financial. and operating performance to .
quantify any damages incurred by CPC:

1. CPC "8 Sales

CPC's historical financial performance reveals that sales were relatively flat from 1998 to ©

2002. In 1999, immediately prior to CPC’s acquisition of. the. Six-Color Press, its
revenues were the lowest during this five-year period, down approximately 6.7% from
the prior year, However, sales in 2000 and 2001 increased approximately 2. 4% and 3.0%
over the prior year, "respectively. CPC’s sales performance does not indicate that it lost

- any sales as a result of its acquisition of the Six-Color Press.

2. CPC's Gross Profit

CPC calculates gross profit by subtracting the costs of sales from the Company’s net
revenues. At CPC; cost of sales includes expenses for direct materials (paper, ink, etc.),
plant wages, outside purchases, repair and maintenance on the presses, depreciation,
certain financing costs, utilities, rent and other factory expenses. To analyze the gross
profit eamed by CPC, I made certain adjustments to the income statements in CPC’s
general ledger system to isolate the change in gross profit that arguably could have been
caused by operational difficulties with the Six-Color Press. Therefore, I excluded rent

13


_ Wi. Background

CPC, based in Broadview, Dlinois, is a pio

da

‘i of commercial paper printing services.
2 menses and other equipment. Its U.S.

Heidelberg is a global manufacturer of r

operations are headquartered i in Kenedy

On October 7, 1999, CPC ‘signed an agree 3
LX 1994 printing press (“Six- -Color Press!’ ” ele jelberg for $1.35 million to replace

its MOFP-H 1994 Heidelberg printing pres Ne Color Press”). The Six-Color Press
was delivered to CPC in December 1999 an installed at.CPC’s new Broadview location. -

Since its delivery to CPC, ‘the Six-Color Press has experienced certain operating
difficulties including streaks, slurs and variances in color. Heidelberg and service repair
personnel operating at Heidelberg’s request and third-party contractors have replaced.
certain’ parts: ‘and performed certain adjustments to the Six-Color Press to resolve. the
problems claimed by CPC. In February 2001, CPC told Heidelberg representatives that
they would no longer be given an opportunity to remedy operational ¢ difficultiés with the ©

Six-Color Press.

By April 2001, CPC bad “leamed how to work around (the problems] to minimize their

| effect.” (CP6 00024) Later‘in 2001, CPC filed a lawsuit. cPc. seeks to Tecover alleged

damages in excess of $2.4 million from Heidelberg, including the recovery of all monies
paid to acquire and finance the Six-Color Press and have the purchase of the Six-Color
Press rescinded. Heidelberg has filed a counterclaim seeking payment for approximately
$40,000 of unpaid invoices for parts, services and consumables.

IV. Analysis of Damages Claimed by CPC

CPC’s Amended Rule 26(a\(1)(c) Disclosure provides a list of expenditures and lost
profits that CPC alleges it incurred due to its acquisition of the Six-Color Press.

Specifically, the disclosure:


N

aL

VIL. Compensation

AlixPartners, LLC is being compensated | at my normal and -customary rate of $425 per

hour for my time and between $100'and $375 per hour for staff working at my direction.

VOI. Additional Anaya and Demonstrative Aids .

1 reserve the right to amend and/or supplement this’ report based upon any new and/or’ *
additional facts ‘or other; documents which may come to my attention, ‘or information,
including expert reports, deposition testimony and related document exhibits thereto,
which may ‘be produced. If] am called upon to testify, I may prepare demonstrative aids, _

. such as graphs, charts or tables. .

K Exhibits
Exhibit 1- Cuca Vitae

Exhibit 2+ Listing of Testimony in the Last Four Years

- . Exhibit 3 —-Listing of Articles Published in the Last Ten Years

Exhibit 4 — Listing of Top Customers |"

Exhibit 5 ~ Income Statement Summary .

