U.S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








FORM 10-K





(Mark One)





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





For the Fiscal Year Ended December 31, 2009





Or





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





For the Period From                to              .





Commission File Number:  333-110441








THE SHERIDAN GROUP, INC.


(Exact name of Registrant as specified in its charter)





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








11311 McCormick Road, Suite 260


Hunt Valley, Maryland 21031-1437


(Address of principal executive offices and zip code)


(410) 785-7277


(Registrant’s telephone number, including area code)


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


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








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





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





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





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













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





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





Check one:  Large accelerated filer £    Accelerated filer £    Non-accelerated filer xSmaller reporting company £




Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes £  No x





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





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


2





THE SHERIDAN GROUP, INC.


ANNUAL REPORT ON FORM 10-K


FOR THE YEAR ENDED DECEMBER 31, 2009


INDEX





PagesITEM 1. BUSINESS
4ITEM 1A. RISK FACTORS
8ITEM 1B. UNRESOLVED STAFF COMMENTS
14ITEM 2. PROPERTIES
14ITEM 3. LEGAL PROCEEDINGS
15ITEM 4. RESERVED
15ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
15ITEM 6. SELECTED FINANCIAL DATA
15ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
15ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
27ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
28ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
51ITEM 9A(T). CONTROLS AND PROCEDURES
52ITEM 9B. OTHER INFORMATION
52ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
52ITEM 11. EXECUTIVE COMPENSATION
57ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
67ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
70ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
72ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
73




3
 Index





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS





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





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





·
competitive pressures and trends in the printing industry;





·
prevailing interest rates;





·
legal proceedings and regulatory matters;





·
general economic conditions;





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





·
future operations, financial condition and prospects; and





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





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





PART I





ITEM 1.
BUSINESS





Overview





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





History





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


4
 Index





Printing Services





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





Value-Added Support Services





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





Printing Segments





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





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





Net sales %

2009


2008


2007Publications


57



54



53Specialty Catalogs


23



27



29Books


20



19



18Total


100



100



100





Additional financial information about our segments is set forth in Note 16 to our consolidated financial statements set forth in Part II, Item 8 of this report.





Publications





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


5
 Index





Journals





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





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





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





Specialty Magazines





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





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





Specialty Catalogs





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





Books





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





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


6
 Index





Competition





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





Customers





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





Sales and Marketing





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





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





Raw Materials





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





Technology and Operations





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





Employees





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





Regulatory Matters





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


7
 Index





ITEM 1A.
RISK FACTORS





Risk Factors





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





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





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





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





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





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





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





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





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





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





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





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





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





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





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


8
 Index





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





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





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





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





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





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





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





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





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


9
 Index





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





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





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





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





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





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





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





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





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





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





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





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





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





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


10
 Index





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





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





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





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





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





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





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





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





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





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





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





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


11
 Index





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





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





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





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





We may require more capital in the future to:





·
refinance our senior secured notes;





·
fund our operations;





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





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





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





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





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





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





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


12
 Index





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





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





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





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





·
restructuring charges associated with the acquisitions; and





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





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





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





·
the possibility that we have acquired substantial undisclosed liabilities;





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





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





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





We may not be successful in overcoming these risks.





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





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


13
 Index





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





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





ITEM 1B.
UNRESOLVED STAFF COMMENTS





None.





ITEM 2.
PROPERTIES





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





Location

Function(s)

Ownership Structure

Total Size (Sq. Feet)Hunt Valley, MD

Corporate Headquarters

Leased

6,366Hanover, PA

Manufacturing (Publications)

Owned
(1)
172,250Chelsea, MI

Manufacturing (Books)

Owned
(1)
160,569Hanover, NH

Manufacturing (Publications)

Owned
(1)
147,830Ashburn, VA

Manufacturing (Publications)

Owned
(1)
70,159Lisbon, ME

Manufacturing (Specialty catalogs)

Owned
(1)
276,787Ann Arbor, MI

Manufacturing and Distribution (Books)

Owned
(1)
124,726Hanover, PA

Warehousing (Publications)

Leased

70,000Orford, NH

Warehousing (Publications)

Leased

4,330Waterbury, VT

Publication Services (Publications)

Leased

13,000Sterling, VA

Warehousing (Publications)

Leased

6,304Lewiston, ME

Warehousing (Specialty catalogs)

Leased

68,286Lisbon, ME

Warehousing (Specialty catalogs)

Leased

3,200Total

1,123,807


______________________


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





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





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


14
 Index





ITEM 3.
LEGAL PROCEEDINGS





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





ITEM 4.
RESERVED





PART II





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





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





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





ITEM 6.
SELECTED FINANCIAL DATA




(Dollars in thousands)

Year ended December 31, 2009


Year ended December 31, 2008


Year ended December 31, 2007


Year ended December 31, 2006


Year ended December 31, 2005Statement of Income Data:Net sales

$
293,349


$
348,027


$
344,240


$
337,540


$
347,959Gross profit


60,401



66,647



70,050



65,376



64,456Selling and administrative expenses


37,115



42,175



41,746



40,339



39,594Operating income


21,390



12,757



26,308



5,489



21,897Net income (loss)


8,217



(5,872
)


4,847



(8,343
)


1,180Balance Sheet Data (at end of period):Cash and cash equivalents

$
4,110


$
16,397


$
20,517


$
7,800


$
7,962Property, plant and equipment, net


117,757



127,064



126,709



129,666



119,220Total assets


249,000



285,097



298,968



291,567



300,721Total debt


142,949



164,946



164,930



164,915



164,904Total stockholder's equity


44,012



44,882



50,845



46,688



54,996Other Financial Data:Depreciation and amortization

$
18,674


$
18,400


$
17,834


$
18,991


$
17,072Capital expenditures


9,654



17,597



15,158



26,296



21,282





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





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


15
 Index





Introduction





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





Acquisition transactions





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





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





Restructuring costs





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





Critical Accounting Estimates





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





·
Allowance for doubtful accounts;


·
Goodwill and other long-lived assets;


·
Income taxes; and


·
Self-insurance.





Allowance for Doubtful Accounts





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


16
 Index





Goodwill and Other Long-Lived Assets





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





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


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





Income Taxes





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





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


17
 Index





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





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





Self-Insurance





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





Results of Operations





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





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




18
 Index





Comparison of Years Ended December 31, 2009 and December 31, 2008




Percent of revenueYear ended December 31,


Increase (decrease)


Year ended December 31,(in thousands)

2009


2008


Dollars


Percentage


2009


2008Net salesPublications

$
165,872


$
188,714


$
(22,842
)


(12.1
%)


56.5
%


54.2
%Specialty catalogs


68,948



92,218



(23,270
)


(25.2
%)


23.5
%


26.5
%Books


58,554



67,282



(8,728
)


(13.0
%)


20.0
%


19.3
%Intersegment sales elimination


(25
)


(187
)


162



86.6
%


-



-Total net sales


293,349



348,027



(54,678
)


(15.7
%)


100.0
%


100.0
%Cost of sales


232,948



281,380



(48,432
)


(17.2
%)


79.4
%


80.9
%Gross profit


60,401



66,647



(6,246
)


(9.4
%)


20.6
%


19.1
%Selling and administrative expenses


37,115



42,175



(5,060
)


(12.0
%)


12.7
%


12.1
%Loss on disposition of fixed assets


146



1,223



(1,077
)


(88.1
%)


-



0.4
%Related party guaranty


-



3,000



(3,000
)


(100.0
%)


-



0.8
%Restructuring costs


312



137



175



127.7
%


0.1
%


-Amortization of intangibles


1,438



1,715



(277
)


(16.2
%)


0.5
%


0.5
%Impairment charge


-



5,640



(5,640
)


(100.0
%)


-



1.6
%Total operating expenses


39,011



53,890



(14,879
)


(27.6
%)


13.3
%


15.4
%Operating incomePublications


17,312



12,481



4,831



38.7
%


10.4
%


6.6
%Specialty catalogs


1,491



(426
)


1,917


nm



2.2
%


(0.5
%)Books


4,039



5,524



(1,485
)


(26.9
%)


6.9
%


8.2
%Corporate expenses


(1,452
)


(4,822
)


3,370



69.9
%


N/A



N/ATotal operating income


21,390



12,757



8,633



67.7
%


7.3
%


3.7
%Other (income) expenseInterest expense


17,229



18,399



(1,170
)


(6.4
%)


5.9
%


5.3
%Interest income


(69
)


(172
)


103



59.9
%


-



(0.1
%)Gain on redemption of notes payable


(7,194
)


-



(7,194
)

nm



(2.5
%)


-Other, net


(234
)


1,269



(1,503
)

nm



(0.1
%)


0.4
%Total other expense


9,732



19,496



(9,764
)


(50.1
%)


3.3
%


5.6
%Income (loss) before income taxes


11,658



(6,739
)


18,397


nm



4.0
%


(1.9
%)Income tax provision (benefit)


3,441



(867
)


4,308


nm



1.2
%


(0.2
%)Net income (loss)

$
8,217


$
(5,872
)

$
14,089


nm



2.8
%


(1.7
%)





_______________


nm- not meaningful





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


19
 Index





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





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





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





Other income was $0.2 million for 2009 as compared to other expense of $1.3 million during the same period last year. This increase was due primarily to the increase in the market value of investments held in the deferred compensation plan during 2009. The market value of these investments decreased during the same period in 2008.





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





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





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


20
 Index





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





Year ended December 31,


Increase (decrease)


Percent of revenue Year ended December 31,(in thousands)

2008


2007


Dollars


Percentage


2008


2007Net salesPublications

$
188,714


$
182,906


$
5,808



3.2
%


54.2
%


53.1
%Specialty catalogs


92,218



98,140



(5,922
)


(6.0
%)


26.5
%


28.5
%Books


67,282



63,278



4,004



6.3
%


19.3
%


18.4
%Intersegment sales elimination


(187
)


(84
)


(103
)


(122.6
%)


-



-Total net sales


348,027



344,240



3,787



1.1
%


100.0
%


100.0
%Cost of sales


281,380



274,190



7,190



2.6
%


80.9
%


79.7
%Gross profit


66,647



70,050



(3,403
)


(4.9
%)


19.1
%


20.3
%Selling and administrative expenses


42,175



41,746



429



1.0
%


12.1
%


12.1
%Loss on disposition of fixed assets


1,223



4



1,219


nm



0.4
%


-Related party guaranty


3,000



-



3,000


nm



0.8
%


-Restructuring costs


137



115



22



19.1
%


-



-Amortization of intangibles


1,715



1,877



(162
)


(8.6
%)


0.5
%


0.6
%Impairment charge


5,640



-



5,640


nm



1.6
%


-Total operating expenses


53,890



43,742



10,148



23.2
%


15.4
%


12.7
%Operating incomePublications


12,481



21,002



(8,521
)


(40.6
%)


6.6
%


11.5
%Specialty catalogs


(426
)


1,551



(1,977
)

nm



(0.5
%)


1.6
%Books


5,524



6,264



(740
)


(11.8
%)


8.2
%


9.9
%Corporate expenses


(4,822
)


(2,509
)


(2,313
)


(92.2
%)


N/A



N/ATotal operating income


12,757



26,308



(13,551
)


(51.5
%)


3.7
%


7.6
%Other (income) expenseInterest expense


18,399



18,577



(178
)


(1.0
%)


5.3
%


5.4
%Interest income


(172
)


(446
)


274



61.4
%


(0.1
%)


(0.2
%)Other, net


1,269



(83
)


1,352


nm



0.4
%


-Total other expense


19,496



18,048



1,448



8.0
%


5.6
%


5.2
%(Loss) income before income taxes


(6,739
)


8,260



(14,999
)

nm



(1.9
%)


2.4
%Income tax (benefit) provision


(867
)


3,413



(4,280
)

nm



(0.2
%)


1.0
%Net (loss) income

$
(5,872
)

$
4,847


$
(10,719
)

nm



(1.7
%)


1.4
%


_______________


nm- not meaningful





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





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


21
 Index





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





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





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





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





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





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





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


22
 Index





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





Liquidity and Capital Resources





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





Operating Activities





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





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





Investing Activities





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





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


23
 Index




FinancingActivities





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





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





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





Indebtedness





As of December 31, 2009, we had total indebtedness of $142.9 million comprised entirely of amounts due under the 2003 Notes and the 2004 Notes, all with a scheduled maturity of August 2011. We have significant interest payments due on the outstanding notes as well as interest payments due on any borrowings under our working capital facility, under which there were no amounts outstanding as of December 31, 2009. Total cash interest payments related to our working capital facility and the 2003 Notes and the 2004 Notes are expected to be in excess of $14.6 million on an annual basis.





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





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





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


24
 Index




Year ended December 31, 2009


Year ended December 31, 2008


Year ended December 31, 2007Net cash provided by operating activities

$
22,968


$
14,640


$
27,459Accounts receivable


(3,646
)


660



3,815Inventories


(3,707
)


(1,141
)


228Other current assets


566



(1,056
)


270Refundable income taxes


(2,755
)


2,117



(438
)Other assets


124



(1,653
)


(527
)Accounts payable


7,149



3,130



(6,814
)Accrued expenses


4,181



3,642



1,572Income taxes payable


(3,140
)


73



(765
)Other liabilities


112



1,049



268Provision for doubtful accounts


(1,239
)


(863
)


(495
)Provision for inventory realizability and LIFO value


(107
)


(199
)


(44
)Non-cash donation of property


-



-



(45
)Deferred income tax benefit (expense)


470



297



(311
)Loss on disposition of fixed assets, net


(146
)


(1,223
)


(4
)Income tax provision (benefit)


3,441



(867
)


3,413Cash interest expense


16,112



17,102



17,123Management fees


894



767



917Non cash adjustments:Adjustments to LIFO value


13



137



12(Increase) decrease in market value of investments


(85
)


319



(58
)Amortization of prepaid lease costs


76



90



84Loss on disposition of fixed assets


174



1,318



190Interest income


(69
)


-



-Related party guaranty


-



3,000



-Restructuring costs


313



137



115Bank fees for abandoned line of credit renewal


308



-



-WCF EBITDA

$
42,007


$
41,476


$
45,965





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





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


25
 Index





Contractual Obligations





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





Remaining Payments Due by PeriodTotal


2010


2011 to 2012


2013 to 2014


2015 and beyond(in thousands)Long term debt, including interest (1)

$
166,702


$
14,647


$
152,055


$
-


$
-Operating leases


7,290



3,395



3,670



225



-Purchase obligations (2)


2,299



2,119



177



3



-Other long-term obligations (3)


466



151



302



13



-Total (4)

$
176,757


$
20,312


$
156,204


$
241


$
-


______________________


(1)
Includes the $142.9 million aggregate principal amount due on the 2003 Notes and the 2004 Notes plus interest at 10.25% payable semi-annually through August 15, 2011.





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





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





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





Off-Balance Sheet Arrangements





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





Effect of Inflation





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





Recently Issued Accounting Pronouncements





On January 1, 2009, we adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on fair value measurement for nonfinancial assets and liabilities, other than non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), which already were subject to the FASB guidance.  The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.





On January 1, 2009, we adopted the authoritative guidance issued by the FASB on business combinations. The guidance addresses the manner in which the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business. This guidance also provides standards for recognizing and measuring the goodwill acquired in the business combination and for disclosure of information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption of this guidance by us did not have a material impact on our financial position, results of operations or cash flows. We expect that its adoption will reduce our earnings due to required recognition of acquisition and restructuring costs through operating earnings. The magnitude of this impact will be dependent on the number, size and nature of acquisitions in periods subsequent to adoption.


26
 Index





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





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





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





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





ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





Foreign Exchange Rate Market Risk





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





Interest Rate Market Risk





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


27
 Index





ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





Report of Independent Registered Public Accounting Firm





To the Board of Directors and the Stockholder


of The Sheridan Group, Inc.





