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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2010

OR

 

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

For the transition period from              to             

Commission File Number 333-133825

 

 

SGS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-3939981

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

626 West Main Street,

Suite 500

Louisville, Kentucky

  40202
(Address of principal executive offices)   (Zip Code)

(502) 637-5443

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    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  ¨    No  ¨

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  (Do not check if a smaller reporting company)    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

As of October 29, 2010 there were 100 shares of the registrant’s common stock, $0.01 par value, outstanding.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION      3   

Item 1.

   Financial Statements      3   
   Condensed Consolidated Statements of Income      3   
   Condensed Consolidated Balance Sheets      5   
   Condensed Consolidated Statements of Cash Flows      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      27   

Item 4.

   Controls and Procedures      27   
PART II – OTHER INFORMATION      28   

Item 1.

   Legal Proceedings      28   

Item 1A.

   Risk Factors      28   

Item 6.

   Exhibits      28   
SIGNATURES      31   

 

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

SGS International, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(unaudited)

(in thousands of dollars)

 

 

     Three Months  Ended
September 30, 2010
    Three Months  Ended
September 30, 2009
 

NET SALES

   $ 87,282      $ 80,862   

COSTS OF OPERATIONS:

    

Cost of goods sold (exclusive of depreciation)

     53,400        50,910   

Selling, general, and administrative expenses

     12,865        12,767   

Depreciation and amortization

     5,961        5,926   
                

INCOME FROM OPERATIONS

     15,056        11,259   
                

NON-OPERATING EXPENSES:

    

Interest expense, net

     6,569        6,870   

Other expense (income), net

     (294     500   
                

INCOME BEFORE INCOME TAXES

     8,781        3,889   

PROVISION FOR INCOME TAXES

     3,443        1,831   
                

NET INCOME

   $ 5,338      $ 2,058   
                

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009, are an integral part of the financial statements.

 

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SGS International, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(unaudited)

(in thousands of dollars)

 

 

     Nine Months  Ended
September 30, 2010
     Nine Months  Ended
September 30, 2009
 

NET SALES

   $ 267,770       $ 241,901   

COSTS OF OPERATIONS:

     

Cost of goods sold (exclusive of depreciation)

     157,696         153,545   

Selling, general, and administrative expenses

     40,278         38,061   

Depreciation and amortization

     17,645         17,573   
                 

INCOME FROM OPERATIONS

     52,151         32,722   
                 

NON-OPERATING EXPENSES (INCOME):

     

Interest expense, net

     19,958         22,314   

Gain on debt extinguishment

     —           (10,500

Other expense, net

     292         943   
                 

INCOME BEFORE INCOME TAXES

     31,901         19,965   

PROVISION FOR INCOME TAXES

     12,390         8,194   
                 

NET INCOME

   $ 19,511       $ 11,771   
                 

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009, are an integral part of the financial statements.

 

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SGS International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands of dollars, except share and per share data)

 

 

     September 30, 2010      December 31, 2009  
     (unaudited)         

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 27,537       $ 10,710   

Receivables from customers, less allowances of $1,664 and $1,204 at September 30, 2010 and December 31, 2009, respectively

     70,810         60,855   

Inventories

     10,000         8,929   

Deferred income taxes

     1,468         2,550   

Prepaid expenses and other current assets

     3,539         4,121   
                 

Total current assets

     113,354         87,165   

Properties, plants and equipment, net

     40,396         42,597   

Goodwill

     183,655         183,139   

Other intangible assets, net

     161,697         165,245   

Deferred financing costs, net

     2,939         4,120   

Other assets

     1,673         1,407   
                 

TOTAL ASSETS

   $ 503,714       $ 483,673   
                 

LIABILITIES AND STOCKHOLDER’S EQUITY

     

Current liabilities:

     

Accounts payable, trade

   $ 11,662       $ 13,498   

Accrued compensation

     6,359         6,702   

Accrued taxes, including taxes on income

     2,186         2,146   

Accrued interest

     6,118         1,388   

Other current liabilities

     9,125         10,730   

Current portion of short-term and long-term obligations

     556         951   
                 

Total current liabilities

     36,006         35,415   

Long-term obligations, net of current portion

     296,348         307,918   

Non-current liabilities

     1,172         1,268   

Deferred income taxes

     31,681         20,562   
                 

Total liabilities

     365,207         365,163   
                 

Commitments and contingencies

     

Stockholder’s equity:

     

Common stock, $.01 par value, 1,000 shares authorized and 100 shares outstanding

     —           —     

Additional capital

     107,000         107,000   

Retained earnings

     30,866         11,355   

Accumulated other comprehensive income - unrealized translation adjustments, net of tax

     641         155   
                 

Total stockholder’s equity

     138,507         118,510   
                 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

   $ 503,714       $ 483,673   
                 

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009, are an integral part of the financial statements.

 

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SGS International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands of dollars)

 

 

     Nine Months  Ended
September 30, 2010
    Nine Months  Ended
September 30, 2009
 

CASH FLOWS FROM OPERATING ACTIVITIES

   $ 38,210      $ 25,279   
                

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Acquisition of properties, plants and equipment

     (7,043     (5,987

Proceeds from sales of equipment

     10        23   

Business acquisitions, net of cash acquired

     (2,047     (3,619
                

Net cash used in investing activities

     (9,080     (9,583
                

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Borrowings on revolving credit facility

     —          22,727   

Payments on revolving credit facility

     —          (21,609

Payments to extinguish senior subordinated notes

     —          (15,000

Payments on senior term loan and acquisition facility

     (11,870     (6,270

Payments on other long-term debt

     (480     (529
                

Net cash used in financing activities

     (12,350     (20,681
                

Effect of exchange rate changes on cash

     47        577   
                

NET CHANGE IN CASH AND CASH EQUIVALENTS

     16,827        (4,408

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     10,710        10,766   
                

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 27,537      $ 6,358   
                

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009, are an integral part of the financial statements.

 

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SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(all amounts in thousands of dollars, unless otherwise stated)

 

A. Summary of Significant Accounting Policies

General Nature of Business

SGS International, Inc. (“the Company” or “the Registrant”), headquartered in Louisville, Kentucky, operates in one operating business segment, pre-press graphic services. The Company provides a variety of services that include the preparatory steps that precede the actual printing of an image onto packaging material. The Company supplies photographic images, digital images, flexographic printing plates and rotogravure cylinders for the packaging printing industry. The Company has 38 locations in the United States, Canada, Mexico, the United Kingdom, the Netherlands, Hong Kong, and the Philippines.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and related footnotes that would normally be required by accounting principles generally accepted in the United States for complete financial reporting. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements for the year ended December 31, 2009 in the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission (SEC). The December 31, 2009 balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States.

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of a normal and recurring nature) that management considers necessary for a fair statement of financial information for the interim periods. Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2010.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of SGS International, Inc., its wholly owned subsidiaries and companies more than fifty percent owned. These subsidiaries include Southern Graphic Systems, Inc., Project Dove Holdco, Inc., Project Dove Manitoba, L.P., Southern Graphic Systems-Canada, Co., Southern Graphic Systems Mexico, S. De R.L. De C.V, SGS Packaging Europe Holdings Limited, SGS Packaging Europe Limited, MCG Graphics Limited, The Box Room Limited, SGS Packaging Netherlands B.V., McGurk Studios Limited, Thames McGurk Limited, and SGS Asia Pacific Limited.

Inventories and Cost of Goods Sold

Raw materials inventory is valued at the lower of cost or market with cost determined using the first-in, first-out (“FIFO”) method. Work-in-process inventory is valued at the lower of cost or net realizable value. There is no finished goods inventory since all products are shipped upon completion. Raw materials inventory and work-in-process inventory are as follows:

 

     September 30,
2010
     December 31,
2009
 

Raw materials

   $ 3,135       $ 2,571   

Work-in-process

     6,865         6,358   
                 

Total

   $ 10,000       $ 8,929   
                 

 

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Use of Estimates

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and require management to make certain estimates and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They may also affect the reported amounts of revenues and expenses during the reporting period. Areas that require significant judgments, estimates and assumptions include revenue recognition, accounts receivable and the allowance for doubtful accounts, work-in-process inventory, impairment of goodwill, other intangible assets and long-lived assets, accrued health and welfare benefits, and tax matters. Management uses historical experience and all available information to make these judgments and actual results could differ from those estimates upon subsequent resolution of some matters.