"Exhibit 6 ~ Calculation of Lost Profits”

Exhibit 7~ Documents Reviewed

Louis G. Dudney, CPA

September 5, 2003 |

19


IN THE UNITED STATES DISTRICT COURT l
FOR THE NORTHERN DISTRICT OF ILLINOIS, &
EASTERN DIVISION c
CHICAGO PRINTING COMPANY, )
) Vy
Plaintiff, ) No. 01 C 3251 7a.
) “Ol
v. y Judge John F. Grady -
HEIDELBERG USA, INC } Dee Veg
> INC. , DEC 2 9 2003
Defendant. )

MOTION IN LIMINE REGARDING EX T TESTIMO.

Plaintiff, Chicago Printing Company, (“Chicago Printing”), by its attorneys, Jeflrey Cole,
Andrew Staes, and Stephen Scallan, moves to limit the expert testimony of Louis G. Dudney
(‘Dudney”) as it relates to the mitigation of damages by Chicago Printing. Chicago Printing’s
reasons for this proposed limitation are described below.

FACTS

In September, 2001, Steven Poplin, printing press repairman for Druck-Tech Inc.,
examined Chicago Printing’s six-color press and recommended a gear alignment and gripper
replacements, repairs estimated to cost between $10,000 and $15,000. (Poplin Dep., July 11,
2003, at 100). However, Poplin began his diagnosis of the press by examining the grippers
merely “to set some type of a foundation to build on, as far as repair went,” not because he
thought new grippers would repair the press. (Poplin Dep., July 11, 2003, at 76).

The money could be such a great amount that you really want to know what you are in for

before you jump into something like that because there is many things you can do that

aren’t going to necessarily repair that problem, but they need to be done so that when you

do reach that point where you think the machine needs to be, you aren’t being affected by
this other thing[.]

l4¢


installation costs and other costs of moving to a new facility having. been

_included in the repair and maintenance expense account.’

©. The costs could have been incurred in the normal course of business. The
préss was five years old at the time of acquisition and as with any used

_ and aging Piece of ‘equipment, parts do break from time to time. To
maintain the Six-Color Press in working order, routine maintenance would

+ Bey need to be * performed on the Press.

CPC's “Answers ‘to Defendant ‘Heidelberg’ 8 First and Third Sets of Requests for
Admission disclose that there are‘numerous. invoices issued by Heidelberg that CPC
“never paid and/or Heidelberg forgave., The total amount of invoices CPC actually :
paid’ to Heidelberg for repair and maintenance of and parts for the Six-Color Press i is
$24,189 through December 31, “2002.

 o Fails to consider that additional’ labor costs related solely to work performed in
the bindery department may have been caused. by reasons unrelated to the initial
‘operational difficulties with the Six-Color Press: Mr. Outlaw testified on August
25, 2003, that the damage amount for this area is caused by the labor cost in the
bindery department for jobs coming off of the Six-Color Press in. 2000, 2001 and
2002 exceeding’ costs of the Five-Color Press in 1998.'° There is no indication
that CPC considered: an ,

o The composition of jobs, i.e. the volume of jobs requiring only bindery |
” ‘work, thereby causing increased bindery labor expenses;

° Deposition of Donald Outlaw, May 23, 2003, p.39 line 8 - p. 49 line 11.
|
°° Deposition of Donald Outlaw, August 25, 2003, p. 237 line 20~p. 239 line 7.

6


fe}

°

-Overtime occurring in the normal course of business’,

Rework related to mistakes by the pressmen’; .

Customer alterations®;

Competency of the employes such as the pre-press person terminated for

poor perforniance’;

Start up and learning time; or

Rush jobs*.

_ Fails to consider that additional repair and maintenance expenses may have been
caused by reasons unrelated to the initial operational difficulties with the Six-

Color Press. For example:

°o

A review of the equipment repair and maintenance expenses of CPC
indicates that the average anniual repair and maintenance expense for 2001
and 2002 was less than CPC’s S repair and maintenance expenses in 1998
and 1999.

