**U.S. SECURITIES ANDEXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

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**(Mark One)**

 
| **ý**                                            | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**     |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| ** **                                            |
| **For the  Fiscal Year Ended December 31, 2004** |
| ** **                                            |
| **or**                                                |
| ** **                                            |
| **o**                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For the Period From               to              .**

 

**Commission File Number:  333-110441**

 

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**THE SHERIDAN GROUP, INC.**

(Exact name of Registrant as specified in its charter)

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

 

**11311 McCormick Road, Suite 260Hunt Valley, Maryland  21031-1437**(Address of principal executive offices and zip code)

 

**(410) 785-7277**(Registrant’s telephone number, including area code)

 

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

 

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

 

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Indicate bycheck mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter periods as the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý   No o

 

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

 

Indicate bycheck mark whether the Registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act.)  Yes o  No ý

 

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

 

There was 1share of the Registrant’s Common Stock outstanding as of March 25, 2005.

 

 

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**THE SHERIDAN GROUP, INC.ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2004**

 

**INDEX**

 
| ITEM 1. BUSINESS                                                                                                            | 3      |
|-----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                        |   |
| ITEM 2. PROPERTIES                                                                                                          | 15     |
|                                                                                                                        |   |
| ITEM 3. LEGAL PROCEEDINGS                                                                                                   | 16     |
|                                                                                                                        |   |
| ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                | 17     |
|                                                                                                                        |   |
| ITEM  5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND  ISSUER PURCHASES OF EQUITY SECURITIES | 17     |
|                                                                                                                        |   |
| ITEM 6. SELECTED  FINANCIAL DATA                                                                                            | 17     |
|                                                                                                                        |   |
| ITEM  7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS                        | 18     |
|                                                                                                                        |   |
| ITEM  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        | 30     |
|                                                                                                                        |   |
| ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 31     |
|                                                                                                                        |   |
| ITEM  9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE                              | 62     |
|                                                                                                                        |   |
| ITEM 9A. CONTROLS AND  PROCEDURES                                                                                           | 62     |
|                                                                                                                        |   |
| ITEM 9B. OTHER INFORMATION                                                                                                  | 62     |
|                                                                                                                        |   |
| ITEM  10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                | 62     |
|                                                                                                                        |   |
| ITEM 11. EXECUTIVE  COMPENSATION                                                                                            | 67     |
|                                                                                                                        |   |
| ITEM  12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED STOCKHOLDER MATTERS                   | 74     |
|                                                                                                                        |   |
| ITEM  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                    | 77     |
|                                                                                                                        |   |
| ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                            | 79     |
|                                                                                                                        |   |
| ITEM  15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                        | 79     |

 

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**SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

•                  our liquidity and capital resources;

 

•                  competitive pressures and trends in theprinting industry;

 

•                  prevailing interest rates;

 

•                  legal proceedings and regulatory matters;

 

•                  general economic conditions;

 

•                  statements with respect to the BuyoutTransactions and the Dingley Transactions (each as defined in this AnnualReport on Form 10-K);

 

•                  predictions of net sales, expenses or otherfinancial items;

 

•                  future operations, financial condition andprospects; and

 

•                  our plans, objectives, strategies andexpectations for the future.

 

Forward-lookingstatements involve risks and uncertainties that may cause actual results todiffer materially from the forward-looking statements, might cause us to modifyour plans or objectives, may affect our ability to pay timely amounts due underthe notes and/or may affect the value of the notes. These risks and uncertaintiesmay include, but are not limited to, those discussed in Part I, Item 1, “RiskFactors.” New risk factors can emerge from time to time. It is not possible forus to predict all of these risks, nor can we assess the extent to which anyfactor, or combination of factors, may cause actual results to differ fromthose contained in forward-looking statements. Given these risks anduncertainties, we urge you to read this prospectus completely with theunderstanding that actual future results may be materially different from whatwe plan or expect. We caution you that any forward-looking statement reflectsonly our belief at the time the statement is made. We will not update theseforward-looking statements even if our situation changes in the future.

 

**PART I**

 

**ITEM 1.   BUSINESS**

 

**Overview**

 

We are aleading specialty printer offering a full range of printing and value-addedsupport services for the journal, catalog, magazine, book and article reprintmarkets. We believe that we enjoy

 

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strong andlongstanding relationships with our customers, which include publishers,catalog merchants, associations and university presses.  We provide a wide range of printing servicesand value-added support services, such as electronic publishing support,digital proofing, preflight checking, off-shore key stroking and copy editing,online peer review systems, manuscript tracking systems, subscriber databasemaintenance, mail sortation and distribution, customer audits and training classes,and back issue fulfillment.  We utilize adecentralized management structure, which provides our customers with access tothe resources of a large company, while maintaining the high level of serviceand flexibility of a smaller company. We operate in three businesssegments:  short-run journals, specialtycatalogs and other publications.  For theyear ended December 31, 2004, we generated net sales of $287.5 million,operating income of $21.5 million and net income of $2.3 million.  As used in this Annual Report on Form 10-K,the terms “we,” “us,” “our” and other similar terms refer to the consolidatedbusinesses of The Sheridan Group, Inc. and all of its subsidiaries.

 

**History**

 

We trace ourroots back to The Sheridan Press, the predecessor of which was founded in 1915.We entered the short-run journal market in 1980, targeting the printing ofscientific, technical, medical and scholarly journals for publishers. TheSheridan Group, Inc. was formed in 1988 to complete the acquisition ofBraun-Brumfield, Inc., a short-run book printer located in Michigan. In 1994,we entered the specialty magazine market with the acquisition of United Litho,Inc., a printer of specialty magazines serving the Washington, D.C. metro area.In conjunction with our recapitalization in 1998, we acquired DartmouthPrinting Company, a specialty magazine printer in New Hampshire, and CapitalCity Press, a journal printer in Vermont. In 1999, we acquired BookCrafters,Inc., a short-run book printer in Chelsea, Michigan and Fredericksburg,Virginia, and consolidated it with Braun-Brumfield to form Sheridan Books, Inc.In 2004, we acquired The Dingley Press, a specialty catalog printer inMaine.  Currently, we are comprised ofseven specialty printing companies operating in the domestic scientific,technical, medical and scholarly journal, specialty catalog, short-run book,specialty magazine and article reprints markets: The Sheridan Press inPennsylvania; Capital City Press in Vermont; Sheridan Books in Michigan;Dartmouth Printing Company in New Hampshire; Dartmouth Journal Services in NewHampshire; United Litho in Virginia; and The Dingley Press in Maine.

 

**Printing Services**

 

Our printingservices include transferring content onto printing plates in pre-press,printing the content on press, binding the printed pages into the finishedproduct and distributing the finished product to either the customer or theultimate end user.  Pre-press processes,which include digital and conventional techniques, as well as computer-to-platetechnology, are criticalfront-end elements of our printing services which ready the content forprinting on our presses.  Sheet-fed and web presses are used, dependingon run length, to produce the printed product. We also offer ultra-short-run printing services for article reprints,books and journals.  We utilize three types of bindingtechniques for the printed product: perfect binding, saddle stitching and case binding.   The product is then labeled and packagedprior to mailing.   Journals, magazinesand books are typically mailed to the publisher or directly to consumers.Roughly half of our journals, the majority of our magazines and all of ourbooks are shipped in cases to the customer. The remaining journals andmagazines are mailed directly to the subscriber. Catalogs are drop-shipped tovarious locations throughout the U.S. and placed into the mail stream close tothe recipient.

 

**Value-AddedSupport Services**

 

In addition toproviding printing services to our customers, we offer a full range of value-addedsupport services.  While sales of theseservices constitute a relatively small percentage of total revenues,

 

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they are critical tomeeting the customer’s needs.  Theseservices are highly customized for each customer’s specifications and logisticsrequirements.  With fully digitalpre-press capabilities and computer-to-plate technology, we have greatlyincreased the efficiency with which we provide these services. Examples of thevalue-added support services we provide are electronic publishing support,digital proofing, preflight checking, off-shore key stroking and copy editing,online peer review systems, manuscript tracking systems, subscriber databasemaintenance, mail sortation and distribution, customer audits and trainingclasses, and back issue fulfillment.

 

**Printing Segments**

 

As a leadingpublications printer, we offer a broad range of products and services,including scientific, technical, medical and scholarly journals, specialtycatalogs, short-run books, specialty magazines, article reprints, and anextensive array of value-added support services.  Our products are sold to a diverse set ofcustomers, including publishers, university presses and associations.   Our printing operations are classified intothree reportable segments.  The followingtable presents the percentage of net sales contributed by each segment duringthe past three fiscal years.

 
| **Net Sales %**            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Short-run  Journals        |       | 34       | %          |     | 42         | %        |       | 41 | % |   |
| Specialty Catalogs         |       | 22       |       |     | —     |     |       | — |   |   |
| Other  Publications        |       | 46       |       |     | 61         |     |       | 61 |   |   |
| Intersegment  Eliminations |       | (2       | )          |     | (3         | )        |       | (2 | ) |   |
| Total                      |       | 100      | %          |     | 100        | %        |       | 100 | % |   |

 

*Short-Run Journals*

 

The journalmarket includes journals for the scientific, technical, medical and scholarlycommunities. We compete in both the short-run and medium-run portions of thejournal market.  We define short-runjournals as journals produced on sheet-fed presses with typical production runsof less than 5,000 copies. Publishers, associations and university presses comprisethe customers in this portion of the publications market.  In 2004, we printed over 1,800 journaltitles.

 

Our journalsare primarily black and white with a small amount of color for photographs,diagrams and advertisements.  They areprinted on schedules that range from weekly to annually in run lengths thataverage 2,300 copies and range from 300 to 5,000 copies.  Journal printing typically results in a highlevel of repeat business due to the periodic nature and complexity of thesepublications.  The vast majority ofjournals are perfect bound, with the remainder saddle-stitched.  Our journal customers rely on our consistencyand on-time reliability to meet the demands of their own customers.

 

The short-runjournals segment also includes article reprints, which are produced onsheet-fed presses, and originally developed as an ancillary product from thebase journal business.  Article reprintsare produced for customers who require reprints of an individual article froma journal or magazine for marketing or other purposes. Historically, we haveprimarily reprinted journal and magazine articles for which we were theoriginal printer. We recently have expanded our business by winning article reprintbusiness on publications for which we were not the original printer.  We are a full-service reprint printer,producing black and white as well as color reprints for publishers, universitypresses and associations.

 

*Specialty Catalogs*

 

We entered thespecialty catalog segment in 2004 with our purchase of The Dingley Press.  We characterize specialty catalogs ascatalogs distributed by specialty catalog merchant companies, which are

 

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often smallerentrepreneurial companies with high service requirements. We produce catalogswith run lengths between 300,000 and 10,000,000 copies, most of which areprinted in four-color and are bound using the saddle stitching technique.Multiple versions of each catalog are distributed during the year requiringhigh levels of customer service and extensive distribution services.  In 2004, we printed over 100 catalog titles.

 

*OtherPublications*

 

The otherpublications segment provides products and services for specialty magazines,short-run books and medium-run journals to publishers, university presses andassociations.

 

Specialty Magazines

 

We characterizespecialty magazines as magazines having production runs of less than 100,000copies. Our customers in this market are publishers and associations. Specialtymagazines also have a high level of repeat business due to the periodic natureof the publications. This is largely a regional market defined by proximity tothe customer. In 2004, we printed over 350 magazine titles.

 

We produceshort-run magazines with average run lengths of 22,000 copies.  The majority of these magazines are printedin four-color.  About half of themagazines are bound using the saddle-stitching technique and the other half areperfect bound.  The magazines areproduced in frequencies that range from weekly to annually. These magazines areproduced on web presses.  Althoughspecialty magazine customers do not require composition services, they dodemand high levels of customer service focused on distribution and mailingservices, where managing the customer’s subscriber database is critical tocustomer satisfaction.

 

Short-Run Books

 

Short-runbooks, which we characterize as books having production runs of less than 5,000copies, are printed for publishers, associations and university presses. Salesto this market include both the initial printing of titles and subsequentreprints.  In 2004, we printed more than11,400 book titles.

 

We producebooks in run lengths that average 2,000 copies and range from 100 to 5,000copies.  The majority of these books areblack and white.  Books are produced onboth sheet-fed and web presses.  About50% of our books have soft covers (perfect bound) and about 50% have hardcovers (case bound).

 

Medium-Run Journals

 

We considermedium-run journals to be journals with production runs between 5,000 and100,000 copies.  Medium-run journals aretypically produced on web presses due to economies of scale versus sheet-fedpresses.  Similar to the short-run journalmarket, customers include publishers, associations and university presses, andthere is a high level of repeat business due to the periodic nature andcomplexity of these publications.  Ourconsistency and on-time reliability are key attributes that our customersexpect and demand.

 

**Competition**

 

The printingindustry in the United States is fragmented and highly competitive in mostproduct categories and geographic regions. We compete in subsegments of theoverall printing market.  Competition islargely based on price, quality, range of services offered, distributioncapabilities, ability to service the specialized needs of customers,availability of printing time on appropriate equipment and

 

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use ofstate-of-the-art technology.  Competitiveprice pressure continues to be strong in the product segments in which wecompete.

 

**Customers**

 

We benefit froma highly diversified customer base consisting of publishers, catalog merchants,associations and university presses.  Themajority of our business comes from publishers, followed by catalog merchants,associations and university presses.  Theaverage length of our relationship with our top 50 customers is approximately13 years.  We print journals for ElsevierScience, which accounted for about 11.2% of our net sales in 2004.  Additionally, as a result of the acquisitionof The Dingley Press in May 2004 (the “Dingley Acquisition”), we printspecialty catalogs for Dr. Leonard.  In2004, Dr. Leonard accounted for about 5.7% of our net sales.  We believe that if the 2004 twelve-month resultsof The Dingley Press had been included in our net sales in 2004, Dr. Leonardwould have accounted for more than 10% of our net sales.

 

**Salesand Marketing**

 

We havedeveloped a knowledgeable and experienced sales management team, which hassuccessfully cultivated and maintained strong relationships with customersacross the U.S. Our products are sold through internal direct salesprofessionals and a dedicated network of sales representatives. Across all ofour companies, external representatives augment an internal sales staff,providing our customers with multiple touch points. Our sales representativesare paid a commission based on sales volume growth targets in a structure thatminimizes the fixed costs we incur to support our sales force.

 

We traditionallymarket through industry trade shows and industry association conferences. Inaddition, in our article reprint business, we have strategic relationshipswith two marketing firms that specialize in obtaining reprint orders fromcustomers, companies and individuals that were featured in a recent publicationproduced by us or other printers.  Thesemarketing firms identify opportunities for these potential clients to utilizethe identified publication reprints as marketing tools.

 

**RawMaterials**

 

The principalraw material used in our business is paper, which represents a significantportion of our cost of materials. Due to the significance of paper in ourbusiness, we are dependent upon the availability of paper. In periods of highdemand, certain paper grades have been in short supply, including grades we usein our business. In addition, during periods of tight supply, many paperproducers allocate shipments of paper based upon historical purchase levels ofcustomers. Historically, however, we generally have not experienced significantdifficulty in obtaining adequate quantities of paper. We do not have anylong-term paper supply agreements. We also use a variety of other raw materialsincluding ink, film, offset plates, chemicals and solvents, glue, wire andsubcontracted components. In general, we have not experienced any significantdifficulty in obtaining these raw materials.

 

**Technologyand Operations**

 

Our capitalinvestments have been focused on productivity improvement, more efficientmaterial usage and incremental capacity. Additionally, our investments in technology have been critical inhelping achieve improved workflow and reduced cycle times.

 

**Employees**

 

We have about2,080 employees as of December 31, 2004. We focus heavily on fostering

 

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enthusiastic andpositive cultures at each of our locations, evidenced by the fact that we havebeen recognized with numerous ‘‘Best Workplace in America’’ awards presented byPrinting Industries of America. In addition, we closely monitor our employees’level of job satisfaction with comprehensive annual surveys.  Management believes our compensation andbenefits packages are competitive within the industry and local markets.

 

We have acollective bargaining agreement with Local Union No. 745 of the GraphicCommunications International Union, which represents about 140 of ourproduction and maintenance employees (as of December 31, 2004) at ourVermont facilities. Management believes our relations with the union are goodand that the union contract provides for necessary flexibility. The unioncontract was renewed in May 2004 and expires on April 30, 2007.

 

**RisksFactors**

 

*Substantial Leverage—Oursubstantial indebtedness could adversely affect our financial health andprevent us from meeting our obligations under our indebtedness.*

 

We have asignificant amount of indebtedness.  On December 31,2004, we had total indebtedness of approximately $164.9 million.

 

Our substantialindebtedness could have important consequences. For example, it could:

 

•                  make it more difficult for us to meet ourpayment and other obligations under our indebtedness;

 

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

 

•                  increase our vulnerability to generaladverse economic and industry conditions;

 

•                  limit our flexibility in planning for, orreacting to, changes in our business and the industry in which we operate;

 

•                  place us at a competitive disadvantagecompared to our competitors that have less debt or are less leveraged; and

 

•                  limit our ability to borrow additionalfunds or raise additional financing.

 

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

 

*TechnologicalChange—The evolution of technology may decrease the demand for our products andservices.*

 

The technologywe use in our operations is rapidly evolving. We could experience delays ordifficulties in responding to changing technology, in addressing theincreasingly sophisticated needs of our customers or in keeping pace withemerging industry standards. In addition, the cost required to respond to andintegrate changing technologies may be greater than we anticipate. If we do notrespond

 

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adequately to the needto integrate changing technologies in a timely manner, or if the investmentrequired to so respond is greater than anticipated, our business, financialcondition, results of operations, cash flow and ability to make payments on thenotes may be adversely affected. We remain largely dependent on thedistribution of scientific, technical, medical and other scholarly informationin printed form. Usage of the Internet and other electronic media continues togrow. We cannot assure you that the acceleration of the trend toward suchelectronic media will not decrease the demand for our products which couldresult in lower profits and reduced cash flows.

 

Changes intechnology could also result in digital printing methods becoming more costeffective for printing short-run publications. If the use of digital printingwere expanded in this manner, it could allow smaller printers to competeagainst us in our specialized market, which could cause a decrease in thedemand for our services or could force us to lower our prices to remaincompetitive. Such a decrease in demand or price could result in decreasedprofitability and have a material adverse effect on our business, financialcondition and results of operations.

 

*Competition—Theprinting industry is competitive and rapidly evolving, and competition mayadversely affect our business.*

 

The printingindustry is extremely competitive. We compete with numerous companies, some ofwhich have greater financial resources than we do. We compete on the basis ofongoing customer service, quality of finished products, range of servicesoffered, distribution capabilities, use of state of the art technology andprice. We cannot assure you that we will be able to compete successfully withrespect to any of these factors. In certain circumstances, due primarily tofactors such as freight rates and customer preference for local services,printers with better access to certain regions of the country may have acompetitive advantage in such regions. Our failure to compete successfullycould cause us to lose existing business or opportunities to generate newbusiness and could result in decreased profitability, adversely affecting ourbusiness.

 

In addition,while we do not currently compete with large printing companies in thespecialized markets that we serve, large printing companies with much greaterresources than ours have from time to time in the past attempted to competewith us in our specialized markets. We cannot assure you that these largeprinting companies will not compete with us in the future.

 

*Consolidation—Industryconsolidation of customers and increased competition for those customers mayresult in increased expenses and reduced revenue and market position.*

 

The continuingconsolidation of publishing companies has shrunk the pool of availablecustomers. Large publishing companies often have preferred providerarrangements with specific printing companies. As smaller publishing companiesare consolidated into the larger companies, the smaller publishing companiesare often required to use the printing company with which the acquiring companyhas established an arrangement. If our customers were to merge or consolidatewith publishing companies utilizing other printing companies, we could lose ourcustomers to competing printing companies. If we were to lose a significantportion of our current base of customers to competing printing companies, ourbusiness, financial condition, results of operations and cash flow could bematerially adversely affected.

 

*CustomerConcentration—The increase in business from a top customer may make our net salesand profitability more sensitive to the loss of such a customer’s business.*

 

One of our topcustomers is increasing the amount of business that it grants to us relative toour competitors. Because of this increase, our net sales from this customer aregrowing at a faster rate than net sales from our other customers. The net salesattributable to that customer accounted for about 11.2% of

 

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our net sales in2004.  If the Dingley Acquisition hadbeen completed at the beginning of 2004, this customer would have accounted for9.9% of our net sales.  In addition, as aresult of the Dingley Acquisition, we have a customer that would have accountedfor 11.9% of our net sales in 2004 if the Dingley Acquisition had beencompleted in the beginning of 2004. In 2005, these two customers are projectedto account for approximately 10.0% and 14.0% of our net sales,respectively.  The loss of either ofthese customers would cause our net sales and profitability to decline. Wecannot assure you that net sales to these and our other large customers willnot continue to increase as a percentage of our total net sales or that thesecustomers will continue to use our printing services. The loss of any suchcustomer could adversely affect us.

 

*Costand Availability of Paper and Other Raw Materials—Increases in prices of paperand other raw materials and postal rates could cause disruptions in ourservices to customers.*

 

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

 

Due to the significanceof paper in our business, we are dependent upon the availability of paper. Inperiods of high demand, certain paper grades have been in short supply,including grades we use in our business. In addition, during periods of tightsupply, many paper producers allocate shipments of paper based upon historicalpurchase levels of customers. Although we generally have not experiencedsignificant difficulty in obtaining adequate quantities of paper, unforeseendevelopments in the overall paper markets could result in a decrease in thesupply of paper and could cause either or both of our revenues or profits todecline.

 

We use avariety of other raw materials including ink, film, offset plates, chemicalsand solvents, glue, wire and subcontracted components. In general, we have notexperienced any significant difficulty in obtaining these raw materials. Wecannot assure you, however, that a shortage of any of these raw materials willnot occur in the future or will not potentially adversely affect the financialresults of our business.

 

Our journalsand magazines are often mailed, either by us or our customers, to subscribers.As a result, an increase in postal rates may cause our customers to decreasethe size and number of their publications. Although we generally have notexperienced significant decreases in mailings in the past due to postal rateincreases, we cannot assure you that such a decrease will not occur in thefuture or will not potentially adversely affect the financial results of ourbusiness.

 

We requireenergy products, primarily natural gas and electricity, in our operatingfacilities.  We also depend on gasolineand diesel fuel for our delivery vehicles and the vehicles of the carriers weutilize to deliver our products. Possible disruption of supplies or an increase in the prices of energyproducts could adversely affect the financial results of our business.

 

*KeyEmployees—Our ability to attract, train and retain executives and otherqualified employees is crucial to results of operations and future growth.*

 

We rely to asignificant extent on our executive officers and other key managementpersonnel. There can be no assurance that we will be able to continue to retainour executive officers and key management personnel or attract additionalqualified management in the future. In addition, the success of

 

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any acquisition by usmay depend, in part, on our ability to retain management personnel of the acquired companies. There can be noassurance that we will be able to retain such management personnel.

 

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

 

•                  the industry experiences shortages ofqualified technicians, and we may not be able to maintain an adequate skilledlabor force necessary to operate efficiently;

 

•                  our labor expenses may increase as a resultof shortages of skilled technicians; or

 

•                  we may have to curtail our planned internalgrowth as a result of labor shortages.

 

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

 

*BusinessInterruption—Our printing facilities may suffer business interruptions whichcould increase our operating costs, decrease our sales or cause us to losecustomers.*

 

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

 

*ResearchFunding—Decreases in the types and amount of research funding could decreasethe demand for our journal printing services.*

 

In our journalbusiness, we provide printing services primarily to scientific, technical,medical and other scholarly journals. The supply of research papers publishedin these journals is related to the amount of research funding provided by thefederal government and private companies. In the future, the federal governmentor private companies could decrease the type and amount of funding that theyprovide for scientific, technical, medical and other scholarly research. Asignificant decrease in research funding might decrease the number or length ofjournals that we print for our customers, which would decrease our cash flow.

 

*LaborRelations—Some of our employees belong to labor unions and certain actions bysuch employees, such as strikes or work stoppages, could adversely affect ouroperations or cause us to incur costs.*

 

We employ about2,080 employees. We have about 140 employees at our Vermont facilities that aremembers of the local union of the Graphic Communications International Union.The union contract covering these employees expires in April 2007. Ifunionized employees were to engage in a concerted strike or other workstoppage, or if other employees were to become unionized, we could experience adisruption of operations, higher labor costs or both. We cannot assure you thata strike or other disruption of operations or work stoppage would not have amaterial adverse effect on our ability to print products for our customers.

 

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*EnvironmentalMatters—Our printing and other facilities are subject to environmental laws andregulations, which may subject us to liability or require us to incur costs.*

 

We use variousmaterials in our operations which contain substances considered hazardous ortoxic under environmental laws. In addition, our operations are subject tofederal, state and local environmental laws and regulations relating to, amongother things, air emissions, waste generation, handling, management anddisposal, waste water treatment and discharge and remediation of soil andgroundwater contamination. Permits are required for the operation of certain ofour businesses, and these permits are subject to renewal, modification and, insome circumstances, revocation. Our operations also generate wastes which aredisposed of off-site. Under certain environmental laws, including theComprehensive Environmental Response, Compensation and Liability Act, asamended (“CERCLA,” commonly referred to as “Superfund”) and similar state lawsand regulations, we may be liable for costs and damages relating to soil andgroundwater contamination at these off-site disposal locations, or at our ownfacilities. In the past, such matters have not had a material impact on ourbusiness or operations. We are not currently aware of any environmental mattersthat are likely to have a material adverse effect on our business, financialcondition, results of operations and cash flow. However, we cannot assure youthat such matters will not have such an impact on us. Furthermore, futurechanges to environmental laws and regulations may give rise to additional costsor liabilities that could have a material adverse impact on us.

 

*Healthand Safety Requirements—We could be adversely affected by health and safetyrequirements.*

 

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

 

*IntellectualProperty—We may not protect our technology effectively, which would allowcompetitors to duplicate our products and services, or our products and servicesmay infringe on claims of intellectual property rights of third parties.*

 

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

 

We do notbelieve that any of our products, services or activities infringe upon theintellectual property rights of third parties in any material respect. Therecan be no assurance, however, that third parties will not claim infringement byus with respect to current or future products, services or activities. Anyinfringement claim, with or without merit, could result in substantial costsand diversion of management and financial resources, and a successful claimcould effectively block our ability to use or license products and services orcost us money.

 

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*AdditionalCapital—We may need additional capital in the future and it may not beavailable on acceptable terms.*

 

We may requiremore capital in the future to:

 

•                  fund our operations;

 

•                  finance investments in equipment andinfrastructure needed to maintain and expand our network;

 

•                  enhance and expand the range of services weoffer; and

 

•                  respond to competitive pressures andpotential strategic opportunities, such as investments, acquisitions andinternational expansion.

 

We cannotassure you that additional financing will be available on terms favorable tous, or at all. The terms of available financing may place limits on ourfinancial and operating flexibility. If adequate funds are not available onacceptable terms, we may be forced to reduce our operations or delay, limit orabandon expansion opportunities. Moreover, even if we are able to continue ouroperations, the failure to obtain additional financing could reduce ourcompetitiveness as our competitors may provide better maintained networks oroffer an expanded range of services.

 

*Consummationof Future Acquisitions—We may not be able to acquire other companies onsatisfactory terms or at all.*

 

Our businessstrategy includes pursuing acquisitions. Nonetheless, we cannot assure you thatwe will identify suitable acquisitions or that such acquisitions can be made atan acceptable price. If we acquire additional businesses, those businesses mayrequire substantial capital. Although we will be able to borrow under ourworking capital facility under certain circumstances to fund acquisitions, wecannot assure you that such borrowings will be available in sufficient amountsor that other financing will be available in amounts and on terms that we deemacceptable. In addition, future acquisitions could result in us incurring debtand contingent liabilities. We cannot assure you that we will be successful in consummatingfuture acquisitions on favorable terms or at all.

 

*Integrationof Acquired Businesses—The integration of acquired businesses, including TheDingley Press, may result in substantial costs, delays and other problems.*

 

Our futureperformance will depend heavily on our ability to integrate the businesses thatwe may acquire, including the business of The Dingley Press, which was acquiredin May 2004. To integrate newly acquired businesses, including The DingleyPress, we must integrate manufacturing facilities and extend our financial andmanagement controls and operating, administrative and information systems in atimely manner and on satisfactory terms and conditions. This may be moredifficult with respect to significant acquisitions such as the DingleyAcquisition. We may not be able to successfully integrate acquired businessesor realize projected cost savings and synergies in connection with thoseacquisitions on the timetable contemplated or at all.

 

Furthermore,the costs of businesses that we may acquire, including The Dingley Press, couldsignificantly impact our short-term operating results. These costs couldinclude:

 

•                  restructuring charges associated with theacquisitions; and

 

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•                  other expenses associated with a change ofcontrol, as well as non-recurring acquisition costs including accounting andlegal fees, investment banking fees, recognition of transaction-relatedobligations and various other acquisition-related costs.

 

The integrationof newly acquired businesses will require the expenditure of substantialmanagerial, operating, financial and other resources and may also lead to adiversion of management’s attention from our ongoing business concerns.

 

Finally,although we conduct and intend to conduct what we believe to be a prudent levelof investigation regarding the businesses we purchase, in light of thecircumstances of each transaction, an unavoidable level of risk remainsregarding the actual condition of these businesses. Until we actually assumeoperating control of such business assets and their operations, we may not beable to ascertain the actual value or understand the potential liabilities ofthe acquired entities and their operations. Once we acquire a business, we arefaced with risks, including:

 

•                  the possibility that we have acquiredsubstantial undisclosed liabilities;

 

•                  the risks of entering markets in which wehave limited or no prior experience;

 

•                  the potential loss of key employees orcustomers as a result of changes in management; and

 

•                  the possibility that we may be unable torecruit additional managers with the necessary skills to supplement themanagement of the acquired businesses.

 

We may not besuccessful in overcoming these risks.

 

*Restatementof the Financial Statements of the Dingley Press—The material weaknesses of theinternal accounting controls of The Dingley Press may take substantial time andcost to correct.*

 

In connectionwith the Dingley Acquisition, our auditors reaudited The Dingley Press’financial statements as of August 31, 2003 and 2002 and for each of theyears ended August 31, 2003, 2002 and 2001 and identified certain mattersthat they considered to be “material weaknesses” involving internal accountingcontrols and the operation of such controls, resulting in restatements of thosefinancial statements. The material weaknesses identified at The Dingley Pressprimarily related to the application of generally accepted accountingprinciples, including revenue recognition, asset valuation, derivativeinstruments and stock option accounting. A “material weakness” is a reportablecondition in which the design or operation of one or more of the internalcontrol components of the subject company does not reduce to a relatively lowrisk the possibility of a material error in the financial statements.

 

The materialweaknesses identified resulted from:

 

•                  The Dingley Press, Inc. management’slack of background and understanding of generally accepted accountingprinciples related to the identified subjects;

 

•                  differences in interpretation of accountingrequirements; and

 

•                  lack of detailed documentation to supportcertain balances and positions taken.

 

The materialweaknesses identified require that The Dingley Press’ management’s knowledge ofgenerally accepted accounting principles and The Dingley Press’ disclosure andreporting controls be improved to ensure that accounting and disclosurerequirements are followed for external financial

 

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reporting purposes.Specifically, in order to address these weaknesses, we have (i) providededucation to The Dingley Press’s management and staff on generally acceptedaccounting principles, external financial reporting requirements anddisclosures and (ii) initiated the establishment of a financial reportingand disclosure process that ensures all significant business transactions andmatters are reviewed, that generally accepted accounting principles areconsidered and that related financial statement disclosures are provided. Forareas where it was determined that The Dingley Press did not have a sufficientlevel of supporting documentation, changes have been instituted to ensure thatthe necessary information is developed, reconciled and retained or accountingpolicies were changed so that certain previously capitalized items are nowexpensed. Until such time as all of the needed controls are in place and deemedto be operating effectively, we have instituted compensating controls whichinclude extensive business performance reviews.

 

We cannotassure you how quickly we will be able to correct these material weaknesses orhow much it will cost to correct these material weaknesses. The time and costassociated with correcting these material weaknesses may be substantial.

 

*PrincipalStockholders—Our principal stockholders could exercise their influence over us.*

 

As a result oftheir stock ownership of TSG Holdings Corp., our parent, Bruckmann, Rosser,Sherrill & Co., L.L.C. (“BRS”), Jefferies Capital Partners (“JCP”) andtheir respective affiliates together beneficially own about 84.8% of TSGHoldings Corp.’s outstanding capital stock. By virtue of their stock ownershipand the terms of the securities holders agreement, these entities havesignificant influence over our management and will be able to determine theoutcome of all matters required to be submitted to the stockholders forapproval, including the election of our directors and the approval of mergers,consolidations and the sale of all or substantially all of our assets. Theinterests of BRS and JCP as equity owners of TSG Holdings Corp. may differ fromthe interests of our noteholders and the lenders under our working capitalfacility, and, as such, BRS and JCP may take actions which may not be in the interestof such noteholders and lenders. For example, if we encounter financialdifficulties or are unable to pay our debts as they mature, the interests ofour equity owners might conflict with the interests of our noteholders and thelenders under our working capital facility. In addition, our equity owners mayhave an interest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investments,even though such transactions might involve risks to our noteholders and thelenders under our working capital facility.