 

B. Goodwill and Other Intangible Assets

Goodwill and other intangible assets consist of the following:

 

     September 30,
2010
    December 31,
2009
 

Goodwill, cost

   $ 183,655      $ 183,139   
                

Customer relationships, cost

   $ 176,918      $ 176,459   

Customer relationships, accumulated amortization

     (39,294     (32,659

Other intangible assets, cost

     30,872        26,732   

Other intangible assets, accumulated amortization

     (6,799     (5,287
                

Total

   $ 161,697      $ 165,245   
                

The change in goodwill, customer relationships (cost) and other intangible assets (cost) during the nine months ended September 30, 2010 is due to the following:

 

     Goodwill      Customer
relationships (cost)
     Other intangible
assets (cost)
 

Balance at December 31, 2009

   $ 183,139       $ 176,459       $ 26,732   

Payment for exclusive supply agreement

     —           —           4,163   

Acquisition

     —           382         —     

Changes due to foreign currency fluctuations

     516         77         (23
                          

Balance at September 30, 2010

   $ 183,655       $ 176,918       $ 30,872   
                          

Amortization of customer relationships and other intangible assets is estimated to be approximately $11,000 in total per year from 2010 through 2014.

Amortization of the payment for the exclusive supply agreement entered into during the nine months ended September 30, 2010 is recorded as a reduction in net sales. Such amortization is expected to be $833 annually, and amounted to $208 and $528 for the quarter and nine months ended September 30, 2010, respectively.

 

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C. Interest Expense, net

Interest expense, net consists of the following:

 

     Three Months  Ended
September 30,
2010
     Three Months  Ended
September 30,
2009
 

Interest on senior term loan

   $ 627       $ 863   

Interest on borrowings on acquisition facility

     286         288   

Interest on senior subordinated notes

     5,235         5,235   

Amortization of deferred financing costs

     355         375   

Commitment fees on senior credit facility

     53         62   

Other

     13         47   
                 

Total

   $ 6,569       $ 6,870   
                 
     Nine Months Ended
September 30,
2010
     Nine Months Ended
September 30,
2009
 

Interest on senior term loan

   $ 2,026       $ 3,141   

Interest on borrowings on acquisition facility

     848         1,092   

Interest on senior subordinated notes

     15,705         16,070   

Amortization of deferred financing costs

     1,181         1,619   

Commitment fees on senior credit facility

     159         144   

Other

     39         248   
                 

Total

   $ 19,958       $ 22,314   
                 

 

D. Gain on Debt Extinguishment

In privately negotiated transactions that settled on February 13 and February 18, 2009, respectively, the Company’s wholly-owned subsidiary, Southern Graphic Systems, Inc., acquired SGS International, Inc.’s 12% Senior Subordinated Notes maturing on December 15, 2013 (“Notes”) in an aggregate principal amount of $25,500 for a cash purchase price of $15,000, resulting in a gain on debt extinguishment of $10,500.

 

E. Comprehensive Income

The following table sets forth comprehensive income for the quarters and nine months ended September 30, 2010 and 2009:

 

     Three Months  Ended
September 30,
2010
     Three Months  Ended
September 30,
2009
 

Net income

   $ 5,338       $ 2,058   

Cumulative translation adjustments, net

     3,559         3,761   
                 

Total

   $ 8,897       $ 5,819   
                 
     Nine Months Ended
September 30,
2010
     Nine Months Ended
September 30,
2009
 

Net income

   $ 19,511       $ 11,771   

Cumulative translation adjustments, net

     486         11,552   
                 

Total

   $ 19,997       $ 23,323   
                 

 

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F. Fair Value Measurements

Fair value is defined as the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized based upon the level of judgment associated with the inputs used to measure their values. These categories include (in descending order of priority): Level 1 inputs are observable inputs such as quoted prices in active markets; Level 2 inputs are inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 inputs are unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The estimated fair value of the Company’s investments in the non-qualified Southern Graphic Systems, Inc. Deferred Compensation Plan and the related offsetting liability are presented at fair value in the Company’s balance sheets. Investments in the Southern Graphic Systems, Inc. Deferred Compensation Plan are included in other assets and the offsetting liability is included in non-current liabilities on the Company’s consolidated balance sheets.

The following table shows assets measured at fair value as of September 30, 2010 on the Company’s balance sheet, and the input categories associated with those assets:

 

     Total Fair Value
at  September 30, 2010
     Fair Value Measurements
at Reporting Date Using
Quoted Prices in Active Markets
 

Deferred compensation plan assets (a)

   $ 1,167       $ 1,167   

 

(a)

The Company also has an offsetting liability related to the Deferred Compensation Plan, which is not disclosed in the table above as it is not independently measured at fair value.

The Company’s Notes have a carrying value of $174,500 and an estimated fair value of $181,488 at September 30, 2010. The estimated fair value of the Company’s Notes is determined using quoted prices in markets that are not active and is based on the average price of the Notes either traded or purchased by third parties between September 1, 2010 and October 29, 2010.

 

G. Commitments and Contingencies

Various lawsuits, claims and proceedings have been or may be instituted or asserted against entities within the Company. While the amounts claimed may be substantial, the ultimate liability cannot be determined because of the considerable uncertainties that exist. Therefore, it is possible that results of operations or liquidity in a particular period could be materially affected by certain contingencies. However, based on currently available facts and in light of legal and other defenses available to us, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the Company’s financial position, results of operations, and liquidity.

 

H. Income Taxes

The effective tax rate for the nine months ended September 30, 2010 was 38.8% compared to 41.0% for the nine months ended September 30, 2009. The effective tax rate for the quarter ended September 30, 2010 was 39.2% compared to 47.1% for the quarter ended September 30, 2009.

During 2010, the Company elected to defer the recognition, for tax purposes, of a $10,500 gain on debt extinguishment, which had previously been included as income in the Company’s 2009 tax provision calculations. Under this election, income is deferred until the fifth year after the gain on debt extinguishment, and is then recognized ratably over the subsequent five years. Making this election resulted in an increase of both deferred tax liabilities, as a result of deferring the $10,500 gain for tax purposes, and deferred tax assets, in the form of net operating loss carryforwards. In addition, this resulted in an alternative minimum tax (AMT) credit for estimated AMT taxes paid as a result of including the gain in the 2009 tax provision calculations.

In early 2011, to avoid withholding taxes on intercompany interest, the Company plans to make an election regarding certain foreign subsidiaries that will result in the utilization of all unlimited and available United States net operating loss carryforwards in 2011. This will substantially reduce the amount of deferred tax liabilities and deferred tax assets and will result in the reversal of $1,368 of currently recorded accrued taxes.

 

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The Company has not recorded a deferred tax liability for undistributed earnings of certain international subsidiaries because such earnings are considered permanently invested in foreign countries. As of September 30, 2010, undistributed earnings of international subsidiaries considered permanently reinvested were approximately $5,202. The unrecognized deferred tax liability is dependent on many factors, including withholding taxes under current tax treaties and foreign tax credits. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable. The Company does not consider undistributed earnings from certain other international operations to be permanently reinvested. A portion of the estimated tax liabilities upon repatriation of earnings from these international operations is expected to be offset with foreign tax credits.

 

I. Subsequent Event

On October 25, 2010, the Company completed an amendment and restatement of its senior secured credit facility originally provided to the Registrant under a credit agreement dated as of December 30, 2005 (the “Original Credit Agreement”) by a syndicate of banks, financial institutions and other entities.

The Original Credit Agreement provided financing of up to $193,700, consisting of: a $118,700 term loan facility; a $40,000 acquisition facility; and a $35,000 revolving credit facility, which included borrowing capacity available for letters of credit. Under the Original Credit Agreement, based on voluntary prepayments we have made there were no required quarterly installments and the outstanding balance of the term loan facility was due at maturity on December 30, 2011. Borrowings on the term loan facility bore interest at a variable rate of LIBOR plus 2.5%. The outstanding balance of the acquisition facility loans was payable in quarterly installments of approximately $100 through September 2011 with the remaining amount due at maturity on December 30, 2011. Borrowings on the acquisition facility bore interest at a variable rate of LIBOR plus 2.5%. The revolving credit facility was to mature on December 30, 2010.

