**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, 2005**                                                                                                |
| ** ** | ** ** | **                        ** |
| ** ** | ** ** | **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 |       | (I.R.S.  employer identification number) |
| incorporation  or organization)  |       | ** **                               |

 

**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 is a well-known seasoned issuer, as definedby Rule 405 of the Securities Act. Yes o  No ý

 

Indicate bycheck mark if the Registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act. Yes ý  No o

 

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 o  No ý

 

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  statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.  ý

 

Indicate bycheck mark whether the Registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:  Large accelerated filer o  Accelerated filer o   Non-accelerated filer ý

 

Indicate bycheck mark whether the Registrant is a shell company (as defined in Rule 12b-2of 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 28, 2006.

 

 

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**THE SHERIDAN GROUP, INC.ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2005**

 

**INDEX**

 
| ** **                                                                                                                  | **Pages**  |
|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** |
| ITEM 1. BUSINESS                                                                                                            | 3          |
|                                                                                                                        |       |
| ITEM 1A. RISK  FACTORS                                                                                                      | 7          |
|                                                                                                                        |       |
| ITEM  1B. UNRESOLVED STAFF COMMENTS                                                                                         | 12         |
|                                                                                                                        |       |
| ITEM 2.  PROPERTIES                                                                                                         | 12         |
|                                                                                                                        |       |
| ITEM 3.  LEGAL PROCEEDINGS                                                                                                  | 13         |
|                                                                                                                        |       |
| ITEM  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                | 13         |
|                                                                                                                        |       |
| ITEM  5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND  ISSUER PURCHASES OF EQUITY SECURITIES | 13         |
|                                                                                                                        |       |
| ITEM  6. SELECTED FINANCIAL DATA                                                                                            | 14         |
|                                                                                                                        |       |
| ITEM  7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS                        | 14         |
|                                                                                                                        |       |
| ITEM  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                        | 26         |
|                                                                                                                        |       |
| ITEM  8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 27         |
|                                                                                                                        |       |
| ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE                              | 53         |
|                                                                                                                        |       |
| ITEM 9A.  CONTROLS AND PROCEDURES                                                                                           | 53         |
|                                                                                                                        |       |
| ITEM 9B.  OTHER INFORMATION                                                                                                 | 53         |
|                                                                                                                        |       |
| ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                                | 53         |
|                                                                                                                        |       |
| ITEM 11.  EXECUTIVE COMPENSATION                                                                                            | 57         |
|                                                                                                                        |       |
| ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  STOCKHOLDER MATTERS                   | 63         |
|                                                                                                                        |       |
| ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                    | 65         |
|                                                                                                                        |       |
| ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                            | 67         |
|                                                                                                                        |       |
| ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                                           | 67         |

 

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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. Theyinclude, but are not limited to, any statement that may predict, forecast,indicate or imply future results, performance, achievements or events. They maycontain words such as “anticipate,” “believe,” “continue,” “could,” “estimate,”“expect,” “intend,” “likely,” “may,” “plan,” “predict,” “project,” “should,” “will,”“would” or words or phrases of similar meaning. They may relate to, among otherthings:

 

•                  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 underour notes and/or may affect the value of our notes. These risks anduncertainties may include, but are not limited to, those discussed in Part I,Item 1A, “Risk Factors.” New risk factors can emerge from time to time. It isnot possible for us to predict all of these risks, nor can we assess the extentto which any factor, or combination of factors, may cause actual results todiffer from those contained in forward-looking statements. Given these risksand uncertainties, we urge you to read this Annual Report on Form 10-Kcompletely with the understanding that actual future results may be materiallydifferent from what we plan or expect. We caution you that any forward-lookingstatement reflects only our belief at the time the statement is made. We willnot update these forward-looking statements even if our situation changes inthe future.

 

**PART I**

 

**ITEM 1.   BUSINESS**

 

**Overview**

 

We are a leading specialtyprinter offering a full range of printing and value-added support services forthe journal, catalog, magazine, book and article reprint markets. Webelieve that we enjoy strong and longstanding relationships with our customers,which include publishers, catalog merchants, associations and universitypresses.  We provide a wide range of printing services and value-addedsupport services, such as electronic publishing support, digital proofing,preflight checking, offshore key stroking and copy editing, online peer reviewsystems, manuscript tracking systems, subscriber database maintenance, mailsortation and distribution, customer audits and training classes, and backissue fulfillment.  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. Weoperate in three business segments:  short-run journals, specialtycatalogs and other publications.  For the year ended December 31,2005, we generated net sales of $348.0 million, operating income of $21.9million and net income of $1.2 million.  As used in this Annual Report onForm 10-K, the terms “we,” “us,” “our” and other similar terms refer to theconsolidated businesses of The Sheridan Group, Inc. and all of itssubsidiaries.

 

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**History**

 

We trace our roots back toThe Sheridan Press, the predecessor of which was founded in 1915. We enteredthe short-run journal market in 1980, targeting the printing of scientific,technical, medical and scholarly journals for publishers. The Sheridan Group,Inc. was formed in 1988 to complete the acquisition of Braun-Brumfield, Inc., ashort-run book printer located in Michigan. In 1994, we entered the specialtymagazine market with the acquisition of United Litho, Inc., a printer ofspecialty magazines serving the Washington, D.C. metro area. In conjunctionwith our recapitalization in 1998, we acquired Dartmouth Printing Company, aspecialty magazine printer in New Hampshire, and Capital City Press, a journalprinter in Vermont. In 1999, we acquired BookCrafters, Inc., a short-run bookprinter in Chelsea, Michigan and Fredericksburg, Virginia, and consolidated itwith Braun-Brumfield to form Sheridan Books, Inc. In 2004, we acquired TheDingley Press (the “Dingley Acquisition”), a specialty catalog printer inMaine. On January 3, 2006, we announced the shutdown of the operations ofCapital City Press and the consolidation of the production of short-runjournals at The Sheridan Press. The shutdown and consolidation were largelycompleted during the first quarter of 2006. Currently, we are comprised of sixspecialty printing companies operating in the domestic scientific, technical,medical and scholarly journal, specialty catalog, short-run book, specialtymagazine and article reprints markets: The Sheridan Press in Pennsylvania;Sheridan Books in Michigan; Dartmouth Printing Company in New Hampshire;Dartmouth Journal Services in New Hampshire; United Litho in Virginia; and TheDingley Press in Maine.

 

**PrintingServices**

 

Our printing servicesinclude transferring content onto printing plates in pre-press, printing thecontent on press, binding the printed pages into the finished product anddistributing the finished product to either the customer or the ultimate enduser.  Pre-press processes, which include digital and conventionaltechniques, as well as computer-to-plate technology, are critical front-endelements of our printing services which ready the content for printing on ourpresses.  Sheet-fed and web presses are used, depending on run length, toproduce the printed product.  We also offer ultra-short-run printingservices for article reprints, books and journals.  We utilize threetypes of binding techniques for the printed product:  perfect binding,saddle stitching and case binding.   The product is then labeled andpackaged prior to mailing.   Journals, magazines and books aretypically mailed to the publisher or directly to consumers. Roughly half of ourjournals, the majority of our magazines and all of our books are shipped incases to the customer. The remaining journals and magazines are mailed directlyto the subscriber. Catalogs are drop-shipped to various locations throughoutthe U.S. and placed into the mail stream close to the recipient.

 

**Value-AddedSupport Services**

 

In addition to providingprinting services to our customers, we offer a full range of value-addedsupport services.  While sales of these services constitute a relativelysmall percentage of total revenues, they are critical to meeting the customer’sneeds.  These services are highly customized for each customer’sspecifications and logistics requirements.  With fully digital pre-presscapabilities and computer-to-plate technology, we have greatly increased theefficiency with which we provide these services. Examples of the value-addedsupport services we provide are electronic publishing support, digitalproofing, preflight checking, offshore key stroking and copy editing, onlinepeer review systems, manuscript tracking systems, subscriber databasemaintenance, mail sortation and distribution, customer audits and trainingclasses, and back issue fulfillment.

 

**PrintingSegments**

 

As a leading publicationsprinter, we offer a broad range of products and services, including scientific,technical, medical and scholarly journals, specialty catalogs, short-run books,specialty magazines, article reprints, and an extensive array ofvalue-added support services.  Our products are sold to a diverse set ofcustomers, including publishers, catalog merchants, university presses andassociations.   Our printing operations are classified into threereportable segments.  The following table presents the percentage of netsales contributed by each segment during the past three fiscal years.

 

| **Net sales %** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Short-run journals        |       | 29       |       | 34       |       | 42       |       |
| Specialty catalogs        |       | 32       |       | 22       |       | —   |       |
| Other publications        |       | 41       |       | 46       |       | 61       |       |
| Intersegment eliminations |       | (2       | )          | (2       | )          | (3       | )          |
| Total                     |       | 100      |       | 100      |       | 100      |       |

 

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*Short-RunJournals*

 

The journal market includesjournals for the scientific, technical, medical and scholarly communities. Wecompete in both the short-run and medium-run portions of the journalmarket.  We define short-run journals as journals produced on sheet-fed presseswith typical production runs of less than 5,000 copies. Publishers,associations and university presses comprise the customers in this portion ofthe publications market.  In 2005, we printed over 2,200 journal titles.

 

Our journals are primarilyblack and white with a small amount of color for photographs, diagrams andadvertisements.  They are printed onschedules that range from weekly to annually in run lengths that average 2,300copies and range from 50 to 5,000 copies. Journal printing typically results ina high level of repeat business due to the periodic nature and complexity ofthese publications. The vast majority of journals are perfect bound, with theremainder saddle-stitched.  Our journal customers rely on our consistencyand on-time reliability to meet the demands of their own customers.

 

The short-run journalssegment also includes article reprints, which are produced on sheet-fedpresses, and originally developed as an ancillary product from the base journalbusiness.  Article reprints are produced for customers who requirereprints of an individual article from a journal or magazine for marketingor other purposes. Historically, we have primarily reprinted journal andmagazine articles for which we were the original printer. We recently haveexpanded our business by winning article reprint business on publicationsfor which we were not the original printer.  We are a full-service reprintprinter, producing black and white as well as color reprints for publishers,university presses and associations.

 

*SpecialtyCatalogs*

 

We entered the specialtycatalog segment in 2004 with our purchase of The Dingley Press.  Wecharacterize specialty catalogs as catalogs distributed by specialty catalogmerchant companies, which are often smaller entrepreneurial firms with highservice requirements. We produce catalogs with run lengths between 300,000 and10,000,000 copies, most of which are printed in four-color and are bound usingthe saddle stitching technique. Multiple versions of each catalog are distributedduring the year requiring high levels of customer service and extensivedistribution services.  In 2005, we printed over 110 catalog titles.

 

*OtherPublications*

 

The other publicationssegment provides products and services for specialty magazines, short-run booksand medium-run journals to publishers, university presses and associations.

 

Specialty Magazines

 

We characterize specialtymagazines as magazines having production runs of less than 100,000 copies. Ourcustomers in this market are publishers and associations. Specialty magazinesalso have a high level of repeat business due to the periodic nature of thepublications. This is largely a regional market defined by proximity to thecustomer. In 2005, we printed over 380 magazine titles.

 

We produce short-runmagazines with average run lengths of 22,000 copies.  The majority ofthese magazines are printed in four-color.  The magazines are bound usingthe saddle-stitching and perfect binding techniques. The magazines areproduced in frequencies that range from weekly to annually. These magazines areproduced on web presses.  Although specialty magazine customers do notrequire composition services, they do demand high levels of customer servicefocused on distribution and mailing services, where managing the customer’ssubscriber database is critical to customer satisfaction.

 

Short-Run Books

 

Short-run books, which wecharacterize as books having production runs of less than 5,000 copies, areprinted for publishers, associations and university presses. Sales to thismarket include both the initial printing of titles and subsequentreprints.  In 2005, we printed more than 10,500 book titles.

 

We produce books in runlengths that average 2,000 copies and range from 100 to 5,000 copies.  Themajority of these books are black and white.  Books are produced on bothsheet-fed and web presses.  About 50% of our books have soft covers

 

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(perfect bound) and about50% have hard covers (case bound).

 

Medium-Run Journals

 

We consider medium-runjournals to be journals with production runs between 5,000 and 100,000copies.  Medium-run journals are typically produced on web presses due toeconomies of scale versus sheet-fed presses.  Similar to the short-runjournal market, customers include publishers, associations and universitypresses, and there is a high level of repeat business due to the periodicnature and complexity of these publications.  Our consistency and on-timereliability are key attributes that our customers expect and demand.

 

**Competition**

 

The printing industry in theUnited States is fragmented and highly competitive in most product categoriesand geographic regions. We compete in subsegments of the overall printingmarket.  Competition is largely based on price, quality, range of servicesoffered, distribution capabilities, ability to service the specialized needs ofcustomers, availability of printing time on appropriate equipment and use ofstate-of-the-art technology.  Competitive price pressure continues to bestrong in the product segments in which we compete.

 

**Customers**

 

We benefit from a highlydiversified customer base. The majority 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 approximately14 years. We print specialty catalogs for High Response Holdings,Inc. In 2005, High Response Holdings, Inc. accounted for about 13.6% ofour net sales.

 

**Sales andMarketing**

 

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

 

We traditionally marketthrough industry trade shows and industry association conferences. In addition,in our article reprint business, we have strategic relationships withthree marketing firms that specialize in obtaining reprint orders fromcustomers, companies and individuals that were featured in a recent publicationproduced by us or other printers.  These marketing firms identifyopportunities for these potential clients to utilize the identified publicationreprints as marketing tools.

 

**RawMaterials**

 

The principal raw materialused in our business is paper, which represents a significant portion of ourcost of materials. Due to the significance of paper in our business, we aredependent upon the availability of paper. In periods of high demand, certainpaper grades have been in short supply, including grades we use in ourbusiness. In addition, during periods of tight supply, many paper producersallocate shipments of paper based upon historical purchase levels of customers.Historically, however, we generally have not experienced significant difficultyin obtaining adequate quantities of paper. We do not have any long-term papersupply agreements. We also use a variety of other raw materials including ink,film, offset plates, chemicals and solvents, glue, wire and subcontractedcomponents. In general, we have not experienced any significant difficulty inobtaining these raw materials.

 

**Technologyand Operations**

 

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

 

**Employees**

 

We have about 2,085employees as of December 31, 2005. We focus heavily on fosteringenthusiastic and positive cultures at

 

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each of our locations,evidenced by the fact that we have been recognized with numerous “BestWorkplace in America” awards presented by Printing Industries of America. Inaddition, we closely monitor our employees’ level of job satisfaction withcomprehensive surveys on a regular basis. Management believes ourcompensation and benefits packages are competitive within the industry andlocal markets.

 

We have a collectivebargaining agreement between Capital City Press and Local Union No. One-L,Graphic Communications International Union, AFL-CIO, which expires on April 30,2007. Prior to the announced closure of Capital City Press, this agreementcovered about 103 of our production and maintenance employees at our Vermontfacilities. As a result of the closure in the first quarter of 2006, we nolonger have any employees covered by the collective bargaining agreement.

 

**RegulatoryMatters**

 

We are subject to abroad range of federal, state and local laws and regulations relating to thepollution and protection of the environment, health and safety and labor. Basedon currently available information, we do not anticipate any material adverseeffect on our operations, financial condition or competitive position as aresult of our efforts to comply with environmental, health and safety or laborrequirements, and we do not anticipate needing to make any material capitalexpenditures to comply with such requirements.

 

**ITEM 1A.   RISK FACTORS**

 

**RiskFactors**

 

*SubstantialLeverage—Our substantial indebtedness could adversely affect our financialhealth and prevent us from meeting our obligations under our indebtedness.*

 

We have a significant amountof indebtedness.  On December 31, 2005, we had total indebtedness ofapproximately $164.9 million.

 

Our substantial indebtednesscould 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 substantial portionof our cash flow from operations to payments on our indebtedness, therebyreducing the availability of our cash flow to fund working capital, capitalexpenditures and other general corporate purposes;

 

•                                         increase our vulnerability to general adverseeconomic 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 additional fundsor raise additional financing.

 

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

 

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

 

The technology we use in ouroperations is rapidly evolving. We could experience delays or difficulties inresponding to changing technology, in addressing the increasingly sophisticatedneeds of our customers or in keeping pace with emerging industry standards. Inaddition, the cost required to respond to and integrate changing technologiesmay be greater than we anticipate. If we do not respond 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

 

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decrease the demand for ourproducts which could result in lower profits and reduced cash flows.

 

Changes in technology couldalso result in digital printing methods becoming more cost effective forprinting short-run publications. If the use of digital printing were expandedin this manner, it could allow smaller printers to compete against us in ourspecialized market, which could cause a decrease in the demand for our servicesor could force us to lower our prices to remain competitive. Such a decrease indemand or price could result in decreased profitability and have a materialadverse effect on our business, financial condition and results of operations.

 

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

 

The printing industry isextremely competitive. We compete with numerous companies, some of which havegreater financial resources than we do. We compete on the basis of ongoingcustomer service, quality of finished products, range of services offered,distribution capabilities, use of state of the art technology and price. Wecannot assure you that we will be able to compete successfully with respect toany of these factors. In certain circumstances, due primarily to factors suchas freight rates and customer preference for local services, printers withbetter access to certain regions of the country may have a competitiveadvantage in such regions. Our failure to compete successfully could cause usto lose existing business or opportunities to generate new business and couldresult in decreased profitability, adversely affecting our business.

 

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

 

The continuing consolidationof publishing companies has shrunk the pool of available customers. Largepublishing companies often have preferred provider arrangements with specificprinting companies. As smaller publishing companies are consolidated into thelarger companies, the smaller publishing companies are often required to usethe printing company with which the acquiring company has established anarrangement. If our customers were to merge or consolidate with publishingcompanies utilizing other printing companies, we could lose our customers tocompeting printing companies. If we were to lose a significant portion of ourcurrent base of customers to competing printing companies, our business,financial condition, results of operations and cash flow could be materiallyadversely affected.

 

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

 

We have a customer, HighResponse Holdings, Inc., that accounted for 13.6% of our net sales in2005. In addition, we have another customer that accounted for 9.6% of ournet sales in 2005. In 2006, these two customers are projected to account forsimilar percentages of our net sales. The loss of either of these customerswould cause our net sales and profitability to decline. We cannot assure youthat net sales to these and our other large customers will not continue toincrease as a percentage of our total net sales or that these customers willcontinue to use our printing services. The loss of any such customer couldadversely affect us.

 

*Cost andAvailability of Paper and Other Raw Materials—Increases in prices of paper andother raw materials and postal rates could cause disruptions in our services tocustomers.*

 

The principal raw materialused in our business is paper, which represents a significant portion of ourcost of materials. Although we believe that we have been successful innegotiating favorable price relationships with our paper vendors, prices in theoverall paper market are beyond our control. Historically, we have generallybeen able to pass increases in the cost of paper on to our customers. If we areunable to continue to pass any price increases on to our customers, futurepaper price increases could adversely affect our margins and profits.

 

Due to the significance ofpaper 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 a variety of otherraw materials including ink, film, offset plates, chemicals and solvents, glue,wire and subcontracted components. In general, we have not experienced anysignificant difficulty in obtaining these raw materials. We cannot assure you,however, that a shortage of any of these raw materials will not occur in thefuture or will not potentially adversely affect the financial results of ourbusiness.

 

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Our journals and magazinesare often mailed, either by us or our customers, to subscribers. As a result,an increase in postal rates may cause our customers to decrease the size andnumber of their publications. Although we generally have not experiencedsignificant decreases in mailings in the past due to postal rate increases, wecannot assure you that such a decrease will not occur in the future or will notpotentially adversely affect the financial results of our business.

 

We require energy products,primarily natural gas and electricity, in our operating facilities.  Wealso depend on gasoline and diesel fuel for our delivery vehicles and thevehicles of the carriers we utilize to deliver our products.  Possibledisruption of supplies or an increase in the prices of energy products couldadversely 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 a significantextent on our executive officers and other key management personnel. There canbe no assurance that we will be able to continue to retain our executiveofficers and key management personnel or attract additional qualifiedmanagement in the future. In addition, the success of any acquisition by us maydepend, in part, on our ability to retain management personnel of the acquiredcompanies. There can be no assurance that we will be able to retain suchmanagement personnel.

 

In addition, to providehigh-quality printed products in a timely fashion we must maintain an adequatestaff of skilled technicians, including pre-press personnel, pressmen, binderyoperators and fulfillment personnel. Accordingly, our ability to maintain andincrease our productivity and profitability will depend, in part, on ourability to employ, train and retain the skilled technicians necessary to meet ourcommitments. 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.

 

Ifany of these events 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 reliability of ourprinting facilities is critical to the success of our business. Our facilitiesmight be damaged or interrupted by fire, flood, power loss, telecommunicationsfailure, break-ins, earthquakes, terrorist attacks, war or similar events.Equipment malfunctions, computer viruses, physical or electronic break-ins andsimilar disruptions might cause interruptions and delays in our printingservices and could significantly diminish our reputation and brand name andprevent us from providing services. Although we believe we have taken adequatesteps to address these risks, damage to, or unreliability of, our printingfacilities could have a material adverse effect on our business, financialcondition, 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 journal business, weprovide printing services primarily to scientific, technical, medical and otherscholarly journals. The supply of research papers published in these journalsis related to the amount of research funding provided by the federal governmentand private companies. In the future, the federal government or privatecompanies could decrease the type and amount of funding that they provide forscientific, technical, medical and other scholarly research. A significantdecrease in research funding might decrease the number or length of journalsthat we print for our customers, which would decrease our cash flow.

 

*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 various materials inour operations which contain substances considered hazardous or toxic underenvironmental

 

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laws. In addition, ouroperations are subject to federal, state and local environmental laws andregulations relating to, among other things, air emissions, waste generation,handling, management and disposal, waste water treatment and discharge andremediation of soil and groundwater contamination. Permits are required for theoperation of certain of our businesses, and these permits are subject torenewal, modification and, in some circumstances, revocation. Our operationsalso generate wastes which are disposed of off-site. Under certainenvironmental laws, including the Comprehensive Environmental Response,Compensation and Liability Act, as amended (“CERCLA,” commonly referred to as “Superfund”)and similar state laws and regulations, we may be liable for costs and damagesrelating to soil and groundwater contamination at these off-site disposallocations, or at our own facilities. In the past, such matters have not had amaterial impact on our business or operations. We are not currently aware ofany environmental matters that are likely to have a material adverse effect onour business, financial condition, results of operations and cash flow.However, we cannot assure you that such matters will not have such an impact onus. Furthermore, future changes to environmental laws and regulations may giverise to additional costs or liabilities that could have a material adverseimpact on us.

 

*Health andSafety Requirements—We could be adversely affected by health and safetyrequirements.*

 

We are subject torequirements 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 andservices may infringe on claims of intellectual property rights of thirdparties.*

 

Our success and ability tocompete depend, in part, upon our technology. Among our significant assets areour proprietary information and intellectual property rights. We rely on acombination 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 these licenses,individually and in the aggregate, are material to our business. Although webelieve that the risk that we will lose any material license is remote, anyloss could have a material adverse effect on our business, financial condition,results of operations and cash flow.

 

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

 

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

 

We may require more capitalin 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 cannot assure you thatadditional financing will be available on terms favorable to us, or at all. Theterms of available financing may place limits on our financial and operatingflexibility. If adequate funds are not available on acceptable terms, we may beforced to reduce our operations or delay, limit or abandon expansionopportunities. Moreover, even if we are able to continue our operations, thefailure to obtain additional financing could reduce our competitiveness as ourcompetitors may provide better maintained networks or offer an expanded rangeof services.

 

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

 

Our business strategyincludes pursuing acquisitions. Nonetheless, we cannot assure you that we willidentify suitable acquisitions or that such acquisitions can be made at anacceptable 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 inconsummating future acquisitions on favorable terms or at all.

 

*Integrationof Acquired Businesses—The integration of acquired businesses may result insubstantial costs, delays and other problems.*

 

Our future performance willdepend heavily on our ability to integrate the businesses that we may acquire.To integrate newly acquired businesses we must integrate manufacturingfacilities and extend our financial and management controls and operating,administrative and information systems in a timely manner and on satisfactoryterms and conditions. This may be more difficult with respect to significantacquisitions. 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 ofbusinesses that we may acquire could significantly impact our short-termoperating results. These costs could include:

 

•                                         restructuring charges associated with theacquisitions; and

 

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

 

Finally, although we conductand intend to conduct what we believe to be a prudent level of investigationregarding the businesses we purchase, in light of the circumstances of eachtransaction, an unavoidable level of risk remains regarding the actualcondition of these businesses. Until we actually assume operating control ofsuch business assets and their operations, we may not be able to ascertain theactual value or understand the potential liabilities of the acquired entitiesand their operations. Once we acquire a business, we are faced 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 be successful inovercoming these risks.

 

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

 

As a result of their stockownership of TSG Holdings Corp., our parent, Bruckmann, Rosser, Sherrill &Co., L.L.C. (“BRS”), Jefferies Capital Partners (“JCP”) and their respectiveaffiliates together beneficially own about 84.8% of TSG Holdings Corp.’soutstanding capital stock. By virtue of their stock ownership and the terms ofthe securities holders agreement, these entities have significant influenceover our management and will be able to determine the outcome of all mattersrequired to be submitted to the stockholders for approval, including theelection of our directors and the approval of mergers, consolidations and thesale of all or substantially all of our assets. The interests of BRS and JCP asequity owners of TSG Holdings Corp. may differ from the interests of ournoteholders and the lenders under our working capital facility, and, as such,BRS and JCP may take actions which may not be in the interest of suchnoteholders and lenders. For example, if we encounter financial difficulties orare unable to pay our debts as they mature, the interests of our equity ownersmight conflict

 

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with the interests of ournoteholders and the lenders under our working capital facility. In addition,our equity owners may have an interest in pursuing acquisitions, divestitures,financings or other transactions that, in their judgment, could enhance theirequity investments, even though such transactions might involve risks to ournoteholders and the lenders under our working capital facility.

