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EX-31.2 - EXHIBIT 31.2 - SHERIDAN GROUP INCex31_2.htm
EX-32.1 - EXHIBIT 32.1 - SHERIDAN GROUP INCex32_1.htm
EX-31.1 - EXHIBIT 31.1 - SHERIDAN GROUP INCex31_1.htm


U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

(Mark One)

 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2009

Or

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Period From                to              .

Commission File Number:  333-110441


THE SHERIDAN GROUP, INC.
(Exact name of Registrant as specified in its charter)

Maryland
52-1659314
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification number)


11311 McCormick Road, Suite 260
Hunt Valley, Maryland 21031-1437
(Address of principal executive offices and zip code)
(410) 785-7277
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  None


Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes £  No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x  No £

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes £  No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o  
 


 
 

 

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Check one:  Large accelerated filer £    Accelerated filer £    Non-accelerated filer x  Smaller reporting company £
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes £  No x

None of the Registrant’s common stock is held by non-affiliates of the Registrant.

There was 1 share of the Registrant’s Common Stock outstanding as of March 29, 2010.

 
2

 

THE SHERIDAN GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009
INDEX

 
Pages
4
   
8
   
14
   
14
   
15
   
15
   
15
   
15
   
15
   
27
   
28
   
51
   
52
   
52
   
52
   
57
   
67
   
70
   
72
   
73
 
 
3


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes “forward-looking statements.” Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “predict,” “project,” “should,” “will,” “would” or words or phrases of similar meaning. They may relate to, among other things:

 
·
our liquidity and capital resources, including our ability to refinance our debt;

 
·
competitive pressures and trends in the printing industry;

 
·
prevailing interest rates;

 
·
legal proceedings and regulatory matters;

 
·
general economic conditions;
  
 
·
predictions of net sales, expenses or other financial items;

 
·
future operations, financial condition and prospects; and

 
·
our plans, objectives, strategies and expectations for the future.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements, might cause us to modify our plans or objectives, may affect our ability to pay timely amounts due under our notes and/or may affect the value of our notes. These risks and uncertainties may include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors.” New risk factors can emerge from time to time. It is not possible for us to predict all of these risks, nor can we assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements. Given these risks and uncertainties, we urge you to read this Annual Report on Form 10-K completely with the understanding that actual future results may be materially different from what we plan or expect. We caution you that any forward-looking statement reflects only our belief at the time the statement is made. We will not update these forward-looking statements even if our situation changes in the future.

PART I

ITEM 1.
BUSINESS

Overview

We are a leading specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine, book and article reprint markets. We believe that we enjoy strong and long-standing relationships with our customers, which include publishers, catalog merchants, associations and university presses.  We provide a wide range of printing services and value-added support services, such as digital proofing, preflight checking, offshore composition, copy editing, subscriber services, mail sortation, distribution and back issue fulfillment.  We utilize a decentralized management structure, which provides our customers with access to the resources of a large company, while maintaining the high level of service and flexibility of a smaller company. We operate in three business segments:  Publications, Specialty Catalogs and Books.  For the year ended December 31, 2009, we generated net sales of $293.3 million, operating income of $21.4 million and net income of $8.2 million.  As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of The Sheridan Group, Inc. and all of its subsidiaries.

History

We trace our roots back to The Sheridan Press, the predecessor of which was founded in 1915. We entered the short-run journal market in 1980, targeting the printing of scientific, technical, medical and scholarly journals for publishers. The Sheridan Group, Inc. was formed in 1988 to complete the acquisition of Braun-Brumfield, Inc., a short-run book printer located in Michigan. In 1994, we entered the specialty magazine market with the acquisition of United Litho, Inc., a printer of specialty magazines serving the Washington, D.C. metro area. In conjunction with our recapitalization in 1998, we acquired Dartmouth Printing Company, a specialty magazine printer in New Hampshire, and Capital City Press (“CCP”), a journal printer in Vermont. In 1999, we acquired BookCrafters, Inc., a short-run book printer in Chelsea, Michigan and consolidated it with Braun-Brumfield to form Sheridan Books, Inc. In 2004, we acquired The Dingley Press (the “Dingley Acquisition”), a specialty catalog printer in Maine. In 2006, we shut down the operations of CCP and consolidated the production of short-run journals at The Sheridan Press. Currently, we are comprised of six specialty printing companies operating in the domestic scientific, technical, medical and scholarly journal, specialty catalog, short-run book, specialty magazine and article reprints markets: The Sheridan Press in Pennsylvania; Sheridan Books in Michigan; Dartmouth Printing Company in New Hampshire; United Litho in Virginia; Dartmouth Journal Services in Vermont; and The Dingley Press in Maine.

 
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Printing Services

Our printing services include transferring content onto printing plates in pre-press, printing the content on press, binding the printed pages into the finished product and distributing the finished product to either the customer or the ultimate end user.  Pre-press processes, which include digital techniques, as well as computer-to-plate technology, are critical front-end elements of our printing services which ready the content for printing on our presses.  Sheet-fed and web presses are used, depending on run length, to produce the printed product.  We also offer ultra-short-run printing services for article reprints, books and journals. During 2008, we launched a new product offering to digitally print books and journals on demand. We utilize three types of binding techniques for the printed product:  perfect binding, saddle stitching and case binding. The product is then labeled and packaged prior to mailing. The majority of journals and magazines are mailed to the subscribers; the remainder are shipped to the publisher. All of our books are shipped in cases to the customer. Catalogs are drop-shipped to various locations throughout the U.S. and placed into the mail stream close to the recipient.

Value-Added Support Services

In addition to providing printing services to our customers, we offer a full range of value-added support services.  While sales of these services constitute a relatively small percentage of total revenues, they are critical to meeting the customer’s needs.  These services are highly customized for each customer’s specifications and logistics requirements.  Examples of the value-added support services we provide are digital proofing, preflight checking, offshore composition, copy editing, subscriber services, mail sortation, distribution and back issue fulfillment.

Printing Segments

As a leading publications printer, we offer a broad range of products and services, including the printing of scientific, technical, medical and scholarly journals, specialty catalogs, short-run books, specialty magazines, article reprints and an extensive array of value-added support services.  Our products are sold to a diverse set of customers, including publishers, catalog merchants, university presses and associations.

The following table presents the percentage of net sales contributed by each segment during the past three fiscal years.

Net sales %
 
2009
   
2008
   
2007
 
Publications
   
57
     
54
     
53
 
Specialty Catalogs
   
23
     
27
     
29
 
Books
   
20
     
19
     
18
 
Total
   
100
     
100
     
100
 
 
Additional financial information about our segments is set forth in Note 16 to our consolidated financial statements set forth in Part II, Item 8 of this report.
 
Publications

The Publications segment provides products and services for journals and specialty magazines to publishers, university presses and associations.

 
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Journals

The journal market includes journals for the scientific, technical, medical and scholarly communities. We compete in both the short-run and medium-run portions of the journal market.  We define short-run journals as journals produced on sheet-fed and digital presses with typical production runs of less than 5,000. We consider medium-run journals to be journals with production runs between 5,000 and 100,000 copies. Medium-run journals are typically produced on web presses due to economies of scale versus sheet-fed presses. Publishers, associations and university presses comprise the customers in the journals market.  In 2009, we printed over 2,400 journal titles.

Our journals are primarily black and white with a small amount of color for photographs, diagrams and advertisements.  They are printed on schedules that range from weekly to annually. Journal printing typically results in a high level of repeat business due to the periodic nature and complexity of these publications. The vast majority of journals are perfect bound, with the remainder saddle-stitched. Our journal customers rely on our consistency and on-time reliability to meet the demands of their own customers.

Originally developed as an ancillary product from the base journal business, we produce article reprints on sheet-fed and digital presses.  Article reprints are produced for customers who require reprints of an individual article from a journal or magazine for marketing or other purposes. Historically, we have primarily reprinted journal and magazine articles for which we were the original printer. We have expanded our business by winning article reprint business on publications for which we were not the original printer.  We are a full-service reprint printer, producing black and white as well as color reprints for publishers, university presses and associations.

Specialty Magazines

We characterize specialty magazines as magazines having production runs of less than 100,000 copies. Our customers in this market are publishers and associations. Specialty magazines also have a high level of repeat business due to the periodic nature of the publications. This is largely a regional market defined by proximity to the customer. In 2009, we printed over 400 magazine titles.

We produce short-run magazines with average run lengths of 27,000 copies.  The majority of these magazines are printed in four-color.  The magazines are bound using the saddle-stitching and perfect binding techniques. The magazines are produced in frequencies that range from weekly to annually. These magazines are produced on web presses.  Although specialty magazine customers do not require composition services, they do demand high levels of customer service focused on distribution and mailing services, where managing the customer’s subscriber database is critical to customer satisfaction.

Specialty Catalogs

We entered the specialty catalog segment in 2004 with our purchase of The Dingley Press.  We characterize Specialty Catalogs as catalogs distributed by specialty catalog merchant companies, which are often smaller entrepreneurial firms with high service requirements. We produce catalogs with run lengths between 50,000 and 8,500,000 copies, most of which are printed in four-color and are bound using the saddle stitching technique. Multiple versions of each catalog are distributed during the year requiring high levels of customer service and extensive distribution services.  In 2009, we printed about 130 catalog titles.

Books

We print books for publishers, associations and university presses. Sales to this market include both the initial printing of titles and subsequent reprints.  In 2009, we printed about 9,600 book titles.

We produce books in run lengths that average about 2,000 copies and range from 100 to 10,000 copies.  The majority of these books are black and white.  Books are produced on both sheet-fed and web presses.  In 2009, about 56% of our books had soft covers (perfect bound) and about 44% had hard covers (case bound).

 
6


Competition

The printing industry in the United States is fragmented and highly competitive in most product categories and geographic regions. We compete in subsegments of the overall printing market.  Competition is largely based on price, quality, range of services offered, distribution capabilities, ability to service the specialized needs of customers, availability of printing time on appropriate equipment and use of state-of-the-art technology.  Competitive price pressure continues to be strong in the product segments in which we compete.