The Original Credit Agreement was amended by an Amended and Restated Credit Agreement dated as of October 25, 2010 to incorporate the following amendments, among others: (i) extend the maturity of the revolving loans/commitments, term loans and acquisition loans until September 30, 2013; (ii) increase the aggregate amount of revolving commitments to $40,000; (iii) increase the margin for extending loans to LIBOR plus 3.5%; (iv) change the amortization for extending term loans and acquisition loans to $5,000 per annum, payable on a quarterly basis; (v) permit $25,000 of repurchases of the Registrant’s outstanding 12% Senior Subordinated Notes Due 2013; and (vi) refresh covenant baskets as of October 25, 2010. Certain lenders who did not consent to the terms of the Amended and Restated Credit Agreement will be repaid their loans in accordance with the repayment schedule of the Original Credit Agreement.

As of October 25, 2010, the Registrant has outstanding under the Amended and Restated Credit Agreement: $21,300 of term loans and $7,900 of acquisition loans due on December 31, 2011 and $92,700 million of term loans due September 30, 2013. (Acquisition loans due September 30, 2013 are term loans under the Amended and Restated Credit Agreement). There are no amounts currently outstanding under the revolving credit facility. Unused portions of the revolving credit facility are charged a fee of 0.75% per annum.

As the terms and conditions of the debt outstanding under the Amended and Restated Credit Agreement did not substantially change from the debt outstanding under the Original Credit Agreement, management concluded, under the guidelines of ASC Subtopic 470-50, that the net present value of the debt outstanding under the Amended and Restated Credit Agreement did not significantly change. Therefore, the change in terms will be accounted for as a debt modification in accordance with ASC 470. We do not expect any gain or loss from the transaction, but will recognize as expense certain fees associated with this debt modification while other fees will be capitalized as deferred financing fees and amortized over the remaining life of the related items of debt.

 

J. Supplemental Guarantor Information

The Company’s debt includes the senior credit facility and the Notes. The U.S. borrowings under the senior credit facility have been guaranteed by Southern Graphics Inc. (the parent of SGS International, Inc.), Southern Graphic Systems, Inc. and Project Dove Holdco, Inc. The Canadian borrowings under the senior credit facility

 

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have been guaranteed by SGS Packaging Europe Holdings Limited, SGS Packaging Europe Limited, MCG Graphics Limited, Southern Graphic Systems Mexico, S. De R.L. De C.V., The Box Room Limited, SGS Packaging Netherlands, B.V., McGurk Studios Limited, Thames McGurk Limited, SGS Asia Pacific Limited, Southern Graphic Systems, Inc., Project Dove Holdco, Inc., Project Dove Manitoba, L.P., Southern Graphics Inc., and SGS International, Inc. The Notes are general unsecured obligations and are guaranteed on a senior subordinated basis by the Company’s domestic subsidiaries and rank secondary to the Company’s senior credit facility. Guarantor subsidiaries for the Notes include Southern Graphic Systems, Inc. and Project Dove Holdco, Inc. Non-guarantor subsidiaries for the Notes include the direct and indirect foreign subsidiaries. The subsidiary guarantors are 100% owned by SGS International, Inc., the guarantees are full and unconditional, and the guarantees are joint and several.

Following are condensed consolidating financial statements of the Company. Investments in subsidiaries are either consolidated or accounted for under the equity method of accounting. Intercompany balances and transactions have been eliminated.

Certain reclassifications for intercompany interest-related items have been made to the consolidating statement of operations for the three months ended and nine months ended September 30, 2009 to conform to the presentation for the three months ended and nine months ended September 30, 2010.

 

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SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

 

Supplemental Condensed Consolidating Balance Sheet

September 30, 2010

 

     Parent / Issuer      Consolidated
Guarantor
Subsidiaries
     Consolidated
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

             

Current assets

             

Cash and cash equivalents

   $ 11,137       $ 5,750       $ 10,650       $ —        $ 27,537   

Receivables from customers, less allowances

     —           46,668         24,142         —          70,810   

Intercompany receivables

     258,934         1,141         1,007         (261,082     —     

Inventories

     —           7,056         2,944         —          10,000   

Deferred income taxes

     439         932         97         —          1,468   

Prepaid expenses and other current assets

     191         2,146         1,202         —          3,539   
                                           

Total current assets

     270,701         63,693         40,042         (261,082     113,354   

Investment in subsidiaries

     146,776         29,225         36,567         (212,568     —     

Properties, plants and equipment, net

     —           32,380         8,016         —          40,396   

Goodwill

     —           119,970         63,685         —          183,655   

Other intangible assets, net

     —           117,607         44,090         —          161,697   

Deferred financing costs, net

     2,939         —           —           —          2,939   

Other assets

     —           1,304         369         —          1,673   
                                           

Total assets

   $ 420,416       $ 364,179       $ 192,769       $ (473,650   $ 503,714   
                                           

Liabilities

             

Current liabilities

             

Accounts payable, trade

   $ 362       $ 7,300       $ 4,000       $ —        $ 11,662   

Intercompany payables

     —           230,406         30,676         (261,082     —     

Accrued compensation

     —           4,371         1,988         —          6,359   

Accrued taxes, including taxes on income

     —           630         1,556         —          2,186   

Accrued interest

     4         6,112         2         —          6,118   

Other current liabilities

     —           7,023         2,102         —          9,125   

Current portion of short-term and long-term obligations

     385         91         80         —          556   
                                           

Total current liabilities

     751         255,933         40,404         (261,082     36,006   

Non-current liabilities

             

Long-term obligations, net of current portion

     280,368         31         15,949         —          296,348   

Non-current liabilities

     —           1,172         —           —          1,172   

Deferred income taxes

     790         13,703         17,188         —          31,681   
                                           

Total liabilities

     281,909         270,839         73,541         (261,082     365,207   
                                           

Contingencies and commitments

             

Stockholder’s equity

             

Common stock

     —           —           —           —          —     

Other stockholder’s equity

     138,507         93,340         119,228         (212,568     138,507   
                                           

Total stockholder’s equity

     138,507         93,340         119,228         (212,568     138,507   
                                           

Total liabilities and stockholder’s equity

   $ 420,416       $ 364,179       $ 192,769       $ (473,650   $ 503,714   
                                           

 

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SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

 

Supplemental Condensed Consolidating Balance Sheet

December 31, 2009

 

     Parent / Issuer      Consolidated
Guarantor
Subsidiaries
     Consolidated
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

             

Current assets

             

Cash and cash equivalents

   $ 237       $ 3,005       $ 7,468       $ —        $ 10,710   

Receivables from customers, less allowances

     —           39,328         21,527         —          60,855   

Intercompany receivables

     415,780         140,374         5,158         (561,312     —     

Inventories

     —           6,125         2,804         —          8,929   

Deferred income taxes

     —           2,453         97         —          2,550   

Prepaid expenses and other current assets

     160         1,975         1,986         —          4,121   
                                           

Total current assets

     416,177         193,260         39,040         (561,312     87,165   

Investment in subsidiaries

     127,916         30,005         —           (157,921     —     

Properties, plants and equipment, net

     —           34,207         8,390         —          42,597   

Goodwill

     —           121,013         62,126         —          183,139   

Other intangible assets, net

     —           119,121         46,124         —          165,245   

Deferred financing costs, net

     4,120         —           —           —          4,120   

Other assets

     —           1,094         313         —          1,407   
                                           

Total assets

   $ 548,213       $ 498,700       $ 155,993       $ (719,233   $ 483,673   
                                           

Liabilities

             

Current liabilities

             

Accounts payable, trade

   $ 423       $ 8,514       $ 4,561       $ —        $ 13,498   

Intercompany payables

     137,612         388,870         34,830         (561,312     —     

Accrued compensation

     —           5,390         1,312         —          6,702   

Accrued taxes, including taxes on income

     —           496         1,650         —          2,146   

Accrued interest

     187         1,199         2         —          1,388   

Other current liabilities

     —           6,845         3,885         —          10,730   

Current portion of short-term and long-term obligations

     388         563         —           —          951   
                                           

Total current liabilities

     138,610         411,877         46,240         (561,312     35,415   

Non-current liabilities

             