 

*Effectiveness of ourinternal controls**— Our internalcontrols over financial reporting may not be effective and our independentregistered public accounting firm may not be able to certify as to theireffectiveness, which could have a significant and adverse effect on ourbusiness and reputation.*

 

Weare evaluating our internal controls over financial reporting in order to allowmanagement to report on, and our independent registered public accounting firmto attest to, our internal controls over financial reporting, as required bySection 404 of the Sarbanes-Oxley Act of 2002, as amended, andrules and regulations of the SEC thereunder, which we refer to as “Section 404”. We are in the process of documenting and testing our internal controlprocedures in order to satisfy the requirements of Section 404, whichrequires annual management assessments of the effectiveness of our internalcontrols over financial reporting and a report by our independent registeredpublic accountants addressing these assessments. During the course of ourtesting, we may identify deficiencies which we may not be able to remediate intime to meet the deadline imposed by the Sarbanes-Oxley Act for compliance withthe requirements of Section 404. We will be required to comply with therequirements of Section 404 for our fiscal year ending December 31,2007. In addition, if we fail to achieve and maintain the adequacy of ourinternal controls, as such standards are modified, supplemented or amended fromtime to time, we may not be able to ensure that we can conclude on an ongoingbasis that we have effective internal controls over financial reporting inaccordance with Section 404. We cannot be certain as to the timing ofcompletion of our evaluation, testing and any remediation actions of the impactof the same on our operations. If we are not able to implement the requirementsof Section 404 in a timely manner or with adequate compliance, our independentregistered public accounting firm may not be able to certify as to theeffectiveness of our internal control over financial reporting and we may besubject to sanctions or investigation by regulatory authorities, such as theSEC. In addition, we expect these rules and regulations to increase ourlegal and financial compliance costs and to make some activities moretime-consuming and costly. We cannot predict or estimate the amount ofadditional costs we may incur as a result of these requirements or the timingof such costs.

 

**ITEM 1B.   UNRESOLVED STAFF COMMENTS**

 

**None.**

 

**ITEM 2.   PROPERTIES**

 

We operate a network of 16manufacturing, warehousing and office facilities located throughout the EastCoast and Midwest that occupy, in total, about 1,226,270 square feet. Wemaintain more than 978,000 square feet of production space consisting ofmanufacturing and publication services. We own about 78% of the square footagewe use.  The following table provides an overview of our manufacturing,warehousing and office facilities.

 

 
| **Location**     | ** ** | **Function(s)**                                      | ** ** | **Ownership  Structure** | ** ** | **Total Size  (Sq. Feet)** | ** ** |
|------------------|------------|------------------------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
| Hunt Valley, MD  |       | Corporate  Headquarters                              |       | Leased                   |       | 6,366                                |       |
| Barre, VT        |       | Publication  Services (Short-run journals)           |       | Leased                   |       | 12,884                               |       |
| Orford, NH       |       | Publication  Services (Other publications)           |       | Leased                   |       | 6,895                                |       |
| Hanover, PA      |       | Manufacturing  (Short-run journals)                  |       | Owned                    | (1)        | 159,250                              |       |
| Berlin, VT       |       | Manufacturing  (Short-run journals)                  |       | Owned                    | (1)        | 55,450                               |       |
| Chelsea, MI      |       | Manufacturing  (Other publications)                  |       | Owned                    | (1)        | 135,279                              |       |
| Hanover, NH      |       | Manufacturing  (Other publications)                  |       | Owned                    | (1)        | 147,830                              |       |
| Ashburn, VA      |       | Manufacturing  (Other publications)                  |       | Owned                    | (1)        | 70,159                               |       |
| Lisbon, ME       |       | Manufacturing  (Specialty catalogs)                  |       | Owned                    | (1)        | 266,447                              |       |
| Ann Arbor, MI    |       | Manufacturing  and Distribution (Other publications) |       | Owned                    | (1)        | 124,726                              |       |
| Williamstown, VT |       | Warehousing  (Short-run journals)                    |       | Leased                   |       | 27,120                               |       |
| Lebanon, NH      |       | Warehousing  (Other publications)                    |       | Leased                   |       | 6,600                                |       |
| Lewiston, ME     |       | Warehousing  (Specialty catalogs)                    |       | Leased                   |       | 55,858                               |       |
| Lewiston, ME     |       | Warehousing  (Specialty catalogs)                    |       | Leased                   |       | 43,800                               |       |
| Lewiston, ME     |       | Warehousing  (Specialty catalogs)                    |       | Leased                   |       | 97,606                               |       |
| Auburn, ME       |       | Warehousing  (Specialty catalogs)                    |       | Leased                   |       | 10,000                               |       |
| ** **       | ** ** | ** **                                           |       | **Total**                |       | **1,226,270**                        |       |

 

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(1)     Subjectto liens in favor of the holders of our outstanding senior secured notes andthe lenders under our working capital facility.

 

Some of our office andwarehouse leases are on yearly renewals, with the lease of our corporateheadquarters expiring in December 2011, subject to a renewal option. We believe that our office, manufacturing and warehousing facilities areadequate for our immediate needs and that additional or substitute space isavailable at a reasonable cost if needed to accommodate future growth andexpansion.  In addition to the properties listed above, we occasionallylease space for single offices for our sales representatives.

 

In 2005, our Sheridan Presssubsidiary demolished the 36,060 square foot building adjacent to its mainplant in Hanover, Pennsylvania and expanded its existing facility by 52,200square feet to provide additional manufacturing capacity.

 

In 2005, our DartmouthPrinting Company subsidiary completed a 24,700 square foot expansion of itsexisting facility in Hanover, New Hampshire to provide additional manufacturingcapacity.

 

We are continuing our efforts to sell the Ann Arbor, Michigan bookfacility. We may consolidate this facility with our Chelsea, Michiganoperation, pending a firm offer from a third party at an acceptable price. Additionally,we are evaluating various options to expand the Chelsea, Michigan productionfacility in 2006 to accommodate other business needs.

 

We have listed for sale the former Capital City Press productionfacility in Berlin, Vermont as a result of the consolidation of this businessin early 2006. Additionally, we have entered into a lease agreement for 11,700square feet of office space in Waterbury, Vermont, beginning approximately May2006. The Waterbury lease will accommodate the needs of Dartmouth JournalServices as it assumes responsibility for the services that had been performedby the Publication Services group at Capital City Press, which had occupiedleased space in Barre, Vermont.

 

Our United Litho subsidiary entered into a lease agreement for 4,800square feet of storage space in Sterling, Virginia beginning in March 2006.

 

**ITEM 3.   LEGALPROCEEDINGS**

 

We currently are involved in variouslitigation proceedings as a defendant and are from time totime involved in routine litigation. In theopinion of our management, these matters are not expected to have a materialadverse effect on our business, financial condition or results of operations.

 

**ITEM4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

There were nomatters submitted to a vote of security holders during the fourth quarter endedDecember 31, 2005.

 

**PARTII**

 

**ITEM 5.   MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

We arewholly-owned by TSG Holdings Corp, a privately owned corporation. There is nopublic trading market for our equity securities or for those of TSG HoldingsCorp. As of March 28, 2006, there were 32 holders of TSG Holdings Corp.common stock.

 

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

 

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any dividends orrepurchase stock. For further information related to the payment of dividends,see the discussion contained in Part III, Item 12, “Security Ownership ofCertain Beneficial Owners 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**      | ** ** | **Year ended**                 | ** ** | **August 21, 2003** | ** ** | **January 1, 2003** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **December 31,**    | ** ** | **December 31,**               | ** ** | **to December 31,** | ** ** | **to August 20,** | ** ** | **Year Ended December 31,** | ** ** |
| **(Dollars in thousands)**       | ** ** | **2005**                 | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **Statement of Income Data:**              |       |                     |       |                                |       |   |   |   |   |   |   |   |   |
| ** **                                 |       |                     |       |                                |       |   |   |   |   |   |   |   |   |
| Net sales                                  |       | $                        | 347,959    |                                | $          | 287,513 |   | $ | 81,193 |   | $ | 131,904 |   | $ | 208,837 |   | $ | 212,302 |   |
| Gross profit                               |       | 64,456                   |       | 60,782                              |       | 18,745 |   | 31,839 |   | 48,997 |   | 42,742 |   |
| Selling and administrative expenses        |       | 39,594                   |       | 37,404                              |       | 12,704 |   | 23,619 |   | 32,244 |   | 31,083 |   |
| Operating income                           |       | 21,897                   |       | 21,456                              |       | 5,415 |   | 8,108 |   | 17,133 |   | 10,613 |   |
| Net income                                 |       | 1,180                    |       | 2,330                               |       | 760 |   | 1,169 |   | 6,624 |   | 1,399 |   |
|                                       |       |                     |       |                                |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at end of period):** |       |                     |       |                                |       |   |   |   |   |   |   |   |   |
|                                       |       |                     |       |                                |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                  |       | $                        | 7,962      |                                | $          | 4,975 |   | $ | 9,918 |   |   |   | $ | 48 |   | $ | 37 |   |
| Property, plant and equipment, net         |       | 119,220                  |       | 115,253                             |       | 57,277 |   |   |   | 45,664 |   | 50,330 |   |
| Total assets                               |       | 300,721                  |       | 299,139                             |       | 202,488 |   |   |   | 99,955 |   | 105,787 |   |
| Total debt and capital leases              |       | 164,904                  |       | 164,894                             |       | 103,641 |   |   |   | 66,003 |   | 75,429 |   |
| Mandatorily redeemable preferred stock     |       | —                   |       | —                              |       | — |   |   |   | 18,192 |   | 18,192 |   |
| Total stockholders’ equity (deficit)  |       | 54,996                   |       | 54,065                              |       | 47,760 |   |   |   | (7,923 | ) | (14,547 | ) |
|                                       |       |                     |       |                                |       |   |   |   |   |   |   |   |   |
| **Other Financial Data:**                  |       |                     |       |                                |       |   |   |   |   |   |   |   |   |
| ** **                                 |       |                     |       |                                |       |   |   |   |   |   |   |   |   |
| Depreciation and amortization              |       | $                        | 17,072     |                                | $          | 14,593 |   | $ | 4,168 |   | $ | 4,874 |   | $ | 8,442 |   | $ | 9,163 |   |
| Capital expenditures                       |       | 21,282                   |       | 21,827                              |       | 2,915 |   | 5,213 |   | 4,870 |   | 7,791 |   |

 

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(1)          Periods prior toAugust 20, 2003 represent the predecessor company prior to theconsummation of the Buyout Transactions (discussed below under Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”), andour historical consolidated financial data for such periods do not give effectto the Buyout Transactions.

 

**ITEM7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND 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, Item1A, “Risk Factors” for a discussion of some of the risks that could affect usin the future.

 

**Introduction**

 

We are aleading specialty printer offering a full range of printing and value-addedsupport services for the journal, catalog, magazine, book andarticle reprint markets. We provide a wide range of printing services andvalue-added support services, such as electronic publishing support, digitalproofing, preflight checking, offshore key stroking and copy editing, onlinepeer review systems, manuscript tracking systems, subscriber databasemaintenance, mail sortation and distribution, customer audits and trainingclasses, and back issue fulfillment. We utilize a decentralized managementstructure, which provides our customers with access to the resources of a largecompany, while maintaining the high level of service and flexibility of asmaller company.

 

**Overview**

 

*Buyout and acquisition transactions*

 

OnAugust 21, 2003, TSG Holdings Corp. purchased 100% of the outstandingcapital stock of The Sheridan Group, Inc. from its existing stockholders (the “Buyout”)for total cash consideration of $142.0 million less net debt (as defined in thestock purchase 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

 

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the related fees andexpenses with the proceeds of the sale of $105,000,000 aggregate principalamount of our 101⁄4% Senior Secured Notes due 2011 (the “2003 Notes”) and equityinvestments in TSG Holdings Corp. We refer to the Buyout, the sale of the 2003Notes, the closing of our working capital facility and the equity investmentscollectively 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”).  The accounting purchaseprice was $95.4 million, which was comprised of cash paid of $65.5 million,$26.0 million of assumed liabilities and $3.9 million of financing costs. Wefunded the acquisition price and the related fees and expenses with theproceeds of the sale of $60,000,000 aggregate principal amount of our 101⁄4%Senior Secured Notes due 2011 (the “2004 Notes”), available cash and equityinvestments in TSG Holdings Corp. The 2003 Notes and the 2004 Notes are fullyand unconditionally guaranteed on a joint and several basis by all of oursubsidiaries. We refer to the Dingley Acquisition, the sale of the 2004 Notes,the amendment of our working capital facility and the equity investmentscollectively as the “Dingley Transactions.”

 

This discussion and analysis of ourresults of operations includes periods prior to the consummation of the Buyout.Accordingly, the discussion and analysis of historical periods prior toAugust 21, 2003 does not reflect the significant impact that the BuyoutTransactions have had and will have on us, including increased leverage andincreased liquidity requirements. In addition, this discussion and analysis only covers the historicalfinancial condition and results of operations of The Dingley Press since May25, 2004, the date of the Dingley Acquisition.

 

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.

 

*Facilityshutdown*

 

On December 15, 2005, due to trends in the short-run journal businessand the high capital investment necessary to maintain two manufacturing facilitiesserving the same market, our Board of Directors approved a restructuring planto consolidate all short-run journal printing operations into onesite. During the first quarter of 2006, we consolidated the printing ofshort-run journals at The Sheridan Press in Hanover, Pennsylvania and closedthe Capital City Press facility in Berlin, Vermont.  Approximately 200positions were eliminated as a result of the closure. Of the 200 employeesaffected, approximately 45 Publication Services employees were offered jobswith one of our subsidiaries, Dartmouth Journal Services.

 

Charges related to this restructuring will be recorded as the plan isimplemented. We estimate approximately $3.3 million of restructuring chargesresulting in future cash expenditures will be incurred, including $2.2 millionof charges related to severance and other personnel costs and $1.1 million ofother exit costs. Of the estimated $3.3 million in anticipatedrestructuring costs, we recorded approximately $0.4 million in 2005 and expectto record the remainder of the costs in 2006.

 

We have undertaken efforts to sell theCapital City Press facility. The amount to be realized from this sale is notreasonably estimable at this time. The facility will be classified as an assetheld for sale as of the end of the first quarter of 2006. We also estimatenon-cash charges of $2.3 million in the first quarter of 2006 associated withthe accelerated depreciation and amortization of equipment and the Capital CityPress trade name which will be disposed of as a result of the shutdown.

 

**Internal Controls**

 

Since 2004, we have invested significant resources to comprehensivelydocument and analyze our system of internal controls over financial reporting,which included contracting with outside consultants, the hiring of a Manager ofFinancial Controls to lead the internal audit function, along with theinitiation of a Company-wide internal controls improvement project. The focusof the improvement project, and the steering committee founded to oversee theproject, has been to design, implement and maintain a system of internalcontrols, including financial policies and procedures, sufficient

 

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tosatisfy our reporting obligations as a public company. Throughout 2005, wecontinued to document significant processes and identify areas requiringimprovement, and we are in the process of designing enhanced processes andcontrols to address the concerns identified. We plan to continue theseinitiatives as well as prepare for our first management report on internalcontrol over financial reporting, as required by Section 404 of theSarbanes-Oxley Act of 2002, for the year ending December 31, 2007.

 

We believe adequate resources and expertise, both internal andexternal, have been put in place to meet the Section 404 requirements. Weintend to work closely with our independent registered public accounting firmduring this process. Though we have taken efforts to become Section 404compliant by the end of 2007, there is no guarantee that our efforts willresult in a management assurance, or an attestation by our independentauditors, that the operating effectiveness and design of our internal controlsare adequate.

 

**Critical Accounting Estimates**

 

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 accounts and notes receivable is to maintain an adequateallowance or reserve for doubtful accounts for estimated losses from theinability of our customers to make required payments. The process to estimatethe collectibility of our trade accounts receivable balances consists of twosteps. First, we evaluate specific accounts for which we have information thatthe customer may have an inability to meet its financial obligations (e.g.,bankruptcy). In these cases, using our judgment based on available facts andcircumstances, we record a specific allowance for that customer against thereceivable to reflect the amount we expect to ultimately collect. Second, wethen establish an additional reserve for all customers based on a range ofpercentages applied to aging categories, based on management’s best estimate.If the financial condition of our customers were to deteriorate and result inan impairment of their ability to make payments, additional allowances may berequired.

 

*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 SFAS No. 142 onJanuary 1, 2002 and performed a fair market valuation analysis of goodwillas of the same date. We tested goodwill for impairment using the two-stepprocess prescribed in SFAS No. 142. The first step was to screen for potentialimpairment, while the second step measured the amount of the impairment, ifany. We also performed the required impairment tests of goodwill to identifywhether an impairment existed under this statement on December 31, 2005and 2004. Noimpairments were noted as a result of these tests. At December 31, 2005,we had $57.0 million in goodwill. While significant judgment is required, webelieve that our estimates of fair value are reasonable. However, should ourassumptions change in future years, our fair value models could result in lowerfair values for goodwill, which could materially affect the valueof goodwill and our results of operations.

 

We periodically review long-lived assets,consisting primarily of property, plant and equipment and identifiedintangibles subject to amortization, for impairment, pursuant to SFAS No. 144,by analyzing the future undiscounted cash flows whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Noimpairments were noted as a result of these tests. While significant judgmentis required, we believe that our estimates of future undiscounted cash flowsare reasonable. However, should our assumptions change in future years, ourfair value models

 

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could result in lower fair values of long-lived assets, which couldmaterially affect the value of long-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, and operatingloss carryforwards. Such differences result in deferred tax assets andliabilities, 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 financialstatement process, we assess the positions taken on our tax returns andestablish tax reserves for tax contingencies that in our judgment are probableand estimable. These estimates could change as the tax returns are reviewed bythe tax authorities or as statutes of limitations close on the returns;however, we believe that we have adequately provided for all such taxcontingencies.

 

*Self-Insurance*

 

We areself-insured for healthcare and workers’ compensation costs. We seek tomitigate the risk related to our ultimate claims exposure under these self-insurancearrangements through the purchase of various levels of individual and aggregateclaims stop-loss insurance coverage with third-party insurers. We periodicallyreview health insurance and workers’ compensation claims outstanding andestimates of incurred but not reported claims with our third-party claimsadministrators and adjust our reserves for self-insurance risk accordingly.Provisions for medical and workers’ compensation claims are based on estimates,which are subject to differing financial outcomes based upon the nature andseverity of those claims. As a result, additional reserves may be required infuture 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 endedDecember 31, 2003 were derived by combining our results of operations forthe period January 1, 2003 through August 20, 2003 and for the periodAugust 21, 2003 through December 31, 2003, which, respectively, arethe periods before and after the date of the Buyout Transactions. Accordingly,the data for these two periods and the periods following the Buyout Transactionswere prepared on differing bases of accounting and, as a result, thecomparability of such percentage relationships with other periods is limited,primarily as a result of one-time transaction costs, amortization ofintangibles, depreciation of fixed assets and interest expense related tooutstanding debt balances.

 

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| ** **                                     | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **(Expressed as percentages)**       | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
|                                           |       |                  |       |                  |       |                  |       |
| Net sales                                      |       | 100.0                 |       | 100.0                 |       | 100.0                 |       |
| Cost of sales                                  |       | 81.5                  |       | 78.9                  |       | 76.3                  |       |
| Gross profit                                   |       | 18.5                  |       | 21.1                  |       | 23.7                  |       |
| Selling and administrative expenses            |       | 11.4                  |       | 13.0                  |       | 17.1                  |       |
| (Gain) loss on disposition of fixed assets     |       | 0.2                   |       | —                |       | —                |       |
| Restructuring costs                            |       | 0.1                   |       | —                |       | —                |       |
| Amortization of intangibles                    |       | 0.5                   |       | 0.6                   |       | 0.3                   |       |
| Total operating expenses                       |       | 12.2                  |       | 13.6                  |       | 17.4                  |       |
| Operating income                               |       | 6.3                   |       | 7.5                   |       | 6.3                   |       |
| Other (income) expense                         |       |                  |       |                  |       |                  |       |
| Interest expense                               |       | 5.5                   |       | 5.8                   |       | 4.3                   |       |
| Fair value adjustment to interest rate  collar |       | —                |       | —                |       | (0.1                  | )          |
| Interest income                                |       | (0.1                  | )          | (0.1                  | )          | (0.1                  | )          |
| Other, net                                     |       | (0.1                  | )          | —                |       | (0.2                  | )          |
| Total other expense                            |       | 5.3                   |       | 5.7                   |       | 3.9                   |       |
| Income before income taxes                     |       | 1.0                   |       | 1.8                   |       | 2.4                   |       |
| Income tax provision                           |       | 0.7                   |       | 1.0                   |       | 1.5                   |       |
| Net income                                     |       | 0.3                   |       | 0.8                   |       | 0.9                   |       |

 

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 runlengths of less than 5,000 copies. The Specialty Catalogs segment, which iscomprised of the assets and operations of The Dingley Press acquired on May 25,2004, is focused on catalog merchants that require run lengths between 300,000and 10,000,000 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** | ** ** |
|-----------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | ** **               | ** ** | ** **                 | ** ** | **Four-months** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **               | ** ** | ** **                 | ** ** | **and eleven-days** | ** ** | **Seven-months** | ** ** |
| ** **                        | ** ** | **Year ended**      | ** ** | **Year ended**        | ** ** | **ended December** | ** ** | **and twenty-days** | ** ** |
| ** **                        | ** ** | **December 31,**    | ** ** | **December 31,**      | ** ** | **31,** | ** ** | **ended August 20,** | ** ** |
| ** **                        | ** ** | **2005**                 | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2003** | ** ** |
| **Net sales**                     |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 99,955     |                       | $          | 97,277 |   | $ | 33,453 |   | $ | 55,371 |   |
| Specialty catalogs                |       | 111,846                  |       | 64,204                     |       | — |   | — |   |
| Other publications                |       | 141,643                  |       | 131,172                    |       | 49,606 |   | 79,785 |   |
| Intersegment eliminations         |       | (5,485                   | )          | (5,140                     | )          | (1,866 | ) | (3,252 | ) |
| Consolidated total                |       | $                        | 347,959    |                       | $          | 287,513 |   | $ | 81,193 |   | $ | 131,904 |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Operating income (loss)**       |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 12,618     |                       | $          | 13,344 |   | $ | 4,087 |   | $ | 6,573 |   |
| Specialty catalogs                |       | 2,599                    |       | 3,483                      |       | — |   | — |   |
| Other publications                |       | 8,678                    |       | 6,885                      |       | 2,471 |   | 2,396 |   |
| Corporate                         |       | (1,998                   | )          | (2,256                     | )          | (1,143 | ) | (861 | ) |
| Consolidated total                |       | $                        | 21,897     |                       | $          | 21,456 |   | $ | 5,415 |   | $ | 8,108 |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Assets**                        |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 98,535     |                       | $          | 94,442 |   | $ | 89,851 |   |   |   |
| Specialty catalogs                |       | 85,633                   |       | 88,147                     |       | — |   |   |   |
| Other publications                |       | 113,722                  |       | 112,348                    |       | 110,563 |   |   |   |
| Corporate                         |       | 2,831                    |       | 4,202                      |       | 2,074 |   |   |   |
| Consolidated total                |       | $                        | 300,721    |                       | $          | 299,139 |   | $ | 202,488 |   |   |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Depreciation and amortization** |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 4,796      |                       | $          | 4,604 |   | $ | 1,640 |   | $ | 1,490 |   |
| Specialty catalogs                |       | 5,785                    |       | 3,424                      |       | — |   | — |   |
| Other publications                |       | 6,281                    |       | 6,399                      |       | 2,426 |   | 3,168 |   |
| Corporate                         |       | 210                      |       | 166                        |       | 102 |   | 216 |   |
| Consolidated total                |       | $                        | 17,072     |                       | $          | 14,593 |   | $ | 4,168 |   | $ | 4,874 |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Capital expenditures**          |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 8,992      |                       | $          | 4,583 |   | $ | 913 |   | $ | 3,425 |   |
| Specialty catalogs                |       | 3,552                    |       | 5,815                      |       | — |   | — |   |
| Other publications                |       | 8,522                    |       | 11,122                     |       | 1,991 |   | 1,773 |   |
| Corporate                         |       | 216                      |       | 307                        |       | 11 |   | 15 |   |
| Consolidated total                |       | $                        | 21,282     |                       | $          | 21,827 |   | $ | 2,915 |   | $ | 5,213 |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Goodwill**                      |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 24,069     |                       | $          | 24,069 |   | $ | 26,098 |   |   |   |
| Specialty catalogs                |       | 13,553                   |       | 14,333                     |       | — |   |   |   |
| Other publications                |       | 19,361                   |       | 19,361                     |       | 18,543 |   |   |   |
| Corporate                         |       | —                   |       | —                     |       | — |   |   |   |
| Consolidated total                |       | $                        | 56,983     |                       | $          | 57,763 |   | $ | 44,641 |   |   |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Intangible assets**             |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 26,507     |                       | $          | 27,463 |   | $ | 28,418 |   |   |   |
| Specialty catalogs                |       | 3,208                    |       | 3,390                      |       | — |   |   |   |
| Other publications                |       | 16,834                   |       | 17,428                     |       | 18,023 |   |   |   |
| Corporate                         |       | —                   |       | —                     |       | — |   |   |   |
| Consolidated total                |       | $                        | 46,549     |                       | $          | 48,281 |   | $ | 46,441 |   |   |   |

 

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* *

*Comparisonof Years Ended December 31, 2005 and December 31, 2004*

 

Net sales were$348.0 million in 2005, a $60.5 million or 21.0% increase compared to net salesof $287.5 million for 2004. The Dingley Acquisition, completed in May 2004,added the specialty catalogs segment and accounted for $47.6 million of thesales growth. Significant growth in other publications combined with slightlystronger net sales in short-run journals accounted for the rest of theincrease. Netsales in 2005 and 2004 included shipping and postage fees billed to customerstotaling $33.0 million and $27.4 million, respectively.