Customers

We benefit from a highly diversified customer base. The majority of our business comes from publishers, followed by catalog merchants, associations and university presses.  The average length of our relationship with our top 50 customers is approximately 18 years. During 2009 and 2008, we had no customer that accounted for more than 10% of our net sales. In 2007, Dr. Leonard’s Healthcare Corp. (“Dr. Leonard’s”) accounted for about 10.7% of our net sales, which are included in the Specialty Catalogs segment. The loss of this or any other large customer could cause our net sales and profitability to materially decline.

Sales and Marketing

We have developed a knowledgeable and experienced sales management team, which has successfully cultivated and maintained strong relationships with customers across the U.S. Our products are sold through internal direct sales professionals and a dedicated network of sales representatives. Across all of our companies, external representatives augment an internal customer service and sales staff, providing our customers with multiple touch points. Our sales representatives are paid a commission based on sales volume growth targets in a structure that minimizes the fixed costs we incur to support our sales force.

We traditionally market through industry trade shows and industry association conferences. In addition, in our article reprint business, we have strategic relationships with three marketing firms that specialize in obtaining reprint orders from customers, companies and individuals that were featured in a recent publication produced by us or other printers.  These marketing firms identify opportunities for these potential clients to utilize the identified publication reprints as marketing tools.

Raw Materials

The principal raw material used in our business is paper, which represents a significant portion of our cost of materials. Due to the significance of paper in our business, we are dependent upon the availability of paper. In periods of high demand, certain paper grades have been in short supply, including grades we use in our business. In addition, during periods of tight supply, many paper producers allocate shipments of paper based upon historical purchase levels of customers. Historically, however, we generally have not experienced significant difficulty in obtaining adequate quantities of paper. We do not have any long-term paper supply agreements. We also use a variety of other raw materials including ink, film, offset plates, chemicals and solvents, glue, wire and subcontracted components. In general, we have not experienced any significant difficulty in obtaining these raw materials.

Technology and Operations

Our capital investments have been focused on productivity improvement, more efficient material usage and incremental capacity.  Additionally, our investments in technology have been critical in helping achieve improved workflow and reduced cycle times.

Employees

We had about 1,540 employees as of December 31, 2009. We focus heavily on fostering enthusiastic and positive cultures at each of our locations, evidenced by the fact that we have been recognized with numerous “Best Workplace in America” awards presented by Printing Industries of America. In addition, we closely monitor our employees’ level of job satisfaction with comprehensive surveys on a regular basis. Management believes our compensation and benefits packages are competitive within the industry and local markets.

Regulatory Matters

We are subject to a broad range of federal, state and local laws and regulations relating to the pollution and protection of the environment, health and safety and labor. Based on currently available information, we do not anticipate any material adverse effect on our operations, financial condition or competitive position as a result of our efforts to comply with environmental, health and safety or labor requirements, and we do not anticipate needing to make any material capital expenditures to comply with such requirements.

 
7


ITEM 1A.
RISK FACTORS

Risk Factors

Senior Secured Notes Maturing—We do not have sufficient funds to repay our senior secured notes that mature on August 15, 2011 and may not be able to refinance them prior to their maturity.

We do not have sufficient funds, nor do we anticipate generating sufficient funds from operations, to repay our senior secured notes, which mature on August 15, 2011. We intend to refinance these notes prior to their maturity but we cannot assure you that we will be able to do so.

Substantial Leverage—Our substantial indebtedness could adversely affect our financial health and prevent us from meeting our obligations under our indebtedness.

We have a significant amount of indebtedness.  On December 31, 2009, we had total indebtedness of approximately $142.9 million.

Our substantial indebtedness could have important consequences.  For example, it could:

 
·
make it more difficult for us to meet our payment and other obligations under our indebtedness;

 
·
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 
·
increase our vulnerability to general adverse economic and industry conditions;

 
·
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 
·
place us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and

 
·
limit our ability to borrow additional funds or raise additional financing.

In addition, agreements governing our indebtedness contain financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests.  Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.

Technological Change—The evolution of technology may decrease the demand for our products and services.

The technology we use in our operations is rapidly evolving. We could experience delays or difficulties in responding to changing technology, in addressing the increasingly sophisticated needs of our customers or in keeping pace with emerging industry standards. In addition, the cost required to respond to and integrate changing technologies may be greater than we anticipate. If we do not respond adequately to the need to integrate changing technologies in a timely manner, or if the investment required to so respond is greater than anticipated, our business, financial condition, results of operations, cash flow and ability to make payments on the notes may be adversely affected. We remain largely dependent on the distribution of scientific, technical, medical and other scholarly information in printed form. Usage of the Internet and other electronic media continues to grow. We cannot assure you that the acceleration of the trend toward such electronic media will not decrease the demand for our products which could result in lower profits and reduced cash flows.

Changes in technology could also result in digital printing methods becoming more cost effective for printing short-run publications. If the use of digital printing were expanded in this manner, it could allow smaller printers to compete against us in our specialized market, which could cause a decrease in the demand for our services or could force us to lower our prices to remain competitive. Such a decrease in demand or price could result in decreased profitability and have a material adverse effect on our business, financial condition and results of operations. Similarly, if our new product offering in the digital printing market is not successful, the same adverse impacts previously mentioned could result.

 
8


Competition—The printing industry is competitive and rapidly evolving and competition may adversely affect our business.

The printing industry is extremely competitive. We compete with numerous companies, some of which have greater financial resources than we do. Two of our direct competitors have been acquired by larger printing companies, which could enable them to reduce operating costs and expand services, thus enhancing their competitiveness. We compete on the basis of ongoing customer service, quality of finished products, range of services offered, distribution capabilities, use of state of the art technology and price. We cannot assure you that we will be able to compete successfully with respect to any of these factors. In certain circumstances, due primarily to factors such as freight rates and customer preference for local services, printers with better access to certain regions of the country may have a competitive advantage in such regions. Our failure to compete successfully could cause us to lose existing business or opportunities to generate new business and could result in decreased profitability, adversely affecting our business.

Consolidation—Industry consolidation of customers and increased competition for those customers may result in increased expenses and reduced revenue and market position.

The continuing consolidation of publishing companies has shrunk the pool of available customers. Large publishing companies often have preferred provider arrangements with specific printing companies. As smaller publishing companies are consolidated into the larger companies, the smaller publishing companies are often required to use the printing company with which the acquiring company has established an arrangement. If our customers were to merge or consolidate with publishing companies utilizing other printing companies, we could lose our customers to competing printing companies. If we were to lose a significant portion of our current base of customers to competing printing companies, our business, financial condition, results of operations and cash flow could be materially adversely affected.

Customer Concentration—The increase in business from a top customer may make our net sales and profitability more sensitive to the loss of such a customer’s business.

During 2009 we did not derive more than 10% of our net sales from any single customer. However, we derived a significant portion of our net sales from our ten largest customers. In the future, an increase in business from a large customer could result in net sales to that customer comprising more than 10% of our total net sales. We cannot assure you that our large customers will continue to use our printing services. The loss of any of our large customers could cause our net sales and profitability to decline materially.

Cost and Availability of Paper and Other Raw Materials—Increases in prices of paper and other raw materials and postal rates as well as changes in postal delivery schedules could cause disruptions in our services to customers.

The principal raw material used in our business is paper, which represents a significant portion of our cost of materials. Although we believe that we have been successful in negotiating favorable price relationships with our paper vendors, prices in the overall paper market are beyond our control. Historically, we have generally been able to pass increases in the cost of paper on to our customers. If we are unable to continue to pass any price increases on to our customers, future paper price increases could adversely affect our margins and profits.

Due to the significance of paper in our business, we are dependent upon the availability of paper. In periods of high demand, certain paper grades have been in short supply, including grades we use in our business. In addition, during periods of tight supply, many paper producers allocate shipments of paper based upon historical purchase levels of customers. Although we generally have not experienced significant difficulty in obtaining adequate quantities of paper, unforeseen developments in the overall paper markets could result in a decrease in the supply of paper and could cause either or both of our revenues or profits to decline.

 
9


We use a variety of other raw materials including ink, film, offset plates, chemicals and solvents, glue, wire and subcontracted components. In general, we have not experienced any significant difficulty in obtaining these raw materials. We cannot assure you, however, that a shortage of any of these raw materials will not occur in the future or will not potentially adversely affect the financial results of our business.

Our journals, magazines and catalogs are mailed, either by us or our customers, to subscribers. As a result, an increase in postal rates may cause our customers to decrease the size and number of their publications. Although we generally have not experienced significant decreases in mailings in the past due to postal rate increases, we cannot assure you that such a decrease will not occur in the future or will not potentially adversely affect the financial results of our business. The U.S. Postmaster General has proposed reducing the delivery of mail from six days to five days per week. If this change is adopted we cannot assure you how our customers will react and whether or not this will adversely affect the financial results of our business.

We require energy products, primarily natural gas and electricity, in our operating facilities.  We also depend on gasoline and diesel fuel for our delivery vehicles and the vehicles of the carriers we utilize to deliver our products.  Possible disruption of supplies or an increase in the prices of energy products could adversely affect the financial results of our business.

Fluctuations in the markets for paper and raw materials could adversely impact the market for our recycled materials, such as paper, cardboard and used plates.  This could have a negative effect on the income we generate from such sales.

Economic Conditions - Current and future economic conditions could adversely affect our business and financial performance.

Our operating results and performance are impacted by general economic conditions, both domestic and abroad. Worldwide economic problems became more pronounced in 2009 resulting in a decrease in demand for our products. The current global economic downturn and credit crisis may continue to negatively and materially affect demand for our products and services and our financial performance. Examples of how our business and financial performance may continue to be adversely affected by current and future economic conditions include:

 
·
increased price competition resulting in lower sales, profitability and cash flow;

 
·
deterioration in the financial condition of our customers resulting in reduced orders, an inability to collect receivables, payment delays or customer bankruptcy;

 
·
increased risk of insolvency of financial institutions, which may limit our liquidity in the future or adversely affect our ability to use or refinance our working capital facility;

 
·
increased turmoil in the financial markets may limit our ability and the ability of our customers and suppliers to access the capital markets or require limitations or terms and conditions for such access that are more restrictive and costly than in the past; and

 
·
declines in our businesses could result in material charges for restructuring or asset impairments.

Key Employees—Our ability to attract, train and retain executives and other qualified employees is crucial to results of operations and future growth.