Long-term obligations, net of current portion

     290,227         66         17,625         —          307,918   

Non-current liabilities

     —           988         280         —          1,268   

Deferred income taxes

     866         6,314         13,382         —          20,562   
                                           

Total liabilities

     429,703         419,245         77,527         (561,312     365,163   
                                           

Contingencies and commitments

             

Stockholder’s equity:

             

Common stock

     —           —           —           —          —     

Other stockholder’s equity

     118,510         79,455         78,466         (157,921     118,510   
                                           

Total stockholder’s equity

     118,510         79,455         78,466         (157,921     118,510   
                                           

Total liabilities and stockholder’s equity

   $ 548,213       $ 498,700       $ 155,993       $ (719,233   $ 483,673   
                                           

 

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SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

 

Supplemental Condensed Consolidating Statement of Income

For the Three Months Ended September 30, 2010

 

     Parent / Issuer     Consolidated
Guarantor
Subsidiaries
    Consolidated
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net sales:

           

Sales

   $ —        $ 62,218      $ 25,064       $ —        $ 87,282   

Intercompany sales

     —          710        1,530         (2,240     —     
                                         

Total net sales

     —          62,928        26,594         (2,240     87,282   
                                         

Costs of operations:

           

Cost of goods sold (exclusive of depreciation)

     —          37,880        17,760         (2,240     53,400   

Selling, general and administrative expenses

     453        7,838        4,574         —          12,865   

Depreciation and amortization

     —          4,292        1,669         —          5,961   
                                         

Income (loss) from operations

     (453     12,918        2,591         —          15,056   
                                         

Interest expense, net

     147        5,693        729         —          6,569   

Other expense (income), net

     145        (558     119         —          (294
                                         

Income (loss) before equity in net income from subsidiaries

     (745     7,783        1,743         —          8,781   
                                         

Equity in net income of subsidiaries

     6,145        —          —           (6,145     —     
                                         

Income before income taxes

     5,400        7,783        1,743         (6,145     8,781   

Provision for income taxes

     62        2,635        746         —          3,443   
                                         

Net income

   $ 5,338      $ 5,148      $ 997       $ (6,145   $ 5,338   
                                         

 

15


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SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

 

Supplemental Condensed Consolidating Statement of Income

For the Three Months Ended September 30, 2009

 

     Parent / Issuer     Consolidated
Guarantor
Subsidiaries
    Consolidated
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales:

          

Sales

   $ —        $ 57,703      $ 23,159      $ —        $ 80,862   

Intercompany sales

     —          432        1,421        (1,853     —     
                                        

Total net sales

     —          58,135        24,580        (1,853     80,862   
                                        

Costs of operations:

          

Cost of goods sold (exclusive of depreciation)

     —          36,308        16,455        (1,853     50,910   

Selling, general and administrative expenses

     435        7,421        4,911        —          12,767   

Depreciation and amortization

     —          4,354        1,572        —          5,926   
                                        

Income (loss) from operations

     (435     10,052        1,642        —          11,259   
                                        

Interest expense, net

     181        5,838        851        —          6,870   

Other (income) expense, net

     (173     (20     693        —          500   
                                        

Income (loss) before equity in net income from subsidiaries

     (443     4,234        98        —          3,889   
                                        

Equity in net income of subsidiaries

     2,221        —          —          (2,221     —     
                                        

Income before income taxes

     1,778        4,234        98        (2,221     3,889   

Provision (benefit) for income taxes

     (280     1,586        525        —          1,831   
                                        

Net income (loss)

   $ 2,058      $ 2,648      $ (427   $ (2,221   $ 2,058   
                                        

 

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Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

 

Supplemental Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2010

 

     Parent / Issuer     Consolidated
Guarantor
Subsidiaries
    Consolidated
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net sales:

           

Sales

   $ —        $ 189,305      $ 78,465       $ —        $ 267,770   

Intercompany sales

     —          2,240        4,826         (7,066     —     
                                         

Total net sales

     —          191,545        83,291         (7,066     267,770   
                                         

Costs of operations:

           

Cost of goods sold (exclusive of depreciation)

     —          112,911        51,851         (7,066     157,696   

Selling, general and administrative expenses

     1,354        25,297        13,627         —          40,278   

Depreciation and amortization

     —          12,884        4,761         —          17,645   
                                         

Income (loss) from operations

     (1,354     40,453        13,052         —          52,151   
                                         

Interest expense, net

     657        17,167        2,134         —          19,958   

Other expense (income), net

     (74     (440     806         —          292   
                                         

Income (loss) before equity in net income from subsidiaries

     (1,937     23,726        10,112         —          31,901   
                                         

Equity in net income of subsidiaries

     20,933        —          —           (20,933     —     
                                         

Income before income taxes

     18,996        23,726        10,112         (20,933     31,901   

Provision (benefit) for income taxes

     (515     9,061        3,844         —          12,390   
                                         

Net income

   $ 19,511      $ 14,665      $ 6,268       $ (20,933   $ 19,511   
                                         

 

17


Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

 

Supplemental Condensed Consolidating Statement of Income

For the Nine Months Ended September 30, 2009

 

     Parent / Issuer     Consolidated
Guarantor
Subsidiaries
    Consolidated
Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net sales:

           

Sales

   $ —        $ 174,896      $ 67,005       $ —        $ 241,901   

Intercompany sales

     —          1,425        3,733         (5,158     —     
                                         

Total net sales

     —          176,321        70,738         (5,158     241,901   
                                         

Costs of operations:

           

Cost of goods sold (exclusive of depreciation)

     —          110,490        48,213         (5,158     153,545   

Selling, general and administrative expenses

     1,265        24,043        12,753         —          38,061   

Depreciation and amortization

     —          13,130        4,443         —          17,573   
                                         

Income (loss) from operations

     (1,265     28,658        5,329         —          32,722   
                                         

Interest expense, net

     1,478        18,361        2,475         —          22,314   

Gain on debt extinguishment

     (10,500     —          —           —          (10,500

Other (income) expense, net

     312        (337     968         —          943   
                                         

Income before equity in net income from subsidiaries

     7,445        10,634        1,886         —          19,965   
                                         

Equity in net income of subsidiaries

     6,731        —          —           (6,731     —     
                                         

Income before income taxes

     14,176        10,634        1,886         (6,731     19,965   

Provision for income taxes

     2,405        4,229        1,560         —          8,194   
                                         

Net income

   $ 11,771      $ 6,405      $ 326       $ (6,731   $ 11,771   
                                         

 

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SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2010

 

     Parent / Issuer     Consolidated
Guarantor
Subsidiaries
    Consolidated
Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operations

   $ 20,611      $ 8,856      $ 8,743      $ —         $ 38,210   
                                         

Investing activities:

           

Acquisition of properties, plants and equipment

     —          (5,303     (1,740     —           (7,043

Proceeds from sales of assets

     —          9        1        —           10   

Business acquisitions, net of cash acquired

     —          (337     (1,710     —           (2,047
                                         

Net cash used in investing activities

     —          (5,631     (3,449     —           (9,080
                                         

Financing activities:

           

Payments on senior term loan and acquisition facility

     (9,711     —          (2,159     —           (11,870

Payments on other long-term debt

     —          (480     —          —           (480
                                         

Net cash used in financing activities

     (9,711     (480     (2,159     —           (12,350
                                         

Effect of exchange rate changes on cash

     —          —          47        —           47   
                                         

Increase (decrease) in cash and cash equivalents

     10,900        2,745        3,182        —           16,827   

Cash and cash equivalents, beginning of period

     237        3,005        7,468        —           10,710   
                                         

Cash and cash equivalents, end of period

   $ 11,137      $ 5,750      $ 10,650      $ —         $ 27,537   
                                         

 

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Table of Contents

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

 

 

Supplemental Condensed Consolidating Statement of Cash Flows

For the Nine Months Ended September 30, 2009

 

     Parent / Issuer     Consolidated
Guarantor
Subsidiaries
    Consolidated
Non-Guarantor
Subsidiaries
    Eliminations      Consolidated  