Although 2000 hada spike in repair and maintenance expenses of
approximately $50,000, Mr. Outlaw was unable to state with any degree of
certainty that the increased costs were due to the Six-Color Press. In fact,
he did speculate that the rise in costs in 2000 might be due to press

“ Deposition of Donald Outlaw, August 25, 2003, p. 235 line 19 —p, 236 line 3.
5 Deposition of Donald Outlaw, August 25, 2003, p. 226 line 16 —p. 227 line 7.
6 Deposition of Donald Outlaw, August 25, 2003, p. 227 lines 12-20. ‘

7 Deposition of Donald Outlaw, August 25, 2003, p. 291 lines 6-12.

* Deposition of Donald Outlaw, August 25, 2003, p. 235 lines 9-18.

5


I. Introduction

A lawsuit bas been filed alleging that Heidelberg USA, Inc. (“Heidelberg”)
- misrepresented the history of a used- printing press. to Chicago Printing Company ;

(‘CPC’) thereby inducing crc to acquire: the printing press. I have been retained by
Heidelberg’ s counsel, Holland & Knight, to analyze and opine on the damages i incurred
by CPC if Heidelberg is is s found liable in this matter. .

Tama Principal with AlixPartners; LLG, a financial and operational consulting. firm.

” Prior to joining AlixPartners, LLC, I was a Partner with PricewaterhouseCoopers. Tama
CPA licensed in Illinois. All of the opinions presented i in this report are based on my .
analysis of the available information and my experience, education and expertise asa
CPA and financial consultant. Exhibit 1 contains a copy of my curriculum vitae.

As part of performing my ‘analysis, I utilized atéeam 1 of professionals who worked under
” my direction and control: . The. opinions expressed herein are subject to change, based
, upon any additional discovery in the case or information that Imay receive, after the date
of this report. , te : :

Ui. Summary of Opinions

Based on my evaluation and analysis of the financial and operational data, testimony and :
documents produced in this matter, I have reached the following opinions, assuming
liability: ot

“e CPC’s Amended Rule 26(a)(1)(c) Disclosure provides no support or. bases
whatsoever for the damages alleged by CPC and as a result, does not represent a
teasonable estimate of damages in this matter; :

e The proper period over which to measure damages is January 2000 through
: September 2001; and

© CPC suffered $237,516 in damages.


uo
4

oS 1999 2000. 2001_—=C«;s
Two-Color Press 37.6% 37.2% 28.8%

Five-Color Press - ~ 41.5% NA ~~ NIA
'. Six-ColorPress) =) N/A 38.2% 48.1%

Combination of presses 17:8% 23.0% | 21.6%

Non-print Jobs 3.1% 1.6% 1.5% .--
Total ~~~ 100.0% _ 100.0% "100.0%

Based upon ‘sales, fevenues eamed in 1999 and 2000 were’ fairly ‘evenly dispersed
between the two active presses or a combination of the two. In 2000 and 2001, more of

_ the revenues were eamed on jobs performed on the Six-Color Press as opposed to jobs

performed on the Two-Color Press. The proportion of jobs placed on the Six-Color Press
in 2001 exceeded that of the Five:Color Press i in 1999 indicating a larger throughput for

: and reliance on the Six-Color Press by CPC.

). Gross Profit —

To analyze the profits cPc ‘lost; assuming liability, I calculated the gross-.profit

percentages, as provided in the chart below, that CPC earned in 1999 through 2001 using
the information in CPC's cost sheets. 26 As indicated in the chart below, there was a

’ significant decline in the gross profit percentage for the jobs: performed on the Six-Color

Press in 2000 and 2001 as compared to the jobs performed on the Five-Color Press i in
1999. ‘Since the Two-Color Press’ performance also- deteriorated significantly from its
1999 levels, the data provides one indication that macroeconomic forces impacted the

entirety of CPC’s business.