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





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








/s/ PricewaterhouseCoopers LLP


Baltimore, Maryland


March 29, 2010


28
 Index





The Sheridan Group, Inc. and Subsidiaries


Consolidated Balance Sheets


At December 31, 2009 and 2008





December 31,


December 31,2009


2008AssetsCurrent assetsCash and cash equivalents

$
4,109,740


$
16,396,628Accounts receivable, net of allowance for doubtful accounts of $2,055,569 and $1,080,208, respectively


29,382,142



34,266,288Inventories, net


13,989,631



17,803,085Due from affiliated companies


-



662,212Other current assets


4,023,966



3,438,647Refundable income taxes


179,473



2,894,829Deferred income taxes


1,700,168



1,684,563Total current assets


53,385,120



77,146,252Property, plant and equipment, net


117,757,008



127,063,798Intangibles, net


33,566,535



35,004,531Goodwill


40,979,426



40,979,426Deferred financing costs, net


1,483,423



2,604,547Due from affiliated companies - non current


-



554,357Other assets


1,828,173



1,743,828Total assets

$
248,999,685


$
285,096,739LiabilitiesCurrent liabilitiesAccounts payable

$
14,621,067


$
23,291,403Accrued expenses


17,698,876



21,880,095Due to parent, net


121,044



-Total current liabilities


32,440,987



45,171,498Notes payable


142,948,652



164,946,468Deferred income taxes


25,935,903



26,313,410Other liabilities


3,662,574



3,782,954Total liabilities


204,988,116



240,214,330Commitments and contingenciesStockholder's EquityCommon stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding


-



-Additional paid-in capital


42,047,938



51,135,564Retained earnings (accumulated deficit)


1,963,631



(6,253,155
)Total stockholder's equity


44,011,569



44,882,409Total liabilities and stockholder's equity

$
248,999,685


$
285,096,739





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


29
 Index





The Sheridan Group, Inc. and Subsidiaries


Consolidated Statements of Operations


Years Ended December 31, 2009, 2008 and 2007





Year Ended December 31,


Year Ended December 31,


Year Ended December 31,2009


2008


2007Net sales

$
293,349,196


$
348,026,720


$
344,239,531Cost of sales


232,947,797



281,380,147



274,189,774Gross profit


60,401,399



66,646,573



70,049,757Selling and administrative expenses


37,115,289



42,175,411



41,745,714Loss on disposition of fixed assets


146,146



1,222,918



4,329Related party guaranty


-



3,000,000



-Restructuring costs


312,556



136,965



114,940Amortization of intangibles


1,437,852



1,714,628



1,877,165Impairment charges


-



5,639,613



-Total operating expenses


39,011,843



53,889,535



43,742,148Operating income


21,389,556



12,757,038



26,307,609Other (income) expenseInterest expense


17,228,454



18,398,974



18,576,598Interest income


(69,485
)


(172,549
)


(445,935
)Gain on redemption of notes payable


(7,193,906
)


-



-Other, net


(233,698
)


1,269,162



(83,320
)Total other expense


9,731,365



19,495,587



18,047,343Income (loss) before income taxes


11,658,191



(6,738,549
)


8,260,266Income tax provision (benefit)


3,441,405



(866,658
)


3,413,273Net income (loss)

$
8,216,786


$
(5,871,891
)

$
4,846,993





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


30
 Index





The Sheridan Group, Inc. and Subsidiaries


Consolidated Statements of Changes in Stockholder’s Equity


Years Ended December 31, 2009, 2008 and 2007





RetainedAdditional


Earnings


TotalCommon Stock


Paid-In


(Accumulated


Stockholder'sShares


Amount


Capital


Deficit)


EquityBalance as of December 31, 2006


1



-


$
51,010,425


$
(4,322,515
)

$
46,687,910Cash dividend


-



-



-



(249,463
)


(249,463
)Impact of adopting new guidance related to accounting for uncertain tax positions


-



-



-



(473,276
)


(473,276
)Share-based compensation


-



-



33,129



-



33,129Net income


-



-



-



4,846,993



4,846,993Balance as of December 31, 2007


1



-


$
51,043,554


$
(198,261
)

$
50,845,293Cash dividend


-



-



-



(183,003
)


(183,003
)Capital contribution from parent company -stock options exercised


-



-



20,400



-



20,400Income tax benefit from stock options exercised


-



-



62,610



-



62,610Share-based compensation


-



-



9,000



-



9,000Net loss


-



-



-



(5,871,891
)


(5,871,891
)Balance as of December 31, 2008


1



-


$
51,135,564


$
(6,253,155
)

$
44,882,409Cash dividend


-



-



(9,105,226
)


-



(9,105,226
)Share-based compensation


-



-



17,600



-



17,600Net income


-



-



-



8,216,786



8,216,786Balance as of December 31, 2009


1



-


$
42,047,938


$
1,963,631


$
44,011,569





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


31
 Index





The Sheridan Group, Inc. and Subsidiaries


Consolidated Statements of Cash Flows


Years Ended December 31, 2009, 2008 and 2007





December 31,


December 31,


December 31,2009


2008


2007Cash flows provided by operating actvities:Net income (loss)

$
8,216,786


$
(5,871,891
)

$
4,846,993Adjustments to reconcile net income (loss) to net cash provided by operating activitiesDepreciation


17,236,045



16,684,883



15,957,244Amortization of intangible assets


1,437,852



1,714,628



1,877,165Impairment of goodwill and intangibles


-



5,639,613



-Provision for doubtful accounts


1,238,625



862,897



495,475Provision for inventory realizability and LIFO value


106,747



198,755



43,493Stock-based compensation


17,600



9,000



33,129Amortization of deferred financing costs and debt discount, included in interest expense


1,116,566



1,296,573



1,453,884Non-cash donation of property


-



-



45,000Deferred income tax (benefit) provision


(470,043
)


(297,475
)


311,100Gain on redemption of notes payable


(7,193,906
)


-



-Loss on disposition of fixed assets


146,146



1,222,918



4,329Changes in operating assets and liabilitiesAccounts receivable


3,645,521



(659,767
)


(3,814,584
)Inventories


3,706,707



1,140,705



(228,159
)Other current assets


(566,094
)


1,056,253



(269,913
)Refundable income taxes


2,755,337



(2,116,829
)


437,504Other assets


(124,182
)


1,653,164



527,308Accounts payable


(7,149,268
)


(3,129,729
)


6,813,640Accrued expenses


(4,181,219
)


(3,642,227
)


(1,571,608
)Income tax payable


3,140,527



(72,513
)


765,438Other liabilities


(111,824
)


(1,048,915
)


(267,974
)Net cash provided by operating activities


22,967,923



14,640,043



27,459,464Cash flows used in investing activities:Purchases of property, plant and equipment


(9,654,334
)


(17,596,886
)


(15,157,782
)Proceeds from sale of fixed assets


38,640



108,330



438,574(Advances to) proceeds from affiliated companies


(1,734,539
)


(1,172,064
)


226,147Net cash used in investing activities


(11,350,233
)


(18,660,620
)


(14,493,061
)Cash flows used in financing activities:Borrowing of revolving line of credit


42,931,000



-



6,847,000Repayment of revolving line of credit


(42,931,000
)


-



(6,847,000
)Repayment of long term debt


(14,539,500
)


-



-Payment of deferred financing costs in connection with long term debt


(259,852
)


-



-Proceeds from capital contribution from parent company


-



20,400



-Realized income tax benefit from stock options exercised


-



62,610



-Payment of dividend


(9,105,226
)


(183,003
)


(249,463
)Net cash used in financing activities


(23,904,578
)


(99,993
)


(249,463
)Net (decrease) increase in cash and cash equivalents


(12,286,888
)


(4,120,570
)


12,716,940Cash and cash equivalents at beginning of period


16,396,628



20,517,198



7,800,258Cash and cash equivalents at end of period

$
4,109,740


$
16,396,628


$
20,517,198Supplemental disclosure of cash flow informationCash paid (received) during the year forInterest paid

$
16,966,542


$
17,076,499


$
17,149,172Income taxes (received) paid, net

$
(1,872,697
)

$
1,120,816


$
1,512,577Non-cash investing activitiesAsset additions in accounts payable

$
160,932


$
1,682,000


$
907,608





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


32
 Index





The Sheridan Group, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


Years Ended December 31, 2009, 2008 and 2007





1. Business Organization





The Sheridan Group, Inc. (“TSG”) is one of the leading specialty printers in the United States, offering a full range of printing and value-added support services for the journal, magazine, book, catalog and article reprint markets. We provide a wide range of printing services and value-added support services, such as digital proofing, preflight checking, offshore composition, copy editing, subscriber services, mail sortation, distribution and back issue fulfillment. We operate seven wholly-owned subsidiaries: The Sheridan Press, Inc. (“TSP”), Dartmouth Printing Company (“DPC”), United Litho, Inc. (“ULI”), Dartmouth Journal Services, Inc. (“DJS”), Sheridan Books, Inc. (“SBI”), The Dingley Press, Inc. (“TDP”) and The Sheridan Group Holding Company. As used in the notes to the consolidated financial statements, the terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of The Sheridan Group, Inc. and all of its subsidiaries.





On August 21, 2003, we became a wholly-owned subsidiary of TSG Holdings Corp. (“Holdings”), when Holdings purchased 100% of the outstanding capital stock of TSG from its existing stockholders (the “Sheridan Acquisition”). We funded the acquisition price and the related fees and expenses with the proceeds of the sale of $105.0 million aggregate principal amount of 10.25% Senior Secured Notes due 2011 (the “2003 Notes”) and equity investments in Holdings. On May 25, 2004, we acquired all of the assets and business of The Dingley Press of Lisbon, Maine (the “Dingley Acquisition”). We funded the acquisition price and the related fees and expenses with the proceeds of the sale of $65.0 million aggregate principal amount of 10.25% Senior Secured Notes due 2011 (the “2004 Notes”) and equity investments in Holdings.





2. Summary of Significant Accounting Policies





Principles of Consolidation





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





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.




Revenue Recognition





In accordance with Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition,” we record revenue when realized or realizable and earned when all of the following criteria are met:





·
Persuasive evidence of an arrangement exists,


·
Delivery has occurred or services have been rendered,


·
The seller’s price to the buyer is fixed or determinable, and


·
Collectibility is reasonably assured.





As such, substantially all revenue is recognized when a product is shipped and title and risk of loss transfers to the customer. Shipping and handling fees billed to customers are included in net sales and any cost of shipping and handling is included in cost of sales. A liability is recognized when cash is received from customers in advance of the shipment of their products.


33
 Index





Cash and Cash Equivalents





Cash and cash equivalents include amounts invested in accounts which are readily convertible to known amounts or have original maturities of three months or less when purchased.





Business and Credit Concentrations





Our customers are not concentrated in any specific geographic region, but are concentrated in the journal, magazine, book, specialty catalog and article reprint markets. There were no significant accounts receivable from a single customer. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.





Accounts Receivable and Allowance for Doubtful Accounts





Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of probable credit losses in our existing accounts receivable. We review the allowance for doubtful accounts on a regular basis. Past due balances over 120 days are reviewed for collectibility and form the basis of our reserve. When we determine that a particular customer poses a credit risk, a specific reserve is established. Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. During 2009, we provided additional reserves for specific customers based on deteriorating market conditions. During 2007, we recognized a significant reduction in our allowance for doubtful accounts as the result of write-offs related primarily to two specific customers. These customers accounted for charges to expense of approximately $0.5 million during 2007.





A rollforward of the allowance for doubtful accounts is as follows:




Year Ended

December 31,


Year Ended

December 31,


Year Ended

December 31,2009


2008


2007Balance at beginning of period

$
1,080,208


$
616,869


$
1,951,420Charged to expense


1,238,625



862,897



495,475Deductions


(263,264
)


(399,558
)


(1,830,026
)Balance at end of period

$
2,055,569


$
1,080,208


$
616,869




Inventories





Inventories are stated at the lower of cost or market with the cost of TSP’s paper inventory and SBI’s work-in-process inventory determined by the last-in, first-out (“LIFO”) cost method. The cost of the remaining inventory (approximately 88% and 86% of inventories at December 31, 2009 and 2008, respectively) 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 through acquisitions, in which case they are recorded at fair value. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, as follows: 3-11 years for machinery and equipment; and 10-40 years for buildings and land improvements. Leasehold improvements are amortized over their estimated useful lives or the term of the underlying lease, whichever is shorter. Upon disposal of property, plant and equipment, the cost of the asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in earnings.





Expenditures for renewals and improvements which extend the original estimated lives of the assets are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred.


34
 Index





We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell. We do not believe there was any impairment of property and equipment as of December 31, 2009.





Income Taxes





Deferred income taxes are recognized for the tax consequences of applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is recorded against deferred tax assets when it is more likely than not that a deferred tax asset will not be realized.




Effective January 1, 2007, we adopted the provisions for accounting for uncertainty in income taxes, which specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements, requires certain disclosures of uncertain tax matters, specifies how reserves for uncertain tax positions should be classified on the balance sheet and provides transition and interim-period guidance. Although we believe that our estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in our consolidated financial statements. We adjust our reserves upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement or upon the expiration of the statute of limitations, in the period in which such event occurs.





Upon adoption of this guidance, we recognized a $0.5 million decrease in our retained earnings balance and a $0.3 million increase in goodwill. At the date of adoption, our gross unrecognized tax benefits were $1.3 million. Of this total, $0.3 million, net of federal and state benefits, represents the amount of unrecognized tax benefits that, if recognized, would have a favorable impact on the effective tax rate.




Goodwill





Goodwill is tested for impairment at the reporting unit level at least annually or whenever circumstances indicate that the carrying value of the reporting unit’s net assets may not be recoverable, utilizing a two-step methodology. The initial step requires us to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair 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 implied fair value of goodwill to the carrying value of goodwill for each reporting unit. To determine the implied fair value of goodwill, we make a hypothetical allocation of the reporting unit’s estimated fair value to the tangible and intangible assets (other than goodwill) of the reporting unit. Based on this methodology, we concluded that $3.4 million of ULI goodwill (a component of our Publications segment) was fully impaired and was required to be expensed as a non-cash charge to continuing operations during the fourth quarter of 2008. In connection with our annual assessment of goodwill in 2009 and 2007, we concluded that there was no impairment.





Identified Intangible and Other Long-Lived Assets





Identified intangible assets, which primarily consist of customer relationships and trade names, were valued at fair value, effective with acquisitions. All long-lived assets are amortized over the estimated useful lives. We review long-lived assets for impairment using undiscounted future cash flows whenever events or changes in circumstances indicate that the carrying values of the long-lived asset groups (including goodwill) may not be recoverable. If the sum of undiscounted cash flows are less than the carrying values, the difference between the fair value of the long-lived asset group, using discounted cash flows, and the carrying value is recognized as impairment to the extent of the individual fair values of the long-lived assets (except goodwill). As a result of the impairment analysis performed in 2008 for ULI (a component of our Publications segment) and TDP (our Specialty Catalogs segment), we concluded that the carrying value of the customer relationship assets exceeded their fair value. Therefore, during the fourth quarter of 2008, we recorded an impairment charge of $2.0 million and $0.2 million for the customer relationship assets of ULI and TDP, respectively.  We do not believe there was any impairment of intangible assets or other long-lived assets as of December 31, 2009 and 2007.


35
 Index




Deferred Financing Costs





Deferred financing costs incurred in connection with the 2003 Notes and the 2004 Notes are being amortized over the term of the related debt using the effective interest method. Deferred financing costs incurred in connection with establishing our working capital facility are being amortized over the term of the agreement using the straight-line method. During 2009, we wrote off $0.3 million of deferred financing costs in connection with the redemption of our senior secured notes and incurred $0.3 million of deferred financing costs in connection with an agreement to amend our working capital facility (see Note 8). Accumulated amortization as of December 31, 2009 and 2008 was $9.3 million and $8.2 million, respectively.





Accounting for Stock Based Compensation





Our parent company, Holdings, established the 2003 Stock-based Incentive Compensation Plan (the “2003 Plan”), pursuant to which Holdings has reserved for issuance 55,500 shares of its Common Stock. There is currently no public trading market for the Common Stock. When necessary, we determine fair value through internal valuations based on historical financial information and/or through a third party service provider. As of December 31, 2009, 7,660 shares were available for future grants. Stock options are granted at exercise prices not less than the fair market value of the stock at the date of grant. Options generally vest ratably over a five-year period, except those options granted to officers, portions of which vest ratably over five years, and the remainder of which vest upon the achievement of certain performance targets, the occurrence of certain future events, including the sale of the Company or a qualified public offering, or after eight years from the date of grant, as specified in the 2003 Plan. Options expire ten years from the date of grant. We have a policy of issuing new shares to satisfy share options upon exercise.





For the years ended December 31, 2009, 2008 and 2007, we recognized non-cash stock-based compensation expense of approximately $17,600 (approximately $12,400 net of taxes), $9,000 (approximately $7,800 net of taxes) and $33,100 (approximately $19,500 net of taxes), respectively, which is included in selling and administrative expenses.