We rely to a significant extent on our executive officers and other key management personnel. There can be no assurance that we will be able to continue to retain our executive officers and key management personnel or attract additional qualified management in the future. In addition, the success of any acquisition by us may depend, in part, on our ability to retain management personnel of the acquired companies. There can be no assurance that we will be able to retain such management personnel.

In addition, to provide high-quality printed products in a timely fashion we must maintain an adequate staff of skilled technicians, including pre-press personnel, pressmen, bindery operators and fulfillment personnel. Accordingly, our ability to maintain and increase our productivity and profitability will depend, in part, on our ability to employ, train and retain the skilled technicians necessary to meet our commitments. From time-to-time:

 
10


 
·
the industry experiences shortages of qualified technicians, and we may not be able to maintain an adequate skilled labor force necessary to operate efficiently;

 
·
our labor expenses may increase as a result of shortages of skilled technicians; or

 
·
we may have to curtail our planned internal growth as a result of labor shortages.

If any of these events were to occur, it could adversely affect our business.

Business Interruption—Our printing facilities may suffer business interruptions which could increase our operating costs, decrease our sales or cause us to lose customers.

The reliability of our printing facilities is critical to the success of our business. Our facilities might be damaged or interrupted by fire, flood, power loss, telecommunications failure, break-ins, earthquakes, terrorist attacks, war or similar events. Equipment malfunctions, computer viruses, physical or electronic break-ins and similar disruptions might cause interruptions and delays in our printing services and could significantly diminish our reputation and brand name and prevent us from providing services. Although we believe we have taken adequate steps to address these risks, damage to, or unreliability of, our printing facilities could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Research Funding—Decreases in the types and amount of research funding could decrease the demand for our journal printing services.

In our journal business, we provide printing services primarily to scientific, technical, medical and other scholarly journals. The supply of research papers published in these journals is related to the amount of research funding provided by the federal government and private companies. In the future, the federal government or private companies could decrease the type and amount of funding that they provide for scientific, technical, medical and other scholarly research. A significant decrease in research funding might decrease the number or length of journals that we print for our customers, which would decrease our cash flow. A reduction in the investment value of university endowments in the current economic environment could also result in less demand by university libraries for printed journals.

Environmental Matters—Our printing and other facilities are subject to environmental laws and regulations, which may subject us to liability or require us to incur costs.

We use various materials in our operations which contain substances considered hazardous or toxic under environmental laws. In addition, our operations are subject to federal, state and local environmental laws and regulations relating to, among other things, air emissions, waste generation, handling, management and disposal, waste water treatment and discharge and remediation of soil and groundwater contamination. Permits are required for the operation of certain of our businesses, and these permits are subject to renewal, modification and, in some circumstances, revocation. Our operations also generate wastes which are disposed of off-site. Under certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act, as amended (“CERCLA,” commonly referred to as “Superfund”) and similar state laws and regulations, we may be liable for costs and damages relating to soil and groundwater contamination at these off-site disposal locations, or at our own facilities. In the past, such matters have not had a material impact on our business or operations. We are not currently aware of any environmental matters that are likely to have a material adverse effect on our business, financial condition, results of operations and cash flow. However, we cannot assure you that such matters will not have such an impact on us. Furthermore, future changes to environmental laws and regulations may give rise to additional costs or liabilities that could have a material adverse impact on us.

Health and Safety Requirements—We could be adversely affected by health and safety requirements.

We are subject to requirements of federal, state and local occupational health and safety laws and regulations. These requirements are complex, constantly changing and have tended to become more stringent over time. It is possible that these requirements may change or liabilities may arise in the future in a manner that could have a material adverse effect on our business, financial condition, results of operations and cash flow. We cannot assure you that we have been or will be at all times in complete compliance with all those requirements or that we will not incur material costs or liabilities in connection with those requirements in the future.

 
11


Intellectual Property—We may not protect our technology effectively, which would allow competitors to duplicate our products and services, or our products and services may infringe on claims of intellectual property rights of third parties.

Our success and ability to compete depend, in part, upon our technology. Among our significant assets are our proprietary information and intellectual property rights. We rely on a combination of copyright, trademark and patent laws, trade secrets, confidentiality procedures and contractual provisions to protect these assets. Unauthorized use and misuse of our intellectual property could have a material adverse effect on our business, financial condition and results of operations, and there can be no assurance that our legal remedies would adequately compensate us for the damages caused by unauthorized use. In addition, licenses for a number of software products have been granted to us. Some of these licenses, individually and in the aggregate, are material to our business. Although we believe that the risk that we will lose any material license is remote, any loss could have a material adverse effect on our business, financial condition, results of operations and cash flow.

We do not believe that any of our products, services or activities infringe upon the intellectual property rights of third parties in any material respect. There can be no assurance, however, that third parties will not claim infringement by us with respect to current or future products, services or activities. Any infringement claim, with or without merit, could result in substantial costs and diversion of management and financial resources, and a successful claim could effectively block our ability to use or license products and services or cost us money.

Additional Capital—We may need additional capital in the future and it may not be available on acceptable terms.

We may require more capital in the future to:

 
·
refinance our senior secured notes;

 
·
fund our operations;

 
·
finance investments in equipment and infrastructure needed to maintain and expand our network;

 
·
enhance and expand the range of services we offer; and

 
·
respond to competitive pressures and potential strategic opportunities, such as investments, acquisitions and international expansion.

We cannot assure you that additional financing will be available on terms favorable to us, or at all. The terms of available financing may place limits on our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or delay, limit or abandon expansion opportunities. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could reduce our competitiveness as our competitors may provide better maintained networks or offer an expanded range of services.

Working Capital Facility Maturing—Although we anticipate that we will be able to refinance our working capital facility prior to its termination on March 25, 2011, there can be no assurance that we will be able to do so.

Our working capital facility is scheduled to terminate on March 25, 2011. As of December 31, 2009 we had no borrowings outstanding under our working capital facility, although we have borrowed under the facility from time to time in the past. We anticipate that we will be able to replace the current facility prior to its termination, but there can be no assurances that we will be able to do so on similar terms or at all. If we are not able to replace our working capital facility on similar terms it could adversely impact our ability to fund our liquidity needs.

Consummation of Future Acquisitions—We may not be able to acquire other companies on satisfactory terms or at all.

 
12


Our business strategy includes pursuing acquisitions. Nonetheless, we cannot assure you that we will identify suitable acquisitions or that such acquisitions can be made at an acceptable price. If we acquire additional businesses, those businesses may require substantial capital. Although we will be able to borrow under our working capital facility under certain circumstances to fund acquisitions, we cannot assure you that such borrowings will be available in sufficient amounts or that other financing will be available in amounts and on terms that we deem acceptable. In addition, future acquisitions could result in us incurring debt and contingent liabilities. We cannot assure you that we will be successful in consummating future acquisitions on favorable terms or at all.

Integration of Acquired Businesses—The integration of acquired businesses may result in substantial costs, delays and other problems.

Our future performance will depend on our ability to integrate the businesses that we may acquire. To integrate newly acquired businesses we must integrate manufacturing facilities and extend our financial and management controls and operating, administrative and information systems in a timely manner and on satisfactory terms and conditions. This may be more difficult with respect to significant acquisitions. We may not be able to successfully integrate acquired businesses or realize projected cost savings and synergies in connection with those acquisitions on the timetable contemplated or at all.

Furthermore, the costs of businesses that we may acquire could significantly impact our short-term operating results. These costs could include:

 
·
restructuring charges associated with the acquisitions; and

 
·
other expenses associated with a change of control, as well as non-recurring acquisition costs including accounting and legal fees, investment banking fees, recognition of transaction-related obligations and various other acquisition-related costs.

The integration of newly acquired businesses will require the expenditure of substantial managerial, operating, financial and other resources and may also lead to a diversion of management’s attention from our ongoing business concerns.

Finally, although we conduct and intend to conduct what we believe to be a prudent level of investigation regarding the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses. Until we actually assume operating control of such business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. Once we acquire a business, we are faced with risks, including:

 
·
the possibility that we have acquired substantial undisclosed liabilities;

 
·
the risks of entering markets in which we have limited or no prior experience;

 
·
the potential loss of key employees or customers as a result of changes in management; and

 
·
the possibility that we may be unable to recruit additional managers with the necessary skills to supplement the management of the acquired businesses.

We may not be successful in overcoming these risks.

Principal Stockholders—Our principal stockholders could exercise their influence over us.

As a result of their stock ownership of TSG Holdings Corp., our parent, Bruckmann, Rosser, Sherrill & Co., L.L.C. (“BRS”), Jefferies Capital Partners (“JCP”) and their respective affiliates together beneficially own about 84.6% of TSG Holdings Corp.’s outstanding capital stock. By virtue of their stock ownership and the terms of the securities holders’ agreement, these entities have significant influence over our management and will be able to determine the outcome of all matters required to be submitted to the stockholders for approval, including the election of our directors and the approval of mergers, consolidations and the sale of all or substantially all of our assets. The interests of BRS and JCP as equity owners of TSG Holdings Corp. may differ from the interests of our noteholders and the lenders under our working capital facility, and, as such, BRS and JCP may take actions which may not be in the interest of such noteholders and lenders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity owners might conflict with the interests of our noteholders and the lenders under our working capital facility. In addition, our equity owners may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to our noteholders and the lenders under our working capital facility.

 
13


Effectiveness of our internal controls — Failure to comply with the Sarbanes-Oxley Act could impact our business.

There can be no assurance that the periodic evaluation of our internal controls required by the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies or that our independent registered public accounting firm will be able to attest to the effectiveness of our internal control over financial reporting. Failure to comply may have consequences for our business. These consequences could include increased risks of financial statement misstatements, investigations or sanctions by regulatory authorities, such as the SEC, and negative capital market reactions.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

We operate a network of 13 manufacturing, warehousing and office facilities located throughout the East Coast and Midwest that occupy, in total, about 1.1 million square feet. We maintain approximately 1.0 million square feet of production space consisting of manufacturing and publication services. We own about 85% of the square footage we use.  The following table provides an overview of our manufacturing, warehousing and office facilities.