 

**ITEM 2.   PROPERTIES**

 

We operate anetwork of 13 manufacturing, warehousing and office facilities locatedthroughout the East Coast and Midwest that occupy, in total, about 1,071,000square feet. We maintain more than 934,000 square feet of production spaceconsisting of manufacturing and publication services. We own about 85% of thesquare footage we use.  The followingtable provides an overview of our manufacturing, warehousing and officefacilities.

 
| **Location**    | ** ** | **Function(****s****)** | ** ** | **Ownership  Structure** | ** ** | **Total Size  (Sq. Feet)** | ** ** |
|-----------------|------------|-------------------------|------------|--------------------------|------------|----------------------------|------------|
| Hunt Valley, MD |       | Corporate  Headquarters |       | Leased                   |       |                       | 6,366      |   |   |
| Barre, VT       |       | Publication  Services   |       | Leased                   |       |                       | 12,884     |   |   |
| Orford, NH      |       | Publication  Services   |       | Leased                   |       |                       | 6,895      |   |   |
| Hanover, PA     |       | Manufacturing           |       | Owned                    | (1)        |                       | 105,618    |   |   |
| Berlin, VT      |       | Manufacturing           |       | Owned                    | (1)        |                       | 55,450     |   |   |
| Chelsea, MI     |       | Manufacturing           |       | Owned                    | (1)        |                       | 135,279    |   |   |

 

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| Hanover, NH      |       | Manufacturing                   |       | Owned     | (1)        |       | 148,830       |       |       |
|------------------|------------|---------------------------------|------------|-----------|------------|------------|---------------|------------|------------|
| Ashburn, VA      |       | Manufacturing                   |       | Owned     | (1)        |       | 70,159        |       |       |
| Lisbon, ME       |       | Manufacturing                   |       | Owned     | (1)        |       | 268,000       |       |       |
| Ann Arbor, MI    |       | Manufacturing  and Distribution |       | Owned     | (1)        |       | 124,726       |       |       |
| Williamstown, VT |       | Warehousing                     |       | Leased    |       |       | 27,120        |       |       |
| Lebanon, NH      |       | Warehousing                     |       | Leased    |       |       | 6,600         |       |       |
| Lisbon, ME       |       | Warehousing                     |       | Leased    |       |       | 103,000       |       |       |
| ** **       | ** ** | ** **                      | ** ** | **Total** | ** ** | ** ** | **1,070,927** | ** ** | ** ** |

 

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(1)          Subject to liens in favorof the holders of our outstanding senior secured notes and the lenders underour working capital facility.

 

Some of ouroffice and warehouse leases are on yearly renewals, with the lease of ourcorporate headquarters expiring in December 2011, subject to a renewaloption.  We believe that our office,manufacturing and warehousing facilities are adequate for our immediate needsand that additional or substitute space is available at a reasonable cost ifneeded to accommodate future growth and expansion.  In addition to the properties listed above,we occasionally lease space for single offices for our sales representatives.

 

On July 27,2004 we announced plans to consolidate the operations of our Sheridan Bookssubsidiary from three operating facilities into a single facility.  Sheridan Books moved the operations equipmentfrom its Fredericksburg, Virginia facility to its Chelsea, Michigan facility inSeptember 2004.  The Fredericksburgfacility building was sold on December 30, 2004.  We plan to expand the Chelsea facility by60,000 square feet during late 2005 or early 2006, contingent on a firm offerfrom a third party to purchase the Ann Arbor, Michigan facility at anacceptable price.  This additional spacewill be used to consolidate the customer service and warehouse operations,currently located in Ann Arbor to the Chelsea facility.

 

In January 2005,our Sheridan Press subsidiary demolished the 36,060 square foot buildingadjacent to its main plant in Hanover, Pennsylvania and began an expansion toadd 52,200 square feet to its existing facility to provide additionalmanufacturing capacity.  The expansion isexpected to be completed by August 2005.

 

In January 2005,our Dartmouth Printing Company subsidiary completed a 24,700 square footexpansion of its existing facility in Hanover, New Hampshire to provideadditional manufacturing capacity.

 

**ITEM 3.   LEGALPROCEEDINGS**

 

**RegulatoryMatters**

 

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

 

**LegalProceedings**

 

We currentlyare involved in various litigation proceedings as a defendant and are from timeto

 

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time involved inroutine litigation. In the opinion of our management, these matters are notexpected to have a material adverse effect on our business, financial conditionor results of operations.

 

**ITEM 4.   SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

There were nomatters submitted to a vote of security holders during the fourth quarter endedDecember 31, 2004.

 

**PART II**

 

**ITEM 5.   MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS****AND ISSUER PURCHASES OF EQUITYSECURITIES**

 

We arewholly-owned by TSG Holdings Corp, a privately owned corporation.  There is no public trading market for ourequity securities or for those of TSG Holdings Corp.  As of March 25, 2005, there were 33holders of TSG Holdings Corp. common stock.

 

In connectionwith the Dingley Acquisition, four officers of The Dingley Press purchased about39,600 shares of TSG Holdings Corp. common stock and about 3,326 shares of TSGHoldings Corp. preferred stock for an aggregate purchase price of about $4.0million pursuant to the TSG Holdings Corp. Stock-Based Incentive CompensationPlan. These sales were made without registration pursuant to the exemptionprovided by Rule 701 of the Securities Act of 1933, as amended. Forfurther information about these transactions and ownership aspects of the TSGHoldings Corp. stock, see “Item 13. Certain Relationships and RelatedTransactions.”

 

Our workingcapital facility contains customary restrictions on our ability and the abilityof certain of our subsidiaries to declare or pay any dividends or repurchasestock. The indenture governing our 101⁄4% Senior Secured Notes due 2011 alsocontains customary terms restricting our ability and the ability of certain ofour subsidiaries to declare or pay any dividends or repurchase stock. Forfurther information related to the payment of dividends, see the discussioncontained in Part III, Item 12, “Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.”  Information with respect to shares of commonstock that may be issued under our equity compensation plans is set forth inPart III, Item 12, “Security Ownership of Certain Beneficial Owners andManagement.”

 

**ITEM 6.   SELECTEDFINANCIAL DATA**

 
| ** **                                          |   | **Successor Basis**               |    | **Predecessor Basis****(1)**                   |    |
|-----------------------------------------------------|--------|-----------------------------------|---------|------------------------------------------------|---------|
| ** **                                          |   | **Year ended  December 31,** |    | **August 21, 2003  to December 31,** |    | **January 1, 2003  to August 20,** |   | **Year Ended December 31,** |   |
| **(Dollars in thousands)**                          |   | **2004**                          |    | **2003**                                       |    | **2003** |   | **2002** |   | **2001** |   | **2000** |   |
| **Statement  of Income Data:**                      |   |                              |    |                                           |    |   |   |   |   |   |   |   |   |
| Net sales                                           |   | $                                 | 287,513 |                                           |    | $ | 81,193 |   |   | $ | 131,904 |   |   | $ | 208,837 |   |   | $ | 212,302 |   |   | $ | 208,134 |   |   |
| Gross profit                                        |   | 60,526                            |    |                                           | 18,745  |   |   | 31,839 |   |   | 48,997 |   |   | 42,742 |   |   | 45,535 |   |   |
| Selling,  administrative and other general expenses |   | 37,232                            |    |                                           | 12,727  |   |   | 23,646 |   |   | 31,658 |   |   | 31,243 |   |   | 31,322 |   |   |
| Operating  income                                   |   | 21,456                            |    |                                           | 5,415   |   |   | 8,108 |   |   | 17,133 |   |   | 10,613 |   |   | 13,327 |   |   |
| Net income                                          |   | 2,330                             |    |                                           | 760     |   |   | 1,169 |   |   | 6,624 |   |   | 1,399 |   |   | 3,921 |   |   |
|                                                |   |                              |    |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data (at end of period):**         |   |                              |    |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and  cash equivalents                          |   | $                                 | 4,975   |                                           |    | $ | 9,918 |   |   |   |   |   | $ | 48 |   |   | $ | 37 |   |   | $ | 1,234 |   |   |
| Property,  plant and equipment, net                 |   | 115,253                           |    |                                           | 57,277  |   |   |   |   |   | 45,664 |   |   | 50,330 |   |   | 49,423 |   |   |
| Total assets                                        |   | 288,398                           |    |                                           | 202,488 |   |   |   |   |   | 99,955 |   |   | 105,787 |   |   | 110,852 |   |   |
| Total debt  and capital leases                      |   | 164,894                           |    |                                           | 103,641 |   |   |   |   |   | 66,003 |   |   | 75,429 |   |   | 81,434 |   |   |
| Mandatorily  redeemable preferred stock             |   | —                            |    |                                           | —  |   |   |   |   |   | 18,192 |   |   | 18,192 |   |   | 18,192 |   |   |
| Total  stockholders’ equity (deficit)          |   | 54,065                            |    |                                           | 47,760  |   |   |   |   |   | (7,923 | ) |   | (14,547 | ) |   | (15,946 | ) |   |
|                                                |   |                              |    |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Other  Financial Data:**                          |   |                              |    |                                           |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation  and amortization                      |   | $                                 | 14,593  |                                           |    | $ | 4,168 |   |   | $ | 4,874 |   |   | $ | 8,442 |   |   | $ | 9,163 |   |   | $ | 8,433 |   |   |
| Capital  expenditures                               |   | 21,827                            |    |                                           | 2,915   |   |   | 5,213 |   |   | 4,870 |   |   | 7,791 |   |   | 10,799 |   |   |

 

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(1)          Periods prior to August 20,2003 represent the predecessor company prior to the consummation of the BuyoutTransactions, and our historical consolidated financial data for such periodsdo not give effect to the Buyout Transactions.

 

**ITEM 7.   MANAGEMENT’SDISCUSSION AND ANALYSIS OR FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion should be read in conjunction with, and is qualified in its entiretyby reference to, our historical consolidated financial statements and relatednotes included elsewhere in this Annual Report on Form 10-K. The discussions inthis section contain forward-looking statements that involve risks anduncertainties. Actual results could differ materially from those discussedbelow. See ‘‘Special Note Regarding Forward-Looking Statements’’ and Part I,Item 1, ‘‘Business—Risk Factors’’ for a discussion of some of the risks thatcould affect us in the future.

 

**Introduction**

 

We are aleading specialty printer offering a full range of printing and value-addedsupport services for the journal, catalog, magazine, book and article reprintmarkets. We provide a wide range of printing services and value-added supportservices, such as electronic copy-editing, composition, digital proofing,subscriber database maintenance, distribution services and electronicpublishing support. We utilize a decentralized management structure, whichprovides our customers with access to the resources of a large company, whilemaintaining the high level of service and flexibility of a smaller company.

 

**Overview**

 

On August 21,2003, TSG Holdings Corp. purchased 100% of the outstanding capital stock of TheSheridan Group, Inc. from its existing stockholders (the “Buyout”) for totalcash consideration of $142.0 million less net debt (as defined in the stockpurchase agreement), resulting in cash of $79.9 million being paid to theselling stockholders. The accounting purchase price was $186.6 million, whichwas comprised of the $79.9 million of cash paid to the selling stockholders,$51.4 million of assumed liabilities and $55.3 million of refinanced debt. Wefunded the acquisition price and the related fees and expenses with theproceeds of the sale of $105,000,000 aggregate principal amount of our 101⁄4%Senior Secured Notes due 2011 (the “2003 Notes”) and equity investments in TSGHoldings Corp.  We refer to the Buyout,the sale of the 2003 Notes, the closing of our working capital facility and theequity investments collectively as the “Buyout Transactions.”

 

On May 25,2004, The Sheridan Group, Inc., through a newly formed subsidiary, purchasedsubstantially all of the assets and business of The Dingley Press (the “DingleyAcquisition”) for a total purchase price of $66.9 million.  The accounting purchase price was $84.3million, which was comprised of cash paid of $65.5 million, $14.9 million ofassumed liabilities and $3.9 million of financing costs. We funded theacquisition price and the related fees and expenses with the proceeds of thesale of $60,000,000 aggregate principal amount of our 101⁄4% Senior Secured Notesdue 2011 (the “2004 Notes”), available cash and equity investments in TSGHoldings Corp. The 2003 Notes and the 2004 Notes are fully and unconditionallyguaranteed on a joint and several basis by all of our subsidiaries.  We refer to the Dingley Acquisition, the saleof the 2004 Notes, the amendment of our working capital facility and the equityinvestments collectively as the “Dingley Transactions.”

 

This discussionand analysis of our results of operations includes periods prior to theconsummation of the Buyout. Accordingly, the discussion and analysis ofhistorical periods prior to August 21, 2003 does not reflect thesignificant impact that the Buyout Transactions have had and will have on us,including increased leverage and increased liquidity requirements. In addition,this discussion

 

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and analysis onlycovers the historical financial condition and results of operations of TheDingley Press since May 25, 2004, the date of the Dingley Acquisition.Consequently, this discussion and analysis does not reflect a full year’simpact of the Dingley Transactions.

 

Resultsdiscussed for the year ended December 31, 2003 represent the mathematicaladdition of the Successor basis results of operations and the Predecessor basisresults of operations. We have combined these results for discussion purposesonly and, accordingly, they may yield results that are not strictly comparableon a period-to-period basis primarily due to (i) the impact of requiredpurchase accounting adjustments, (ii) the new basis of accounting establishedas a result of the Buyout and (iii) the significant increase in debt andrelated interest expense. We believe that this is the most meaningful way topresent our results of operations. Such results are not indicative of what theresults for the year ended December 31, 2003 would have been had theBuyout not occurred.

 

**Critical Accounting Policies**

 

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

 

•                  Allowance for doubtful accounts;

•                  Impairment of goodwill and otheridentifiable intangibles;

•                  Income taxes; and

•                  Self-insurance.

 

*Allowancefor Doubtful Accounts*

 

Our policy withrespect to trade and notes receivable is to maintain an adequate allowance orreserve for doubtful accounts for estimated losses from the inability of ourcustomers to make required payments. The process to estimate the collectibilityof our trade accounts receivable balances consists of two steps. First, weevaluate specific accounts for which we have information that the customer mayhave an inability to meet its financial obligations (e.g., bankruptcy). Inthese cases, using our judgment based on available facts and circumstances, werecord a specific allowance for that customer against the receivable to reflectthe amount we expect to ultimately collect. Second, we then establish anadditional reserve for all customers based on a range of percentages applied toaging categories, based on management’s best estimate. If the financialcondition of our customers were to deteriorate and result in an impairment oftheir ability to make payments, additional allowances may be required.

 

*Impairmentof Long-Lived Assets and Goodwill*

 

We conductimpairment reviews of long-lived assets and goodwill in accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” andSFAS No. 142, “Goodwill and Other Intangible Assets.”

 

We adopted SFASNo. 142 on January 1, 2002 and performed a fair market valuation analysisof goodwill as of the same date. We tested goodwill for impairment using thetwo-step process prescribed in SFAS No. 142. The first step is to screen forpotential impairment, while the second step measures the amount of the impairment,if any. We also performed the required impairment tests of goodwill to identifywhether an impairment existed under this statement on December 31, 2004and 2003. No

 

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impairments were notedas a result of these tests.  At December 31,2004, we had $47.1 million in goodwill. While significant judgment is required, we believe that our estimates offair value are reasonable.  However,should our assumptions change in future years, our fair value models couldresult in lower fair values for goodwill, which could materially affect thevalue of goodwill and the results of operations.

 

We periodically review long-lived assets, consisting primarily ofproperty, plant and equipment and identified intangibles subject toamortization, for impairment, pursuant to SFAS No. 144, by analyzing the futureundiscounted cash flows whenever events or changes in circumstances indicatethat the carrying value may not be recoverable. No impairments were noted as a result of these tests.  While significant judgment is required, webelieve that our estimates of future undiscounted cash flows arereasonable.  However, should ourassumptions change in future years, our fair value models could result in lowerfair values of long-lived assets, which could materially affect the value oflong-lived assets and the results of operations.

 

*IncomeTaxes*

 

As part of theprocess of preparing our consolidated financial statements, we are required toestimate income taxes in each of the jurisdictions in which we operate. Inaddition to estimating the actual current tax liability, we must assess futuretax effects of temporary differences between the tax bases of assets andliabilities and amounts reflected on our consolidated balance sheets, andoperating loss carryforwards. Such differences result in deferred tax assetsand liabilities, which are recorded in our consolidated balance sheets. We thenassess the likelihood that deferred tax assets will be recovered from futuretaxable income, and, to the extent recovery is not considered likely, establisha valuation allowance against those assets. The valuation allowance is based onestimates of future taxable income in jurisdictions in which we operate and theperiod over which the deferred tax assets will be recoverable. We use our bestjudgment in determining the provision for income taxes, the deferred tax assetsand liabilities and any valuation allowance recorded against the net deferredtax assets.

 

To the extentthat actual results differ from our estimates, new information results inchanges to estimates or there is a material change in the actual tax rates ortime periods within which the underlying temporary differences become taxableor deductible, we may need to establish an additional valuation allowance,reduce our existing valuation allowance or adjust the effective tax rate, allof which could materially impact our financial position and results ofoperations.

 

In addition, as part of the financial statement process, we assess thepositions taken on our tax returns and establish tax reserves for taxcontingencies that in our judgment are probable and estimable.  These estimates could change as the taxreturns are reviewed by the tax authorities or as statutes of limitations closeon the returns; however, we believe that we have adequately provided for allsuch tax contingencies.

 

*Self-Insurance*

 

We areself-insured for healthcare costs at certain of our operating subsidiarylocations. We mitigate the risk related to our ultimate claims exposure underthese self-insurance arrangements through the purchase of various levels ofindividual and aggregate claims stop-loss insurance coverage with third-partyinsurers. We periodically review health insurance claims outstanding andestimates of incurred but not reported claims with our third-party claimsadministrator and adjust our reserves for self-insurance risk accordingly.Provisions for medical claims are based on estimates, which are subject todiffering financial outcomes based upon the nature and severity of thoseclaims. As a result, additional reserves may be required in future periods.

 

**Results of Operations**

 

The followingtable sets forth, for the periods indicated, information derived from ourconsolidated statements of income expressed as a percentage of net sales forthe periods presented. The percentage relationships for the year ended December 31,2003 were derived by combining our results of operations for the period January 1,2003 through August 20, 2003 and for the period August 21, 2003through December 31, 2003, which, respectively, are the periods before andafter the date of the Buyout Transactions. Accordingly, the data for these twoperiods and the periods preceding and following the Buyout Transactions wereprepared on differing bases of accounting and, as a result, the comparabilityof such percentage relationships with other periods is limited, primarily as aresult of one-time transaction costs, amortization of intangibles, depreciationof fixed assets and interest expense related to outstanding debt balances.

 

20

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| ** **                                     | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** | **Year Ended  December 31,  2002** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Net sales                                      |       | 100.0                                   | %          |                                    | 100.0      | %                                       |       | 100.0 | % |   |
| Cost of  sales                                 |       | 78.9                                    |       |                                    | 76.3       |                                    |       | 76.5 |   |   |
| Gross profit                                   |       | 21.1                                    |       |                                    | 23.7       |                                    |       | 23.5 |   |   |
| Selling and  administrative expenses           |       | 13.0                                    |       |                                    | 17.1       |                                    |       | 15.4 |   |   |
| Other  general (income) expense                |       | —                                  |       |                                    | —     |                                    |       | (0.2 | ) |   |
| Amortization  of intangibles                   |       | 0.6                                     |       |                                    | 0.3        |                                    |       | 0.1 |   |   |
| Total  operating expenses                      |       | 13.6                                    |       |                                    | 17.4       |                                    |       | 15.3 |   |   |
| Operating  income                              |       | 7.5                                     |       |                                    | 6.3        |                                    |       | 8.2 |   |   |
| Other  (income) expense                        |       |                                    |       |                                    |       |                                    |       |   |   |   |
| Interest  expense                              |       | 5.8                                     |       |                                    | 4.3        |                                    |       | 2.9 |   |   |
| Fair value  adjustment to interest rate collar |       | —                                  |       |                                    | (0.1       | )                                       |       | 0.1 |   |   |
| Interest  income                               |       | (0.1                                    | )          |                                    | (0.1       | )                                       |       | — |   |   |
| Other, net                                     |       | —                                  |       |                                    | (0.2       | )                                       |       | 0.1 |   |   |
| Total other  expense                           |       | 5.7                                     |       |                                    | 3.9        |                                    |       | 3.1 |   |   |
| Income  before income taxes                    |       | 1.8                                     |       |                                    | 2.4        |                                    |       | 5.1 |   |   |
| Income tax  provision                          |       | 1.0                                     |       |                                    | 1.5        |                                    |       | 1.9 |   |   |
| Net income                                     |       | 0.8                                     | %          |                                    | 0.9        | %                                       |       | 3.2 | % |   |

 

Our businessincludes three reportable segments comprised of “Short-run Journals,” “SpecialtyCatalogs” and “Other Publications.” Short-run Journals are primarily medical,technical, scientific or scholarly journals and related reprints with run sizesof less than 5,000 copies. The Specialty Catalogs segment, which is comprisedof the assets and operations of The Dingley Press acquired on May 25, 2004, isfocused on catalog merchants that require run sizes between 300,000 and10,000,000 copies. The Other Publications business segment is comprised ofthree operating segments, which produce specialty magazines, medium-runjournals and short-run books.

 

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| ** **                         | ** ** | **Successor Basis**                     | ** ** | **Predecessor Basis**                                       | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| **(Dollars in thousands)**         | ** ** | **Year ended  December 31,  2004** | ** ** | **Four-months  and eleven-days  ended  December 31,  2003** | ** ** | **Seven-months  and twenty-  days ended  August 20,  2003** | ** ** | **Year ended  December 31,  2002** | ** ** |
| **Net  sales**                     |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |
| Short-run  journals                |       |                                    | $          | 97,277                                                      |       |   | $ | 33,453 |   |   | $ | 55,371 |   |   | $ | 86,053 |   |   |
| Specialty  catalogs                |       |                                    | 64,204     |                                                        |       | — |   |   | — |   |   | — |   |   |
| Other  publications                |       |                                    | 131,172    |                                                        |       | 49,606 |   |   | 79,785 |   |   | 127,430 |   |   |
| Intersegment  eliminations         |       |                                    | (5,140     | )                                                           |       | (1,866 | ) |   | (3,252 | ) |   | (4,646 | ) |   |
| Consolidated  total                |       |                                    | $          | 287,513                                                     |       |   | $ | 81,193 |   |   | $ | 131,904 |   |   | $ | 208,837 |   |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| **Operating  income**              |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Short-run  journals                |       |                                    | $          | 13,344                                                      |       |   | $ | 4,087 |   |   | $ | 6,573 |   |   | $ | 12,150 |   |   |
| Specialty  catalogs                |       |                                    | 3,483      |                                                        |       | — |   |   | — |   |   | — |   |   |
| Other  publications                |       |                                    | 6,885      |                                                        |       | 2,471 |   |   | 2,396 |   |   | 5,691 |   |   |
| Corporate                          |       |                                    | (2,256     | )                                                           |       | (1,143 | ) |   | (861 | ) |   | (708 | ) |   |
| Consolidated  total                |       |                                    | $          | 21,456                                                      |       |   | $ | 5,415 |   |   | $ | 8,108 |   |   | $ | 17,133 |   |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| **Assets**                         |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Short-run  journals                |       |                                    | $          | 94,442                                                      |       |   | $ | 89,851 |   |   |   |   |   | $ | 34,560 |   |   |
| Specialty  catalogs                |       |                                    | 77,406     |                                                        |       | — |   |   |   |   |   | — |   |   |
| Other  publications                |       |                                    | 112,348    |                                                        |       | 110,563 |   |   |   |   |   | 64,383 |   |   |
| Corporate                          |       |                                    | 4,202      |                                                        |       | 2,074 |   |   |   |   |   | 1,012 |   |   |
| Consolidated  total                |       |                                    | $          | 288,398                                                     |       |   | $ | 202,488 |   |   |   |   |   | $ | 99,955 |   |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| **Depreciation  and amortization** |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Short-run  journals                |       |                                    | $          | 4,604                                                       |       |   | $ | 1,640 |   |   | $ | 1,490 |   |   | $ | 2,974 |   |   |
| Specialty  catalogs                |       |                                    | 3,424      |                                                        |       | — |   |   | — |   |   | — |   |   |
| Other  publications                |       |                                    | 6,399      |                                                        |       | 2,426 |   |   | 3,168 |   |   | 5,125 |   |   |
| Corporate                          |       |                                    | 166        |                                                        |       | 102 |   |   | 216 |   |   | 343 |   |   |
| Consolidated  total                |       |                                    | $          | 14,593                                                      |       |   | $ | 4,168 |   |   | $ | 4,874 |   |   | $ | 8,442 |   |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| **Capital  expenditures**          |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Short-run  journals                |       |                                    | $          | 4,583                                                       |       |   | $ | 913 |   |   | $ | 3,425 |   |   | $ | 1,608 |   |   |
| Specialty  catalogs                |       |                                    | 5,815      |                                                        |       | — |   |   | — |   |   | — |   |   |
| Other  publications                |       |                                    | 11,122     |                                                        |       | 1,991 |   |   | 1,773 |   |   | 3,231 |   |   |
| Corporate                          |       |                                    | 307        |                                                        |       | 11 |   |   | 15 |   |   | 31 |   |   |
| Consolidated  total                |       |                                    | $          | 21,827                                                      |       |   | $ | 2,915 |   |   | $ | 5,213 |   |   | $ | 4,870 |   |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| **Goodwill**                       |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Short-run  journals                |       |                                    | $          | 24,069                                                      |       |   | $ | 26,098 |   |   |   |   |   | $ | 11,193 |   |   |
| Specialty  catalogs                |       |                                    | 3,673      |                                                        |       | — |   |   |   |   |   | — |   |   |
| Other  publications                |       |                                    | 19,361     |                                                        |       | 18,543 |   |   |   |   |   | 3,082 |   |   |
| Corporate                          |       |                                    | —     |                                                        |       | — |   |   |   |   |   | — |   |   |
| Consolidated  total                |       |                                    | $          | 47,103                                                      |       |   | $ | 44,641 |   |   |   |   |   | $ | 14,275 |   |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| **Intangible  assets**             |       |                                    |       |                                                        |       |   |   |   |   |   |   |   |   |   |
| Short-run  journals                |       |                                    | $          | 27,463                                                      |       |   | $ | 28,418 |   |   |   |   |   | $ | — |   |   |
| Specialty  catalogs                |       |                                    | 3,390      |                                                        |       | — |   |   |   |   |   | — |   |   |
| Other  publications                |       |                                    | 17,428     |                                                        |       | 18,023 |   |   |   |   |   | — |   |   |
| Corporate                          |       |                                    | —     |                                                        |       | — |   |   |   |   |   | — |   |   |
| Consolidated  total                |       |                                    | $          | 48,281                                                      |       |   | $ | 46,441 |   |   |   |   |   | $ | — |   |   |

 

22

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*Comparisonof Years Ended December 31, 2004 and December 31, 2003*

 

Net sales were$287.5 million in 2004, a $74.4 million or 34.9% increase compared to net salesof $213.1 million for 2003.  The DingleyAcquisition, completed in May 2004, added the specialty catalog segment andaccounted for $64.2 million of the sales growth.  Significant growth in short-run journalscombined with slightly stronger net sales in other publications accounted forthe rest of the increase.  Net sales in 2004 and 2003 includedshipping and postage fees billed to customers totaling $27.4 million and $19.7million, respectively.

 

Net sales forthe short-run journal segment were $97.3 million in 2004, an $8.5 million or9.5% increase compared to net sales of $88.8 million for 2003.  The increase in net sales for the short-runjournals segment was attributable to new titles that were awarded to us during2004, primarily from existing customers. Net sales for the other publications segment for 2004 were $131.2million, a $1.8 million or 1.4% increase compared to $129.4 million for2003.  Continued growth in medium-runjournals and magazine revenues, partially offset by a decrease in our bookbusiness, accounted for the growth in the other publications segment.  Softness in the book business resulted in ourdecision to close the Sheridan Books facility in Fredericksburg, VA andconsolidate the manufacturing operations into our facility in Chelsea, MI.  We subsequently sold the Fredericksburg facility.

 

Gross profitfor 2004 was $60.5 million, a $9.9 million or 19.7% increase compared to grossprofit of $50.6 million for 2003.  Grossmargin for 2004 decreased to 21.1% of net sales compared to 23.7% for2003.  The gross margin decline for 2004was attributable primarily to the Dingley Acquisition, as the specialty catalogsegment has a lower gross margin than our other businesses.  The decline attributable to The Dingley Presswas partially offset by productivity gains, driven by capital investments,realized at other segments during 2004.

 

Selling,administrative and other general expenses for 2004 were $37.2 million, a $0.8million or 2.4% increase compared to $36.4 million for 2003.  The increase for 2004 was due mainly to theaddition of selling, administrative and other general expense for The DingleyPress, higher employee costs, including healthcare, the management fee paid toour equity sponsors and increases in accounting, legal and other costsassociated with the additional reporting and compliance requirements resultingfrom the public registration of the 2003 Notes and the 2004 Notes, partiallyoffset by the absence of $3.5 million of transaction costs related to theBuyout Transactions (which were expensed as incurred in 2003).

 

Amortizationexpense for 2004 was $1.8 million, a $1.1 million increase compared toamortization expense of $0.7 million for 2003. The increase in amortization expense in 2004 was due to the recognitionof intangible assets associated with the Buyout in August 2003 and theDingley Acquisition in May 2004.

 

Operatingincome for 2004 was $21.5 million, an $8.0 million or 58.7% increase comparedto operating income of $13.5 million for 2003. Operating margin for 2004 was 7.5%, reflecting a 1.2 margin pointincrease compared to an operating margin of 6.3% for 2003.  The margin improvement for 2004 compared to2003 was largely a function of the impact of one-time transaction costs relatedto the Buyout Transactions in August 2003.

 

Interestexpense in 2004 was $16.7 million, a $7.9 million or 88.7% increase compared tointerest expense of $8.8 million for 2003. This increase was primarily attributable to the increase in debtassociated with the Buyout Transactions and the Dingley Transactions, coupledwith the higher interest rate of the 2003 Notes and the 2004 Notes as well as $0.3million of liquidated damages accrued as a result of not having an exchangeregistration statement for the 2003 Notes filed with the Securities andExchange

 

23

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Commission (“SEC”) anddeclared effective by the deadline required by the registration rightsagreement relating to the 2003 Notes.

 

Other income(including interest income) for 2004 was $0.3 million, a $0.1 million or 28.3%decrease compared to other income (including interest income) of $0.4 millionfor 2003.

 

Income beforeincome taxes for 2004 was $5.1 million, unchanged as compared to income beforeincome taxes of $5.1 million for 2003. Income before income taxes margin for 2004 of 1.8% decreased 0.6 marginpoints compared to a 2.4% margin for 2003. The decrease in income before income taxes margin for 2004 was mainlythe result of higher interest expense and increased depreciation andamortization expense attributable to the Buyout Transactions and the DingleyTransactions, as well as higher administrative costs associated with publicreporting in connection with the 2003 Notes and the 2004 Notes, partiallyoffset by higher net sales and the absence of the transaction costs related tothe Buyout Transactions (which were incurred in 2003).

 

Our effectiveincome tax rate in 2004 was 54.3% compared to 62.4% in 2003.  The decrease was caused by a reduction in theamount of tax reserves established in 2004 as compared to 2003, partiallyoffset by an increase in our effective state rate brought about by the unitarytax filing requirements in Maine as a result of the Dingley Acquisition.  In October 2004, the American JobsCreation Act was signed into law.  We arecurrently evaluating the law’s provisions relating to the phased-in deductionassociated with pre-tax income from domestic production activity.  We believe that this legislation will have afavorable impact on our effective income tax rates in the future.

 

Net income for2004 was $2.3 million, a $0.4 million or 20.8% increase from net income of $1.9million for 2003.  The increase in netincome for 2004 was principally due to the impact of higher net sales and theabsence of the 2003 transaction costs related to the Buyout Transactionspartially offset by higher interest expense and increased depreciation andamortization expense attributable to the Buyout Transactions and the DingleyTransactions as well as higher costs associated with public reporting inconnection with the 2003 Notes and the 2004 Notes.

 

*Comparisonof Years Ended December 31, 2003 and December 31, 2002*

 

Net sales were$213.1 million in 2003, a $4.3 million or 2.0% increase from net sales of$208.8 million for 2002. Both the short-run journal and other publicationssegments realized sales growth during 2003. Net sales in 2003 and 2002 included shipping andpostage fees billed to customers totaling $19.7 million and $18.7 million,respectively.