We value options using the Black-Scholes option-pricing model which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term of the options is an output of the option-pricing model and estimates the period of time that options are expected to remain unexercised. We use historical data to estimate the timing and amount of option exercises and forfeitures. The expected volatility is calculated by averaging the 12-month volatility for five peer group companies and a small-cap index. There were no stock options granted during the years ended December 31, 2009 and 2008. The following summarizes the assumptions used for estimating the fair value of stock options granted during the year ended December 31, 2007:




Risk-free interest rate
4.12%-4.32%Average expected years until exercise
7.75 yearsExpected volatility
25%Weighted-average expected volatility
25%Dividend yield
0%




The following is a summary of option activity for the years ended December 31, 2007, 2008 and 2009:


36
 Index




Weighted averageNumber of shares


Exercise price


Remaining term

(in years)


Aggregate

intrinsic valueOptions outstanding at December 31, 2006


55,150


$
11.52



7.4


$
1,725,400Granted


900



53.06Exercised


-Forfeited


(900
)


10.00Options outstanding at December 31, 2007


55,150


$
12.23



6.7


$
5,851,600Granted


-



-Exercised


(2,040
)


10.00Forfeited


(4,910
)


10.00Options outstanding at December 31, 2008


48,200


$
12.55



5.4


$
-Granted


-Exercised


-Forfeited


(2,600
)


12.27Options outstanding at December 31, 2009


45,600


$
12.56



4.3


$
487,000Options exercisable at December 31, 2009


25,800


$
10.88



4.1


$
318,900





The following is a summary of non-vested option activity for the years ended December 31, 2009, 2008 and 2007:





Number of shares

Years ended December 31,


Weighted average grant

date fair value

Years ended December 31,2009


2008


2007


2009


2008


2007Non vested options outstanding at beginning of year


25,500



34,920



40,240


$
4.79


$
4.11


$
3.32Granted


-



-



900



-



-



20.06Vested


(4,060
)


(4,960
)


(5,680
)


3.70



3.19



2.62Forfeited


(1,640
)


(4,460
)


(540
)


9.09



2.49



2.49Non vested options outstanding at end of year


19,800



25,500



34,920


$
4.13


$
4.79


$
4.11





The total compensation cost related to nonvested awards not yet recognized as of December 31, 2009 is approximately $0.1 million and will be recognized over a weighted average period of approximately 3.7 years.





During the year ended December 31, 2009, no options to purchase Holdings Common Stock were exercised. During the year ended December 31, 2008, 2,040 options to purchase Holdings Common Stock were exercised and $20,400 of proceeds was received. The total intrinsic value, the difference between the exercise price and the fair value of Holdings Common Stock on the date of exercise of options exercised during the year ended December 31, 2008, was $215,100. During the year ended December 31, 2007, no options to purchase Holdings Common Stock were exercised.





Fair Value Measurements





Certain of our assets and liabilities must be recorded at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures and prioritizes the inputs used in measuring fair value as follows:





Level 1: Observable inputs such as quoted prices in active markets;





Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and





Level 3: Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.





Our financial instruments consist of long-term investments in marketable securities (held in trust for payment of non-qualified deferred compensation) and long-term debt. We are permitted to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. We have elected not to measure any financial assets or financial liabilities, including long-term debt, at fair value which were not previously required to be measured at fair value. We classify the investments in marketable securities within level 1 of the hierarchy since quoted market prices are available in active markets.


37
 Index





We believe that the carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses reported in the consolidated balance sheets approximate their fair values due to the short maturity of these instruments. The estimated fair value of the our publicly traded debt, based on quoted market prices, was approximately $133.4 million and $115.7 million as of December 31, 2009 and 2008, respectively.





Advertising Costs





We expense advertising costs as the advertising occurs in accordance with the authoritative guidance.   Advertising expense, included in selling and administrative expenses in the consolidated statements of operations, was approximately $0.2 million, $0.3 million and $0.4 million, for the years ended December 31, 2009, 2008 and 2007, respectively.





New Accounting Standards





On January 1, 2009, we adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) on fair value measurement for nonfinancial assets and liabilities, other than non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), which already were subject to the FASB guidance.  The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.





On January 1, 2009, we adopted the authoritative guidance issued by the FASB on business combinations. The guidance addresses the manner in which the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired business. This guidance also provides standards for recognizing and measuring the goodwill acquired in the business combination and for disclosure of information to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The adoption of this guidance by us did not have a material impact on our financial position, results of operations or cash flows. We expect that its adoption will reduce our earnings due to required recognition of acquisition and restructuring costs through operating earnings. The magnitude of this impact will be dependent on the number, size and nature of acquisitions in periods subsequent to adoption.





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





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





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





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


38
 Index





Reclassifications





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





3. Inventories





Inventories consist of the following:





December 31,


December 31,2009


2008Work-in-process

$
7,367,236


$
8,243,280Raw materials (principally paper)


6,895,279



9,819,55814,262,515



18,062,838Excess of current cost over LIFO inventory value


(272,884
)


(259,753
)$
13,989,631


$
17,803,085




We maintained a reserve for the realizability of inventory in the amounts of $193,991 and $116,433 for the years ended December 31, 2009 and 2008, respectively, which are included in the amounts in the table above relating to work-in-process and raw materials. A rollforward of this inventory reserve is as follows:




Year Ended December 31,


Year Ended December 31,


Year Ended December 31,2009


2008


2007Balance at beginning of period

$
116,433


$
83,363


$
90,796Charged to expense


93,616



61,602



23,888Deductions


(16,058
)


(28,532
)


(31,321
)Balance at end of period

$
193,991


$
116,433


$
83,363




4. Property, Plant and Equipment





Property, plant and equipment consist of the following:




December 31,


December 31,2009


2008Land

$
4,742,111


$
4,742,111Buildings and improvements


43,833,998



43,629,028Machinery and equipment


154,397,889



147,953,713202,973,998



196,324,852Accumulated depreciation


(85,216,990
)


(69,261,054
)Property, plant and equipment, net

$
117,757,008


$
127,063,798




Depreciation expense for the years ended December 31, 2009, 2008 and 2007, was $17.2 million, $16.7 million, and $16.0 million, respectively.





5. Intangible Assets





In conjunction with previous acquisitions, we acquired intangible assets relating to customer relationships, trade names and technology. The customer relationships, trade names and technology are being amortized using the straight-line method over their estimated useful lives as described below. Amortization expense for the years ended December 31, 2009, 2008 and 2007, related to customer relationships, trade names and technology intangible assets was $1.4 million, $1.6 million and $1.7 million, respectively. As a result of our impairment analysis, we recorded a charge of $2.2 million in 2008 related to customer relationships at ULI and TDP. Other, in the table below, represents the realization of the tax goodwill benefit in connection with the Dingley Acquisition. Beginning in 2007, this benefit was applied to reduce intangibles related to the Dingley Acquisition since the goodwill related to the Dingley Acquisition was reduced to zero in 2006 as the result of our impairment analysis (see Note 6).


39
 Index




December 31, 2009


December 31, 2008Useful Life

Gross Carrying Amount


Accumulated Amortization


Impairment Charge


Other


Net Carrying Amount


Gross Carrying Amount


Accumulated Amortization


Impairment Charge


Other


Net Carrying AmountCustomer relationships
25 years

$
27,800,000


$
6,714,668


$
2,202,626


$
2,135,806


$
16,746,900


$
27,800,000


$
5,816,653


$
2,202,626


$
2,135,806


$
17,644,915Trade names
40 years


20,400,000



3,221,262



-



359,103



16,819,635



20,400,000



2,721,262



-



319,122



17,359,616Technology
5 years


300,000



243,416



-



56,584



-



300,000



243,416



-



56,584



-$
48,500,000


$
10,179,346


$
2,202,626


$
2,551,493


$
33,566,535


$
48,500,000


$
8,781,331


$
2,202,626


$
2,511,512


$
35,004,531





We estimate annual amortization expense related to these intangibles as follows:





Years ended December 31,

Amortization expense2010


1,398,4002011


1,398,4002012


1,398,4002013


1,398,4002014


1,398,400Thereafter


26,574,535Total

$
33,566,535








6. Goodwill





Goodwill, which arises from the purchase price exceeding the assigned value of the net assets of an acquired business, represents the value attributable to unidentifiable intangible elements being acquired. Goodwill totaled $41.0 million at December 31, 2009 and 2008. Goodwill resulted from the Sheridan Acquisition as a result of a stock purchase and, therefore, is not deductible for tax purposes and from the Dingley Acquisition as a result of an asset purchase and is deductible for tax purposes.





As of December 31, 2008, the initial step in the annual test for goodwill impairment indicated potential impairment at ULI, one of the components of the Publications segment, as a result of the worldwide economic downturn and declining results. We completed the second step by comparing the implied fair value of goodwill to the carrying value of goodwill for ULI. As a result of the second step, we determined that the carrying value of goodwill at ULI was fully impaired. The changes in the carrying amount of goodwill for the years ended December 31, 2008 and 2009 are as follows:


40
 Index




Publications


Specialty Catalogs


Books


ConsolidatedBalance at December 31, 2007Goodwill

$
35,580,464


$
12,774,931


$
8,922,848


$
57,278,243Accumulated impairment losses


-



(12,774,931
)


-



(12,774,931
)35,580,464



-



8,922,848



44,503,312Reduction of uncertain tax positions related to the lapse of a statute of limitations


(86,899
)


-



-



(86,899
)Impairment charge


(3,436,987
)


-



-



(3,436,987
)Balance at December 31, 2008Goodwill


35,493,565



12,774,931



8,922,848



57,191,344Accumulated impairment losses


(3,436,987
)


(12,774,931
)


-



(16,211,918
)32,056,578



-



8,922,848



40,979,426Balance at December 31, 2009Goodwill


35,493,565



12,774,931



8,922,848



57,191,344Accumulated impairment losses


(3,436,987
)


(12,774,931
)


-



(16,211,918
)$
32,056,578


$
-


$
8,922,848


$
40,979,426





7. Other Assets





Other assets consist of the following:





December 31,


December 31,2009


2008Other receivables

$
1,407,591


$
1,027,947Prepaid expenses and deposits


2,616,375



2,410,699Non-compete agreements, net


-



39,837Deferred compensation plan assets


1,731,265



1,534,163Other


96,908



169,829Total


5,852,139



5,182,475Less: current portion


4,023,966



3,438,647Long-term portion

$
1,828,173


$
1,743,828





A non-compete agreement valued at $0.5 million expired during 2009 and was fully amortized. A non-compete agreement valued at $1.2 million expired during 2008 and was fully amortized. Amortization expense related to the non-compete agreements (which is included in amortization of intangibles in the consolidated statements of income and cash flows) for the years ended December 31, 2009, 2008 and 2007, was minimal, $0.1 million and $0.2 million, respectively.





8. Notes Payable and Working Capital Facility





In conjunction with the Sheridan Acquisition, on August 21, 2003, we completed a private debt offering of 10.25% senior secured notes totaling $105.0 million, priced to yield 10.50%, that mature August 15, 2011 (the “2003 Notes”). In conjunction with the Dingley Acquisition, on May 25, 2004, we completed a private debt offering of 10.25% senior secured notes totaling $60.0 million, priced to yield 9.86%, that mature August 15, 2011 (the “2004 Notes”). The 2004 Notes have identical terms to the 2003 Notes. The carrying value of the 2003 Notes and the 2004 Notes was $142.9 million and $164.9 million as of December 31, 2009 and 2008, respectively.





The 2003 Notes and the 2004 Notes are collateralized by security interests in substantially all of our assets, subject to permitted liens. The capital stock, securities and other payment rights of our subsidiaries will constitute collateral for the 2003 Notes and the 2004 Notes only to the extent that Rule 3-10 and Rule 3-16 of Regulation S-X under the Securities Act do not require separate financial statements of a subsidiary to be filed with the SEC. Payment obligations under the 2003 Notes and the 2004 Notes are guaranteed jointly and severally, irrevocably and unconditionally, by all of our subsidiaries. The Sheridan Group, Inc. (the stand-alone parent company) owns 100% of the outstanding stock of all of its subsidiaries and has no material independent assets or operations. There are no restrictions on the ability of The Sheridan Group, Inc. (the stand-alone parent company) to obtain funds by dividend, advance or loan from its subsidiaries.


41
 Index





In connection with the offerings of the 2003 Notes and the 2004 Notes (the “Offerings”), we entered into registration rights agreements pursuant to which we were required to register the 2003 Notes and the 2004 Notes with the SEC. We filed Registration Statements on Form S-4 with the SEC in connection with exchange offers of our outstanding 2003 Notes and 2004 Notes for like principal amounts of new senior secured notes. The Registration Statement covering the 2003 Notes was declared effective on October 13, 2004. The Registration Statement covering the 2004 Notes was declared effective on October 25, 2004. The new senior secured notes are identical in all material respects to the 2003 Notes and the 2004 Notes, except that the new senior secured notes do not bear legends restricting the transfer thereof.





In an event of default, the holders of at least 25% in aggregate principal amount of 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 to be due and payable immediately. Concurrent with the offering of the 2003 Notes, we entered into a working capital facility agreement. The working capital facility was amended concurrent with the offering of the 2004 Notes. Terms of the working capital facility allowed for revolving debt of up to $30.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. Borrowings under the working capital facility bore interest at the bank’s base rate or the LIBOR rate plus a margin of 1.75% at our option and matured in June 2009. Interest was payable monthly in arrears. We agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.35%. In addition, we agreed to pay an annual fee of 1.875% on all letters of credit outstanding.





During 2009, we paid $15.0 million, which included $0.5 million of accrued interest, to redeem senior secured notes with a face value of $22.1 million. Deferred financing costs and unamortized debt discount attributable to these notes, along with commission fees, totaled $0.4 million. As a result of the redemptions, we recognized a net gain of $7.2 million.





On June 16, 2009, we executed an agreement to amend our working capital facility. Terms of the working capital facility allow for revolving debt of up to $20.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. The interest rate on borrowings under the working capital facility is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, and (c) the LIBOR rate plus a margin of 3.75%.  At our option, we can elect a LIBOR option for a specified period. Any such borrowings bear interest at the specified LIBOR rate plus a margin of 3.75%. We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.50%. In addition, we have agreed to pay an annual fee of 3.875% on all letters of credit outstanding. The working capital facility is scheduled to mature on March 25, 2011. As of December 31, 2009, we had no borrowings outstanding under the working capital facility, had unused amounts available of $17.7 million and had $1.4 million in outstanding letters of credit.





Borrowings under the working capital facility are collateralized by the assets of the Company and our subsidiaries, subject to permitted liens. The working capital facility contains various covenants including provisions that restrict our ability to incur or prepay indebtedness, including the 2003 Notes and the 2004 Notes, or pay dividends. It also requires us to satisfy financial tests, such as an interest coverage ratio and the maintenance of a minimum amount of earnings before interest, taxes, depreciation and amortization (as defined in the working capital facility agreement). We have complied with all of the restrictive covenants as of December 31, 2009. In an event of default, all principal and interest due under the working capital facility shall be immediately due and payable.


42
 Index





9. Accrued Expenses





Accrued expenses consist of the following:




December 31,


December 31,2009


2008Payroll and related expenses

$
3,639,665


$
3,963,599Profit sharing accrual


476,151



2,123,887Accrued interest


5,516,678



6,374,647Customer prepayments


3,727,548



4,283,222Self-insured health and workers' compensation accrual


1,933,529



2,298,030Other


2,405,305



2,836,710$
17,698,876


$
21,880,095




10. Other Liabilities





Other liabilities consist of the following:




December 31,


December 31,2009


2008Non-compete agreements

$
292,602


$
417,663Deferred compensation


1,471,953



1,270,540Tax reserves


1,884,992



2,058,139Other


13,027



36,612Total

$
3,662,574


$
3,782,954




11. Income Taxes





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








December 31,


December 31,


December 31,2009


2008


2007CurrentFederal

$
3,308,339


$
(1,198,197
)

$
2,605,734State


603,109



629,014



496,4393,911,448



(569,183
)


3,102,173DeferredFederal


(14,884
)


118,837



318,811State


(455,159
)


(416,312
)


(7,711
)(470,043
)


(297,475
)


311,100$
3,441,405


$
(866,658
)

$
3,413,273





Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities were as follows:


43
 Index




December 31,


December 31,2009


2008Deferred tax assetsIncentive and vacation accrual

$
920,512


$
1,119,282Bad debt reserve


762,203



403,561Self insurance accrual


451,661



594,393Intangible assets


276,813



320,514Amortization of financing costs


266,538



427,020Inventory-additional costs capitalized for tax


264,321



337,432Net operating loss carryforwards-Federal


13,854



217,293Net operating loss carryforwards-States


777,540



813,661Capital loss carryforward-Federal


161,969



-Goodwill


3,959,844



4,349,815Federal benefit related to State tax reserves


463,491



472,047Other


302,888



473,275Valuation allowance


(758,393
)


(762,906
)Total deferred tax assets


7,863,241



8,765,387Deferred tax liabilitiesIntangible assets


12,611,090



13,532,891Inventory basis difference


208,855



262,490Property and equipment


18,138,947



18,444,397Land


1,022,911



1,033,967Prepaid insurance


117,173



120,489Total deferred tax liabilities


32,098,976



33,394,234Net deferred tax liabilities

$
24,235,735


$
24,628,847







December 31,


December 31,2009


2008Included in the balance sheetNoncurrent deferred tax liabilities in excess of assets

$
25,935,903


$
26,313,410Current deferred tax assets in excess of liabilities


1,700,168



1,684,563Net deferred tax liability

$
24,235,735


$
24,628,847





We will realize a tax benefit associated with the amount of tax goodwill in excess of book goodwill associated with the Dingley Acquisition. We will only recognize the benefit when realized on future tax returns and will apply the benefit first to reduce book goodwill associated with the acquisition to zero, second to reduce to zero other noncurrent intangible assets related to the acquisition, and third to reduce income tax expense. During 2009 and 2008, we realized a tax benefit of $0.8 million in both years associated with the realization of tax deductible goodwill in excess of book goodwill. A negligible amount of the benefit was recorded as a reduction to intangible assets for the year ended December 31, 2009, which resulted in reducing these intangible assets to zero. The majority of this benefit was recorded as a reduction to the tax provision for the year ended December 31, 2009. The entire benefit was recorded as a reduction to intangible assets for the year ended December 31, 2008.