Location
 
Function(s)
 
Ownership Structure
 
Total Size (Sq. Feet)
Hunt Valley, MD
 
Corporate Headquarters
 
Leased
 
6,366
Hanover, PA
 
Manufacturing (Publications)
 
Owned
(1)
172,250
Chelsea, MI
 
Manufacturing (Books)
 
Owned
(1)
160,569
Hanover, NH
 
Manufacturing (Publications)
 
Owned
(1)
147,830
Ashburn, VA
 
Manufacturing (Publications)
 
Owned
(1)
70,159
Lisbon, ME
 
Manufacturing (Specialty catalogs)
 
Owned
(1)
276,787
Ann Arbor, MI
 
Manufacturing and Distribution (Books)
 
Owned
(1)
124,726
Hanover, PA
 
Warehousing (Publications)
 
Leased
 
70,000
Orford, NH
 
Warehousing (Publications)
 
Leased
 
4,330
Waterbury, VT
 
Publication Services (Publications)
 
Leased
 
13,000
Sterling, VA
 
Warehousing (Publications)
 
Leased
 
6,304
Lewiston, ME
 
Warehousing (Specialty catalogs)
 
Leased
 
68,286
Lisbon, ME
 
Warehousing (Specialty catalogs)
 
Leased
 
3,200
       
Total
 
1,123,807
______________________
(1)     Subject to liens in favor of the holders of our outstanding senior secured notes and the lenders under our working capital facility.

Some of our office and warehouse leases are on yearly renewals.  The lease of our corporate headquarters expires in December 2011, subject to a renewal option.  We believe that our office, manufacturing and warehousing facilities are adequate for our immediate needs and that additional or substitute space is available at a reasonable cost if needed to accommodate future growth and expansion.  

We are continuing our efforts to sell the Ann Arbor, Michigan book facility. We may consolidate this facility with our Chelsea, Michigan operation, pending a firm offer from a third party at an acceptable price.

 
14


ITEM 3.
LEGAL PROCEEDINGS

We currently are involved in various litigation proceedings as a defendant and are from time to time involved in routine litigation. Accruals for litigation have not been provided because information available at this time does not indicate that it is probable that a liability has been incurred. In the opinion of our management, these matters are not expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.

ITEM 4.
RESERVED

PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

We are wholly-owned by TSG Holdings Corp, a privately owned corporation. There is no public trading market for our equity securities or for those of TSG Holdings Corp. As of March 29, 2010, there were 33 holders of TSG Holdings Corp. common stock.

Our working capital facility contains customary restrictions on our ability and the ability of certain of our subsidiaries to declare or pay any dividends or repurchase stock. The indenture governing our 10.25% Senior Secured Notes due 2011 also contains customary terms restricting our ability and the ability of certain of our subsidiaries to declare or pay any dividends or repurchase stock. For further information related to the payment of dividends, see the discussion contained in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”  Information with respect to shares of common stock that may be issued under our equity compensation plans is set forth in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

ITEM 6.
SELECTED FINANCIAL DATA
 
(Dollars in thousands)
 
Year ended December 31, 2009
   
Year ended December 31, 2008
   
Year ended December 31, 2007
   
Year ended December 31, 2006
   
Year ended December 31, 2005
 
Statement of Income Data:
                             
                               
Net sales
  $ 293,349     $ 348,027     $ 344,240     $ 337,540     $ 347,959  
Gross profit
    60,401       66,647       70,050       65,376       64,456  
Selling and administrative expenses
    37,115       42,175       41,746       40,339       39,594  
Operating income
    21,390       12,757       26,308       5,489       21,897  
Net income (loss)
    8,217       (5,872 )     4,847       (8,343 )     1,180  
                                         
Balance Sheet Data (at end of period):
                                       
                                         
Cash and cash equivalents
  $ 4,110     $ 16,397     $ 20,517     $ 7,800     $ 7,962  
Property, plant and equipment, net
    117,757       127,064       126,709       129,666       119,220  
Total assets
    249,000       285,097       298,968       291,567       300,721  
Total debt
    142,949       164,946       164,930       164,915       164,904  
Total stockholder's equity
    44,012       44,882       50,845       46,688       54,996  
                                         
Other Financial Data:
                                       
                                         
Depreciation and amortization
  $ 18,674     $ 18,400     $ 17,834     $ 18,991     $ 17,072  
Capital expenditures
    9,654       17,597       15,158       26,296       21,282  

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our historical consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The discussions in this section contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below. See “Special Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors” for a discussion of some of the risks that could affect us in the future.

 
15


Introduction

We are a leading specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine, book and article reprint markets. We provide a wide range of printing services and value-added support services, such as digital proofing, preflight checking, offshore composition, copy editing, subscriber services, mail sortation, distribution and back issue fulfillment. We utilize a decentralized management structure, which provides our customers with access to the resources of a large company, while maintaining the high level of service and flexibility of a smaller company.

Acquisition transactions

On August 21, 2003, TSG Holdings Corp (“Holdings” or our “Parent”) purchased 100% of the outstanding capital stock of The Sheridan Group, Inc. from its existing stockholders (the “Sheridan Acquisition”) for total cash consideration of $142.0 million less net debt (as defined in the stock purchase agreement), resulting in cash of $79.9 million being paid to the selling stockholders. The accounting purchase price was $186.6 million, which was comprised of the $79.9 million of cash paid to the selling stockholders, $51.4 million of assumed liabilities and $55.3 million of refinanced debt. We funded the acquisition price and the related fees and expenses with the proceeds of the sale of $105.0 million aggregate principal amount of our 10.25% Senior Secured Notes due 2011 (the “2003 Notes”) and equity investments in Holdings.

On May 25, 2004, The Sheridan Group, Inc., through a newly formed subsidiary, purchased substantially all of the assets and business of The Dingley Press (the “Dingley Acquisition”).  The accounting purchase price was $95.4 million, which was comprised of cash paid of $65.5 million, $26.0 million of assumed liabilities and $3.9 million of financing costs. We funded the acquisition price and the related fees and expenses with the proceeds of the sale of $60.0 million aggregate principal amount of our 10.25% Senior Secured Notes due 2011 (the “2004 Notes”), available cash and equity investments in Holdings. The 2003 Notes and the 2004 Notes are fully and unconditionally guaranteed on a joint and several bases by all of our subsidiaries.

Restructuring costs

In January 2009, we announced our plan to consolidate some administrative and production operations at our DPC facility in Hanover, New Hampshire. Approximately 20 positions at our ULI facility in Ashburn, Virginia were eliminated as a result of this action. We recorded $0.3 million of restructuring costs during 2009. The costs relate primarily to guaranteed severance payments and employee health benefits. We expect to record an additional $0.1 million of restructuring costs in connection with this consolidation during 2010.

Critical Accounting Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and the differences could be material. We consider the following accounting policies to be critical policies which involve various estimation processes:

 
·
Allowance for doubtful accounts;
 
·
Goodwill and other long-lived assets;
 
·
Income taxes; and
 
·
Self-insurance.

Allowance for Doubtful Accounts

Our policy with respect to trade accounts and notes receivable is to maintain an adequate allowance or reserve for doubtful accounts for estimated losses from the inability of our customers to make required payments. The process to estimate the collectibility of our trade accounts receivable balances consists of two steps. First, we evaluate specific accounts for which we have information that the customer may have an inability to meet its financial obligations (e.g., bankruptcy). In these cases, using our judgment based on available facts and circumstances, we record a specific allowance for that customer against the receivable to reflect the amount we expect to ultimately collect. Second, we then establish an additional reserve for all customers based on a range of percentages applied to aging categories, based on management’s best estimate. If the financial condition of our customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

 
16


Goodwill and Other Long-Lived Assets

On an annual basis or as circumstances dictate, we review goodwill and evaluate events or other developments that may indicate impairment in the carrying amount. We test goodwill for impairment using the two-step process as prescribed by the appropriate guidance. The first step is to screen for potential impairment, while the second step measures the amount of the impairment, if any. No impairments were noted as a result of these tests performed on December 31, 2009. The December 31, 2008 assessment indicated that goodwill related to our United Litho reporting unit, a component of the Publications segment, was fully impaired resulting in a write-down of goodwill totaling $3.4 million which was recorded during the fourth quarter of 2008. No impairments were noted as a result of these tests performed on December 31, 2007. At December 31, 2009, we had $41.0 million in goodwill. While significant judgment is required, we believe that our estimates of fair value are reasonable. However, should our assumptions change in future years, our fair value models could result in lower fair values for goodwill, which could materially affect the value of goodwill and our results of operations.

The determination of the fair value of our reporting units and the allocation of fair value to assets and liabilities within the reporting units requires management to make significant estimates and assumptions.  These estimates and assumptions include: the selection of suitable peer group companies, control premiums appropriate for acquisitions in our industry, the discount rate and forecasts of revenues, operating income, depreciation and amortization and capital expenditures.  The allocation requires several analyses to determine the fair value of assets and liabilities including, among others, customer relationships, trade names, technology and property, plant and equipment. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the uncertainty involved in making such estimates.  Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both.

We review other long-lived assets, consisting primarily of property, plant and equipment and identified intangibles subject to amortization, for impairment by analyzing the future undiscounted cash flows whenever events or changes in circumstances indicate that the carrying value of the long-lived assets, including goodwill, may not be recoverable. As a result of the impairment analysis performed in 2008 for United Litho (a component of the Publications segment) and The Dingley Press (our Specialty Catalogs segment), we concluded that the carrying value of the customer relationship assets exceeded their fair value. Therefore, during the fourth quarter of 2008, we recorded an impairment charge of $2.0 million and $0.2 million for the customer relationship assets of United Litho and The Dingley Press, respectively.  We do not believe there was any impairment of intangible assets or other long-lived assets as of December 31, 2009 and 2007. While significant judgment is required, we believe that our estimates of future undiscounted cash flows are reasonable. However, should our assumptions change in future years, our fair value models could result in lower fair values of long-lived assets, which could materially affect the value of long-lived assets and the results of operations.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. In addition to estimating the actual current tax liability, we must assess future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reflected on our consolidated balance sheets, and operating loss carryforwards. Such differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and, to the extent recovery is not considered likely, establish a valuation allowance against those assets. The valuation allowance is based on estimates of future taxable income in jurisdictions in which we operate and the period over which the deferred tax assets will be recoverable. We use our best judgment in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets.

To the extent that actual results differ from our estimates, new information results in changes to estimates or there is a material change in the actual tax rates or time periods within which the underlying temporary differences become taxable or deductible, we may need to establish an additional valuation allowance, reduce our existing valuation allowance or adjust the effective tax rate, all of which could materially impact our financial position and results of operations.