 

Net sales forthe short-run journal segment were $88.8 million for 2003, a $2.7 million or3.2% increase from the $86.1 million net sales for 2002. Net sales for theother publications segment were $129.4 million for 2003, a $2.0 million or 1.5%increase compared to $127.4 million for 2002. Continued growth in medium-runjournals coupled with strengthening magazine and book revenues accounted forthe growth in the other publications segment.

 

Gross profitwas $50.6 million in 2003, a $1.6 million or 3.2% increase from gross profit of$49.0 million for 2002. Gross margin (gross profit as a percentage of sales)increased to 23.7% of net sales in 2003 from 23.5% in 2002. One-time costs of$0.6 million attributable to the purchase accounting write-up of inventory areincluded in 2003 gross profit. The gross margin improvement

 

24

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was due primarily toproductivity improvements resulting from investments in capital. Increases inhealthcare costs were offset by reductions in discretionary expenses as well asmaterials.

 

Selling,administrative and other general expenses for 2003 were $36.4 million, a $4.7million or 14.9% increase from selling, administrative and other generalexpenses of $31.7 million for 2002. One-time costs consisting of $3.5 millionassociated with the Buyout Transactions accounted for most of this increase. Theimpact of a $0.5 million one time gain on the sale of a used web press in 2002was also a factor in the year-to-year increase. The balance of the increase wasprincipally due to higher healthcare costs as well as a new management feepayable to the equity sponsors, and increases in accounting, legal and othercosts associated with the additional reporting and compliance requirementsrelated to the 2003 Notes.

 

Amortizationexpense was $0.7 million in 2003, a $0.5 million or 233.9% increase fromamortization expense of $0.2 million for 2002. The increase in amortization wasdue to the recognition of definite-lived intangible assets associated with theBuyout Transactions in August 2003.

 

Operatingincome was $13.5 million in 2003, a $3.6 million or 21.1% decrease fromoperating income of $17.1 million for 2002. Operating margin in 2003 was 6.3%,reflecting a 1.9 margin point reduction compared to an operating margin of 8.2%in 2002. Operating income in 2003 was negatively impacted by $4.1 million inone-time transaction and purchase accounting costs related to the BuyoutTransactions.

 

Interestexpense was $8.8 million in 2003, a $2.4 million or 38.3% increase from 2002interest expense of $6.4 million. This increase was primarily attributable tothe increase in debt associated with the Buyout Transactions and the higherinterest rate of the 2003 Notes, partially offset by an increase in the fairvalue adjustment to the interest rate collar prior to the closing of the BuyoutTransactions.

 

Other income(including interest income) of $0.4 million in 2003 increased by $0.5 millionfrom 2002 expense of $0.1 million. This increase was due principally to theincrease in the market value of the deferred compensation funds.

 

Income beforeincome taxes was $5.1 million for 2003, a $5.5 million or 51.8% decreasecompared to income before income taxes for 2002 of $10.6 million. Income beforeincome taxes margin of 2.4% for 2003 decreased 2.7 margin points compared to a5.1% margin for fiscal 2002.

 

Our effectivetax rate was 62.4% for 2003 compared to 37.8% for 2002. The increase wasprincipally due to the establishment of tax reserves and valuation allowancesrelated to current and future deductibility, respectively, of certain costsincurred in connection with the Buyout Transactions.

 

Net income was$1.9 million in 2003, a $4.7 million or 70.9% decrease from 2002 net income of$6.6 million. The decrease in net income was due primarily to one-timetransaction and purchase accounting costs, higher interest expense and the impactof a one-time gain on the sale of a press in 2002.

 

**Liquidity and Capital Resources**

 

*OperatingActiviti*es

 

Net cashprovided by operating activities was $22.7 million for 2004 compared to $20.1million for 2003.  This $2.6 millionincrease was primarily the result of a $0.4 million increase in net income in2004 as compared to 2003 and a $5.6 million increase in non-cash items such asdepreciation and amortization related to the Buyout Transactions and theDingley Transactions.  This increase was

 

25

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primarily offset byunfavorable working capital changes, most notably accounts receivable andaccrued expenses, partially offset by a favorable change in inventories.

 

*InvestingActivities*

 

Net cash usedin investing activities was $85.0 million for 2004 compared to $87.5 millionfor 2003.  This $2.5 million decrease wasprimarily the net result of a $14.4 million decrease in cash used to acquirebusinesses and $2.4 million in proceeds from the sale of fixed assets,primarily due to the closure of the Sheridan Books facility in Fredericksburg,VA, offset by an approximate $13.7 million increase in capital expenditures.

 

*Financing**Activities*

 

Total debtoutstanding at December 31, 2004 was $164.9 million compared to $103.6million at December 31, 2003.  This$61.3 million increase in debt is due primarily to the issuance of the 2004Notes associated with the Dingley Acquisition which totaled $61.2 million(including a $1.2 million premium).

 

Net cashprovided by financing activities for 2004 totaled $57.3 million and consistedof $61.2 million of proceeds from the sale of the 2004 Notes less $3.9 millionof costs paid in connection with such sale in conjunction with the DingleyAcquisition.  Net cash provided byfinancing activities for 2003 was $77.3 million and largely resulted from theBuyout Transactions.

 

We had cash of$5.0 million as of December 31, 2004 compared to $9.9 million as of December 31,2003.  During 2004, we utilized cashprovided by operating activities as well as cash from additional borrowings tohelp fund the Dingley Acquisition, make investments in new equipment and makethe semi-annual interest payments on the 2003 Notes and the 2004 Notes.  During 2003, we used cash provided byoperating activities as well as cash from additional borrowings to help fundthe Buyout and make investments in new equipment.

 

*Indebtedness*

 

As a result ofthe Buyout Transactions and the Dingley Transactions, as of December 31,2004, we had total indebtedness of $164.9 million comprised entirely of amountsdue under the 2003 Notes and the 2004 Notes, all with a scheduled maturity of August 2011.We will have significant interest payments due on the outstanding notes as wellas interest payments due on any borrowings under our working capital facility,under which there were no amounts outstanding as of December 31, 2004.Total cash interest payments related to our working capital facility and the2003 Notes and the 2004 Notes are expected to be in excess of $16.9 million onan annual basis.

 

Concurrent withthe closing of the Dingley Transactions, we amended our working capitalfacility. This amendment, among other things, increased our borrowingavailability from $18.0 million to $30.0 million. The terms of our workingcapital facility, as amended, are substantially as set forth below. Revolvingadvances are available from the lenders in an aggregate principal amount of upto $30.0 million, subject to a borrowing base test. We are able to repay andre-borrow such advances until the May 2009 maturity date.

 

Our workingcapital facility and the indenture governing the 2003 Notes and the 2004 Notescontain various covenants which limit our discretion in the operation of ourbusinesses. Our working capital facility contains various restrictivecovenants. Among other things, it prohibits us from prepaying otherindebtedness, including the 2003 Notes and the 2004 Notes, and it requires usto satisfy certain

 

26

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financial testsincluding an interest coverage ratio and requires us to maintain a minimumEBITDA (as defined in and calculated pursuant to our working capital facility)(such EBITDA being referred to hereinafter as “WCF EBITDA”), both calculatedfor the period consisting of the four preceding consecutive fiscalquarters.  WCF EBITDA is defined in andcalculated pursuant to our working capital facility and is used below solelyfor purposes of calculating our compliance with the covenants in our workingcapital facility.  Failure to satisfy thefinancial tests in our working capital facility would constitute a defaultunder our working capital facility. Prior to the consummation of the Dingley Transactions, the requiredinterest coverage ratio was 2:00 to 1:00 and the minimum WCF EBITDA requirementwas $21.0 million.  In connection withthe Dingley Transactions, the minimum WCF EBITDA requirement was raised to$33.0 million through the end of the third quarter of 2006 and $36.0 millionthereafter.  For the year ended December 31,2004, our interest coverage ratio was 2:38 to 1:00 and our WCF EBITDA forpurposes of our working capital facility was $41.5 million.  For purposes of these calculations, thefinancial results of The Dingley Press were combined with our results for thefull year.  In addition, our workingcapital facility restricts our ability to declare or pay any dividends andprohibits us from making any payments with respect to the 2003 Notes and the2004 Notes if we fail to perform our obligations under, or fail to meet theconditions of, our working capital facility or if payment creates a defaultunder our working capital facility.

 

WCF EBITDAcalculated pursuant to the working capital facility is defined as net income(loss) before interest expense, income taxes, depreciation, amortization andother non-cash charges (including all fees and costs relating to thetransactions contemplated by the working capital facility) as defined in theworking capital facility.  WCF EBITDAcalculated pursuant to the working capital facility is not an indicator offinancial performance or liquidity under generally accepted accountingprinciples and may not be comparable to similarly captioned informationreported by other companies.  In addition,it should not be considered as an alternative to, or more meaningful than,income before income taxes, cash flows from operating activities or othertraditional indicators of operating performance.

 

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

 

27

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| ** **                                                                       | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                       | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|                                                                             |       |             |       |             |       |             |       |
| Net cash  provided by operating activities                                       |       | $                | 22,692     |             | $          | 20,137           |       | $ | 13,711 |   |
| Accounts receivable                                                              |       | 1,697            |       | (1,144           | )          | (153             | )          |
| Notes receivable                                                                 |       | —           |       | (104             | )          | 110              |       |
| Inventories                                                                      |       | (6,658           | )          | (1,641           | )          | (360             | )          |
| Other current assets                                                             |       | 897              |       | 373              |       | 15               |       |
| Refundable income taxes                                                          |       | 1,213            |       | (155             | )          | 251              |       |
| Other assets                                                                     |       | 816              |       | 515              |       | 172              |       |
| Accounts payable                                                                 |       | (1,363           | )          | (638             | )          | 4,776            |       |
| Accrued expenses                                                                 |       | 2,877            |       | (2,001           | )          | (537             | )          |
| Accrued interest                                                                 |       | (2,604           | )          | (2,544           | )          | (106             | )          |
| Income taxes payable                                                             |       | —           |       | —           |       | 708              |       |
| Other liabilities                                                                |       | (543             | )          | (4               | )          | (1,262           | )          |
| Provision for doubtful accounts                                                  |       | (196             | )          | (315             | )          | (781             | )          |
| Provision for inventory realizability and  LIFO value                            |       | (136             | )          | (19              | )          | (338             | )          |
| Deferred income tax benefit (expense)                                            |       | (252             | )          | 456              |       | (695             | )          |
| Gain (loss) on disposition of fixed assets,  net                                 |       | 172              |       | (51              | )          | 586              |       |
| Income tax provision                                                             |       | 2,765            |       | 3,197            |       | 4,018            |       |
| Cash interest expense                                                            |       | 14,989           |       | 6,944            |       | 5,359            |       |
| Non cash adjustments:                                                            |       |             |       |             |       |             |       |
| Purchase accounting write-up of inventory                                        |       | 257              |       | 629              |       | —           |       |
| Adjustments to LIFO value                                                        |       | 30               |       | 15               |       | 286              |       |
| Decrease (increase) in market value of  investments                              |       | (66              | )          | (143             | )          | 79               |       |
| Amortization of prepaid lease costs                                              |       | 83               |       | 83               |       | —           |       |
| Loss on disposition of fixed assets                                              |       | 1,010            |       | 54               |       | 52               |       |
| Non-recurring transaction costs                                                  |       | —           |       | 3,484            |       | —           |       |
| Restructuring costs                                                              |       | 399              |       | —           |       | —           |       |
| Gain on sale of Fredericksburg, VA land and  building                            |       | (919             | )          | —           |       | —           |       |
| The Dingley Press EBITDA from January 1,  2004** **through May 24, 2004 (a) |       | 4,327            |       | —           |       | —           |       |
| **Working Capital Facility EBITDA**                                              |       | $                | 41,487     |             | $          | 27,128           |       | $ | 25,891 |   |

 

----

(a)               For covenant calculation purposes, WCF EBITDAfor The Dingley Press prior to the Dingley Acquisition was included with ourresults for the full year.

 

The indenturegoverning the 2003 Notes and the 2004 Notes also contains various restrictivecovenants. It, among other things: (i) limits our ability and the ability ofour subsidiaries to incur additional indebtedness, issue shares of preferredstock, incur liens and enter into certain transactions with affiliates; (ii)places restrictions on our ability to pay dividends or make certain otherrestricted payments; and (iii) places restrictions on our ability and theability of our subsidiaries to merge or consolidate with any other person orsell, assign, transfer, convey or otherwise dispose of all or substantially allof our assets.

 

The BuyoutTransactions and the Dingley Transactions significantly increased our leverageand liquidity requirements as a result of the issuance of the 2003 Notes andthe 2004 Notes.  The Dingley Acquisitionis expected to provide an important source of sales and earnings growth for us.

 

Our principalsource of liquidity will be cash flow generated from operations and borrowingsunder our working capital facility.  Ourprincipal uses of cash will be to meet debt service requirements,

 

28

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finance our capitalexpenditures and provide working capital. We estimate that our capitalexpenditures for 2005 will total about $25.4 million.  Based on our current level of operations, webelieve that our cash flow from operations, available cash and available borrowingsunder our working capital facility will be adequate to meet our futureshort-term and long-term liquidity needs. Our future operating performance andability to extend or refinance our indebtedness will be dependent on futureeconomic conditions and financial, business and other factors that may bebeyond our control.

 

**Contractual Obligations**

 

The followingtable summarizes our future minimum non-cancelable contractual obligations asof December 31, 2004:

 
| ** **                             | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                     | ** ** | **Total**                  | ** ** | **2005** | ** ** | **2006 to  2007** | ** ** | **2008 to  2009** | ** ** | **2010 and  beyond** | ** ** |
|                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Long term  debt, including interest(1) |       | $                          | 285,502    |   | $ | 16,913 |   | $ | 33,825 |   | $ | 33,825 |   | $ | 200,939 |   |
| Operating  leases                      |       | 16,640                     |       | 5,125 |   | 7,626 |   | 3,572 |   | 317 |   |
| Purchase  obligations(2)               |       | 23,624                     |       | 13,135 |   | 5,975 |   | 4,410 |   | 104 |   |
| Other  long-term obligations(3)        |       | 1,657                      |       | 247 |   | 493 |   | 451 |   | 466 |   |
| Total                                  |       | $                          | 327,423    |   | $ | 35,420 |   | $ | 47,919 |   | $ | 42,258 |   | $ | 201,826 |   |

 

----

(1) Includes the $105.0million aggregate principal amount due on the 2003 Notes and the $60.0 millionaggregate principal amount due on the 2004 Notes plus interest at 10.25%payable semi-annually through August 15, 2011.

 

(2) Represents payments dueunder purchase agreements for consumable raw materials and commitments forconstruction projects and equipment acquisitions.

 

(3) Represents payments dueunder non-compete arrangements with our former Chairman of the Board and thePresident of The Dingley Press.

 

**Off-Balance Sheet Arrangements**

 

At December 31,2004 and 2003, we did not have any relationships with unconsolidated entitiesor financial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. We are, therefore, not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin such relationships.

 

**Effect of Inflation**

 

Inflationgenerally affects us by increasing our costs of labor, equipment and newmaterials. We do not believe that inflation has had any material effect on ourresults of operations during 2004, 2003 and 2002.

 

**Recently Issued AccountingPronouncements**

 

In November 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 151, “Inventory Costs, an Amendment of ARBNo. 43,

 

29

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Chapter 4.”  SFAS No. 151 amends the guidance in ARB No.43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . .under some circumstances, items such as idle facility expense, excessivespoilage, double freight, and rehandling costs may be so abnormal as to requiretreatment as current period charges. . . .” SFAS No. 151 requires that those items be recognized as current-periodcharges regardless of whether they meet the criterion of “so abnormal.” Inaddition, SFAS No. 151 requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities.  SFAS No. 151 is effectivefor inventory costs incurred during fiscal years beginning after June 15,2005.  We are evaluating the impact ofSFAS No. 151 on our financial results.

 

In December 2004,the FASB issued SFAS No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets –an Amendment of APB Opinion No. 29.”  SFASNo. 153 amends Opinion No. 29 to eliminate the exception for nonmonetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of nonmonetary assets that do not have commercial substance. Anonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange.  SFAS 153 is effective for nonmonetary assetexchanges occurring in fiscal periods beginning after June 15, 2005.  We believe that the adoption of SFAS No. 153will not have a material impact on our financial results.

 

In December 2004,the FASB issued a revision to SFAS No. 123 (“SFAS 123R”), “Share-Based Payment.”  SFAS 123R requires that the cost of equitybased service awards be measured based on the grant-date fair value of theaward.  The cost will be recognized overthe period during which an employee is required to provide service in exchangefor the award or the requisite service period. No compensation cost is recognized for equity instruments for whichemployees do not render the requisite service. SFAS 123R requires the measurement of the cost of liability-basedservice awards based on current fair value; the fair value of that award willbe remeasured subsequently at each reporting date through the settlementdate.  Changes in fair value during therequisite service period will be recognized as compensation cost over thatperiod.  SFAS 123R is effective forshare-based payments occurring in fiscal periods beginning after June 15,2005.  We are evaluating the impact ofSFAS 123R on our financial results.

 

**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Market riskrepresents the risk of changes in value of a financial instrument, derivativeor non-derivative, caused by fluctuations in interest rates, foreign exchangerates and equity prices. Changes in these factors could cause fluctuations inresults of our operations and cash flows. In the ordinary course of business,we are exposed to foreign currency and interest rate risks.  These risks primarily relate to the sale ofproducts and services to foreign customers and changes in interest rates on ourlong-term debt.

 

**Foreign Exchange Rate Market Risk**

 

We consider theU.S. dollar to be the functional currency for all of our entities.Substantially all of our net sales and our expenses in fiscal years 2004, 2003and 2002 were denominated in U.S. dollars. Therefore, foreign currencyfluctuations did not materially impact our financial results in those periods.

 

**Interest Rate Market Risk**

 

We could beexposed to changes in interest rates. Our working capital facility is variable rate debt. Interest ratechanges, therefore, generally do not affect the market value of such debt butdo impact the amount of our interest payments and, therefore, our futureearnings and cash flows, assuming other

 

30

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factors are heldconstant. We currently do not have any borrowings under our working capitalfacility. All of our other debt carries fixed interest rates.

 

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**Report of Independent Registered Public Accounting Firm**

 

To the Board of Directorsand the Stockholdersof the Sheridan Group, Inc.

 

In our opinion, the accompanyingconsolidated balance sheets and the related consolidated statements of income,of changes in the stockholders’ equity (deficit) and mandatorily redeemableconvertible preferred stock, and of cash flows present fairly, in all materialrespects, the financial position of The Sheridan Group, Inc. and Subsidiaries(the “Company”)(“Successor”) at December 31, 2004 and 2003, and theresults of their operations and their cash flows for the year-ended December 31,2004 and four- month and eleven-day period ending December 31, 2003, inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

 

As discussed in Note 2 tothe consolidated financial statements, on August 21, 2003, SheridanAcquisition Corp., a newly formed entity, acquired the outstanding stock of theCompany. The financial statements for the periods subsequent to August 21,2003 have been prepared on a basis of accounting arising from this acquisition.The financial statements for the periods from January 1, 2003 to August 20,2003 and for the year ended December 31, 2002 are presented on the Company’sprevious basis of accounting. 

 

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|
| Baltimore, Maryland             |
| March 29, 2005             |

 

31

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**Report of Independent Registered Public AccountingFirm**

 

To the Board of Directorsand the Stockholdersof the Sheridan Group, Inc.

 

In our opinion, theaccompanying consolidated statements of income, of changes in stockholders’equity (deficit) and mandatorily redeemable convertible preferred stock and ofcash flows present fairly, in all material respects, the results of operationsand cash flows of The Sheridan Group, Inc. and Subsidiaries (the “Company”)(“Predecessor”)for the seven-month and twenty-day period ended August 20, 2003, and theyear ended December 31, 2002, in conformity with accounting principlesgenerally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits. Weconducted our audit of these statements in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

As discussed in Note 2 tothe consolidated financial statements, on August 21, 2003, SheridanAcquisition Corp., a newly formed entity, acquired the outstanding stock of theCompany. The financial statements for the periods subsequent to August 21,2003 have been prepared on a basis of accounting arising from this acquisition.The financial statements for the periods from January 1, 2003 to August 20,2003 and for the year ended December 31, 2002 are presented on the Company’sprevious basis of accounting.

 

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|
| Baltimore, Maryland             |
| March 24, 2004             |

 

 

 

32

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** **

**The Sheridan Group, Inc. and SubsidiariesConsolidated Balance SheetsAt December 31, 2004 and 2003**

 
| ** **                                                                                                                | ** ** | **December 31,  2004** | ** **  | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| **Assets**                                                                                                                |       |                        |        |                        |       |
| Current  assets                                                                                                           |       |                        |        |                        |       |
| Cash and  cash equivalents                                                                                                |       | $                           | 4,974,615   |                        | $          | 9,917,752 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $1,136,719 and  $1,089,139, respectively                  |       | 32,893,070                  |        | 25,156,695                  |       |
| Inventories                                                                                                               |       | 18,562,870                  |        | 5,993,361                   |       |
| Other  current assets                                                                                                     |       | 4,325,228                   |        | 2,203,294                   |       |
| Refundable  income taxes                                                                                                  |       | 2,531,073                   |        | 95,221                      |       |
| Deferred  income taxes                                                                                                    |       | 1,907,748                   |        | 1,558,145                   |       |
| Total  current assets                                                                                                     |       | 65,194,604                  |        | 44,924,468                  |       |
|                                                                                                                      |       |                        |        |                        |       |
| Property,  plant and equipment, net                                                                                       |       | 115,253,354                 |        | 57,277,009                  |       |
| Intangibles,  net                                                                                                         |       | 48,281,162                  |        | 46,440,867                  |       |
| Goodwill                                                                                                                  |       | 47,102,734                  |        | 44,641,054                  |       |
| Deferred  financing costs, net                                                                                            |       | 8,672,108                   |        | 6,426,628                   |       |
| Other assets                                                                                                              |       | 3,893,675                   |        | 2,777,817                   |       |
|                                                                                                                      |       |                        |        |                        |       |
| Total assets                                                                                                              |       | $                           | 288,397,637 |                        | $          | 202,487,843 |   |
|                                                                                                                      |       |                        |        |                        |       |
| **Liabilities**                                                                                                           |       |                        |        |                        |       |
| ** **                                                                                                                |       |                        |        |                        |       |
| Current  liabilities                                                                                                      |       |                        |        |                        |       |
| Accounts  payable                                                                                                         |       | $                           | 17,487,828  |                        | $          | 8,677,022 |   |
| Accrued  expenses                                                                                                         |       | 24,214,084                  |        | 16,369,213                  |       |
| Total  current liabilities                                                                                                |       | 41,701,912                  |        | 25,046,235                  |       |
|                                                                                                                      |       |                        |        |                        |       |
| Notes  payable                                                                                                            |       | 164,893,650                 |        | 103,641,351                 |       |
| Deferred  income taxes                                                                                                    |       | 24,788,544                  |        | 24,025,665                  |       |
| Other  liabilities                                                                                                        |       | 2,948,686                   |        | 2,014,379                   |       |
| Total  liabilities                                                                                                        |       | 234,332,792                 |        | 154,727,630                 |       |
|                                                                                                                      |       |                        |        |                        |       |
| Commitments  and contingencies (Notes 14 and 19)                                                                          |       |                        |        |                        |       |
|                                                                                                                      |       |                        |        |                        |       |
| **Stockholder’s  Equity**                                                                                            |       |                        |        |                        |       |
| Common  stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding  at December 31, 2004 and 2003 |       | —                      |        | —                      |       |
| Additional  paid-in capital                                                                                               |       | 50,975,000                  |        | 47,000,000                  |       |
| Retained  earnings                                                                                                        |       | 3,089,845                   |        | 760,213                     |       |
| Total  stockholder’s equity                                                                                          |       | 54,064,845                  |        | 47,760,213                  |       |
|                                                                                                                      |       |                        |        |                        |       |
| Total  liabilities and stockholder’s equity                                                                          |       | $                           | 288,397,637 |                        | $          | 202,487,843 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

33

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**The Sheridan Group, Inc. and SubsidiariesConsolidated Statementsof IncomeYear Ended December 31, 2004, Periods Ended December 31 and August 20,2003 and Year Ended December 31, 2002**

 
| ** **                                     | ** ** | **Successor Basis**                     | ** **  | ** **                                                      | **Predecessor Basis** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|-------------|-----------------------------------------------------------------|-----------------------|------------|
| ** **                                     | ** ** | **Year Ended  December 31,  2004** | ** **  | **Four-months and  eleven-days ended  December 31,  2003** | ** **            | ** ** | **Seven-months  and twenty-days  ended August 20,  2003** | ** ** | **Year Ended  December 31,  2002** | ** ** |
|                                           |       |                                    |        |                                                            |                  |       |   |   |   |   |
| Net sales                                      |       | $                                       | 287,513,124 |                                                            | $                     | 81,192,856 |   |   | $ | 131,904,436 |   | $ | 208,836,960 |   |
| Cost of  sales                                 |       | 226,987,235                             |        | 62,447,372                                                      |                  |       | 100,065,635 |   | 159,840,033 |   |
| Gross profit                                   |       | 60,525,889                              |        | 18,745,484                                                      |                  |       | 31,838,801 |   | 48,996,927 |   |
| Selling and  administrative expenses           |       | 37,404,454                              |        | 12,703,533                                                      |                  |       | 23,619,398 |   | 32,243,709 |   |
| Other  general (income) expense                |       | (172,405                                | )           | 23,610                                                          |                  |       | 26,583 |   | (585,769 | ) |
| Amortization  of intangibles                   |       | 1,838,073                               |        | 603,624                                                         |                  |       | 85,079 |   | 206,284 |   |
| Total  operating expenses                      |       | 39,070,122                              |        | 13,330,767                                                      |                  |       | 23,731,060 |   | 31,864,224 |   |
| Operating  income                              |       | 21,455,767                              |        | 5,414,717                                                       |                  |       | 8,107,741 |   | 17,132,703 |   |
| Other  (income) expense                        |       |                                    |        |                                                            |                  |       |   |   |   |   |
| Interest  expense                              |       | 16,678,096                              |        | 4,423,048                                                       |                  |       | 4,698,393 |   | 6,087,185 |   |
| Fair value  adjustment to interest rate collar |       | —                                  |        | —                                                          |                  |       | (283,123 | ) | 302,520 |   |
| Interest  income                               |       | (183,296                                | )           | (47,153                                                         | )                     |       | (66,603 | ) | (211,103 | ) |
| Other, net                                     |       | (133,516                                | )           | (235,236                                                        | )                     |       | (93,154 | ) | 312,097 |   |
| Total other  expense                           |       | 16,361,284                              |        | 4,140,659                                                       |                  |       | 4,255,513 |   | 6,490,699 |   |
| Income  before income taxes                    |       | 5,094,483                               |        | 1,274,058                                                       |                  |       | 3,852,228 |   | 10,642,004 |   |
| Income tax  provision                          |       | 2,764,851                               |        | 513,845                                                         |                  |       | 2,683,312 |   | 4,018,263 |   |
| Net income                                     |       | $                                       | 2,329,632   |                                                            | $                     | 760,213    |   |   | $ | 1,168,916 |   | $ | 6,623,741 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

34

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**The Sheridan Group, Inc. and SubsidiariesConsolidated Statementsof Changes in Stockholders’ Equity (Deficit) and Mandatorily RedeemableConvertible Preferred Stock**

**YearEnded December 31, 2004, Periods Ended December 31 and August 20,2003 and Year Ended December 31, 2002**

 
| ** **                               | ** ** | **Mandatorily Redeemable  Preferred Stock** | ** ** | **Class A  Common Stock** | ** ** | **Class E  Common Stock** | ** ** | **Successor  Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained Earnings  (Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|---------------------------|------------|---------------------------|------------|-----------------------------|------------|-------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **Shares**                                  | ** ** | **Amount**                | ** ** | **Shares**                | ** ** | **Amount**                  | ** ** | **Shares**              | ** ** | **Amount**                          | ** ** | **Shares**                    | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Deficit)** | ** ** | **Equity (Deficit)** | ** ** |
| **Balance as of December 31, 2001** |       | 18,192                                      |       | $                         | 18,191,665 |                      | 60,916     |                        | $          | 609                     |       | —                              |       | $                             | —     |   | — |   | $ | — |   | $ | 2,437,847 |   | $ | (16,985,294 | ) | $ | (14,546,838 | ) |
| Net income                               |       | —                                      |       | —                    |       | —                    |       | —                      |       | —                  |       | —                              |       | —                        |       | — |   | — |   | 6,623,741 |   | 6,623,741 |   |
| **Balance as of December 31, 2002** |       | 18,192                                      |       | 18,191,665                |       | 60,916                    |       | 609                         |       | —                  |       | —                              |       | —                        |       | — |   | 2,437,847 |   | (10,361,553 | ) | (7,923,097 | ) |
| ** **                               |       |                                        |       |                      |       |                      |       |                        |       |                    |       |                                |       |                          |       |   |   |   |   |   |   |   |   |
| Predecessor Basis                        |       |                                        |       |                      |       |                      |       |                        |       |                    |       |                                |       |                          |       |   |   |   |   |   |   |   |   |
|                                     |       |                                        |       |                      |       |                      |       |                        |       |                    |       |                                |       |                          |       |   |   |   |   |   |   |   |   |
| Net income                               |       | —                                      |       | —                    |       | —                    |       | —                      |       | —                  |       | —                              |       | —                        |       | — |   | — |   | 1,168,916 |   | 1,168,916 |   |
| Exercised stock options                  |       | —                                      |       | —                    |       | 12,389                    |       | 124                         |       | —                  |       | —                              |       | —                        |       | — |   | 1,000,132 |   | — |   | 1,000,256 |   |
| Exercised warrants                       |       | —                                      |       | —                    |       | —                    |       | —                      |       | 26,300                  |       | 263                                 |       | —                        |       | — |   | — |   | — |   | 263 |   |
| Conversion of mandatorily redeemable     |       | —                                      |       | —                    |       | —                    |       | —                      |       | —                  |       | —                              |       | —                        |       | — |   | — |   | — |   | — |   |
| preferred stock to Class A common stock  |       | (18,192                                     | )          | (18,191,665               | )          | 230,800                   |       | 2,308                       |       | —                  |       | —                              |       | —                        |       | — |   | 18,189,357 |   | — |   | 18,191,665 |   |
| Ending balance of predecessor company    |       | —                                      |       | —                    |       | 304,105                   |       | 3,041                       |       | 26,300                  |       | 263                                 |       | —                        |       | — |   | 21,627,336 |   | (9,192,637 | ) | 12,438,003 |   |
|                                     |       |                                        |       |                      |       |                      |       |                        |       |                    |       |                                |       |                          |       |   |   |   |   |   |   |   |   |
| Successor Basis                          |       |                                        |       |                      |       |                      |       |                        |       |                    |       |                                |       |                          |       |   |   |   |   |   |   |   |   |
|                                     |       |                                        |       |                      |       |                      |       |                        |       |                    |       |                                |       |                          |       |   |   |   |   |   |   |   |   |
| Issuance of successor common stock       |       | —                                      |       | —                    |       | —                    |       | —                      |       | —                  |       | —                              |       | 1                             |       | — |   | 47,000,000 |   | — |   | 47,000,000 |   |
| Net Income                               |       | —                                      |       | —                    |       | —                    |       | —                      |       | —                  |       | —                              |       | —                        |       | — |   | — |   | 760,213 |   | 760,213 |   |
| **Balance as of December 31, 2003** |       | —                                      |       | —                    |       | —                    |       | —                      |       | —                  |       | —                              |       | 1                             |       | — |   | 47,000,000 |   | 760,213 |   | 47,760,213 |   |
| ** **                               |       |                                        |       |                      |       |                      |       |                        |       |                    |       |                                |       |                          |       |   |   |   |   |   |   |   |   |
| Capital contribution from parent company |       | —                                      |       | —                    |       | —                    |       | —                      |       | —                  |       | —                              |       | —                        |       | — |   | 3,975,000 |   | — |   | 3,975,000 |   |
| Net income                               |       | —                                      |       | —                    |       | —                    |       | —                      |       | —                  |       | —                              |       | —                        |       | — |   | — |   | 2,329,632 |   | 2,329,632 |   |
| **Balance as of December 31, 2004** |       | —                                      |       | $                         | —     |                      | —     |                        | $          | —                  |       | —                              |       | $                             | —     |   | 1 |   | $ | — |   | $ | 50,975,000 |   | $ | 3,089,845 |   | $ | 54,064,845 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