As of December 31, 2009 and 2008, we had a minimal amount and $0.6 million of U.S. Federal net operating loss (“NOL”) deduction carryforwards, respectively. We anticipate that we will fully utilize the benefit of the deduction during 2010 which is when it expires.





As of December 31, 2009 and 2008, we had state NOLs with a tax effected value of approximately $0.8 million in various jurisdictions, which begin to expire in 2012. We have determined that a full valuation allowance is needed as of December 31, 2009 and 2008, for these net operating losses due to the uncertainty of their realization.


44
 Index





We utilized NOLs against Federal and state taxable income, which reduced tax expense by $0.2 million and $0.1 million for 2009 and 2008, respectively.





In 2007, upon the adoption of the guidance for uncertain tax positions, we determined that the deferred tax asset related to transaction costs from the Sheridan Acquisition did not meet the more likely than not threshold. Accordingly, the deferred tax asset and full valuation allowance were removed, as shown as a component of Other in the valuation allowance rollforward.





A rollforward of our valuation allowance is as follows:




Year Ended December 31,


Year Ended December 31,


Year Ended December 31,2009


2008


2007Balance at beginning of period

$
762,906


$
686,924


$
1,205,168Charged to expense


54,185



112,134



48,524Other, net


(58,698
)


(36,152
)


(566,768
)Balance at end of period

$
758,393


$
762,906


$
686,924








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





Year ended December 31,


Year ended December 31,


Year ended December 31,2009


2008


2007Income (loss) before income taxes

$
11,658,191


$
(6,738,549
)

$
8,260,266U.S. Federal statutory tax rate

$
3,963,785


$
(2,291,106
)

$
2,808,491Increase (decrease) in tax expense resulting fromTax reserves


5,301



430,127



281,229Non-deductible meals and entertainment


50,198



75,874



75,235Change in valuation allowance


54,185



112,134



48,524Goodwill impairment


-



1,168,576



-Tax goodwill in excess of book goodwill


(445,171
)


-



-State income taxes, net of U.S.Federal income tax benefit


523,180



79,376



366,831Change in state tax apportionment and rates


(637,582
)


(453,892
)


(73,609
)Domestic production activity deduction


(171,107
)


-



(77,066
)Other, net


98,616



12,253



(16,362
)Income tax provision (benefit)

$
3,441,405


$
(866,658
)

$
3,413,273





We reported a decrease in our deferred state tax liabilities and our deferred state tax provision of approximately $0.5 million, $0.5 million and $0.1 million during the years ended December 31, 2009, 2008 and 2007, respectively, to properly reflect the lower anticipated state effective income tax rates due to decreased apportionment of our taxable income to states with high tax rates. We recognized an increase of a minimal amount, $0.4 million and $0.3 million during the years ended December 31, 2009, 2008 and 2007, respectively, in our effective rate related to the accounting for uncertain tax positions.





We file consolidated tax returns with Holdings for Federal and certain state jurisdictions. We classify these current tax liabilities as “Due to parent, net” on the consolidated balance sheet. The tax liabilities owed to Holdings were $3.0 million and $0 as of December 31, 2009 and 2008, respectively, which are presented net against other amounts receivable from Holdings (which are discussed further in Note 14).


45
 Index





We continue to recognize both interest and penalties related to uncertain tax positions as part of the income tax provision. We had accrued interest of $0.5 million and penalties of $0.4 million as of December 31, 2009 and $0.4 million and $0.3 million as of December 31, 2008. Interest and penalties in the amount of $0.1 million were expensed during the years ended December 31, 2009, 2008 and 2007, respectively. Interest and penalties will continue to accrue on certain issues in 2010 and forward.





Our tax reserves relate primarily to state nexus and other related state tax issues. It is anticipated that the amount of unrecognized tax benefits will decrease by approximately $0.2 million within the next twelve months as the result of a settlement reached in connection with an audit conducted by the state of Maryland. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.9 million. Our tax reserves, excluding interest and penalties, are as follows:




Year Ended December 31,


Year Ended December 31,


Year Ended December 31,(Dollars in thousands)

2009


2008


2007Balance at beginning of period

$
1,445


$
1,093


$
1,313Increases for current year tax positions


19



192



2Increases for prior year tax positions


25



251



273Decreases for prior year tax positions


(7
)


-



-Lapse in statute of limitations


(123
)


(91
)


(495
)Balance at end of period

$
1,359


$
1,445


$
1,093








We are subject to U.S. federal income tax as well as income tax of multiple state and local jurisdictions.  The statute of limitations related to the consolidated U.S. federal income tax return and most state income tax returns are closed for all tax years up to and including 2005. During the first quarter of 2010, we reached a settlement in connection with an audit conducted by the state of Maryland. As a result of this audit, all tax years are closed with the state of Maryland through 2008. Currently, no other federal or state income tax returns are under examination by the respective taxing authorities.





12. Commitments





In February 1998, we entered into an employment agreement with our former Chairman of the Board. This agreement includes a 10 year non-compete arrangement, which expired in 2008. The liability for this agreement is to be paid out in increments increasing from $126,000 to $151,200 per year, over 15 years. Included in accrued expenses and other liabilities as of December 31, 2009 is approximately $0.4 million related to the net present value of the obligation under this agreement.





In May 2004, we entered into an employment agreement with the Chairman of The Dingley Press. This agreement included a 5 year non-compete arrangement, which expired in 2009. There are no future payments due under this agreement.





We lease warehouse, plant and office space, printing equipment, computer equipment and delivery equipment under non-cancelable operating leases. Rental expense relating to these leases was approximately $4.5 million, $5.3 million and $4.9 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009 approximate minimum future rental payments under non-cancelable operating leases are as follows:


46
 Index




Years Ended December 31,

(in thousands)2010


3,3952011


2,7702012


9002013


2062014


19Thereafter


-Total

$
7,290





We have also entered into agreements to acquire raw materials and additional plant and equipment. As of December 31, 2009, approximate future payments related to these agreements are as follows:




(in thousands)Raw


Plant andYears Ended December 31,

materials


equipment2010


319



1,8002011


5



1322012


-



402013


-



32014Thereafter


-



-Total

$
324


$
1,975




13. Employee Benefit Plans





We sponsor a 401(k) retirement plan (the “Plan”). Substantially all of our employees are eligible to participate in the Plan on the first day of the month in which the employee has attained 18 years of age and 30 days of employment. Employees may make pre-tax contributions of their eligible compensation under the Plan and may direct their investments among various pre-selected investment alternatives. We determine discretionary and matching contributions to the Plan. Contributions of approximately $0.8 million, $4.5 million and $4.4 million were charged to operations for the years ended December 31, 2009, 2008 and 2007, respectively.





We maintain a non-qualified deferred compensation plan for certain employees which allows participants to annually elect (via individual contracts) to defer a portion of their compensation on a pre-tax basis and which allows for make-whole contributions for participants whose pre-tax deferrals are limited under our 401(k) Plan and other discretionary contributions. Contributions made by us and our employees are maintained in an irrevocable trust. Legally, the assets remain ours; however, access to the trust assets is severely restricted. The trust cannot be revoked by the employer or an acquirer, but the assets are subject to the claims of our general creditors. The employee has no right to assign or transfer contractual rights in the trust. The participants are fully vested in their compensation deferred; however, the make-whole contributions and any employer discretionary contributions are subject to vesting requirements. As of December 31, 2009 and 2008, we recorded a deferred compensation liability of approximately $1.5 million and $1.3 million, respectively, in other non-current liabilities in the accompanying consolidated balance sheets. We account for the assets as trading securities.  The change in the fair value of the assets held in trust is recorded within “Other, net” in the accompanying consolidated statements of operations.  The change in the deferred compensation obligation related to changes in the fair value of the vested assets is recorded as income (loss) in compensation expense.  The assets held in trust were approximately $1.7 million and $1.5 million as of December 31, 2009 and 2008, respectively, and are recorded at their fair value, based on quoted market prices, as discussed in “Fair Value Measurements” in Note 2.  The assets held in trust are included in “Other assets” in the accompanying consolidated balance sheets.




14. Related Party Transactions





On January 5, 2009, we executed a waiver to our working capital facility. The waiver allowed us to pay a cash dividend and make a loan to Holdings, which is not a registrant with the Securities and Exchange Commission, in the aggregate amount of up to $14.0 million, provided that Holdings used the entire cash proceeds of such dividend and loan solely to purchase capital stock issued by Holdings (the “Stock Purchase”) from Participatiemaatschappij Giraffe B.V. (“Giraffe”) and to pay related expenses in connection therewith. On January 5, 2009, we paid a dividend in the aggregate amount of $8.0 million to Holdings and made a loan in the principal amount of $2.0 million to Holdings.  The loan will mature on January 4, 2012 and will accrue interest at the rate of 1.36% per year payable in cash or in kind on February 15 and August 15 each year. Subsequent to January 5, 2009, we paid an additional dividend in the amount of $1.1 million to Holdings to pay expenses and other amounts in connection with the Stock Purchase. In connection with the Stock Purchase, Euradius Acquisition Co., a majority owned subsidiary of Holdings, sold all of the outstanding stock of Euradius International Dutch Bidco B.V. (“Euradius”) to Giraffe. This resulted in Holdings fully divesting its interest in Euradius, which was Holdings’ only investment other than The Sheridan Group, Inc.  Neither Euradius nor its subsidiaries were guarantors of the 2003 or 2004 Notes. Neither Euradius nor its subsidiaries were subsidiaries of ours and their financial results were not included in our consolidated financial statements. The amount due from Holdings as of December 31, 2009 was $2.0 million and is presented net against the income tax obligations due to Holdings (as discussed in Note 2), within “Due to parent, net” in the consolidated balance sheet.





We engage in transactions with Holdings and its affiliates, in the normal course of business. These transactions primarily involve administrative costs and management fees paid on behalf of Holdings and its affiliates. In connection with the Stock Purchase, Holdings ceased to have an ownership interest in an affiliate that owed us approximately $1.1 million as of December 31, 2008. In December 2009, Holdings executed an agreement with the former affiliate whereby the $1.1 million owed to us by the former affiliate was satisfied in full by being offset against the principal amount of a note owed by Holdings to the former affiliate. The result is that the $1.1 million once owed to us by the former affiliate became a receivable from Holdings. Holdings satisfied $0.2 million of the amount due to us and the remaining $0.9 million is presented net against the income tax obligations due to Holdings (as discussed in Note 2), within “Due to parent, net” in the consolidated balance sheet.


47
 Index




In connection with the Sheridan Acquisition, we entered into a 10-year management agreement with our principal equity sponsors, Bruckmann, Rosser, Sherrill & Co. LLC and Jefferies Capital Partners. The management fee is equal to the greater of $0.5 million or 2% of earnings before interest, taxes depreciation and amortization (as defined in the management agreement), plus reasonable out-of-pocket expenses. We incurred and paid approximately $0.9 million, $0.8 million and $0.9 million in such fees for the years ended December 31, 2009, 2008 and 2007, respectively.





During 2008, we guaranteed certain obligations of GPN Asia Pte. Ltd. (“GPN Asia”), an affiliate of our parent company, related to a lease agreement, up to a maximum of $4.0 million, and established a $0.3 million letter of credit to secure a working capital facility for GPN Asia. In August 2008, GPN Asia began the process of shutting down operations. In connection with this shutdown, we estimated our liabilities to be $3.0 million which was charged to operations during 2008. We paid $2.6 million and $0.4 million during 2008 and 2009, respectively, to satisfy the obligations under the lease agreement, the letter of credit and other costs related to the shutdown including severance payments and professional fees. We expect that any future payments in connection with this shutdown will be negligible and are provided for in our consolidated balance sheet as of December 31, 2009.





Pierce Atwood LLP serves as legal counsel for The Dingley Press. A partner at Pierce Atwood LLP is the brother of Christopher A. Pierce, one of our executive officers in his role as Chairman of The Dingley Press. The fees incurred and paid for the year ended December 31, 2009 were negligible. We incurred and paid approximately $0.1 million in fees to Pierce Atwood LLP during both of the years ended December 31, 2008 and 2007. We believe the fees were reasonable based upon the services rendered.





15. Contingencies





We are party to legal actions as a result of various claims arising in the normal course of business. Accruals for litigation have not been provided because information available at this time does not indicate that it is probable that a liability has been incurred. We believe that the disposition of these matters will not have a material adverse effect on our financial condition, results of operations or cash flows.





16. Business Segments





We are a specialty printer in the United States offering a full range of printing and value–added support services for the journal, magazine, book, catalog and article reprint markets. The Publications business segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing, United Litho and Dartmouth Journal Services. We believe there are many similarities in the journal and magazine markets such as the equipment used in the print and bind process, distribution methods, repetitiveness and frequency of titles and the level of service required by customers. We have a Group President - Publication Services, to manage our journal and magazine business. The Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books.  This market does not have the repetitive nature of our other products and does not require the same level of customer service. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies.


48
 Index





The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies. The results of each segment include certain allocations for general, administrative and other shared costs. However, certain costs, such as corporate profit sharing and bonuses and the amortization of a non-compete agreement with our former Chairman of the Board (Note 12), are not allocated to the segments. Our customer base resides primarily in the continental United States and our manufacturing, warehouse and office facilities are located throughout the East Coast and Midwest.





We had no customers which accounted for 10.0% or more of our net sales for the years ended December 31, 2009 and 2008. We had one customer which accounted for 10.7% of consolidated net sales for the year ended December 31, 2007. Net sales for this customer are reported in the Specialty Catalogs segment.


49
 Index





The following table provides segment information for continuing operations (in thousands):




Year ended December 31,


Year ended December 31,


Year ended December 31,2009


2008


2007Net salesPublications

$
165,872


$
188,714


$
182,906Specialty catalogs


68,948



92,218



98,140Books


58,554



67,282



63,278Intersegment eliminations


(25
)


(187
)


(84
)Consolidated total

$
293,349


$
348,027


$
344,240Operating income (loss)Publications

$
17,312


$
12,481


$
21,002Specialty catalogs


1,491



(426
)


1,551Books


4,039



5,524



6,264Corporate


(1,452
)


(4,822
)


(2,509
)Consolidated total

$
21,390


$
12,757


$
26,308Depreciation and amortizationPublications

$
9,248


$
9,284


$
9,484Specialty catalogs


5,878



6,193



5,834Books


3,365



2,769



2,269Corporate


183



154



247Consolidated total

$
18,674


$
18,400


$
17,834Capital expendituresPublications

$
7,027


$
5,480


$
7,449Specialty catalogs


1,335



3,715



2,959Books


1,146



7,870



4,720Corporate


146



532



30Consolidated total

$
9,654


$
17,597


$
15,158AssetsPublications

$
147,020


$
165,194Specialty catalogs


54,186



65,403Books


46,173



51,386Corporate


1,621



3,114Consolidated total

$
249,000


$
285,097GoodwillPublications

$
32,056


$
32,056Books


8,923



8,923Consolidated total

$
40,979


$
40,979Intangible assetsPublications

$
31,733


$
33,073Specialty catalogs


-



40Books


1,834



1,892Consolidated total

$
33,567


$
35,005




50
 Index





A reconciliation of total segment operating income to consolidated income before income taxes is as follows:




Years ended December 31,(in thousands)

2009


2008


2007Total operating income (as shown above)

$
21,390


$
12,757


$
26,308Interest expense


(17,229
)


(18,399
)


(18,577
)Interest income


69



172



446Gain on redemption of notes payable


7,194



-



-Other, net


234



(1,269
)


83Income (loss) before income taxes

$
11,658


$
(6,739
)

$
8,260





17. Restructuring Costs





In January 2009, we announced our plan to consolidate some administrative and production operations at our DPC facility in Hanover, New Hampshire. Approximately 20 positions at our ULI facility in Ashburn, Virginia were eliminated as a result of this action. We recorded $0.3 million of restructuring costs during 2009. The costs relate primarily to guaranteed severance payments and employee health benefits. We expect to record an additional $0.1 million of restructuring costs in connection with this consolidation during 2010. There was no liability outstanding as of December 31, 2009 related to this restructuring.





We recorded $0.1 million of restructuring costs during 2008. The costs related primarily to guaranteed severance payments and employee health benefits as a result of a reduction in the workforce at our ULI facility in Ashburn, Virginia. There was a nominal liability outstanding as of December 31, 2008 related to the 2008 restructuring costs.