 
17


We adopted the recognition, measurement and disclosure guidance for the accounting for uncertain tax positions. This guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of this guidance and in subsequent periods. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We recognize interest and penalties related to uncertain tax positions as part of the income tax provision. We had accrued interest of $0.5 million and penalties of $0.4 million as of December 31, 2009. Interest and penalties in the amount of $0.1 million were expensed during the years ended December 31, 2009, 2008 and 2007, respectively. Interest and penalties will continue to accrue on certain issues in 2010 and forward.

Self-Insurance

We are self-insured for healthcare and workers’ compensation costs. We seek to mitigate the risk related to our ultimate claims exposure under these self-insurance arrangements through the purchase of various levels of individual and aggregate claims stop-loss insurance coverage with third-party insurers. We periodically review health insurance and workers’ compensation claims outstanding and estimates of incurred but not reported claims with our third-party claims administrators and adjust our reserves for self-insurance risk accordingly. Provisions for medical and workers’ compensation claims are based on estimates, which are subject to differing financial outcomes based upon the nature and severity of those claims. As a result, additional reserves may be required in future periods.

Results of Operations

The periods presented in this Form 10-K are reported on a comparable basis. The Publications business segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing, Dartmouth Journal Services and United Litho. We believe there are many similarities in the journal and magazine markets such as the equipment used in the print and bind process, distribution methods, repetitiveness and frequency of titles and the level of service required by customers. We have a Group President - Publication Services, to manage our journal and magazine business. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books.  This market does not have the repetitive nature of our other products and does not require the same level of customer service. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies.

The following tables set forth, for the periods indicated, information derived from our consolidated statements of income, the relative percentage that those amounts represent to total net sales (unless otherwise indicated), and the percentage change in those amounts from period to period. These tables should be read in conjunction with the commentary that follows them.
 
 
18


Comparison of Years Ended December 31, 2009 and December 31, 2008
 
                           
Percent of revenue
 
   
Year ended December 31,
   
Increase (decrease)
   
Year ended December 31,
 
(in thousands)
 
2009
   
2008
   
Dollars
   
Percentage
   
2009
   
2008
 
                                     
Net sales
                                   
Publications
  $ 165,872     $ 188,714     $ (22,842 )     (12.1 %)     56.5 %     54.2 %
Specialty catalogs
    68,948       92,218       (23,270 )     (25.2 %)     23.5 %     26.5 %
Books
    58,554       67,282       (8,728 )     (13.0 %)     20.0 %     19.3 %
Intersegment sales elimination
    (25 )     (187 )     162       86.6 %     -       -  
Total net sales
    293,349       348,027       (54,678 )     (15.7 %)     100.0 %     100.0 %
                                                 
Cost of sales
    232,948       281,380       (48,432 )     (17.2 %)     79.4 %     80.9 %
                                                 
Gross profit
    60,401       66,647       (6,246 )     (9.4 %)     20.6 %     19.1 %
                                                 
Selling and administrative expenses
    37,115       42,175       (5,060 )     (12.0 %)     12.7 %     12.1 %
Loss on disposition of fixed assets
    146       1,223       (1,077 )     (88.1 %)     -       0.4 %
Related party guaranty
    -       3,000       (3,000 )     (100.0 %)     -       0.8 %
Restructuring costs
    312       137       175       127.7 %     0.1 %     -  
Amortization of intangibles
    1,438       1,715       (277 )     (16.2 %)     0.5 %     0.5 %
Impairment charge
    -       5,640       (5,640 )     (100.0 %)     -       1.6 %
Total operating expenses
    39,011       53,890       (14,879 )     (27.6 %)     13.3 %     15.4 %
                                                 
Operating income
                                               
Publications
    17,312       12,481       4,831       38.7 %     10.4 %     6.6 %
Specialty catalogs
    1,491       (426 )     1,917    
nm
      2.2 %     (0.5 %)
Books
    4,039       5,524       (1,485 )     (26.9 %)     6.9 %     8.2 %
Corporate expenses
    (1,452 )     (4,822 )     3,370       69.9 %     N/A       N/A  
Total operating income
    21,390       12,757       8,633       67.7 %     7.3 %     3.7 %
                                                 
Other (income) expense
                                               
Interest expense
    17,229       18,399       (1,170 )     (6.4 %)     5.9 %     5.3 %
Interest income
    (69 )     (172 )     103       59.9 %     -       (0.1 %)
Gain on redemption of notes payable
    (7,194 )     -       (7,194 )  
nm
      (2.5 %)     -  
Other, net
    (234 )     1,269       (1,503 )  
nm
      (0.1 %)     0.4 %
Total other expense
    9,732       19,496       (9,764 )     (50.1 %)     3.3 %     5.6 %
                                                 
Income (loss) before income taxes
    11,658       (6,739 )     18,397    
nm
      4.0 %     (1.9 %)
                                                 
Income tax provision (benefit)
    3,441       (867 )     4,308    
nm
      1.2 %     (0.2 %)
                                                 
Net income (loss)
  $ 8,217     $ (5,872 )   $ 14,089    
nm
      2.8 %     (1.7 %)

_______________
nm- not meaningful

Net sales were $293.3 million in 2009, a $54.7 million or 15.7% decrease compared to net sales of $348.0 in 2008.  The decrease in sales was due primarily to reductions in pricing, print run lengths and page counts resulting from the ongoing economic recession coupled with decreases in paper and shipping costs, which are passed on to our customers. Net sales for the Publications segment decreased $22.8 million or 12.1% in 2009 as compared to the same period a year ago with about half the sales decline due to lower paper and freight costs. The balance of the Publications sales decline was due to reductions in pricing, run lengths and frequency of publication for journal and magazine customers along with a reduction in page counts from our magazine customers. Net sales for the Specialty Catalogs segment decreased $23.3 million or 25.2% in 2009 as compared to the same period a year ago. Approximately 75% of the Specialty Catalogs sales decrease was due to lower paper and freight costs, including the impact of the segment’s largest customer’s decision to supply its own paper. The remainder of the Specialty Catalogs sales decline is attributable to a reduction in print run lengths and page counts for catalogs reflecting reduced consumer spending. Net sales for the Books segment decreased $8.7 million or 13.0% in 2009 as compared to the same period a year ago due primarily to fewer titles being produced coupled with shorter run lengths and page counts as book publishers deal with the economic recession. Lower paper and freight costs accounted for about one third of the dollar sales decline in Books.

 
19


Gross profit for 2009 decreased by $6.2 million or 9.4% compared to 2008. The gross profit decrease was attributable primarily to the reduction in sales mentioned previously coupled with lower revenue from recyclable materials partially offset by lower variable costs, reductions in healthcare and utility costs, and cost reductions pertaining to staffing, benefits and discretionary spending. Additionally, the non-recurrence of 2008 start-up costs associated with the new digital product offering in the Publications segment also helped partially offset the adverse impact of the decline in sales and recyclables revenue. Gross margin of 20.6% of net sales in 2009 reflected a 1.5 margin point increase versus 2008. The gross margin increase was due principally to reductions in pass through costs of freight and paper as well as the reductions in health care, utility and variable costs combined with cost reduction efforts.

Operating income of $21.4 million for 2009 represented an increase of $8.6 million or 67.7% as compared to operating income of $12.8 million for 2008. This increase was primarily attributable to the non-recurrence of three items from 2008: (i) $5.6 million of impairment charges related to goodwill and intangibles at United Litho, (ii) $3.0 million of related party guaranty costs to satisfy obligations in connection with the shutdown of GPN Asia, a former affiliate of our parent company and (iii) $0.8 million of losses on the disposition of fixed assets associated with our product offering in the digital printing market. We also realized reductions in selling and administrative costs due to cost management of staffing, employee benefits and discretionary costs coupled with lower administrative costs associated with the new digital product initiative, partially offset by the gross profit reductions discussed previously. In the Publications segment, operating income increased by $4.8 million during 2009 as compared to the year ago period due primarily to the non-recurrence of the impairment charges for goodwill and other intangibles and the losses on the disposition of fixed assets associated with the digital product initiative mentioned previously. Additionally, reductions in Publications staffing, employee benefit plans and discretionary spending coupled with lower healthcare claims, lower material and utility costs, and the absence of start-up costs associated with our product offering in the digital printing market more than offset the adverse impact of lower sales volume and lower revenue from recyclable materials. In the Specialty Catalogs segments, operating income increased by $1.9 million in 2009 as a result of reductions in staffing and discretionary spending coupled with lower utility costs which offset the impact of lower sales volume and the lower revenue from recyclable materials compared to the same period year ago. Operating income in the Books segment decreased $1.5 million in 2009 as compared to 2008 due primarily to the decline in sales volume and lower revenue from recyclable materials. These adverse impacts were partially offset by significant reductions in staffing and employee benefits in the Books segment.

During 2009, we recorded gains on the redemption of notes payable of $7.2 million. There were no comparable transactions during 2008.  The redemption of notes payable was the primary reason our interest expense decreased $1.2 million during 2009 as compared to the same period last year.

Other income was $0.2 million for 2009 as compared to other expense of $1.3 million during the same period last year. This increase was due primarily to the increase in the market value of investments held in the deferred compensation plan during 2009. The market value of these investments decreased during the same period in 2008.
 
Income before income taxes of $11.7 million for 2009 represented an $18.4 million increase as compared to the same period last year. The increase was due primarily to the gains on the redemptions of notes payable and the non-recurrence of (i) impairment charges for goodwill and other intangibles, (ii) the related party guaranty costs in connection with the shutdown of GPN Asia and (iii) the losses on the disposition of certain fixed assets associated with the digital product initiative. In addition, the reduction in interest expense and the increase in the market value of investments held in the deferred compensation plan during the year also contributed to the increase in income before income taxes.  These increases were partially offset by the adverse impact of lower sales net of the operating cost reductions mentioned previously.

Our effective income tax rate was 29.5% for 2009 compared to 12.9% for the same period in 2008. The effective tax rate was much lower in 2008 due primarily to the impact of the goodwill impairment charge mentioned previously.

Net income of $8.2 million for 2009 represented a $14.1 million increase as compared to a net loss of $5.9 million for 2008 due to the factors mentioned previously.