35

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**The Sheridan Group, Inc. and SubsidiariesConsolidatedStatements of Cash FlowsYear Ended December 31, 2004, Periods Ended December 31 and August 20,2003 and Year Ended December 31, 2002**

 
| ** **                                                                                    | ** ** | **Successor Basis** | ** ** | ** **            | **Predecessor Basis** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------|-----------------------|------------|
| ** **                                                                                    | ** ** | ** **          | ** ** | **Four-months and**   | ** **            | ** ** | **Seven-months and** | ** ** | ** ** | ** ** |
| ** **                                                                                    | ** ** | **Year ended**      | ** ** | **eleven-days ended** | ** **            | ** ** | **twenty-days ended** | ** ** | **Year ended** | ** ** |
| ** **                                                                                    | ** ** | **December 31,**    | ** ** | **December 31,**      | ** **            | ** ** | **August 20,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                    | ** ** | **2004**            | ** ** | **2003**              | ** **            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| **Cash flows provided by operating  activities:**                                             |       |                |       |                  |                  |       |   |   |   |   |
| Net income                                                                                    |       | $                   | 2,329,632  |                  | $                     | 760,213    |   |   | $ | 1,168,916 |   | $ | 6,623,741 |   |
| Adjustments to reconcile net income to net  cash from operating activities                    |       |                |       |                  |                  |       |   |   |   |   |
| Depreciation                                                                                  |       | 12,755,046          |       | 3,563,957             |                  |       | 4,591,401 |   | 7,877,258 |   |
| Amortization of assets under capital lease                                                    |       | —              |       | —                |                  |       | 197,527 |   | 358,543 |   |
| Amortization of intangible assets                                                             |       | 1,838,073           |       | 603,624               |                  |       | 85,079 |   | 206,284 |   |
| Provision for doubtful accounts                                                               |       | 195,961             |       | 81,823                |                  |       | 232,757 |   | 780,460 |   |
| Provision (credit) for inventory  realizability and LIFO value                                |       | 136,110             |       | (9,555                | )                     |       | 28,372 |   | 338,119 |   |
| Fair value adjustment to interest rate  collar                                                |       | —              |       | —                |                  |       | (283,123 | ) | 302,520 |   |
| Amortization of deferred financing costs  and debt discount, included in interest expense     |       | 1,689,413           |       | 496,175               |                  |       | 1,681,665 |   | 727,610 |   |
| Deferred income tax expense (benefit)                                                         |       | 251,962             |       | (739,434              | )                     |       | 284,109 |   | 695,172 |   |
| (Gain)/loss on disposition of fixed assets                                                    |       | (172,405            | )          | 23,610                |                  |       | 26,583 |   | (585,769 | ) |
| Changes in operating assets and liabilities,  net of assets acquired and liabilities assumed: |       |                |       |                  |                  |       |   |   |   |   |
| Accounts receivable                                                                           |       | (1,697,032          | )          | (2,325,780            | )                     |       | 3,470,338 |   | 153,186 |   |
| Notes receivable                                                                              |       | —              |       | 33,356                |                  |       | 70,636 |   | (109,931 | ) |
| Inventories                                                                                   |       | 6,657,930           |       | 1,981,057             |                  |       | (340,259 | ) | 360,090 |   |
| Other current assets                                                                          |       | (896,973            | )          | (657,603              | )                     |       | 284,837 |   | (14,765 | ) |
| Refundable income taxes                                                                       |       | (1,212,347          | )          | 466,393               |                  |       | (311,135 | ) | (250,479 | ) |
| Other assets                                                                                  |       | (816,179            | )          | 117,688               |                  |       | (633,394 | ) | (171,850 | ) |
| Accounts payable                                                                              |       | 1,363,309           |       | 1,284,949             |                  |       | (646,728 | ) | (4,776,186 | ) |
| Income taxes payable                                                                          |       | —              |       | —                |                  |       | — |   | (707,650 | ) |
| Accrued expenses                                                                              |       | (2,877,309          | )          | (241,779              | )                     |       | 2,243,055 |   | 537,088 |   |
| Accrued interest                                                                              |       | 2,604,371           |       | 3,629,504             |                  |       | (1,085,925 | ) | 105,921 |   |
| Other liabilities                                                                             |       | 542,515             |       | (280,457              | )                     |       | 284,288 |   | 1,261,768 |   |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| Net cash provided by operating activities                                                     |       | 22,692,077          |       | 8,787,741             |                  |       | 11,348,999 |   | 13,711,130 |   |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| **Cash flows used in investing activities**                                                   |       |                |       |                  |                  |       |   |   |   |   |
| Purchases of property, plant and equipment                                                    |       | (21,827,456         | )          | (2,914,838            | )                     |       | (5,213,268 | ) | (4,870,123 | ) |
| Proceeds from sale of fixed assets                                                            |       | 2,404,366           |       | 27,044                |                  |       | 26,155 |   | 746,872 |   |
| Collection of notes receivable                                                                |       | —              |       | 430,630               |                  |       | — |   | — |   |
| Acquisition of business, net of cash  acquired                                                |       | (65,529,531         | )          | (79,883,936           | )                     |       | — |   | — |   |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| Net cash used in investing activities                                                         |       | (84,952,621         | )          | (82,341,100           | )                     |       | (5,187,113 | ) | (4,123,251 | ) |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| **Cash flows provided by (used in) financing  activities**                                    |       |                |       |                  |                  |       |   |   |   |   |
| Borrowing of revolving line of credit                                                         |       | 9,274,000           |       | —                |                  |       | 15,693,315 |   | 27,560,856 |   |
| Repayment of revolving line of credit                                                         |       | (9,274,000          | )          | (2,121,771            | )                     |       | (16,473,000 | ) | (31,297,000 | ) |
| Repayment of long term debt                                                                   |       | —              |       | (56,744,439           | )                     |       | (5,185,798 | ) | (5,573,859 | ) |
| Repayment of obligation under capital  leases                                                 |       | —              |       | (1,469,565            | )                     |       | (164,376 | ) | (266,345 | ) |
| Payment of deferred financing costs in  connection with issuance of long term debt            |       | (3,882,593          | )          | (6,873,594            | )                     |       | — |   | — |   |
| Proceeds from issuance of long term debt                                                      |       | 61,200,000          |       | 103,600,350           |                  |       | — |   | — |   |
| Proceeds from issuance of stock                                                               |       | —              |       | 47,000,000            |                  |       | — |   | — |   |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| Net cash provided by (used in) financing  activities                                          |       | 57,317,407          |       | 83,390,981            |                  |       | (6,129,859 | ) | (9,576,348 | ) |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                         |       | (4,943,137          | )          | 9,837,622             |                  |       | 32,027 |   | 11,531 |   |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| **Cash and cash equivalents**                                                                 |       |                |       |                  |                  |       |   |   |   |   |
| Cash and cash equivalents, beginning of  year                                                 |       | 9,917,752           |       | 80,130                |                  |       | 48,103 |   | 36,572 |   |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| Cash and cash equivalents, end of year                                                        |       | $                   | 4,974,615  |                  | $                     | 9,917,752  |   |   | $ | 80,130 |   | $ | 48,103 |   |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| **Supplemental disclosure of cash flow  information**                                         |       |                |       |                  |                  |       |   |   |   |   |
| Cash paid during the year for                                                                 |       |                |       |                  |                  |       |   |   |   |   |
| Interest                                                                                      |       | $                   | 14,092,645 |                  | $                     | 5,353      |   |   | $ | 4,282,030 |   | $ | 5,253,654 |   |
| Income taxes, net of refunds                                                                  |       | $                   | 3,699,852  |                  | $                     | 771,943    |   |   | $ | 2,238,506 |   | $ | 4,281,221 |   |
|                                                                                          |       |                |       |                  |                  |       |   |   |   |   |
| Non-cash investing and financing activities                                                   |       |                |       |                  |                  |       |   |   |   |   |
| Conversion of preferred stock into common  stock                                              |       | $                   | —     |                  | $                     | 18,191,665 |   |   | $ | — |   | $ | — |   |
| Asset additions in accounts payable                                                           |       | $                   | 2,465,449  |                  | $                     | 1,040,000  |   |   | $ | 176,000 |   | $ | 274,500 |   |
| Capital contribution representing issuance  of stock at Holdings to acquire business          |       | $                   | 3,975,000  |                  | $                     | —     |   |   | $ | — |   | $ | — |   |
|                                                                                               |            |                     |            |                       |                       |            |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

36

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**The Sheridan Group, Inc. and SubsidiariesNotes to ConsolidatedFinancial StatementsYear Ended December 31, 2004, Periods Ended December 31 and August 20,2003 and Year Ended December 31, 2002**

 

**1. BusinessOrganization**

 

TheSheridan Group, Inc. (“TSG” or the “Company”) is one of the leading specialtyprinters in the United States, offering a full range of printing andvalue-added support services for the journal, magazine, book, catalog and article reprintmarkets. The Company provides a wide range of printing services and value-addedsupport services, such as electronic copy editing, composition, digitalproofing, subscriber database maintenance, distribution services and electronicpublishing support. TSG has eight wholly-owned subsidiaries: The SheridanPress, Inc. (“TSP”), United Litho, Inc. (“ULI”), Dartmouth Printing Company (“DPC”),Capital City Press, Inc. (“CCP”), Sheridan Books, Inc. (“SBI”), DartmouthJournal Services, Inc. (“DJS”), The Dingley Press, Inc. (“TDP”) and TheSheridan Group Holding Company (collectively with TSG, the “Company”).

 

TheCompany is a wholly-owned subsidiary of TSG Holdings Corp. (“Holdings”), whichis owned 84.8% by its equity sponsors, Bruckmann, Rosser, Sherrill & Co.LLC (“BRS”) and Jefferies Capital Partners (“JCP”), and 15.2% by the managementand directors of TSG.

 

**2.Acquisitions**

 

TheSheridan Group, Inc.

 

OnAugust 1, 2003, Sheridan Acquisition Corp., a newly formed, wholly-ownedsubsidiary of Holdings entered into a stock purchase agreement with the Companyto purchase all of the Company’s outstanding capital stock (the “SheridanAcquisition”). On August 21, 2003, Sheridan Acquisition Corp., completed aprivate debt offering of 10.25% senior secured notes (the “2003 Notes”)totaling $105.0 million, priced to yield 10.50% that mature August 15,2011. Proceeds from the 2003 Notes of $103.6 million (which was net ofdiscount), together with $47.0 million of new equity investments, were used tofund the Sheridan Acquisition, cover fees and expenses of the 2003 Notesoffering and the Sheridan Acquisition and repay 100% of the Company’s thenoutstanding revolving line of credit, Term A & B credit agreements, seniorsubordinated debt, industrial revenue bonds, and various notes payable andcapital leases, which totaled approximately $55.3 million. The total purchaseprice for the Sheridan Acquisition was $186.6 million, which consisted of $55.3million of refinanced indebtedness discussed above, cash paid of $79.9 millionand liabilities assumed of $51.4 million. Included in the purchase price was astandard seller indemnity escrow fund totaling $5.0 million, which wasdisbursed to the sellers on August 21, 2004. Concurrent with the SheridanAcquisition, Sheridan Acquisition Corp. merged with and into the Company.

 

TheSheridan Acquisition was treated as a purchase business combination requiring anew basis of accounting for the acquired assets and liabilities pursuant to therequirements of Statement of Financial Accounting Standard (“SFAS”) No. 141 “BusinessCombinations.” Accordingly, the financial statements of the Company as of andfor periods subsequent to August 21, 2003 are referred to as the “Successorbasis” statements and all financial statements prior to that date are referredto as the “Predecessor basis” statements. The aforementioned application ofpurchase accounting will result in higher depreciation and amortization infuture periods. Accordingly, and because of the Sheridan Acquisition and newbasis of accounting, the Company’s financial statements for the period subsequentto the Sheridan Acquisition are not comparable to the Predecessor’s financialstatements for the periods prior to the Sheridan Acquisition.

 

37

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TheDingley Press, Inc.

 

OnMarch 5, 2004, the Company entered into an agreement to purchasesubstantially all of the assets and business of The Dingley Press of Lisbon,Maine (the “Dingley Acquisition”). On May 25, 2004, the Company completed aprivate debt offering of 10.25% senior secured notes (the “2004 Notes”)totaling $60.0 million, priced to yield 9.86%, that mature August 15,2011. The 2004 Notes have identical terms to the 2003 Notes. Proceeds from the2004 Notes of $61.2 million (which included a premium), together withapproximately $4.0 million of stock issued by TSG Holdings Corp., which wascontributed to the Company as additional paid-in capital, were used to fund theDingley Acquisition and to cover fees and expenses of the 2004 Notes offeringand the Dingley Acquisition. The total purchase price for the DingleyAcquisition was $84.3 million, which consisted of cash paid of $65.5 million,liabilities assumed of $14.9 million and financing costs of $3.9 million.Included in the purchase price was a standard seller indemnity escrow fundtotaling $3.0 million which expires on November 25, 2005. The results ofoperations of The Dingley Press have been included in the Company’s results ofoperations since the date of the Dingley Acquisition.

 

TheDingley Acquisition was accounted for as a purchase in accordance with SFAS No.141, “Business Combinations,” and the Company accordingly allocated thepurchase price of The Dingley Press based upon the fair value of net assetsacquired and liabilities assumed. The total purchase price was allocated to theacquired assets and liabilities based on their respective fair values at May25, 2004 as follows:

 
| Current  assets                  |   | $       | 26,926 |   |
|----------------------------------|--------|---------|--------|--------|
| Property,  plant & equipment |   | 49,711  |   |
| Intangible  assets               |   | 3,978   |   |
| Goodwill                         |   | 3,673   |   |
| Total assets  acquired           |   | 84,288  |   |
| Liabilities  assumed             |   | (14,850 | )      |
| Net assets  acquired             |   | $       | 69,438 |   |

 

Theacquisition of The Dingley Press provides the Company with an opportunity forfuture growth while diversifying its product offering. Importantly, the catalogmarket, in which The Dingley Press competes, has characteristics that aresimilar to the other business segments of the Company. The purchase price ofThe Dingley Press was based on the projected business growth and cash flows ofThe Dingley Press over the next several years and indicated a value that was inexcess of the current net book value of the business, resulting in therecognition of various intangible assets and goodwill. The goodwill isdeductible for tax purposes and the intangible assets consist primarily ofcustomer relationships.

 

Thefollowing unaudited pro forma summary for the year ended December 31, 2004presents the consolidated results of operations as if the Dingley Acquisitionhad occurred as of January 1, 2004. The following unaudited pro formasummary for the year ended December 31, 2003 presents the consolidated resultsof operations as if both the Sheridan Acquisition and the Dingley Acquisition(the “Acquisitions”) had occured as of January 1, 2003. The summary includesadjustments for depreciation and amortization of noncurrent assets, incometaxes, interest expense on the debt incurred to fund the Acquisitions,management fees and transaction costs which would have been incurred had theAcquisitions occurred as of the beginning of the periods presented. Theseunaudited pro forma results have been prepared for comparative purposes onlyand do not purport to be indicative of what would have occurred had theAcquisitions and other transactions occurred as of that date or results whichmay occur in the future.

 

38

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| ** **                 | ** ** | **(Unaudited)  December 31,** | ** ** |
|----------------------------|------------|------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **                 | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Revenue                    |       | $                                  | 324,453    |   | $ | 306,939 |   |
| Net income                 |       | $                                  | 2,074      |   | $ | 1,773 |   |

 

**3. Summaryof Significant Accounting Policies**

 

**Principlesof Consolidation**

 

Theconsolidated financial statements include the accounts of The Sheridan Group,Inc. and its wholly-owned subsidiaries, TSP, ULI, DPC, CCP, SBI, TDP, DJS andThe Sheridan Group Holding Company. All material intercompany balances andtransactions have been eliminated.

 

**Use ofEstimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates. 

 

**RevenueRecognition**

 

Inaccordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,”the Company records revenue when realized or realizable and earned when all ofthe following criteria are met:

 

• Persuasive evidence of an arrangementexists,

• Delivery has occurred or services have beenrendered,

• The sellers price to the buyer is fixed anddeterminable, and

• Collectibility is reasonably assured.

 

Assuch, substantially all revenue is recognized when a product is shipped andtitle and risk of loss transfers to the customer. Shipping and handling feesbilled to customers are included in net sales and any cost of shipping andhandling is included in cost of sales.

 

**Cash andCash Equivalents**

 

Cashand cash equivalents include amounts invested in accounts which are readilyconvertible to known amounts or have original maturities of three months orless when purchased.

 

39

----

 

**Businessand Credit Concentrations**

 

TheCompany’s customers are not concentrated in any specific geographic region, butare concentrated in the journal, magazine, book, specialty catalog and article reprintmarkets. There were no significant accounts receivables from a single customer.The Company establishes an allowance for doubtful accounts based upon factorssurrounding the credit risk of specific customers, historical trends and otherinformation.

 

**AccountsReceivable and Allowance for Doubtful Accounts**

 

Tradeaccounts receivable are recorded at the invoiced amount and do not bear interest.The allowance for doubtful accounts is the Company’s best estimate of probablecredit losses in its existing accounts receivable. The Company reviews theallowance for doubtful accounts on a regular basis. Past due balances over 120days are reviewed for collectibility and form the basis of the Company’sreserve. When the Company determines that a particular customer poses a creditrisk, a specific reserve is established. Account balances are charged offagainst the allowance when the Company feels it is probable the receivable willnot be recovered. The Company does not have any off-balance sheet creditexposure related to its customers.

 

Arollforward of the allowance for doubtful accounts is as follows:

 
| ** **                      | ** ** | **Successor Basis**                    | ** ** | **Predecessor Basis**                                      | ** ** |
|---------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                      | ** ** | **Year Ended  December 31, 2004** | ** ** | **Four-months and  eleven-days  ended  December 31, 2003** | ** ** | **Seven-months  and twenty-days  ended  August 20, 2003** | ** ** | **Year Ended  December 31, 2002** | ** ** |
| Balance at  beginning of period |       | $                                      | 1,089,139  |                                                       | $          | 1,155,565 |   | $ | 996,685 |   | $ | 652,685 |   |
| Charged to expense              |       | 195,961                                |       | 81,823                                                     |       | 232,757 |   | 780,460 |   |
| Deductions                      |       | (549,793                               | )          | (148,249                                                   | )          | (73,877 | ) | (436,460 | ) |
| Other (a)                       |       | 401,412                                |       | —                                                     |       | — |   | — |   |
| Balance at  end of period       |       | $                                      | 1,136,719  |                                                       | $          | 1,089,139 |   | $ | 1,155,565 |   | $ | 996,685 |   |
|                                 |            |                                        |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a)Includes the beginning balance resulting from the acquisition of The DingleyPress during 2004.

 

**Inventories**

 

Inventoriesare stated at the lower of cost or market with the cost of TSP’s paperinventory and all of SBI’s inventories determined by the last-in, first-out (“LIFO”)cost method. The cost of the remaining inventory (approximately 92% ofinventories at December 31, 2004 and approximately 78% of inventories at December 31,2003) is determined using the first-in, first-out (“FIFO”) method.

 

40

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**Propertyand Equipment**

 

Property,plant and equipment are recorded at cost. Depreciation is provided using thestraight- line method over the estimated useful lives of the assets, asfollows: 1-11 years for machinery and equipment; and 10-40 years for buildingsand land improvements. Leasehold improvements are amortized over theirestimated useful lives or the term of the underlying lease, whichever isshorter. Upon disposal of property, plant and equipment, the cost of the assetand the related accumulated depreciation are removed from the accounts and anyresulting gain or loss is reflected in earnings.

 

Expendituresfor renewals and improvements which extend the original estimated lives of theassets are capitalized. Expenditures for maintenance and repairs are charged tooperations as incurred.

 

TheCompany reviews long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable pursuant to SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment recognized is measured by the amount by which thecarrying amount of the assets exceeds the fair value of the assets. Assets tobe disposed of by sale are reported at the lower of the carrying amount or fairvalue less costs to sell.

 

**IncomeTaxes**

 

Deferredincome taxes are recognized for the tax consequences of applying enactedstatutory tax rates applicable to future years to differences between thefinancial statement carrying amounts and the tax bases of existing assets andliabilities. A valuation allowance is recorded against deferred tax assets whenit is more likely than not that a deferred tax asset will not be realized.

 

**Goodwill**

 

EffectiveJanuary 1, 2002, the Company adopted SFAS No. 142 (“SFAS 142”), “Goodwilland Other Intangible Assets,” which establishes financial accounting andreporting for acquired goodwill and other intangible assets. Under SFAS 142,goodwill and indefinite-lived intangible assets are no longer amortized but arereviewed at least annually for impairment. Separable intangible assets thathave finite useful lives will continue to be amortized over their useful lives.

 

SFAS142 required that goodwill be tested for impairment at the reporting unit levelat adoption and at least annually thereafter, utilizing a two-step methodology.The initial step required the Company to determine the fair value of eachreporting unit and compare it to the carrying value, including goodwill, ofsuch unit. If the fair value exceeded the carrying value, no impairment losswas recognized. However, if the carrying value of the reporting unit exceededits fair value, the goodwill of this unit might have been impaired. The amount,if any, of the impairment would then be measured in the second step bycomparing the implied fair value of goodwill, determined using estimated futurediscounted cash flows, to the carrying value of goodwill for each reportingunit.

 

**Identified Intangibleand Other Long-Lived Assets**

 

Identifiedintangible assets, which primarily consist of customer relationships and tradenames, were valued at fair value with the assistance of independent appraisers,effective with the Acquisitions. All long-lived assets are amortized over theestimated useful lives. The Company periodically reviews long-lived

 

41

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assets for impairment usingundiscounted future cash flows whenever events or changes in circumstancesindicate that the carrying value may not be recoverable, and does not believethere is any impairment of intangible assets or other long-lived assets as of December 31,2004 and 2003 pursuant to SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”

 

**DeferredFinancing Costs**

 

Deferredfinancing costs incurred in connection with the 2003 Notes and the 2004 Notesare being amortized over the term of the related debt using the effectiveinterest method. Deferred financing costs incurred in connection withestablishing the revolving credit agreement are being amortized over the termof the agreement using the straight-line method. Accumulated amortization as ofDecember 31, 2004 and 2003 was $2,092,287 and $455,174, respectively.

 

**Accountingfor Stock Options**

 

TheCompany uses the intrinsic value method as defined in Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” toaccount for stock options issued to employees. Accordingly, no compensationexpense has been recognized for stock options granted, as the exercise pricesof the options were in excess of or equal to the fair value of the underlyingcommon stock on the date of the option grants.

 

Thefollowing table reflects pro forma net income for the year ended December 31,2004, the four-months and eleven-days ended December 31, 2003, theseven-months and twenty-days ended August 20, 2003, and the year ended December 31,2002 had the Company elected to adopt the fair value approach of SFAS No. 123,“Accounting for Stock-Based Compensation”:

 
| ** **                                  | ** ** | **Successor Basis**                    | ** ** | **Predecessor Basis**                                           | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Year ended  December 31, 2004** | ** ** | **Four-months  and eleven  days ended  December 31, 2003** | ** ** | **Seven-months  and twenty-  days ended  August 20, 2003** | ** ** | **Year ended  December 31, 2002** | ** ** |
| ** **                                  | ** ** | ** **                             | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  as reported                     |       | $                                      | 2,329,632  |                                                            | $          | 760,213 |   | $ | 1,168,916 |   | $ | 6,623,741 |   |
| Less:  Stock-based compensation, net of tax |       | 12,460                                 |       | —                                                          |       | 32,275 |   | 84,377 |   |
| Pro forma  net income                       |       | $                                      | 2,317,172  |                                                            | $          | 760,213 |   | $ | 1,136,641 |   | $ | 6,539,364 |   |

 

Theestimated fair value of each option on the date of grant was calculated usingthe Black-Scholes option-pricing model. The following table summarizes theweighted-average of the assumptions used for stock options granted during theyears ended December 31, 2004, 2003 and 2002.  No new option issuances under the 1998 planoccurred since January 31, 2002.

 

42

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| ** **                             | ** ** | **Successor Basis**         | ** ** | ** **                  | **Predecessor  Basis** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------------------|------------|
| ** **                             | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** **             | ** ** | **December 31,  2002** | ** ** |
| ** **                             | ** ** | ** **                  | ** ** | ** **                  | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free  interest rate               |       | 3.95                        | %          |                        | 3.95                   | %          |   |   | 5.19 | % |   |
| Average  expected years until exercise |       | 6.5 years                   |       |                        | 7 years                |       |   |   | 8 years |   |   |
| Expected  volatility                   |       | 0                           | %          |                        | 0                      | %          |   |   | 0 | % |   |
| Dividend  yield                        |       | 0                           | %          |                        | 0                      | %          |   |   | 0 | % |   |
| Weighted  average fair value per share |       | $2.26                       |       |                        | $2.41                  |       |   |   | $28.37 |   |   |

 

**Fair ValueInformation**

 

TheCompany believes that the carrying amounts of cash and cash equivalents,accounts and notes receivable, accounts payable and accrued expenses reportedin the consolidated balance sheets approximate their fair values due to theshort maturity of these instruments. The estimated fair value of the Company’spublicly traded debt, based on quoted market prices, was approximately $180.5million as of December 31, 2004. The Company believes the carrying amountof the debt reported in the December 31, 2003 balance sheet approximatedits fair value.

 

**DerivativeInstruments and Hedging Activities**

 

OnJanuary 1, 2001, the Company adopted SFAS No. 133 (“SFAS 133”), “Accountingfor Derivative Instruments and Hedging Activities.” This statement establishedaccounting and reporting standards for derivative financial instruments,including certain derivative financial instruments embedded in other contractsand for hedging activity. SFAS 133 requires the Company to recognize all derivativesas either assets or liabilities in its financial statements and record theseinstruments at their fair values. In order to achieve hedge accountingtreatment, hedging activities must be appropriately designated, documented andproven to be effective as a hedge of a balance sheet item pursuant to provisionsof SFAS 133. The Company has elected, as permitted by SFAS 133, not to provethe hedge effectiveness of its interest rate collar due to the administrativeburden of complying with SFAS 133. As a result, changes in the fair value ofthe interest rate collar are recorded through current income rather thanthrough other comprehensive income. The cumulative loss as a result of thechange in fair value as of December 31, 2002 was $813,020. On August 21,2003, a portion of the proceeds from the 2003 Notes were used to pay theobligation of $529,897, relating to the interest rate collar, and the interestrate collar agreement was terminated.

 

**AdvertisingCosts**

 

TheCompany expenses advertising costs as the advertising occurs in accordance withAmerican Institute of Certified Public Accountants, Statement of Position 93-7,“Reporting on Advertising Costs.” Advertising expense, included in selling andadministrative expenses in the consolidated statements of income, wasapproximately $491,000, $160,000, $363,000 and $478,000 for the year ended December 31,2004, the four-months and eleven-days ended December 31, 2003, the seven-monthsand twenty-days ended August 20, 2003, and the year ended December 31,2002, respectively.

 

43

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**NewAccounting Standards**

 

InJanuary 2003, the Financial Accounting Standard Board (“FASB”) issued andsubsequently revised Interpretation No. 46 (“FIN 46”), “Consolidation ofVariable Interest Entities.” FIN 46 clarifies the application of AccountingResearch Bulletin No. 51, “Consolidated Financial Statements,” to certain entitiesin which equity investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties; such entities are known as variable interest entities (“VIE’s”).FIN 46 applied immediately to all VIE’s created after January 31, 2003 andwas effective as of December 31, 2003 for any VIE’s deemed to be specialpurpose entities (“SPE’s”) created prior to February 1, 2003. FIN 46 waseffective for interim periods after March 15, 2004, for all other VIE’s. The Company’sadoption of FIN 46 had no impact since the Company has no VIE’s.

 

InNovember 2004, the FASB issued SFAS No. 151 (“SFAS 151”), “InventoryCosts, an Amendment of ARB No. 43, Chapter 4.” SFAS 151 amends theguidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,previously stated that “. . . under some circumstances, items such as idlefacility expense, excessive spoilage, double freight, and rehandling costs maybe so abnormal as to require treatment as current period charges. . . .” This Statementrequires that those items be recognized as current-period charges regardless ofwhether they meet the criterion of “so abnormal.” In addition, this Statementrequires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. SFAS151 is effective for inventory costs incurred during fiscal years beginningafter June 15, 2005. The Company is evaluating the impact of SFAS 151 onfinancial results.

 

InDecember 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchangesof Nonmonetary Assets – an Amendment of APB Opinion No. 29.” SFAS 153amends Opinion No. 29 to eliminate the exception for nonmonetary exchangesof similar productive assets and replaces it with a general exception for exchangesof nonmonetary assets that do not have commercial substance. A nonmonetaryexchange has commercial substance if the future cash flows of the entity areexpected to change significantly as a result of the exchange. SFAS 153 iseffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. The Company believes that the adoption of SFAS 153will not have a material impact on its financial results.

 

InDecember 2004, the FASB issued a revision to SFAS No. 123 (“SFAS 123R”),“Share-Based Payment.” SFAS 123R requires that the cost of equity based serviceawards be measured based on the grant-date fair value of the award. The costwill be recognized over the period during which an employee is required toprovide service in exchange for the award or the requisite service period. No compensationcost is recognized for equity instruments for which employees do not render therequisite service. SFAS 123R requires the measurement of the cost of liabilitybased service awards based on its current fair value; the fair value of thataward will be remeasured subsequently at each reporting date through thesettlement date. Changes in fair value during the requisite service period willbe recognized as compensation cost over that period. SFAS 123R is effective forshare-based payments occurring in interim periods beginning after June 15,2005. The Company is currently evaluating the impact of SFAS 123R on itsfinancial results.

 

In December2004, the FASB issued Staff Position SFAS 109-1, Application of FASB StatementNo. 109 (“FSP SFAS 109-1”), “Accounting for Income Taxes, to the TaxDeduction on Qualified Production Activities Provided by the American JobsCreation Act of 2004.”  The American JobsCreation Act of 2004 (the “Act”), which was signed into law on October 22,2004, provides a deduction for income from qualified domestic productionactivities, which will be phased in from 2005 through 2010.  The Company does not expect the phase in ofthis new deduction to result in a significant impact in the effective tax ratefor fiscal years 2005 and 2006 based on current earnings levels.  However, due to the complexity of the Act,the Company has entered into contractual arrangements with an external resourceto evaluate the overall impact of the Act on the Company’s earningsforecast.  Under the guidance in FSP SFAS109-1, the deduction will be treated as a “special deduction” as described inSFAS No. 109.  As such, the specialdeduction has no effect on deferred tax assets and liabilities existing at theenactment date.  Rather, the impact ofthis deduction will be reported in the period in which the deduction is claimedon the Company’s tax return.

 

**Reclassifications**

 

Certain previously reportedamounts have been reclassified to conform to the current year presentation.

 

44

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**4.Inventories**

 

Inventoriesconsist of the following:

 

| ** **                                        | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Work-in-process                                   |       | $                           | 7,591,952  |                        | $          | 3,648,351 |   |
| Raw  materials (principally paper)                |       | 11,001,183                  |       | 2,345,010                   |       |
|                                              |       | 18,593,135                  |       | 5,993,361                   |       |
| Excess of  current cost over LIFO inventory value |       | (30,265                     | )          | —                      |       |
|                                              |       | $                           | 18,562,870 |                        | $          | 5,993,361 |   |

 

Inconnection with the Sheridan Acquisition, the Company’s historical LIFO reserveof $771,449 at August 20, 2003, was eliminated, and the acquired inventory wasstated at fair value. The Company also maintains a reserve for therealizability of inventory in the amounts of $127,144 and $72,608 for the yearsended December 31, 2004 and 2003, respectively, which are included in theamounts in the table above relating to work-in- process and raw materials. Arollforward of the inventory reserve is as follows: 

 

| ** **                      | ** ** | **Successor Basis**                    | ** ** | ** **                                                     | **Predecessor Basis** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------------|-----------------------|------------|
| ** **                      | ** ** | **Year Ended  December 31, 2004** | ** ** | **Four-months  and eleven  days ended December 31, 2003** | ** **            | ** ** | **Seven-months  and twenty  days ended  August 20, 2003** | ** ** | **Year Ended  December 31, 2002** | ** ** |
| Balance at  beginning of period |       | $                                      | 72,608     |                                                           | $                     | 83,285     |   |   | $ | 69,949 |   | $ | 17,098 |   |
| Charged to  expense             |       | 105,845                                |       | (9,555                                                         | )                     |       | 13,336 |   | 52,851 |   |
| Deductions                      |       | (51,309                                | )          | (1,122                                                         | )                     |       | — |   | — |   |
| Other                           |       | —                                 |       | —                                                         |                  |       | — |   | — |   |
| Balance at  end of period       |       | $                                      | 127,144    |                                                           | $                     | 72,608     |   |   | $ | 83,285 |   | $ | 69,949 |   |

 

**5.Property, Plant and Equipment**

 

Property,plant and equipment consist of the following:

 

45

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| ** **                          | ** ** | **December 31,  2004** | ** **  | **December 31,  2003** | ** ** |
|-------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| ** **                          | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| Land                                |       | $                           | 5,205,316   |                        | $          | 4,923,921 |   |
| Buildings  and improvements         |       | 33,024,140                  |        | 23,465,036                  |       |
| Machinery  and equipment            |       | 92,312,572                  |        | 32,428,582                  |       |
|                                |       | 130,542,028                 |        | 60,817,539                  |       |
|                                |       |                        |        |                        |       |
| Accumulated  depreciation           |       | (15,288,674                 | )           | (3,540,530                  | )          |
| Property,  plant and equipment, net |       | $                           | 115,253,354 |                        | $          | 57,277,009 |   |

 

Depreciationand amortization expense for the year ended December 31, 2004, thefour-months and eleven-days ended December 31, 2003, the seven-months andtwenty-days ended August 20, 2003, and the year ended December 31,2002, was $12,755,046, $3,563,957, $4,788,928 and $8,235,801, respectively.