18. Quarterly Financial Information (unaudited)





Quarterly financial information for the years ended December 31, 2009 and 2008 is as follows (in thousands):





First


Second


Third


Fourth2009

Quarter


Quarter


Quarter


QuarterNet sales

$
76,976


$
70,702


$
73,341


$
72,330Gross profit


13,927



14,828



15,587



16,059Operating income


4,095



4,965



6,174



6,156Net income (loss)

$
(743
)

$
1,806


$
5,207


$
1,947





First


Second


Third


Fourth2008

Quarter


Quarter


Quarter


QuarterNet sales

$
92,392


$
82,722


$
86,768


$
86,145Gross profit


16,886



16,147



16,985



16,629Operating income


5,809



4,907



2,893



(852
)Net income (loss)

$
584


$
86


$
(83
)

$
(6,459
)





The results for the second and third quarters of 2009 reflect the impact of the gain on redemption of notes payable of $5.4 million and $1.8 million, respectively (see Note 8). The results for the third quarter of 2008 reflect the impact of the related party guaranty costs (see Note 14.)  The results for the fourth quarter of 2008 reflect the impact of the impairment charges for intangibles and goodwill (see Notes 5 and 6.)





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





Not applicable.


51
 Index





ITEM 9A(T).
CONTROLS AND PROCEDURES





(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures





As of the end of the period covered by this Annual Report on Form 10-K, we conducted an evaluation, under the supervision and with the participation of the principal executive officer (“CEO”) and principal financial officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on this evaluation and as of the end of the period for which this report is made, the CEO and CFO concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the CEO and CFO, to allow timely decisions regarding required disclosure.





(b)  Management’s Report on Internal Control Over Financial Reporting





Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). To evaluate the effectiveness of our internal control over financial reporting, we use the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Using the COSO Framework, our management, including the CEO and CFO, evaluated our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2009. Because of the inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.





(c)  Changes in Internal Control Over Financial Reporting





There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





ITEM 9B.
OTHER INFORMATION





Not applicable.





PART III





ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





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





Our Equity Sponsors





Bruckmann, Rosser, Sherrill & Co., LLC, or BRS, is a New York-based private equity investment firm with about $1.4 billion under management. BRS was founded in 1995 and has since invested in approximately 40 companies in the following industries: restaurants, consumer goods, specialty retail, recreation/leisure, apparel, home furnishings, industrial and commercial services (including equipment rental), commercial equipment manufacturing, wholesale distribution and healthcare services. BRS and its affiliates are collectively referred to as “BRS.”


52
 Index





Jefferies Capital Partners, or JCP, is a New York-based private equity investment firm with over $1.0 billion in equity commitments under management. Since 1994, JCP’s professionals have invested in approximately 50 companies in a variety of industries. JCP focuses on partnering with entrepreneurs and management teams in industries in which JCP has expertise. JCP invests in management buyouts, recapitalizations, industry consolidations and growth equity. JCP and its affiliates are collectively referred to as “JCP.”





Directors and Executive Officers





We have provided information below about our directors and executive officers, including their ages, term of service, business experience, and service on other boards of directors.  We have also included information about each director’s specific experience, qualifications, attributes or skills that led the board to conclude that he should serve as a director of the Company, in light of our business and structure. Our executive officers and directors are as follows:





Name

Age

PositionJohn A. Saxton

60

President and Chief Executive Officer and DirectorRobert M. Jakobe

56

Executive Vice President and Chief Financial Officer and SecretaryDouglas R. Ehmann

53

Executive Vice President and Chief Technology OfficerDale A. Tepp

53

Vice President—Human ResourcesJoan B. Davidson

48

Group President—Sheridan Publication ServicesPatricia A. Stricker

45

President and Chief Operating Officer—The Sheridan Press, Inc. (“TSP”)Gary J. Kittredge

59

President and Chief Operating Officer—Dartmouth Journal Services (“DJS”)Michael J. Seagram

53

President and Chief Operating Officer—Sheridan Books, Inc. (“SBI”)G. Paul Bozuwa

49

President and Chief Operating Officer—Dartmouth Printing Company ("DPC") and United Litho, Inc. ("ULI")Eric D. Lane

50

President and Chief Operating Officer – The Dingley Press, Inc. (“TDP”)Thomas J. Baldwin

51

DirectorNicholas Daraviras

36

DirectorCraig H. Deery

62

DirectorGary T. DiCamillo

59

DirectorJames L. Luikart

64

DirectorNicholas R. Sheppard

35

DirectorGeorge A. Whaling

73

Director





John A. Saxton, President, Chief Executive Officer and Director.Mr. Saxton joined us in 1995 as our President and Chief Executive Officer and has served on our board of directors since 1991. Prior to joining us, Mr. Saxton held various positions during 24 years at The Procter & Gamble Company, most recently serving as President of the Noxell Corporation following its acquisition by The Procter & Gamble Company in 1990. Mr. Saxton is a member of the National Association for Printing Leadership’s Walter E. Soderstrom Society, which honors individuals in the printing industry who have significantly contributed to the development and the progress of the graphic arts. Mr. Saxton holds a B.S. from Bucknell University. Mr. Saxton is the only director who is also one of our officers.  The board believes that Mr. Saxton has a deep knowledge of our business gained throughout his 15 years as Chief Executive Officer of the Company and adds a valuable perspective for board decision making.





Robert M. Jakobe, Executive Vice President and Chief Financial Officer and Secretary. Mr. Jakobe joined us in 1994 as Vice President and Chief Financial Officer of TSG.  He has served as Secretary of TSG since 2003.  Effective January 1, 2007, he began serving as Executive Vice President and Chief Financial Officer and Secretary.  Prior to joining us, he worked at various positions within The Procter & Gamble Company, most recently serving as Division Comptroller and Vice President of Finance for the Noxell Corporation. Mr. Jakobe holds a B.A. from the University of Notre Dame.





Joan B. Davidson, Group President—Sheridan Publication Services. Ms. Davidson joined us in 1995, and effective January 1, 2007, began serving as Group President, Sheridan Publication Services. Ms. Davidson served as President and Chief Operating Officer of TSP from 1996 through 2006. From 1995 to 1996, she served as Finance Manager of TSP. Prior to joining us, Ms. Davidson worked in various positions in the marketing and finance departments of The Procter & Gamble Company, most recently serving as a Finance Manager. Ms. Davidson is active in the industry as former Chairman of the National Association for Printing Leadership and as past Secretary and past Treasurer of the Print and Graphic Scholarship Foundation of the Graphic Arts. She is a member of the National Association for Printing Leadership’s Walter E. Soderstrom Society. Ms. Davidson holds a B.S. from the College of Notre Dame of Maryland and an M.B.A. from Loyola College in Maryland.


53
 Index





Douglas R. Ehmann, Executive Vice President and Chief Technology Officer.Mr. Ehmann joined us in 1998 as our Vice President and Chief Technology Officer. He was promoted to Executive Vice President and Chief Technology Officer on January 1, 2009.  Prior to joining us, he worked at Northrop Grumman Corporation as a Sector Chief Information Officer for Information Systems from 1995 to 1998 and in the Management Systems Division at the Procter & Gamble Company from 1981 to 1995. He holds a B.S., an M.E. and an M.B.A. from Cornell University.





Dale A. Tepp, Vice President—Human Resources.Ms. Tepp joined us in September 2006 as Vice President, Human Resources.  Prior to joining us, she worked in various Human Resources positions with Great Northern Nekoosa Corporation, Georgia-Pacific Corporation, Color-Box and Cenveo, most recently serving as Executive Director of Human Resources.  She holds a B.S. from the University of Wisconsin.





Patricia A. Stricker, President and Chief Operating Officer—TSP.Ms. Stricker joined us in 1998 and effective January 1, 2007, began serving as President and Chief Operating Officer of TSP.  Ms. Stricker served as Vice President, Operations and Human Resources for TSG from January 2003 through 2006. From 2000 to 2003, she served as President of SBI. Ms. Stricker served as our Vice President, Corporate Development from 1999 to 2000, and as our Projects Manager from 1998 to 1999. Prior to joining us, Ms. Stricker held various positions at General Physics Corporation, most recently serving as Vice President, Finance and Administration. She holds a B.A. from the College of Notre Dame of Maryland.





Ms. Stricker, President and Chief Operating Officer of TSP, and Ms. Davidson, Group President- Sheridan Publication Services, are sisters.





Gary J. Kittredge, President and Chief Operating Officer—DJS.Mr. Kittredge joined us in 2000, and effective September 1, 2009 began serving as President and Chief Operating Officer of DJS.  From January 2008 to September 2009 he served as President and Chief Operating Officer of DPC, DJS, and ULI.  From April 2006 to 2008, he served as President and Chief Operating Officer of DPC and DJS.  From 2002 to 2006, he served as President and Chief Operating Officer of CCP. From 2000 to 2002, he served as Executive Vice President of CCP. Prior to joining us, Mr. Kittredge was the General Manager and Vice President of Manufacturing for IPD Printing. Prior to that, he served as a Business Unit Manager and Manager of Technical Development of Litho-Krome Co., a subsidiary of Hallmark Cards, Incorporated. He holds a B.S. and an M.S. from Rochester Institute of Technology.




Michael J. Seagram, President and Chief Operating Officer—SBI.Mr. Seagram joined us in 2003, and since April 1, 2006 has served 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. Seagram was 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 holds a B.S. from Wayne State University.





G. Paul Bozuwa, President and Chief Operating Officer—DPC and ULI.Mr. Bozuwa joined us in 1991 and effective September 2009 began serving as President and Chief Operating Officer of DPC and ULI.  From January 2007 to September 2009 Mr. Bozuwa served as Vice President, Global Business Development.  Mr. Bozuwa served as President of DJS from 2002 to 2006.  From 1995 to 2002, he served as President and Chief Operating Officer of CCP. From 1991 to 1995, he served as Chief Financial Officer of CCP. Mr. Bozuwa is active in industry affairs serving as past Chairman of the Finance Committee and past Treasurer of the Council of Science Editors. He was also the Chairman of the task force on Science, Journals, Poverty and Human Development. Prior to joining us, he was an Associate of Kearsarge Ventures, a venture fund, from 1989 to 1991. Mr. Bozuwa holds a B.A. from Dartmouth College and an M.B.A. from the University of New Hampshire.





Eric D. Lane, President and Chief Operating Officer—TDP.Mr. Lane joined us in 1986 and effective October, 2008 began serving as President and Chief Operating Officer of TDP.  From 2000 to 2008 he served as Vice President of Finance of TDP.  From 1986 to 2000 he served as Controller of TDP.  Mr. Lane holds an A.S. in Accounting from Andover College.


54
 Index





Thomas J. Baldwin, Director.Mr. Baldwin has been a member of our board of directors since 2003.  Mr. Baldwin is a Managing Director of BRS. He joined BRS in 2000. From 1996 to 2000, Mr. Baldwin was a Principal at PB Ventures, Inc. From 1988 to 1995, he served as Vice President and then Managing Director of The INVUS Group, Ltd., a private equity investment firm. Prior to that he was a consultant with the Boston Consulting Group, a strategy consulting firm. Mr. Baldwin holds a B.B.A. from Siena College and an M.B.A. from Harvard Business School.  From 2005 to 2006 Mr. Baldwin also held Directorship of Eurofresh, Inc., Lazy Days, Inc., and Totes Isotoner Corp. Mr. Baldwin brings to the board extensive experience advising portfolio companies of BRS and provides valuable insight regarding strategic, financing, acquisition and management issues.





Nicholas Daraviras, Director.Mr. Daraviras has been a member of our board of directors since August 2003.  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 University of Pennsylvania.  Mr. Daraviras is also a Director of Carrols Restaurant Group.  He served as a Director of Edgen Corporation from 2005 to 2006 and various private companies in which JCP has an interest. Mr. Daraviras brings to the board extensive experience advising portfolio companies of JCP and provides valuable insight regarding strategic, financing, acquisition and management issues.





Craig H. Deery, Director.Mr. Deery has been a member of our board of directors since August 2003.  He was also a member of our board of directors from 1991 through 2001.  Mr. Deery was a Managing Director of JCP from 2002 to 2003. From 1987 to 2002, Mr. Deery was a Managing Director at BancBoston Capital, where he served on the management committee of BancBoston Capital. While at BancBoston Capital, Mr. Deery supervised a direct investment portfolio of $500 million, including mezzanine securities and equity as a minority, co-invest, and control investor. Prior to 1987, Mr. Deery spent fifteen years at BancBoston, serving as a team leader in domestic lending and as Deputy Managing Director and Senior Credit Officer of BancBoston Australia, Ltd. Mr. Deery holds a B.A. from Bucknell University and an M.B.A. from New York University.  He served as Director of First Ipswich Bancorp from 2005-2007. Mr. Deery has a broad knowledge of our business gained throughout his 17 years as a director of the Company.  Mr. Deery brings to the board extensive experience advising portfolio companies of BancBoston Capital and JCP and he provides valuable insight to the board regarding strategic, financial, acquisition, and management issues.





Gary T. DiCamillo, Director.Mr. DiCamillo has been a member of our board of directors since 1989. Mr. DiCamillo has been a partner for Eaglepoint Advisors, LLC, since January 2010.  He served as President and Chief Executive Officer of RADIA International in Dedham, Massachusetts from 2005 to 2009. From 2002 to 2005, Mr. DiCamillo served as President, Chief Executive Officer, and Director of TAC Worldwide Companies. From 1995 to 2002, he was Chairman and Chief Executive Officer of Polaroid Corporation (which filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on October 12, 2001), and from 1993 to 1995 he was President of Worldwide Power Tools for Black & Decker Corporation. Mr. DiCamillo holds a B.S. from Rensselaer Polytechnic Institute and an M.B.A. from Harvard Business School. Mr. DiCamillo is also a director of 3Com Corporation from 2000 to the present, Whirlpool Corporation from 1997 to the present and Pella Corporation from 2005 to 2007 and from January 2010 to the present. Mr. DiCamillo has a broad knowledge of our business gained throughout his 21 years as a director of the Company and brings to the board his vast experience as a chief executive, non-executive director, and audit committee chair with a variety of both public and private companies.  These experiences have provided Mr. DiCamillo with a deep of knowledge in such areas as finance, general management, marketing, risk management and strategic development.





James L. Luikart,Director. Mr. Luikart has been a member of our board of directors since 2003.  Mr. Luikart is Executive Vice President of JCP. Mr. Luikart joined JCP in 1994 after spending over twenty years with Citicorp, the last seven years of which were as a Vice President of Citicorp Venture Capital, Ltd. Mr. Luikart holds a B.A. from Yale University and an M.I.A. from Columbia University.  He served as director of W&T Offshore, Inc. from 2002 to 2006; Edgen/Murray L.P. from 2005 to 2007 and various private companies in which JCP has an interest. Mr. Luikart brings to the board extensive experience advising portfolio companies of JCP and provides valuable insight regarding strategic, financing, acquisition and management issues.


55
 Index





Nicholas R. Sheppard, Director.Mr. Sheppard was a member of our board of directors from 2003 to 2007, rejoining our board in March 2009.  Mr. Sheppard is a Managing Director of BRS. Prior to joining BRS in 2000, he worked as a Consultant in the London and New York offices of Marakon Associates, a strategy consulting firm. Mr. Sheppard received his BSc from the London School of Economics and Political Science and his MBA from The Wharton School of the University of Pennsylvania.  Mr. Sheppard was a director of Lazy Days R.V. Center, Inc. from 2005 to 2009 and was Director of Penhall International, Inc. in 2005 to 2006. Mr. Sheppard brings to the board extensive experience advising portfolio companies of BRS and provides valuable insight regarding strategic, financing, acquisition and management issues.





George A. Whaling, Director.Mr. Whaling has been a member of our board of directors since 1998 and is Chairman of Kingston Capital Corporation in New York. From 1980 to 1997, he was Chairman and owner of the Petty Printing Company, a commercial web printer. Mr. Whaling holds a B.A. from Colgate University.  Mr. Whaling served as Director of Colgate University, Hamilton Initiative LLC and Augusta Glenn Partners LLC from 2005 to 2006. Mr. Whaling has a broad knowledge of our business gained throughout his 11 years as a director of the Company and his 30 years of experience in the printing industry and he provides valuable insight to the board regarding operational, sales, and management issues.





Board Composition and Director Independence





The securities holders’ agreement among BRS, JCP and the other stockholders of TSG Holdings Corp. provides that TSG Holdings Corp.’s and our board of directors will consist of eight members, including four designees of BRS (who currently are Messrs. Baldwin, DiCamillo, Sheppard and Saxton), four designees of JCP (who currently are Messrs. Daraviras, Deery, Luikart and Whaling).  Pursuant to the securities holders’ agreement, we may not take certain significant actions without the approval of each of BRS and JCP. Although our securities are not listed on the New York Stock Exchange, for purposes of this item we have adopted the definition of “independence” applicable under the listing standards of the New York Stock Exchange. Using such definition, the board of directors has determined that each of Messrs. DiCamillo, Deery and Whaling is independent. If we were listed on the New York Stock Exchange, we would be exempt from certain independence requirements with respect to our board of directors and board committees under the “controlled company” exemption. See Part III, Item 13, “Certain Relationships and Related Transactions—Securities Holders’ Agreement.”