1999 2000 - 2001

Two-Color Press 23.4% 15.4% 19.8%
Five-Color Press . 36.6% . N/A N/A

Six-Color Press . “NA 11.3% 19.8%
Combination of presses 19.3% 23.4% — 143%

2 See Exhibit 6b.

16


about which he admits he knows nothing.’ Admission of this testimony would, therefore, violate
the principle that a “district judge should assure himself, before admitting expert testimony, that
the expert knows whereof he speaks.” Bammerlin, 30 F.3d at 901 (citing Daubert v. Merrell

Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).
CONCLUSION

Defendant’s expert is not qualified to testify as to whether Plaintiff should have mitigated
its damages beginning in September, 2001. Only the trial judge may inform the jury of the
applicable law, and Defendant’s expert should not be permitted to intrude on the Court’s duty by
instructing the jury on applicable principles of law. For these reasons, all references to

mitigation of damages in Dudney’s report should be excluded.

' Dudney’s deposition contains the following colloquy:

Q: Do you have an understanding or an opinion as to what litigants are required to do to
mitigate its damages?

A: Well, I think that’s a legal question that you are asking me, and I didn’t look at that
aspect of my analysis as a legal question. I looked at it more as an economic question;
which is, that if someone is incurring harm, then I would look at what is the cost of the
cure,

eee

Q: And you don’t know if the law looks at it differently than you as an economist would
view that particular analytical problem?

A: Iam not an economist, I am a CPA, but nonetheless I would look at it from an
economic perspective.

Q: You used the word economic. You looked at it from an economic perspective, not
from a legal perspective, is that correct?

A: That’s correct. I’m not a lawyer.

Q: And you don’t have an opinion as to what the law requires a litigant to do in terms of
mitigation of damages?

A: No. That would be I think a legal opinion. I don’t have a legal opinion in this case.

(Dudney Dep., Nov. 11, 2003, at 35-36).


In‘addition, CPC has not obtained a current valuation of the Company. In fact,
CPC has not made any attempt to sell or market the business since its discussions —
* with Richards Graphie Communications.'* Mr. Outlaw’s. basis for his. current
valuation of CPC ($0) is that “No one’s offered me any money for it”. 6 Based
upon the above, CPC has not presented any ‘sound of reliable basis for either its
former $2.4 million valuation of CPC or its present valuation of 30. ,

* Misrepresents :claims ‘that CPC: Jost-Richards Graphic Communications ‘as a -
‘customer due to problems ‘with the Six-Color Press. Stephen Richards testified
- that Richards Graphic Communications ceased giving CPC print jobs for the Six-

i
?
a

' Color Press because’ it purchased its own 40-inch f press for reasons other than the
* quality of printing from CPC’s Six-Color Press,!7 Don Outlaw confirmed that’
. Richards Graphic Communications acquired’ its’ own six-color press. and,
therefore, was able to capture the profits that they would have otherwise given up
to CPC.'*.

e Fails to make a correlation between the debts listed and the alleged operational
difficulties with the press; Accordingly damages are not warranted for these

” items.

For the reasons stated above, CPC has not provided a sufficient basis for supporting its
lost profits damage claim provided in its Amended Rule 26(a)(1Xc) Disclosure. The
deficient disclosure and document production places me in the disadvantageous position
of not having access to all of the documents and methodologies CPC used to develop its
claim, thereby limiting my ability to rebut CPC’s damage claim. :

'S Deposition of Donald Outlaw, August 25, 2003, p, 254 lines 19-25.

‘6 Deposition of Donald Outlaw, August 25, 2003, p. 253 line 20 — p. 254 line 25.
” Deposition of Stephen Richards, March 6, 2003, p. 37 line 1 —p. 39 line 16.

" Deposition of Donald Outlaw, August 25, 2003, p. 252 line 25 — p. 253 line 19.

.

9


" unfamiliar with the new machine ‘and additional repair costs for the Two-Color
and Six-Color Presses. (CPs 00026)

© For the six-month period ended December 31,2000, CPC’s refers to additional
costs of the Six-Color Press related to repair costs, and down time for the Tepairs
causing certain employees to work overtime. (CP6 0025) :

« ’ For.the four. mont period ‘ended April 2001, despite CPC's claims of continued
problems with the Six-Colot Press, CPC reported to the bank that it had “learned
how to work around [the’ problen] to minimize their effect.” ” (CP6 00024)

-e May, 3 June and july of 2001 there is no’ mention ‘of “any oss of income or
additional costs due to sub-par performance of the Six-Color Press. (CP6 00021- -
- 23) : oe .

o The* June 2001 financial report touts CPC’s gross profit tumaround ©
relative to the same six-month period for the prior year (improved gross

profit percentage by 132%).