 

Net sales forthe short-run journals segment were $100.0 million in 2005, a $2.7 million or2.8% increase compared to net sales of $97.3 million for 2004. The increase innet sales for the short-run journals segment was primarily attributable tohigher paper and shipping revenue as well as new titles that were awarded to uspartially offset by declines in revenue related to prepress services. Net salesfor the specialty catalogs segment were $111.8 million in 2005, a $47.6 millionor 74.2% increase compared to net sales of $64.2 million for 2004. The DingleyAcquisition added the specialty catalogs segment of the printing market. Thissegment has been included in our results since the May 2004 acquisition datewhich primarily accounts for the comparative sales growth for 2005. Net salesfor the other publications segment for 2005 were $141.6 million, a $10.4 millionor 8.0% increase compared to $131.2 million for 2004. Continued growth inmedium-run journals and magazine revenues accounted for most of the growth inthe other publications segment.

 

Gross profitfor 2005 was $64.5 million, a $3.7 million or 6.0% increase compared to grossprofit of $60.8 million for 2004. Gross margin for 2005 decreased to 18.5% ofnet sales compared to 21.1% for 2004. The gross margin decline for 2005 wasattributable primarily to the inclusion of a full year’s gross margin for TheDingley Press as a result of the Dingley Acquisition, as the specialty catalogssegment has a lower gross margin than our other businesses. Increases in paperand shipping expenses, which are primarily pass-through costs for ourbusinesses, as well as pricing pressures also contributed to the gross margindecline in 2005.

 

Selling andadministrative expenses for 2005 were $39.6 million, a $2.2 million or 5.9%increase compared to $37.4 million for 2004. The increase for 2005 was duemainly to the inclusion of a full year of selling and administrative expensesfor The Dingley Press as a result of the Dingley Acquisition.

 

Gain or losson fixed asset dispositions for2005 was a loss of $0.6 million as compared to a gain of $0.2 million for 2004.

 

Restructuringexpenses related to the shutdown of Capital City Press were $0.4 million in2005. In December 2005, our Board of Directors approved a plan to shut down theoperations of Capital City Press and consolidate the production of short-runjournals at The Sheridan Press. This decision resulted from trends in theshort-run journals industry and the capital investment required for maintainingtwo facilities serving the same market. The $0.4 million charge recorded in thefourth quarter of 2005 related primarily to guaranteed severance payments andother one-time costs. We estimate an additional $2.9 million of restructuringcharges resulting in future cash expenditures will be charged in 2006, as theshutdown is implemented. We also estimate non-cash charges of approximately$2.3 million in the first quarter of 2006 associated with accelerateddepreciation and amortization on tangible and intangible assets which will bedisposed of as a result of the shutdown. Restructuring expenses related to theclosure of the Sheridan Books facility in Fredericksburg, Virginia were $0.3million in 2004.

 

Amortizationexpense for 2005 was $2.0 million, a $0.2 million increase compared toamortization expense of $1.8 million for 2004. The increase in amortizationexpense in 2005 was due to the recognition of intangible assets associated withthe Dingley Acquisition in May 2004.

 

Operatingincome for 2005 was $21.9 million, a $0.4 million or 2.1% increase compared tooperating income of $21.5 million for 2004. Operating margin for 2005 was 6.3%,reflecting a 1.2 margin point decrease compared to an operating margin of 7.5%for 2004. Operating margins were lower in 2005 due primarily to the acquisitionof The Dingley Press in May 2004, as the specialty catalogs segment has a loweroperating margin than our other businesses. Operating margins were alsoadversely impacted by higher paper and freight costs as well as pricingpressure.

 

Operatingincome for the short-run journals segment for 2005 was $12.6 million, a $0.7million or 5.4% decrease compared to operating income of $13.3 million for2004. The decrease in operating income was primarily attributable to declinesin revenues related to prepress services, resulting from continued pricingpressure and the loss of business to lower cost offshore suppliers, as well as$0.4 million of restructuring costs associated with the decision to shutdownthe operations of Capital City Press and consolidate the production of short-runjournals at The Sheridan Press. Operating margin for the

 

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short-run journalssegment was 12.6% for 2005, reflecting a 1.1 margin point decrease compared toan operating margin of 13.7% for 2004. The decline in prepress service sales,pricing pressures, increases in paper and shipping costs and restructuringcosts were primarily responsible for the decrease in operating margins for2005. Operating income for the specialty catalogs segment for 2005 was $2.6million, a $0.9 million or 25.4% decrease compared to operating income of $3.5million for 2004. Operating margin for the specialty catalogs segment was 2.3%for 2005, reflecting a 3.1 margin point decrease compared to an operatingmargin of 5.4% for 2004. Increases in transportation costs and utility rates,coupled with pricing pressures and a full year’s allocation of corporateoverhead were primarily responsible for the lower operating income andoperating margins experienced in the specialty catalogs segment for 2005.Increases in paper costs, although a pass-through item to customers, alsoadversely impacted the operating margin for specialty catalogs in 2005.Operating income for the other publications segment for 2005 was $8.7 million,a $1.8 million or 26.0% increase compared to operating income of $6.9 million for2004. Operating margin for the other publications segment was 6.1% for 2005,reflecting a 0.9 margin point increase compared to an operating margin of 5.2%for 2004. The increased operating income and operating margin in the otherpublications segment were primarily due to manufacturing labor and overheadsavings realized from the closing of the Sheridan Books facility inFredericksburg, Virginia and the consolidation of the manufacturing operationsinto our facility in Chelsea, Michigan during the third and fourth quarters of2004.

 

Interest expense in 2005 was $19.0million, a $2.3 million or 13.7% increase compared to interest expense of $16.7million for 2004. This increase was primarily attributable to recording a fullyear of interest expense for the debt associated with the Dingley Acquisitionfor 2005 as compared to a partial year in 2004 since the Dingley Acquisitionwas finalized in May 2004.

 

Other income(including interest income) for 2005 was $0.7 million, a $0.4 million increasecompared to other income (including interest income) of $0.3 million for 2004.This increase was due primarily to increases in the market value of investmentsheld in deferred compensation funds as well as interest income earned on taxrefunds during 2005.

 

Income beforeincome taxes for 2005 was $3.6 million, a $1.5 million or 29.0% decrease ascompared to income before income taxes of $5.1 million for 2004. Income beforeincome taxes margin for 2005 of 1.0% decreased 0.8 margin points compared to a1.8% margin for 2004. The decrease in income before income taxes margin for2005 was mainly the result of higher interest expense associated with thefinancing of the Dingley Acquisition in May 2004, poorer operating results inour specialty catalogs segment and the restructuring costs recorded inconnection with the shutdown of Capital City Press partially offset by improvedprofitability in other publications.

 

Our effectiveincome tax rate in 2005 was 67.4% compared to 54.3% in 2004. The increase wasprimarily the result of the impact of increased state tax apportionment instates with unitary tax filing requirements, primarily Maine and New Hampshire,as well as other high tax states. The decline in pre-tax operating income in2005 also contributed to the higher effective income tax rate.

 

Net income for2005 was $1.2 million, a $1.1 million or 49.3% decrease from net income of $2.3million for 2004. The decrease in net income for 2005 was principally due tohigher interest expense associated with the financing of the DingleyAcquisition in May 2004, poorer operating results in our specialty catalogssegment and the restructuring costs recorded in connection with the shutdown ofCapital City Press partially offset by improved profitability in the otherpublications segment.

 

*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 Dingley Acquisition, completed in May 2004,added the specialty catalog segment and accounted for $64.2 million of thesales growth. Significant growth in short-run journals combined with slightlystronger net sales in other publications accounted for the rest of the increase.Net sales in 2004 and2003 included shipping and postage fees billed to customers totaling $27.4million and $19.7 million, 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 innet sales for the short-run journals segment was attributable to new titlesthat were awarded to us during 2004, primarily from existing customers. Netsales for the other publications segment for 2004 were $131.2 million, a $1.8million or 1.4% increase compared to $129.4 million for 2003. Continued growthin medium-run journals and magazine revenues, partially offset by a decrease inour book business, accounted for the growth in the other publications segment. Softnessin the book business resulted in our decision to close the Sheridan Booksfacility in Fredericksburg, VA and consolidate the manufacturing operationsinto our facility in Chelsea, MI. We subsequently sold the Fredericksburgfacility.

 

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Gross profitfor 2004 was $60.8 million, a $10.2 million or 20.2% increase compared to grossprofit of $50.6 million for 2003. Gross margin for 2004 decreased to 21.1% ofnet sales compared to 23.7% for 2003. The gross margin decline for 2004 wasattributable primarily to the Dingley Acquisition, as the specialty catalogsegment has a lower gross margin than our other businesses. The declineattributable to The Dingley Press was partially offset by productivity gains,driven by capital investments, realized by other segments during 2004.

 

Selling andadministrative expenses for 2004 were $37.4 million, a $1.1 million or 3.0%increase compared to $36.3 million for 2003. The increase for 2004 was duemainly to the addition of selling and administrative expenses 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).

 

Gain or loss on fixed asset dispositionsfor 2004 was a gain of $0.2 million and was a loss of $0.1 million for 2003.

 

Restructuring costs for 2004 were $0.3 million; none were recorded in2003. The restructuring costs in 2004 were due to the closure of the SheridanBooks facility in Fredericksburg, Virginia and were primarily related toemployee termination and other one-time costs.

 

Amortizationexpense for 2004 was $1.8 million, a $1.1 million increase compared toamortization expense of $0.7 million for 2003. The increase in amortizationexpense in 2004 was due to the recognition of intangible assets associated withthe Buyout in August 2003 and the Dingley 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 was7.5%, reflecting a 1.2 margin point increase compared to an operating margin of6.3% for 2003. The margin improvement for 2004 compared to 2003 was largely afunction of the impact of one-time transaction costs related to the BuyoutTransactions 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 primarilyattributable to the increase in debt associated with the Buyout Transactionsand the Dingley Transactions, coupled with the higher interest rate of the 2003Notes and the 2004 Notes as well as $0.3 million of liquidated damages accruedas a result of not having an exchange registration statement for the 2003 Notesfiled with the Securities and Exchange Commission and declared effective by thedeadline required by the registration rights agreement relating to the 2003Notes.

 

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 for2004 of 1.8% decreased 0.6 margin points compared to a 2.4% margin for 2003. Thedecrease in income before income taxes margin for 2004 was mainly the result ofhigher interest expense and increased depreciation and amortization expenseattributable to the Buyout Transactions and the Dingley Transactions, as wellas higher administrative costs associated with public reporting in connectionwith the 2003 Notes and the 2004 Notes, partially offset by higher net salesand the absence of the transaction costs related to the Buyout Transactions(which were incurred in 2003).

 

Our effectiveincome tax rate in 2004 was 54.3% compared to 62.4% in 2003. The decrease wascaused by a reduction in the amount of tax reserves established in 2004 ascompared to 2003, partially offset by an increase in our effective state ratebrought about by the unitary tax filing requirements in Maine as a result ofthe Dingley Acquisition.

 

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 net income for 2004 was principally due tothe impact of higher net sales and the absence of the 2003 transaction costsrelated to the Buyout Transactions partially offset by higher interest expenseand increased depreciation and amortization expense attributable to the BuyoutTransactions and the Dingley Transactions as well as higher costs associatedwith public reporting in connection with the 2003 Notes and the 2004 Notes.

 

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**Liquidity and Capital Resources**

 

*OperatingActiviti*es

 

Net cash provided by operating activitieswas $23.5 million for 2005 compared to $22.7 million for 2004. This $0.8million increase was primarily the result of $2.5 million of additionaldepreciation and amortization in 2005 as a result of the Dingley Acquisitionand reductions in working capital deployed, partially offset by lower earnings.

 

*InvestingActivities*

 

Net cash usedin investing activities was $20.3 million for 2005 compared to $85.0 millionfor 2004. This $64.7 million decrease was primarily the result of the absencein 2005 of the $65.5 million of cash paid related to the Dingley Acquisitionoffset by $0.8 million of proceeds received from our insurer in 2005 as aresult of property damage suffered in September 2004 at our manufacturingfacility in Ashburn, Virginia.

 

*Financing**Activities*

 

Total debtoutstanding at December 31, 2005 was $164.9 million which was unchanged ascompared to $164.9 million outstanding at December 31, 2004.

 

Net cash usedin financing activities for 2005 was $0.2 million which primarily resulted fromthe payment of a cash dividend. Net cash provided by financing activities for2004 totaled $57.3 million and consisted of $61.2 million of proceeds from thesale of the 2004 Notes less $3.9 million of costs paid in connection with suchsale in conjunction with the Dingley Acquisition.

 

We had cash of$8.0 million as of December 31, 2005 compared to $5.0 million as ofDecember 31, 2004. During 2005, we utilized cash provided by operatingactivities to make investments in new equipment and make the semi-annualinterest payments on the 2003 Notes and the 2004 Notes. During 2004, weutilized cash provided by operating activities as well as cash from additionalborrowings to help fund the Dingley Acquisition, make investments in newequipment and make the semi-annual interest payments on the 2003 Notes and the2004 Notes.

 

*Indebtedness*

 

As ofDecember 31, 2005, we had total indebtedness of $164.9 million comprisedentirely of amounts due under the 2003 Notes and the 2004 Notes, all with ascheduled maturity of August 2011. We will have significant interestpayments due on the outstanding notes as well as interest payments due on anyborrowings under our working capital facility, under which there were noamounts outstanding as of December 31, 2005. Total cash interest paymentsrelated to our working capital facility and the 2003 Notes and the 2004 Notesare expected to be in excess of $16.9 million on an 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 working capitalfacility, as amended, are substantially as set forth below. Revolving advancesare available from the lenders in an aggregate principal amount of up to $30.0million, subject to a borrowing base test. We are able to repay and re-borrowsuch advances until the May 2009 maturity date.

 

Our working capital facility and theindenture governing the 2003 Notes and the 2004 Notes contain various covenantswhich limit our discretion in the operation of our businesses. Additionally,our working capital facility contains various restrictive covenants. Amongother things, it prohibits us from prepaying other indebtedness, including the2003 Notes and the 2004 Notes, and it requires us to satisfy certain financial tests including an interestcoverage ratio and requires us to maintain a minimum EBITDA (as defined in andcalculated pursuant to our working capital facility) (such EBITDA beingreferred to hereinafter as “WCF EBITDA”), both calculated for the periodconsisting of the four preceding consecutive fiscal quarters. WCF EBITDA isdefined in and calculated pursuant to our working capital facility and is usedbelow solely for purposes of calculating our compliance with the covenants inour working capital facility. Failure to satisfy the financial tests in our workingcapital facility would constitute a default under our working capital facility.The required interest coverage ratio is 2.00 to 1.00 and the minimum WCF EBITDArequirement (calculated on a rolling twelve months) is $33.0 million throughthe end of the third quarter of 2006 and $36.0 million thereafter. For the yearended December 31, 2005, our interest coverage ratio was 2.42 to 1.00 andour WCF EBITDA for purposes of our working capital facility was $41.6 million.In addition, our working capital facility restricts our ability to declare orpay any dividends and prohibits us from making any payments with respect to the2003 Notes and the 2004 Notes if we fail to perform our obligations under, orfail to meet the conditions of, our working capital facility or if paymentcreates a default under 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 the

 

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transactionscontemplated by the working capital facility) as defined in the working capitalfacility. WCF EBITDA calculated pursuant to the working capital facility is notan indicator of financial performance or liquidity under generally acceptedaccounting principles and may not be comparable to similarly captionedinformation reported by other companies. In addition, it should not beconsidered as an alternative to, or more meaningful than, income before incometaxes, cash flows from operating activities or other traditional indicators ofoperating performance.

 

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

 
| ** **                                                               | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                               | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| Net cash provided by operating activities                                |       | $                     | 23,543     |                  | $          | 22,692                |       | $ | 20,137 |   |
| Accounts receivable                                                      |       | 704                   |       | 1,697                 |       | (1,144                | )          |
| Notes receivable                                                         |       | —                |       | —                |       | (104                  | )          |
| Inventories                                                              |       | 556                   |       | (6,658                | )          | (1,641                | )          |
| Other current assets                                                     |       | 611                   |       | 897                   |       | 373                   |       |
| Refundable income taxes                                                  |       | (1,935                | )          | 1,213                 |       | (155                  | )          |
| Other assets                                                             |       | 846                   |       | 816                   |       | 515                   |       |
| Accounts payable                                                         |       | (3,357                | )          | (1,363                | )          | (638                  | )          |
| Accrued expenses                                                         |       | (125                  | )          | 2,877                 |       | (2,001                | )          |
| Accrued interest                                                         |       | 119                   |       | (2,604                | )          | (2,544                | )          |
| Other liabilities                                                        |       | (509                  | )          | (543                  | )          | (4                    | )          |
| Provision for doubtful accounts                                          |       | (53                   | )          | (196                  | )          | (315                  | )          |
| Provision for inventory realizability and  LIFO value                    |       | (64                   | )          | (136                  | )          | (19                   | )          |
| Deferred income tax benefit (expense)                                    |       | 269                   |       | (252                  | )          | 456                   |       |
| Gain (loss) on disposition of fixed assets,  net                         |       | (586                  | )          | 172                   |       | (51                   | )          |
| Income tax provision                                                     |       | 2,436                 |       | 2,765                 |       | 3,197                 |       |
| Cash interest expense                                                    |       | 17,201                |       | 14,989                |       | 6,944                 |       |
| Management fees                                                          |       | 827                   |       | 769                   |       | 210                   |       |
| Non cash adjustments:                                                    |       |                  |       |                  |       |                  |       |
| Purchase accounting write-up of inventory                                |       | —                |       | 257                   |       | 629                   |       |
| Adjustments to LIFO value                                                |       | 30                    |       | 30                    |       | 15                    |       |
| Decrease (increase) in market value of  investments                      |       | (85                   | )          | (66                   | )          | (143                  | )          |
| Amortization of prepaid lease costs                                      |       | 83                    |       | 83                    |       | 83                    |       |
| Loss on disposition of fixed assets                                      |       | 695                   |       | 1,010                 |       | 54                    |       |
| Non-recurring transaction costs                                          |       | —                |       | —                |       | 3,484                 |       |
| Restructuring costs                                                      |       | 429                   |       | 256                   |       | —                |       |
| Gain on sale of Fredericksburg, VA land and  building, net of exit costs |       | —                |       | (776                  | )          | —                |       |
| The Dingley Press EBITDA from January 1,  2004 through May 24, 2004 (a)  |       | —                |       | 4,327                 |       | —                |       |
| **Working Capital Facility EBITDA**                                      |       | $                     | 41,635     |                  | $          | 42,256                |       | $ | 27,338 |   |

 

----

(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

 

24

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assets.

 

Our principal sources of liquidity areexpected to be cash flow generated from operations and borrowings under ourworking capital facility. Our principal uses of cash are expected to be to meetdebt service requirements, financeour capital expenditures and provide working capital. We estimate that ourcapital expenditures for 2006 will total about $24.9 million. Based on ourcurrent level of operations, we believe that our cash flow from operations,available cash and available borrowings under our working capital facility willbe adequate to meet our future short-term and long-term liquidity needs. Ourfuture operating performance and ability to extend or refinance ourindebtedness will be dependent on future economic conditions and financial,business and other factors that may be beyond our control.

 

**Contractual Obligations**

 

The followingtable summarizes our future minimum non-cancelable contractual obligations asof December 31, 2005:

 
| ** **                             | ** ** | **Remaining Payments Due by Period** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                             | ** ** | ** **                                               | ** ** | ** ** | ** ** | **2007 to** | ** ** | **2009 to** | ** ** | **2011 and** | ** ** |
| **(in thousands)**                | ** ** | **Total**                                                | ** ** | **2006** | ** ** | **2008** | ** ** | **2010** | ** ** | **beyond** | ** ** |
|                                   |       |                                                     |       |   |   |   |   |   |   |   |   |
| Long term debt, including interest (1) |       | $                                                        | 260,133    |   | $ | 16,913 |   | $ | 33,825 |   | $ | 33,825 |   | $ | 175,570 |   |
| Operating leases                       |       | 14,775                                                   |       | 4,983 |   | 7,419 |   | 2,160 |   | 213 |   |
| Purchase obligations (2)               |       | 31,020                                                   |       | 23,318 |   | 5,511 |   | 2,191 |   | — |   |
| Other long-term obligations (3)        |       | 1,411                                                    |       | 247 |   | 505 |   | 344 |   | 315 |   |
|                                   |       |                                                     |       |   |   |   |   |   |   |   |   |
| Total                                  |       | $                                                        | 307,339    |   | $ | 45,461 |   | $ | 47,260 |   | $ | 38,520 |   | $ | 176,098 |   |

 

----

(1) Includesthe $105.0 million aggregate principal amount due on the 2003 Notes and the$60.0 million aggregate principal amount due on the 2004 Notes plus interest at10.25% payable semi-annually through August 15, 2011.

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

(3)Represents payments due under non-compete arrangements with our former Chairmanof the Board and the President of The Dingley Press.

 

**Off-Balance Sheet Arrangements**

 

AtDecember 31, 2005 and 2004, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. We are, therefore, notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in 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 2005, 2004 and 2003.

 

**Recently Issued AccountingPronouncements**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued a revision to SFAS No. 123 (“SFAS 123R”), “Share-BasedPayment.” SFAS 123R requires that the cost of equity-based service awards bemeasured based on the

 

25

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grant-datefair value of the award. The cost will be recognized over the period duringwhich an employee is required to provide service in exchange for the award orthe requisite service period. No compensation cost is recognized for equityinstruments for which employees do not render the requisite service. InApril 2005, the Securities and Exchange Commission announced the adoptionof a new rule that amends the effective date of SFAS 123R. Theeffective date of the new standard under these new rules isJanuary 1, 2006. Adoption of this statement will have an impact on ourconsolidated financial statements as we will be required to expense the fairvalue of our stock option grants rather than disclose the impact on ourconsolidated net income within our footnotes, as is our current practice.We do not believe adoption of SFAS 123R will have a material effect on ourconsolidated financial position, results of operations or cash flows.

 

In March 2005, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”)regarding the Staff’s interpretation of SFAS 123R. This interpretationexpresses the views of the Staff regarding the interaction between SFAS 123Rand certain SEC rules and regulations and provides the Staff’s viewsregarding the valuation of share-based payment arrangements by publiccompanies. In particular, this SAB provides guidance related to share-basedpayment transactions with non-employees, the transition from nonpublic topublic entity status, valuation methods, the accounting for certain redeemablefinancial instruments issued under share-based payment arrangements, theclassification of compensation expense, non-GAAP financial measures, first-timeadoption of SFAS 123R in an interim period, capitalization of compensation costrelated to share-based payment arrangements, the accounting for income taxeffects of share-based payment arrangements upon adoption of SFAS 123R, themodification of employee share options prior to adoption of SFAS 123R anddisclosures in Management’s Discussion and Analysis subsequent to adoption ofSFAS 123R. We will adopt SAB 107 in connection with our adoption of SFAS123R.

 

In May 2005, the FASB issued SFAS No. 154,*Accounting Changes and Error Corrections*,(“SFAS 154”) which replaces APB Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *Reporting AccountingChanges in Interim Financial Statements*. SFAS 154 applies to allvoluntary changes in accounting principle and requires retrospectiveapplication (a term defined by the statement) to prior periods’ financialstatements, unless it is impracticable to determine the effect of a change. Italso applies to changes required by an accounting pronouncement that does notinclude specific transition provisions. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning afterDecember 15, 2005. We will adopt SFAS 154 in the first quarter of fiscal2006.

 

In September 2005, the Emerging Issues TaskForce (“EITF”) issued EITF 05-06, “Determining the Amortization Period forLeasehold Improvements after Lease Inception or Acquired in a BusinessCombination”. EITF 05-06 requires that leasehold improvements acquired ina business combination be capitalized over the shorter of the useful life ofthe assets or a term that includes required lease periods and renewals that aredeemed to be reasonably assured at the date of acquisition.  EITF 05-06also requires leasehold improvements that are placed in service significantlyafter and not contemplated at or near the beginning of the lease term should beamortized over the shorter of the useful life of the assets or a term thatincludes required lease periods and renewals that are deemed to be reasonablyassured (as defined in paragraph 5 of Statement 13) at the date the leaseholdimprovements are purchased. EITF 05-06 is effective for leasehold improvementsthat are purchased or acquired in reporting periods beginning afterJune 29, 2005. Early adoption of the consensus is permitted in periods forwhich financial statements have not been issued.  We do not believe thatthe adoption of EITF 05-06 will have a material effect on our consolidatedfinancial position, results of operations or cash flows.

 

In October 2005, the FASB issued SFAS 13-1, *Accounting for Rental Costs Incurred during aConstruction Period* (“FSP SFAS 13-1”). FSP SFAS 13-1 concludes thatthere is no distinction between the right to use a leased asset during andafter the construction period; therefore rental costs incurred during theconstruction period should be recognized as rental expense and included in incomefrom continuing operations. FSP SFAS 13-1 is effective for the first reportingperiod beginning after December 15, 2005; early adoption is permitted. Weplan to adopt FSP SFAS 13-1 in the first quarter of 2006 and do not expect FSPSFAS 13-1 to have a material impact on the consolidated financial statements.