Net cash provided by operations

   $ 18,797      $ 7,647      $ (1,165   $ —         $ 25,279   
                                         

Investing activities:

           

Acquisition of properties, plants and equipment

     —          (5,311     (676     —           (5,987

Proceeds from sales of assets

     —          4        19        —           23   

Business acquisitions, net of cash acquired

     —          (3,047     (572     —           (3,619
                                         

Net cash used in investing activities

     —          (8,354     (1,229     —           (9,583
                                         

Financing activities:

           

Borrowings on revolving credit facility

     22,727        —          —          —           22,727   

Payments on revolving credit facility

     (21,609     —          —          —           (21,609

Payments to extinguish senior subordinated notes

     (15,000     —          —          —           (15,000

Payments on acquisition facility

     (5,257     —          (1,013     —           (6,270

Payments on other long-term debt

     —          (506     (23     —           (529
                                         

Net cash used in financing activities

     (19,139     (506     (1,036     —           (20,681
                                         

Effect of exchange rate changes on cash

     —          —          577        —           577   
                                         

Net change in cash and cash equivalents

     (342     (1,213     (2,853     —           (4,408

Cash and cash equivalents, beginning of period

     410        3,382        6,974        —           10,766   
                                         

Cash and cash equivalents, end of period

   $ 68      $ 2,169      $ 4,121      $ —         $ 6,358   
                                         

 

20


Table of Contents

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1, “ Financial Statements” in Part I of this quarterly report on Form 10-Q.

The statements in the discussion and analysis regarding our expectations regarding the performance of our business, our liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties. Our actual results may differ materially from those contained in or implied by any of these forward-looking statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this report.

Overview

We are a global leader in the digital imaging industry, offering design-to-print graphic services to the international consumer products packaging market in North America, Europe and Asia. Our global service platform and financial capability provide a distinct competitive advantage over the majority of companies in our industry. We offer a full spectrum of innovative digital solutions that streamline the capture, management, execution, and distribution of graphics information. Our brand development, creative design, prepress, image carriers and print support services are utilized in each of the three main printing processes: flexography, gravure and lithography. Our customers, many of which we have served for over 20 years, include large branded consumer products companies, mass merchant retailers and the printers and converters that service them. Our services ensure that our customers are able to obtain or produce consistent, high quality packaging materials often on short turnaround times.

Net sales for the nine months ended September 30, 2010 increased 10.7%, or $25.9 million, to $267.8 million from sales of $241.9 million for the nine months ended September 30, 2009. This increase in sales was driven by a broad-based improvement in sales volumes with our larger customers, as well as a $4.1 million increase in sales to our customers in the tobacco industry in response to changes in labeling requirements imposed by the United States and Canadian governments. We expect the tobacco volumes to return to a more normal level since a significant portion of the volume increases related to a June 30, 2010 deadline for changes in the United States. Tobacco sales are historically less than 5% of our total sales. In addition, the United States dollar weakened in relation to the Canadian dollar for the first nine months of 2010 compared to the first nine months of 2009, which positively impacted sales by $4.8 million.

We have previously reported that we believe price erosion in the industry, which we estimate at approximately 2% to 3% annually, is negatively impacting our sales. As part of our strategy to combat continuing downward pressure on our pricing, we seek business at pricing that we believe is commensurate with the value we deliver, that will enable us to maintain margins at the levels we have historically achieved, and that will allow us to realize profitable organic growth. We have attempted to mitigate the negative impact of price concessions on our net income by putting in place effective cost control measures, among other things.

Cost of goods sold (exclusive of depreciation) expressed as a percentage of sales for our entire business was 58.9% for the nine months ended September 30, 2010, compared to 63.5% for the nine months ended September 30, 2009. This reduction in cost of goods sold as a percentage of sales is due to a combination of factors, including the benefits of cost cutting initiatives implemented in prior years and leveraging our existing resources on increased sales volumes. The increase in sales combined with effective control of expenses resulted in income from operations of $52.2 million for the nine months ended September 30, 2010 compared to $32.7 million for the nine months ended September 30, 2009.

During the first nine months of 2010, we continued to reduce our debt levels to strengthen our balance sheet and reduce interest expense. We made optional principal repayments on our senior term loan of $2.5 million and $9.1 million in March 2010 and June 2010, respectively. We chose not to make optional principal repayments during the third quarter of 2010, but instead retained a significant amount of cash in anticipation of completing an amendment and extension of our senior secured credit facility, which we completed on October 25, 2010 (see additional discussion in Liquidity and Capital Resources). Our normal cash balance target is $10.0 million compared to our cash balance at September 30, 2010 of $27.5 million. We plan to use our excess cash in the fourth quarter of 2010 to further reduce our outstanding debt.

 

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RESULTS OF OPERATIONS

The information presented below for the quarters and nine months ended September 30, 2010 and 2009 was prepared by management and is unaudited. In the opinion of management, all adjustments necessary for a fair statement of our financial position and operating results for such quarters and as of such dates have been included. (Dollar amounts in the table below are in thousands.)

Quarter ended September 30, 2010 compared to quarter ended September 30, 2009

 

     Quarter Ended
September 30, 2010
    Quarter Ended
September 30, 2009
     $
Change
    Percentage
Change
 
     (unaudited)     (unaudited)               

Net sales

   $ 87,282      $ 80,862       $ 6,420        7.9

Cost of goods sold (exclusive of depreciation)

     53,400        50,910         2,490        4.9

Selling, general, and administrative expenses

     12,865        12,767         98        0.8

Depreciation and amortization

     5,961        5,926         35        0.6
                     

Income from operations

     15,056        11,259         3,797        33.7
                     

Interest expense

     6,569        6,870         (301     (4.4 %) 

Other expense (income), net

     (294     500         (794     (158.8 %) 
                     

Income before income taxes

     8,781        3,889         4,892        125.8

Provision for income taxes

     3,443        1,831         1,612        88.0
                     

Net income

   $ 5,338      $ 2,058         3,280        159.4
                     

Net Sales. Sales for the quarter ended September 30, 2010 increased 7.9%, or $6.4 million, to $87.3 million from $80.9 million for the quarter ended September 30, 2009. This increase in sales was driven by improved sales spread across our major customers in the United States, Canada, and Mexico. Also, foreign currency fluctuations for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009 impacted sales. The weakening of the United States dollar as compared to the Canadian dollar positively impacted sales by $0.8 million; whereas the United States dollar strengthened in comparison to the British pound and euro, which negatively impacted sales by $0.6 million on a combined basis.

Sales in the United States increased by $4.5 million for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009. After excluding the impact of foreign currency fluctuations, sales in Canada and Mexico for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009 increased approximately $0.9 million and $0.5 million, respectively. The sales increase for our operations in the United States, Canada, and Mexico was primarily due to organic growth driven by increased sales spread across many of our larger customers. After excluding the impact of foreign currency fluctuations, sales in Europe were flat for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009.

Cost of Goods Sold. Cost of goods sold for the quarter ended September 30, 2010 increased 4.9%, or $2.5 million, to $53.4 million from $50.9 million for the quarter ended September 30, 2009. The increase in cost of goods sold was due to the significant increase in sales previously discussed, partially offset by the realization of the benefits of cost cutting initiatives implemented in prior years, including headcount reductions and plant consolidations. The weakening of the United States dollar as compared to the Canadian dollar resulted in an increase in cost of goods sold by $0.5 million, while the strengthening of the United States dollar in comparison to the British pound and euro reduced cost of sales by $0.4 million on a combined basis for a minimal impact on cost of goods sold related to foreign currency fluctuations.

Cost of goods sold expressed as a percentage of sales decreased to 61.2% for the quarter ended September 30, 2010 from 63.0% for the quarter ended September 30, 2009. The decrease in cost of goods sold as a percentage of sales is due to a combination of factors, including the benefits of cost cutting initiatives implemented in prior years and leveraging our existing resources on increased sales volumes.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended September 30, 2010 increased 0.8%, or $0.1 million, to $12.9 million from $12.8 million for the quarter ended September 30,

 

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2009. Included in the $12.9 million of expenses for the quarter ended September 30, 2010 is a reduction of certain reserves previously recorded totaling $0.7 million; excluding the benefit of this reduction, selling, general and administrative expenses would have increased by $0.8 million. This increase was primarily due to the incremental expenses required to drive the organic sales growth and additional expenses as a result of the increased sales level.