 
20


Comparison of Years Ended December 31, 2008 and December 31, 2007

   
Year ended December 31,
   
Increase (decrease)
   
Percent of revenue Year ended December 31,
 
(in thousands)
 
2008
   
2007
   
Dollars
   
Percentage
   
2008
   
2007
 
                                     
Net sales
                                   
Publications
  $ 188,714     $ 182,906     $ 5,808       3.2 %     54.2 %     53.1 %
Specialty catalogs
    92,218       98,140       (5,922 )     (6.0 %)     26.5 %     28.5 %
Books
    67,282       63,278       4,004       6.3 %     19.3 %     18.4 %
Intersegment sales elimination
    (187 )     (84 )     (103 )     (122.6 %)     -       -  
Total net sales
    348,027       344,240       3,787       1.1 %     100.0 %     100.0 %
                                                 
Cost of sales
    281,380       274,190       7,190       2.6 %     80.9 %     79.7 %
                                                 
Gross profit
    66,647       70,050       (3,403 )     (4.9 %)     19.1 %     20.3 %
                                                 
Selling and administrative expenses
    42,175       41,746       429       1.0 %     12.1 %     12.1 %
Loss on disposition of fixed assets
    1,223       4       1,219    
nm
      0.4 %     -  
Related party guaranty
    3,000       -       3,000    
nm
      0.8 %     -  
Restructuring costs
    137       115       22       19.1 %     -       -  
Amortization of intangibles
    1,715       1,877       (162 )     (8.6 %)     0.5 %     0.6 %
Impairment charge
    5,640       -       5,640    
nm
      1.6 %     -  
Total operating expenses
    53,890       43,742       10,148       23.2 %     15.4 %     12.7 %
                                                 
Operating income
                                               
Publications
    12,481       21,002       (8,521 )     (40.6 %)     6.6 %     11.5 %
Specialty catalogs
    (426 )     1,551       (1,977 )  
nm
      (0.5 %)     1.6 %
Books
    5,524       6,264       (740 )     (11.8 %)     8.2 %     9.9 %
Corporate expenses
    (4,822 )     (2,509 )     (2,313 )     (92.2 %)     N/A       N/A  
Total operating income
    12,757       26,308       (13,551 )     (51.5 %)     3.7 %     7.6 %
                                                 
Other (income) expense
                                               
Interest expense
    18,399       18,577       (178 )     (1.0 %)     5.3 %     5.4 %
Interest income
    (172 )     (446 )     274       61.4 %     (0.1 %)     (0.2 %)
Other, net
    1,269       (83 )     1,352    
nm
      0.4 %     -  
Total other expense
    19,496       18,048       1,448       8.0 %     5.6 %     5.2 %
                                                 
(Loss) income before income taxes
    (6,739 )     8,260       (14,999 )  
nm
      (1.9 %)     2.4 %
                                                 
Income tax (benefit) provision
    (867 )     3,413       (4,280 )  
nm
      (0.2 %)     1.0 %
                                                 
Net (loss) income
  $ (5,872 )   $ 4,847     $ (10,719 )  
nm
      (1.7 %)     1.4 %
_______________
nm- not meaningful

Net sales were $348.0 million in 2008, a $3.8 million or 1.1% increase compared to net sales of $344.2 million for 2007, due primarily to cost increases for shipping and paper costs which were passed on to our customers during 2008. Net sales for the Publications segment in 2008 increased $5.8 million or 3.2% compared to 2007 due mainly to increases in shipping and paper costs which were passed on to our customers. Net sales for the Specialty Catalogs segment in 2008 decreased $5.9 million or 6.0% compared with 2007 primarily because the largest customer began supplying their own paper in 2008 instead of purchasing it through us, partially offset by higher shipping and paper costs which were passed on to our customers. Net sales for the Books segment in 2008 increased $4.0 million or 6.3% compared with 2007 due primarily to new work awarded to us by existing customers and the impact of increases in paper costs, which were passed on to our customers.

Gross profit for 2008 was $66.6 million, a $3.4 million or 4.9% decrease compared to gross profit of $70.0 million for 2007. Gross margin for 2008 decreased to 19.1% of net sales compared to 20.3% for 2007. The gross profit and margin decreases were attributable primarily to a $0.7 million increase in start-up costs incurred in establishing a new product offering in the Publications segment coupled with higher costs for healthcare, workers’ compensation claims, energy, materials and depreciation. These cost increases were partially offset by the impact of higher revenue from recyclable materials, primarily paper, and increased sales volume.

 
21


The loss on the disposition of fixed assets was $1.2 million during 2008 and was minimal during 2007. This loss was due primarily to the disposition of binding equipment acquired for our new product offering in the digital printing market that was replaced because it was not meeting our performance requirements.

We recorded $3.0 million of related party guaranty costs during 2008 to satisfy certain obligations of GPN Asia, a former affiliate of our parent company. We guaranteed the obligations of GPN Asia related to a lease agreement, up to a maximum of $4.0 million, and established a $0.3 million letter of credit to secure a working capital facility for GPN Asia. In August 2008, GPN Asia began the process of shutting down operations. In connection with this shutdown, we satisfied obligations under the lease agreement and letter of credit. Based on current estimates, we expect our total expenditures to be approximately $3.0 million. Of this amount, approximately $0.4 million was included in accrued expenses as of December 31, 2008.

As a result of our impairment tests in 2008, we concluded that the carrying value of goodwill at United Litho and the customer relationship assets at United Litho and The Dingley Press exceeded their fair value. This resulted in a non-cash impairment charge of $5.6 million during the fourth quarter of 2008. In connection with our annual assessment of goodwill and other intangibles in 2007, we concluded that there were no indications of impairment.

Operating income of $12.8 million in 2008 represented a $13.6 million or 51.5% decrease compared to operating income of $26.3 million in 2007. This decrease was due principally to a $1.8 million increase in start-up costs incurred in establishing a new product offering in the Publications segment, the related party guaranty, the loss on the disposition of fixed assets, the impairment charge for goodwill and other intangibles, an increase in claims for employee healthcare and workers’ compensation benefits, and higher costs for energy, materials and depreciation. These cost increases were partially offset by the impact of higher revenue from recyclable materials, primarily paper, and increased sales volume. The operating income of $12.5 million for the Publications segment in 2008 was $8.5 million lower than the operating income for the same period in 2007 primarily due to the impairment of goodwill and other intangibles at United Litho along with an increase of $1.8 million in start-up costs incurred in establishing a new product offering in the short-run digital printing market, the loss on disposition of fixed assets and an increase in claims for employee healthcare and workers’ compensation benefits and higher costs for energy, repairs, supplies and equipment leases. These cost increases were partially offset by the impact of higher revenue from recyclable materials, primarily paper. The operating loss was $0.4 million for the Specialty Catalogs segment in 2008 and represented a $2.0 million decrease as compared to the same period in 2007. This decrease was primarily due to the impairment of intangible assets, an increase in claims for employee healthcare and higher costs for outside services, energy and depreciation partially offset by higher recyclable revenue. Operating income of $5.5 million for the Books segment in 2008 represented a $0.7 million decrease as compared to 2007. The decrease was due primarily to an increase in claims for employee healthcare and workers’ compensation benefits and higher costs for materials and depreciation. These cost increases were partially offset by the impact of higher revenue from recyclable materials, primarily paper, and increased sales volume. We had an operating loss of $4.8 million in 2008 related to our corporate expenses. This loss was $2.3 million greater than the loss realized in the same period in 2007. This adverse impact was due primarily to the related party guaranty costs recorded in 2008 partially offset by lower costs related to management performance incentive payments.

The increase in other expense of $1.4 million during 2008 as compared to the same period in 2007 was due primarily to decreases in the market value of investments held in the deferred compensation plan during 2008.

Loss before income taxes for 2008 was $6.7 million, a $15.0 million decrease as compared to income before income taxes of $8.3 million for 2007. The decrease was due primarily to the impairment of goodwill and other intangibles, the costs incurred to settle the guaranty obligations in connection with the shutdown of GPN Asia, the start-up costs incurred in establishing a new product offering in the Publications segment, higher healthcare, workers’ compensation and energy costs and decreases in the market value of investments held in the deferred compensation plan, partially offset by higher recyclable revenue and increases in sales volume.

Our effective income tax rate in 2008 was 12.9% compared to 41.3% in 2007. The decrease in the effective tax rate was due primarily to the impact of the goodwill impairment charge in the Publications segment.

 
22


Net loss for 2008 was $5.9 million, a $10.7 million decrease as compared to net income of $4.8 million for 2007 due to the factors mentioned previously.

Liquidity and Capital Resources

We had cash of $4.1 million as of December 31, 2009 compared to $16.4 million as of December 31, 2008. During 2009, we utilized cash on hand to fund operations, make investments in new plant and equipment, make the semi-annual interest payments on the senior secured notes, repurchase some of our senior secured notes and pay a cash dividend and make a loan to our parent company.

Operating Activities

Net cash provided by operating activities was $23.0 million for 2009, an increase of $8.3 million as compared to $14.7 million for 2008. The increase was primarily due to favorable changes in working capital and other assets and liabilities totaling $7.9 million. The working capital changes included (i) a decrease in accounts receivable at the end of 2009 as compared to 2008 due primarily to decreases in sales activity, (ii) inventory levels at the end of 2009 were significantly lower as compared to the end of 2008 due primarily to efforts to reduce inventory balances in line with our lower production and sales levels, (iii) a decrease in refundable income taxes at the end of 2009 as compared to 2008 due to the tax refunds we collected during the year and (iv) the effect of the increase in income taxes payable to Holdings for federal and state jurisdictions where consolidated income tax returns are filed by Holdings. These favorable changes were partially offset by unfavorable changes which included: (i) a decrease in accounts payable at the end of 2009 as compared to 2008 due primarily to our lower production levels, (ii) an unfavorable change in other current assets due to the timing of cash received for rebates for materials and recyclables and (iii) an unfavorable change in other non-current assets due to the increase in the market value of investments held in the deferred compensation plan at the end of 2009 as compared to the end of 2008 versus the decrease in these investments at the end of 2008 as compared to the end of 2007. We also realized an increase in net income of $14.1 million in 2009 as compared to 2008. Much of this increase did not result in additional cash flow because it was due principally to decreases in non-cash charges consisting primarily of the reduction of impairment charges for goodwill and intangibles, the reduction in losses from the disposition of fixed assets, the reduction in amortization of intangible assets as well as the non-cash nature of the gain on the redemption of notes payable partially offset by increases in depreciation expense and the provision for doubtful accounts.