 

**ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT 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 risksprimarily relate to the sale of products and services to foreign customers andchanges in interest rates on our long-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

 

26

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and our expenses infiscal years 2005, 2004 and 2003 were denominated in U.S. dollars. Therefore,foreign currency fluctuations did not materially impact our financial resultsin those periods.

 

**Interest Rate Market Risk**

 

We could be exposed to changes ininterest rates. Our working capital facility is variable rate debt. Interestrate changes, therefore, generally do not affect the market value of such debtbut do impact the amount of our interest payments and, therefore, our futureearnings and cash flows, assuming other factors are held constant. We currently do nothave any borrowings under our working capital facility. All of our other debtcarries fixed interest rates.

 

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**Report of Independent Registered Public AccountingFirm**

 

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

 

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of income, of changes in the stockholders’ equity (deficit) andmandatorily redeemable convertible preferred stock, and of cash flows presentfairly, in all material respects, the financial position of The Sheridan Group,Inc. and Subsidiaries (the “Company”)(“Successor”) at December 31, 2005and 2004, and the results of their operations and their cash flows for theyears ended December 31, 2005 and 2004 and the four-month and eleven-dayperiod ended December 31, 2003, 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 audits of these statements in accordance with the standards ofthe Public 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 anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable 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 period from January 1, 2003 toAugust 20, 2003 are presented on the Company’s previous basis ofaccounting.

 

 
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|
| Baltimore, Maryland             |
| March 29, 2006             |

 

27

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**Report of Independent Registered Public Accounting Firm**

 

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, 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 audit. We conducted our audit 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 audit provides 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 period from January 1, 2003 toAugust 20, 2003 are presented on the Company’s previous basis ofaccounting.

 

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

 

28

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**The Sheridan Group, Inc. and SubsidiariesConsolidated Balance SheetsAt December 31, 2005 and 2004**

 
| ** **                                                                                                          | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                                                                                          | ** ** | **2005**              | ** **  | **2004**              | ** ** |
| **Assets**                                                                                                          |       |                  |        |                  |       |
| Current assets                                                                                                      |       |                  |        |                  |       |
| Cash and cash equivalents                                                                                           |       | $                     | 7,962,406   |                  | $          | 4,974,615 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $956,612 and $1,136,719, respectively               |       | 33,544,025            |        | 32,893,070            |       |
| Inventories, net                                                                                                    |       | 19,055,266            |        | 18,562,870            |       |
| Other current assets                                                                                                |       | 4,125,713             |        | 4,325,228             |       |
| Refundable income taxes                                                                                             |       | 677,061               |        | 2,611,725             |       |
| Deferred income taxes                                                                                               |       | 1,167,836             |        | 1,907,748             |       |
| Total current assets                                                                                                |       | 66,532,307            |        | 65,275,256            |       |
|                                                                                                                |       |                  |        |                  |       |
| Property, plant and equipment, net                                                                                  |       | 119,219,511           |        | 115,253,354           |       |
| Intangibles, net                                                                                                    |       | 46,549,163            |        | 48,281,162            |       |
| Goodwill                                                                                                            |       | 56,983,043            |        | 57,763,307            |       |
| Deferred financing costs, net                                                                                       |       | 6,915,181             |        | 8,672,108             |       |
| Other assets                                                                                                        |       | 4,521,350             |        | 3,893,675             |       |
|                                                                                                                |       |                  |        |                  |       |
| Total assets                                                                                                        |       | $                     | 300,720,555 |                  | $          | 299,138,862 |   |
|                                                                                                                |       |                  |        |                  |       |
| **Liabilities**                                                                                                     |       |                  |        |                  |       |
| Current liabilities                                                                                                 |       |                  |        |                  |       |
| Accounts payable                                                                                                    |       | $                     | 19,401,927  |                  | $          | 17,487,828 |   |
| Accrued expenses                                                                                                    |       | 24,220,519            |        | 24,214,084            |       |
| Total current liabilities                                                                                           |       | 43,622,446            |        | 41,701,912            |       |
|                                                                                                                |       |                  |        |                  |       |
| Notes payable                                                                                                       |       | 164,903,580           |        | 164,893,650           |       |
| Deferred income taxes                                                                                               |       | 33,740,457            |        | 35,529,769            |       |
| Other liabilities                                                                                                   |       | 3,457,939             |        | 2,948,686             |       |
| Total liabilities                                                                                                   |       | 245,724,422           |        | 245,074,017           |       |
| Commitments and contingencies (Notes 13 and  18)                                                                    |       |                  |        |                  |       |
|                                                                                                                |       |                  |        |                  |       |
| **Stockholder’s Equity**                                                                                       |       |                  |        |                  |       |
| Common stock, $0.01 par value; 100 shares  authorized; 1 share issued and outstanding at December 31, 2005 and 2004 |       | —                |        | —                |       |
| Additional paid-in capital                                                                                          |       | 50,975,800            |        | 50,975,000            |       |
| Retained earnings                                                                                                   |       | 4,020,333             |        | 3,089,845             |       |
| Total stockholder’s equity                                                                                     |       | 54,996,133            |        | 54,064,845            |       |
|                                                                                                                |       |                  |        |                  |       |
| Total liabilities and stockholder’s equity                                                                     |       | $                     | 300,720,555 |                  | $          | 299,138,862 |   |

 

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

 

29

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**The Sheridan Group, Inc. and SubsidiariesConsolidatedStatements of IncomeYears Ended December 31, 2005 and December 31, 2004 and Periods EndedDecember 31 and August 20, 2003**

 
| ** **                                     | ** ** | **Successor Basis** | ** **  | **Predecessor Basis** | ** ** |
|------------------------------------------------|------------|--------------------------|-------------|----------------------------|------------|
| ** **                                     | ** ** | ** **               | ** **  | ** **                 | ** ** | **Four-months and** | ** ** | **Seven-months and** | ** ** |
| ** **                                     | ** ** | **Year Ended**      | ** **  | **Year Ended**        | ** ** | **eleven-days ended** | ** ** | **twenty-days ended** | ** ** |
| ** **                                     | ** ** | **December 31,**    | ** **  | **December 31,**      | ** ** | **December 31,** | ** ** | **August 20,** | ** ** |
| ** **                                     | ** ** | **2005**                 | ** **  | **2004**                   | ** ** | **2003** | ** ** | **2003** | ** ** |
| Net sales                                      |       | $                        | 347,958,675 |                       | $          | 287,513,124 |   | $ | 81,192,856 |   | $ | 131,904,436 |   |
| Cost of sales                                  |       | 283,502,625              |        | 226,730,754                |       | 62,447,372 |   | 100,065,635 |   |
| Gross profit                                   |       | 64,456,050               |        | 60,782,370                 |       | 18,745,484 |   | 31,838,801 |   |
| Selling and administrative expenses            |       | 39,594,103               |        | 37,404,454                 |       | 12,703,533 |   | 23,619,398 |   |
| (Gain) loss on disposition of fixed assets     |       | 585,617                  |        | (172,405                   | )          | 23,610 |   | 26,583 |   |
| Restructuring costs                            |       | 429,231                  |        | 256,481                    |       | — |   | — |   |
| Amortization of intangibles                    |       | 1,950,204                |        | 1,838,073                  |       | 603,624 |   | 85,079 |   |
| Total operating expenses                       |       | 42,559,155               |        | 39,326,603                 |       | 13,330,767 |   | 23,731,060 |   |
| Operating income                               |       | 21,896,895               |        | 21,455,767                 |       | 5,414,717 |   | 8,107,741 |   |
| Other (income) expense                         |       |                     |        |                       |       |   |   |   |   |
| Interest expense                               |       | 18,967,623               |        | 16,678,096                 |       | 4,423,048 |   | 4,698,393 |   |
| Fair value adjustment to interest rate  collar |       | —                   |        | —                     |       | — |   | (283,123 | ) |
| Interest income                                |       | (280,254                 | )           | (183,296                   | )          | (47,153 | ) | (66,603 | ) |
| Other, net                                     |       | (406,853                 | )           | (133,516                   | )          | (235,236 | ) | (93,154 | ) |
| Total other expense                            |       | 18,280,516               |        | 16,361,284                 |       | 4,140,659 |   | 4,255,513 |   |
| Income before income taxes                     |       | 3,616,379                |        | 5,094,483                  |       | 1,274,058 |   | 3,852,228 |   |
| Income tax provision                           |       | 2,436,000                |        | 2,764,851                  |       | 513,845 |   | 2,683,312 |   |
| Net income                                     |       | $                        | 1,180,379   |                       | $          | 2,329,632 |   | $ | 760,213 |   | $ | 1,168,916 |   |

 

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

 

30

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**The Sheridan Group, Inc. and SubsidiariesConsolidatedStatements of Changes in Stockholders’ Equity (Deficit) and MandatorilyRedeemable Convertible Preferred Stock**

**YearsEnded December 31, 2005 and December 31, 2004 and Periods EndedDecember 31 and August 20, 2003**

 
| ** **                                | ** ** | **Mandatorily Redeemable** | ** ** | **Class A**      | ** ** | **Class E**      | ** ** | **Successor**         | ** ** | **Additional** | ** ** | **Retained Earnings** | ** ** | **Total**              | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|----------------|------------|----------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **Preferred Stock**        | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Common Stock** | ** ** | **Paid-In**    | ** ** | **(Accumulated**           | ** ** | **Stockholders’** | ** ** |
| ** **                                | ** ** | **Shares**                      | ** ** | **Amount**            | ** ** | **Shares**            | ** ** | **Amount**            | ** ** | **Shares**     | ** ** | **Amount**                 | ** ** | **Shares**             | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Deficit)** | ** ** | **Equity (Deficit)** | ** ** |
| **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 |   |
| Stock option  compensation                |       | —                          |       | —                |       | 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 |   |
| Cash dividend                             |       | —                          |       | —                |       | —                |       | —                |       | —         |       | —                     |       | —                 |       | — |   | — |   | (249,891 | ) | (249,891 | ) |
| Capital  contribution from parent company |       | —                          |       | —                |       | —                |       | —                |       | —         |       | —                     |       | —                 |       | — |   | 800 |   | — |   | 800 |   |
| Net income                                |       | —                          |       | —                |       | —                |       | —                |       | —         |       | —                     |       | —                 |       | — |   | — |   | 1,180,379 |   | 1,180,379 |   |
| **Balance  as of December 31, 2005**      |       | —                          |       | $                     | —     |                  | —     |                  | $          | —         |       | —                     |       | $                      | —     |   | 1 |   | $ | — |   | $ | 50,975,800 |   | $ | 4,020,333 |   | $ | 54,996,133 |   |

 

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

 

31

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** **

**The Sheridan Group, Inc. and SubsidiariesConsolidatedStatements of Cash FlowsYears Ended December 31, 2005 and December 31, 2004 and Periods EndedDecember 31 and August 20, 2003**

 
| ** **                                                                                     | ** ** | **Successor Basis** | ** ** | **Predecessor Basis** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                     | ** ** | ** **               | ** ** | ** **                 | ** ** | **Four-months and** | ** ** | **Seven-months and** | ** ** |
| ** **                                                                                     | ** ** | **Year ended**      | ** ** | **Year ended**        | ** ** | **eleven-days ended** | ** ** | **twenty-days ended** | ** ** |
| ** **                                                                                     | ** ** | **December 31,**    | ** ** | **December 31,**      | ** ** | **December 31,** | ** ** | **August 20,** | ** ** |
| ** **                                                                                     | ** ** | **2005**                 | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2003** | ** ** |
|                                                                                           |       |                     |       |                       |       |   |   |   |   |
| **Cash  flows provided by operating activities:**                                              |       |                     |       |                       |       |   |   |   |   |
| Net income                                                                                     |       | $                        | 1,180,379  |                       | $          | 2,329,632 |   | $ | 760,213 |   | $ | 1,168,916 |   |
| Adjustments to  reconcile net income to net cash from operating activities                     |       |                     |       |                       |       |   |   |   |   |
| Depreciation                                                                                   |       | 15,121,343               |       | 12,755,046                 |       | 3,563,957 |   | 4,591,401 |   |
| Amortization of  assets under capital lease                                                    |       | —                   |       | —                     |       | — |   | 197,527 |   |
| Amortization of  intangible assets                                                             |       | 1,950,204                |       | 1,838,073                  |       | 603,624 |   | 85,079 |   |
| Provision for  doubtful accounts                                                               |       | 53,074                   |       | 195,961                    |       | 81,823 |   | 232,757 |   |
| Provision  (credit) for inventory realizability and LIFO value                                 |       | 63,950                   |       | 136,110                    |       | (9,555 | ) | 28,372 |   |
| Fair value  adjustment to interest rate collar                                                 |       | —                   |       | —                     |       | — |   | (283,123 | ) |
| Amortization of  deferred financing costs and debt discount, included in interest expense      |       | 1,766,857                |       | 1,689,413                  |       | 496,175 |   | 1,681,665 |   |
| Deferred income  tax expense (benefit)                                                         |       | (269,136                 | )          | 332,614                    |       | (739,434 | ) | 284,109 |   |
| (Gain)/loss on  disposition of fixed assets                                                    |       | 585,617                  |       | (172,405                   | )          | 23,610 |   | 26,583 |   |
| Changes in  operating assets and liabilities, net of assets acquired and liabilities  assumed: |       |                     |       |                       |       |   |   |   |   |
| Accounts receivable                                                                            |       | (704,029                 | )          | (1,697,032                 | )          | (2,325,780 | ) | 3,470,338 |   |
| Notes receivable                                                                               |       | —                   |       | —                     |       | 33,356 |   | 70,636 |   |
| Inventories                                                                                    |       | (556,346                 | )          | 6,657,930                  |       | 1,981,057 |   | (340,259 | ) |
| Other current  assets                                                                          |       | (610,456                 | )          | (896,973                   | )          | (657,603 | ) | 284,837 |   |
| Refundable income  taxes                                                                       |       | 1,934,664                |       | (1,292,999                 | )          | 466,393 |   | (311,135 | ) |
| Other assets                                                                                   |       | (845,880                 | )          | (816,179                   | )          | 117,688 |   | (633,394 | ) |
| Accounts payable                                                                               |       | 3,357,249                |       | 1,363,309                  |       | 1,284,949 |   | (646,728 | ) |
| Accrued expenses                                                                               |       | 125,202                  |       | (2,877,309                 | )          | (241,779 | ) | 2,243,055 |   |
| Accrued interest                                                                               |       | (118,767                 | )          | 2,604,371                  |       | 3,629,504 |   | (1,085,925 | ) |
| Other liabilities                                                                              |       | 509,253                  |       | 542,515                    |       | (280,457 | ) | 284,288 |   |
| Net cash provided  by operating activities                                                     |       | 23,543,178               |       | 22,692,077                 |       | 8,787,741 |   | 11,348,999 |   |
|                                                                                           |       |                     |       |                       |       |   |   |   |   |
| **Cash  flows used in investing activities**                                                   |       |                     |       |                       |       |   |   |   |   |
| Purchases of  property, plant and equipment                                                    |       | (21,282,193              | )          | (21,827,456                | )          | (2,914,838 | ) | (5,213,268 | ) |
| Proceeds from  sale of fixed assets                                                            |       | 165,926                  |       | 2,404,366                  |       | 27,044 |   | 26,155 |   |
| Proceeds from  insurance coverage                                                              |       | 809,971                  |       | —                     |       | — |   | — |   |
| 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                                                         |       | (20,306,296              | )          | (84,952,621                | )          | (82,341,100 | ) | (5,187,113 | ) |
|                                                                                           |       |                     |       |                       |       |   |   |   |   |
| **Cash  flows (used in) provided by financing activities**                                     |       |                     |       |                       |       |   |   |   |   |
| Borrowing of  revolving line of credit                                                         |       | 21,568,000               |       | 9,274,000                  |       | — |   | 15,693,315 |   |
| Repayment of  revolving line of credit                                                         |       | (21,568,000              | )          | (9,274,000                 | )          | (2,121,771 | ) | (16,473,000 | ) |
| Repayment of long  term debt                                                                   |       | —                   |       | —                     |       | (56,744,439 | ) | (5,185,798 | ) |
| Repayment of  obligation under capital leases                                                  |       | —                   |       | —                     |       | (1,469,565 | ) | (164,376 | ) |
| Payment of  deferred financing costs in connection with issuance of long term debt             |       | —                   |       | (3,882,593                 | )          | (6,873,594 | ) | — |   |
| Payment of  dividend                                                                           |       | (249,891                 | )          |                       |       |   |   |   |   |
| Proceeds from  issuance of long term debt                                                      |       | —                   |       | 61,200,000                 |       | 103,600,350 |   | — |   |
| Proceeds from  capital contribution from parent company                                        |       | 800                      |       | —                     |       | 47,000,000 |   | — |   |
| Net cash (used  in) provided by financing activities                                           |       | (249,091                 | )          | 57,317,407                 |       | 83,390,981 |   | (6,129,859 | ) |
|                                                                                           |       |                     |       |                       |       |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                          |       | 2,987,791                |       | (4,943,137                 | )          | 9,837,622 |   | 32,027 |   |
|                                                                                           |       |                     |       |                       |       |   |   |   |   |
| **Cash and  cash equivalents**                                                                 |       |                     |       |                       |       |   |   |   |   |
| Cash and cash  equivalents, beginning of year                                                  |       | 4,974,615                |       | 9,917,752                  |       | 80,130 |   | 48,103 |   |
|                                                                                           |       |                     |       |                       |       |   |   |   |   |
| Cash and cash  equivalents, end of year                                                        |       | $                        | 7,962,406  |                       | $          | 4,974,615 |   | $ | 9,917,752 |   | $ | 80,130 |   |
|                                                                                           |       |                     |       |                       |       |   |   |   |   |
| **Supplemental  disclosure of cash flow information**                                          |       |                     |       |                       |       |   |   |   |   |
| Cash paid during  the year for                                                                 |       |                     |       |                       |       |   |   |   |   |
| Interest                                                                                       |       | $                        | 17,319,533 |                       | $          | 14,092,645 |   | $ | 5,353 |   | $ | 4,282,030 |   |
| Income taxes, net  of refunds                                                                  |       | $                        | 738,852    |                       | $          | 3,699,852 |   | $ | 771,943 |   | $ | 2,238,506 |   |
|                                                                                           |       |                     |       |                       |       |   |   |   |   |
| Non-cash  investing and financing activities                                                   |       |                     |       |                       |       |   |   |   |   |
| Conversion of  preferred stock into common stock                                               |       | $                        | —     |                       | $          | — |   | $ | 18,191,665 |   | $ | — |   |
| Asset additions  in accounts payable                                                           |       | $                        | 977,324    |                       | $          | 2,420,474 |   | $ | 1,040,000 |   | $ | 176,000 |   |
| Issuance of stock  as purchase consideration                                                   |       | $                        | —     |                       | $          | 3,975,000 |   | $ | — |   | $ | — |   |

 

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

 

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**The Sheridan Group, Inc. and SubsidiariesNotes toConsolidated Financial StatementsYears Ended December 31, 2005 and December 31, 2004 and Periods EndedDecember 31 and August 20, 2003**

 

**1. BusinessOrganization**

 

TheSheridan Group, Inc. (“TSG” or the “Company”) is one of the leadingspecialty printers 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 Sheridan Press, Inc.(“TSP”), United Litho, Inc. (“ULI”), Dartmouth Printing Company (“DPC”),Capital City Press, Inc. (“CCP”), Sheridan Books, Inc. (“SBI”),Dartmouth Journal Services, Inc. (“DJS”), The Dingley Press, Inc. (“TDP”)and The Sheridan 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 themanagement and 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,senior subordinated debt, industrial revenue bonds, and various notes payableand capital leases, which totaled approximately $55.3 million. The totalpurchase price for the Sheridan Acquisition was $186.6 million, which consistedof $55.3 million of refinanced indebtedness discussed above, cash paid of $79.9million and liabilities assumed of $51.4 million. Included in the purchaseprice was a standard seller indemnity escrow fund totaling $5.0 million, whichwas disbursed to the sellers on August 21, 2004. Concurrent with theSheridan Acquisition, Sheridan Acquisition Corp. merged with and into theCompany.

 

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“Business Combinations.” Accordingly, the financial statements of the Companyas of and for periods subsequent to August 21, 2003 are referred to as the“Successor basis” statements and all financial statements prior to that dateare referred to as the “Predecessor basis” statements. The aforementionedapplication of purchase accounting resulted in higher depreciation andamortization expense. Accordingly, because of the Sheridan Acquisition and newbasis of accounting, the Company’s financial statements for the periodsubsequent to the Sheridan Acquisition are not comparable to the Predecessor’sfinancial statements for the periods prior to the Sheridan Acquisition.

 

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 completeda private 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 $95.4 million, which consisted of cash paid of $65.5 million,liabilities assumed of $26.0 million and financing costs of $3.9 million.Included in the purchase price was a standard seller indemnity escrow fundtotaling $3.0 million which expired 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.

 

33

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TheDingley Acquisition was accounted for as a purchase in accordance with SFAS No. 141,“Business Combinations,” and the Company accordingly allocated the purchaseprice of The Dingley Press based upon the fair value of net assets acquired andliabilities assumed. The total purchase price was allocated to the acquiredassets and liabilities based on their respective fair values at May 25,2004 as follows:

 
| Current  assets                      |   | $       | 26,926 |   |
|--------------------------------------|--------|---------|--------|--------|
| Property, plant & equipment |   | 49,711  |   |
| Intangible assets                    |   | 3,978   |   |
| Goodwill                             |   | 14,829  |   |
| Total assets  acquired               |   | 95,444  |   |
| Liabilities assumed                  |   | (26,006 | )      |
| Net assets  acquired                 |   | $       | 69,438 |   |

 

During 2005, the Company has revised theoriginal allocation of purchase price made to the net assets acquired as aresult of the Dingley Acquisition. The Company corrected the classification of thedeferred tax asset arising from the portion of tax deductible goodwill acquiredin excess of book goodwill. The revision resulted in an increase to goodwilland a decrease to deferred tax assets of $11.2 million, as of the acquisitiondate. The revision had no effect on net assets acquired as a result of theacquisition and no impact on previously reported consolidated statements ofincome, cash flows, and stockholders’ equity. As a result of the revision, reflectedin the December 31, 2004 consolidated balance sheet, and in accordancewith FAS 109, “Accounting for Income Taxes”, the Company will realize a taxbenefit associated with the amount of tax goodwill in excess of book goodwillassociated with the acquisition. The Company will only recognize the benefitwhen realized on future tax returns and will apply the benefit first to reducebook goodwill associated with the acquisition to zero, second to reduce to zeroother noncurrent intangible assets related to the acquisition, and third toreduce income tax expense. During 2005, the Company incurred a tax benefit of $0.8million associated with the realization of tax deductible goodwill in excess ofbook goodwill. Such amount has been recorded as a reduction to book goodwillfor the year ended December 31, 2005 (see Note 7).

 

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 consolidatedresults of operations as if both the Sheridan Acquisition and the DingleyAcquisition (the “Acquisitions”) occurred as of January 1, 2003. Thesummary includes adjustments for depreciation and amortization of noncurrentassets, income taxes, interest expense on the debt incurred to fund theAcquisitions, management fees and transaction costs which would have beenincurred had the Acquisitions occurred as of the beginning of the periodspresented. These unaudited pro forma results have been prepared for comparativepurposes only and do not purport to be indicative of what would have occurredhad the Acquisitions and other transactions occurred as of that date or resultswhich may occur in the future.

 
| ** **                 | ** ** | **(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 and TheSheridan Group Holding Company. All material intercompany balances andtransactions have been eliminated.

 

34

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**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 seller’s 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.

 

**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 receivable from a single customer.The Company establishes an allowance for doubtful accounts based upon factorssurrounding the credit risk of specific customers, historical trends and other information.

 

**AccountsReceivable and Allowance for Doubtful Accounts**

 

Tradeaccounts receivable are recorded at the invoiced amount and do not bearinterest. The allowance for doubtful accounts is the Company’s best estimate ofprobable credit losses in its existing accounts receivable. The Company reviewsthe allowance for doubtful accounts on a regular basis. Past due balances over120 days 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:

 

35

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| ** **                      | ** ** | **Successor Basis**               | ** ** | **Predecessor Basis**             | ** ** |
|---------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **Year Ended  December 31,** | ** ** | **Year Ended  December 31,** | ** ** | **Four-months and  eleven-days  ended December  31,** | ** ** | **Seven-months  and twenty-days  ended August 20,** | ** ** |
| ** **                      | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2003** | ** ** |
|                            |       |                              |       |                              |       |   |   |   |   |
| Balance at  beginning of period |       | $                                 | 1,136,719  |                              | $          | 1,089,139 |   | $ | 1,155,565 |   | $ | 996,685 |   |
| Charged to  expense             |       | 53,074                            |       | 195,961                           |       | 81,823 |   | 232,757 |   |
| Deductions                      |       | (233,181                          | )          | (549,793                          | )          | (148,249 | ) | (73,877 | ) |
| Other (a)                       |       | —                            |       | 401,412                           |       | — |   | — |   |
| Balance at  end of period       |       | $                                 | 956,612    |                              | $          | 1,136,719 |   | $ | 1,089,139 |   | $ | 1,155,565 |   |

 

----

(a) Representsthe opening balance in the allowance resulting from the acquisition of TheDingley Press during 2004.

 

**Inventories**

 

Inventoriesare stated at the lower of cost or market with the cost of TSP’s paperinventory and SBI’s work-in-process inventory determined by the last-in,first-out (“LIFO”) cost method. The cost of the remaining inventory(approximately 92% of inventories at December 31, 2005 and December 31,2004) is determined using the first-in, first-out (“FIFO”) method.