° The fuly: 2001 financial report cites only higher outside purchases” as the _
cause for gross profit being lower than normal. No mention is made of -
issues related to the Six-Color press. ‘

e For the year ended Déceiaber 31, 2001 and projection for 2002, there is no
mention of any actual or possible reduction in sales or profits caused by the Six-
Color Press. Rather, blame for sales (and thus profits) being lower than CPC’s
‘expectations is placed on the attacks of September 11, 2001 and the country being ©

in an economic recession. (CP6 00019),

| During Donald Outlaw’s deposition he explained that the cost to ready a print job for mailing (ie.,
| addressing, labeling and sorting) was an example of an outside purchase. May 23, 2003 Deposition of
| ‘Donald Outlaw, p. 98 line 17 ~p. 99 line 16,

il


Indeed, witness testimony on the law always is excluded because “the judge (or the jury
as instructed by the judge) can determine equally well” the law, and the special legal knowledge
of the judge makes the witness’ testimony superfluous. VI Wigmore, Evidence § 1952
{Chadbourn rev. 1978). That is why opinions on the law are inadmissible even where the witness

is a lawyer or ajudge. See Specht v. Jensen, 853 F.2d 805, 807-08 (10" Cir. 1988) (en banc)
(lawyer could not testify as to his interpretation of applicable law because “it is axiomatic that the
judge is the sole arbiter of the law and its applicability.”); Marx & Co.. Inc. v. Diners’ Club, Inc.,
550 F.2d 505, (2d Cir. 1977), cert. denied, 434 U.S. 861 (1977) (securities law expert barred
from testifying as to his opinion of the legal obligations of the parties to the contract because “i]t
is not for witnesses to instruct the jury as to applicable principles of law, but for the judge.”);
United States v. Zipkin, 729 F.2d 384 (6" Cir. 1984) (bankruptcy judge could not testify as to the
applicable law because “the trial judge does not need the judgment of witnesses.”).

Nonlawyer expert witnesses fare no better when their testimony veers into the province of
the trial judge. See.i.e., West v. Waymire, 114 F.3d 646, 652 (7" Cir. 1997) (Posner, J.)
(criminal justice professor not allowed to draw legal conclusion from town’s alleged negligent

supervision of police officer; also, the testimony exceeded his professional competence);

Bammerlin y. Navistar Int’). Transp. Corp., 30 F.3d 898, 900 (7" Cir. 1994) (Easterbrook, J.)

(auto safety experts unfamiliar with the legal interpretation of auto safety standards could not

testify as to their interpretations of federal automobile regulations).
If Dudney is allowed to testify that damages are barred after September, 2001, based on
his opinion that Chicago Printing failed to mitigate damages, he will intrude upon the province of

the Court, confuse the jury, and testify on a concept exceeding his professional competence,


(Poplin Dep., July 11, 2003, at 76).

Poplin emphasized that the gripper and gear work was “the first phase” of his repair work
to the press, because “we had to start somewhere.” (Poplin Dep., Oct. 3, 2003, at 59). The total
repair bill could have been as much $300,000, so Poplin told Don Outlaw that the gripper and
gear work was where he wanted to start, and said that Mr. Outlaw should tell him “when it’s
good enough, or when you — if you get to the point where you can’t afford any more.” (Poplin
Dep., Oct. 3, 2003, at 54, 59-60). Chicago Printing did not authorize the gripper and gear work
until August, 2002. (Poplin Dep., July 11, 2003, at 100-04). The gripper and gear work did not
repair the press; among the current actual or potential problem areas are the urethane grippers on
the triple drums; the transfer drums; the pad heights on the gripper bars; and the transfer cylinder
triple drum gears. (Poplin Dep., July 11, 2003, at 198-99).