 

**6.Intangible Assets**

 

Inconjunction with the Acquisitions, the Company acquired intangible assetsrelating to customer relationships, trade names and technology. The customerrelationships, trade names and technology are being amortized using thestraight-line method over their estimated useful lives as described below.Amortization expense for the year ended December 31, 2004 and the periodended December 31, 2003, related to customer relationships, trade name andtechnology intangible assets was $1,659,705 and $559,133, respectively.

 
| ** **              | ** ** | ** **      | ** ** | **December 31, 2004** | ** ** | **December 31, 2003**    | ** ** |
|-------------------------|------------|-----------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Useful Life** | ** ** | **Cost**                   | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| ** **              | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer  relationships |       | 25 years        |       | $                          | 27,800,000 |                          | $          | 1,428,241 |   | $ | 26,371,759 |   | $ | 25,000,000 |   | $ | 360,731 |   | $ | 24,639,269 |   |
| Trade names             |       | 40 years        |       | 22,400,000                 |       | 754,430                       |       | 21,645,570 |   | 22,000,000 |   | 198,402 |   | 21,801,598 |   |
| Technology              |       | 5 years         |       | 300,000                    |       | 36,167                        |       | 263,833 |   | — |   | — |   | — |   |
|                    |       |            |       | $                          | 50,500,000 |                          | $          | 2,218,838 |   | $ | 48,281,162 |   | $ | 47,000,000 |   | $ | 559,133 |   | $ | 46,440,867 |   |

 

TheCompany estimates annual amortization expense related to these intangibles asfollows:

 
| **Years Ended December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| ** **                        | ** ** | ** ** | ** ** |
| 2005                              |       | $          | 1,732,000  |   |
| 2006                              |       | 1,732,000  |       |
| 2007                              |       | 1,732,000  |       |
| 2008                              |       | 1,732,000  |       |
| 2009                              |       | 1,695,833  |       |
| Thereafter                        |       | 39,657,329 |       |
|                              |       |       |       |
| Total                             |       | $          | 48,281,162 |   |

 

46

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**7. Goodwill**

 

Goodwillat December 31, 2004 represents the excess of the purchase price over theestimated fair value of the net assets acquired for The Sheridan Group and TheDingley Press acquisitions. Goodwill of $43,430,022 from the SheridanAcquisition is a result of a stock purchase, and therefore is not deductiblefor tax purposes. Goodwill of $3,672,712 from the Dingley Acquisition is aresult of an asset purchase and is deductible for tax purposes. 

 

Inconnection with adopting SFAS 142 as of January 1, 2002, the Companycompleted step one of the test for impairment, which indicated that the fairvalues of the reporting units exceeded their carrying values; therefore, noimpairment was recognized. The Company performed a similar test as of December 31,2004, 2003 and 2002 and concluded that no goodwill impairment exists.

 

AtDecember 31, 2003, the Company had goodwill of $26,098,237 for theshort-run journal operating segment and $18,542,817 for the other publicationsoperating segment. The changes in the carrying amount of goodwill for the yearended December 31, 2004, are as follows:

 
| ** **                                                                                      | ** ** | **Short-Run  Journals** | ** ** | **Specialty  Catalogs** | ** ** | **Other  Publications** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|------------------|------------|
| **Balance  at January 1, 2003 (Predecessor)**                                              |       | $                       | 11,193,063 |                    | $          | —                  |       | $                | 3,081,671  |   | $ | 14,274,734 |   |
| Write-off of  old predecessor goodwill concurrent with the Sheridan Acquisition                 |       | (11,193,063             | )          | —                  |       | (3,081,671              | )          | (14,274,734      | )          |
| Creation of  goodwill as a result of the Sheridan Acquisition                                   |       | 26,098,237              |       | —                  |       | 18,542,817              |       | 44,641,054       |       |
| **Balance  at December 31, 2003 (Successor)**                                              |       | 26,098,237              |       | —                  |       | 18,542,817              |       | 44,641,054       |       |
| Adjustment  of deferred tax liabilities related to assets acquired in the Sheridan  Acquisition |       | (656,490                | )          | —                  |       | 817,804                 |       | 161,314          |       |
| Adjustment  of tax valuation allowance established in the Sheridan Acquisition                  |       | (1,223,505              | )          | —                  |       | —                  |       | (1,223,505       | )          |
| Adjustment  of tax contingency reserve related to the finalization of Predecessor income  tax   |       | (148,841                | )          | —                  |       | —                  |       | (148,841         | )          |
| Creation of  goodwill as a result of the Dingley Acquisition                                    |       | —                  |       | 3,672,712               |       | —                  |       | 3,672,712        |       |
| **Balance  at December 31, 2004**                                                          |       | $                       | 24,069,401 |                    | $          | 3,672,712               |       | $                | 19,360,621 |   | $ | 47,102,734 |   |

 

47

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**8.  Other Assets**

 

Otherassets consist of the following:

 

| ** **                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Notes and  other receivables, net  |       | $                           | 1,802,240  |                        | $          | 462,078 |   |
| Due from  former shareholders      |       | —                      |       | 661,393                     |       |
| Prepaid  expenses and deposits     |       | 2,929,257                   |       | 1,569,432                   |       |
| Non-compete  agreements, net       |       | 800,285                     |       | 500,606                     |       |
| Deferred compensation  plan assets |       | 2,599,898                   |       | 1,697,749                   |       |
| Other                              |       | 87,223                      |       | 89,853                      |       |
| Total                              |       | 8,218,903                   |       | 4,981,111                   |       |
| Less:  current portion             |       | 4,325,228                   |       | 2,203,294                   |       |
| Long-term  portion                 |       | $                           | 3,893,675  |                        | $          | 2,777,817 |   |

 

Notesreceivable are presented net of an allowance of $431,877 and $136,908 as of December 31,2004 and 2003, respectively. Non-compete agreements are presented net ofaccumulated amortization of $903,724 and $725,356 as of December 31, 2004and 2003, respectively. Amortization expense related to the non-competeagreements (which is included in amortization of intangibles in the consolidatedstatements of income and cash flows) for the year ended December 31, 2004,the four- months and eleven-days ended December 31, 2003, the seven-monthsand twenty-days ended August 20, 2003, and the year ended December 31,2002, was $178,368, $44,491, $85,079 and $206,284, respectively.

 

**9. NotesPayable and Revolving Credit Facility**

 

Inconjunction with the Sheridan Acquisition, on August 21, 2003, the Companycompleted a private debt offering of 10.25% senior secured notes totaling$105.0 million, priced to yield 10.50%, that mature August 15, 2011.  The carrying value of the 2003 Notes was$103.8 million and $103.6 million as of December 31, 2004 and 2003,respectively.

 

Inconjunction with the Dingley Acquisition, on May 25, 2004, the Companycompleted a private debt offering of 10.25% senior secured notes totaling $60.0million, priced to yield 9.86%, that mature August 15, 2011.  The carrying value of the 2004 Notes was $61.1million as of December 31, 2004.  The2004 Notes have identical terms to the 2003 Notes.

 

The2003 Notes and the 2004 Notes are collateralized by security interests insubstantially all of the assets of the Company and its subsidiaries, subject topermitted liens. The capital stock, securities and other payment rights of theCompany’s subsidiaries will constitute collateral for the 2003 Notes and the 2004Notes only to the extent that Rule 3-10 and Rule 3-16 of RegulationS-X under the Securities Act do not require separate financial statements of asubsidiary to be filed with the SEC. Payment obligations under the 2003 Notesand the 2004 Notes are guaranteed jointly and severally, irrevocably and unconditionally,by all of the Company’s subsidiaries. The Sheridan Group, Inc. (thestand-alone parent company) owns 100% of the outstanding stock of all of itssubsidiaries and has no material independent assets or operations. There are norestrictions on the ability of The Sheridan Group, Inc. (the stand-alone parentcompany) to obtain funds by dividend, advance or loan from its subsidiaries.

 

Inconnection with the offerings of the 2003 Notes and the 2004 Notes (the “Offerings”),the Company entered into registration rights agreements pursuant to which theCompany was required to

 

48

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register the 2003 Notes andthe 2004 Notes with the SEC. The Company filed Registration Statements onForm S-4 with the SEC in connection with exchange offers of its outstanding2003 Notes and 2004 Notes for like principal amounts of new senior securednotes. The Registration Statement covering the 2003 Notes was declaredeffective on October 13, 2004. The Registration Statement covering the2004 Notes was declared effective on October 25, 2004. The new seniorsecured notes are identical in all material respects to the 2003 Notes and the2004 Notes, except that the new senior secured notes do not bear legendsrestricting the transfer thereof.

 

Theterms of the registration rights agreement relating to the 2003 Notes requiredthe Company to have had an exchange registration statement for the 2003 Notesfiled with the SEC and declared effective by February 17, 2004. Because ofadditional SEC requirements as a result of the Dingley Acquisition, the Companywas not able to satisfy this requirement until October 13, 2004.Consequently, the Company paid liquidated damages with respect to the 2003Notes totaling approximately $319,000, which is included in interest expense.The 2004 Notes did not accrue any liquidated damages since the registration ofthe 2004 Notes was declared effective prior to November 21, 2004.

 

Inan event of default, the holders of at least 25% in aggregate principal amountof the 2003 Notes and the 2004 Notes, may declare the principal, premium, ifany, and accrued and unpaid interest on the 2003 Notes and the 2004 Notes to bedue and payable immediately.

 

Concurrentwith the offering of the 2003 Notes, the Company entered into a revolvingcredit agreement (the “Revolver”). The Revolver was amended concurrent with theoffering of the 2004 Notes.  Terms of theRevolver allow for revolving debt of up to $30.0 million, including letters ofcredit commitments of up to $5.0 million, subject to a borrowing base test.Borrowings under the Revolver bear interest at the bank’s base rate or theLIBOR rate plus a margin of 1.75% at the Company’s option and mature inMay 2009. Interest is payable monthly in arrears. The Company has agreedto pay an annual commitment fee on the unused portion of the Revolver at a rateof 0.35%. In addition, the Company has agreed to pay an annual fee of 1.875% onall letters of credit outstanding. As of December 31, 2004, the Companyhad no borrowings outstanding under the Revolver, had unused amounts availableof $28,200,000 and had $1,800,000 in outstanding letters of credit.

 

Borrowingsunder the Revolver are collateralized by the assets of the Company and itssubsidiaries, subject to permitted liens. The Revolver contains variouscovenants including provisions that prohibit the Company from incurring andprepaying other indebtedness and places restrictions on the Company’s abilityto pay dividends. It also requires the Company to satisfy financial tests, suchas an interest coverage ratio and the maintenance of a minimum amount ofearnings before interest, taxes depreciation and amortization (as defined inthe revolving credit agreement). The Company has complied with all of therestrictive covenants as of December 31, 2004.

 

Inan event of default, all principal and interest due under the Revolver shall beimmediately due and payable.

 

**10. CapitalLease Obligations**

 

Witha portion of the proceeds from the 2003 Notes, on August 21, 2003, allcapital lease obligations were paid in full and the lease agreements wereterminated.

 

49

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**11. Accrued Expenses**

 

Accruedexpenses consist of the following:

 
| ** **                                                  | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Payroll and  related expenses                               |       | $                           | 6,027,051  |                        | $          | 4,986,405 |   |
| Profit sharing  accrual                                     |       | 1,834,393                   |       | 1,749,021                   |       |
| Accrued  interest                                           |       | 6,494,593                   |       | 3,890,222                   |       |
| Customer  prepayments                                       |       | 3,638,336                   |       | 1,331,114                   |       |
| Deferred  revenue                                           |       | 1,314,656                   |       | —                      |       |
| Self-insured  health and worker’s compensation accrual |       | 2,792,300                   |       | 1,856,181                   |       |
| Other                                                       |       | 2,112,755                   |       | 2,556,270                   |       |
| Total                                                       |       | $                           | 24,214,084 |                        | $          | 16,369,213 |   |

 

**12. Other Liabilities**

 

Otherliabilities consist of the following:

 
| ** **              | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Non-compete  agreements |       | $                           | 1,146,312  |                        | $          | 891,428 |   |
| Deferred  compensation  |       | 1,760,636                   |       | 1,122,951                   |       |
| Other                   |       | 41,738                      |       | —                      |       |
| Total                   |       | $                           | 2,948,686  |                        | $          | 2,014,379 |   |

 

**13. Income Taxes**

 

Thecomponents of the income tax provision (benefit) are as follows:

 

50

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| ** **   | ** ** | **Successor Basis**        | ** ** | ** **                                                     | **Predecessor Basis** | ** ** |
|--------------|------------|----------------------------|------------|----------------------------------------------------------------|-----------------------|------------|
| ** **   | ** ** | **December 31, 2004** | ** ** | **Four-months and  eleven-days ended  December 31, 2003** | ** **            | ** ** | **Seven-months and  twenty-days ended  August 20, 2003** | ** ** | **December 31, 2002** | ** ** |
| ** **   | ** ** | ** **                 | ** ** | ** **                                                     | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current**  |       |                       |       |                                                           |                  |       |   |   |   |   |
| Federal      |       | $                          | 1,895,663  |                                                           | $                     | 1,098,000  |   |   | $ | 1,977,357 |   | $ | 2,835,000 |   |
| State        |       | 617,226                    |       | 155,279                                                        |                  |       | 421,846 |   | 488,091 |   |
|         |       | 2,512,889                  |       | 1,253,279                                                      |                  |       | 2,399,203 |   | 3,323,091 |   |
| **Deferred** |       |                       |       |                                                           |                  |       |   |   |   |   |
| Federal      |       | (122,414                   | )          | (684,226                                                       | )                     |       | 126,242 |   | 487,208 |   |
| State        |       | 374,376                    |       | (55,208                                                        | )                     |       | 157,867 |   | 207,964 |   |
|         |       | 251,962                    |       | (739,434                                                       | )                     |       | 284,109 |   | 695,172 |   |
|         |       | $                          | 2,764,851  |                                                           | $                     | 513,845    |   |   | $ | 2,683,312 |   | $ | 4,018,263 |   |
|              |            |                            |            |                                                                |                       |            |  |  |  |  |  |  |  |  |  |

 

Deferredincome taxes reflect the net tax effects of the temporary differences betweenthe carrying amounts of assets and liabilities for financial reporting purposesand the amounts used for income tax purposes. Significant components of thedeferred tax assets and liabilities were as follows:

 
| ** **                                                             | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                                                   |       |                       |       |                       |       |
| **Deferred  tax assets**                                               |       |                       |       |                       |       |
| Incentive  and vacation accrual                                        |       | $                          | 848,513    |                       | $          | 826,283 |   |
| Bad debt  reserve                                                      |       | 441,234                    |       | 437,788                    |       |
| Self  insurance accrual                                                |       | 434,658                    |       | 165,452                    |       |
| Intangible  assets                                                     |       | 549,825                    |       | 338,660                    |       |
| Amortization  of financing costs                                       |       | 298,395                    |       | 143,160                    |       |
| Inventory-additional  costs capitalized for tax                        |       | 201,247                    |       | 191,276                    |       |
| Tax credit  carryforwards                                              |       | —                     |       | 76,611                     |       |
| Net  operating loss carryforwards-Federal                              |       | 522,451                    |       | 1,937,743                  |       |
| Net  operating loss carryforwards-States                               |       | 469,772                    |       | 423,465                    |       |
| Fixed asset  basis related to state disallowance of bonus depreciation |       | 268,793                    |       | 60,288                     |       |
| Other                                                                  |       | 30,197                     |       | 97,857                     |       |
| Valuation  allowance                                                   |       | (669,180                   | )          | (1,870,660                 | )          |
| Total  deferred tax assets                                             |       | 3,395,905                  |       | 2,827,923                  |       |
| **Deferred  tax liabilities**                                          |       |                       |       |                       |       |
| Intangible  assets                                                     |       | 7,743,518                  |       | 17,169,794                 |       |
| Inventory  basis difference                                            |       | 283,589                    |       | 276,921                    |       |
| Property and  equipment                                                |       | 16,937,677                 |       | 6,873,342                  |       |
| Land                                                                   |       | 1,145,727                  |       | 975,386                    |       |
| Prepaid  insurance                                                     |       | 166,190                    |       | —                     |       |
| Total  deferred tax liabilities                                        |       | 26,276,701                 |       | 25,295,443                 |       |
| Net deferred  tax liabilities                                          |       | $                          | 22,880,796 |                       | $          | 22,467,520 |   |

 

51

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| ** **                                               | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Included in  the balance sheet                           |       |                        |       |                        |       |
| Noncurrent  deferred tax liabilities in excess of assets |       | $                           | 24,788,544 |                        | $          | 24,025,665 |   |
| Current  deferred tax assets in excess of liabilities    |       | 1,907,748                   |       | 1,558,145                   |       |
| Net deferred  tax liability                              |       | $                           | 22,880,796 |                        | $          | 22,467,520 |   |

 

During2004, the Company refined its determination of deferred tax liabilitiesassociated with fixed assets acquired in the Sheridan Acquisition, resulting inan increase to goodwill and deferred tax liabilities of approximately $161,000.

 

AtDecember 31, 2004 and 2003, the Company had U.S. Federal net operatingloss (“NOL”) carryforwards of approximately $1,537,000 and $5,191,000,respectively, attributable to one of its subsidiaries.

 

TheInternal Revenue Code and various state taxing jurisdictions place certainlimitations on the annual amount of NOL carryforwards which can be utilized ifcertain changes in the Company’s ownership occur. In connection with theCompany’s 1998 acquisition of CCP, a change in ownership occurred, resulting ina limitation on the utilization of CCP’s preacquistion NOLs. As of December 31,2003, the gross deferred tax asset for NOLs was reduced by a valuationallowance since management believed that it was more likely than not thatcertain of these NOL benefits would not be realized due to the limitationsimposed on the utilization of the NOL carryforward. During 2004, the Companyelected to adopt an alternative method of determining the limitation on the useof the NOLs pursuant to IRS Notice 2003-65, which resulted in a decrease to thelimitation on the use of Federal and certain State NOLs. As a result, theCompany applied for U.S. Federal and State of Vermont income tax refunds ofapproximately $1,224,000, generated from additional use of the net operatinglosses against taxable income in 2000, 2001, and 2002. Thus, managementconcluded during 2004 that it is more likely than not that the remaining U.S.Federal net operating losses in the table shown below and the related State netoperating losses will be utilized. Accordingly, the related valuation allowance of approximately $1,210,000was fully reversed in 2004. This reversal of valuation allowance resulted in areduction to goodwill since the valuation allowance had been establishedthrough purchase accounting upon the acquisition of CCP.

 

Theremaining Federal NOLs as of December 31, 2004 are subject to limitationswhich allow for approximately $299,000 of NOLs to be available for use eachyear. The Company’s Federal NOLs will expire approximately as follows:

 

| **Amount of Regular  Net Operating Loss** | ** ** | **Year of  Expiration** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|
| $                                         | 70,000     |                    |       | 2007 |   |
| 614,000                                   |       |                    | 2008       |   |
| 674,000                                   |       |                    | 2009       |   |
| 179,000                                   |       |                    | 2011       |   |

 

52

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Asof December 31, 2004 and 2003, the Company had state NOLs with a value ofapproximately $470,000 and $423,000, respectively, in various jurisdictions,which begin to expire in 2008. Management has determined that a valuationallowance is needed for approximately $320,000 as of December 31, 2004against net operating losses in State jurisdictions without sufficient priorearnings.

 

TheCompany utilized NOLs against Federal and State taxable income, which reducedtax expense for 2004 by approximately $26,000.

 

TheCompany has also determined that valuation allowances of approximately $350,000and $339,000 as of December 31, 2004 and 2003, respectively, are neededfor a deferred tax asset relating to transaction costs from the SheridanAcquisition which are deductible for tax purposes upon sale of the Company.Given the indefinite timing of this reversal, a valuation allowance wasestablished.

 

TheCompany has provided for contingencies related to income taxes in accordancewith SFAS No. 5. At December 31, 2004 and December 31, 2003, theCompany has reserves of approximately $637,000 and $505,000, respectively,related to transaction costs for the Sheridan Acquisition. In analyzing theneed for the provision of tax contingency reserves, including interest, managementreviewed applicable statutes, rules, regulations and interpretations andestablished these reserves based on past experiences and judgments aboutpotential actions by taxing jurisdictions.

 

Arollforward of the Company’s valuation allowance is as follows:

 
| ** **                      | ** ** | **Successor Basis**                     | ** ** | ** **                                                  | **Predecessor Basis** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|-----------------------|------------|
| ** **                      | ** ** | **Year Ended  December 31,  2004** | ** ** | **Four-months and  eleven-days  ended December  31,  2003** | ** **            | ** ** | **Seven-months  and twenty-days  ended August  20,  2003** | ** ** | **Year Ended  December 31,  2002** | ** ** |
| Balance at  beginning of period |       | $                                       | 1,870,660  |                                                        | $                     | 1,532,007  |   |   | $ | 1,532,007 |   | $ | 1,532,007 |   |
| Charged to  expense             |       | 319,551                                 |       | 338,653                                                     |                  |       | — |   | — |   |
| Deductions                      |       | (1,223,505                              | )          | —                                                      |                  |       | — |   | — |   |
| Other                           |       | (297,526                                | )          | —                                                      |                  |       | — |   | — |   |
| Balance at  end of period       |       | $                                       | 669,180    |                                                        | $                     | 1,870,660  |   |   | $ | 1,532,007 |   | $ | 1,532,007 |   |

 

TheCompany’s income tax provision differs from taxes computed using the U.S.Federal statutory tax rate as follows:

 

53

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| ** **                                                  | ** ** | **Successor Basis**                              | ** ** | ** **                                                              | **Predecessor Basis** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------|-----------------------|------------|
| ** **                                                  | ** ** | **Years ended  December 31,  2004  Amount** | ** ** | **Four-months and  eleven-days ended  December 31,  2003  Amount** | ** **            | ** ** | **Seven-months  and twenty-days  ended August 20,  2003  Amount** | ** ** | **Years ended  December 31,  2002  Amount** | ** ** |
| Income  before income taxes                                 |       | $                                                | 5,094,483  |                                                                    | $                     | 1,274,058  |   |   | $ | 3,852,228 |   | $ | 10,642,004 |   |
|                                                        |       |                                             |       |                                                                    |                  |       |   |   |   |   |
| U.S. Federal  statutory tax rate                            |       | $                                                | 1,732,125  |                                                                    | $                     | 433,180    |   |   | $ | 1,309,758 |   | $ | 3,618,281 |   |
| Increase  (decrease) in tax expense resulting from          |       |                                             |       |                                                                    |                  |       |   |   |   |   |
| Tax reserves                                                |       | 21,957                                           |       | —                                                                  |                  |       | 504,916 |   | — |   |
| Non-deductible  stock warrant costs                         |       | —                                           |       | —                                                                  |                  |       | 153,425 |   | 47,175 |   |
| Non-deductible  meals and entertainment                     |       | 82,218                                           |       | 31,522                                                                  |                  |       | 48,064 |   | 22,450 |   |
| Change in  valuation allowance                              |       | 319,551                                          |       | —                                                                  |                  |       | 338,660 |   | — |   |
| State income  taxes, net of U.S. Federal income tax benefit |       | (91,584                                          | )          | 47,276                                                                  |                  |       | 173,331 |   | 322,141 |   |
| Change in  state tax apportionment and rates                |       | 554,080                                          |       | —                                                                  |                  |       | — |   | — |   |
| Other, net                                                  |       | 146,504                                          |       | 1,867                                                                   |                  |       | 155,158 |   | 8,216 |   |
| Income tax  provision                                       |       | $                                                | 2,764,851  |                                                                    | $                     | 513,845    |   |   | $ | 2,683,312 |   | $ | 4,018,263 |   |

 

During2004, the Company reported an increase in its deferred State tax provision ofapproximately $554,000 to properly reflect higher anticipated State effectiveincome taxes due primarily to the Dingley Acquisition which caused the Companyto be subject to unitary State income tax in Maine.

 

OnOctober 22, 2004, the President of the U.S. signed into law the AmericanJobs Creation Act of 2004. The Company is currently evaluating the impact ofthis new law on its operations and effective tax rate. In particular, theCompany is evaluating the law’s provisions relating to the phased-in deductionassociated with pre-tax income from domestic production activities. Thisspecial deduction is 3% of qualifying income for years 2004 and 2005, 6% inyears 2006 through 2009 and 9% thereafter.

 

**14.Commitments**

 

InFebruary 1998, the Company entered into an employment agreement with itsformer Chairman of the Board. This agreement includes a 10 year non-competearrangement, which expires in 2008. The liability for this agreement is to bepaid out in increments increasing from $126,000 to $151,200 per year, over 15years. Included in other liabilities as of December 31, 2004 isapproximately $810,000 related to the net present value of the obligation underthis agreement.

 

InMay 2004, the Company entered into an employment agreement with thePresident of The Dingley Press. This agreement includes a 5 year non-competearrangement, which expires in 2009. The liability for this agreement is to bepaid out in increments of $108,000 per year over 5 years. Included in otherliabilities as of December 31, 2004 is approximately $336,000 related tothe net present value of the obligation under the agreement.

 

TheCompany leases warehouse, plant and office space, printing equipment, computerequipment and delivery equipment under non-cancelable operating leases. Rentalexpense relating to these leases was approximately $4,806,000, $1,649,000,$3,295,000 and $4,823,000, for the year ended December 31, 2004, thefour-months and eleven-days ended December 31, 2003, the seven-months andtwenty-days ended August 20, 2003, and the year ended December 31,2002, respectively. As of

 

54

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December 31, 2004approximate minimum future rental payments under non-cancelable operatingleases

are as follows:

 
| **Years Ended December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2005                              |       | $          | 5,125,000  |   |
| 2006                              |       | 4,036,000  |       |
| 2007                              |       | 3,590,000  |       |
| 2008                              |       | 2,369,000  |       |
| 2009                              |       | 1,203,000  |       |
| Thereafter                        |       | 317,000    |       |
| Total                             |       | $          | 16,640,000 |   |

 

Inexchange for certain pricing arrangements, the Company has entered intoagreements to purchase consumable raw materials. The Company has also enteredinto agreements to acquire additional plant and equipment. As of December 31,2004, approximate future payments related to these agreements are as follows:

 
| **Years Ended December 31,** | ** ** | **Raw  materials** | ** ** | **Plant and  equipment** | ** ** |
|-----------------------------------|------------|--------------------|------------|--------------------------|------------|
| 2005                              |       | $                  | 3,134,000  |                     | $          | 10,001,000 |   |
| 2006                              |       | 2,988,000          |       | —                   |       |
| 2007                              |       | 2,987,000          |       | —                   |       |
| 2008                              |       | 2,694,000          |       | —                   |       |
| 2009                              |       | 1,716,000          |       | —                   |       |
| Thereafter                        |       | 104,000            |       | —                   |       |
| Total                             |       | $                  | 13,623,000 |                     | $          | 10,001,000 |   |
|                                   |            |                    |            |                          |            |  |  |  |

 

**15. Mandatorily Redeemable Convertible Preferred Stock**

 

Inconjunction with the Sheridan Acquisition on August 21, 2003, thePredecessor Company’s outstanding A and A-1 mandatorily redeemable convertiblepreferred shares were converted into Class A Common Stock at rates of12.385 and 13.76 shares of common stock for each preferred share, respectively.

 

ThePredecessor Company’s mandatorily redeemable convertible preferred stock (the“Preferred Stock”), which was convertible into common stock, was comprised ofthe following series, all of which were $1.00 par value:

 

55

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| ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | **Predecessor Basis**                                  | ** ** |
|------------|------------|----------------|------------|-------------------|------------|--------------------------------------------------------|------------|
| ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | **Issued and Outstanding  at December 31,  2002** | ** ** |
| **Series** | ** ** | **Authorized** | ** ** | **Voting Rights** | ** ** | **Dollars**                                            | ** ** | **Shares** | ** ** |
| ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| A          |       |           | 20,000     |              | Voting     |                                                   | $          | 14,206,665 |   |   | 14,207 |   |   |
| A-1        |       |           | 20,000     |              | Voting     |                                                   | 3,985,000  |   |   | 3,985 |   |   |
| B          |       |           | 20,000     |              | Non-Voting |                                                   | —     |   |   | — |   |   |
| B-1        |       |           | 20,000     |              | Non-Voting |                                                   | —     |   |   | — |   |   |
| C          |       |           | 20,000     |              | Non-Voting |                                                   | —     |   |   | — |   |   |
|       |       |           |       |              |       |                                                   | $          | 18,191,665 |   |   |   |   |   |

 

TheSeries A and A-1 shares were entitled to the number of votes equal to thenumber of shares of Class A Common Stock into which they could beconverted. The Preferred Stock had no preferential dividend feature and eachshare of Preferred Stock had a liquidation preference of $1,000 plus intereston such amount at the rate of 8% per year compounded quarterly from the date ofissuance until the liquidation date (approximately $26,268,000, in theaggregate, as of December 31, 2002). The Corporation was required, uponthe occurrence of any disposition event to redeem at the closing thereof all ofthe Preferred Stock then outstanding at a price per share equal to theliquidation value. The Preferred Stock was convertible into common stock at anytime at the option of the holder. The Series A and A-1 Preferred Stock wasconvertible into Class A Common Stock at the rates of 12.385 and 13.76shares of common stock for each share of Preferred Stock, respectively, and theSeries B, B-1 and C Preferred Stock was convertible into Class ECommon Stock at the rates of 12.385, 13.76 and 16.673 shares of common stockfor each share of Preferred Stock, respectively.

 

**16.Stockholders’ Equity**

 

**Predecessor Basis**

 

OnAugust 21, 2003, in conjunction with the Sheridan Acquisition, alloutstanding common stock including all Preferred Stock, which concurrentlyconverted into common stock, was redeemed by the stockholders.

 

**Common****Stock**

 

TheCompany’s common stock was comprised of the following classes, all of which are$0.01 par value:

 

56

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| ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | **Predecessor Basis**                                  | ** ** |
|------------|------------|----------------|------------|-------------------|------------|--------------------------------------------------------|------------|
| ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | **Issued and Outstanding  at December 31,  2002** | ** ** |
| **Series** | ** ** | **Authorized** | ** ** | **Voting Rights** | ** ** | **Dollars**                                            | ** ** | **Shares** | ** ** |
| ** ** | ** ** | ** **     | ** ** | ** **        | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| A          |       |           | 12,250,000 |              | Voting     |                                                   | $          | 609 |   | 60,916 |   |
| B          |       |           | 495,000    |              | Non-Voting |                                                   | —     |   | — |   |
| C          |       |           | 12,250,000 |              | Voting     |                                                   | —     |   | — |   |
| D          |       |           | 5,000      |              | Non-Voting |                                                   | —     |   | — |   |
| E          |       |           | 12,250,000 |              | Non-Voting |                                                   | —     |   | — |   |
|       |       |           |       |              |       |                                                   | $          | 609 |   |   |   |

 

**Stock Purchase Warrants**

 

Inconnection with a financing transaction in February 1998, the Companyissued warrants to certain lending institutions to purchase 1,578.5 stock unitsat a purchase price of $1.00 per share of Series C Preferred Stock or$0.01 per share of Class E Common Stock (in the case of the conversion ofthe Preferred Stock) included in such stock unit. Each stock unit was comprisedof either one share of Series C Preferred Stock or the number of shares ofClass E Common Stock into which one share of Series C Preferred Stockwas convertible. The warrants were exercisable immediately and expired on February 2,2008, unless extended per the Warrant Agreement. The Company recorded a discountto the related note of approximately $1,200,000 for the estimated fair marketvalue at grant date of the stock warrants issued as calculated using a binomialmodel. These costs were being amortized over the term of the SeniorSubordinated Debt. The outstanding warrants were entitled to share in receiptof any dividends declared and distributed to any class of shares as if thewarrants had been exercised immediately prior to the declaration. On August 21,2003, in conjunction with the Acquisition, all outstanding warrants to purchasecommon stock were exercised.