 

**Property and Equipment**

 

Property,plant and equipment are recorded at cost, except those assets acquired throughthe Acquisitions, in which case they are recorded at fair value. Depreciationis provided using the straight-line method over the estimated useful lives ofthe assets, as follows: 1-11 years for machinery and equipment; and 10-40 yearsfor buildings and land improvements. Leasehold improvements are amortized overtheir estimated useful lives or the term of the underlying lease, whichever isshorter. Upon disposal of property, plant and equipment, the cost of the asset andthe 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 (“SFAS 144”), “Accounting for theImpairment or Disposal of Long-Lived Assets.” Recoverability of assets to beheld and used is measured by a comparison of the carrying amount of an asset tofuture net cash flows expected to be generated by the asset. If such assets areconsidered to be impaired, the impairment recognized is measured by the amountby which the carrying amount of the assets exceeds the fair value of theassets. Assets to be disposed of by sale are reported at the lower of thecarrying amount or fair value 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

 

36

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impairment. Separableintangible assets that have finite useful lives will continue to be amortizedover their useful lives.

 

SFAS142 requires 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 requires 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 exceeds the carrying value, no impairment loss isrecognized. However, if the carrying value of the reporting unit exceeds itsfair value, the goodwill of this unit may be impaired. The amount, if any,of the impairment is then measured in the second step by comparing the impliedfair value of goodwill, determined using estimated future discounted cashflows, to the carrying value of goodwill for each reporting unit.

 

**IdentifiedIntangible and 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 assets forimpairment using undiscounted future cash flows whenever events or changes incircumstances indicate that the carrying value may not be recoverable, anddoes not believe there is any impairment of intangible assets or otherlong-lived assets as of December 31, 2005 and 2004 pursuant to SFAS 144.

 

**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, 2005 and 2004 was $3,849,214 and $2,092,287, 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 had the Company elected to adoptthe fair value approach of SFAS No. 123, “Accounting for Stock-BasedCompensation”:

 
| ** **                                  | ** ** | **Successor Basis**               | ** ** | **Predecessor Basis**             | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **Year ended  December 31,** | ** ** | **Year ended  December 31,** | ** ** | **Four-months  and eleven-days  ended December  31,** | ** ** | **Seven-months  and twenty-days  ended August 20,** | ** ** |
| ** **                                  | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2003** | ** ** |
|                                        |       |                              |       |                              |       |   |   |   |   |
| Net income  (loss) as reported              |       | $                                 | 1,180,379  |                              | $          | 2,329,632 |   | $ | 760,213 |   | $ | 1,168,916 |   |
| Less:  Stock-based compensation, net of tax |       | 13,615                            |       | 12,460                            |       | — |   | 32,275 |   |
| Pro forma  net income (loss)                |       | $                                 | 1,166,764  |                              | $          | 2,317,172 |   | $ | 760,213 |   | $ | 1,136,641 |   |

 

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:

 
| ** **                             | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Risk-free  interest rate               |       | 4.38                        | %          | 3.95                        | %          | 3.95                        | %          |
| Average  expected years until exercise |       | 5.6 years                   |       | 6.5 years                   |       | 7 years                     |       |
| Expected  volatility                   |       | 0                           | %          | 0                           | %          | 0                           | %          |
| Dividend  yield                        |       | 0                           | %          | 0                           | %          | 0                           | %          |
| Weighted  average fair value per share |       | $                           | 2.17       |                        | $          | 2.26                        |       | $ | 2.41 |   |
|                                        |            |                             |            |                             |            |                             |            |  |  |  |

 

37

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**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 $169.7million and $180.5 million as of December 31, 2005 and 2004, respectively.

 

**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 allderivatives as either assets or liabilities in its financial statements andrecord these instruments at their fair values. In order to achieve hedgeaccounting treatment, hedging activities must be appropriately designated,documented and proven to be effective as a hedge of a balance sheet itempursuant to provisions of SFAS 133. The Company elected, as permitted by SFAS133, not to prove the hedge effectiveness of its interest rate collar due tothe administrative burden of complying with SFAS 133. As a result, changes inthe fair value of the interest rate collar were recorded through current incomerather than through other comprehensive income. On August 21, 2003, aportion of the proceeds from the 2003 Notes were used to pay the obligation of$529,897, relating to the interest rate collar, and the interest rate collaragreement was terminated. The Company had no derivative financial instrumentsat December 31, 2005 and 2004.

 

**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 $469,000, $491,000, $160,000 and $363,000 for the years ended December 31,2005 and 2004, the four-months and eleven-days ended December 31, 2003 andthe seven-months and twenty-days ended August 20, 2003, respectively.

 

**NewAccounting Standards**

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued a revision to SFAS No. 123 (“SFAS 123R”), “Share-BasedPayment.” SFAS 123R requires that the cost of equity-based service awards bemeasured based on the grant-date fair value of the award. The cost will berecognized over the period during which an employee is required to provideservice in exchange for the award or the requisite service period. Nocompensation cost is recognized for equity instruments for which employees donot render the requisite service. In April 2005, the Securities andExchange Commission announced the adoption of a new rule that amends theeffective date of SFAS 123R. For the Company, the effective date of thenew standard under these new rules is January 1, 2006. Adoption ofthis statement will have an impact on the Company's consolidated financialstatements as it will be required to expense the fair value of stock optiongrants rather than disclose the impact on consolidated net income within thefootnotes, as is the current practice. The Company does not believeadoption of SFAS 123R will have a material effect on its consolidated financialposition, results of operations or cash flows.

 

In March 2005, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”)regarding the Staff’s interpretation of SFAS 123R. This interpretation expressesthe views of the Staff regarding the interaction between SFAS 123R and certainSEC rules and regulations and provides the Staff’s views regarding thevaluation of share-based payment arrangements by public companies. Inparticular, this SAB provides guidance related to share-based paymenttransactions with non-employees, the transition from nonpublic to public entitystatus, valuation methods, the accounting for certain redeemable financialinstruments issued under share-based payment arrangements, the classificationof compensation expense, non-GAAP financial measures, first-time adoption ofSFAS 123R in an interim period, capitalization of compensation cost related toshare-based payment arrangements, the accounting for income tax effects of share-basedpayment arrangements upon adoption of SFAS 123R, the modification of employeeshare options prior to adoption of SFAS 123R and disclosures in Management’sDiscussion and Analysis subsequent to adoption of SFAS 123R. The Companywill adopt SAB 107 in connection with its adoption of SFAS 123R.

 

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*, (“SFAS 154”) whichreplaces APB Opinion No. 20, *Accounting Changes*,and SFAS No. 3, *Reporting AccountingChanges in Interim Financial Statements*. SFAS 154 applies to allvoluntary changes in accounting principle and requires retrospectiveapplication (a term defined by the statement) to prior periods’ financialstatements, unless it is impracticable to determine the effect of a change.

 

38

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Italso applies to changes required by an accounting pronouncement that does notinclude specific transition provisions. SFAS 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. The Company will adopt SFAS 154 in the first quarter of fiscal 2006.

 

In September 2005, the Emerging Issues Task Force(“EITF”) issued EITF 05-06, “ Determining the Amortization Period for LeaseholdImprovements after Lease Inception or Acquired in a Business Combination”. EITF05-06 requires that leasehold improvements acquired in a business combinationbe capitalized over the shorter of the useful life of the assets or a term thatincludes required lease periods and renewals that are deemed to be reasonablyassured at the date of acquisition. EITF 05-06 also requires leaseholdimprovements that are placed in service significantly after and notcontemplated at or near the beginning of the lease term should be amortizedover the shorter of the useful life of the assets or a term that includesrequired lease periods and renewals that are deemed to be reasonably assured(as defined in paragraph 5 of Statement 13) at the date the leaseholdimprovements are purchased. EITF 05-06 is effective for leasehold improvementsthat are purchased or acquired in reporting periods beginning after June 29,2005. Early adoption of the consensus is permitted in periods for whichfinancial statements have not been issued. The Company does not believe thatthe adoption of EITF 05-06 will have a material effect on its consolidatedfinancial position, results of operations or cash flows.

 

In October 2005, the FASB issued SFAS 13-1, *Accounting for Rental Costs Incurred during a ConstructionPeriod* (“FSP SFAS 13-1”). FSP SFAS 13-1 concludes that there is nodistinction between the right to use a leased asset during and after theconstruction period; therefore rental costs incurred during the constructionperiod should be recognized as rental expense and included in income fromcontinuing operations. FSP SFAS 13-1 is effective for the first reportingperiod beginning after December 15, 2005; early adoption is permitted. TheCompany plans to adopt FSP SFAS 13-1 in the first quarter of 2006 and does notexpect FSP SFAS 13-1 to have a material impact on the consolidated financialstatements.

 

**Reclassifications**

 

Certain previously reportedamounts have been reclassified to conform to the current yearpresentation.

 

**4.Inventories**

 

Inventoriesconsist of the following:

 
| ** **                                        | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Work-in-process                                   |       | $                           | 9,998,419  |                        | $          | 7,591,952 |   |
| Raw materials (principally paper)                 |       | 9,116,711                   |       | 11,001,183                  |       |
|                                              |       | 19,115,130                  |       | 18,593,135                  |       |
| Excess of current cost over LIFO inventory  value |       | (59,864                     | )          | (30,265                     | )          |
|                                              |       | $                           | 19,055,266 |                        | $          | 18,562,870 |   |

 

TheCompany maintained a reserve for the realizability of inventory in the amountsof $95,988 and $127,144 for the years ended December 31, 2005 and 2004,respectively, which are included in the amounts in the table above relating towork-in-process and raw materials. A rollforward of the inventory reserve is asfollows:

 

39

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| ** **                      | ** ** | **Successor Basis**               | ** ** | **Predecessor Basis**             | ** ** |
|---------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                      | ** ** | **Year Ended  December 31,** | ** ** | **Year Ended  December 31,** | ** ** | **Four-months and  eleven-days  ended December  31,** | ** ** | **Seven-months and  twenty-days ended  August 20,** | ** ** |
| ** **                      | ** ** | **2005**                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2003** | ** ** |
|                            |       |                              |       |                              |       |   |   |   |   |
| Balance at  beginning of period |       | $                                 | 127,144    |                              | $          | 72,608 |   | $ | 83,285 |   | $ | 69,949 |   |
| Charged to  expense             |       | 34,351                            |       | 105,845                           |       | (9,555 | ) | 13,336 |   |
| Deductions                      |       | (65,507                           | )          | (51,309                           | )          | (1,122 | ) | — |   |
| Balance at  end of period       |       | $                                 | 95,988     |                              | $          | 127,144 |   | $ | 72,608 |   | $ | 83,285 |   |

 

**5.Property, Plant and Equipment**

 

Property,plant and equipment consist of the following:

 
| ** **                          | ** ** | **December 31,  2005** | ** **  | **December 31,  2004** | ** ** |
|-------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| Land                                |       | $                           | 5,235,310   |                        | $          | 5,205,316 |   |
| Buildings  and improvements         |       | 39,934,420                  |        | 33,024,140                  |       |
| Machinery  and equipment            |       | 103,704,298                 |        | 92,312,572                  |       |
|                                |       | 148,874,028                 |        | 130,542,028                 |       |
| Accumulated  depreciation           |       | (29,654,517                 | )           | (15,288,674                 | )          |
| Property,  plant and equipment, net |       | $                           | 119,219,511 |                        | $          | 115,253,354 |   |

 

Depreciationand amortization expense for the years ended December 31, 2005 and 2004,the four-months and eleven-days ended December 31, 2003 and theseven-months and twenty-days ended August 20, 2003 was $15,121,343, $12,755,046,$3,563,957 and $4,788,928, 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 years ended December 31, 2005 and 2004,related to customer relationships, trade name and technology intangible assetswas $1,731,999 and $1,659,705, respectively.

 
| ** **              | ** ** | ** **      | ** ** | **December 31, 2005** | ** ** | **December 31, 2004**    | ** ** |
|-------------------------|------------|-----------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **Useful Life** | ** ** | **Cost**                   | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Customer  relationships |       | 25 years        |       | $                          | 27,800,000 |                          | $          | 2,540,241 |   | $ | 25,259,759 |   | $ | 27,800,000 |   | $ | 1,428,241 |   | $ | 26,371,759 |   |
| Trade names             |       | 40 years        |       | 22,400,000                 |       | 1,314,430                     |       | 21,085,570 |   | 22,400,000 |   | 754,430 |   | 21,645,570 |   |
| Technology              |       | 5 years         |       | 300,000                    |       | 96,166                        |       | 203,834 |   | 300,000 |   | 36,167 |   | 263,833 |   |
|                    |       |            |       | $                          | 50,500,000 |                          | $          | 3,950,837 |   | $ | 46,549,163 |   | $ | 50,500,000 |   | $ | 2,218,838 |   | $ | 48,281,162 |   |

 

InDecember 2005, our Board of Directors approved a plan to consolidate theprinting of short-run journals at The Sheridan Press and shut down the CapitalCity Press facility. In connection with this shutdown, the Capital City Presstrade name, with a net cost of $1,881,962 as of December 31, 2005, will beamortized over its remaining useful life of three months.

 

TheCompany estimates annual amortization expense related to these intangibles asfollows:

 

40

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| **Years Ended December 31,** | ** ** | **Amortization** | ** ** |
|-----------------------------------|------------|------------------|------------|
| 2006                              |       | $                | 3,563,962  |   |
| 2007                              |       | 1,682,000        |       |
| 2008                              |       | 1,682,000        |       |
| 2009                              |       | 1,645,834        |       |
| 2010                              |       | 1,622,000        |       |
| Thereafter                        |       | 36,353,367       |       |
|                              |       |             |       |
| Total                             |       | $                | 46,549,163 |   |

 

**7. Goodwill**

 

Goodwillat December 31, 2005 represents the excess of the purchase price over theestimated fair value of the net assets acquired in 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 $13,553,021 from the Dingley Acquisition is aresult of an asset purchase and is deductible for tax purposes.

 

Asof December 31, 2005, the initial step in our annual test for goodwill impairmentindicated potential impairment in our specialty catalogs segment, as a resultof declining results at TDP. We completed the second step by comparing theimplied fair value of goodwill to the carrying value of goodwill for TDP. As aresult of the second step, we determined that the goodwill at TDP was not impaired.The changes in the carrying amount of goodwill for the years ended December 31,2004 and 2005, are as follows:

 
| ** **                                                                                      | ** ** | **Short-Run  Journals** | ** ** | **Specialty  Catalogs** | ** ** | **Other  Publications** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|------------------|------------|
| **Balance  at December 31, 2003**                                                          |       | $                       | 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 valuation allowance established in the Sheridan Acquisition                      |       | (1,223,505              | )          | —                  |       | —                  |       | (1,223,505       | )          |
| Adjustment  of contingency related to the Sheridan Acquisition                                  |       | (148,841                | )          | —                  |       | —                  |       | (148,841         | )          |
| Creation of  goodwill as a result of the Dingley Acquisition                                    |       | —                  |       | 14,829,126              |       | —                  |       | 14,829,126       |       |
| Realization  of tax goodwill benefit related to the Dingley Acquisition                         |       | —                  |       | (495,841                | )          | —                  |       | (495,841         | )          |
| **Balance  at December 31, 2004**                                                          |       | $                       | 24,069,401 |                    | $          | 14,333,285              |       | $                | 19,360,621 |   | $ | 57,763,307 |   |
| Realization  of tax goodwill benefit related to the Dingley Acquisition                         |       | —                  |       | (780,264                | )          | —                  |       | (780,264         | )          |
| **Balance  at December 31, 2005**                                                          |       | $                       | 24,069,401 |                    | $          | 13,553,021              |       | $                | 19,360,621 |   | $ | 56,983,043 |   |

 

**8. OtherAssets**

 

Otherassets consist of the following:

 

41

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| ** **                         | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Notes and  other receivables, net  |       | $                           | 1,172,148  |                        | $          | 1,802,240 |   |
| Prepaid  expenses and deposits     |       | 3,327,091                   |       | 2,929,257                   |       |
| Non-compete  agreements, net       |       | 582,080                     |       | 800,285                     |       |
| Deferred  compensation plan assets |       | 3,477,251                   |       | 2,599,898                   |       |
| Other                              |       | 88,493                      |       | 87,223                      |       |
| Total                              |       | 8,647,063                   |       | 8,218,903                   |       |
| Less:  current portion             |       | 4,125,713                   |       | 4,325,228                   |       |
| Long-term  portion                 |       | $                           | 4,521,350  |                        | $          | 3,893,675 |   |

 

Notesreceivable are presented net of an allowance of $194,820 and $431,877 as of December 31,2005 and 2004, respectively. Non-compete agreements are presented net ofaccumulated amortization of $1,121,929 and $903,724 as of December 31, 2005and 2004, respectively. Amortization expense related to the non-competeagreements (which is included in amortization of intangibles in theconsolidated statements of income and cash flows) for the years ended December 31,2005 and 2004, the four- months and eleven-days ended December 31, 2003,the seven-months and twenty-days ended August 20, 2003, was $218,205, $178,368,$44,491 and $85,079, respectively.

 

Otherreceivables at December 31, 2004, included approximately $721,000representing an amount due from an insurance carrier to reimburse us forproperty damage sustained at ULI. This receivable was collected in full during2005.

 

**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. Thecarrying value of the 2003 Notes was $103.9 million and $103.8 million as of December 31,2005 and 2004, 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 carryingvalue of the 2004 Notes was $61.0 million and $61.1 million as of December 31,2005 and 2004, respectively. The 2004 Notes have identical terms to the 2003Notes.

 

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 the2004 Notes only to the extent that Rule 3-10 and Rule 3-16 ofRegulation S-X under the Securities Act do not require separate financialstatements of a subsidiary to be filed with the SEC. Payment obligations underthe 2003 Notes and the 2004 Notes are guaranteed jointly and severally,irrevocably and unconditionally, by all of the Company’s subsidiaries. TheSheridan Group, Inc. (the stand-alone parent company) owns 100% of theoutstanding stock of all of its subsidiaries and has no material independentassets or operations. There are no restrictions on the ability of The SheridanGroup, Inc. (the stand-alone parent company) 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 register the 2003 Notes and the 2004 Notes with theSEC. The Company filed Registration Statements on Form S-4 with the SEC inconnection with exchange offers of its outstanding 2003 Notes and 2004 Notesfor like principal amounts of new senior secured notes. The RegistrationStatement covering the 2003 Notes was declared effective on October 13,2004. The Registration Statement covering the 2004 Notes was declared effectiveon October 25, 2004. The new senior secured notes are identical in allmaterial respects to the 2003 Notes and the 2004 Notes, except that the newsenior secured notes do not bear legends restricting 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, during 2004 the Company paid liquidated damages with respect tothe 2003 Notes totaling approximately $319,000, which is included in interestexpense for the year ended December 31, 2004. The 2004

 

42

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Notes did not accrue anyliquidated damages since the registration of the 2004 Notes was declaredeffective 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,if any, and accrued and unpaid interest on the 2003 Notes and the 2004 Notes tobe due 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 the Revolver allow for revolving debt ofup to $30.0 million, including letters of credit commitments of up to $5.0million, subject to a borrowing base test. Borrowings under the Revolver bearinterest at the bank’s base rate or the LIBOR rate plus a margin of 1.75% atthe Company’s option and mature in May 2009. Interest is payable monthlyin arrears. The Company has agreed to pay an annual commitment fee on theunused portion of the Revolver at a rate of 0.35%. In addition, the Company hasagreed to pay an annual fee of 1.875% on all letters of credit outstanding. Asof December 31, 2005, the Company had no borrowings outstanding under theRevolver, had unused amounts available of $27,950,000 and had $2,050,000 inoutstanding 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, 2005.

 

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

 

**10. AccruedExpenses**

 

Accruedexpenses consist of the following:

 
| ** **                                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Payroll and  related expenses                               |       | $                           | 5,508,232  |                        | $          | 6,027,051 |   |
| Profit  sharing accrual                                     |       | 2,219,059                   |       | 1,834,393                   |       |
| Accrued  interest                                           |       | 6,375,826                   |       | 6,494,593                   |       |
| Customer  prepayments                                       |       | 3,670,677                   |       | 3,638,336                   |       |
| Deferred  revenue                                           |       | 1,515,840                   |       | 1,314,656                   |       |
| Self-insured  health and worker’s compensation accrual |       | 3,075,622                   |       | 2,792,300                   |       |
| Other                                                       |       | 1,855,263                   |       | 2,112,755                   |       |
| Total                                                       |       | $                           | 24,220,519 |                        | $          | 24,214,084 |   |

 

**11. OtherLiabilities**

 

Otherliabilities consist of the following:

 
| ** **             | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Non-compete agreements |       | $                           | 971,327    |                        | $          | 1,146,312 |   |
| Deferred compensation  |       | 2,394,894                   |       | 1,760,636                   |       |
| Other                  |       | 91,718                      |       | 41,738                      |       |
| Total                  |       | $                           | 3,457,939  |                        | $          | 2,948,686 |   |

 

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**12. IncomeTaxes**

 

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

 
| ** **   | ** ** | **Successor Basis**   | ** ** | **Predecessor Basis** | ** ** |
|--------------|------------|-----------------------|------------|-----------------------|------------|
| ** **   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **Four-months and  eleven-days ended  December 31,** | ** ** | **Seven-months and  twenty-days ended  August 20,** | ** ** |
| ** **   | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| **Current**  |       |                  |       |                  |       |   |   |   |   |
| Federal      |       | $                     | 2,151,489  |                  | $          | 1,819,044 |   | $ | 1,098,000 |   | $ | 1,977,357 |   |
| State        |       | 553,647               |       | 613,193               |       | 155,279 |   | 421,846 |   |
|         |       | 2,705,136             |       | 2,432,237             |       | 1,253,279 |   | 2,399,203 |   |
| **Deferred** |       |                  |       |                  |       |   |   |   |   |
| Federal      |       | (1,173,117            | )          | (45,795               | )          | (684,226 | ) | 126,242 |   |
| State        |       | 903,981               |       | 378,409               |       | (55,208 | ) | 157,867 |   |
|         |       | (269,136              | )          | 332,614               |       | (739,434 | ) | 284,109 |   |
|         |       | $                     | 2,436,000  |                  | $          | 2,764,851 |   | $ | 513,845 |   | $ | 2,683,312 |   |

 

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,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                                   |       |                        |       |                        |       |
| **Deferred  tax assets**                                               |       |                        |       |                        |       |
| Incentive  and vacation accrual                                        |       | $                           | 1,156,191  |                        | $          | 848,513 |   |
| Bad debt  reserve                                                      |       | 435,811                     |       | 441,234                     |       |
| Self  insurance accrual                                                |       | 553,939                     |       | 434,658                     |       |
| Intangible  assets                                                     |       | 607,128                     |       | 549,825                     |       |
| Amortization  of financing costs                                       |       | 425,981                     |       | 298,395                     |       |
| Inventory-additional  costs capitalized for tax                        |       | 220,918                     |       | 201,247                     |       |
| Net  operating loss carryforwards-Federal                              |       | 420,791                     |       | 522,451                     |       |
| Net  operating loss carryforwards-States                               |       | 691,603                     |       | 469,772                     |       |
| Fixed asset  basis related to state disallowance of bonus depreciation |       | 227,177                     |       | 268,793                     |       |
| Other                                                                  |       | 44,677                      |       | 30,197                      |       |
| Valuation  allowance                                                   |       | (978,482                    | )          | (669,180                    | )          |
| Total  deferred tax assets                                             |       | 3,805,734                   |       | 3,395,905                   |       |
| **Deferred  tax liabilities**                                          |       |                        |       |                        |       |
| Intangible  assets                                                     |       | 18,273,862                  |       | 18,484,743                  |       |
| Inventory  basis difference                                            |       | 277,078                     |       | 283,589                     |       |
| Property and  equipment                                                |       | 16,539,330                  |       | 16,937,677                  |       |
| Land                                                                   |       | 1,112,861                   |       | 1,145,727                   |       |
| Prepaid  insurance                                                     |       | 175,224                     |       | 166,190                     |       |
| Total  deferred tax liabilities                                        |       | 36,378,355                  |       | 37,017,926                  |       |
| Net deferred  tax liabilities                                          |       | $                           | 32,572,621 |                        | $          | 33,622,021 |   |

 

44

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| ** **                                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Included in the balance sheet                            |       |                  |       |                  |       |
| Noncurrent  deferred tax liabilities in excess of assets |       | $                     | 33,740,457 |                  | $          | 35,529,769 |   |
| Current  deferred tax assets in excess of liabilities    |       | 1,167,836             |       | 1,907,748             |       |
| Net deferred tax liability                               |       | $                     | 32,572,621 |                  | $          | 33,622,021 |   |

 

During 2005 and 2004, the Company realized a tax benefit of $0.8million and $0.5 million, respectively, associated with the realization of taxdeductible goodwill in excess of book goodwill. Such amount has been recordedas a reduction to book goodwill for the years ending December 31, 2005 and2004 (see Note 7).

 

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, 2005 and 2004, the Company had U.S. Federal net operatingloss (“NOL”) deduction carryforwards of approximately $1,238,000 and$1,537,000, 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. During 2004, theCompany elected to adopt an alternative method of determining the limitation onthe use of the NOLs pursuant to IRS Notice 2003-65, which resulted in adecrease to the limitation on the use of Federal and certain State NOLs. As aresult, the Company received U.S. Federal and State of Vermont income taxrefunds of approximately $1,322,000, generated from additional use of the netoperating losses against taxable income in 2000, 2001, and 2002. Thus,management concluded during 2004 that it is more likely than not that theremaining U.S. Federal net operating losses in the table shown below and therelated State net operating losses will be utilized. Accordingly, the relatedvaluation allowance of approximately $1,220,000 was fully reversed in 2004.This reversal of valuation allowance resulted in a reduction to goodwill sincethe valuation allowance had been established through purchase accounting uponthe acquisition of CCP.