Audit Committee





The board of directors has an audit committee. The audit committee consists of Messrs. Daraviras, DiCamillo and Sheppard. The audit committee reviews our financial statements and accounting practices, selects our independent registered public accounting firm and oversees our internal audit function. The responsibilities of the Audit Committee are defined in a charter, which has been approved by the Board of Directors. In carrying out their responsibilities, the Committee has reviewed and discussed our audited financial statements with management, and it has discussed the matters which are required to be discussed by AU Section 380 (The Auditor's Communication with Those Charged With Governance), as adopted by the Public Company Accounting Oversight Board, with our Independent Registered Public Accounting Firm. In addition, the Committee has reviewed the written disclosures required by the Public Company Accounting Oversight Board, which were received from our Independent Registered Public Accounting Firm, and has discussed the Independent Registered Public Accounting Firm’s independence with them. The Audit Committee has reviewed the fees of the Independent Registered Public Accounting Firm for non-audit services and believes that such fees are compatible with the independence of the Independent Registered Public Accounting Firm.





Based on these reviews and discussions, the Committee recommended to the Board of Directors that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.





The Board of Directors has determined that Mr. DiCamillo, the chairman of the audit committee, is the “audit committee financial expert” as defined in applicable SEC rules and regulations. Mr. DiCamillo is “independent” as defined in the listing standards of the New York Stock Exchange.





Code of Business Conduct





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


56
 Index





ITEM 11.
EXECUTIVE COMPENSATION





Compensation Discussion and Analysis





Introduction





This Compensation Discussion and Analysis (“CD&A”) provides an overview of our executive compensation program together with a description of the material factors underlying the decisions which resulted in the compensation provided to our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and certain other executive officers (collectively, the named executive officers) for 2009 (as presented in the tables which follow this CD&A).





Compensation Committee





The board of directors has a compensation committee. The compensation committee consists of three members, Messrs. Baldwin, Deery and Luikart. The compensation committee has responsibility for establishing, implementing and continually monitoring adherence with our compensation philosophy. The role of the compensation committee is to make recommendations to our board of directors concerning salaries, incentive compensation and employee benefit programs. The compensation committee reviews and approves employment agreements and compensation programs or benefit plans for all of our executive officers, including the named executive officers, and certain other management employees. The compensation committee periodically compares our executive compensation levels with those of companies with which we believe that we compete in recruitment and retention of senior executives. The compensation committee also reviews and makes recommendations with respect to succession planning and management development. The CEO recommends changes in compensation for his direct reports, including each of the named executive officers, to the compensation committee for approval. The compensation committee recommends changes in compensation for the CEO to the full board for approval.





Compensation Philosophy and Objectives





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





Setting Executive Compensation





Based on the foregoing philosophy, the company’s annual and long-term incentive-based cash and non-cash executive compensation has been structured to (a) pay competitive levels of compensation in order to attract and retain qualified executives, (b) motivate executives to achieve the short-term and long-term business goals set by us and reward the executives for achieving such goals and (c) reward long-term performance. We compete with many larger companies for top executive-level talent.  Competitors include RR Donnelley, WorldColor, Cenveo (previously Cadmus), Quad Graphics, Edwards Brothers, and numerous other printing companies. We consider these our primary competitors because we compete against these companies in each of our market segments. Accordingly, we generally consider the compensation paid to similarly situated executives at these larger corporations, together with individual experience, performance and cost-of-living factors, when determining the overall compensation available to our named executive officers. A significant percentage of total compensation is allocated to incentive compensation. However, there is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Rather, market data, internal pay equity and performance are the factors considered in determining the appropriate level and mix of incentive compensation.


57
 Index





Compensation Policies and Practices as they Relate to Risk Management





We conducted an assessment of potential risks arising from our compensation policies and practices and concluded that these risks are not reasonably likely to have a material adverse effect on the Company.





2009 Executive Compensation Components





For the fiscal year ending December 31, 2009, the principal components of compensation considered by the compensation committee for named executive officers were:





·
Base salary;


·
Non-equity annual incentive compensation;


·
Stock-based incentive compensation;


·
Non-qualified deferred compensation program; and


·
Perquisites and other benefits.





We have also entered into employment agreements and/or change in control arrangements with all of the named executive officers. In addition to the compensation components listed above, these agreements provide for post-employment severance payments and benefits in the event of a termination of employment under certain circumstances.  The terms of these agreements are described in more detail below (see the section entitled “Potential Payments on Termination or a Change in Control”). We believe that these agreements provide an incentive to the named executive officers to remain with us and serve to align the interests of the executives and the stockholders in the event of a potential acquisition. Additionally, a retention award, made to the Deferred Compensation Plan described below, was provided to a certain named executive officer whose retention is determined by our board of directors to be critical to our ongoing success.





Base Salary





We provide the named executive officers with base salaries to compensate them for services rendered during the fiscal year. The base salaries for our CEO, Messrs. Jakobe and Bozuwa, and Mss. Davidson and Stricker are contained in their respective employment agreements and are subject to increase at the discretion of our board of directors.  Base salary levels are intended to reflect an individual’s responsibilities, performance and expertise and are designed to be competitive with salary levels in effect at other manufacturing companies, and in particular, companies within the printing industry. Accordingly, we establish salaries for the named executive officers on the basis of personal performance and by reviewing available national and printing industry compensation data from time to time, including published salary surveys regarding compensation of officers of larger and smaller companies, both within and outside the printing industry.Our CEO annually reviews and provides his subjective assessment of the performance of each of our named executive officers and recommends whether any adjustment to base salary for any named executive officer should be considered by the compensation committee.  The compensation committee generally affords significant consideration to the CEO’s recommendations based on his proximity to the other named executive officers and understanding of their day-to-day performance and responsibilities.  Based on the CEO’s recommendations and the compensation committee’s review of available market data, the compensation committee set base salaries for 2009 at the levels reported in the Summary Compensation Table, below.  The compensation committee believes such salaries are in line with market data and reflect the responsibilities, performance and expertise of our named executive officers.





Annual Incentive Compensation





Management Performance Incentive Plan.  Annual cash bonuses are generally considered for inclusion in our executive compensation program because we believe that a significant portion of each named executive officer’s compensation should be contingent on our annual performance, as well as the individual contribution of the executive.  Accordingly, our named executive officers have historically participated in a management performance incentive plan, which compensated them for achievement of certain objectives established annually by our board of directors. Historically, these objectives have been based on our earnings before interest, taxes, depreciation and amortization (“EBITDA”), the EBITDA of each executive’s operating subsidiary and individual performance. For purposes of our management performance incentive plan and our profit sharing plan (discussed below), our EBITDA is calculated the same way WCF EBITDA is calculated as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.  To the extent applicable with respect to any named executive officer’s award, the same EBITDA calculation is performed for the applicable operating subsidiary.


58
 Index





The management performance incentive plan was temporarily suspended for 2009 as a cost-savings measure to offset revenue reductions brought on by the economic recession.  This plan has been reinstated for 2010 and the following is a summary of how the management performance incentive plan operated prior to suspension, which is substantially the same as how we expect the plan will operate for 2010.





Under the management performance incentive plan, our executive officers are eligible to receive a maximum award of 50% of base salary, except Mr. Saxton, whose maximum award is 100% of base salary.   Maximum award amounts are developed based on market data but also set at a level to insure that a significant portion of potential compensation is tied to delivering results.  Management performance incentive awards are based upon achievement of corporate EBITDA financial objectives and individual performance objectives.  Upon completion of the fiscal year, the compensation committee assesses our performance for each corporate financial objective, comparing actual year-end results to the objectives.  Then individual performance is evaluated and an overall award is calculated.





The board of directors establishes the financial performance objectives for our named executive officers and designates the portion of each named executive officer’s annual bonus that would be eligible to be paid based on a subjective assessment of such individual’s performance, in the board’s discretion.There is no calculation or metric used for determining the subjective individual performance score; it is determined in the Board’s discretion based on the input of the CEO and the board’s view of the individual named executive officer’s contribution to our success.





The financial objectives are set based on the annual plan that is approved by the Board of Directors.  The maximum target is set to be approximately 2-4% above the target and the minimum is set to be approximately 8-10% below the target. EBITDA is the primary measure that private equity investors like ours often use to determine the success of their portfolio companies. TSG and operating company subsidiary EBITDA targets, consistent with the company's annual financial plan that is approved by the board of directors, are set at levels to incent improvement over previous year operating results and are designed to be relatively challenging to achieve and very difficult to exceed.  Accordingly, the Board of Directors sets financial performance goals at levels that it expects will be achieved, at least in part, for a fiscal year.  TSG financial targets have been achieved in one out of the last three fiscal years.  Operating company subsidiary EBITDA targets have been achieved at least at the threshold level in two of the last three years.





Annual incentive compensation awards for 2008 and 2007 appear as “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table.





Profit Sharing Plan.  The Sheridan Group Profit Sharing Plan is a broad-based incentive program provided to all eligible employees at each location, excluding TDP and DJS.  The annual discretionary profit sharing contribution for each participating operating subsidiary company is determined by a formula approved each year by our board of directors.





Under the formula approved for 2009, a guideline has been established of 6.5% of EBITDA for TSP, SBI, DPC, and ULI.  If company EBITDA is a positive number, the established percent of EBITDA is put into the profit sharing pool.  The total dollar contribution for an operating subsidiary cannot exceed 6.5% of its total payroll for the year. Additionally, a company must also meet a minimum threshold of an 8% net profit margin (before profit sharing) in order to be eligible for profit sharing.  In 2009, all companies transitioned to payment of profit sharing in cash; however, employees have the option of deferring their cash payment into their 401(k) accounts.  The profit sharing plan was suspended as a cost-savings measure for all locations other than TSP to offset revenue reductions brought on by the economic recession.  Accordingly, Ms. Stricker was the only named executive officer eligible to receive a profit sharing award for 2009. The $20,569 profit sharing award for Ms. Stricker is reported in the “All Other Compensation” column in the Summary Compensation Table shown below.





Stock-Based Incentive Compensation





TSG Holdings Corp., our parent company, adopted a Stock-Based Incentive Compensation Plan in October 2003. The purpose of the 2003 Stock-Based Incentive Compensation Plan is to provide long-term equity incentives to assist us in attracting and retaining valued management employees through the award of options to purchase common stock of TSG Holdings Corp.  Option grants are designed to align the interests of officers and employees with those of the stockholders, to provide each individual with a significant incentive to manage our business from the perspective of an owner and to remain employed by us.  Eligible employees will receive options on terms determined by our board of directors.  The compensation committee considers the level of responsibility, position, past and expected performance, potential incentive payouts and annual base salary of each named executive officer when determining awards to be made under the Stock-Based Incentive Plan. The stock option awards are recommended by the CEO to the compensation committee, who then makes a recommendation to our board of directors for approval.


59
 Index





Options granted under the Stock-Based Incentive Compensation Plan have exercise prices equal to or above the fair market value of the underlying common stock (as determined under the Stock-Based Incentive Compensation Plan) on the grant date and are equally split 50% between a time-based vesting schedule and a performance-based vesting schedule.  Time-based awards vest 20% per year over five years subject to the executive’s continued employment with us.  Performance-based awards vest 20% per year over five years based on us achieving a per share equity value, as defined by the option agreements, each year as determined by the board. The per share equity value is calculated by multiplying our twelve month EBITDA by a pre-defined multiple, then subtracting net debt, and then dividing by the number of issued and outstanding shares of TSG Holdings Corp. Common Stock. If an annual performance target is not met in any of the five years, but is achieved by meeting subsequent year targets, shares will vest for all preceding plan years.  The targets for the performance based options were established based upon the original objectives that BRS and JCP established when they bought us in 2003 (as modified in connection with the Dingley Acquisition in 2004) and wanted to incent management to deliver the rate of return expected on their investment in us.





No named executive officer received an option award in fiscal year 2009.





We do not require our named executive officers to maintain a minimum ownership interest in us or our affiliates.





Nonqualified Deferred Compensation





In General.  Our nonqualified deferred compensation program serves primarily to attract and retain qualified executives by providing them with enhanced tax deferral opportunities and retirement benefits in addition to those provided under our broad-based 401(k) plan.  Under the nonqualified deferred compensation plan, officers, directors and certain management employees may annually elect (via individual contracts) to defer a portion of their compensation, on a pre-tax basis. The benefit is based on the amount of compensation (salary and bonus) deferred, employer “make-whole” contributions, employer discretionary contributions and earnings on these amounts.  Make-whole contributions are matching contributions and profit sharing contributions which we would have made to the participants’ accounts under the 401(k) plan were we not prohibited from making such contribution under the limits applicable to the 401(k) plan under the Internal Revenue Code.  Make-whole contributions are made early in the year following the year in which the applicable matching and profit sharing contributions to our 401(k) plan were limited.  Accordingly, such contributions for 2009 include a component relating to 2008’s profit sharing plan even though such profit sharing plan was unavailable to most of the named executive officers in 2009.  Individuals are fully vested in deferred salary and bonus amounts; however, the make-whole contributions vest in full after two years of employment, which is the same schedule applicable to employer contributions under the 401(k) plan. The employer discretionary contributions become vested pursuant to a vesting schedule as determined by us.





Salary and bonus amounts deferred by named executive officers in 2009 under the nonqualified deferred compensation plan are shown in the “Executive Contributions” column of the Deferred Compensation Table below.  Employer make whole and discretionary contributions for 2009 are shown in the “Registrant Contributions” column of the Deferred Compensation Table and in the “All Other Compensation” column of the Summary Compensation Table.





Retention Awards.Annual retention awards are employer discretionary contributions paid to certain management employees whose retention is determined by our board of directors to be critical to our ongoing success. These awards are deposited in the deferred compensation plan under the employee’s name and vest after five years.  Distribution is made on a date previously elected by the executive. Other than the awards paid in accordance with the employment agreement of Ms. Davidson, these awards are solely awarded at the board of directors’ discretion. Any awards made outside of an employment agreement were equal to 10% of base salary.





In 2009, our board of directors provided a retention award to Ms. Davidson in the amount of $82,388 in accordance with the terms of her existing employment agreement.  The retention awards for our named executive officers are disclosed under “All Other Compensation” on the Summary Compensation Table and in the Nonqualified Deferred Compensation table under Registrant Contributions.


60
 Index





Other Compensation, Perquisites and Other Benefits





401(k) Plan.  We sponsor a defined contribution plan, or 401(k) Plan, intended to qualify under section 401 of the Internal Revenue Code. Substantially all of our employees are eligible to participate in the 401(k) Plan on the first day of the month in which the employee has attained 18 years of age and 30 days of employment. Employees may make pre-tax contributions of their eligible compensation, not to exceed the limits under the Internal Revenue Code. Employees may direct their investments among various pre-selected investment alternatives.





Effective January 2009, we sponsored a Safe Harbor defined contribution plan, or 401(k) Plan, intended to qualify under section 401 of the Internal Revenue Code. We match the employee’s contributions, up to a maximum of 6% of the employee’s eligible compensation; 100% of the first 1% invested and 50% of the next 5% invested of the employee’s eligible compensation.  Employer matching contributions to the 401(k) plan vest after two years of employment.  Employer matching contributions were suspended as of July 2009.





Perquisites and Other Benefits.  The named executive officers are not generally entitled to benefits that are not otherwise available to all of our employees.  In this regard it should be noted that we do not provide pension arrangements (other than the 401(k) plan and the nonqualified deferred compensation plan), post-retirement health coverage or similar benefits for our executives. However, some of the named executive officers are entitled to certain insurance benefits, relocation benefits and an executive physical program.  These perquisites are provided because we view the benefits as being very closely related to the services our named executive officers perform for us.  Supplemental Long-Term disability insurance is provided as an income security measure in the event of a catastrophic illness.  Relocation benefits are provided to all management employees who are relocated at our request, including named executive officers.  The executive physical program benefit is provided to all of our key managers and officers, including the named executive officers, to ensure their continuing ability to fulfill the responsibilities of their respective positions.  These amounts are noted in the “All Other Compensation” column in the Summary Compensation Table.  The Committee believes that these benefits are consistent with the goal of attracting and retaining superior executive talent.