Depreciation and Amortization Expenses. Depreciation and amortization expenses for the quarter ended September 30, 2010 increased 0.6%, or $0.1 million, to $6.0 million from $5.9 million for the quarter ended September 30, 2009. This increase is not significant.

Interest Expense. Interest expense for the quarter ended September 30, 2010 decreased 4.4%, or $0.3 million, to $6.6 million from $6.9 million for the quarter ended September 30, 2009. This decrease was primarily due to the Company’s debt reduction strategy. The combined optional principal repayments of $25.7 million on the senior term loan facility during the period from September 2009 through June 2010 resulted in a combined reduction in interest expense of $0.2 million for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009. Interest rates had a minimal impact on interest expense for the quarter ended September 30, 2010 compared to the quarter ended September 30, 2009 as the weighted average interest rates on the senior term and acquisition loan facilities were 3.0% and 3.1% for the quarters ended September 30, 2010 and September 30, 2009, respectively.

Other Expense (Income), net. Other expense (income), net fluctuated by $0.8 million to $0.3 million of income for the quarter ended September 30, 2010 from $0.5 million of expense for the quarter ended September 30, 2009. Other expense (income), net, primarily consists of realized (gains) losses on foreign exchange and miscellaneous non-operating expense (income) items. The fluctuation in other expense (income), net for the quarter ended September 30, 2010 from the quarter ended September 30, 2009 was primarily due to a $0.5 million gain on a minor acquisition made during the quarter ended September 30, 2010. The remaining fluctuation was due to more favorable fluctuations in the exchange rates related to the United States dollar, Canadian dollar and British pound during the quarter ended September 30, 2010 than during the quarter ended September 30, 2009.

Provision for Income Taxes. The effective tax rate for the quarter ended September 30, 2010 was 39.2%, compared to 47.1% for the quarter ended September 30, 2009. The decrease in the effective tax rate was primarily due to the global dispersion of income before taxes, as a higher percentage of the Company’s income before taxes during the quarter ended September 30, 2010 was generated by subsidiaries outside the United States than for the quarter ended September 30, 2009. The subsidiaries outside the United States generally have a lower statutory tax rate than the United States. In addition, certain discrete tax items recorded to the provision for income taxes in the quarter ended September 30, 2009 contributed to the higher effective tax rate for the quarter ended September 30, 2009.

Nine months ended September 30, 2010 compared to nine months ended September 30, 2009

 

     Nine Months Ended
September 30, 2010
     Nine Months Ended
September 30, 2009
    $
Change
    Percentage
Change
 
     (unaudited)      (unaudited)              

Net sales

   $ 267,770       $ 241,901      $ 25,869        10.7

Cost of goods sold (exclusive of depreciation)

     157,696         153,545        4,151        2.7

Selling, general, and administrative expenses

     40,278         38,061        2,217        5.8

Depreciation and amortization

     17,645         17,573        72        0.4
                     

Income from operations

     52,151         32,722        19,429        59.4
                     

Interest expense

     19,958         22,314        (2,356     (10.6 %) 

Gain on debt extinguishment, net

     —           (10,500     10,500        (100.0 %) 

Other expense (income), net

     292         943        (651     (69.0 %) 
                     

Income before income taxes

     31,901         19,965        11,936        59.8

Provision for income taxes

     12,390         8,194        4,196        51.2
                     

Net income

   $ 19,511       $ 11,771        7,740        65.8
                     

 

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Net Sales. Sales for the nine months ended September 30, 2010 increased 10.7%, or $25.9 million, to $267.8 million from $241.9 million for the nine months ended September 30, 2009. This increase in sales was driven by improved sales spread across our major customers in the United States, Canada, and Mexico. In addition, sales to our customers in the tobacco industry increased $4.1 million in response to changes in labeling requirements imposed by the United States and Canadian governments. Also, the weakening of the United States dollar, as compared to the Canadian dollar, positively impacted sales by $4.8 million. The impact of the weakening of the United States dollar compared to the Canadian dollar was only slightly offset by the strengthening of the United States dollar compared to the British pound and the euro, which negatively impacted sales by $0.2 million on a combined basis.

Sales in the United States increased by $14.4 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. After excluding the impact of foreign currency fluctuations, sales in Canada and Mexico for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 increased approximately $4.7 million and $1.4 million, respectively. The sales increase for our operations in the United States, Canada, and Mexico was organic growth driven by increased sales spread across many of our larger customers. In addition, sales to our customers in the tobacco industry in the United States and Canada increased by $3.0 million and $1.1 million, respectively, as a result of the previously discussed changes in labeling requirements. After excluding the impact of foreign currency fluctuations, sales in Europe increased by $0.2 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

Cost of Goods Sold. Cost of goods sold for the nine months ended September 30, 2010 increased 2.7%, or $4.2 million, to $157.7 million from $153.5 million for the nine months ended September 30, 2009. The increase in cost of goods sold was due to the significant increase in sales previously discussed, partially offset by the realization of the benefits of cost cutting initiatives implemented in prior years, including headcount reductions and plant consolidations. In addition, foreign currency fluctuations resulted in a net increase in cost of goods sold of $3.0 million.

Cost of goods sold expressed as a percentage of sales decreased to 58.9% for the nine months ended September 30, 2010 from 63.5% for the nine months ended September 30, 2009. The decrease in cost of goods sold as a percentage of sales is due to a combination of factors, including the benefits of cost cutting initiatives implemented in prior years and leveraging our existing resources on increased sales volumes.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended September 30, 2010 increased 5.8%, or $2.2 million, to $40.3 million from $38.1 million for the nine months ended September 30, 2009. This increase was primarily due to the incremental expenses required to drive the organic sales growth and additional expenses as a result of the increased sales level. In addition, the weakening of the United States dollar as compared to the Canadian dollar resulted in an increase of selling, general and administrative expenses of $0.6 million in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. These increases to selling, general, and administrative expenses were partially offset by the reduction of $0.7 million in reserves previously recorded, which resulted in a decrease to selling, general, and administrative expenses for the nine months ended September 30, 2010.

Depreciation and Amortization Expenses. Depreciation and amortization expenses for the nine months ended September 30, 2010 increased 0.4%, or $0.1 million, to $17.6 million from $17.5 million for the nine months ended September 30, 2009. This increase is not significant.

Interest Expense. Interest expense for the nine months ended September 30, 2010 decreased 10.6%, or $2.3 million, to $20.0 million from $22.3 million for the nine months ended September 30, 2009. This decrease was primarily due to lower interest rates on the senior term and acquisition loan facilities during the nine months ended September 30, 2010 than for the nine months ended September 30, 2009, as well as the Company’s debt reduction strategy. The weighted average interest rates on the senior term and acquisition loan facilities were 2.9% and 3.9% for the nine months ended September 30, 2010 and September 30, 2009, respectively. The reduction in these interest rates resulted in a reduction of interest expense of $0.9 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. In addition, the repurchase in February 2009 of $25.5 million in principal of our 12% Senior Subordinated Notes (“Notes”) and the optional principal repayments of $25.7 million on the senior term loan facility during the period from September 2009 through June 2010 resulted in a combined reduction in interest expense of $0.9 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The residual decrease in interest expense of $0.5 million is primarily due to accelerating the amortization of deferred financing fees due to the extinguishment of $25.5 million of Notes.

 

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Gain on Debt Extinguishment. The $10.5 million gain on debt extinguishment in the nine months ended September 30, 2009 is due to the repurchase of $25.5 million of Notes for a cash purchase price of $15.0 million.

Other Expense (Income), net. Other expense (income), net fluctuated to $0.3 million of expense for the nine months ended September 30, 2010 from $0.9 million of expense for the nine months ended September 30, 2009. The fluctuation in other expense (income), net for the nine months ended September 30, 2010 from the nine months ended September 30, 2009 was primarily due to a $0.5 million gain on a minor acquisition made during the nine months ended September 30, 2010. The remaining components of other expense (income), net primarily consist of realized foreign exchange losses (gains). Realized foreign exchange losses were comparable for both periods.