 

Theremaining Federal NOLs as of December 31, 2005 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**  | ** ** | **Year of**    | ** ** |
|------------------------|------------|----------------|------------|
| **Net Operating Loss** | ** ** | **Expiration** | ** ** |
| 385,000                |       | 2008           |       |
| 674,000                |       | 2009           |       |
| 179,000                |       | 2011           |       |

 

Asof December 31, 2005 and 2004, the Company had state NOLs with a taxeffected value of approximately $692,000 and $470,000, respectively, in variousjurisdictions, which begin to expire in 2008. Management has determined that avaluation allowance is needed for approximately $623,000 and $320,000 as of December 31,2005 and 2004, respectively, against net operating losses in Statejurisdictions without sufficient prior earnings.

 

TheCompany utilized NOLs against Federal and State taxable income, which reducedtax expense for 2005 by approximately $123,000.

 

TheCompany has also determined that valuation allowances of approximately $355,000and $350,000 as of December 31, 2005 and 2004, 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.

 

45

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TheCompany has provided for contingencies related to income taxes in accordancewith SFAS No. 5. At December 31, 2005 and December 31, 2004, theCompany has reserves of approximately $559,000 and $527,000, respectively,related to transaction costs for the Sheridan Acquisition. In analyzing theneed for the provision of tax contingency reserves, including interest,management reviewed applicable statutes, rules, regulations and interpretationsand established 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** | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                     | ** ** | ** **            | ** ** | ** **            | ** ** | **Four-months and** | ** ** | **Seven-months and** | ** ** |
| ** **                     | ** ** | **Year Ended**        | ** ** | **Year Ended**        | ** ** | **eleven-days ended** | ** ** | **twenty-days ended** | ** ** |
| ** **                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **August 20,** | ** ** |
| ** **                     | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
|                           |       |                  |       |                  |       |   |   |   |   |
| Balance at beginning of period |       | $                     | 669,180    |                  | $          | 1,870,660 |   | $ | 1,532,007 |   | $ | 1,532,007 |   |
|                           |       |                  |       |                  |       |   |   |   |   |
| Charged to expense             |       | 309,302               |       | 319,551               |       | 338,653 |   | — |   |
|                           |       |                  |       |                  |       |   |   |   |   |
| Reductions                     |       | —                |       | (1,223,505            | )          | — |   | — |   |
|                           |       |                  |       |                  |       |   |   |   |   |
| Other, net                     |       | —                |       | (297,526              | )          | — |   | — |   |
|                           |       |                  |       |                  |       |   |   |   |   |
| Balance at end of period       |       | $                     | 978,482    |                  | $          | 669,180 |   | $ | 1,870,660 |   | $ | 1,532,007 |   |

 

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

 
| ** **                                          | ** ** | **Successor Basis**   | ** ** | **Predecessor Basis** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | ** **            | ** ** | ** **            | ** ** | **Four-months and** | ** ** | **Seven-months and** | ** ** |
| ** **                                          | ** ** | **Years ended**       | ** ** | **Years ended**       | ** ** | **eleven-days ended** | ** ** | **twenty-days ended** | ** ** |
| ** **                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **August 20,** | ** ** |
| ** **                                          | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003** | ** ** | **2003** | ** ** |
| ** **                                          | ** ** | **Amount**            | ** ** | **Amount**            | ** ** | **Amount** | ** ** | **Amount** | ** ** |
| Income before income taxes                          |       | $                     | 3,616,379  |                  | $          | 5,094,483 |   | $ | 1,274,058 |   | $ | 3,852,228 |   |
|                                                |       |                  |       |                  |       |   |   |   |   |
| U.S. Federal statutory tax rate                     |       | $                     | 1,229,569  |                  | $          | 1,732,125 |   | $ | 433,180 |   | $ | 1,309,758 |   |
| Increase  (decrease) in tax expense resulting from: |       | 31,620                |       | 21,957                |       | — |   | 504,916 |   |
| Tax reserves                                        |
| Amortization  of non-deductible goodwill            |       | —                |       | —                |       | — |   | 35,122 |   |
| Non-deductible  stock warrant costs                 |       | —                |       | —                |       | — |   | 153,425 |   |
| Non-deductible  meals and entertainment             |       | 79,459                |       | 82,218                |       | 31,522 |   | 48,064 |   |
| Change in  valuation allowance                      |       | 309,302               |       | 319,551               |       | — |   | 338,660 |   |
| State income  taxes, net of U.S.                    |       |                  |       |                  |       |   |   |   |   |
| Federal  income tax benefit                         |       | 168,352               |       | (91,584               | )          | 47,276 |   | 173,331 |   |
| Change in  state tax apportionment and rates        |       | 780,198               |       | 554,080               |       | — |   | — |   |
| Domestic  production activity deduction             |       | (65,179               | )          | —                |       | — |   | — |   |
| Other, net                                          |       | (97,321               | )          | 146,504               |       | 1,867 |   | 120,036 |   |
| Income tax  provision                               |       | $                     | 2,436,000  |                  | $          | 2,764,851 |   | $ | 513,845 |   | $ | 2,683,312 |   |

 

During2005 and 2004, the Company reported an increase in its deferred State taxprovision of approximately $780,000 and $554,000 to properly reflect higheranticipated State effective income taxes due primarily to increasedapportionment of the Company’s taxable income to states with unitary filing requirementsand other high tax states.

 

OnOctober 22, 2004, the President of the U.S. signed into law the AmericanJobs Creation Act of 2004. During 2005, the Company realized a benefit ofapproximately $65,000 from the deduction associated with domestic productionactivities. This special deduction is 3% of qualifying income for years 2005and 2006, 6% in years 2007 through 2009 and 9% thereafter.

 

46

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**13.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, 2005 isapproximately $728,000 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, 2005 is approximately $243,000 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 $5,441,000, $4,806,000,$1,649,000 and $3,295,000 for the years ended December 31, 2005 and 2004,the four-months and eleven-days ended December 31, 2003, and theseven-months and twenty-days ended August 20, 2003, respectively. As of December 31,2005 approximate minimum future rental payments under non-cancelable operatingleases are as follows:

 
| **Years Ended December 31,** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2006                              |       | $          | 4,983,000  |   |
| 2007                              |       | 4,407,000  |       |
| 2008                              |       | 3,012,000  |       |
| 2009                              |       | 1,734,000  |       |
| 2010                              |       | 426,000    |       |
| Thereafter                        |       | 213,000    |       |
| Total                             |       | $          | 14,775,000 |   |

 

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 31,2005, approximate future payments related to these agreements are as follows:

 
| ** **                        | ** ** | **Raw**       | ** ** | **Plant and** | ** ** |
|-----------------------------------|------------|---------------|------------|---------------|------------|
| **Years Ended December 31,** | ** ** | **materials** | ** ** | **equipment** | ** ** |
| 2006                              |       | $             | 5,914,000  |          | $          | 17,404,000 |   |
| 2007                              |       | 2,768,000     |       | —        |       |
| 2008                              |       | 2,743,000     |       | —        |       |
| 2009                              |       | 2,087,000     |       | —        |       |
| 2010                              |       | 104,000       |       | —        |       |
| Thereafter                        |       | —        |       | —        |       |
| Total                             |       | $             | 13,616,000 |          | $          | 17,404,000 |   |

 

**14. 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 “PreferredStock”), which was convertible into common stock, was comprised of thefollowing series, all of which were $1.00 par value:

 

47

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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.

 

**15.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:

 
|       |       |           |       |              |       | **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 adiscount to the related note of approximately $1,200,000 for the estimated fairmarket value at grant date of the stock warrants issued as calculated using abinomial model. 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.

 

48

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**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. On August 21, 2003, inconnection with the Sheridan Acquisition, all outstanding options (totaling27,723 shares) were 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**        | ** ** | **Year ended**        | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                    | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Shares under option at beginning of year                      |       | 55,500                |       | 48,700                |       |
| Options granted (weighted average exercise  price of $10.00)  |       | 900                   |       | 7,700                 |       |
| Options canceled (weighted average exercise  price of $10.00) |       | (3,920                | )          | (900                  | )          |
| Options exercised (exercise price of  $10.00)                 |       | (80                   | )          | —                |       |
| Shares under option at end of year                            |       | 52,400                |       | 55,500                |       |

 

AtDecember 31, 2005, the remaining weighted average life of the outstandingoptions was approximately 8 years. All options issued since plan inception weregranted with an exercise price of $10.00, which equaled the fair market valueof Holdings Common Stock on the date of grant. At December 31, 2005,15,270 options were exercisable. During 2005, 80 options to purchase HoldingsCommon Stock were exercised and the $800 of proceeds received were contributedfrom Holdings to the Company.

 

**16.Employee Benefit Plans**

 

TheCompany sponsors two 401(k) retirement plans. The Company determines annualdiscretionary contributions to the plans. Contributions of approximately$2,886,000, $2,103,000, $756,000 and $1,087,000 were charged to operations forthe years ended December 31, 2005 and 2004, the four-months andeleven-days ended December 31, 2003 and the seven-months and twenty-daysended August 20, 2003, 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 Where Amounts Earned AreHeld in a Rabbi Trust and Invested.” Pursuant to EITF 97-14, as of December 31,2005 and 2004, the Company recorded a deferred compensation liability ofapproximately $2,395,000 and $1,761,000, respectively, in other non-currentliabilities in the accompanying consolidated balance sheets. 

 

49

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The change in the deferredcompensation obligation related to changes in the fair value of the vesteddiversified assets held in trust is recorded in accordance with SFAS 115 astrading income (loss) in compensation expense with an offsetting entry to otherincome (loss), respectively. The diversified assets held in trust wereapproximately $3,477,000 and $2,600,000 as of December 31, 2005 and 2004,respectively, and are recorded at their fair value, based on quoted marketprices, in other non-current assets on the accompanying consolidated balancesheets.

 

**17. RelatedParty Transactions**

 

Inconnection with the Sheridan Acquisition, the Company entered into a 10 yearmanagement agreement with BRS and JCP. The management fee is equal to thegreater of $500,000 or 2% of earnings before interest, taxes depreciation and amortization(as defined in the management agreement), plus reasonable out-of-pocketexpenses. The Company incurred and paid approximately $827,000 and $769,000 insuch fees for the years ended December 31, 2005 and 2004, respectively.

 

J.M. Dryden Hall, Jr., a member of the Company’s board of directors, hasserved the Company as legal counsel. Fees paid to Mr. Hall for the yearsended December 31, 2005 and 2004, the four-months and eleven-days ended December 31,2003, the seven-months and twenty-days ended August 20, 2003, wereapproximately $50,000, $56,000,  $33,000and $22,000, respectively. Effective January 1, 2006, Mr. Hall willno longer serve as legal counsel to the Company.

 

**18. 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.

 

**19.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 lengthsof 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 lengths 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, “Disclosuresabout Segments of an Enterprise and Related Information,” due to the similarcharacteristics of their financial performance and operations, including thenature of their service offerings, processes supporting the delivery of theservices, 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 costs, such as corporate profit sharing and bonuses and theamortization of a non-compete agreement with the Company’s former Chairman ofthe Board (Note 13), are not allocated to the segments. The Company’s customerbase resides in the continental United States and its manufacturing, warehouseand office facilities are located throughout the East Coast and Midwest.

 

TheCompany had one customer, High Response Holdings, Inc., which accountedfor 13.6 % of consolidated net sales for the year ended December 31, 2005.Net sales for High Response Holdings, Inc. are reported in the SpecialtyCatalogs segment. The Company had one customer, Elsevier, which accounted for11.2% of consolidated net sales for the year ended December 31, 2004, 12.3%for the period ended December 31, 2003 and 12.1% for the period ended August 20,2003, respectively. Net sales for Elsevier are reported in both the “Short-runJournals” and “Other Publications” segments.

 

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

 

50

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| ** **                        | ** ** | **Successor Basis** | ** ** | **Predecessor Basis** | ** ** |
|-----------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | ** **               | ** ** | ** **                 | ** ** | **Four-months** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **               | ** ** | ** **                 | ** ** | **and eleven-days** | ** ** | **Seven-months** | ** ** |
| ** **                        | ** ** | **Year ended**      | ** ** | **Year ended**        | ** ** | **ended December** | ** ** | **and twenty-days** | ** ** |
| ** **                        | ** ** | **December 31,**    | ** ** | **December 31,**      | ** ** | **31,** | ** ** | **ended August 20,** | ** ** |
| ** **                        | ** ** | **2005**                 | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2003** | ** ** |
| **Net sales**                     |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 99,955     |                       | $          | 97,277 |   | $ | 33,453 |   | $ | 55,371 |   |
| Specialty catalogs                |       | 111,846                  |       | 64,204                     |       | — |   | — |   |
| Other publications                |       | 141,643                  |       | 131,172                    |       | 49,606 |   | 79,785 |   |
| Intersegment eliminations         |       | (5,485                   | )          | (5,140                     | )          | (1,866 | ) | (3,252 | ) |
| Consolidated total                |       | $                        | 347,959    |                       | $          | 287,513 |   | $ | 81,193 |   | $ | 131,904 |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Operating income (loss)**       |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 12,618     |                       | $          | 13,344 |   | $ | 4,087 |   | $ | 6,573 |   |
| Specialty catalogs                |       | 2,599                    |       | 3,483                      |       | — |   | — |   |
| Other publications                |       | 8,678                    |       | 6,885                      |       | 2,471 |   | 2,396 |   |
| Corporate                         |       | (1,998                   | )          | (2,256                     | )          | (1,143 | ) | (861 | ) |
| Consolidated total                |       | $                        | 21,897     |                       | $          | 21,456 |   | $ | 5,415 |   | $ | 8,108 |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Assets**                        |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 98,535     |                       | $          | 94,442 |   | $ | 89,851 |   |   |   |
| Specialty catalogs                |       | 85,633                   |       | 88,147                     |       | — |   |   |   |
| Other publications                |       | 113,722                  |       | 112,348                    |       | 110,563 |   |   |   |
| Corporate                         |       | 2,831                    |       | 4,202                      |       | 2,074 |   |   |   |
| Consolidated total                |       | $                        | 300,721    |                       | $          | 299,139 |   | $ | 202,488 |   |   |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Depreciation and amortization** |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 4,796      |                       | $          | 4,604 |   | $ | 1,640 |   | $ | 1,490 |   |
| Specialty catalogs                |       | 5,785                    |       | 3,424                      |       | — |   | — |   |
| Other publications                |       | 6,281                    |       | 6,399                      |       | 2,426 |   | 3,168 |   |
| Corporate                         |       | 210                      |       | 166                        |       | 102 |   | 216 |   |
| Consolidated total                |       | $                        | 17,072     |                       | $          | 14,593 |   | $ | 4,168 |   | $ | 4,874 |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Capital expenditures**          |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 8,992      |                       | $          | 4,583 |   | $ | 913 |   | $ | 3,425 |   |
| Specialty catalogs                |       | 3,552                    |       | 5,815                      |       | — |   | — |   |
| Other publications                |       | 8,522                    |       | 11,122                     |       | 1,991 |   | 1,773 |   |
| Corporate                         |       | 216                      |       | 307                        |       | 11 |   | 15 |   |
| Consolidated total                |       | $                        | 21,282     |                       | $          | 21,827 |   | $ | 2,915 |   | $ | 5,213 |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Goodwill**                      |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 24,069     |                       | $          | 24,069 |   | $ | 26,098 |   |   |   |
| Specialty catalogs                |       | 13,553                   |       | 14,333                     |       | — |   |   |   |
| Other publications                |       | 19,361                   |       | 19,361                     |       | 18,543 |   |   |   |
| Corporate                         |       | —                   |       | —                     |       | — |   |   |   |
| Consolidated total                |       | $                        | 56,983     |                       | $          | 57,763 |   | $ | 44,641 |   |   |   |
|                              |       |                     |       |                       |       |   |   |   |   |
| **Intangible assets**             |       |                     |       |                       |       |   |   |   |   |
| Short-run journals                |       | $                        | 26,507     |                       | $          | 27,463 |   | $ | 28,418 |   |   |   |
| Specialty catalogs                |       | 3,208                    |       | 3,390                      |       | — |   |   |   |
| Other publications                |       | 16,834                   |       | 17,428                     |       | 18,023 |   |   |   |
| Corporate                         |       | —                   |       | —                     |       | — |   |   |   |
| Consolidated total                |       | $                        | 46,549     |                       | $          | 48,281 |   | $ | 46,441 |   |   |   |

 

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**20.Restructuring and Other Exit Costs**

 

Dueto trends in the short-run journal business and the high capital investmentnecessary to maintain two manufacturing facilities serving the same market, theCompany’s Board of Directors, on December 15, 2005, approved arestructuring plan to consolidate all short-run journal printing operationsinto one site. During the first quarter of 2006, the Company consolidatedthe printing of short-run journals at The Sheridan Press in Hanover,Pennsylvania and closed the Capital City Press facility in Berlin, Vermont. Approximately200 positions were eliminated as a result of the closure. Of the 200employees affected, approximately 45 Publication Services employees wereoffered jobs with one of the Company’s subsidiaries, Dartmouth JournalServices.

 

Chargesrelated to this restructuring will be recorded as the plan is implemented. TheCompany estimates approximately $3.3 million of restructuring charges resultingin future cash expenditures will be incurred, including $2.2 million of chargesrelated to severance and other personnel costs and $1.1 million of other exitcosts. Of the estimated $3.3 million in anticipated restructuring costs,the Company recorded approximately $0.4 million in 2005 and expects to recordthe remainder of the costs in 2006.

 

TheCompany has undertaken efforts to sell the Capital City Press facility. Theamount to be realized from this sale is not reasonably estimable at this time.The facility will be classified as an asset held for sale as of the end of thefirst quarter of 2006. The Company also estimates non-cash charges of $2.3million in the first quarter of 2006 associated with the accelerateddepreciation and amortization of equipment and the Capital City Press tradename which will be disposed of as a result of the shutdown.

 

OnAugust 31, 2005 the Company announced plans to reduce the scope of itsPublications Services operation at Capital City Press and eliminateapproximately 35 positions involved with composition and graphics work and alsolay off about 10 printing operations employees due to a reduced volume ofprinting work. In connection with these layoffs, we recorded approximately$74,000 of restructuring costs in 2005, primarily related to severance payments.The Company also incurred a charge of approximately $70,000, included in costof sales, in 2005 related to the write-off of equipment.

 

InSeptember 2004, the Company closed the Sheridan Books, Inc. facilityin Fredericksburg, VA, which was part of the Other Publications segment,and moved most of the manufacturing operations equipment from this facility toits facility in Chelsea, Michigan. As a result of this action, the Companyincurred approximately $256,000 of restructuring costs related to employeetermination and other closure-related expenses. No amounts were accrued relatedto this restructuring at December 31, 2004.

 

TheFredericksburg facility and excess equipment were sold during 2004. The sale ofthe land and building, which had a carrying value of approximately $952,000,resulted in a gain of approximately $919,000. In connection with the sale of the land and building, the Companyincurred approximately $143,000 of costs related to vacating the facility.  The sale and disposal of the excessequipment, which had a carrying value of approximately $484,000, resulted in a lossof approximately $435,000.

 

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

 

Quarterlyfinancial information for the years ended December 31, 2005 and 2004 is asfollows (in thousands):

 

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| ** **       | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **2005**         | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Net sales        |       | $           | 84,995     |        | $          | 84,124      |       | $           | 87,403     |   | $ | 91,437 |   |
| Gross profit     |       | 16,326      |       | 15,302      |       | 16,534      |       | 16,294      |       |
| Operating income |       | 5,762       |       | 4,785       |       | 5,780       |       | 5,570       |       |
| Net income       |       | $           | 469        |        | $          | 91          |       | $           | 498        |   | $ | 122 |   |

 
| ** **        | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **2004**          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Net sales         |       | $           | 54,396     |        | $          | 63,939      |       | $           | 82,516     |   | $ | 86,662 |   |
| Gross profit      |       | 13,371      |       | 14,871      |       | 16,586      |       | 15,954      |       |
| Operating income  |       | 4,168       |       | 5,414       |       | 6,314       |       | 5,560       |       |
| Net income (loss) |       | $           | 674        |        | $          | 998         |       | $           | 771        |   | $ | (113 | ) |

 

**ITEM 9**.  **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

Notapplicable.

 

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

 

Asof the end of the period covered by this Annual Report on Form 10-K, weconducted an evaluation, under the supervision and with the participation ofthe principal executive officer (“CEO”) and principal financial officer (“CFO”),of the effectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe 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. There was no change in our internal controlover financial reporting during our most recently completed fiscal quarter thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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

 

Notapplicable.

 

**PART III**

 

**ITEM 10.****  ****DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Weare a wholly-owned subsidiary of TSG Holdings Corp., whose stockholders includeaffiliates of Bruckmann, Rosser, Sherrill & Co., LLC and JefferiesCapital Partners, and members of our senior management.

 

**Our EquitySponsors**

 

Bruckmann,Rosser, Sherrill & Co., LLC, or BRS, is a New York-based privateequity investment firm with about $1.2 billion under management. BRS wasfounded in 1995 and has since invested in over 30 companies in the followingindustries: restaurants, consumer goods, specialty retail, recreation/leisure,apparel, home furnishings, industrial and commercial services (includingequipment rental), commercial equipment manufacturing, wholesale distributionand healthcare services. BRS and its affiliates are collectively referred to as“BRS.”

 

JefferiesCapital Partners, or JCP, is a New York-based private equity investment firmwith over $1.0 billion in equity commitments under management. Since 1994, JCP’sprofessionals have invested in over 45 companies in a variety of industries.JCP focuses on partnering with entrepreneurs and management teams in industriesin which JCP has expertise. JCP invests in management buyouts,recapitalizations, industry consolidations and growth equity. JCP and itsaffiliates are collectively referred to as “JCP.”

 

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**Directorsand Executive Officers**

 

Ourexecutive officers and directors are as follows:

 
| **Name**                     | ** ** | **Age** | ** ** | **Position**                                                                                |
|------------------------------|------------|---------|------------|---------------------------------------------------------------------------------------------|
| John A. Saxton               |       | 56      |       | President and Chief  Executive Officer and Director                                         |
| Robert M. Jakobe             |       | 52      |       | Vice President and Chief  Financial Officer and Secretary                                   |
| Patricia A. Stricker         |       | 41      |       | Vice President, Operations  and Human Resources                                             |
| Douglas R. Ehmann            |       | 49      |       | Vice President and Chief  Technology Officer                                                |
| Joan B. Davidson             |       | 44      |       | President and Chief  Operating Officer—The Sheridan Press, Inc. (“TSP”) |
| Gary J. Kittredge            |       | 55      |       | President and Chief  Operating Officer—Capital City Press, Inc. (“CCP”) |
| Robert M. Moore              |       | 40      |       | President and Chief  Operating Officer—Sheridan Books, Inc. (“SBI”)     |
| David C. Hewitt              |       | 63      |       | President and Chief  Operating Officer—Dartmouth Printing Company (“DPC”)    |
| J. Kenneth Garner            |       | 52      |       | President and Chief  Operating Officer—United Litho, Inc. (“ULI”)       |
| G. Paul Bozuwa               |       | 45      |       | President—Dartmouth Journal  Services, Inc. (“DJS”)                          |
| Christopher A. Pierce        |       | 57      |       | President and Chief  Operating Officer—The Dingley Press, Inc. (“TDP”)  |
| Thomas J. Baldwin            |       | 47      |       | Director                                                                                    |
| Nicholas Daraviras           |       | 32      |       | Director                                                                                    |
| Craig H. Deery               |       | 58      |       | Director                                                                                    |
| Gary T. DiCamillo            |       | 55      |       | Director                                                                                    |
| J. Rice Edmonds              |       | 35      |       | Director                                                                                    |
| J. M.  Dryden Hall, Jr. |       | 72      |       | Director                                                                                    |
| James L. Luikart             |       | 60      |       | Director                                                                                    |
| Nicholas R. Sheppard         |       | 31      |       | Director                                                                                    |
| George A. Whaling            |       | 69      |       | Director                                                                                    |

 

Thetable above provides a current list of our executive officers and their respectivecurrent positions. Effective April 1, 2006, the following organizationalchanges will be implemented. Mr. Pierce will be named Chairman of TDP and Mr. Moorewill become President and Chief Operating Officer of TDP. Mr. Michael J.Seagram will become an executive officer serving as President and ChiefOperating Officer of SBI. Mr. Hewitt will retire from his role at DPC and Mr. Kittredgewill become the President and Chief Operating Officer of DPC. The new titlesare used in the following biographies.

 

***John A. Saxton, President, Chief ExecutiveOfficer 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 recentlyserving as President of the Noxell Corporation following its acquisition by TheProcter & Gamble Company in 1990. Mr. Saxton is a member of theNational Association for Printing Leadership’s Walter E. Soderstrom Society,which honors individuals in the printing industry who have significantlycontributed to the development and the progress of the graphic arts. Mr. Saxtonholds a B.S. from Bucknell University. 

 

***Robert M. Jakobe, Vice President and ChiefFinancial 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 theUniversity of Notre Dame.

 

***Patricia A. 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. From 2000 to 2003, she served as Presidentof SBI. Ms. Stricker served as our Vice President, Corporate Developmentfrom 1999 to 2000, and as our Projects Manager from 1998 to 1999. Prior tojoining us, Ms. Stricker held various positions at General PhysicsCorporation, most recently serving as Vice President, Finance andAdministration. She holds a B.A. from the College of Notre Dame of Maryland.