Tax and Accounting Implications





Deductibility of Certain Compensation.Section 162(m) of the Internal Revenue Code imposes a $1.0 million limit on the deductibility of compensation paid to certain executive officers of public companies, unless the compensation meets certain requirements for “performance-based” compensation.  Although Section 162(m) does not apply to companies that do not have registered common equity securities, we generally consider the potential loss of deduction under Section 162(m) in designing certain types of compensation plans so that such plans may protect us from a potential loss of deduction if our common equity securities become publicly traded.  In determining executive compensation, the compensation committee considers, among other factors, the possible tax consequences to us and to the executives.  However, tax consequences, including but not limited to tax deductibility by us, are subject to many factors (such as changes in the tax laws and regulations or interpretations thereof and the timing and nature of various decisions by executives regarding options and other rights) that are beyond our control.  In addition, the compensation committee believes that it is important for it to retain maximum flexibility in designing compensation programs that meet its stated objectives.  For all of the foregoing reasons, the compensation committee, while considering tax deductibility as one of its factors in determining compensation, will not limit compensation to those 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.





Accounting Impact.The compensation committeedoes not consider potential accounting treatment in making decisions regarding equity-based or cash-based compensation.





Compensation Committee Report





Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this annual report for the fiscal year ending December 31, 2009.


61
 Index




Thomas J. BaldwinCraig H. DeeryJames L. Luikart





The following table summarizes compensation awarded or paid by us during 2009, 2008 and 2007 to our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer, and our three next most highly compensated executive officers (our “named executive officers”).  Perquisites and other benefits included in the All Other Compensation column are disclosed and itemized in the “All Other Compensation” table below.





Summary Compensation Table


Name and Principal Position

Year

Salary

($)


Bonus

($)

(1)


Stock

Awards ($)


Option

Awards ($)

(2)


Non-Equity

Incentive Plan

Compensation

($)

(3)


All Other

Compensation

($)

(4)


Total

($)John A. Saxton

2009


619,967



—



—



—



—



143,833



763,800President and Chief

2008


599,567



—



—



—



—



108,136



707,703Executive Officer

2007


559,655



—



—



—



560,000



106,158



1,225,813Robert M. Jakobe

2009


310,011



—



—



—



—



35,546



345,557Executive Vice President

2008


299,694



—



—



—



—



78,160



377,854and Chief Financial Officer

2007


269,805



—



—



—



135,000



68,696



473,501Joan B. Davidson

2009


335,800



—



—



—



—



121,509



457,309Group President - Sheridan

2008


324,596



—



—



—



69,000



136,238



529,834Publication Services

2007


287,773



—



—



—



123,200



128,707



539,680G. Paul Bozuwa (5)

2009


255,399



—



—



—



—



222,555



477,954President &  COO - DPC/ULI

2008


81,736



—



—



—



—



94,307



176,0432007


238,186



—



—



—



60,000



29,810



327,996Patricia A. Stricker

2009


238,878



—



—



—



—



45,378



284,256President & COO - TSP

2008


239,917



135



—



—



90,000



58,437



388,4892007


228,278



135



—



—



113,000



58,789



400,202





___________________


(1) Ms. Stricker received a $135 Christmas bonus in 2008 and 2007.





(2) There were no option awards granted during the years presented.





(3) The amounts reported as “Non-Equity Incentive Plan Compensation” for 2009, 2008 and 2007 consist of bonuses paid as management performance incentive compensation.





(4) The amounts reported as “All Other Compensation” for 2009, 2008 and 2007 are itemized in the “All Other Compensation” table below.





(5) Mr. Bozuwa worked for an affiliate of our parent during a portion of 2008.  Base salary for 2008 reflects only wages for services performed for the Company.


62
 Index




All Other Compensation




Name

Year

Spousal Travel

Taxable Relocation Income

Other Non Cash

Retention Awards

Additional Disability Coverage

Taxable Term Life

Physical Program

GTL Taxable Income

Profit Sharing

Profit Sharing Make Whole

401k Match


401(k) Fixed 1%


401(k) Make Whole


Total All Other Comp($)

($)

($)

($)

($)

($)

($)

($)

($)

($)

($)


($)


($)


($)John A. Saxton

2009


—


—


850


—


4,000


12,230


2,784


6,732


—


92,957


7,569



—



16,711



143,833President and Chief

2008


—


—


850


—


4,000


12,230


—


4,390


23,000


43,666


4,600



2,300



13,100



108,136Executive Officer

2007


—


—


—


—


4,000


12,230


5,634


4,082


22,500


39,202


4,500



2,250



11,760



106,158Robert M. Jakobe

2009


—


—


—


—


—


—


3,047


2,100


—


20,469


5,526



—



4,404



35,546Executive Vice President

2008


—


—


—


30,000


2,735


—


3,731


2,069


23,000


7,481


4,600



2,300



2,244



78,160and Chief Financial Officer

2007


—


—


—


27,000


1,384


—


3,575


983


22,500


5,003


4,500



2,250



1,501



68,696Joan B. Davidson

2009


—


—


—


82,388


—


—


3,501


801


—


21,780


8,068



—



4,971



121,509Group President - Sheridan

2008


959


—


—


81,250


2,740


—


—


788


23,000


15,847


4,600



2,300



4,754



136,238Publication Services

2007


611


—


—


72,500


1,544


—


2,969


695


22,500


16,472


4,500



2,250



4,666



128,707Paul Bozuwa

2009


—


205,039


—


—


—


—


—


596


—


12,315


4,605



—



—



222,555President & COO -

2008


—


—


—


62,500


—


—


—


587


23,000


2,475


3,400



2,098



247



94,307DPC/ULI

2007


—


—


—


—


—


—


—


560


22,500


—


4,500



2,250



—



29,810Patricia A. Stricker

2009


—


—


—


—


—


—


3,699


569


21,248


12,562


7,225



—



75



45,378President & COO - TSP

2008


—


—


—


24,000


—


—


—


373


23,000


3,241


4,600



2,300



923



58,4372007


—


—


—


23,000


—


—


2,974


355


22,500


2,918


4,500



2,250



292



58,789




Retention awards and make-whole contributions are invested in the deferred compensation plan.  Even though the profit sharing plan was not available in 2009 for named executive officers other than Ms. Stricker, each named executive officer’s deferred compensation plan account was credited with a profit-sharing make-whole contribution in 2009 due to the limitations applicable to our 401(k) plan for 2008.  401(k) match is invested in the 401(k) plan.  Pre-2009 Profit sharing and 1% fixed contributions are also invested in the 401(k) plan.





Grants of Plan-Based Awards


(1) Estimated Possible Payouts Under Non-Equity Incentive Plan Awards


Estimated Future Payouts Under Equity Incentive Plan Awards


All Other Option Awards Number of Securities


Exercise or Base Price of Option


Grant Date Fair Value ofName

Grant Date


Threshold


Target


Maximum


Threshold


Target


Maximum


Underlying

Options


Awards

($/sh)


Option

Awards($)


($)


($)


($)


($)


($)


($)


($)


($)John A. Saxton


N/A



0



0



0President and ChiefExecutive OfficerRobert M. Jakobe


N/A



0



0



0Executive Vice Presidentand Chief Financial OfficerJoan B. Davidson


N/A



0



0



0Group President - SheridanPublication ServicesG. Paul Bozuwa


N/A



0



0



0President & COO - DPC/ULIPatricia A. Stricker


N/A



0



0



0President & COO - TSP





______________________


(1)  The management incentive bonus plan was suspended for 2009 as a cost-savings measure to offset revenue reductions brought on by the economic recession; therefore, no incentive targets were established.


63
 Index





There were no stock options awarded under the Stock-Based Incentive Compensation Plan in 2009.





Outstanding Equity Awards at Fiscal Year-End





Option AwardsName

Number of Securities Underlying Unexercised Options (#) (Exercisable) (1)


Number of Securities Underlying Unexercised Options (#) (Unexercisable)


Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)


Option Exercise Price ($)

Option Expiration DateJohn A. Saxton


3,300







2,200



10.00

11/16/2013Robert M. Jakobe


3,300







2,200



10.00

11/16/2013Joan B. Davidson


2,100







1,400



10.00

11/16/2013G. Paul Bozuwa


1,800







1,200



10.00

11/16/2013Patricia A. Stricker


1,620







1,080



10.00

11/16/2013





______________________


(1) Stock option awards were awarded on October 16, 2003. The shares began vesting on January 1, 2004. Twenty percent (20%) of the time-based shares vest each year on January 1st, i.e. 20% vested on January 1, 2005, 20% vested on January 1, 2006, 20% vested on January 1, 2007, 20% vested on January 1, 2008, and the remaining 20% vested on January 1, 2009.  As of December 31, 2009, 100% of the Named Executive Officers’ time-based shares were vested. Because our 2009 performance targets were not met, only 20% of performance shares vested through December 31, 2009. The established performance-based option targets (per share equity values, as defined in the stock option agreements) are $20/share on 1/1/05, $52/share on 1/1/06, $86/share on 1/1/07, $118/share on 1/1/08, $148/share on 1/1/09, $178/share on 1/1/10. See Stock-Based Incentive Compensation under the Compensation Discussion and Analysis for details on the vesting schedule.


64
 Index





Option Exercises and Stock Vested in Last Fiscal Year





Option AwardsName

Number ofSharesAcquired onExercise (1)


ValueRealized onExercise ($)John A. Saxton


—



—President and ChiefExecutive OfficerRobert M. Jakobe


—



—Executive Vice Presidentand Chief Financial OfficerJoan B. Davidson


—



—Group President – SheridanPublication ServicesG. Paul Bozuwa


—



—President & COO – DPC/ULIPatricia A. Stricker


—



—President & COO – TSP


______________________


(1) No options were exercised during 2009.





Nonqualified Deferred Compensation





Name

Executive Contributions in last FY ($)


Registrant Contributions in Last FY ($) (Retention Bonus and Make-Wholes) (1)


Aggregate Earnings in Last FY ($)


Aggregate Withdrawals/ Distributions ($)


Aggregate Balance at Last FYE ($)John A. Saxton


16,430



109,668



39,845



80,669



165,943Robert M. Jakobe


—



24,873



27,357



16,943



116,245Joan B. Davidson


16,010



109,139



(5,682
)


104,555



306,506G. Paul Bozuwa


—



12,315



68,902



40,812



256,433Patricia A. Stricker


10,000



12,637



25,542



16,896



81,498





______________________


(1) Registrant contributions for Fiscal Years ending 2009, 2008 and 2007, respectively, that were included in the Summary Compensation Table are as follows: Mr. Saxton - Make Whole Contributions of $109,668, $56,766, and $50,962; Mr. Jakobe – Make Whole Contributions of  $24,873, $9,725, and $6,504, and Retention Awards of $0, $30,000, and $27,000; Ms. Davidson – Make Whole Contributions of $26,751, $20,601, and $21,138, and Retention Awards of $82,388, $81,250, and $72,500; Mr. Bozuwa – Make Whole Contributions of $12,315, $2,722, and $0 and Retention Awards of $0, $62,500 and $0; and Ms. Stricker – Make Whole Contributions of $12,637, $4,164, and $3,210, and Retention Awards of $0, $24,000, and $23,000. Retention awards and employer make-whole contributions (described below) are reported in the Summary Compensation Table in the “All Other Compensation” column.





The types of compensation that may be deferred under our nonqualified deferred compensation plan are salary, profit share and bonus (deferred at the employee’s election), employee retention awards, employer make-whole contributions, employer discretionary contributions and earnings on the deferrals. The individuals are fully vested in the compensation they voluntarily defer; however, the make-whole contributions, the employer discretionary contributions and employee retention awards are subject to vesting requirements. Make-whole contributions vest once the employee has attained two years of service.  Employee retention awards cliff vest after five years.  Employees may defer up to 20% of their base salary and up to 100% of any earned bonus or profit share into the deferred compensation program on an annual basis.  Earnings under the nonqualified plan are calculated by reference to the return on investment funds selected by the executives from a menu of investment fund options offered under the plan.  These investment fund options are the same options as are available to all participants under our 401(k) plan.  Participants may change their investment fund elections at any time.   A participant may elect distribution of their vested account balance at a fixed payment date, no earlier than the third calendar year after the calendar year in which the initial election is made, five years after a previously-scheduled distribution is to be made, or upon separation of service from the company.


65
 Index





The table below shows the funds available under our 401(k) plan and their annual rate of return for the calendar year ended December 31, 2009:





Deferred Compensation Investment Options





Name of Fund

Rate of Return

Name of Fund

Rate of ReturnFidelity Advisor Freedom 2010 A

25.64

Fidelity Advisor Freedom 2025 A

30.82Fidelity Advisor Freedom 2020 A

29.46

Fidelity Advisor Freedom 2035 A

32.08Fidelity Advisor Freedom 2030 A

31.57

Fidelity Advisor Freedom 2045 A

33.10Fidelity Advisor Freedom 2040 A

32.98

Fidelity Advisor High Income Advantage

69.41Fidelity Advisor Freedom 2050 A

33.71

Legg Mason Value, FI

41.63Maxim Money Market Portfolio

0.01

Franklin Small-Mid-Cap Growth Fund A

43.17PIMCO Total Return A

13.33

Legg Mason Special Investment FI

79.59PIMCO Low Duration Fund A

12.91

Pennsylvania Mutual Fund Consultant CI

35.16Davis NY Venture Fund

32.06

American Funds EuroPacific A

39.10Hartford Capital Appreciation

42.83

RS Value Fund

38.01Fidelity Advisor Freedom 2015 A

26.27

American Funds Growth Fund of America

34.48





Potential Payments on Termination or Change of Control





Our employment agreements with Mr. Saxton, Mr. Jakobe, Ms. Davidson, Mr. Bozuwa and Ms. Stricker provide that if the executive is terminated by us without “cause” or by the executive for “good reason,” the executive will be entitled to receive the following amounts:  (1) severance pay equal to his or her annual base salary and average annual incentive bonus during the two years preceding the termination for a period of 18 months in the case of Messrs. Jakobe and Bozuwa and Mss. Davidson and Stricker, and 24 months in the case of Mr. Saxton, (2) all amounts credited to the executive under our deferred compensation plan will fully vest and become payable in a single lump sum and (3) the executive will continue to have coverage under our health insurance plan for 18 months, or 24 months in the case of Mr. Saxton.  A termination shall be for “cause,” as defined in the agreements, if any one or more of the following has occurred:  i) the employee shall have committed an act of fraud, embezzlement or misappropriation against the employer, including, but not limited to, the offer, payment, solicitation or acceptance of any unlawful bribe or kickback with respect to the employer’s business; or, ii) the employee shall have been convicted by a court of competent jurisdiction of, or pleaded guilty or nolo contendere to, any felony or any crime involving moral turpitude; or, iii) the employee shall have refused, after explicit written notice, to obey any lawful resolution of or direction by the Board which is consistent with his duties; or, iv) the employee has been chronically absent from work (excluding vacations, illnesses or leaves of absence approved by the Board); or, v) the employee shall have failed to perform the duties incident to his employment with the employer on a regular basis, and such failure shall have continued for a period of twenty (20) days after written notice to the employee specifying such failure in reasonable detail (other than as a result of the employee’s disability); or, vi) the employee shall have engaged in the unlawful use (including being under the influence) or possession of illegal drugs on the employer’s premises; or vii) the employee shall have breached any one or more of the provisions of the Stock Purchase Agreement, dated as of August 1, 2003, among The Sheridan Group, Inc. and its stockholders as amended and in effect from time to time, and such breach shall have continued for a period of ten (10) days after written notice to the employee specifying such breach in reasonable detail.  “Good reason” is defined as the occurrence of: i) a material reduction in the employee’s status, position, scope of authority or responsibilities, the assignment to the employee of any duties or responsibilities which are materially inconsistent with such status, position, authority or responsibilities; involuntary relocation of the employee to an extent requiring an increase in his commute to his normal place of employment of more than 50 miles; or any removal of the employee from or failure to reappoint him to any of positions to which the employee has been appointed by the employer, except in connection with the termination of his employment; or, ii) a material reduction by the employer in the employee’s compensation or benefits, except in conjunction with a general reduction by the employer in the salaries of its executive level employees or the TSG site management team.


66
 Index





The employment agreements contain non-compete and non-solicitation language prohibiting such actions for the term of the severance period.  Additionally, the severed employee is prohibited from disclosing proprietary company information to any person, firm, corporation, association or entity, during or after their term of employment.  Any breach of these terms will be subject to appropriate injunctive and equitable relief.





The following table summarizes potential benefits that each of the Named Executive Officers would have received under their employment agreements or change in control arrangements on December 31, 2009, if a termination without cause or for good reason occurred, or they had been terminated following a change in control.