 

**Stock Option Plan**

 

TheCompany reserved for issuance 29,243 shares of its Class A Common Stockpursuant to its 1998 Stock Option Plan (the “1998 Plan”). Incentive StockOptions were granted at prices for issuance not less than the fair market valueof the stock at the date of grant. Options generally vested ratably over a fiveyear period, except for those options granted to officers, portions of whichvested ratably over time and the remainder of which vested only upon theachievement of certain performance targets or after ten years from the date ofgrant. A portion of the unvested options would immediately vest upon theoccurrence of certain future events, as specified in the 1998 Plan, includingthe sale of the Company or a qualified public offering. Options were notexercisable until the passage of ten years from date of issuance except uponthe occurrence of a sale of the Company or a qualified public offering. Theoptions expire 12 years from the date of grant. The 1998 Plan activity was asfollows:

 

57

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| ** **                                                    | ** ** | **Predecessor Basis**                  | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **Year ended  December 31, 2002** | ** ** |
| ** **                                                    | ** ** | ** **                             | ** ** |
| Shares under  option at beginning of year                     |       | 27,843                                 |       |
| Options  granted (weighted average exercise price of $80.74)  |       | 900                                    |       |
| Options  canceled (weighted average exercise price of $80.74) |       | (1,020                                 | )          |
| Options  exercised                                            |       | —                                 |       |
| Shares under  option at end of year                           |       | 27,723                                 |       |

 

OnAugust 21, 2003, in connection with the Sheridan Acquisition, all optionswere exercised and the 1998 Plan was terminated.

 

**Successor Basis**

 

**Stock****Option****Plan**

 

OnOctober 16, 2003, Holdings adopted the 2003 Stock-based IncentiveCompensation Plan (the “2003 Plan”), pursuant to which Holdings has reservedfor issuance 55,500 shares of its Common Stock. Incentive Stock Options aregranted at prices for issuance not less than the fair market value of the stockat the date of grant. Options generally vest ratably over a five year period,except those options granted to officers, portions of which vest ratably overfive years, and the remainder of which vest upon the achievement of certainperformance targets, occurrence of certain future events, including the sale ofthe Company or a qualified public offering, or after eight years from the dateof grant, as specified in the 2003 Plan. Options expire ten years from date ofgrant. The 2003 Plan activity was as follows:

 
| ** **                                                    | ** ** | **Year ended  December 31,  2004** | ** ** | **Four-months  and eleven-days  ended  December 31,  2003** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                              | ** ** | ** **                                                       | ** ** |
| Shares under  option at beginning of year                     |       | 48,700                                  |       | —                                                           |       |
| Options  granted (weighted average exercise price of $10.00)  |       | 7,700                                   |       | 48,700                                                           |       |
| Options  canceled (weighted average exercise price of $10.00) |       | (900                                    | )          | —                                                           |       |
| Options  exercised                                            |       | —                                  |       | —                                                           |       |
| Shares under  option at end of year                           |       | 55,500                                  |       | 48,700                                                           |       |

 

AtDecember 31, 2004, the remaining weighted average life of the outstandingoptions was approximately 9 years. All options issued since plan inception weregranted with an exercise price of $10.00, the fair market value of HoldingsCommon Stock on the date of grant. At December 31, 2004, 10,560 options wereexercisable.

 

**17.Employee Benefit Plans**

 

TheCompany sponsors two 401(k) retirement plans. The Company determines annualdiscretionary contributions to the plans. Contributions of approximately$2,103,000, $756,000,

 

58

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$1,087,000 and $1,548,000were charged to operations for the year ended December 31, 2004, thefour-months and eleven-days ended December 31, 2003, the seven-months andtwenty-days ended August 20, 2003, and the year ended December 31,2002, respectively.

 

TheCompany maintains a non-qualified deferred compensation plan for certainemployees which allows participants to annually elect (via individualcontracts) to defer a portion of their compensation on a pre-tax basis andwhich allows for make-whole contributions for participants whose pre-taxdeferrals are limited under the Company’s 401(k) Plan and other discretionarycontributions. Employee and Company contributions are maintained in anirrevocable trust. Legally, the assets remain those of the Company; however,access to the trust assets is severely restricted. The trust cannot be revokedby the employer or an acquirer, but the assets are subject to the claims of theCompany’s general creditors. The employee has no right to assign or transfercontractual rights in the trust. The participants are fully vested in theircompensation deferred; however, the make-whole contributions and any employerdiscretionary contributions are subject to vesting requirements. The Companyaccounts for the plan in accordance with Emerging Issues Task Force (“EITF”)No. 97-14, “Accounting for Deferred Compensation Arrangements WhereAmounts Earned Are Held in a Rabbi Trust and Invested.” Pursuant to EITF 97-14,as of December 31, 2004 and 2003, the Company recorded a deferredcompensation liability of approximately $1,761,000 and $1,123,000,respectively, in other non-current liabilities in the accompanying consolidatedbalance sheets. The change in the deferred compensation obligation related tochanges in the fair value of the vested diversified assets held in trust isrecorded in accordance with SFAS 115 as trading income (loss) in compensationexpense with an offsetting entry to other income (loss), respectively. Thediversified assets held in trust were approximately $2,600,000 and $1,698,000as of December 31, 2004 and 2003, respectively, and are recorded at theirfair value, based on quoted market prices, in other non-current assets on theaccompanying consolidated balance sheets.

 

**18.  Related Party Transactions**

 

Includedin other assets as of December 31, 2003 is $661,393 due from formershareholders related to the favorable result of the estimated closing datetangible net worth calculation, pursuant to the stock purchase agreement.Included in accrued expenses as of December 31, 2003 is $471,623 due toformer shareholders related to the anticipated tax refund from the final taxreturns filed for the Predecessor company. Appropriate payments were made in2004 in settlement of both of these items.

 

Inconnection with the Sheridan Acquisition, the Company entered into a 10 yearmanagement agreement with BRS and JCP. The management fee will be equal to thegreater of $500,000 or 2% of earnings before interest, taxes depreciation andamortization (as defined in the management agreement), plus reasonableout-of-pocket expenses. The Company accrued and paid approximately $769,000 and$210,000 in such fees for the year ended December 31, 2004 and the four-monthand eleven-day period ended December 31, 2003, respectively.

 

**19.  Contingencies**

 

TheCompany is party to legal actions as a result of various claims arising in thenormal course of business. The Company believes that the disposition of thesematters will not have a material adverse effect on the financial condition,results of operations or liquidity of the Company.

 

59

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**20.Business Segments**

 

TheCompany is a specialty printer in the United States offering a full range ofprinting and value-added support services for the journal, catalog, magazine,book and article reprint markets. The Company’s business includes threebusiness reporting segments comprised of ‘‘Short-run Journals’’, “SpecialtyCatalogs” and ‘‘Other Publications.’’ Short-run Journals are primarily medical,technical, scientific or scholarly journals and related reprints with run sizesof less than 5,000 copies. The Specialty Catalogs segment, which is comprisedof the assets and operations of The Dingley Press acquired on May 25,2004, is focused on catalog merchants that require run sizes between 300,000and 10,000,000 copies. The Other Publications business segment is comprised ofthree operating segments which produce specialty magazines, medium-run journalsand short-run books. Certain operations within the Company’s Other Publicationssegment have been aggregated following the provisions of SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information,” due to thesimilar characteristics of their financial performance and operations,including the nature of their service offerings, processes supporting thedelivery of the services, customers, and marketing and sales processes.

 

Theaccounting policies of the operating segments are the same as those describedin the Summary of Significant Accounting Policies. The results of each segmentinclude certain allocations for general, administrative and other shared costs.However, certain shared costs, such as corporate profit sharing and bonuses andthe amortization of a non-compete agreement with the Company’s former Chairmanof the Board (Note 13), are not allocated to the segments. The Company’scustomer base resides in the continental United States and its manufacturing,warehouse and office facilities are located throughout the East Coast andMidwest.

 

TheCompany had one customer, Elsevier, which accounted for 11.2 % of consolidatednet sales for the year ended December 31, 2004, 12.3% for the period endedDecember 31, 2003, 12.1% for the period ended August 20, 2003 and10.5% for the year ended December 31, 2002, respectively. Net sales forElsevier are reported in both the “Short-run Journals” and “Other Publications”segments.

 

Thefollowing table provides segment information for continuing operations (inthousands):

 

60

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| ** **                         | ** ** | **Successor Basis**                     | ** ** | **Predecessor Basis**                                       | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                         | ** ** | **Year ended  December 31,  2004** | ** ** | **Four-months  and eleven-days  ended  December 31,  2003** | ** ** | **Seven-months  and twenty-  days ended  August 20,  2003** | ** ** | **Year ended  December 31,  2002** | ** ** |
| **Net  sales**                     |       |                                    |       |                                                        |       |   |   |   |   |
| Short-run  journals                |       | $                                       | 97,277     |                                                        | $          | 33,453 |   | $ | 55,371 |   | $ | 86,053 |   |
| Specialty  catalogs                |       | 64,204                                  |       | —                                                      |       | — |   | — |   |
| Other  publications                |       | 131,172                                 |       | 49,606                                                      |       | 79,785 |   | 127,430 |   |
| Intersegment  eliminations         |       | (5,140                                  | )          | (1,866                                                      | )          | (3,252 | ) | (4,646 | ) |
| Consolidated  total                |       | $                                       | 287,513    |                                                        | $          | 81,193 |   | $ | 131,904 |   | $ | 208,837 |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |
| **Operating  income**              |       |                                    |       |                                                        |       |   |   |   |   |
| Short-run  journals                |       | $                                       | 13,344     |                                                        | $          | 4,087 |   | $ | 6,573 |   | $ | 12,150 |   |
| Specialty  catalogs                |       | 3,483                                   |       | —                                                      |       | — |   | — |   |
| Other  publications                |       | 6,885                                   |       | 2,471                                                       |       | 2,396 |   | 5,691 |   |
| Corporate                          |       | (2,256                                  | )          | (1,143                                                      | )          | (861 | ) | (708 | ) |
| Consolidated  total                |       | $                                       | 21,456     |                                                        | $          | 5,415 |   | $ | 8,108 |   | $ | 17,133 |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |
| **Assets**                         |       |                                    |       |                                                        |       |   |   |   |   |
| Short-run  journals                |       | $                                       | 94,442     |                                                        | $          | 89,851 |   |   |   | $ | 34,560 |   |
| Specialty  catalogs                |       | 77,406                                  |       | —                                                      |       |   |   | — |   |
| Other  publications                |       | 112,348                                 |       | 110,563                                                     |       |   |   | 64,383 |   |
| Corporate                          |       | 4,202                                   |       | 2,074                                                       |       |   |   | 1,012 |   |
| Consolidated  total                |       | $                                       | 288,398    |                                                        | $          | 202,488 |   |   |   | $ | 99,955 |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |
| **Depreciation  and amortization** |       |                                    |       |                                                        |       |   |   |   |   |
| Short-run  journals                |       | $                                       | 4,604      |                                                        | $          | 1,640 |   | $ | 1,490 |   | $ | 2,974 |   |
| Specialty  catalogs                |       | 3,424                                   |       | —                                                      |       | — |   | — |   |
| Other  publications                |       | 6,399                                   |       | 2,426                                                       |       | 3,168 |   | 5,125 |   |
| Corporate                          |       | 166                                     |       | 102                                                         |       | 216 |   | 343 |   |
| Consolidated  total                |       | $                                       | 14,593     |                                                        | $          | 4,168 |   | $ | 4,874 |   | $ | 8,442 |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |
| **Capital  expenditures**          |       |                                    |       |                                                        |       |   |   |   |   |
| Short-run  journals                |       | $                                       | 4,583      |                                                        | $          | 913 |   | $ | 3,425 |   | $ | 1,608 |   |
| Specialty  catalogs                |       | 5,815                                   |       | —                                                      |       | — |   | — |   |
| Other  publications                |       | 11,122                                  |       | 1,991                                                       |       | 1,773 |   | 3,231 |   |
| Corporate                          |       | 307                                     |       | 11                                                          |       | 15 |   | 31 |   |
| Consolidated  total                |       | $                                       | 21,827     |                                                        | $          | 2,915 |   | $ | 5,213 |   | $ | 4,870 |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |
| **Goodwill**                       |       |                                    |       |                                                        |       |   |   |   |   |
| Short-run  journals                |       | $                                       | 24,069     |                                                        | $          | 26,098 |   |   |   | $ | 11,193 |   |
| Specialty  catalogs                |       | 3,673                                   |       | —                                                      |       |   |   | — |   |
| Other  publications                |       | 19,361                                  |       | 18,543                                                      |       |   |   | 3,082 |   |
| Corporate                          |       | —                                  |       | —                                                      |       |   |   | — |   |
| Consolidated  total                |       | $                                       | 47,103     |                                                        | $          | 44,641 |   |   |   | $ | 14,275 |   |
|                               |       |                                    |       |                                                        |       |   |   |   |   |
| **Intangible  assets**             |       |                                    |       |                                                        |       |   |   |   |   |
| Short-run  journals                |       | $                                       | 27,463     |                                                        | $          | 28,418 |   |   |   | $ | — |   |
| Specialty  catalogs                |       | 3,390                                   |       | —                                                      |       |   |   | — |   |
| Other  publications                |       | 17,428                                  |       | 18,023                                                      |       |   |   | — |   |
| Corporate                          |       | —                                  |       | —                                                      |       |   |   | — |   |
| Consolidated  total                |       | $                                       | 48,281     |                                                        | $          | 46,441 |   |   |   | $ | — |   |

 

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**21.Restructuring and Other Exit Costs**

 

In September 2004, theCompany closed the Sheridan Books, Inc. facility in Fredericksburg, VA, whichwas part of the Other Publications segment, and moved most of the manufacturingoperations equipment from this facility to its facility in Chelsea, Michigan.As a result of this action, the Company incurred approximately $399,000 ofcosts related to employee termination, the relocation of the operationsequipment and other closure related expenses. These costs are included in costof sales in the December 31, 2004 consolidated statement of income. No amountswere accrued related to this restructuring at December 31, 2004.

 

The Fredericksburg facilityand excess equipment were sold during 2004. The sale of the land and building,which had a carrying value of approximately $952,000, resulted in a gain ofapproximately $919,000 while the sale and disposal of the excess equipment,which had a carrying value of approximately $484,000, resulted in a loss ofapproximately $435,000. These items are reflected in other general (income)expense in the December 31, 2004 consolidated statement of income.

 

**22.Quarterly Financial Information (unaudited)**

 

Quarterly financialinformation for the years ended December 31,2004 and 2003 is as follows (in thousands):

 
| ** **              | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** **   | **Fourth**  | ** ** |
|-------------------------|------------|-------------|------------|-------------|------------|-------------|--------------|-------------|------------|
| **2004 (Successor)**    | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** **   | **Quarter** | ** ** |
| Net sales               |       | $           | 54,396     |        |       | $           | 63,939       |        |       | $ | 82,516 |   |   | $ | 86,662 |   |   |
| Gross profit            |       | 13,371      |       |        | 14,871     |        |         | 16,586      |       |   | 15,698 |   |   |
| Operating income        |       | 4,168       |       |        | 5,414      |        |         | 6,314       |       |   | 5,560 |   |   |
| Net income (loss)       |       | $           | 674        |        |       | $           | 998          |        |       | $ | 771 |   |   | $ | (113 | ) |   |
|                    |       |        |       |        |       |        |         |        |       |   |   |   |   |
| ** **              | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** **   | **Fourth**  | ** ** |
| **2003 (Successor)**    | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** **   | **Quarter** | ** ** |
| Net sales               |       | $           | —     |        |       | $           | —       |        |       | $ | 24,798 |   |   | $ | 56,395 |   |   |
| Gross profit            |       | —      |       |        | —     |        |         | 5,684       |       |   | 13,061 |   |   |
| Operating income        |       | —      |       |        | —     |        |         | 1,751       |       |   | 3,664 |   |   |
| Net income              |       | $           | —     |        |       | $           |  — |        |       | $ | 345 |   |   | $ | 415 |   |   |
|                    |       |        |       |        |       |        |         |        |       |   |   |   |   |
| ** **              | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** **   | **Fourth**  | ** ** |
| **2003 (Predecessor)**  | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** **   | **Quarter** | ** ** |
| Net sales               |       | $           | 52,182     |        |       | $           | 52,407       |        |       | $ | 27,315 |   |   | $ | — |   |   |
| Gross profit            |       | 12,277      |       |        | 13,120     |        |         | 6,442       |       |   | — |   |   |
| Operating income (loss) |       | 4,374       |       |        | 5,033      |        |         | (1,299      | )          |   | — |   |   |
| Net income (loss)       |       | $           | 1,889      |        |       | $           | 2,385        |        |       | $ | (3,105 | ) |   | $ | — |   |   |
|                         |            |             |            |             |            |             |              |             |            |  |  |  |  |  |  |  |  |  |  |

 

As mentioned in Note 2, on August 21,2003, there was a change in ownershiprequiring a new basis of accounting for the acquired assets andliabilities.  Therefore, the Predecessor financialinformation for the third quarter of 2003 covers the period of July 1, 2003 through August 20, 2003 andthe Successor financialinformation for the third quarter of 2003 covers the period of August 21, 2003 through September 30, 2003.

 
| **ITEM 9**. | ** ** | **CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|------------------|------------|-------------------------------------------------------------------------------------------|

 

Not applicable.

 

**ITEM 9A.****    ****CONTROLS AND PROCEDURES**

 

As of the end of the period covered bythis Annual Report on Form 10-K, we conducted an evaluation, under thesupervision and with the participation of the principal executive officer(“CEO”) and principal financial officer (“CFO”), of the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the“Exchange Act”)).  Based on thisevaluation, the CEO and CFO concluded that our disclosure controls andprocedures are effective to provide reasonable assurance that informationrequired to be disclosed by us in reports we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in SEC rules and forms.  Therewas no change in our internal control over financial reporting during our mostrecently completed fiscal quarter that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

In connectionwith the Dingley Acquisition, our auditors identified certain matters that theyconsidered to be “material weaknesses” involving internal accounting controlsand the operation of such controls. The material weaknesses identified at The DingleyPress primarily related to the application of generally accepted accountingprinciples. In order to address these weaknesses we have undertaken programs toimprove disclosure and reporting controls including the initiation of a morerobust financial reporting and disclosure process that ensures all significantbusiness transactions and matters are reviewed, that generally acceptedaccounting principles are considered and that related financial statementdisclosures are provided. Until such time as all of the needed controls are inplace and deemed to be operating effectively, we have instituted compensatingcontrols such as extensive business performance reviews to address the controlweaknesses and to provide reasonable assurance that the information required tobe disclosed by us in reports we file under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

 

**ITEM 9B.****    ****OTHER INFORMATION**

 

Not applicable.

 

**PARTIII**

 

**ITEM 10.****     ****DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT**

 

We are a wholly-owned subsidiary of TSGHolding Corp., whose stockholders include affiliates of Bruckmann, Rosser,Sherrill & Co., LLC and Jefferies Capital Partners, and members of oursenior management.

 

**Our Equity Sponsors**

 

Bruckmann, Rosser, Sherrill & Co.,LLC, or BRS, is a New York-based private equity investment firm with about $1.2billion under management. BRS was founded in 1995 and has since invested inover 30 companies in the following industries: restaurants, consumer goods,specialty retail, recreation/leisure, apparel, home furnishings, industrial andcommercial services (including equipment rental), commercial equipmentmanufacturing, wholesale distribution and healthcare services. BRS and its affiliatesare collectively referred to as ‘‘BRS.’’

 

Jefferies Capital Partners, or JCP, is aNew York-based private equity investment firm with over $600 million in equitycommitments under management. Since 1994, JCP’s professionals have invested inover 40 companies in a variety of industries. JCP focuses on partnering withentrepreneurs and management teams in industries in which JCP has expertise.JCP invests in management buyouts, recapitalizations, industry consolidationsand growth equity. JCP and its affiliates are collectively referred

 

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to as “JCP.”

 

**Directorsand Executive Officers**

 

Our executive officers and directors areas follows:

 
| **Name**                | ** ** | **Age** | ** ** | **Position**                                                                             |
|-------------------------|------------|---------|------------|------------------------------------------------------------------------------------------|
| John  A. Saxton         |       | 55      |       | President  and Chief Executive Officer and Director                                      |
| Robert  M. Jakobe       |       | 51      |       | Vice  President and Chief Financial Officer and Secretary                                |
| Patricia  A. Stricker   |       | 40      |       | Vice  President, Operations and Human Resources                                          |
| Douglas  R. Ehmann      |       | 47      |       | Vice  President and Chief Technology Officer                                             |
| Joan  B. Weisman        |       | 43      |       | President  and Chief Operating Officer—The Sheridan Press, Inc. (“TSP”)   |
| Gary  J. Kittredge      |       | 53      |       | President  and Chief Operating Officer—Capital City Press, Inc. (“CCP”)   |
| Robert  M. Moore        |       | 39      |       | President  and Chief Operating Officer—Sheridan Books, Inc. (“SBI”)       |
| David  C. Hewitt        |       | 62      |       | President  and Chief Operating Officer—Dartmouth Printing Company (“DPC”) |
| J.  Kenneth Garner      |       | 51      |       | President  and Chief Operating Officer—United Litho, Inc. (“ULI”)         |
| G.  Paul Bozuwa         |       | 44      |       | President—Dartmouth  Journal Services, Inc. (“DJS”)                       |
| Christopher  A. Pierce  |       | 56      |       | President  and Chief Operating Officer—The Dingley                                  |
|                    |       |    |       | Press,  Inc. (“TDP”)                                                           |
| Thomas  J. Baldwin      |       | 45      |       | Director                                                                                 |
| Nicholas  Daraviras     |       | 31      |       | Director                                                                                 |
| Craig  H. Deery         |       | 57      |       | Director                                                                                 |
| Gary  T. DiCamillo      |       | 54      |       | Director                                                                                 |
| J.  Rice Edmonds        |       | 33      |       | Director                                                                                 |
| J. M.  Dryden Hall, Jr. |       | 71      |       | Director                                                                                 |
| James  L. Luikart       |       | 59      |       | Director                                                                                 |
| Nicholas  R. Sheppard   |       | 29      |       | Director                                                                                 |
| George  A. Whaling      |       | 67      |       | Director                                                                                 |

 

***JohnA. Saxton, President, Chief Executive Officer and Director****.*Mr. Saxtonjoined us in 1995 as our President and Chief Executive Officer and has servedon our board of directors since 1991. Prior to joining us, Mr. Saxton heldvarious positions at The Procter & Gamble Company, most recently serving asPresident of the Noxell Corporation following its acquisition by The Procter& Gamble Company in 1990. Mr. Saxton is a member of the NationalAssociation for Printing Leadership’s Walter E. Soderstrom Society, whichhonors individuals in the printing industry who have significantly contributedto the development and the progress of the graphic arts. Mr. Saxton holds aB.S. from Bucknell University. Mr. Saxton is also a director of TAC WorldwideCompanies.

 

***RobertM. Jakobe, Vice President and Chief Financial Officer and Secretary****.*Mr. Jakobejoined us in 1994 as our Vice President and Chief Financial Officer. Prior tojoining us, he worked at various positions within The Procter & GambleCompany, most recently serving as Division Comptroller and Vice President ofFinance for the Noxell Corporation. Mr. Jakobe holds a B.A. from the Universityof Notre Dame.

 

***PatriciaA. Stricker, Vice President, Operations and Human Resources****.*Ms. Strickerjoined us in 1998 and has served as our Vice President, Operations and HumanResources since January 2003.

 

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From 2000 to 2003, she served as President ofSBI. Ms. Stricker served as our Vice President, Corporate Development from 1999to 2000, and as our Projects Manager from 1998 to 1999. Prior to joining us,Ms. Stricker held various positions at General Physics Corporation, mostrecently serving as Vice President, Finance and Administration. She holds aB.A. from the College of Notre Dame of Maryland.

 

***DouglasR. Ehmann, Vice President and Chief Technology Officer****.*Mr. Ehmannjoined us in 1998 as our Vice President and Chief Technology Officer. Prior tojoining us, he worked at Northrop Grumman Corporation as a Division ChiefInformation Officer for Information Systems from 1995 to 1998. Mr. Ehmann is amember of the Print Industries Market Information and Research (PRIMIR)organization and serves on the International Digital Enterprise AllianceE-commerce Committee. He holds a B.S., an M.E. and an M.B.A. from CornellUniversity.

 

***JoanB. Weisman, President and Chief Operating Officer—TSP****.*Ms. Weismanjoined us in 1995 and has served as President and Chief Operating Officer ofTSP since 1996. From 1995 to 1996, she served as Finance Manager of TSP. Priorto joining us, Ms. Weisman worked in various positions in the marketing andfinance departments of The Procter & Gamble Company, most recently servingas a Finance Manager. Ms. Weisman is active in the industry as Vice Chair ofthe National Association for Printing Leadership and as past Secretary and pastTreasurer of the Print and Graphic Scholarship Foundation of the Graphic Arts.She is a member of the National Association for Printing Leadership’s Walter E.Soderstrom Society. Ms. Weisman holds a B.S. from the College of Notre Dame ofMaryland and an M.B.A. from Loyola College in Maryland.

 

***GaryJ. Kittredge, President and Chief Operating Officer—CCP****.*Mr. Kittredgejoined us in 2000 and has served as President and Chief Operating Officer ofCCP since 2002. From 2000 to 2002, he served as Executive Vice President ofCCP. Prior to joining us, Mr. Kittredge was the General Manager and VicePresident of Manufacturing for IPD Printing. Prior to that, he served as aBusiness Unit Manager and Manager of Technical Development of Litho-Krome Co.,a subsidiary of Hallmark Cards, Incorporated. Mr. Kittredge is a member of theBoard of Directors of the Printing Industry of New England.  He holds a B.S. and an M.S. from RochesterInstitute of Technology.

 

***RobertM. Moore, President and Chief Operating Officer—SBI****.*****Mr. Moore joined us in 2000 and has served asPresident and Chief Operating Officer of SBI since January 2003. From November2001 to January 2003, he served as Vice President of Finance of SBI, and, from2000 to November 2001, Mr. Moore served as Director of Finance of SBI. Prior tojoining us, Mr. Moore held several positions at The Procter & GambleCompany, most recently serving as Assistant Brand Manager, New BusinessDevelopment from 1999 to 2000. He served as Finance Manager, Commercial ProductsGroup from 1998 to 1999 and as Manager, Profit Forecasting for the Food andBeverage Sector from 1997 to 1998. Mr. Moore holds a B.A. from the Universityof Cincinnati.

 

***DavidC. Hewitt, President and Chief Operating Officer—DPC****.*****Mr. Hewitt joined us in 1978 and has served asPresident and Chief Operating Officer of DPC since 1998. From 1970 to 1998, heserved as Executive Vice President and co-owner of DPC. Mr. Hewitt has beenactive in industry affairs. He previously served on the Executive Committee andthe Board of Directors of the Printing Industries of America. He is also pastChair of the Printing Industries of America’s Association Relations Committee.Mr. Hewitt holds a B.A. from Dartmouth College and an M.B.A. from HarvardBusiness School.

 

***J.Kenneth Garner, President and Chief Operating Officer—ULI****.*****Mr. Garner joined us in 1975 and has served asPresident and Chief Operating Officer of ULI since 1994. From 1985 to 1992, heserved as Executive Vice President and Chief Operating Officer of ULI. Mr. Garneris very active in industry affairs and is a past Chairman of the NationalAssociation for Printing Leadership (“NAPL”), a member of the Walter E.Soderstrom Society and the recipient of the 2002 Soderstrom Award.  He is a 

 

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former chairman of the Graphic Arts Education& Research Foundation, Environmental Conservation Board, and the PrintingIndustries of America’s (“PIA’s”) Executive Development Committee.  He is a former director of the Graphic ArtsShow Company and the Printing Industries of Virginia.  He is a current director for the VirginiaPrinting Foundation and is a member of executive committee of The PrintCouncil. Mr. Garner holds a B.A. from Randolph-Macon College.

 

***G.Paul Bozuwa, President—DJS****.*****Mr. Bozuwa joined us in 1991 and has served asPresident of DJS since 2002, when he led the creation of DJS. From 1995 to2002, Mr. Bozuwa served as President and Chief Operating Officer of CCP. From1991 to 1995, he served as Chief Financial Officer of CCP. Mr. Bozuwa is activein industry affairs serving as Chairman of the Finance Committee, Chair of thetask force on Science, Journals, Poverty and Human Development, and pastTreasurer of the Council of Science Editors. Prior to joining us, he was anAssociate of Kearsarge Ventures, a venture fund, from 1989 to 1991. Mr. Bozuwaholds a B.A. from Dartmouth College and an M.B.A. from the University of NewHampshire.

 

***ChristopherA. Pierce—President and Chief Operating Officer—TDP****.***** Mr.Pierce joined us in May 2004, upon the consummation of the Dingley Acquisition,as President and Chief Operating Officer of TDP. From 1980 to the time of theDingley Acquisition, Mr. Pierce served as President of The Dingley Press. Mr.Pierce holds a B.A. from Bowdoin College.

 

***ThomasJ. Baldwin, Director****.*****Mr.Baldwin is a Managing Director of BRS. He joined BRS in 2000. From 1995 to2000, Mr. Baldwin was a Principal at PB Ventures, Inc. From 1988 to 1995, heserved as Vice President and then Managing Director of The INVUS Group, Ltd., aprivate equity investment firm. Prior to that he was a consultant with theBoston Consulting Group, a strategy consulting firm. Mr. Baldwin holds a B.B.A.from Siena College and an M.B.A. from Harvard Business School. Mr. Baldwin isalso a director of Eurofresh, Inc., Lazy Days, Inc. and Totes IsotonerCorporation.

 

***NicholasDaraviras, Director****.*****Mr.Daraviras is a Managing Director of JCP. Mr. Daraviras joined JCP in 1996. Mr.Daraviras holds a B.S. and an M.B.A. from the Wharton School of the Universityof Pennsylvania. Mr. Daraviras also serves as a director of various privatecompanies in which JCP has an interest.

 

***CraigH. Deery, Director****.*Mr. Deery was a Managing Director of JCP from2002 to 2003. He previously served as a member of our board of directors from1995 to 2001. From 1987 to 2002, Mr. Deery was a Managing Director atBancBoston Capital, where he served on the management committee of BancBostonCapital. While at BancBoston Capital, Mr. Deery supervised a direct investment portfolioof $500 million, including mezzanine securities and equity as a minority,co-invest, and control investor. Prior to 1987, Mr. Deery spent fifteen yearsat BancBoston, serving as a team leader in domestic lending and as SeniorCredit Officer and Chairman of the Credit Committee of BancBoston Australia,Ltd. Mr. Deery holds a B.A. from Bucknell University and an M.B.A. from NewYork University.

 

***GaryT. DiCamillo, Director****.*Mr. DiCamillo has been a member of ourboard of directors since 1989. Mr. DiCamillo serves as President, ChiefExecutive Officer and Director of TAC Worldwide Companies in Dedham,Massachusetts since 2002. From 1995 to 2002, Mr. DiCamillo was Chairman andChief Executive Officer of Polaroid Corporation (which filed a voluntary petitionfor reorganization under Chapter 11 of the U.S. Bankruptcy Code on October 12,2001), and from 1993 to 1995 he was President of Worldwide Power Tools forBlack & Decker Corporation. Mr. DiCamillo holds a B.S. from RensselaerPolytechnic Institute and an M.B.A. from Harvard Business School. Mr. DiCamillois also a director of Pella Corporation, 3Com Corporation and WhirlpoolCorporation.

 

***J.Rice Edmonds, Director****.*****Mr. Edmonds is a Principal at BRS. He joined BRSin 1996. From 

 

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1993 to 1996, he worked in the high yieldfinance group of Bankers Trust. Mr. Edmonds holds a B.S. from the University ofVirginia McIntire School of Commerce and an M.B.A. from The Wharton School ofthe University of Pennsylvania. Mr. Edmonds is also a director of McCormick& Schmick Restaurant Corporation, Penhall International, Inc., Real MexRestaurants, Inc., Town Sports International, Inc. and several privatecompanies in which BRS has an interest.

 

***J. M.Dryden Hall, Jr., Director****.*****Mr. Hall has been a member of our board ofdirectors since 1967. Mr. Hall formed and has been the principal in the lawfirm of J.M.D. Hall, Jr., P.A. and its predecessors in Baltimore, Marylandsince 1962. Mr. Hall holds a B.A. from Johns Hopkins University and an L.L.B.from New York University Law School.

 

***James L. Luikart****, **Director***. Mr. Luikart is Executive Vice Presidentof JCP. Mr. Luikart joined JCP in 1994 after spending over twenty years withCiticorp, the last seven years of which were as a Vice President of CiticorpVenture Capital, Ltd. Mr. Luikart holds a B.A. from Yale University and anM.I.A. from Columbia University. Mr. Luikart serves as a director of W & TOffshore, Inc. and various private companies in which JCP has an interest.

 

***NicholasR. Sheppard, Director****.*****Mr. Sheppard is Vice President at BRS. He joinedBRS in 2000. From 1997 to 2000, he worked as a Consultant in the London and NewYork offices of Marakon Associates, a strategy consulting firm. Mr. Sheppard isa graduate of the London School of Economics.

 

***GeorgeA. Whaling, Director****.*****Mr.Whaling has been a member of our board of directors since 1998. Mr. Whaling isChairman of Kingston Capital in Pt. Pleasant, New Jersey. From 1980 to 1997, heserved as the President and owner of Petty Printing Company, a commercial webprinter. Mr. Whaling holds a B.A. from Colgate University. Mr. Whaling is aTrustee of Colgate University and a director of Augusta Glenn Partners, LLC.