Provision for Income Taxes. The effective tax rate for the nine months ended September 30, 2010 was 38.8%, compared to 41.0% for the nine months ended September 30, 2009. The decrease in the effective tax rate was primarily due to the global dispersion of income before taxes, as a higher percentage of the Company’s income before taxes during the nine months ended September 30, 2010 was generated by subsidiaries outside the United States than for the nine months ended September 30, 2009. The subsidiaries outside the United States generally have a lower statutory tax rate than the United States.

Liquidity and Capital Resources

At September 30, 2010, we had $27.5 million in cash and $77.4 million in working capital compared with $10.7 million in cash and $51.8 million in working capital at December 31, 2009. The $16.8 million increase in cash resulted from $38.2 million in cash provided by operations, partially offset by the $12.4 million in principal repayments of long-term debt, $7.0 million in capital expenditures, and $2.0 million in net cash paid for acquisitions. The $25.6 million increase in working capital is primarily due to the combination of increases in cash and accounts receivable, as well as decreases in accounts payable and other current liabilities, partially offset by the increase in accrued interest.

On October 25, 2010, we completed an amendment and extension of our senior secured credit facility. The Original Credit Agreement was amended by the Amended and Restated Credit Agreement to incorporate the following amendments, among others: (i) extend the maturity of the revolving loans/commitments, term loans and acquisition loans until September 30, 2013; (ii) increase the aggregate amount of revolving commitments to $40,000,000; (iii) increase the margin for extending loans to LIBOR plus 3.5%; (iv) change the amortization for extending term loans and acquisition loans to $5,000,000 per annum, payable on a quarterly basis; (v) permit $25,000,000 of repurchases of the Registrant’s outstanding 12% Senior Subordinated Notes Due 2013; and (vi) refresh covenant baskets as of October 25, 2010. Certain lenders who did not consent to the terms of the Amended and Restated Credit Agreement will be repaid their loans in accordance with the repayment schedule of the Original Credit Agreement.

As of October 25, 2010, the Registrant has outstanding under the Amended and Restated Credit Agreement: $21.3 million of term loans and $7.9 million of acquisition loans due on December 31, 2011 and $92.7 million of term loans due September 30, 2013. (Acquisition loans due September 30, 2013 are term loans under the Amended and Restated Credit Agreement). There are no amounts currently outstanding under the revolving credit facility (the “Revolver”). Unused portions of the Revolver are charged a fee of 0.75% per annum.

We expect that cash generated from operating activities and availability under the $40.0 million Revolver will be our principal sources of liquidity. Based on our current level of operations, we believe our cash flow from operations and availability under the Revolver will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flows from operations, or that future borrowings will be available to us under our Revolver in an amount sufficient to enable us to repay our indebtedness, or to fund our other liquidity needs.

We are highly leveraged and our aggregate indebtedness at September 30, 2010 was $296.9 million. In 2013, our debt service requirements will substantially increase as a result of the September 30, 2013 maturity of the loans under the Amended and Restated Credit Agreement and the December 15, 2013 maturity of the 12% Senior Subordinated Notes. Our ability to operate our business, service our debt requirements and reduce our total debt will depend upon our future operating performance.

 

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Our senior secured credit facility contains customary financial and other covenants, including a maximum leverage ratio and a minimum interest coverage ratio, as defined in the Amended and Restated Credit Agreement. Our senior secured credit facility also places certain restrictions on our ability to make capital expenditures. As of September 30, 2010, we were in compliance with all covenants. The combination of our financial performance over the past twelve months and our debt reduction initiatives have resulted in our ratios calculated as of September 30, 2010 being the lowest leverage ratio and highest interest coverage ratio in the history of SGS International, Inc. Below are the required financial covenant levels and the actual levels as of September 30, 2010:

 

     Required     Actual  

Maximum leverage ratio

     5.00        3.24   

Minimum interest coverage ratio

     1.80        3.66   

Maximum annual capital expenditures

   not to exceed $ 21.1 million (1)    $ 7.0 million   

 

(1)

The maximum annual capital expenditures consists of $15.0 million plus $6.1 million of allowed carry over from the fiscal year ended December 31, 2009.

We believe that our financing arrangements provide us with sufficient financial flexibility to fund our operations, debt service requirements and other committed obligations. Our ability to access additional capital in the long-term depends on the availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. From time-to-time, we review our long-term financing and capital structure. We may periodically explore alternatives to our current financing prior to the maturity of the Amended Credit Agreement and 12% Senior Subordinated Notes. These alternatives may include the issuance of additional long-term debt, refinancing our credit facility and other restructurings or financings. In addition, we may from time-to-time seek to retire our outstanding 12% Senior Subordinated Notes in open market purchases, privately negotiated transactions or otherwise. These repurchases, if any, will depend on prevailing market conditions based on our liquidity requirements, contractual restrictions and other factors. The amount of repurchases of our 12% Senior Subordinated Notes may be material and may involve significant amounts of cash and/or financing availability.

Income taxes

Based on the changes noted in Footnote H “Income Taxes” included in the condensed consolidated financial statements and on our recent results, we expect that that our cash payments for income taxes will be significantly greater in 2011 than in 2010 and prior years.

Cash flows

Nine months ended September 30, 2010 compared to nine months ended September 30, 2009

Cash flows from operating activities. Net cash provided by operating activities was $38.2 million for the nine months ended September 30, 2010 as compared to $25.3 million for the nine months ended September 30, 2009. The primary reason for this increase is the $19.4 million increase in income from operations for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. In addition, cash paid for interest was $14.0 million for the nine months ended September 30, 2010 compared to $15.3 million for the nine months ended September 30, 2009. Partially offsetting these increases in cash flows from operating activities were the payment of $4.2 million for an exclusive supply agreement, the timing of cash payments to settle liabilities, and an increase in accounts receivable.

Cash flows from investing activities. Net cash used for investing activities was $9.1 million for the nine months ended September 30, 2010 as compared to $9.6 million for the nine months ended September 30, 2009. The decrease in cash used for investing activities is due to a reduction of $1.6 million in net cash paid for acquisitions for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, partially offset by an increase in capital expenditures of $1.1 million.

Cash flows from financing activities. Net cash used in financing activities was $12.4 million for the nine months ended September 30, 2010 as compared to cash used by financing activities of $20.7 million for the nine months ended September 30, 2009. The primary reason for this fluctuation was management’s decision to retain excess cash at September 30, 2010 in anticipation of completing an amendment and extension of our senior secured credit facility. The Company actually had more cash available to pay down outstanding debt during the nine months ended September 30, 2010 than the nine months ended September 30, 2009 as a result of cash generated through increased income from operations; however, management elected not to use the excess cash to make an optional principal repayment of debt on September 30, 2010. Our normal operating cash balance target is $10.0 million compared to our cash balance at September 30, 2010 of $27.5 million.

 

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Contractual Obligations

In connection with our entry into the Amended and Restated Credit Agreement and the optional principal payments made during 2010 on the borrowings outstanding under the Original Credit Agreement, the schedule of contractual obligations has changed significantly. As of the effective date of the Amended and Restated Credit Agreement on October 25, 2010, $29.2 million of borrowings under the Original Credit Agreement that were not extended are scheduled to mature on December 30, 2011. (Subsequent to the effective date of the Amended and Restated Credit Agreement, the Company paid the $21.3 million of term loans outstanding under the Original Credit Agreement on October 29, 2010.) In addition, the outstanding balance of $92.7 million of borrowings under the Amended and Restated Credit Agreement is payable in quarterly installments of $1.25 million through June 2013, with the remaining amount due at maturity on September 30, 2013. Borrowings under the Original Credit Agreement bear interest at a variable rate of LIBOR plus 2.5%. Borrowings under the Amended and Restated Credit Agreement bear interest at a variable rate of LIBOR plus 3.5%.

At September 30, 2010, there were no other material changes in our December 31, 2009 contractual obligations.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Recently Issued Accounting Standards

See Note A to the condensed consolidated financial statements for the impact of recently issued accounting standards.

There have been no other material changes to our critical accounting policies since December 31, 2009.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At September 30, 2010, there were no material changes in our December 31, 2009 market risks relating to interest and foreign exchange rates.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2010. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010, at the reasonable assurance level.