 

***Douglas R. Ehmann, Vice President and ChiefTechnology 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 Sector ChiefInformation Officer for Information Systems from 1995 to 1998 and in theManagement Systems Division at the Procter & Gamble Company from 1981to 1995. Mr. Ehmann serves on the Executive Committee of the PrintIndustries Market Information and Research (PRIMIR) organization. He holds aB.S., an M.E. and an M.B.A. from Cornell University.

 

***Joan B. Davidson, President and ChiefOperating Officer—TSP****.*Ms. Davidsonjoined 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. Davidson worked in various positions in the marketingand finance departments of The Procter &

 

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Gamble Company, mostrecently serving as a Finance Manager. Ms. Davidson is active in theindustry as Chairman of the National Association for Printing Leadership and aspast Secretary and past Treasurer of the Print and Graphic ScholarshipFoundation of the Graphic Arts. She is a member of the National Association forPrinting Leadership’s Walter E. Soderstrom Society. Ms. Davidson holds aB.S. from the College of Notre Dame of Maryland and an M.B.A. from LoyolaCollege in Maryland.

 

***Gary J. Kittredge, President and ChiefOperating Officer—DPC****.*Mr. Kittredgejoined us in 2000 and effective April 1, 2006 will serve as President andChief Operating Officer of DPC. From 2002 to 2006, he served as President andChief Operating Officer of CCP. From 2000 to 2002, he served as Executive VicePresident of CCP. Prior to joining us, Mr. Kittredge was the GeneralManager and Vice President of Manufacturing for IPD Printing. Prior to that, heserved as a Business Unit Manager and Manager of Technical Development ofLitho-Krome Co., a subsidiary of Hallmark Cards, Incorporated. Mr. Kittredgeis a member of the Board of Directors of the Printing Industry of New England. Heholds a B.S. and an M.S. from Rochester Institute of Technology.

 

***Robert M. Moore, President and ChiefOperating Officer—TDP****.*****Mr. Moore joined us in 2000 andeffective April 1, 2006, will serve as President and Chief OperatingOfficer of TDP. From 2003 to 2006, he served as President and Chief OperatingOfficer of SBI. From November 2001 to January 2003, he served as VicePresident of Finance of SBI, and, from 2000 to November 2001, Mr. Mooreserved as Director of Finance of SBI. Prior to joining us, Mr. Moore heldseveral positions at The Procter & Gamble Company, most recentlyserving as Assistant Brand Manager, New Business Development from 1999 to 2000.He served as Finance Manager, Commercial Products Group from 1998 to 1999 andas Manager, Profit Forecasting for the Food and Beverage Sector from 1997 to1998. Mr. Moore holds a B.A. from the University of Cincinnati.

 

***David C. Hewitt, President and ChiefOperating Officer—DPC****.*****Mr. Hewitt joined us in 1998 and isretiring effective April 1, 2006. From 1998 to 2006, he served asPresident and Chief Operating Officer of DPC. From 1970 to 1998, he served asExecutive Vice President and co-owner of DPC. Mr. Hewitt has been activein industry affairs. He previously served on the Executive Committee and theBoard of Directors of the Printing Industries of America. He is also past Chairof the Printing Industries of America’s Association Relations Committee. Mr. Hewittholds a B.A. from Dartmouth College and an M.B.A. from Harvard Business School.

 

***J. Kenneth Garner, President and ChiefOperating Officer—ULI****.*****Mr. Garner joined us in 1975 and hasserved as President and Chief Operating Officer of ULI since 1994. From 1985 to1992, he served as Executive Vice President and Chief Operating Officer of ULI.Mr. Garner is very active in industry affairs and is a past Chairman ofthe National Association for Printing Leadership (“NAPL”), a member of theWalter E. Soderstrom Society and the recipient of the 2002 Soderstrom Award. Heis a former chairman of the Graphic Arts Education & ResearchFoundation, Environmental Conservation Board, and the Printing Industries ofAmerica’s (“PIA’s”) Executive Development Committee. He is a former director ofthe Graphic Arts Show Company and the Printing Industries of Virginia. He is acurrent director for the Virginia Printing Foundation. Mr. Garner holds aB.A. from Randolph-Macon College.

 

***G. Paul Bozuwa, President—DJS****.*****Mr. Bozuwajoined us in 1991 and has served as President of DJS since 2002, when he ledthe creation of DJS. From 1995 to 2002, Mr. Bozuwa served as President andChief Operating Officer of CCP. From 1991 to 1995, he served as Chief FinancialOfficer of CCP. Mr. Bozuwa is active in industry affairs serving as Chairof the task force on Science, Journals, Poverty and Human Development, pastChairman of the Finance Committee and past Treasurer of the Council of ScienceEditors. Prior to joining us, he was an Associate of Kearsarge Ventures, aventure fund, from 1989 to 1991. Mr. Bozuwa holds a B.A. from DartmouthCollege and an M.B.A. from the University of New Hampshire.

 

***Christopher A. Pierce—Chairman—TDP****.*Mr. Pierce joined us in May 2004,upon the consummation of the Dingley Acquisition, and effective April 1,2006, will serve as Chairman of TDP. From 2004 to 2006, he served as Presidentand Chief Operating Officer of TDP. From 1980 to the time of the DingleyAcquisition, Mr. Pierce served as President of The Dingley Press. Mr. Pierceholds a B.A. from Bowdoin College.

 

***Michael J. Seagram, President and ChiefOperating Officer—SBI.***Mr. Seagram joined us in 2003 and effective April 1, 2006will serve as President and Chief Operating Officer of SBI. From 2003 to 2006,he served as Vice President of Sales and Marketing of SBI. Before joining SBI, Mr. Seagramwas Owner and President of Aristoplay, Ltd., a publisher of children’s games,from 1997 to 2003. He was also the Owner and President of the marketing firm,Seagram & Singer, Inc. from 1986 to 1998. Mr. Seagram holdsa B.S. from Wayne State University.

 

***Thomas J. Baldwin, Director****.*****Mr. Baldwinis a Managing Director of BRS. He joined BRS in 2000. From 1995

 

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to 2000, Mr. Baldwin was a Principal at PBVentures, Inc. From 1988 to 1995, he served as Vice President and then ManagingDirector of The INVUS Group, Ltd., a private equity investment firm. Prior tothat he was a consultant with the Boston Consulting Group, a strategyconsulting firm. Mr. Baldwin holds a B.B.A. from Siena College and an M.B.A.from Harvard Business School. Mr. Baldwin is also a director of Eurofresh,Inc., Lazy Days, Inc. and Totes Isotoner Corporation.

 

***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 Edgen Corp. andvarious private companies 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 investmentportfolio of $500 million, including mezzanine securities and equity as aminority, co-invest, and control investor. Prior to 1987, Mr. Deery spentfifteen years at BancBoston, serving as a team leader in domestic lending andas Senior Credit Officer and Chairman of the Credit Committee of BancBostonAustralia, Ltd. Mr. Deery holds a B.A. from Bucknell University and an M.B.A.from New York University. Mr Deery is also a director of First Ipswich Bancorp.

 

***GaryT. DiCamillo, Director****.*Mr. DiCamillo has been a member of ourboard of directors since 1989. Mr. DiCamillo has served as President and ChiefExecutive Officer of American Crystal, Inc. in Dedham, Massachusetts since2005. From 2002 to 2005, Mr. DiCamillo served as President, Chief ExecutiveOfficer, and Director of TAC Worldwide Companies. From 1995 to 2002, he wasChairman and Chief Executive Officer of Polaroid Corporation (which filed avoluntary petition for reorganization under Chapter 11 of the U.S. BankruptcyCode on October 12, 2001), and from 1993 to 1995 he was President of WorldwidePower Tools for Black & Decker Corporation. Mr. DiCamillo holds a B.S. fromRensselaer Polytechnic Institute and an M.B.A. from Harvard Business School. Mr.DiCamillo is also a director of Pella Corporation, 3Com Corporation andWhirlpool Corporation.

 

***J.Rice Edmonds, Director****.*****Mr. Edmonds is a Managing Director at BRS. Hejoined BRS in 1996. From 1993 to 1996, he worked in the high yield financegroup 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, Real Mex Restaurants, Inc., Town SportsInternational, Inc. and several private companies 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 also serves as a director of W& T Offshore, Inc., Edgen Corp. and various private companies in which JCPhas an interest.

 

***NicholasR. Sheppard, Director****.*****Mr. Sheppard is a Vice President at BRS. Hejoined BRS in 2000. From 1997 to 2000, he worked as a Consultant in the Londonand New York offices of Marakon Associates, a strategy consulting firm. Mr.Sheppard is a graduate of the London School of Economics. Mr. Sheppard is adirector of Penhall International, Inc.

 

***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 and Director of Colgate University, Chairman of the Hamilton InitiativeLLC and a director of Augusta Glenn Partners, LLC.

 

**BoardComposition**

 

Thesecurities holders agreement among BRS, JCP and the other stockholders of TSGHoldings Corp. provides that TSG Holdings Corp.’s and our board of directorswill consist of ten members, including four designees of BRS (who currently areMessrs. Baldwin, DiCamillo, Edmonds and Sheppard), four designees of JCP (whocurrently are Messrs. Daraviras, Deery, Luikart and Whaling) and two directorsjointly designated by both BRS and JCP (who currently are Messrs. Hall andSaxton). Pursuant to the securities holders agreement, we may not take certainsignificant actions without

 

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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 hasan audit committee and a compensation committee. The audit committee consistsof Messrs. Daraviras, DiCamillo, Edmonds, Hall and Whaling. The auditcommittee reviews our financial statements and accounting practices, selectsour independent registered public accounting firm and oversees our internalaudit function. The compensation committee consists of Messrs. Baldwin,Deery and Luikart. The compensation committee makes recommendations to ourboard of directors concerning salaries and incentive compensation for ourofficers and employees and administers our employee benefit plans.

 

**AuditCommittee Financial Expert**

 

The board of directors hasdetermined that Mr. DiCamillo, the chairman of the audit committee, is the“audit committee financial expert” as defined in applicable SEC rules andregulations. Mr. DiCamillo is “independent” as defined in the listing standardsof the New York Stock Exchange.

 

**Code ofBusiness Conduct**

 

Our Code of Business Conductapplies to all employees of The Sheridan Group, Inc. and all its wholly-ownedsubsidiaries.  Each supervisor and abovehas been required to sign that they have read, understand and will comply withthe Code. This Code is posted on our Internet website athttp://www.sheridan.com.  If anysubstantive amendments are made to the Code of Business Conduct or the Board ofDirectors grants any waiver from a provision of the Code to any officers of TheSheridan Group, Inc. or its wholly-owned subsidiaries, the nature of suchamendment or waiver will be disclosed on the website at the above address.

 

**ITEM 11.****  ****EXECUTIVE COMPENSATION**

 

**Compensationof Directors**

 

Each director who is notalso one of our executive officers or an employee of BRS or JCP receives a feeof $16,000 per year for their service on our board of directors. The chairmanof the audit committee receives an additional fee of $4,000 per year. Alldirectors are reimbursed for any personal expenses incurred in the conduct oftheir duties as a director.

 

**Compensationof Executive Officers**

 

The following tablesummarizes compensation awarded or paid by us during 2005, 2004 and 2003 to ourPresident and Chief Executive Officer and our four next most highly compensatedexecutive officers (our “named executive officers”).

 

**SummaryCompensation Table**

 
| ** **                                     | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | ** **   | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|--------------|------------|
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **Salary**                   | ** ** | **Bonus(1)** | ** ** | **Other Annual  Compensation(2)** | ** ** | **All Other  Compensation(3)** | ** ** |
| John A. Saxton                                 |       | 2005       |       | $                            | 509,939    |         | $          | 102,000 |   | $ | — |   | $ | 135,123 |   |
| President and Chief Executive                  |       | 2004       |       | 509,648                      |       | 380,000      |       | — |   | 233,847 |   |
| Officer                                        |       | 2003       |       | 500,032                      |       | 326,800      |       | — |   | 277,922 |   |
| Joan B. Davidson                               |       | 2005       |       | 254,893                      |       | 78,435       |       | — |   | 113,774 |   |
| President and Chief Operating                  |       | 2004       |       | 244,359                      |       | 120,135      |       | — |   | 104,943 |   |
| Officer—TSP                               |       | 2003       |       | 224,850                      |       | 100,835      |       | — |   | 177,459 |   |
| Paul Bozuwa                                    |       | 2005       |       | 231,885                      |       | 50,200       |       | — |   | 66,361 |   |
| President—DJS                             |       | 2004       |       | 225,885                      |       | 89,300       |       | — |   | 65,937 |   |
|                                           |       | 2003       |       | 224,077                      |       | 74,800       |       | 103,871 |   | 142,238 |   |
| Robert M. Jakobe                               |       | 2005       |       | 240,032                      |       | 30,000       |       | — |   | 69,688 |   |
| Vice President and Chief Financial             |       | 2004       |       | 229,043                      |       | 131,900      |       | — |   | 63,954 |   |
| Officer                                        |       | 2003       |       | 209,836                      |       | 85,800       |       | — |   | 132,101 |   |
| Robert M. Moore                                |       | 2005       |       | 195,000                      |       | 73,335       |       | — |   | 36,660 |   |
| President and Chief Operating                  |       | 2004       |       | 185,000                      |       | 69,400       |       | — |   | 29,095 |   |
| Officer - SBI                                  |       | 2003       |       | 175,000                      |       | 76,692       |       | — |   | 31,087 |   |
|                                                |            |            |            |                              |            |              |            |  |  |  |  |  |  |  |  |

 

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(1)   The amounts reported as ‘‘Bonus’’ for 2005,2004 and 2003 consist of bonuses paid as management performance incentivecompensation and other minor cash payments. The executive incentivecompensation awards for the years ended December 31, 2005, 2004 and 2003, respectively,were as follows: Mr. Saxton— $102,000, $380,000 and $326,800; Ms. Davidson—$78,300, $120,000 and $100,700; Mr. Bozuwa— $50,200, $89,300 and $74,800; Mr.Jakobe— $30,000, $106,900 and $85,800; and Mr. Moore— $73,200, $69,400 and$76,300.  Mr. Jakobe received a $25,000cash bonus in 2004 for completing the Dingley Acquisition.  Ms. Davidson received cash bonuses of $135 in2005, 2004 and 2003.  Mr. Moore receivedcash bonuses of $135 in 2005 and $392 in 2003.

(2)   The $103,871 reported as ‘‘Other AnnualCompensation’’ for Mr. Bozuwa in 2003 consisted of taxable relocationincome.  The value of certain perquisitesand other personal benefits for the named executive officers is not included inthe amounts 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 OtherCompensation’’ for 2005, 2004 and 2003 include our contributions to individual401(k) plan and deferred compensation accounts in connection with (a) ourProfit Sharing Plan, (b) our employer matches under our 401(k) plan and (c) ourretention awards granted to certain executive officers, which vest after fiveyears. The profit sharing contributions for the years ended December 31, 2005,2004 and 2003, respectively, were as follows: Mr. Saxton— $84,145, $84,523, and$64,963; Ms. Davidson— $35,202, $34,615 and $32,702; Mr. Bozuwa— $0, $0 and $0;Mr. Jakobe— $34,484, $29,954 and $25,568; and Mr. Moore— $12,669, $1,722 and$2,783.  The 401(k) match contributionsfor the years ended December 31, 2005, 2004, and 2003, respectively, were asfollows: Mr. Saxton— $25,243, $28,663 and $11,687; Ms. Davidson— $10,502,$9,785 and $8,046; Mr. Bozuwa— $6,560, $5,779 and $6,968; Mr. Jakobe— $10,345,$8,986 and $7,114; and Mr. Moore— $4,200, $5,402 and $4,768.  The retention awards for the years endedDecember 31, 2005, 2004 and 2003, respectively, were as follows: Ms. Davidson—$63,750, $60,000 and $56,250; Mr. Bozuwa— $58,000, $56,500 and $55,000; Mr.Jakobe— $24,000, $22,500 and $21,000; and Mr. Moore— $19,500, $18,500 and$0.  The amounts reported as ‘‘All OtherCompensation’’ for 2005, 2004 and 2003 also include taxable insurance benefitsconsisting of disability, life and executive physical costs. The taxableinsurance benefits for the years ended December 31, 2005, 2004 and 2003,respectively, were as follows: Mr. Saxton— $25,735, $120,661 and $7,058; Ms.Davidson— $4,320, $543 and $2,776; Mr. Bozuwa— $1,801, $3,658 and $2,584; Mr.Jakobe— $858, $2,514 and $734; and Mr. Moore— $291, $3,471 and $230.  Of the amount paid to Mr. Saxton in 2004 fortaxable insurance, $113,849 pertains to a payment regarding a supplemental termlife 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. Davidson—$77,686; Mr. Jakobe—$77,686; Mr. Bozuwa—$77,686; and Mr. Moore$23,306.

 

**OptionGrants in Last Fiscal Year**

 

No stock options weregranted to the named executive officers during 2005.

 

**AggregatedOption Exercises in Last Fiscal Year and Fiscal Year End Option Values**

 
| ** **       | ** ** | **Shares  Acquired on** | ** ** | **Value  Realized** | ** ** | **Number of  Securities Underlying  Unexercised Options at  Fiscal Year-End** | ** ** | **Value of Unexercised In-  the-Money Options at  Fiscal Year-End(1)** | ** ** |
|------------------|------------|------------------------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| **Name**         | ** ** | **Exercise(#)**              | ** ** | **($ )**       | ** ** | **Exercisable**                                                                                        | ** ** | **Unexercisable**                                                                                    | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| John A. Saxton   |       | 0                            |       | N/A                 |       | 1,650                                                                                                  |       | 3,850                                                                                                |       | $ | 40,838 |   | $ | 95,288 |   |
| Joan B. Davidson |       | 0                            |       | N/A                 |       | 1,050                                                                                                  |       | 2,450                                                                                                |       | 25,988 |   | 60,638 |   |
| G. Paul Bozuwa   |       | 0                            |       | N/A                 |       | 900                                                                                                    |       | 2,100                                                                                                |       | 22,275 |   | 51,975 |   |
| Robert M. Jakobe |       | 0                            |       | N/A                 |       | 1,650                                                                                                  |       | 3,850                                                                                                |       | 40,838 |   | 95,288 |   |
| Robert M. Moore  |       | 0                            |       | N/A                 |       | 900                                                                                                    |       | 2,100                                                                                                |       | 22,275 |   | 51,975 |   |
|                  |            |                              |            |                     |            |                                                                                                        |            |                                                                                                      |            |  |  |  |  |  |  |

 

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(1)   There is currently no public trading market for the common stock of TSGHoldings Corp. An independent appraiser engaged by TSG Holdings Corp. hasdetermined that the fair market value of the common stock of TSG Holdings Corp.was $24.75 per share as of December 31, 2005.

 

**CompensationCommittee Interlocks and Insider Participation**

 

In 2005, the compensationcommittee consisted of Messrs. Baldwin, Deery and Luikart. None of the membersof the compensation committee are currently, or have been at any time since thetime of our formation, one of our officers or employees.

 

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**Report ofthe Compensation Committee**

 

The compensation committeeis composed of three members of our board of directors. The role of thecompensation committee is to make recommendations to our board of directorsconcerning salaries, incentive compensation and employee benefit programs.  The compensation committee reviews andapproves employment agreements and compensation programs or benefit plans forour chief executive officer, our executive officers and certain othermanagement employees.  The compensationcommittee periodically compares our executive compensation levels with those ofcompanies with which we believe that we compete in recruitment and retention ofsenior executives.  The compensationcommittee also reviews and makes recommendations with respect to successionplanning and management development.  Thecurrent members of the compensation committee are Messrs. Baldwin, Deery andLuikart.

 

The following is a summaryof policies which the compensation committee analyzed in determining thecompensation for our executive officers in 2005.

 

*CompensationPhilosophy*

 

In reviewing ourcompensation programs, the compensation committee applies a philosophy which isbased on the premise that our achievements result from the coordinated effortsof all individuals working toward common objectives.  We have developed a compensation policy thatis designed to attract and retain qualified senior executives, rewardexecutives for actions that result in the long-term enhancement of stockholdervalue and reward results with respect to our financial and operational goals.

 

Our compensation program forexecutive officers consists of three elements: (a) base salary which reflectsan individual’s responsibilities, performance and expertise and is designed tobe competitive with salary levels in effect at printing and other manufacturingcompanies of the same size; (b) cash bonuses tied to our achievement ofspecified financial goals for the year; and (c) stock options which strengthenthe alignment of interests between the executive officers and the stockholdersof 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.

 

*BaseSalary*

 

The base salaries for ourchief executive officer and certain other executive officers are contained intheir respective employment agreements and are subject to increase at thediscretion of our board of directors. The compensation committee has reviewed these agreements and thesalaries of other officers and key management employees and determined that thesalaries in place are in keeping with our compensation philosophy.  We establish salaries for executive officersand key management employees on the basis of personal performance and by reviewingavailable data, including published salary surveys regarding compensation ofofficers of comparably sized companies. The compensation committee has reviewed the base salaries of ourexecutive officers and key management employees for 2005 and is of the opinionthat such salaries are in line with those paid by comparable companies.

 

*AnnualCash Bonuses*

 

Each of our executiveofficers, including our chief executive officer and our named executiveofficers, are eligible for annual bonuses based upon goals for the year underour management performance incentive plan, which are reviewed and approved byour board of directors.  Our executiveofficers are eligible to receive a maximum award of 50% of base salary, except Mr.Saxton, whose maximum award is 80% of base salary.  These awards for our named executive officersappear as “Bonus” in the Summary Compensation Table.

 

*StockOptions Awards*

 

Since October 2003, we havegranted options to purchase common stock of TSG Holdings Corp., our parent, toprovide long-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 considers awardsmade by the board of directors of TSG Holdings Corp. under the Stock-BasedIncentive Plan in conjunction with the recipient’s level of responsibility andrelative position within the company, past performance, potential and annualbase salary.

 

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*RetentionAwards*

 

In 2005, our board ofdirectors continued to provide retention awards to certain key employees.  Except for our chief executive officer, ournamed executive officers and certain other executive officers receivedretention awards in 2005. The awards for Mr. Bozuwa and Ms. Davidson were inaccordance with their employment agreements. The other awards were 10% of base 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.

 

*CEOCompensation*

 

Mr. Saxton joined us in 1995as our President and Chief Executive Officer and has served on our board ofdirectors since 1991.  On February 2,1998, Mr. Saxton entered into an employment agreement with us and this agreementwas subsequently 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. The compensation committee reviewed all forms of compensationto Mr. Saxton (salary, bonus and all other), and, in January 2005, determinedthat his base salary should be increased to $510,000.

 

*Deductibilityof Compensation*

 

Section 162(m) of theInternal Revenue Code imposes a $1.0 million limit on the deductibility ofcompensation paid to certain executive officers of public companies, unless thecompensation meets certain 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 compensation goals,which preserve deductibility.

 

*Conclusion*

 

The compensation committeebelieves it has designed a compensation program that is competitive with theoverall industry and is appropriately aligned with our financial goals andtargeted stockholder returns.

 

The compensation committeeis pleased to submit this report with regard to the above matters.

 

Thomas J. Baldwin

Craig H. Deery

James L. Luikart

 

**Stock-BasedIncentive Compensation Plan**

 

TSG Holdings Corp. adopted aStock-Based Incentive Compensation Plan in October 2003. The purpose of the2003 Stock-Based Incentive Compensation Plan is to assist us in attracting andretaining valued management employees. The Stock-Based Incentive CompensationPlan will accomplish these goals by allowing eligible employees to receiveawards of options to purchase common stock of TSG Holdings Corp., our parent.Eligible employees will receive options on terms as determined by TSG HoldingsCorp.’s board of directors. Options granted under the Stock-Based IncentiveCompensation Plan will vest over five years, based on both time and companyperformance. Our previous stock option plan was terminated as of the closing ofthe Buyout Transactions in August 2003.

 

**ManagementPerformance Incentive Plan**

 

Our top thirty-two members ofmanagement participate in a management performance incentive plan, whichcompensates them for achievement of certain objectives established annually byour board of directors. For 2006, these objectives are based on our EBITDA, aswell as the EBITDA of each executive’s operating subsidiary. Under the

 

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management performanceincentive plan, our executive officers are eligible to receive a maximum awardof 50% of base salary, except Mr. Saxton, whose maximum award is 80% of basesalary.

 

**401(k) Plan**

 

We sponsor a definedcontribution plan, or 401(k) Plan, intended to qualify under section 401 of theInternal Revenue Code. Substantially all of our employees are eligible toparticipate in the 401(k) Plan on the first day of the month in which theemployee has attained 18 years of age and 90 days of employment. Employees maymake pre-tax contributions of their eligible compensation, not to exceed thelimits under the Internal Revenue Code. At all but one company, we match 50% of the employee’s contributions, upto a maximum of 4% of the employee’s eligible compensation.  The Dingley Press, Inc. matches 25% of theemployee’s contributions, up to a maximum of 4% of the employee’s eligiblecompensation.  In addition, certaincontributions from the company’s profit sharing plan are deposited into the401(k) plan.  Certain companies also havea 1% fixed contribution, 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.

 

**DeferredCompensation Plan**

 

In 2000, we established anonqualified deferred compensation program which permits officers, directorsand certain management employees to annually elect (via individual contracts)to defer a portion of their compensation, on a pre-tax basis. The benefit isbased on the amount of compensation deferred, company make-whole contributions,employer discretionary contributions and earnings on the deferrals. Theindividuals are fully vested in the compensation deferred; however, themake-whole contributions and the employer discretionary contributions aresubject to vesting requirements. At December 31, 2005 and 2004, the fullyvested portion was approximately $2,395,000 and $1,761,000, respectively, andhas been included in other non-current liabilities.