In his Expert Rebuttal Report of September 5, 2003, attached hereto as Exhibit 1,
Dudney, a certified public accountant, argues that the proper period over which to measure
damages ended in September, 2001. (Exh. A, at 2, 12, 18). Dudney opines that Chicago Printing
failed to mitigate its damages starting in September, 2001, because it did not immediately order
the gear and gripper work Poplin recommended. (Exh. A, at 13). Dudney is neither an expert in
Press repair nor a lawyer. This testimony should not be allowed.

ARGUMENT

Dudney proposes to deliver his opinion of Chicago Printing’s damages theory. The
proposition that Dudney is not qualified to give a legal opinion scarcely needs citation of
authority. By definition, he lacks the “knowledge, skill, experience, training, or education,” to be

“qualified as an expert” to opine on any legal matter. Fed. R. Evid. 702.


© Macroeconomic effects such as the increased cost of labor two, three or
four years after CPC’s base year of 1998! 5

-o Start up and teaming time
oe Competency of the employees or °

o Costs already. considered in the claim for. reimbursement of overtime
costs.» < ,

“s Fails to consider that raw material expenses may have been caused by reasons
unrelated to the initial operational difficulties with the Six-Color Press. The claim: :
for additional raw material expenditures was computed using the same approach

. used to determine the additional labor costs. There is no indication that CPC
“considered: ue ; _ . : co

o Macroeconomic effects such as the increased cost tof raw materials;

° Excessive esos by enaployees such as that which led to the termination
‘of a pre- pressman'?;

© Changes caused by customer alterations;

fe) Stort up and learning time;

"' The printing industry is a mature market. In 2000 and 2001, analysts were’ projecting average annual
gtowth in the range of 3%-5%. The printing industry was continuing its move toward consolidation and
technological improvements to identify ways to cut costs. Large printers with access 'to capital to invest in
technology and the ability to-create economies of scale were well pasitioned to succeed.

Labor and paper costs, which account for approximately 60% of a printer’s revemues, were projected to
spike significantly in 2000 and 2001 relative to 1999. In 2000, UBS Warburg forecast an 11%-14%
increase in the cost of paper, excluding newsprint, followed by a 4%-5% increase in prices in 2001. In
addition, labor prices were forecast to increase 4%-5% in 2000 and another 3%-4% in 2001. The rising
costs of paper and labor coupled with the mature market projected declining profits for smaller printing
companies.

ma Deposition of Donald Outlaw, August 25, 2003, p. 291 lines 6-12.

q


v. Dudney Damages. Analysis

To analyze damages in this case, I first considered the appropriate. framework. within
which damages, assuming liability, should be calculated. The documents I reviewed in
this matter reflect that CPC actively pursued and ultimately purchased a Six- Color Press.
CPC was not satisfied with thie performance of the Six-Color Press and believes that it
lost sales and profits as a result of the alleged problems with the Six-Color Press. As
discussed further below, CPC and its agents were eventually | able to get the press to °
perform at an acceptable level for equipment of this type. : Therefore, if lability i is found .
‘in this matter, CPC should be entitled to. damages to compensate for the Six-Color Press’
failure to meet CPC’s reasonable performance expectations. Based on discussions with
counsel, I have been asked to assume ‘that CPC is legally not entitled to rescission of the
: contract and restitution of, the purchase price and related financing expenses.

A, Determination of the s Approprit Damage Period

: As | a first step in conducting my damages. analysis, I evaluated the appropriate time
period over which to measure damages. To conduct my analysis I reviewed (1)
contemporaneous financial reports crc provided to a prospective: lender, Associated
Bank, and (2) interactions CPC had with machinery repair and maintenance personnel.

1. Financial Reports

I reviewed the historical financial performatce of CPC and correspondence with and
CPC financial reports sent to Michael O’Rourke of Associated Bank®. “During this
review IJ noted the following:

© For the six-month period ended June 30, 2000, there were additional Six-Color
Press costs caused by “start up and learning time” incurred by CPC employees

'° CPC was attempting to develop a lending relationship with Associated Bank to replace its current lender,
Bank One.

10