 

**BoardComposition**

 

The securities holders agreement amongBRS, JCP and the other stockholders of TSG Holdings Corp. provides that TSGHoldings Corp.’s and our board of directors will consist of ten members,including four designees of BRS (who currently are Messrs. Baldwin, DiCamillo,Edmonds and Sheppard), four designees of JCP (who currently are Messrs.Daraviras, Deery, Luikart and Whaling) and two directors jointly designated byboth BRS and JCP (who currently are Messrs. Hall and Saxton). Pursuant to thesecurities holders agreement, we may not take certain significant actionswithout the approval of each of BRS and JCP. See Part III, Item 13, “CertainRelationships and Related Transactions—Securities Holders Agreement.”

 

**BoardCommittees**

 

The board of directors has an auditcommittee and a compensation committee. The audit committee consists ofMessrs. Daraviras, DiCamillo, Edmonds, Hall and Whaling. The auditcommittee reviews our financial statements and accounting practices and selectsour independent registered public accounting firm. The compensation committeeconsists of Messrs. Baldwin, Deery and Luikart. The compensation committeemakes recommendations to our board of directors concerning salaries andincentive compensation for our officers and employees and administers ouremployee benefit plans.

 

**AuditCommittee Financial Expert**

 

The board of directors has determinedthat Mr. DiCamillo, the chairman of the audit committee, is the “auditcommittee financial expert” as defined in applicable SEC rules andregulations.  

 

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Mr. DiCamillo is “independent” as defined in thelisting standards of the New York Stock Exchange.

 

**Code ofBusiness Conduct**

 

Our Code of Business Conduct applies toall employees of The Sheridan Group, Inc. and all its wholly-owned subsidiaries.  Each supervisor and above has been requiredto sign that they have read, understand and will comply with the Code. ThisCode is posted on our Internet website at http://www.sheridan.com.  If any substantive amendments are made to theCode of Business Conduct or the Board of Directors grants any waiver from aprovision of the Code to any officers of The Sheridan Group, Inc. or itswholly-owned subsidiaries, the nature of such amendment or waiver will bedisclosed on the website at the above address.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

**Compensation of Directors**

 

Each director who is not also one of ourexecutive officers or an employee of BRS or JCP receives a fee of $16,000 peryear for their service on our board of directors. The chairman of the auditcommittee receives an additional fee of $4,000 per year. All directors arereimbursed for any personal expenses incurred in the conduct of their duties asa director.

 

**Compensation of ExecutiveOfficers**

 

The following table summarizescompensation awarded or paid by us during 2004, 2003 and 2002 to our Presidentand Chief Executive Officer and our four next most highly compensated executiveofficers (our “named executive officers”).

 

**Summary Compensation Table**

 
| ** **                         | ** ** | ** ** | ** ** | **Annual  Compensation** |       | ** **       |   |
|------------------------------------|------------|------------|------------|--------------------------|------------|------------------|--------|
| **Name and Principal Position**    | ** ** | **Year**   | ** ** | **Salary**               | ** ** | **Bonus****(1)** |   | **Other Annual  Compensation****(2)** |   | **All Other  Compensation****(3)** |   |
| John A. Saxton                     |       | 2004       |       | $                        | 509,648    |             | $      | 380,000 |   | $ | — |   | $ | 233,847 |   |
| President and Chief Executive      |       | 2003       |       | 500,032                  |       | 326,800          |   | — |   | 277,922 |   |
| Officer                            |       | 2002       |       | 500,032                  |       | 340,200          |   | — |   | 47,170 |   |
| Joan B. Weisman                    |       | 2004       |       | 244,359                  |       | 120,135          |   | — |   | 104,943 |   |
| President and Chief Operating      |       | 2003       |       | 224,850                  |       | 100,835          |   | — |   | 177,459 |   |
| Officer—TSP                   |       | 2002       |       | 214,847                  |       | 107,635          |   | — |   | 91,100 |   |
| Robert M. Jakobe                   |       | 2004       |       | 229,043                  |       | 131,900          |   | — |   | 63,954 |   |
| Vice President and Chief Financial |       | 2003       |       | 209,836                  |       | 85,800           |   | — |   | 132,101 |   |
| Officer                            |       | 2002       |       | 199,079                  |       | 84,700           |   | — |   | 51,416 |   |
| Patricia A. Stricker               |       | 2004       |       | 219,059                  |       | 102,200          |   | — |   | 62,295 |   |
| Vice President, Operations and     |       | 2003       |       | 210,028                  |       | 85,800           |   | — |   | 127,127 |   |
| Human Resources                    |       | 2002       |       | 208,385                  |       | 122,400          |   | — |   | 25,017 |   |
| Paul Bozuwa                        |       | 2004       |       | 225,885                  |       | 89,300           |   | — |   | 64,650 |   |
| President—DJS                 |       | 2003       |       | 224,077                  |       | 74,800           |   | 103,871 |   | 142,238 |   |
|                               |       | 2002       |       | 211,769                  |       | 82,200           |   | — |   | 56,748 |   |
|                                    |            |            |            |                          |            |                  |        |  |  |  |  |  |  |  |  |

 

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(1)   The amounts reported as ‘‘Bonus’’ for 2004, 2003 and 2002consist of bonuses paid as management performance incentive compensation andother minor cash payments. The executive incentive compensation awards for theyears ended December 31, 2004, 2003 and 2002, respectively, were as follows:Mr. Saxton— $380,000, $326,800 and $340,200; Ms. Weisman— $120,000, $100,700and $107,500; Mr. Jakobe— $106,900, $85,800 and $84,700; Ms. Stricker—$102,200, $85,800 and $122,400; and Mr. Bozuwa— $89,300, $74,800 and $82,200.  Mr. Jakobe received a $25,000 cash bonus in2004 for completing the Dingley Acquisition. Ms. Weisman received cash bonuses 

 

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of $135 in 2004, 2003 and 2002.

(2)   The $103,871 reported as ‘‘Other Annual Compensation’’ forMr. Bozuwa in 2003 consisted of taxable relocation income.  The value of certain perquisites and otherpersonal benefits for the named executive officers is not included in theamounts disclosed because it did not exceed for any such named executiveofficer the lesser of $50,000 or 10% of the total annual salary and bonusreported for such named executive officer.

(3)   The amounts reported as ‘‘All Other Compensation’’ for 2004,2003 and 2002 include our contributions to individual 401(k) plan and deferredcompensation accounts in connection with (a) our Profit Sharing Plan, (b) ouremployer matches under our 401(k) plan and (c) our retention awards granted tocertain executive officers, which vest after five years. The profit sharingcontributions for the years ended December 31, 2004, 2003 and 2002,respectively, were as follows: Mr. Saxton— $84,523,  $64,963 and $30,000; Ms. Weisman— $34,615,$32,702 and $32,707; Mr. Jakobe— $29,954, $25,568 and $26,863; Ms. Stricker—$31,243, $20,008 and $0; and Mr. Bozuwa— $0, $0 and $0.  The 401(k) match contributions for the yearsended December 31, 2004, 2003, and 2002, respectively, were as follows: Mr.Saxton— $28,663, $11,687 and $11,951; Ms. Weisman— $9,785, $8,046 and $4,000;Mr. Jakobe— $8,986, $7,114 and $4,000; Ms. Stricker— $9,224, $6,474 and $3,731;and Mr. Bozuwa— $5,779, $6,968 and $1,286. The retention awards for the years ended December 31, 2004, 2003 and2002, respectively, were as follows: Ms. Weisman— $60,000, $56,250 and $53,750;Mr. Jakobe— $22,500, $21,000 and $20,000; Ms. Stricker— $21,500, $21,000 and$21,000; and Mr. Bozuwa— $56,500, $55,000 and $53,000.   The amounts reported as ‘‘All OtherCompensation’’ for 2004, 2003 and 2002 also include taxable insurance benefitsconsisting of disability, life and executive physical costs. The taxableinsurance benefits for the years ended December 31, 2004, 2003 and 2002,respectively, were as follows: Mr. Saxton— $120,661, $7,058 and $5,219; Ms.Weisman— $543, $2,776 and $643; Mr. Jakobe— $2,514, $734 and $553; Ms.Stricker— $328, $2,230 and $286; and Mr. Bozuwa— $2,371, $2,584 and$2,462.  Of the amount paid to Mr. Saxtonfor taxable insurance, $113,849 pertains to a payment regarding a supplementalterm life policy covering the periods 1996 through 2004.  The amounts reported as ‘‘All OtherCompensation’’ for 2003 include recapitalization bonuses payable in connectionwith the Buyout. The recapitalization bonuses were as follows: Mr.Saxton—$194,214; Ms. Weisman—$77,686; Mr. Jakobe—$77,686; Ms. Stricker—$77,414;and Mr. Bozuwa—$77,686.

 

**Option Grants in Last FiscalYear**

 

No stock options were granted to the namedexecutive officers during 2004.

 

**Aggregated Option Exercises in Last Fiscal Yearand Fiscal Year End Option Values**

 
| **Name**             | ** ** | **Shares  Acquired on  Exercise(#)** | ** **      | **Value  Realized  ($)** | ** **        | **Number of  Securities Underlying  Unexercised Options at  Fiscal Year-End** | ** ** | **Value of Unexercised In-  the-Money Options at  Fiscal Year-End****(1)**** ** | ** ** |
|----------------------|------------|--------------------------------------|-----------------|--------------------------|-------------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **Exercisable**      | ** ** | **Unexercisable**                    | **Exercisable** | ** **               | **Unexercisable** |
| John A. Saxton       |       | 0                                    |            |                     | N/A               |                                                                          |       | 1,100                                                                                |       |   | 4,400 |   |   | $ | 14,300 |   |   | $ | 57,200 |   |   |
| Joan B. Weisman      |       | 0                                    |            |                     | N/A               |                                                                          |       | 700                                                                                  |       |   | 2,800 |   |   | 9,100 |   |   | 36,400 |   |   |
| Robert M. Jakobe     |       | 0                                    |            |                     | N/A               |                                                                          |       | 1,100                                                                                |       |   | 4,400 |   |   | 14,300 |   |   | 57,200 |   |   |
| Patricia A. Stricker |       | 0                                    |            |                     | N/A               |                                                                          |       | 540                                                                                  |       |   | 2,160 |   |   | 7,020 |   |   | 28,080 |   |   |
| G. Paul Bozuwa       |       | 0                                    |            |                     | N/A               |                                                                          |       | 600                                                                                  |       |   | 2,400 |   |   | 7,800 |   |   | 31,200 |   |   |

 

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(1)   There is currently no public trading market for the commonstock of TSG Holdings Corp. The board of directors of TSG Holdings Corp. hasdetermined that the fair market value of the common stock of TSG Holdings Corp.was $23.00 per share as of December 31, 2004.

 

**Compensation CommitteeInterlocks and Insider Participation**

 

In 2004, the compensation committeeconsisted of Messrs. Baldwin, Deery and Luikart. None of the members of the compensationcommittee are currently, or have been at any time since the time of ourformation, one of our officers or employees. 

 

As of November 2003, Mr. Saxton wasappointed to the board of directors of TAC Worldwide Companies where he alsoserves on the audit committee. Mr. DiCamillo is the President and ChiefExecutive Officer of TAC Worldwide Companies. Mr. DiCamillo has been a memberof our board of directors since 1989 and effective 2004 became chairman of ouraudit committee.

 

**Reportof the Compensation Committee**

 

The compensation committee is composed ofthree members of our board of directors. The role 

 

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of the compensation committee is to makerecommendations to our board of directors concerning salaries, incentivecompensation and employee benefit programs. The compensation committee reviews and approves employment agreementsand compensation programs or benefit plans for our chief executive officer, ourexecutive officers and certain other management employees.  The compensation committee periodicallycompares our executive compensation levels with those of companies with whichwe believe that we compete in recruitment and retention of senior executives.  The compensation committee also reviews andmakes recommendations with respect to succession planning and managementdevelopment.  The current members of thecompensation committee are Messrs. Baldwin, Deery and Luikart.

 

The following is a summary of policieswhich the compensation committee analyzed in determining the compensation forour executive officers in 2004.

 

*Compensation Philosophy*

 

In reviewing our compensation programs,the compensation committee applies a philosophy which is based on the premisethat our achievements result from the coordinated efforts of all individualsworking toward common objectives.  Wehave developed a compensation policy that is designed to attract and retainqualified senior executives, reward executives for actions that result in thelong-term enhancement of stockholder value and reward results with respect toour financial and operational goals.

 

For 2004, each executive officer’scompensation package was comprised of three elements: (a) base salary whichreflects an individual’s responsibilities, performance and expertise and isdesigned to be competitive with salary levels in effect at printing and othermanufacturing companies of the same size; (b) cash bonuses tied to ourachievement of specified financial goals for the year; and (c) stock optionswhich strengthen the alignment of interests between the executive officers andthe stockholders of TSG Holdings Corp., our parent.  Additionally, retention awards are providedto certain key employees (excluding our chief executive officer) whoseretention is determined by our board of directors to be critical to our ongoingsuccess.

 

*Base Salary*

 

The base salaries for our chief executiveofficer and certain other executive officers are contained in their respectiveemployment agreements and are subject to increase at the discretion of ourboard of directors.  The compensationcommittee has reviewed these agreements and the salaries of other officers andkey management employees and determined that the salaries in place are inkeeping with our compensation philosophy. We establish salaries for executive officers and key managementemployees on the basis of personal performance and by reviewing available data,including published salary surveys regarding compensation of officers ofcomparably sized companies.  The compensationcommittee has reviewed the base salaries of our executive officers and keymanagement employees for 2004 and is of the opinion that such salaries are inline with those paid by comparable companies.

 

*Annual Cash Bonuses*

 

Each of our executive officers, includingour chief executive officer and our named executive officers, are eligible forannual bonuses based upon goals for the year under our management performanceincentive plan, which are reviewed and approved by our board of directors.  Our executive officers are eligible toreceive a maximum award of 50% of base salary, except Mr. Saxton, whose maximumaward is 80% of base salary.  Theseawards for our named executive officers appear as “Bonus” in the SummaryCompensation Table.

 

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*Stock Options Awards*

 

Since October 2003, we have grantedoptions to purchase common stock of TSG Holdings Corp., our parent, to providelong-term equity incentives for selected management employees.  Option grants are designed to align theinterests of officers and employees with those of the stockholders, to provideeach individual with a significant incentive to manage our business from theperspective of an owner and to remain employed by us.  The compensation committee has broaddiscretion to make awards under the Stock-Based Incentive Plan and in doing soconsiders the recipient’s level of responsibility and relative position withinthe company, past performance, potential and annual base salary.

 

*Retention Awards*

 

In 2004, our board of directors continuedto provide retention awards to certain key employees.  Except for our chief executive officer, ournamed executive officers and certain other executive officers received retentionawards in 2004.  The awards for Mr.Bozuwa and Ms. Weisman were in accordance with their employmentagreements.  The other awards were 10% ofbase salary.  As these awards vest fiveyears from the award date, they provide a long-term incentive for therecipients to remain with us.  Theseawards for our named executive officers are captured under “All OtherCompensation” on the Summary Compensation Table.

 

*CEO Compensation*

 

Mr. Saxton joined us in 1995 as ourPresident and Chief Executive Officer and has served on our board of directors since1991.  On February 2, 1998, Mr. Saxtonentered into an employment agreement with us and this agreement wassubsequently amended on April 1, 2000. The agreement established his base salary, a management incentive bonuspercentage and an additional annual bonus equal to $30,000 minus the amount ofcompany contributions to our profit sharing plan for Mr. Saxton’s benefit paidduring the year.  In January 2005, thecompensation committee determined that Mr. Saxton’s base salary should beincreased to $510,000.

 

*Deductibility of Compensation*

 

Section 162(m) of the Internal RevenueCode imposes a $1.0 million limit on the deductibility of compensation paid tocertain executive officers of public companies, unless the compensation meetscertain requirements for “performance-based” compensation.  In determining executive compensation, thecompensation committee considers, among other factors, the possible taxconsequences to us and to the executives. However, tax consequences, including but not limited to taxdeductibility by us, are subject to many factors (such as changes in the taxlaws and regulations or interpretations thereof and the timing and nature ofvarious decisions by executives regarding options and other rights) that arebeyond our control.  In addition, thecompensation committee believes that it is important for it to retain maximumflexibility in designing compensation programs that meet its statedobjectives.  For all of the foregoingreasons, the compensation committee, while considering tax deductibility as oneof its factors in determining compensation, will not limit compensation tothose levels or types of compensation that will be deductible.  The compensation committee will, of course,consider alternative forms of compensation, consistent with its compensationgoals, which preserve deductibility.

 

*Conclusion*

 

The compensation committee believes ithas designed a compensation program that is competitive with the overallindustry and is appropriately aligned with our financial goals and targetedstockholder returns.

 

The compensation committee is pleased tosubmit this report with regard to the above matters.

 

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Thomas J.Baldwin

Craig H. Deery

James L.Luikart

 

**Stock-Based Incentive CompensationPlan**

 

TSG Holdings Corp. adopted a Stock-BasedIncentive Compensation Plan in October 2003. The purpose of the 2003Stock-Based Incentive Compensation Plan, or Stock-Based Incentive CompensationPlan, is to assist us in attracting and retaining valued management employees.The Stock-Based Incentive Compensation Plan will accomplish these goals byallowing eligible employees to receive awards of options to purchase commonstock of TSG Holdings Corp., our parent. Eligible employees will receive optionson terms as determined by TSG Holdings Corp.’s compensation committee. Optionsgranted under the Stock-Based Incentive Compensation Plan will vest over fiveyears, based on both time and company performance. Our previous stock optionplan was terminated as of the closing of the Buyout Transactions in August2003.

 

**Management PerformanceIncentive Plan**

 

Our top thirty-five members of managementparticipate in a management performance incentive plan, which compensates themfor achievement of certain objectives established annually by our board ofdirectors. For 2005, these objectives are based on our EBITDA, as well as theEBITDA of each executive’s operating subsidiary. Under the managementperformance incentive plan, our executive officers are eligible to receive amaximum award of 50% of base salary, except Mr. Saxton, whose maximum award is80% of base salary.

 

**401(k) Plan**

 

We sponsor a defined contribution plan,or 401(k) Plan, intended to qualify under section 401 of the Internal RevenueCode. Substantially all of our employees are eligible to participate in the401(k) Plan on the first day of the month in which the employee has attained 18years of age and 90 days of employment. Employees may make pre-taxcontributions of their eligible compensation, not to exceed the limits underthe Internal Revenue Code.  At all butone company, we match 50% of the employee’s contributions, up to a maximum of4% of the employee’s eligible compensation. The Dingley Press, Inc. matches 25% of the employee’s contributions, upto a maximum of 4% of the employee’s eligible compensation.  In addition, certain contributions from thecompany’s profit sharing plan are deposited into the 401(k) plan.  Certain companies also have a 1% fixedcontribution, for which the 90 days of service is waived.  Employees may direct their investments amongvarious pre-selected investment alternatives. Employer contributions to the 401(k) plan, including profit sharingcontributions, fixed contributions and employer matching contributions, vestafter three years of employment.

 

**Deferred Compensation Plan**

 

In 2000, we established a nonqualifieddeferred compensation program which permits officers, directors and certainmanagement employees to annually elect (via individual contracts) to defer a portionof their compensation, on a pre-tax basis. The benefit is based on the amountof compensation deferred, company make-whole contributions, employerdiscretionary contributions and earnings on the deferrals. The individuals arefully vested in the compensation deferred; however, the make-wholecontributions and the employer discretionary contributions are subject tovesting requirements. At December 31, 2004 and 2003, the fully vested portionwas approximately $1,761,000 and $1,123,000, respectively, and has beenincluded in other non-current liabilities.

 

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Due to new legislation, effectiveDecember 31, 2004, the existing Deferred Compensation Plan was frozen, andeffective January 1, 2005, a new Deferred Compensation Plan wasestablished.  The provisions of the newDeferred Compensation Plan are substantially similar to the provisions of theold Deferred Compensation Plan.

 

We have established a trust fund to holdthe investments under this program. The trust holds shares in registered mutualfunds, in an irrevocable rabbi trust, which are recorded as assets of ours. Asof December 31, 2004 and 2003, total assets held by the trust wereapproximately $2,600,000 and $1,698,000, respectively and are included in otherassets.

 

**Profit Sharing Plan**

 

The Sheridan Group Profit Sharing Plan isan incentive program provided to all eligible employees at each location,excluding Capital City Press and The Dingley Press, Inc.  Capital City Press has a Gainsharing Program,and The Dingley Press, Inc. does not currently provide a profit sharing plan.The annual profit sharing contribution for each participating operatingsubsidiary company is determined by a formula approved by our board ofdirectors.

 

Net profit prior to profit sharing mustbe above 8% for the year for profit sharing to be earned by the operatingsubsidiary. The total dollar contribution for an operating subsidiary cannotexceed 10% of their total payroll for the year. Profit sharing contributions tothe 401(k) plan of approximately $2,103,000, $1,843,000 and $1,548,000 werecharged to operations in 2004, 2003 and 2002, respectively.

 

All of the companies that participate inthe Profit Sharing Plan, except for Dartmouth Printing Company, currentlydeposit profit sharing contributions into the employees’ 401(k) account.Dartmouth Printing Company had an established cash payment policy when theywere acquired, which remains in place, although employees may choose to puttheir cash into their 401(k) account.

 

At Capital City Press, a GainsharingProgram was established in lieu of the Profit Sharing Plan. This program isfocused on production costs as a percentage of production sales and rewards allemployees as annual improvement targets are achieved.  The program covers all union employees at theCapital City Press facilities pursuant to their union agreement.

 

**Change of Control IncentivePlans**

 

In January 2005, our board of directorsapproved change-of-control incentive plans for the benefit of certain officers(currently Messrs. Hewitt, Jakobe, Ehmann, Walters, Kittredge, Moore and Garnerand Ms. Stricker) and our corporate staff employees, under which we agreed thatif any plan beneficiary’s employment is terminated by us or our successorswithout cause, or by the plan beneficiary for ‘‘good reason,’’ within 18 monthsfollowing any change in control, then the terminated plan beneficiary isentitled to receive severance benefits for the applicable period. In the caseof the executive officers, the terminated plan beneficiary is to receive asseverance his or her annual base salary and his or her average annual incentivebonus during the two years preceding his or her termination date for a periodof 18 months, amounts earned under his or her deferred compensation plan willfully vest and he or she will continue to have coverage under our healthinsurance plan for 18 months. In the case of the corporate staff employees, theterminated plan beneficiary is entitled to receive as severance his or herannual base salary for a period equal to the longer of 6 months or a period oftwo weeks for each full year of employment with us and he or she will continueto have coverage under our health insurance plan for such period.

 

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**Employment Agreements**

 

We entered into an employment agreementwith John A. Saxton, our President and Chief Executive Officer, on February 2,1998, and amended this agreement as of April 1, 2000. Under his employmentagreement, Mr. Saxton currently earns a base salary of $510,000 and is entitledto an annual management incentive bonus of up to 80% of his base salary underour management incentive performance plan, subject to increases by boardaction, as well as an additional annual bonus of an amount equal to $30,000 perfiscal year less the amount of our contributions to our profit sharing plan forMr. Saxton’s benefit during such fiscal year. If Mr. Saxton’s employment isterminated by us without cause, or by Mr. Saxton for ‘‘good reason,’’ he is entitledto receive as severance his annual base salary and his average annual incentivebonus during the two years preceding his termination for a period of 24 months.

 

We entered into an employment agreementwith G. Paul Bozuwa, President of DJS, on June 30, 2001, and amended thisagreement as of April 18, 2003. Under his employment agreement, Mr. Bozuwacurrently earns a base salary of $232,000 and is entitled to an annualmanagement incentive bonus of up to 50% of his base salary. In addition to theincentive bonus, Mr. Bozuwa is entitled to an annual retention bonus, payableunder a deferred compensation plan, of 25% of his base salary for each year heremains employed in his current position. Each annual award made pursuant tothe annual retention bonus, plus any growth from investing such reward, becomesfully vested five years after the date the award is paid into the deferredcompensation plan. In the event that Mr. Bozuwa no longer reports directly toJohn A. Saxton, the vesting period for each annual award shall immediatelyadjust to three years instead of five years. If Mr. Bozuwa’s employment isterminated by us without cause, or by Mr. Bozuwa for ‘‘good reason,’’ he isentitled to receive as severance his annual base salary and his average annualincentive bonus during the two years preceding his termination for a period of18 months, amounts earned under his deferred compensation plan will fully vestand he will continue to have coverage under our health insurance plan for 18months.

 

We entered into an employment agreementwith Joan B. Weisman, President and Chief Operating Officer of TSP, on October31, 2001. Under her employment agreement, Ms. Weisman currently earns a basesalary of $255,000 and is entitled to an annual management incentive bonus ofup to 50% of her base salary. In addition to the incentive bonus, Ms. Weismanis entitled to an annual retention bonus, payable under a deferred compensationplan, of 25% of her base salary for each year she remains employed in hercurrent position. Each annual award made pursuant to the annual retentionbonus, plus any growth from investing such reward, becomes fully vested fiveyears after the date the award is paid into the deferred compensation plan. IfMs. Weisman’s employment is terminated by us without cause, or by Ms. Weismanfor ‘‘good reason,’’ she is entitled to receive as severance her annual basesalary and her average annual incentive bonus during the two years precedingher termination for a period of 18 months, amounts earned under her deferredcompensation plan will fully vest and she will continue to have coverage underour health insurance plan for 18 months.

 

DPC entered into an employment agreementwith David C. Hewitt, President and Chief Operating Officer of DPC, on February2, 1998, and amended it on August 1, 2003. Under his employment agreement, Mr.Hewitt currently earns a base salary of $195,000, and is entitled to an annualmanagement incentive bonus of up to 50% of his current base salary.

 

On May 25, 2004, TDP entered into anemployment agreement with Christopher A. Pierce, President and Chief OperatingOfficer of TDP. Under his employment agreement, Mr. Pierce currently earns abase salary of $235,000 and is entitled to an annual management incentive bonusof up to 50% of his base salary. In addition, Mr. Pierce will receive annualnon-compete payments in the amount of $108,000 over the first five years of theagreement. If Mr. Pierce’s employment is terminated by us without cause, or byMr. Pierce for ‘‘good reason,’’ he is entitled to receive as severance hisannual base 

 

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salary and his average annual incentive bonusduring the two years preceding his termination date for a period equal to theseverance period, amounts earned under his deferred compensation plan willfully vest and he will continue to have coverage under our health insuranceplan during the severance period. The severance period will be the longer ofthe time period from the date of termination of his employment until the end ofthe initial five year term or 18 months following the date of termination.

 

**Retention Awards**

 

Annual retention awards are paid tocertain management employees whose retention is determined by our board ofdirectors to be critical to our ongoing success. These awards are deposited inthe deferred compensation plan under the employee’s name and vest after fiveyears. Other than the awards paid in accordance with the employment agreementsof Mr. Bozuwa and Ms. Weisman, these awards are solely awarded at the board ofdirectors’ discretion.  In 2003 and 2004,any awards made outside of an employment agreement were equal to 10% of basesalary.

 
| **ITEM 12.** | ** ** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED STOCKHOLDER MATTERS** |
|--------------|------------|-----------------------------------------------------------------------------------------------------|

 

We are a wholly-owned subsidiary of TSGHoldings Corp. The following table sets forth certain information regarding thebeneficial ownership of TSG Holdings Corp., as of March 25, 2005, by (i) eachperson or entity known to us to own more than 5% of any class of TSG HoldingsCorp.’s outstanding securities, (ii) each known member of our board ofdirectors and each of our named executive officers and (iii) all of the membersof the board of directors and executive officers as a group. TSG Holdings Corp.’soutstanding securities consist of about 539,600 shares of TSG Holdings Corp.common stock and about 45,327 shares of TSG Holdings Corp. preferred stock, theterms of which are described in more detail below. To our knowledge, each ofsuch stockholders will have sole voting and investment power as to the stockshown unless otherwise noted. Beneficial ownership of the securities listed inthe table has been determined in accordance with the applicable rules andregulation promulgated under the Exchange Act.

 
| ** **                                               | ** ** | **Number and Percent of Shares of TSG Holdings Corp.****(1)** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                               | ** ** | **Preferred Stock**                                           | ** ** | **Common Stock** | ** ** |
| ** **                                               | ** ** | **Number**                                                    | ** ** | **Percent** | ** ** | **Number** | ** ** | **Percent** | ** ** |
| **Greater than 5% Stockholders:**                        |       |                                                          |       |   |   |   |   |   |   |   |   |
| Bruckmann, Rosser, Sherrill & Co. II, L.P.(2)   |       |                                                          |       |   |   |   |   |   |   |   |   |
| 126 East 56th Street New York, New York 10022            |       | 19,209.704                                                    |       | 42.4 | % |   | 228,687 |   | 42.4 | % |   |
| Funds affiliated with Jefferies Capital Partners(3)      |       |                                                          |       |   |   |   |   |   |   |   |   |
| 520 Madison Avenue, 12th Floor New  York, New York 10022 |       | 19,209.704                                                    |       | 42.4 | % |   | 228,687 |   | 42.4 | % |   |
| Christopher A. Pierce(4)(5)                              |       | 3,096.224                                                     |       | 6.8 | % |   | 37,500 |   | 6.9 | % |   |
| **Named Executive Officers and Directors:**              |       |                                                          |       |   |   |   |   |   |   |   |   |
| John A. Saxton(4)(6)(7)                                  |       | 1,340.426                                                     |       | 3.0 | % |   | 17,057 |   | 3.2 | % |   |
| Robert M. Jakobe(4)(8)(9)                                |       | 89.362                                                        |       | * |   |   | 2,164 |   | * |   |   |
| Patricia A. Stricker(4)(10)                              |       | 27.999                                                        |       | * |   |   | 873 |   | * |   |   |
| Joan B. Weisman(4)(11)                                   |       | 67.021                                                        |       | * |   |   | 1,498 |   | * |   |   |
| G. Paul Bozuwa(4)(12)                                    |       | 268.085                                                       |       | * |   |   | 3,791 |   | * |   |   |
| Thomas J. Baldwin(13)(14)                                |       | 19,209.704                                                    |       | 42.4 | % |   | 228,687 |   | 42.4 | % |   |
| Nicholas Daraviras(15)                                   |       | —                                                        |       | — |   |   | — |   | — |   |   |
| Craig H. Deery(4)                                        |       | 244.616                                                       |       | * |   |   | 2,912 |   | * |   |   |
| Gary T. DiCamillo(4)                                     |       | 268.085                                                       |       | * |   |   | 3,191 |   | * |   |   |
| J. Rice Edmonds(13)                                      |       | —                                                        |       | — |   |   | — |   | — |   |   |
| J. M. Dryden Hall, Jr.(4)                                |       | 89.362                                                        |       | * |   |   | 1,064 |   | * |   |   |

 

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| James L. Luikart(15)(16)                                         |   | 19,209.704 |   | 42.4   | %      |   | 228,687 |   | 42.4   | %      |   |
|------------------------------------------------------------------|--------|------------|--------|--------|--------|--------|---------|--------|--------|--------|--------|
| Nicholas R. Sheppard(13)                                         |   | —     |   | — |   |   | —  |   | — |   |   |
| George A. Whaling(4)                                             |   | 272.040    |   | *      |   |   | 3,239   |   | *      |   |   |
| All executive officers and directors as a group (20 persons)(17) |   | 44,876.841 |   | 99.0   | %      |   | 541,608 |   | 99.0   | %      |   |

 

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*indicates less than 1%

 

(1)   Pursuant to Rule 13d-3 underthe Securities Exchange Act of 1934, as amended, a person has beneficialownership of any securities as to which such person, directly or indirectly,through any contract, arrangement, undertaking, relationship or otherwise hasor shares voting power and/or investment power and as to which such person hasthe right to acquire such voting and/or investment power within 60 days.Percentage of beneficial ownership as to any person as of a particular date iscalculated by dividing the number of shares beneficially owned by such personby the sum of the number of shares outstanding as of such date and the numberof shares as to which such person has the right to acquire voting and/orinvestment power within 60 days.