Net cash provided by operating activities was $14.7 million for 2008, a decrease of $12.8 million as compared to $27.5 million for 2007. The decrease was primarily due to a decline in net income of $10.7 million coupled with unfavorable working capital changes of $9.2 million partially offset by an increase in non-cash charges of $7.1 million. The decline due to working capital changes was caused by (i) a decrease in accounts payable at the end of 2008 as compared to 2007 due primarily to the timing of vendor payments, (ii) a decrease in the level of accrued expenses, primarily due to lower bonus accruals across all segments and lower customer deposits and deferred revenue in our Specialty Catalogs segment, at the end of 2008 as compared to the same period in 2007 and (iii) an increase in refundable income taxes due to the impact of our loss before income taxes, partially offset by an increase in cash receipts during 2008 as compared to 2007 and a reduction in our inventory balances at the end of 2008 as compared to 2007. The increase in non-cash charges consisted primarily of the $5.6 million impairment charge for goodwill and intangibles, along with a $1.2 million loss on the disposition of fixed assets and increases in depreciation expense, the provision for doubtful accounts and the provision for inventory realizability partially offset by the change in deferred income taxes.

Investing Activities

Net cash used in investing activities was $11.4 million for 2009 compared to $18.7 million for 2008. This $7.3 million decrease was primarily the result of a $7.9 million decrease in plant and equipment purchased in the ordinary course of business partially offset by a $0.6 million net increase in advances made to our parent and a former affiliated company.

Net cash used in investing activities was $18.7 million for 2008 compared to $14.5 million for 2007. This $4.2 million increase was primarily the result of a $2.4 million increase in plant and equipment purchased in the ordinary course of business coupled with a $1.4 million increase in advances made to affiliated companies.

 
23

 
FinancingActivities

Net cash used in financing activities during 2009 was $23.9 million compared to $0.1 million during 2008. The $23.8 million increase in cash used was primarily the result of the $14.5 million we paid to repurchase our senior secured notes, the $9.1 million dividend paid to our parent company to enable it to repurchase its capital stock in connection with the complete divestiture of its interest in Euradius International Dutch Bidco B.V. and the $0.3 million in deferred financing costs we paid in connection with the amendment to our working capital facility.

Net cash used in financing activities during 2008 and 2007 was $0.1 million and $0.2 million, respectively. The change was due primarily to the proceeds received and income tax benefit realized from the exercise of stock options.

Total debt outstanding at December 31, 2009 was $142.9 million which was a decrease of $22.0 million as compared to $164.9 million outstanding at December 31, 2008. The decrease was due primarily to the repurchase of our senior secured notes with a face value of $22.1 million during 2009.

Indebtedness

As of December 31, 2009, we had total indebtedness of $142.9 million comprised entirely of amounts due under the 2003 Notes and the 2004 Notes, all with a scheduled maturity of August 2011. We have significant interest payments due on the outstanding notes as well as interest payments due on any borrowings under our working capital facility, under which there were no amounts outstanding as of December 31, 2009. Total cash interest payments related to our working capital facility and the 2003 Notes and the 2004 Notes are expected to be in excess of $14.6 million on an annual basis.
 
Our working capital facility provides for available credit of up to $20.0 million, subject to a borrowing base test, that we may repay and reborrow until the March 25, 2011 maturity date. Actual available credit under the working capital facility fluctuates because it depends on inventory and accounts receivable values that fluctuate and is subject to discretionary reserves and revaluation adjustments that may be imposed by the agent from time to time and other limitations. Our working capital facility contains various covenants which limit our discretion in the operation of our businesses. Among other things, our working capital facility restricts our ability to prepay other indebtedness, including the 2003 Notes and the 2004 Notes, incur other indebtedness or pay dividends. We amended our working capital facility on June 16, 2009. The amended agreement prohibits us from repurchasing the 2003 Notes and the 2004 Notes unless certain conditions are met, including that the amount expended for note repurchases after May 25, 2009 may not exceed $20.0 million in the aggregate, and that immediately after each note repurchase, there must be at least $5.0 million available under the working capital facility. The working capital facility also requires us to satisfy an interest coverage ratio of at least 1.80 to 1.00 and to maintain EBITDA (as defined in and calculated pursuant to our working capital facility, such EBITDA being referred to hereinafter as “WCF EBITDA”) of at least $33.0 million, both calculated for the period consisting of the four preceding consecutive fiscal quarters. Failure to satisfy the financial tests in our working capital facility would constitute a default under our working capital facility. For the twelve months ended December 31, 2009, our interest coverage ratio was 2.61 to 1.00 and our WCF EBITDA for purposes of our working capital facility was $42.0 million. As of December 31, 2009, we had no borrowings outstanding under the working capital facility, had unused amounts available of $17.7 million and had $1.4 million in outstanding letters of credit.

WCF EBITDA, as calculated pursuant to the working capital facility, generally consists of net income (loss) before interest expense, income taxes, depreciation, amortization, restructuring charges and certain other non-cash items. WCF EBITDA is used below for purposes of calculating our compliance with the covenants in our working capital facility and to evaluate our operating performance and determine management incentive payments. WCF EBITDA is not an indicator of financial performance or liquidity under generally accepted accounting principles and may not be comparable to similarly captioned information reported by other companies. In addition, it should not be considered as an alternative to, or more meaningful than, income before income taxes, cash flows from operating activities or other traditional indicators of operating performance.

WCF EBITDA is reconciled directly to cash flow from operations as follows (in thousands):

 
24

 
   
Year ended December 31, 2009
   
Year ended December 31, 2008
   
Year ended December 31, 2007
 
                   
Net cash provided by operating activities
  $ 22,968     $ 14,640     $ 27,459  
                         
Accounts receivable
    (3,646 )     660       3,815  
Inventories
    (3,707 )     (1,141 )     228  
Other current assets
    566       (1,056 )     270  
Refundable income taxes
    (2,755 )     2,117       (438 )
Other assets
    124       (1,653 )     (527 )
Accounts payable
    7,149       3,130       (6,814 )
Accrued expenses
    4,181       3,642       1,572  
Income taxes payable
    (3,140 )     73       (765 )
Other liabilities
    112       1,049       268  
Provision for doubtful accounts
    (1,239 )     (863 )     (495 )
Provision for inventory realizability and LIFO value
    (107 )     (199 )     (44 )
Non-cash donation of property
    -       -       (45 )
Deferred income tax benefit (expense)
    470       297       (311 )
Loss on disposition of fixed assets, net
    (146 )     (1,223 )     (4 )
Income tax provision (benefit)
    3,441       (867 )     3,413  
Cash interest expense
    16,112       17,102       17,123  
Management fees
    894       767       917  
Non cash adjustments:
                       
Adjustments to LIFO value
    13       137       12  
(Increase) decrease in market value of investments
    (85 )     319       (58 )
Amortization of prepaid lease costs
    76       90       84  
Loss on disposition of fixed assets
    174       1,318       190  
Interest income
    (69 )     -       -  
Related party guaranty
    -       3,000       -  
Restructuring costs
    313       137       115  
Bank fees for abandoned line of credit renewal
    308       -       -  
WCF EBITDA
  $ 42,007     $ 41,476     $ 45,965  

The indenture governing the 2003 Notes and the 2004 Notes also contains various restrictive covenants. It, among other things: (i) limits our ability and the ability of our subsidiaries to incur additional indebtedness, issue shares of preferred stock, incur liens and enter into certain transactions with affiliates; (ii) places restrictions on our ability to pay dividends or make certain other restricted payments; and (iii) places restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of our assets.

Our principal sources of liquidity are expected to be cash flow generated from operations and borrowings under our working capital facility. Our principal uses of cash are expected to be to meet debt service requirements, finance our capital expenditures and provide working capital. We may from time to time seek to purchase or retire our outstanding debt, including the 2003 Notes and 2004 Notes, through cash purchases, in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Additionally, we may from time to time fund cash distributions to our Parent, as we did in the first quarter of 2009, in accordance with the limitations outlined in our bond indenture and our working capital facility. We estimate that our capital expenditures for 2010 will total about $9.4 million. Based on our current level of operations, we believe that our cash flow from operations, available cash and available borrowings under our working capital facility will be adequate to meet our future short-term liquidity needs. Our 2003 Notes and 2004 Notes mature on August 15, 2011. We do not have sufficient funds, nor do we anticipate generating sufficient funds from operations, to repay these notes. We intend to refinance these notes prior to their maturity but we cannot assure you that we will be able to do so. Our future operating performance and ability to extend or refinance our indebtedness will be dependent on future economic conditions and financial, business and other factors that may be beyond our control.

 
25


Contractual Obligations

The following table summarizes our future minimum non-cancelable contractual obligations as of December 31, 2009:

   
Remaining Payments Due by Period
 
   
Total
   
2010
   
2011 to 2012
   
2013 to 2014
   
2015 and beyond
 
(in thousands)
                             
                               
Long term debt, including interest (1)
  $ 166,702     $ 14,647     $ 152,055     $ -     $ -  
Operating leases
    7,290       3,395       3,670       225       -  
Purchase obligations (2)
    2,299       2,119       177       3       -  
Other long-term obligations (3)
    466       151       302       13       -  
                                         
Total (4)
  $ 176,757     $ 20,312     $ 156,204     $ 241     $ -  
______________________
(1)
Includes the $142.9 million aggregate principal amount due on the 2003 Notes and the 2004 Notes plus interest at 10.25% payable semi-annually through August 15, 2011.

(2)
Represents payments due under purchase agreements for consumable raw materials and commitments for construction projects and equipment acquisitions.

(3)
Represents payments due under a non-compete arrangement with our former Chairman of the Board.

(4)
At December 31, 2009, we have recognized $2.3 million of liabilities for unrecognized tax benefits. There is a high degree of uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits because they are dependent on various matters including tax examinations, changes in tax laws or interpretation of those laws, expiration of statutes of limitation, etc. Due to these uncertainties, our unrecognized tax benefits have been excluded from the contractual obligations table above.

Off-Balance Sheet Arrangements

At December 31, 2009 and 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Effect of Inflation

Inflation generally affects us by increasing our costs of labor, equipment and new materials. We do not believe that inflation has had any material effect on our results of operations during 2009, 2008 and 2007.