A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

There was one material weakness discussed in our Annual Report on Form 10-K for the year ended December 31, 2009, which has been remediated as discussed below.

Changes in Internal Control Over Financial Reporting

Based on the evaluation performed as of September 30, 2010, management has concluded that the material weakness previously reported in our Annual Report on Form 10-K for the year ended December 31, 2009 has been remediated as a result of the following changes in internal control:

 

   

Accounting for income taxes for foreign entities. As of December 31, 2009, we did not maintain effective controls over the accuracy of foreign income taxes. Beginning in the first quarter of 2010, we implemented new processes for calculating and reviewing foreign tax provisions in functional currency. We also developed procedures for a detailed review of foreign deferred tax items prior to recording of the foreign tax provisions.

 

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There were no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the nine months ended September 30, 2010 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

Various lawsuits, claims and proceedings have been or may be instituted or asserted against entities within the Company. While the amounts claimed may be substantial, the ultimate liability cannot be determined because of the considerable uncertainties that exist. Therefore, it is possible that results of operations or liquidity in a particular period could be materially affected by certain contingencies. However, based on currently available facts and in light of legal and other defenses available to us, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the Company’s financial position, results of operations, and liquidity.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors included in the Registrant’s Form 10-K for the year ended December 31, 2009.

 

Item 6. Exhibits

 

EXHIBIT
NUMBER

 

DESCRIPTION

3.   CERTIFICATE OF INCORPORATION AND BY-LAWS
3.1   Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on November 8, 2005, incorporated by reference to exhibit 3.1 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
3.2   By-Laws of the Registrant adopted on November 8, 2005, incorporated by reference to exhibit 3.2 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.   INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1   Certificate of Incorporation. See Exhibit 3.1
4.2   By-laws. See Exhibit 3.2
4.3   Indenture dated as of December 30, 2005, by and between the Registrant and Wells Fargo Bank National Association, as trustee, relating to the 12% Senior Subordinated Notes due 2013, incorporated by reference to exhibit 4.3 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.4   Form of Global 12% Notes due 2013 (included in Exhibit 4.3)
4.5   Form of Regulation S Temporary Global 12% Notes due 2013 (included in Exhibit 4.3)
4.6   Supplemental Indenture, dated April 25, 2006, by and among the Registrant, Southern Graphic Systems, Inc., Project Dove Holdco, Inc. and Wells Fargo Bank, N.A., as trustee, incorporated by reference to exhibit 4.6 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.7   Registration Rights Agreement, dated as of December 30, 2005, by and between the Registrant, certain of its subsidiaries as Guarantors, and UBS Securities LLC and Lehman Brothers Inc. as Initial Purchasers, incorporated by reference to exhibit 4.7 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825

 

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4.8    Amendment Agreement, dated as of October 25, 2010, to the Credit Agreement dated as of December 30, 2005, by and among Southern Graphic Systems - Canada, Co./Systemes Graphiques Southern-Canada, Co. (“Canadian Borrower”), SGS International, Inc. (“US Borrower”), the guarantors from time to time party thereto, the lending institutions from time to time party thereto, UBS Securities LLC and Lehman Brothers Inc., as joint lead arrangers, UBS Securities LLC, as syndication agent, CIT Lending Services Corporation, as documentation agent, UBS Loan Finance LLC, as swingline lender, UBS AG, Stamford Branch, as issuing bank, as US administrative agent, as US collateral agent and as Canadian collateral agent, and PNC Bank, National Association, as Successor to National City Bank, as Canadian administrative agent, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated October 25, 2010, filed October 29, 2010, File No. 333-133825
4.9    Amended and Restated Credit Agreement dated as of October 25, 2010, among Southern Graphic Systems - Canada, Co./Systemes Graphiques Southern – Canada, Co. (“Canadian Borrower”), SGS International, Inc. (“US Borrower”, and together with Canadian Borrower, the “Borrowers”), certain affiliates of the Borrowers as guarantors, the Lenders thereto, UBS Securities LLC and Fifth Third Bank, as joint lead arrangers, UBS Securities LLC, as syndication agent, JPMorgan Chase Bank, N.A., as documentation agent, UBS Loan Finance LLC, as swingline lender, and UBS AG, Stamford Branch, as issuing bank, as US administrative agent, as Canadian administrative agent, as US collateral agent and as Canadian collateral agent, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K dated October 25, 2010, filed October 29, 2010, File No. 333-133825
4.10    Omnibus Acknowledgement, Reaffirmation and Amendment to Security Documents made as of October 25, 2010, by and among Southern Graphic Systems - Canada, Co./Systemes Graphiques Southern – Canada, Co. (“Canadian Borrower”), SGS International, Inc. (“US Borrower”), the Guarantors party thereto and UBS AG, Stamford Branch, as US administrative agent, as US collateral agent, as Canadian administrative agent and as Canadian collateral agent, incorporated by reference to Exhibit 10.3 to the Registrant’s Form 8-K dated October 25, 2010, filed October 29, 2010, File No. 333-133825
4.11    Supplemental Debenture [not dated] between SGS Packaging Europe Holdings Limited, SGS Packaging Europe Limited, MCG Graphics Limited and UBS, AG, Stamford Branch, incorporated by reference to Exhibit 10.4 to the Registrant’s Form 8-K dated October 25, 2010, filed October 29, 2010, File No. 333-133825
4.12    Credit Agreement, dated as of December 30, 2005, among the Registrant and Southern Graphic Systems – Canada, Co., as borrowers, certain of the Registrant’s subsidiaries, as guarantors, UBS Securities LLC and Lehman Brothers Inc., as joint arrangers and joint bookmanagers, UBS AG, Stamford Branch, as issuing bank, US administrative agent, US collateral agent and Canadian collateral agent, Lehman Brothers Inc., as syndication agent, CIT Lending Services Corporation, as documentation agent, National City Bank, as Canadian administrative agent, UBS Loan Finance LLC, as swingline lender, and the lenders referred to therein, incorporated by reference to exhibit 10.7 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.13    First Amendment to Credit Agreement by and among the Registrant and Southern Graphic Systems - Canada, Co., as borrowers, certain affiliates of the borrowers, as guarantors, and the lenders party to the Credit Agreement as described therein, incorporated by reference to exhibit 10.8 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.14    Security Agreement, dated as of December 30, 2005, by the Registrant, as borrower, certain of the Registrant’s subsidiaries, as guarantors, and UBS AG, Stamford Branch, as US collateral agent, incorporated by reference to exhibit 10.9 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.15    Canadian Security Agreement, dated as of December 30, 2005, by certain of the Registrant’s subsidiaries, as pledgors, and UBS AG, Stamford Branch, as Canadian collateral agent, incorporated by reference to exhibit 10.10 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825

 

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4.16    Debenture dated as of December 30, 2005, from SGS-UK Holdings Limited and others, as chargors, in favour of UBS AG, Stamford Branch, as Canadian collateral agent, incorporated by reference to exhibit 10.11 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.17    Limited Waiver and Consent to Credit Agreement dated as of April 11, 2007 among SGS International, Inc. and Southern Graphic Systems – Canada, Co., as borrowers, certain of the Registrant’s subsidiaries, as guarantors, the lenders signatory thereto, UBS AG, Stamford Branch, as US administrative agent, US collateral agent and Canadian collateral agent, and National City Bank, as Canadian administrative agent, incorporated by reference to Exhibit 4.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, filed May 15, 2007, File No. 333-133825
10.    MATERIAL CONTRACTS
10.1    Amendment Agreement. See Exhibit 4.8.
10.2    Amended and Restated Credit Agreement. See Exhibit 4.9.
10.3    Omnibus Acknowledgement, Reaffirmation and Amendment to Security Documents. See Exhibit 4.10.
10.4    Supplemental Debenture. See Exhibit 4.11.
31.    CERTIFICATIONS
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.    CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES OXLEY ACT OF 2002
32.1    Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    SGS INTERNATIONAL, INC.
Date: November 9, 2010     By:   /s/ Henry R. Baughman
      Henry R. Baughman
     

President, Chief Executive Officer and Director

(Principal Executive Officer)

Date: November 9, 2010     By:   /s/ James M. Dahmus
      James M. Dahmus
     

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

 

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