(2)   Bruckmann, Rosser, Sherrill& Co. II, L.P. (the ‘‘BRS Fund’’) is a private equity investment fundmanaged by Bruckmann, Rosser, Sherrill & Co., LLC. BRSE, L.L.C. (‘‘BRSE’’)is the general partner of the BRS Fund and by virtue of such status may bedeemed to be the beneficial owner of the shares owned by the BRS Fund. BRSE hasthe power to direct the BRS Fund as to the voting and disposition of sharesheld by the BRS Fund. No single person controls the voting and dispositivepower of BRSE with respect to the shares owned by the BRS Fund. BruceBruckmann, Harold O. Rosser, Stephen C. Sherrill, Paul D. Kaminski and ThomasJ. Baldwin are the managers of BRSE, and none of them individually has thepower to direct or veto the voting or disposition of shares owned by the BRSFund. BRSE expressly disclaims beneficial ownership of the shares owned by theBRS Fund. Each of Messrs. Bruckmann, Rosser, Sherrill, Kaminski and Baldwinexpressly disclaims beneficial ownership of the shares owned by the BRS Fund.Also includes (a) 25.049 and 5.763 shares of TSG Holdings Corp. preferred stockheld by Julie Frist and Marilena Tibrea, respectively, and (b) 298 and 69shares of TSG Holdings Corp. common stock held by Julie Frist and MarilenaTibrea, respectively. Ms. Frist and Ms. Tibrea are former employees of BRS andBRS retains voting control of the shares of TSG Holdings Corp. preferred stockand TSG Holdings Corp. common stock held by them.

(3)   Consists of (a) 13,385.226shares of TSG Holdings Corp. preferred stock held by ING Furman Selz InvestorsIII L.P., 4,729.477 shares of TSG Holdings Corp. preferred stock held by INGBarings U.S. Leveraged Equity Plan LLC and 1,095.001 shares of TSG HoldingsCorp. preferred stock held by ING Barings Global Leveraged Equity Plan Ltd. and(b) 159,348 shares of TSG Holdings Corp. common stock held by ING Furman SelzInvestors III L.P., 56,303 shares of TSG Holdings Corp. common stock held byING Barings U.S. Leveraged Equity Plan LLC and 13,036 shares of TSG HoldingsCorp. common stock held by ING Barings Global Leveraged Equity Plan Ltd. INGFurman Selz Investors III L.P., ING Barings U.S. Leveraged Equity Plan LLC andING Barings Global Leveraged Equity Plan Ltd. are private equity investmentfunds managed by Jefferies Capital Partners. Brian P. Friedman and Mr. Luikartare the Managing Members of JCP and may be considered the beneficial owners ofthe shares owned by ING Furman Selz Investors III L.P., ING Barings U.S.Leveraged Equity Plan LLC and ING Barings Global Leveraged Equity Plan Ltd.,but each of Messrs. Friedman and Luikart expressly disclaim beneficialownership of such shares, except to the extent of each of their pecuniaryinterests therein.

(4)   The address of each of Mr.Saxton, Mr. Jakobe, Ms. Stricker, Ms. Weisman, Mr. Bozuwa, Mr. Pierce, Mr. Deery,Mr. DiCamillo, Mr. Hall and Mr. Whaling is c/o The Sheridan Group, Inc., 11311McCormick Road, S260, Hunt Valley, Maryland 21031.

(5)   Includes options to purchase640 shares of TSG Holdings Corp. common stock exercisable within 60 days.

(6)   Includes 15,957 shares whichare owned by LMWW Custodian FBO John A. Saxton Roll-over IRA. Mr. Saxton may bedeemed to beneficially own such shares.

(7)   Includes options to purchase1,100 shares of TSG Holdings Corp. common stock exercisable within 60 days.

(8)   Includes 1,064 shares which areowned by LMWW Custodian FBO Robert M. Jakobe Roll-over IRA. Mr. Jakobe may bedeemed to beneficially own such shares.

(9)   Includes options to purchase1,100 shares of TSG Holdings Corp. common stock exercisable within 60 days.

(10)Includes options to purchase540 shares of TSG Holdings Corp. common stock exercisable within 60 days.

(11)Includes options to purchase700 shares of TSG Holdings Corp. common stock exercisable within 60 days.

(12)Includes options to purchase600 shares of TSG Holdings Corp. common stock exercisable within 60 days.

(13)The address of each of Mr.Baldwin, Mr. Edmonds and Mr. Sheppard is c/o Bruckmann, Rosser, Sherrill &Co., Inc.,

 

75

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126 East 56th Street, NewYork, New York 10022.

 

(14)Consists of 19,209.704 sharesof TSG Holdings Corp. preferred stock and 228,687 shares of TSG Holdings Corp.common stock owned and/or controlled by the BRS Fund. Mr. Baldwin may be deemedto share beneficial ownership of the shares owned of record and/or controlledby the BRS Fund by virtue of his status as a manager of BRSE, but he expresslydisclaims such beneficial ownership of the shares owned and/or controlled bythe BRS Fund. The members and managers of BRSE share investment and votingpower with respect to securities owned and/or controlled by the BRS Fund, butno individual controls such investment or voting power.

(15)The address of each of Mr.Daraviras and Mr. Luikart is c/o Jefferies Capital Partners, 520 MadisonAvenue, 12th Floor, New York, New York 10022.

(16)Consists of 19,209.704 sharesof TSG Holdings Corp. preferred stock and 228,687 shares of TSG Holdings Corp.common stock owned by ING Furman Selz Investors III L.P., ING Barings U.S.Leveraged Equity Plan LLC and ING Barings Global Leveraged Equity Plan Ltd. Mr.Luikart is a Managing Member of JCP and may be considered the beneficial ownerof such shares, but he expressly disclaims such beneficial ownership of theshares owned by ING Furman Selz Investors III L.P., ING Barings U.S. LeveragedEquity Plan LLC and ING Barings Global Leveraged Equity Plan Ltd., except tothe extent of his pecuniary interest therein.

(17)Includes options to purchase 7,360shares of TSG Holdings Corp. common stock exercisable within 60 days.

 

**TSGHoldings Corp. Preferred Stock**

 

TSG Holdings Corp.’s Certificate ofIncorporation provides that TSG Holdings Corp. may issue 100,000 shares ofpreferred stock, 75,000 of which is designated as 10% Series A CumulativeCompounding Preferred Stock and 25,000 of which is undesignated. TSG HoldingsCorp. preferred stock has a stated value of $1,000 per share and is entitled toannual dividends when, as and if declared, which dividends will be cumulative,whether or not earned or declared, and will accrue at a rate of 10%,compounding annually. As of March 25, 2005, there are issued and outstandingabout 45,327 shares of TSG Holdings Corp. preferred stock.

 

Except as otherwise required by law, theTSG Holdings Corp. preferred stock is not entitled to vote. TSG Holdings Corp.may not pay any dividend upon (except for a dividend payable in Junior Stock,as defined below), or redeem or otherwise acquire shares of, capital stockjunior to the TSG Holdings Corp. preferred stock (including the common stock) (“JuniorStock”) unless all cumulative dividends on the TSG Holdings Corp. preferredstock have been paid in full. Upon liquidation, dissolution or winding up ofTSG Holdings Corp., holders of TSG Holdings Corp. preferred stock are entitledto receive out of the legally available assets of TSG Holdings Corp., beforeany amount shall be paid to holders of Junior Stock, an amount equal to $1,000per share of TSG Holdings Corp. preferred stock, plus all accrued and unpaiddividends to the date of final distribution. If the available assets areinsufficient to pay the holders of the outstanding shares of TSG Holdings Corp.preferred stock in full, the assets, or the proceeds from the sale of theassets, will be distributed ratably among the holders.  The TSG Holdings Corp. preferred stock is notredeemable.

 

**TSGHoldings Corp. Common Stock**

 

The Certificate of Incorporation of TSGHoldings Corp. provides that TSG Holdings Corp. may issue 1,000,000 shares ofTSG Holdings Corp. common stock. About 539,600 shares of TSG Holdings Corp.common stock are issued and outstanding as of March 25, 2005. The holders ofTSG Holdings Corp. common stock are entitled to one vote for each share held ofrecord on all matters submitted to a vote of the stockholders.

 

**Equity Compensation Plan Information**

 

The following table sets forthinformation as of December 31, 2004 regarding all of our existingcompensation plans pursuant to which equity securities are authorized forissuance to employees and non-employee directors.

 

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| **Plan Category**                                           | ** ** | **Number of securities to   be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights(1)** | ** ** | **Number of Securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected  in column (a))** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                             | ** ** | **(b)**                                                                               | ** ** | **(c)**                                                                                                                                                    | ** ** |
| ** **                                                  | ** ** | ** **                                                                                          | ** ** | ** **                                                                            | ** ** | ** **                                                                                                                                                 | ** ** |
| Equity compensation plans approved by  security holders     |       | N/A                                                                                                 |       | N/A                                                                                   |       | N/A                                                                                                                                                        |       |
| Equity compensation plans not approved by  security holders |       | 55,500                                                                                              |       | $                                                                                     | 10.00      |                                                                                                                                                       |       | 900 |   |
| Total                                                       |       | 55,500                                                                                              |       | $                                                                                     | 10.00      |                                                                                                                                                       |       | 900 |   |

 

----

(1)   As of December 31, 2004.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

**Securities Holders Agreement**

 

At the closing of the BuyoutTransactions, TSG Holdings Corp. entered into a securities holders agreementwith BRS, JCP and the management investors. The securities holders agreementprovides that TSG Holdings Corp.’s and our board of directors will consist often members, including four designees of BRS, four designees of JCP and twodirectors jointly designated by both BRS and JCP. Also pursuant to thesecurities holders agreement, we may not take certain significant actions, suchas incurrences of indebtedness in excess of certain thresholds or a sale of allor substantially all of our assets, without the approval of each of BRS andJCP.

 

The securities holders agreementgenerally restricts the transfer of shares of TSG Holdings Corp. common stockor TSG Holdings Corp. preferred stock without the consent of BRS and JCP.Exceptions to this restriction include transfers to affiliates and transfersfor estate planning purposes, in each case so long as any transferee agrees tobe bound by the terms of the agreement.

 

Each of TSG Holdings Corp., BRS and JCPhas a right of first refusal under the securities holders agreement withrespect to sales of shares of TSG Holdings Corp. by management investors. Undercertain circumstances, the stockholders have ‘‘tag-along’’ rights to sell theirshares on a pro rata basis with the selling stockholder in certain sales tothird parties. If BRS and JCP approve a sale of TSG Holdings Corp., they havethe right to require the other stockholders of TSG Holdings Corp. to sell theirshares on the same terms. The securities holders agreement also contains aprovision that gives TSG Holdings Corp. the right to repurchase a managementinvestor’s shares upon termination of that management stockholder’s employmentor removal or resignation from the board of directors.

 

**Registration Rights Agreement**

 

At the closing of the BuyoutTransactions, TSG Holdings Corp., BRS, JCP and the management investors enteredinto a registration rights agreement. Pursuant to the registration rightsagreement, upon the written request of either BRS or JCP, TSG Holdings Corp.has agreed to, on one or more occasions, prepare and file a registrationstatement with the SEC concerning the distribution of all or part of the sharesof TSG Holdings Corp. common stock held by BRS or JCP or certain of their respectiveaffiliates, as the case may be, and use its best efforts to cause theregistration statement to 

 

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become effective. Following an initial publicoffering of TSG Holdings Corp., BRS, JCP and the management investors also havethe right, subject to certain exceptions and rights of priority, to have theirshares included in certain registration statements filed by TSG Holdings Corp.Registration expenses of the selling stockholders (other than underwritingdiscounts and commissions and transfer taxes applicable to the shares sold bysuch stockholders or the fees and expenses of any accountants or otherrepresentatives retained by a selling stockholder) will be paid by TSG HoldingsCorp. TSG Holdings Corp. has also agreed to indemnify the stockholders againstcertain customary liabilities in connection with any registration.

 

**Management Agreement**

 

In connection with the BuyoutTransactions, we entered into a management agreement with BRS and JCP pursuant towhich BRS and JCP may provide financial, advisory and consulting services tous. In exchange for these services, BRS and JCP will be entitled to an annualmanagement fee. The total management fee will be equal to the greater of 2% ofEBITDA (as defined in the Management Agreement) or $0.5 million per year, plusreasonable out-of-pocket expenses and will be split equally between BRS andJCP. In addition, BRS and JCP may negotiate with us to provide additionalservices in connection with any transaction in which we may be, or may considerbecoming, involved. At the closing of the Acquisition, BRS and JCP also werepaid a transaction fee of about $1.0 million, plus reasonable out-of-pocketexpenses, pursuant to the management agreement. The management agreement has aninitial term of ten years. The agreement automatically renews for additionalone year terms unless either we or BRS and JCP give written notice oftermination within 90 days prior to the expiration of the initial term or anyextension thereof. There are no minimum levels of service required to beprovided pursuant to the management agreement. The management agreementincludes customary indemnification provisions in favor of BRS and JCP.

 

**Stock Option Grant**

 

In May 2004, TSG Holdings Corp. grantedoptions to purchase about 3,200 shares of TSG Holdings Corp. common stockpursuant to the Stock-Based Incentive Compensation Plan to Mr. Pierce. Theseoptions have an exercise price of $10.00 per share and will vest over fiveyears, based on both time and company performance.

 

**Securities Purchase Agreement**

 

At the closing of the DingleyAcquisition, TSG Holdings Corp. entered into agreements with certain members ofmanagement of The Dingley Press who were offered the opportunity to acquireshares of TSG Holdings Corp. Pursuant to these agreements, these managementinvestors purchased shares of TSG Holdings Corp. common stock and TSG HoldingsCorp. preferred stock having a combined aggregate value of about $4.0 million.

 

**Agreements with Our Officers andDirectors**

 

We employ J. M. Dryden Hall, Jr., amember of our board of directors, to serve as our company counsel. In 2004, ourfees paid to Mr. Hall totaled $55,800.

 

**Other Related Party Transactionsand Matters**

 

Ms. Stricker, Vice President, Operationsand Human Resources, and Ms. Weisman, President and Chief Operating Officer ofTSP, are sisters.

 

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**ITEM 14.  PRINCIPALACCOUNTING FEES AND SERVICES**

 

The Company incurred fees forservices performed by PricewaterhouseCoopers LLP as follows:

 
| ** **                                                                                                                                                                                                                                                 | ** ** | **Successor Basis** | ** **  | ** **             | **Predecessor Basis** | ** **   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|-------------|------------------------|-----------------------|--------------|
| ** **                                                                                                                                                                                                                                                 | ** ** | ** **          | ** **  | **Four-months and**    | ** **            | ** **   | **Seven-months and** | ** ** |
| ** **                                                                                                                                                                                                                                                 | ** ** | **Year ended**      | ** **  | **eleven-days**        | ** **            | ** **   | **twenty-days ended** | ** ** |
| ** **                                                                                                                                                                                                                                                 | ** ** | **December 31,**    | ** **  | **ended December 31,** | *** ***          | *** *** | **August 20,** | *** *** |
| **(Dollars in thousands)**                                                                                                                                                                                                                                 | ** ** | **2004**            | ** **  | **2003**               | ** **            | ** **   | **2003** | ** ** |
| ** **                                                                                                                                                                                                                                                 | ** ** | ** **          | ** **  | ** **             | ** **            | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Audit fees (include the review of interim  consolidated financial statements, annual audit of the consolidated financial  statements, procedures related to offerings of notes, comfort letters, SEC  registration and assistance with other SEC  filings) |       | $                   |  1,146 |                   |                  | $            |   779 |   |   |   | $ |   22 | ** ** | ** ** |
|                                                                                                                                                                                                                                                       |       |                |        |                   |                  |         |   |   |   |   | ** ** | ** ** |
| Audit-related fees (include  the annual audit of the 401K plan, review of internal controls and due diligence related to acquisitions)                                                                                                                     |       | 665                 |        |                   | 216                   |         |   |   | 12 | ** ** | ** ** |
|                                                                                                                                                                                                                                                       |       |                |        |                   |                  |         |   |   |   | ** ** | ** ** |
| Tax fees (include tax compliance, transactional  consulting and advice for federal and state tax issues)                                                                                                                                                   |       | 284                 |        |                   | 260                   |         |   |   | 48 | ** ** | ** ** |
|                                                                                                                                                                                                                                                       |       |                |        |                   |                  |         |   |   |   | ** ** | ** ** |
| All other fees                                                                                                                                                                                                                                             |       | —              |        |                   | —                |         |   |   | — | ** ** | ** ** |
|                                                                                                                                                                                                                                                       |       |                |        |                   |                  |         |   |   |   | ** ** | ** ** |
| Total                                                                                                                                                                                                                                                      |       | $                   |  2,095 |                   |                  | $            |  1,255 |   |   |   | $ |   82 | ** ** | ** ** |
|                                                                                                                                                                                                                                                            |            |                     |             |                        |                       |              |  |  |  |  |  |  |  |  |  |

 

We became a public registranton October 13, 2004.  The services PricewaterhouseCoopersLLP Performed prior to this date were not required to be approved by our auditcommittee.  After October 13, 2004, allservices performed by PricewaterhouseCoopers LLP have been or will be approvedby the audit committee prior to performance in accordance with legalrequirements.

 

**PART IV**

 

**ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

(a)  The following documents are filed as part ofthis Annual Report on Form 10-K:

 

(1)       All Financial Statements:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                      | ** ** | Page  No. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|
| Reports of Independent Registered Public  Accounting Firm                                                                                                                                                                                                                                                                                                                                       | 31-32      |
| Consolidated balance sheets as of December 31, 2004 and 2003                                                                                                                                                                                                                                                                                                                                    | 33         |
| Consolidated statements of income for the  year ended December 31, 2004, and for the four-months and eleven-days ended  December 31, 2003, on a successor basis, and for the seven-months and  twenty-days ended August 20, 2003, and for the year ended December 31, 2002,  on a predecessor basis                                                                                             | 34         |
| Consolidated statements of changes in  stockholders’ equity (deficit) and mandatorily redeemable convertible  preferred stock for the year ended December 31, 2004, for the four-months and  eleven-days ended December 31, 2003, on a successor basis, and for the  seven-months and twenty-days ended August 20, 2003, and for the year ended  December 31, 2002, on a predecessor basis | 35         |
| Consolidated statements of cash flows for  the year ended December 31, 2004, and for the four-months and eleven-days  ended December 31, 2003, on a successor basis, and for the seven-months and  twenty-days ended August 20, 2003, and for the year ended December 31, 2002,  on a predecessor basis                                                                                         | 36    |
| Notes to consolidated financial statements                                                                                                                                                                                                                                                                                                                                                      | 37-62      |

 

(2)       Financial Statement Schedules:

 

All schedules have been omitted becausethey are not applicable or the required information is included in theconsolidated financial statements and the footnotes thereto.

 

(3)       Exhibits

 

The following is a list of exhibits filedas part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed areincorporated by reference.

 

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| 2.1  |   | Stock  Purchase Agreement, dated as of August 1, 2003, by and among Sheridan  Acquisition Corp., The Sheridan Group, Inc. and the shareholders,  optionholders and warrantholders named therein.†                                                                                                                                                                                              |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2  |   | First  Amendment to Stock Purchase Agreement, dated as of August 21, 2003, by and  among Sheridan Acquisition Corp., The Sheridan Group, Inc. and BancBoston  Ventures Inc. and John A. Saxton, on behalf of and solely in their capacity  as representatives of all of the Sellers (as defined in the Stock Purchase  Agreement).†                                                            |
| 2.3  |   | Asset  Purchase Agreement, dated as of March 5, 2004, by and among The Sheridan  Group, Inc., Lisbon Acquisition Corp. and The Dingley Press.†                                                                                                                                                                                                                                                 |
| 3.1  |   | Amended  and Restated Certificate of Incorporation of TSG Holdings Corp.†                                                                                                                                                                                                                                                                                                                      |
| 3.2  |   | Amended  and Restated Bylaws of TSG Holdings Corp.†                                                                                                                                                                                                                                                                                                                                            |
| 3.3  |   | Amended  and Restated Articles of Incorporation of The Sheridan Group, Inc.†                                                                                                                                                                                                                                                                                                                   |
| 3.4  |   | Amended  and Restated Bylaws of The Sheridan Group, Inc.†                                                                                                                                                                                                                                                                                                                                      |
| 3.5  |   | Restated  and Amended Articles of Association of Capital City Press, Inc.†                                                                                                                                                                                                                                                                                                                     |
| 3.6  |   | Restated  and Amended By-laws of Capital City Press, Inc.†                                                                                                                                                                                                                                                                                                                                     |
| 3.7  |   | Articles  of Incorporation of Dartmouth Journal Services, Inc.†                                                                                                                                                                                                                                                                                                                                |
| 3.8  |   | Bylaws  of Dartmouth Journal Services, Inc.†                                                                                                                                                                                                                                                                                                                                                   |
| 3.9  |   | Articles  of Agreement of Dartmouth Printing Company, as amended.†                                                                                                                                                                                                                                                                                                                             |
| 3.10 |   | By-Laws  of Dartmouth Printing Company.†                                                                                                                                                                                                                                                                                                                                                       |
| 3.11 |   | Certificate  of Incorporation of Sheridan Books, Inc., as amended.†                                                                                                                                                                                                                                                                                                                            |
| 3.12 |   | By-laws  of Sheridan Books, Inc.†                                                                                                                                                                                                                                                                                                                                                              |
| 3.13 |   | Certificate  of Incorporation of The Sheridan Group Holding Company.†                                                                                                                                                                                                                                                                                                                          |
| 3.14 |   | By-Laws  of The Sheridan Group Holding Company.†                                                                                                                                                                                                                                                                                                                                               |
| 3.15 |   | Amended  and Restated Articles of Incorporation of The Sheridan Press, Inc.†                                                                                                                                                                                                                                                                                                                   |
| 3.16 |   | By-Laws  of The Sheridan Press, Inc.†                                                                                                                                                                                                                                                                                                                                                          |
| 3.17 |   | Amendment  and Restatement of Articles of Incorporation of United Litho, Inc.†                                                                                                                                                                                                                                                                                                                 |
| 3.18 |   | By-Laws  of United Litho, Inc.†                                                                                                                                                                                                                                                                                                                                                                |
| 3.19 |   | Amended  and Restated Certificate of Incorporation of The Dingley Press, Inc.†                                                                                                                                                                                                                                                                                                                 |
| 3.20 |   | Bylaws  of The Dingley Press, Inc.†                                                                                                                                                                                                                                                                                                                                                            |
| 4.1  |   | Indenture,  dated as of August 21, 2003, among Sheridan Acquisition Corp. and The Bank of  New York, as trustee and notes collateral agent.†                                                                                                                                                                                                                                                   |
| 4.2  |   | Supplemental  Indenture, dated as of August 21, 2003, among Capital City Press, Inc.,  Dartmouth Printing Company, Dartmouth Journal Services, Inc., Sheridan Books,  Inc., The Sheridan Group Holding Company, The Sheridan Press, Inc., United  Litho, Inc. and The Bank of New York, as trustee and notes collateral agent.†                                                                |
| 4.3  |   | Form  of 101⁄4% Senior Secured Note Due 2011 (included in Exhibit 4.1).†                                                                                                                                                                                                                                                                                                                    |
| 4.4  |   | Registration  Rights Agreement, dated as of August 21, 2003, by and between Sheridan  Acquisition Corp. and Jefferies & Company, Inc.†                                                                                                                                                                                                                                                     |
| 4.5  |   | Joinder  to the Registration Rights Agreement, dated as of August 21, 2003, by and  among Capital City Press, Inc., Dartmouth Printing Company, Dartmouth Journal  Services, Inc., Sheridan Books, Inc., The Sheridan Group Holding Company, The  Sheridan Press, Inc., United Litho, Inc. and Jefferies & Company, Inc.†                                                                  |
| 4.6  |   | Second  Supplemental Indenture, dated as of May 11, 2004, by and among The Sheridan  Group, Inc., Lisbon Acquisition Corp. and The Bank of New York, as trustee  and notes collateral agent.†                                                                                                                                                                                                  |
| 4.7  |   | Third  Supplemental Indenture, dated as of May 11, 2004, by and among The Sheridan  Group, Inc., Capital City Press, Inc., Dartmouth Printing Company, Dartmouth  Journal Services, Inc., Lisbon Acquisition Corp., Sheridan Books, Inc., The  Sheridan Group Holding Company, The Sheridan Press, Inc., United Litho, Inc.  and The Bank of New York, as trustee and notes collateral agent.† |

 

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| 4.8   |   | Registration  Rights Agreement, dated as of May 25, 2004, by and among The Sheridan Group,  Inc., Capital City Press, Inc., Dartmouth Printing Company, Dartmouth Journal  Services, Inc., Lisbon Acquisition Corp., Sheridan Books, Inc., The Sheridan  Group Holding Company, The Sheridan Press, Inc., United Litho, Inc. and  Jefferies & Company, Inc.†                 |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  |   | Amended  and Restated Revolving Credit Agreement, dated as of May 25, 2004, by and  among The Sheridan Group, Inc., Fleet National Bank, as administrative agent,  issuer and a lender, and the other financial institutions party thereto.†                                                                                                                                     |
| 10.2  |   | Intercreditor  Agreement, dated as of August 21, 2003, among Sheridan Acquisition Corp., The  Sheridan Group, Inc., the guarantors signatory thereto, The Bank of New York,  as trustee and collateral agent, and Fleet National Bank.†                                                                                                                                          |
| 10.3  |   | Securities  Holders Agreement, dated as of August 21, 2003, by and among TSG Holdings  Corp., Bruckmann, Rosser, Sherrill & Co. II, L.P., ING Furman Selz  Investors III L.P., ING Barings Global Leveraged Equity Plan Ltd., ING  Barings U.S. Leveraged Equity Plan LLC and the management investors named  therein.†                                                      |
| 10.4  |   | Registration  Rights Agreement, dated as of August 21, 2003, by and among TSG Holdings  Corp., Bruckmann, Rosser, Sherrill & Co. II, L.P., ING Furman Selz  Investors III L.P., ING Barings Global Leveraged Equity Plan Ltd., ING  Barings U.S. Leveraged Equity Plan LLC and the management investors named  therein.†                                                     |
| 10.5  |   | Securities  Purchase Agreement, dated as of August 21, 2003, by and among TSG Holdings  Corp., Bruckmann, Rosser, Sherrill & Co. II, L.P., ING Furman Selz  Investors III L.P., ING Barings Global Leveraged Equity Plan Ltd. and ING  Barings U.S. Leveraged Equity Plan LLC.†                                                                                              |
| 10.6  |   | Securities  Purchase and Exchange Agreement, dated as of August 21, 2003, by and among  TSG Holdings Corp. and the management investors named therein.†                                                                                                                                                                                                                          |
| 10.7  |   | Management  Agreement, dated as of August 21, 2003, by and among Bruckmann, Rosser,  Sherrill & Co., LLC, FS Private Investments III LLC (d/b/a Jefferies  Capital Partners) and Sheridan Acquisition Corp.†                                                                                                                                                                 |
| 10.8  |   | Employment  and Non-Competition Agreement, dated as of January 2, 1998, between The  Sheridan Group, Inc. and John A. Saxton, as amended by First Amendment to  Employment Agreement, dated as of April 1, 2000.†*                                                                                                                                                               |
| 10.9  |   | Employment  and Non-Competition Agreement, dated as of June 30, 2001, between The  Sheridan Group, Inc. and G. Paul Bozuwa, as amended by First Amendment to  Employment Agreement, dated as of April 18, 2003.†*                                                                                                                                                                |
| 10.10 |   | Employment  and Non-Competition Agreement, dated as of October 31, 2001, between The  Sheridan Group, Inc. and Joan B. Weisman.†*                                                                                                                                                                                                                                                |
| 10.11 |   | TSG  Holdings Corp. 2003 Stock-Based Incentive Compensation Plan.†*                                                                                                                                                                                                                                                                                                              |
| 10.12 |   | The  Sheridan Group, Inc. Executive and Director Deferred Compensation Plan.†*                                                                                                                                                                                                                                                                                                   |
| 10.13 |   | The  Sheridan Group, Inc. Change-of-Control Incentive Plan for Corporate Staff.*                                                                                                                                                                                                                                                                                                      |
| 10.14 |   | The  Sheridan Group, Inc. Change-of-Control Incentive Plan for Key Management  Employees.*                                                                                                                                                                                                                                                                                            |
| 10.15 |   | Amendment  No. 1 to Intercreditor Agreement, dated as of May 11, 2004, by and among The  Sheridan Group, Inc., the guarantors signatory thereto, The Bank of New York,  as trustee and collateral agent, and Fleet National Bank.†                                                                                                                                               |
| 10.16 |   | Securities  Purchase Agreement, dated as of May 25, 2004, by and among TSG Holdings Corp.  and the management investors named therein.†                                                                                                                                                                                                                                          |
| 10.17 |   | Joinder  Agreement—Securities Holders Agreement, dated as of May 25, 2004, by and  among Christopher A. Pierce, Eric Lane, William Braley, Kenneth Stickley, Jr.  and TSG Holdings Corp.†                                                                                                                                                                                   |
| 10.18 |   | Joinder  Agreement—Registration Rights Agreement, dated as of May 25, 2004, by and  among Christopher A. Pierce, Eric Lane, William Braley, Kenneth Stickley,  Jr., TSG Holdings Corp., Bruckmann, Rosser, Sherrill & Co. II, L.P., ING  Furman Selz Investors III L.P., ING Barings U.S. Leveraged Equity Plan LLC  and ING Barings Global Leveraged Equity Plan Ltd.† |

 

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| 10.19 |   | Employment  and Non-Competition Agreement, dated as of May 25, 2004, among The Dingley  Press, Inc., Christopher A. Pierce and The Sheridan Group, Inc.†*                                                                                                                                   |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1  |   | Subsidiaries  of The Sheridan Group, Inc.†                                                                                                                                                                                                                                                  |
| 31.1  |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                |
| 31.2  |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                |
| 32.1  |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, executed by John A. Saxton, President and Chief  Executive Officer of The Sheridan Group, Inc. and Robert Jakobe, Chief  Financial Officer of The Sheridan Group, Inc. |

 

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†      Filed as a likenumbered exhibit to the Registrant’s Registration Statement on Form S-4 (FileNo. 333-110441) and incorporated herein by reference.

 

*      Managementcontract or compensatory plan or arrangement.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 orSection 15(d) of the Securities Exchange Act of 1933, the Registrant has dulycaused this Annual Report on Form 10-K to be signed on its behalf by theundersigned this 31st day of March, 2005.

 
|   | THE  SHERIDAN GROUP, INC. |
|--------|---------------------------|
|   |                      |
|   |                      |
|   | By:                       | /s/  John A. Saxton |
|   |                      | Name: | John  A. Saxton |
|   |                      | Title: | President  and Chief Executive  Officer and Director |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this Annual Report on Form 10-K has beensigned below by the following persons on behalf of the Registrant in thecapacities and on the dates indicated.

 
| **Signature**           | ** ** | **Title**                                          | ** ** | **Date**        |
|-------------------------|------------|----------------------------------------------------|------------|-----------------|
| ** **              | ** ** | ** **                                         | ** ** | ** **      |
| /s/  John A. Saxton     |       | President and Chief Executive Officer and Director |       | March  31, 2005 |
| **John A. Saxton**      | ** ** | (Principal Executive Officer)                      | ** ** | ** **      |
| ** **              | ** ** | ** **                                         | ** ** | ** **      |
| /s/  Robert M. Jakobe   |       | Chief Financial Officer                            |       | March  31, 2005 |
| **Robert M. Jakobe**    | ** ** | (Principal Financial and Accounting Officer)       | ** ** | ** **      |
| ** **              | ** ** | ** **                                         | ** ** | ** **      |
| /s/  Thomas J. Baldwin  |       | Director                                           |       | March  31, 2005 |
| **Thomas J. Baldwin**   | ** ** | ** **                                         | ** ** | ** **      |
|                    |       |                                               |       |            |
| /s/  Nicholas Daraviras |       | Director                                           |       | March  31, 2005 |
| **Nicholas Daraviras**  | ** ** | ** **                                         | ** ** | ** **      |
|                    |       |                                               |       |            |
| /s/  Craig H. Deery     |       | Director                                           |       | March  31, 2005 |
| **Craig H. Deery**      | ** ** | ** **                                         | ** ** | ** **      |
|                    |       |                                               |       |            |
| /s/  Gary T. DiCamillo  |       | Director                                           |       | March  31, 2005 |
| **Gary T. DiCamillo**   | ** ** | ** **                                         | ** ** | ** **      |
|                    |       |                                               |       |            |
| /s/  J. Rice Edmonds    |       | Director                                           |       | March  31, 2005 |
| **J. Rice Edmonds**     | ** ** | ** **                                         | ** ** | ** **      |

 

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|                        |       |       |       |            |
|-----------------------------|------------|------------|------------|-----------------|
| /s/  J. M. Dryden Hall, Jr. |       | Director   |       | March  31, 2005 |
| **J. M. Dryden Hall, Jr.**  | ** ** | ** ** | ** ** | ** **      |
|                        |       |       |       |            |
| /s/  James L. Luikart       |       | Director   |       | March  31, 2005 |
| **James L. Luikart**        | ** ** | ** ** | ** ** | ** **      |
|                        |       |       |       |            |
| /s/  Nicholas R. Sheppard   |       | Director   |       | March  31, 2005 |
| **Nicholas R. Sheppard**    | ** ** | ** ** | ** ** | ** **      |
|                        |       |       |       |            |
| /s/  George A. Whaling      |       | Director   |       | March  31, 2005 |
| **George A. Whaling**       | ** ** | ** ** | ** ** | ** **      |

 

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