Recently Issued Accounting Pronouncements

On January 1, 2009, we adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on fair value measurement for nonfinancial assets and liabilities, other than non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), which already were subject to the FASB guidance.  The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.
  
On January 1, 2009, we adopted the authoritative guidance issued by the FASB on business combinations. The guidance addresses the manner in which the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business. This guidance also provides standards for recognizing and measuring the goodwill acquired in the business combination and for disclosure of information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption of this guidance by us did not have a material impact on our financial position, results of operations or cash flows. We expect that its adoption will reduce our earnings due to required recognition of acquisition and restructuring costs through operating earnings. The magnitude of this impact will be dependent on the number, size and nature of acquisitions in periods subsequent to adoption.

 
26


On January 1, 2009, we adopted authoritative guidance issued by the FASB that changes the accounting and reporting for non-controlling interests.  This guidance requires, among other things, that: non-controlling interests be reported as a component of equity; changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions; and any retained non-controlling equity investment upon the deconsolidation of a subsidiary initially be measured at fair value.  The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

In June 2009, the FASB issued the FASB Accounting Standards Codification (“Codification”). The Codification became the single source for all authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and does not have an effect on our financial position, results of operations or liquidity.

In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for transfers of financial assets. This amendment requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, this amendment eliminates the concept of a qualifying special-purpose entity. This amendment is effective for financial statements issued for fiscal years beginning after November 15, 2009. This amendment is not expected to have a material effect on our financial position, results of operations or liquidity.

In June 2009, the accounting standard regarding the requirements of consolidation accounting for variable interest entities was updated by the FASB to require an enterprise to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling interest in a variable interest entity. The adoption of this standard, effective January 1, 2010, is not expected to have a significant impact on our financial position, results of operations or liquidity.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in results of our operations and cash flows. In the ordinary course of business, we are exposed to foreign currency and interest rate risks. These risks primarily relate to the purchase of products and services from foreign suppliers and changes in interest rates on our long-term debt.

Foreign Exchange Rate Market Risk

We consider the U.S. dollar to be the functional currency for all of our entities. All of our net sales and virtually all of our expenses in fiscal years 2009, 2008 and 2007 were denominated in U.S. dollars. Therefore, foreign currency fluctuations had a negligible impact on our financial results in those periods.

Interest Rate Market Risk

We could be exposed to changes in interest rates. Our working capital facility is variable rate debt. Interest rate changes, therefore, generally do not affect the market value of such debt but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. During 2009, we had borrowings under our working capital facility and we estimate that a 1.0% increase in interest rates would have resulted in a negligible amount of additional interest expense for the year ended December 31, 2009. All of our other debt carries fixed interest rates.

 
27


ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Stockholder
of The Sheridan Group, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in the stockholder’s equity and of cash flows present fairly, in all material respects, the financial position of The Sheridan Group, Inc. and Subsidiaries (the “Company”) at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007.


/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
March 29, 2010

 
28


The Sheridan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
At December 31, 2009 and 2008

   
December 31,
   
December 31,
 
   
2009
   
2008
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 4,109,740     $ 16,396,628  
Accounts receivable, net of allowance for doubtful accounts of $2,055,569 and $1,080,208, respectively
    29,382,142       34,266,288  
Inventories, net
    13,989,631       17,803,085  
Due from affiliated companies
    -       662,212  
Other current assets
    4,023,966       3,438,647  
Refundable income taxes
    179,473       2,894,829  
Deferred income taxes
    1,700,168       1,684,563  
Total current assets
    53,385,120       77,146,252  
                 
Property, plant and equipment, net
    117,757,008       127,063,798  
Intangibles, net
    33,566,535       35,004,531  
Goodwill
    40,979,426       40,979,426  
Deferred financing costs, net
    1,483,423       2,604,547  
Due from affiliated companies - non current
    -       554,357  
Other assets
    1,828,173       1,743,828  
Total assets
  $ 248,999,685     $ 285,096,739  
                 
Liabilities
               
Current liabilities
               
Accounts payable
  $ 14,621,067     $ 23,291,403  
Accrued expenses
    17,698,876       21,880,095  
Due to parent, net
    121,044       -  
Total current liabilities
    32,440,987       45,171,498  
                 
Notes payable
    142,948,652       164,946,468  
Deferred income taxes
    25,935,903       26,313,410  
Other liabilities
    3,662,574       3,782,954  
Total liabilities
    204,988,116       240,214,330  
                 
Commitments and contingencies
               
                 
Stockholder's Equity
               
Common stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding
    -       -  
Additional paid-in capital
    42,047,938       51,135,564  
Retained earnings (accumulated deficit)
    1,963,631       (6,253,155 )
Total stockholder's equity
    44,011,569       44,882,409  
                 
Total liabilities and stockholder's equity
  $ 248,999,685     $ 285,096,739  

The accompanying notes are an integral part of these consolidated financial statements.

 
29


The Sheridan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008 and 2007

   
Year Ended December 31,
   
Year Ended December 31,
   
Year Ended December 31,
 
   
2009
   
2008
   
2007
 
Net sales
  $ 293,349,196     $ 348,026,720     $ 344,239,531  
Cost of sales
    232,947,797       281,380,147       274,189,774  
Gross profit
    60,401,399       66,646,573       70,049,757  
Selling and administrative expenses
    37,115,289       42,175,411       41,745,714  
Loss on disposition of fixed assets
    146,146       1,222,918       4,329  
Related party guaranty
    -       3,000,000       -  
Restructuring costs
    312,556       136,965       114,940  
Amortization of intangibles
    1,437,852       1,714,628       1,877,165  
Impairment charges
    -       5,639,613       -  
Total operating expenses
    39,011,843       53,889,535       43,742,148  
Operating income
    21,389,556       12,757,038       26,307,609  
Other (income) expense
                       
Interest expense
    17,228,454       18,398,974       18,576,598  
Interest income
    (69,485 )     (172,549 )     (445,935 )
Gain on redemption of notes payable
    (7,193,906 )     -       -  
Other, net
    (233,698 )     1,269,162       (83,320 )
Total other expense
    9,731,365       19,495,587       18,047,343  
Income (loss) before income taxes
    11,658,191       (6,738,549 )     8,260,266  
Income tax provision (benefit)
    3,441,405       (866,658 )     3,413,273  
Net income (loss)
  $ 8,216,786     $ (5,871,891 )   $ 4,846,993  

The accompanying notes are an integral part of these consolidated financial statements.

 
30


The Sheridan Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholder’s Equity
Years Ended December 31, 2009, 2008 and 2007

                     
Retained
       
         
Additional
   
Earnings
   
Total
 
   
Common Stock
   
Paid-In
   
(Accumulated
   
Stockholder's
 
   
Shares
   
Amount
   
Capital
   
Deficit)
   
Equity
 
Balance as of December 31, 2006
    1       -     $ 51,010,425     $ (4,322,515 )   $ 46,687,910  
                                         
Cash dividend
    -       -       -       (249,463 )     (249,463 )
Impact of adopting new guidance related to accounting for uncertain tax positions
    -       -       -       (473,276 )     (473,276 )
Share-based compensation
    -       -       33,129       -       33,129  
Net income
    -       -       -       4,846,993       4,846,993  
                                         
Balance as of December 31, 2007
    1       -     $ 51,043,554     $ (198,261 )   $ 50,845,293  
                                         
Cash dividend
    -       -       -       (183,003 )     (183,003 )
Capital contribution from parent company -stock options exercised
    -       -       20,400       -       20,400  
Income tax benefit from stock options exercised
    -       -       62,610       -       62,610  
Share-based compensation
    -       -       9,000       -       9,000  
Net loss
    -       -       -       (5,871,891 )     (5,871,891 )
                                         
Balance as of December 31, 2008
    1       -     $ 51,135,564     $ (6,253,155 )   $ 44,882,409  
                                         
Cash dividend
    -       -       (9,105,226 )     -       (9,105,226 )
Share-based compensation
    -       -       17,600       -       17,600  
Net income
    -       -       -       8,216,786       8,216,786  
                                         
Balance as of December 31, 2009
    1       -     $ 42,047,938     $ 1,963,631     $ 44,011,569  

The accompanying notes are an integral part of these consolidated financial statements.

 
31


The Sheridan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007

   
December 31,
   
December 31,
   
December 31,
 
   
2009
   
2008
   
2007
 
Cash flows provided by operating actvities:
                 
Net income (loss)
  $ 8,216,786     $ (5,871,891 )   $ 4,846,993  
Adjustments to reconcile net income (loss) to net cash provided by operating activities
                       
Depreciation
    17,236,045       16,684,883       15,957,244  
Amortization of intangible assets
    1,437,852       1,714,628       1,877,165  
Impairment of goodwill and intangibles
    -       5,639,613       -  
Provision for doubtful accounts
    1,238,625       862,897       495,475  
Provision for inventory realizability and LIFO value
    106,747       198,755       43,493  
Stock-based compensation
    17,600       9,000       33,129  
Amortization of deferred financing costs and debt discount, included in interest expense
    1,116,566       1,296,573       1,453,884  
Non-cash donation of property
    -       -       45,000  
Deferred income tax (benefit) provision
    (470,043 )     (297,475 )     311,100  
Gain on redemption of notes payable
    (7,193,906 )     -       -  
Loss on disposition of fixed assets
    146,146       1,222,918       4,329  
Changes in operating assets and liabilities
                       
Accounts receivable
    3,645,521       (659,767 )     (3,814,584 )
Inventories
    3,706,707       1,140,705       (228,159 )
Other current assets
    (566,094 )     1,056,253       (269,913 )
Refundable income taxes
    2,755,337       (2,116,829 )     437,504  
Other assets
    (124,182 )     1,653,164       527,308  
Accounts payable
    (7,149,268 )     (3,129,729 )     6,813,640  
Accrued expenses
    (4,181,219 )     (3,642,227 )     (1,571,608 )
Income tax payable
    3,140,527       (72,513 )     765,438  
Other liabilities
    (111,824 )     (1,048,915 )     (267,974 )
Net cash provided by operating activities
    22,967,923       14,640,043       27,459,464  
                         
Cash flows used in investing activities:
                       
Purchases of property, plant and equipment
    (9,654,334 )