 

Due to new legislation,effective December 31, 2004, the existing Deferred Compensation Plan wasfrozen, and effective 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 trustfund to hold the investments under this program. The trust holds shares inregistered mutual funds, in an irrevocable rabbi trust, which are recorded asassets of ours. As of December 31, 2005 and 2004, total assets held by thetrust were approximately $3,477,000 and $2,600,000, respectively and areincluded in other assets.

 

**ProfitSharing Plan**

 

The Sheridan Group ProfitSharing Plan is an incentive program provided to all eligible employees at eachlocation, excluding Capital City Press and The Dingley Press, Inc.  Capital City Press had a Gainsharing Program,and The Dingley Press, Inc. does not currently provide a profit sharing plan.The annual discretionary profit sharing contribution for each participatingoperating subsidiary company is determined by a formula approved by our boardof directors.

 

Under the formula approvedfor 2005, net profit prior to profit sharing had to exceed 8% for the year forprofit sharing to be earned by the operating subsidiary. The total dollarcontribution for an operating subsidiary cannot exceed 10% of their totalpayroll for the year. Discretionary profit sharing contributions to the 401(k)plan of approximately $2,886,000, $2,103,000 and $1,843,000 were charged tooperations in 2005, 2004 and 2003, respectively.

 

All of the companies thatparticipate in the Profit Sharing Plan, except for Dartmouth Printing Company,currently deposit profit sharing contributions into the employees’ 401(k)account. Dartmouth Printing Company had an established cash payment policy whenthey were acquired, which remains in place, although employees may choose toput their cash into their 401(k) account.

 

**Change ofControl Incentive Plans**

 

In January 2006, our board ofdirectors approved change-of-control incentive plans for the benefit of certainofficers (currently Messrs. Jakobe, Ehmann, Walters, Kittredge, Moore, Seagramand Garner and Ms. Stricker) and our corporate staff employees, under which weagreed that if any plan beneficiary’s employment is terminated by us or oursuccessors without cause, or by the plan beneficiary for ‘‘good reason,’’within 18 months following any change in control, then the terminated planbeneficiary is entitled to receive severance benefits for the applicableperiod. In the case of the executive officers, the terminated plan beneficiaryis to receive as severance his or her annual base salary and his or her

 

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average annual incentive bonusduring the two years preceding his or her termination date for a period of 18months, amounts earned under his or her deferred compensation plan will fullyvest and he or she will continue to have coverage under our health insuranceplan 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.

 

**EmploymentAgreements**

 

We entered into anemployment agreement with John A. Saxton, our President and Chief ExecutiveOfficer, on February 2, 1998, and amended this agreement as of April 1, 2000.Under his employment agreement, Mr. Saxton currently earns a base salary of$510,000 and is entitled to an annual management incentive bonus of up to 80%of his base salary under our management incentive performance plan, subject toincreases by board action, as well as an additional annual bonus of an amountequal to $30,000 per fiscal year less the amount of our contributions to ourprofit sharing plan for Mr. Saxton’s benefit during such fiscal year. If Mr.Saxton’s employment is terminated by us without cause, or by Mr. Saxton for‘‘good reason,’’ he is entitled to receive as severance his annual base salaryand his average annual incentive bonus during the two years preceding histermination for a period of 24 months.

 

We entered into anemployment agreement with G. Paul Bozuwa, President of DJS, on June 30, 2001,and amended this agreement as of April 18, 2003. Under his employmentagreement, Mr. Bozuwa currently earns a base salary of $232,000 and is entitledto an annual management incentive bonus of up to 50% of his base salary. Inaddition to the incentive bonus, Mr. Bozuwa is entitled to an annual retentionbonus, payable under a deferred compensation plan, of 25% of his base salaryfor each year he remains employed in his current position. Each annual awardmade pursuant to the annual retention bonus, plus any growth from investingsuch reward, becomes fully vested five years after the date the award is paidinto the deferred compensation plan. In the event that Mr. Bozuwa no longerreports directly to John A. Saxton, the vesting period for each annual awardshall immediately adjust to three years instead of five years. If Mr. Bozuwa’semployment is terminated by us without cause, or by Mr. Bozuwa for ‘‘good reason,’’he is entitled to receive as severance his annual base salary and his averageannual incentive bonus during the two years preceding his termination for aperiod of 18 months, amounts earned under his deferred compensation plan willfully vest and he will continue to have coverage under our health insuranceplan for 18 months.

 

We entered into anemployment agreement with Joan B. Davidson, President and Chief OperatingOfficer of TSP, on October 31, 2001. Under her employment agreement, Ms.Davidson currently earns a base salary of $255,000 and is entitled to an annualmanagement incentive bonus of up to 50% of her base salary. In addition to theincentive bonus, Ms. Davidson is entitled to an annual retention bonus, payableunder a deferred compensation plan, of 25% of her base salary for each year sheremains employed in her 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. If Ms. Davidson’s employment is terminated by us withoutcause, or by Ms. Davidson for ‘‘good reason,’’ she is entitled to receive asseverance her annual base salary and her average annual incentive bonus duringthe two years preceding her termination for a period of 18 months, amountsearned under her deferred compensation plan will fully vest and she willcontinue to have coverage under our health insurance plan for 18 months.

 

TDP entered into anemployment agreement with Christopher A. Pierce, Chairman of TDP on May 25,2004 and amended this agreement on March 28, 2006. Under his employmentagreement, Mr. Pierce currently earns a base salary of $235,000 and is entitledto an annual management incentive bonus of up to 50% of his base salary. Inaddition, Mr. Pierce will receive annual non-compete payments in the amount of$108,000 over the first five years of the agreement. If Mr. Pierce’s employmentis terminated by us without cause, or by Mr. Pierce 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 date for aperiod equal to the severance period, amounts earned under his deferredcompensation plan will fully vest and he will continue to have coverage underour health insurance plan during the severance period. The severance periodwill be the longer of the time period from the date of termination of hisemployment until the end of the initial five year term or 18 months followingthe date of termination.

 

On March 28, 2006, weentered into an employment agreement with Robert M. Moore, as President andChief Operating Officer of TDP effective April 1, 2006. Under his employmentagreement, Mr. Moore will receive a base salary of $225,000 and is entitled toan annual management incentive bonus of up to 50% of his base salary. If Mr.Moore’s employment is terminated by us without cause or by Mr. Moore for “goodreason,” he is entitled to receive as severance his annual base salary and hisaverage annual incentive bonus during the two years preceding his terminationfor a period of 18 months, amounts earned under his deferred compensation planwill fully vest and the company would be responsible for COBRA

 

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coverage for 18 months at the premium amount less the premium paid bythe employee immediately prior to termination of employment.

 

**RetentionAwards**

 

Annual retention awards arepaid to certain management employees whose retention is determined by our boardof directors to be critical to our ongoing success. These awards are depositedin the 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. Davidson, these awards are solely awarded at the board ofdirectors’ discretion. Any awards made outside of an employment agreement wereequal to 10% of base salary.

 

**ITEM 12.****  ****SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

We are a wholly-ownedsubsidiary of TSG Holdings Corp. The following table sets forth certaininformation regarding the beneficial ownership of TSG Holdings Corp., as ofMarch 28, 2006, by (i) each person or entity known to us to own more than 5% ofany class of TSG Holdings Corp.’s outstanding securities, (ii) each knownmember of our board of directors and each of our named executive officers and(iii) all of the members of the board of directors and executive officers as agroup. TSG Holdings Corp.’s outstanding securities consist of about 539,600shares of TSG Holdings Corp. common stock and about 45,327 shares of TSGHoldings Corp. preferred stock, the terms of which are described in more detailbelow. To our knowledge, each of such stockholders will have sole voting andinvestment power as to the stock shown unless otherwise noted. Beneficialownership of the securities listed in the table has been determined inaccordance with the applicable rules and regulation promulgated under theExchange 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 | % | 37,820 |   | 7.0 | % |
| **Named Executive Officers and Directors:**                       |       |                                                                                                  |       |   |   |   |   |   |   |
| John A. Saxton(4)(6)(7)                                           |       | 1,340.426                                                                                             |       | 3.0 | % | 17,607 |   | 3.3 | % |
| Robert M. Jakobe(4)(8)(9)                                         |       | 108.190                                                                                               |       |   | * | 2,938 |   |   | * |
| Joan B. Davidson(4)(10)                                           |       | 67.021                                                                                                |       |   | * | 1,848 |   |   | * |
| Robert M. Moore(4)(11)                                            |       | 53.617                                                                                                |       |   | * | 1,538 |   |   | * |
| G. Paul Bozuwa(4)(12)                                             |       | 268.085                                                                                               |       |   | * | 4,091 |   |   | * |
| 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 |   |   | * |
| 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) |       | 44,958.431                                                                                            |       | 99.2 | % | 546,259 |   | 99.2 | % |

 

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* indicates less than 1%

 

(1)   Pursuant to Rule 13d-3 under the SecuritiesExchange Act of 1934, as amended, a person has beneficial ownership of anysecurities as to which such person, directly or indirectly, through anycontract, arrangement, undertaking,

 

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relationship or otherwisehas or shares voting power and/or investment power and as to which such personhas the 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)   The Sheridan Group Holdings (BRS), LLC (the“BRSLLC”) is controlled by Bruckmann, Rosser, Sherrill & Co. II, L.P. (the‘‘BRS Fund’’) which is a private equity investment fund managed by Bruckmann,Rosser, Sherrill & Co., LLC. BRSE, L.L.C. (‘‘BRSE’’) is the general partnerof the BRS Fund and by virtue of such status may be deemed to be the beneficialowner of the shares owned by BRSLLC. BRSE has the power to direct BRSLLC as tothe voting and disposition of shares held by BRSLLC. No single person controlsthe voting and dispositive power of BRSE with respect to the shares owned byBRSLLC. Bruce Bruckmann, Harold O. Rosser, Stephen C. Sherrill, Paul D.Kaminski and Thomas J. Baldwin are the managers of BRSE, and none of themindividually has the power to direct or veto the voting or disposition ofshares owned by BRSLLC. BRSE expressly disclaims beneficial ownership of theshares owned by BRSLLC. Each of Messrs. Bruckmann, Rosser, Sherrill, Kaminskiand Baldwin expressly disclaims beneficial ownership of the shares owned byBRSLLC.

(3)   The Sheridan Group Holdings (Jefferies), LLCis controlled by ING Furman Selz Investors III L.P., ING Barings U.S. LeveragedEquity Plan LLC and ING Barings Global Leveraged Equity Plan Ltd. which areprivate equity investment funds managed by Jefferies Capital Partners. Brian P.Friedman and Mr. Luikart are the Managing Members of JCP and may be consideredthe beneficial owners of the shares owned by The Sheridan Group Holdings(Jefferies), LLC, but each of Messrs. Friedman and Luikart expressly disclaimbeneficial ownership of such shares, except to the extent of each of theirpecuniary interests therein.

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

(5)   Includes options to purchase 960 shares ofTSG Holdings Corp. common stock exercisable within 60 days.

(6)   Includes 15,957 shares which are owned byLMWW Custodian FBO John A. Saxton Roll-over IRA. Mr. Saxton may be deemed tobeneficially own such shares.

(7)   Includes options to purchase 1,650 shares ofTSG Holdings Corp. common stock exercisable within 60 days.

(8)   Includes 1,288 shares which are owned by LMWWCustodian FBO Robert M. Jakobe Roll-over IRA. Mr. Jakobe may be deemed tobeneficially own such shares.

(9)   Includes options to purchase 1,650 shares ofTSG Holdings Corp. common stock exercisable within 60 days.

(10)Includes options to purchase 1,050 shares ofTSG Holdings Corp. common stock exercisable within 60 days.

(11)Includes options to purchase 900 shares ofTSG Holdings Corp. common stock exercisable within 60 days.

(12)Includes options to purchase 900 shares of TSGHoldings Corp. common stock exercisable within 60 days.

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

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

(14)Consists of 19,209.704 shares of TSG HoldingsCorp. preferred stock and 228,687 shares of TSG Holdings Corp. common stockowned and/or controlled by the BRSLLC. Mr. Baldwin may be deemed to sharebeneficial ownership of the shares owned of record and/or controlled by BRSLLCby virtue of his status as a manager of BRSE, but he expressly disclaims suchbeneficial ownership of the shares owned and/or controlled by BRSLLC. Themembers and managers of BRSE share investment and voting power with respect tosecurities owned and/or controlled by BRSE, but no individual controls suchinvestment or voting power.

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

(16)Consists of 19,209.704 shares of TSG HoldingsCorp. preferred stock and 228,687 shares of TSG Holdings Corp. common stockowned by The Sheridan Group Holdings (Jefferies), LLC. Mr. Luikart is aManaging Member of JCP and may be considered the beneficial owner of suchshares, but he expressly disclaims such beneficial ownership of the sharesowned by The Sheridan Group Holdings (Jefferies), LLC, except to the extent ofhis pecuniary interest therein.

(17)Includesoptions to purchase 15,270 shares of TSG Holdings Corp. common stock exercisablewithin 60 days.

 

**TSGHoldings Corp. Preferred Stock**

 

TSG Holdings Corp.’sCertificate of Incorporation provides that TSG Holdings Corp. may issue 100,000shares of preferred stock, 75,000 of which is designated as 10% Series ACumulative Compounding Preferred Stock and 25,000 of which is undesignated. TSGHoldings Corp. preferred stock has a stated value of $1,000 per share and isentitled to annual dividends when, as and if declared, which dividends will becumulative, whether or not earned or declared, and will accrue at a rate of10%, compounding annually. As of March 28, 2006, there are issued andoutstanding about 45,327 shares of TSG Holdings Corp. preferred stock.

 

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Except as otherwise requiredby law, the TSG Holdings Corp. preferred stock is not entitled to vote. TSGHoldings Corp. may not pay any dividend upon (except for a dividend payable inJunior Stock, as defined below), or redeem or otherwise acquire shares of,capital stock junior to the TSG Holdings Corp. preferred stock (including thecommon stock) (“Junior Stock”) unless all cumulative dividends on the TSGHoldings Corp. preferred stock have been paid in full. Upon liquidation,dissolution or winding up of TSG Holdings Corp., holders of TSG Holdings Corp.preferred stock are entitled to receive out of the legally available assets ofTSG Holdings Corp., before any amount shall be paid to holders of Junior Stock,an amount equal to $1,000 per share of TSG Holdings Corp. preferred stock, plusall accrued and unpaid dividends to the date of final distribution. If theavailable assets are insufficient to pay the holders of the outstanding sharesof TSG Holdings Corp. preferred stock in full, the assets, or the proceeds fromthe sale of the assets, will be distributed ratably among the holders.  The TSG Holdings Corp. preferred stock is notredeemable.

 

**TSGHoldings Corp. Common Stock**

 

The Certificate ofIncorporation of TSG Holdings Corp. provides that TSG Holdings Corp. may issue1,000,000 shares of TSG Holdings Corp. common stock. About 539,680 shares ofTSG Holdings Corp. common stock are issued and outstanding as of March 28,2006. The holders of TSG Holdings Corp. common stock are entitled to one votefor each share held of record on all matters submitted to a vote of thestockholders.

 

**EquityCompensation Plan Information**

 

The following table setsforth information as of December 31, 2005 regarding all of our existingcompensation plans pursuant to which equity securities are authorized forissuance to employees and non-employee directors.

 
| **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 |       | 52,400                                                                                                                                               |       | $                                                                                                              | 10.00      |                                                                                                                                                                                                         | 3,020      |   |
| Total                                                       |       | 52,400                                                                                                                                               |       | $                                                                                                              | 10.00      |                                                                                                                                                                                                         | 3,020      |   |

 

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(1)   As of December 31, 2005.

 

**ITEM 13.****  ****CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

 

**SecuritiesHolders 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 holdersagreement generally restricts the transfer of shares of TSG Holdings Corp.common stock or TSG Holdings Corp. preferred stock without the consent of BRSand JCP. Exceptions to this restriction include transfers to affiliates andtransfers for estate planning purposes, in each case so long as any transfereeagrees to be bound by the terms of the agreement.

 

Each of TSG Holdings Corp.,BRS and JCP has a right of first refusal under the securities holders agreementwith respect to sales of shares of TSG Holdings Corp. by management investors.Under certain circumstances, the stockholders have ‘‘tag-along’’ rights to selltheir shares on a pro rata basis with the selling stockholder in certain salesto third parties. If

 

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BRS and JCP approve a saleof TSG Holdings Corp., they have the right to require the other stockholders ofTSG Holdings Corp. to sell their shares on the same terms. The securitiesholders agreement also contains a provision that gives TSG Holdings Corp. theright to repurchase a management investor’s shares upon termination of thatmanagement stockholder’s employment or removal or resignation from the board ofdirectors.

 

**RegistrationRights 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 theirrespective affiliates, as the case may be, and use its best efforts to causethe registration statement to 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.

 

**ManagementAgreement**

 

In connection with theBuyout Transactions, we entered into a management agreement with BRS and JCP pursuantto which 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 Sheridan Acquisition, BRS and JCPalso were paid a transaction fee of about $1.0 million, plus reasonableout-of-pocket expenses, pursuant to the management agreement. The managementagreement has an initial term of ten years. The agreement automatically renewsfor additional one year terms unless either we or BRS and JCP give writtennotice of termination within 90 days prior to the expiration of the initialterm or any extension thereof. There are no minimum levels of service requiredto be provided pursuant to the management agreement. The management agreementincludes customary indemnification provisions in favor of BRS and JCP.

 

**Agreementswith Our Officers and Directors**

 

We employed J. M. DrydenHall, Jr., a member of our board of directors, to serve as our legal counsel.In 2005, our fees paid to Mr. Hall totaled $50,000. Effective January 1, 2006,Mr. Hall will no longer serve as our legal counsel.

 

**OtherRelated Party Transactions and Matters**

 

  In May 2005 our two principalstockholders, BRS and funds affiliated with Jefferies Capital Partners, eachentered into a separate limited liability company agreement with John A.Saxton, our chief executive officer, pursuant to which each principalstockholder contributed their preferred and common stock of TSG Holdings Corp.,our parent corporation, to a limited liability company, or LLC, called TheSheridan Group Holdings (BRS), LLC and The Sheridan Group Holdings (Jefferies),LLC, respectively, in exchange for limited liability company interests inthe LLC, and Mr. Saxton acquired an interest in the LLC fornominal consideration. Mr. Saxton’s interest in each LLC entitles himto receive a portion of any profit earned by the LLC on the shares of TSGHoldings Corp. stock held by it, after the principal stockholder has receivedback its entire investment in such shares, plus a specified return on itsinvestment. Under each limited liability company agreement, Mr. Saxton willforfeit his interest in the LLCs if he terminates or we terminate hisemployment for any reason; however, if Mr. Saxton’s employment isterminated as a result of his death, one–third of his interest in the LLCwill not be forfeited for each year of his service following the date of thelimited liability company agreement.

 

Ms. Stricker, VicePresident, Operations and Human Resources, and Ms. Davidson, President andChief Operating Officer of TSP, are sisters.

 

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**ITEM 14.****  ****PRINCIPAL ACCOUNTING FEESAND SERVICES**

 

The Company incurred fees for services performed byPricewaterhouseCoopers LLP as follows:

 
| ** **                                                                                                                                                            | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **(Dollars in thousands)**                                                                                                                                  | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Audit fees (include the review of interim consolidated  financial statements, annual audit of the consolidated financial statements and  assistance with SEC filings) |       | $                     | 654        |                  | $          | 1,146 |   |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Audit-related fees (include the annual  audit of the 401K plan, review of internal controls and due diligence related  to acquisitions)                               |       | 2                     |       | 665                   |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Tax fees (include tax compliance,  transactional consulting and advice for state tax issues)                                                                          |       | 123                   |       | 284                   |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| All other fees (include license fees for  online financial reporting and assurance literature)                                                                        |       | 2                     |       | —                |       |
|                                                                                                                                                                  |       |                  |       |                  |       |
| Total                                                                                                                                                                 |       | $                     |  781  |                  | $          |  2,095 |   |

 

All services performed by PricewaterhouseCoopers LLP have been or willbe approved by the audit committee prior to performance in accordance withlegal requirements.

 

**PART IV**

 

**ITEM 15.****  ****EXHIBITS, FINANCIALSTATEMENT 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                                                                                                                                                                                                                                                                                                       |       | 27-28        |
| Consolidated balance  sheets as of December 31, 2005 and 2004                                                                                                                                                                                                                                                                                                   |       | 29           |
| Consolidated  statements of income for the years-ended December 31, 2005 and 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, on a  predecessor basis                                                                                             |       | 30           |
| Consolidated  statements of changes in stockholders’ equity (deficit) and mandatorily  redeemable convertible preferred stock for the years-ended December 31, 2005  and 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, on a predecessor basis |       | 31           |
| Consolidated  statements of cash flows for the years-ended December 31, 2005 and 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, on a  predecessor basis                                                                                         |       | 32           |
| Notes to  consolidated financial statements                                                                                                                                                                                                                                                                                                                     |       | 33-53        |

 

(2)       Financial Statement Schedules:

 

All schedules have beenomitted because they are not applicable or the required information is includedin the consolidated financial statements and the footnotes thereto.

 

(3)       Exhibits

 

The following is a list ofexhibits filed as part of this Annual Report on Form 10-K.  Where so indicated by footnote, exhibitswhich were previously filed are incorporated 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 |   | Amended and Restated  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. Davidson.†*                                                                                                                                                                                                                                               |
| 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.*                                                                                                                                         |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20 |   | Limited Liability Company Agreement dated as of May 10, 2005, of  The Sheridan Group Holdings (BRS), LLC by and between Bruckmann, Rosser,  Sherrill & Co. II, L.P. and John A. Saxton.                                                                                       |
| 10.21 |   | Limited Liability Company Agreement dated as of May 10, 2005, of  The Sheridan Group Holdings (Jefferies), LLC by and among ING Furman  Selz Investors III L.P., ING Barings U.S. Leveraged Equity Plan LLC, ING  Barings Global Leveraged Equity Plan Ltd. and John A. Saxton.   |
| 10.22 |   | Joinder Agreement—Securities Holders Agreement and Registration  Rights Agreement, dated as of August 3, 2004, by and among William P. Walters  and TSG Holdings Corp.                                                                                                                      |
| 10.23 |   | Employment and Non-Competition Agreement, dated as of March 28, 2006,  among Robert M. Moore and The Sheridan Group, Inc.*                                                                                                                                                                       |
| 10.24 |   | First Amendment to Employment Agreement, dated as of March 28, 2006,  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 like numbered exhibit to theRegistrant’s Registration Statement on Form S-4 (File No. 333-110441) andincorporated herein by reference.

 

*      Management contract or compensatory plan orarrangement.

 

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or Section 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this Annual Report on Form 10-K to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   | THE SHERIDAN GROUP, INC. |
|--------|--------------------------|
|   |                     |
|   |                     |
|   | By:                      | /s/ John A. Saxton |   |
|   |                     | Name: | John A. Saxton |
|   |                     | Title: | President and Chief  Executive  Officer and Director |
|   |                     | Date: | March 30, 2006 |
|        |                          |  |  |  |

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this Annual Report on Form 10-K hasbeen signed 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 30, 2006 |       |
| **John A.  Saxton**     | ** ** | (Principal  Executive Officer)                      | ** ** | ** **     | ** ** |
| ** **              | ** ** | ** **                                          | ** ** | ** **     | ** ** |
| /s/  Robert M. Jakobe   |       | Chief Financial Officer                             |       | March 30, 2006 |       |
| **Robert M.  Jakobe**   | ** ** | (Principal  Financial and Accounting Officer)       | ** ** | ** **     | ** ** |
| ** **              | ** ** | ** **                                          | ** ** | ** **     | ** ** |
| /s/  Thomas J. Baldwin  |       | Director                                            |       | March 30, 2006 |       |
| **Thomas J.  Baldwin**  | ** ** | ** **                                          | ** ** | ** **     | ** ** |
|                    |       |                                                |       |           |       |
| /s/  Nicholas Daraviras |       | Director                                            |       | March 30, 2006 |       |
| **Nicholas  Daraviras** | ** ** | ** **                                          | ** ** | ** **     | ** ** |
|                    |       |                                                |       |           |       |
| /s/  Craig H. Deery     |       | Director                                            |       | March 30, 2006 |       |
| **Craig H.  Deery**     | ** ** | ** **                                          | ** ** | ** **     | ** ** |
|                    |       |                                                |       |           |       |
| /s/  Gary T. DiCamillo  |       | Director                                            |       | March 30, 2006 |       |
| **Gary T.  DiCamillo**  | ** ** | ** **                                          | ** ** | ** **     | ** ** |
|                    |       |                                                |       |           |       |
| /s/  J. Rice Edmonds    |       | Director                                            |       | March 30, 2006 |       |
| **J. Rice  Edmonds**    | ** ** | ** **                                          | ** ** | ** **     | ** ** |

 

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| /s/ J. M. Dryden Hall, Jr.  |   | Director   |   | March 30, 2006 |   |
|-----------------------------|--------|------------|--------|----------------|--------|
| **J. M.  Dryden Hall, Jr.** |   | ** ** |   | ** **     |   |
|                        |   |       |   |           |   |
| /s/  James L. Luikart       |   | Director   |   | March 30, 2006 |   |
| **James L.  Luikart**       |   | ** ** |   | ** **     |   |
|                        |   |       |   |           |   |
| /s/  Nicholas R. Sheppard   |   | Director   |   | March 30, 2006 |   |
| **Nicholas  R. Sheppard**   |   | ** ** |   | ** **     |   |
|                        |   |       |   |           |   |
| /s/  George A. Whaling      |   | Director   |   | March 30, 2006 |   |
| **George A.  Whaling**      |   | ** ** |   | ** **     |   |

 

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