Named ExecutiveOfficer

SeverancePay


IncentivePay


Deferred

Compensation


COBRA

(Employer’s Portion)John A. Saxton

$
1,216,857


$
-


$
165,943


$
17,775Robert M. Jakobe

$
456,361


$
-


$
116,245


$
13,332Joan B. Davidson

$
494,325


$
51,750


$
306,506


$
13,332G. Paul Bozuwa

$
380,274


$
-


$
256,433


$
18,886Patricia A. Stricker

$
365,449


$
67,500


$
81,498


$
18,886





Compensation of Directors





Beginning on January 1, 2009, each director who is not also one of our executive officers or an employee of BRS or JCP will receive a fee of $30,000 per year for their service on our board of directors. The chairman of the audit committee (Mr. DiCamillo) will receive an additional fee of $5,000 per year. All directors are reimbursed for any personal expenses incurred in the conduct of their duties as a director. There were no stock options awarded to directors during 2009. A summary of fees paid to our directors in 2009 is as follows:





Name

Fees Earnedor Paid inCash


All Other Compensation


TotalGary T. DiCamillo

$
35,000



—


$
35,000Craig H. Deery

$
30,000



—


$
30,000George A. Whaling

$
30,000



—


$
30,000





Compensation Committee Interlocks and Insider Participation





In 2009, the compensation committee consisted of Messrs. Baldwin, Deery and Luikart. None of the members of the compensation committee are currently, or have been at any time since the time of our formation, one of our officers or employees.





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





We are a wholly-owned subsidiary of TSG Holdings Corp, which has pledged our shares as security for our obligations under our working capital facility. The following table sets forth certain information regarding the beneficial ownership of TSG Holdings Corp., as of March 29, 2010, by (i) each person or entity known to us to own more than 5% of any class of TSG Holdings Corp.’s outstanding securities, (ii) each member 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 a group. TSG Holdings Corp.’s outstanding securities consist of about 597,433 shares of TSG Holdings Corp. common stock and about 45,326 shares and 4,234 shares of TSG Holdings Corp. Series A and Series B preferred stock, respectively, the terms of which are described in more detail below. Additionally, there are 17,580 options to purchase common stock outstanding that are held by our executive officers. To our knowledge, each of such stockholders will have sole voting and investment power as to the stock shown unless otherwise noted. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulation promulgated under the Exchange Act.


67
 Index




Number and Percent of Shares of TSG Holdings Corp. (1)Preferred Stock


Common StockSeries A


Series BNumber


Percent


Number


Percent


Number


PercentGreater than 5% Stockholders:Bruckmann, Rosser, Sherrill & Co. II, L.P. (2)

126 East 56th Street, New York, NY, 10022


19,210



42.4
%


1,833



43.3
%


252,756



42.3
%Funds affiliated with Jefferies Capital Partners (3)520 Madison Avenue, New York, NY 10022


19,210



42.4
%


1,833



43.3
%


252,756



42.3
%Christopher A. Pierce (4)(5)


3,096



6.8
%


289



6.8
%


42,577



7.1
%Named Executive Officers and Directors:John A. Saxton (4)(6)(7)


1,340



3.0
%


125



3.0
%


20,902



3.5
%Robert M. Jakobe (4)(8)(9)


108



0.2
%


10



0.2
%


4,721



0.8
%Joan B. Davidson (4)(10)


67



0.1
%


6



0.1
%


2,980



0.5
%G. Paul Bozuwa (4)(11)


268



0.6
%


25



0.6
%


5,320



0.9
%Patricia A. Stricker (4)(12)


91



0.2
%


-



-



2,700



0.5
%Thomas J. Baldwin (13)(14)


19,210



42.4
%


1,833



43.3
%


252,756



42.3
%Nicholas Daraviras (15)


-



-



-



-



-



-Craig H. Deery (4)


245



0.5
%


23



0.5
%


3,212



0.5
%Gary T. DiCamillo (4)


268



0.6
%


25



0.6
%


3,520



0.6
%James L. Luikart (15)(16)


19,210



42.4
%


1,833



43.3
%


252,756



42.3
%Nicholas R. Sheppard (13)


-



-



-



-



-



-George A. Whaling (4)


272



0.6
%


25



0.6
%


3,572



0.6
%All executive officers and directors as a group(15 persons)(17)


41,220



90.9
%


3,919



92.5
%


559,744



91.0
%





(1)
Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power and as to which such person has 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 is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of shares as to which such person has the right to acquire voting and/or investment 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 partner of the BRS Fund and by virtue of such status may be deemed to be the beneficial owner of the shares owned by BRSLLC. BRSE has the power to direct BRSLLC as to the voting and disposition of shares held by BRSLLC. No single person controls the voting and dispositive power of BRSE with respect to the shares owned by BRSLLC. Bruce Bruckmann, Harold O. Rosser, Stephen C. Sherrill, Paul D. Kaminski and Thomas J. Baldwin are the managers of BRSE, and none of them individually has the power to direct or veto the voting or disposition of shares owned by BRSLLC. BRSE expressly disclaims beneficial ownership of the shares owned by BRSLLC. Each of Messrs. Bruckmann, Rosser, Sherrill, Kaminski and Baldwin expressly disclaims beneficial ownership of the shares owned by BRSLLC.





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


68
 Index





(4)
The address of each of Mr. Pierce, Mr. Saxton, Mr. Jakobe, Ms. Davidson, Mr. Bozuwa, Ms. Stricker, Mr. Deery, Mr. DiCamillo and Mr. Whaling is c/o The Sheridan Group, Inc., 11311 McCormick Road, Suite 260, Hunt Valley, Maryland 21031.





(5)
Includes options to purchase 1,920 shares of TSG Holdings Corp. common stock exercisable within 60 days.





(6)
Includes 17,602 common shares, 1,340 Series A preferred shares and 125 Series B preferred shares which are owned by LMWW Custodian FBO John A. Saxton Roll-over IRA. Mr. Saxton may be deemed to beneficially own such shares.





(7)
Includes options to purchase 3,300 shares of TSG Holdings Corp. common stock exercisable within 60 days.





(8)
Includes 1,288 common shares and 108 Series A preferred shares which are owned by LMWW Custodian FBO Robert M. Jakobe Roll-over IRA. Mr. Jakobe may be deemed to beneficially own such shares.





(9)
Includes options to purchase 3,300 shares of TSG Holdings Corp. common stock exercisable within 60 days.





(10)
Includes options to purchase 2,100 shares of TSG Holdings Corp. common stock exercisable within 60 days.





(11)
Includes options to purchase 1,800 shares of TSG Holdings Corp. common stock exercisable within 60 days.





(12)
Includes options to purchase 1,620 shares of TSG Holdings Corp. common stock exercisable within 60 days.





(13)
The address of each of Mr. Baldwin and Mr. Sheppard is c/o Bruckmann, Rosser, Sherrill & Co., Inc., 126 East 56th Street, New York, New York 10022.





(14)
Consists of 19,210 shares and 1,833 shares of TSG Holdings Corp. Series A and Series B preferred stock, respectively, and 252,756 shares of TSG Holdings Corp. common stock owned and/or controlled by the BRSLLC. Mr. Baldwin may be deemed to share beneficial ownership of the shares owned of record and/or controlled by BRSLLC by virtue of his status as a manager of BRSE, but he expressly disclaims such beneficial ownership of the shares owned and/or controlled by BRSLLC. The members and managers of BRSE share investment and voting power with respect to securities owned and/or controlled by BRSE, but no individual controls such investment or voting power.





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





(16)
Consists of 19,210 shares and 1,833 shares of TSG Holdings Corp. Series A and Series B preferred stock, respectively, and 252,756 shares of TSG Holdings Corp. common stock owned by The Sheridan Group Holdings (Jefferies), LLC. Mr. Luikart is a Managing Member of JCP and may be considered the beneficial owner of such shares, but he expressly disclaims such beneficial ownership of the shares owned by The Sheridan Group Holdings (Jefferies), LLC, except to the extent of his pecuniary interest therein.





(17)
Includes options to purchase 17,580 shares of TSG Holdings Corp. common stock exercisable within 60 days.





TSG Holdings Corp. Preferred Stock





TSG Holdings Corp.’s Certificate of Incorporation provides that TSG Holdings Corp. may issue 200,000 shares of preferred stock, 50,000 of which is designated as 10% Series A Cumulative Compounding Preferred Stock (“Series A”), 20,000 of which is designated as 10% Series B Cumulative Compounding Preferred Stock (“Series B”) and 130,000 of which is undesignated. TSG Holdings Corp. preferred stock has a stated value of $1,000 per share for Series A and $1,428.89 per share for Series B and is entitled to annual dividends when, as and if declared, which dividends will be cumulative, whether or not earned or declared, and will accrue at a rate of 10%, compounding annually. As of March 29, 2010, there are issued and outstanding about 45,326 and 4,234 shares of Series A and Series B preferred stock, respectively.


69
 Index





Except as otherwise required by law, the TSG Holdings Corp. preferred stock is not entitled to vote. TSG Holdings Corp. may not pay any dividend upon (except for a dividend payable in Junior Stock, as defined below), or redeem or otherwise acquire shares of, capital stock junior to the TSG Holdings Corp. preferred stock (including the common stock) (“Junior Stock”) unless all cumulative dividends on the TSG Holdings Corp. preferred stock have been paid in full. Upon liquidation, dissolution or winding up of TSG Holdings Corp., holders of TSG Holdings Corp. Series A and Series B preferred stock are entitled to receive out of the legally available assets of TSG Holdings Corp., before any amount shall be paid to holders of Junior Stock, an amount equal to $1,000 per share and $1,428.89 per share, respectively, of TSG Holdings Corp. preferred stock, plus all accrued and unpaid dividends to the date of final distribution. If the available assets are insufficient to pay the holders of the outstanding shares of TSG Holdings Corp. preferred stock in full, the assets, or the proceeds from the sale of the assets, will be distributed ratably among the holders.





TSG Holdings Corp. Common Stock





The Certificate of Incorporation of TSG Holdings Corp. provides that TSG Holdings Corp. may issue 1,000,000 shares of TSG Holdings Corp. common stock. About 597,433 shares of TSG Holdings Corp. common stock are issued and outstanding as of March 29, 2010. The holders of TSG Holdings Corp. common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders.





Equity Compensation Plan Information





The following table sets forth information as of December 31, 2009 regarding all of our existing compensation plans pursuant to which equity securities are authorized for issuance 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/AEquity compensation plans not approved by security holders


45,600


$
12.56



7,660Total


45,600


$
12.56



7,660


______________________


(1)
As of December 31, 2009.





ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Dividend and Loan





On January 5, 2009, we executed a waiver to our working capital facility. The waiver allowed us to pay a cash dividend and make a loan to our parent company, TSG Holdings Corp. ("Holdings"), which is not a registrant with the Securities and Exchange Commission, in the aggregate amount of up to $14.0 million, provided that Holdings used the entire cash proceeds of such dividend and loan solely to purchase capital stock issued by Holdings (the “Stock Purchase”) from Participatiemaatschappij Giraffe B.V. and to pay related expenses in connection therewith. On January 5, 2009, we paid a dividend in the aggregate amount of $8.0 million and made a loan in the principal amount of $2.0 million to Holdings. The loan will mature on January 4, 2012 and will accrue interest at the rate of 1.36% per year payable in cash or in kind on February 15 and August 15 each year. Subsequent to January 5, 2009, we paid an additional dividend in the amount of $1.1 million to Holdings to pay expenses and other amounts in connection with the Stock Purchase. In connection with the Stock Purchase, Holdings ceased to have an ownership interest in an affiliate that owed us approximately $1.1 million as of December 31, 2008. In December 2009, Holdings executed an agreement with the former affiliate whereby the $1.1 million owed to us by the former affiliate was satisfied in full by being offset against the principal amount of a note owed by Holdings to the former affiliate. The result is that the $1.1 million once owed to us by the former affiliate became a receivable from Holdings. Holdings satisfied $0.2 million of the amount due to us and the remaining $0.9 million is presented net against the income tax oblibations due to Holdings within "Due to parent, net" in the Consolidated Balance Sheet.


70
 Index





Securities Holders’ Agreement





The second amended and restated securities holders’ agreement among BRS, JCP and the other stockholders of Holdings provides that Holding's and our board of directors will consist of eight members, including four designees of BRS and four designees of JCP. Also pursuant to the securities holders’ agreement, we may not take certain significant actions, such as incurrence of indebtedness in excess of certain thresholds or a sale of all or substantially all of our assets, without the approval of each of BRS and JCP.





The securities holders’ agreement generally restricts the transfer of shares of Holding's common stock or Holding's preferred stock without the consent of BRS and JCP. Exceptions to this restriction include transfers to affiliates and transfers for estate planning purposes, in each case so long as any transferee agrees to be bound by the terms of the agreement.





Each of Holdings, BRS and JCP has a right of first refusal under the securities holders’ agreement with respect to sales of shares of Holdings by management investors. Under certain circumstances, the stockholders have “tag-along” rights to sell their shares on a pro rata basis with the selling stockholder in certain sales to third parties. If BRS and JCP approve a sale of Holdings, they have the right to require the other stockholders of Holdings to sell their shares on the same terms. The securities holders’ agreement also contains a provision that gives Holdings the right to repurchase a management investor’s shares upon termination of that management stockholder’s employment or removal or resignation from the board of directors.





Registration Rights Agreement





Pursuant to the amended and restated registration rights agreement among BRS, JCP and the other stockholders of Holdings, upon the written request of either BRS or JCP, Holdings has agreed to, on one or more occasions, prepare and file a registration statement with the SEC concerning the distribution of all or part of the shares of Holding's common stock held by BRS or JCP or certain of their respective affiliates, as the case may be, and use its best efforts to cause the registration statement to become effective. Following an initial public offering of Holdings, BRS, JCP and the management investors also have the right, subject to certain exceptions and rights of priority, to have their shares included in certain registration statements filed by Holdings.  Registration expenses of the selling stockholders (other than underwriting discounts and commissions and transfer taxes applicable to the shares sold by such stockholders or the fees and expenses of any accountants or other representatives retained by a selling stockholder) will be paid by Holdings. Holdings has also agreed to indemnify the stockholders against certain customary liabilities in connection with any registration.





Management Agreement





In connection with the Sheridan Acquisition, we entered into a management agreement with BRS and JCP pursuant to which BRS and JCP may provide financial, advisory and consulting services to us. In exchange for these services, BRS and JCP will be entitled to an annual management fee. The total management fee will be equal to the greater of 2% of EBITDA (as defined in the Management Agreement) or $0.5 million per year, plus reasonable out-of-pocket expenses and will be split equally between BRS and JCP. In addition, BRS and JCP may negotiate with us to provide additional services in connection with any transaction in which we may be, or may consider becoming, involved. At the closing of the Sheridan Acquisition, BRS and JCP also were paid a transaction fee of about $1.0 million, plus reasonable out-of-pocket expenses, pursuant to the management agreement. The management agreement has an initial term of ten years. The agreement automatically renews for additional one year terms unless either we or BRS and JCP give written notice of termination within 90 days prior to the expiration of the initial term or any extension thereof. There are no minimum levels of service required to be provided pursuant to the management agreement. The management agreement includes customary indemnification provisions in favor of BRS and JCP.


71
 Index





Policy for Approval of Related Transactions





We do not have a written policy for the treatment of transactions required to be disclosed under Item 404(a) of Regulation S-K.  Our securities holders’ agreement described above generally prohibits entry into such transactions without the consent of BRS and JCP.





Director Independence





See Part III, Item 10, “Directors, Executive Officers and Corporate Governance – Board Composition and Director Independence.”





ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES





The Company incurred fees for services performed by PricewaterhouseCoopers LLP as follows:








(Dollars in thousands)

Year ended December 31,


Year ended December 31,2009


2008Audit fees (include the review of interim consolidated financial statements, annual audit of the consolidated financial statements and assistance with SEC filings)

$
755


$
741Audit-related fees (include the review of internal controls and due diligence related to acquisitions)


-



50Tax fees (include tax compliance, transactional consulting and advice for state tax issues )


182



316All other fees (include license fees for online financial reporting and assurance literature)


3



2Total

$
940


$
1,109




All services performed by PricewaterhouseCoopers LLP have been approved by the audit committee prior to performance in accordance with legal requirements.


72
 Index





PART IV





ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES





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





(1) All Financial Statements:





Page No.Reports of Independent Registered Public Accounting Firm
28Consolidated balance sheets as of December 31, 2009 and 2008
29Consolidated statements of operations for the years-ended December 31, 2009, 2008 and 2007
30Consolidated statements of changes in stockholder’s equity for the years-ended December 31, 2009, 2008 and 2007
31Consolidated statements of cash flows for the years-ended December 31, 2009, 2008 and 2007
32Notes to consolidated financial statements
33-51





(2) Financial Statement Schedules:





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





(3) Exhibits





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





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.a
Third Amended and Restated Certificate of Incorporation of TSG Holdings Corp. (filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 28, 2008 and incorporated herein by reference).3.1.b
Amendment to Third Amended and Restated Certificate of Incorporation of TSG Holdings Corp. (filed as Exhibit 3.1.b to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008, filed on March 31, 2009 and incorporated herein by reference).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 10.25% Senior Secured Note Due 2011 (included in Exhibit 4.1).†




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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.†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
Second Amended and Restated Revolving Credit Agreement, dated as of June 16, 2009, by and among The Sheridan Group, Inc. and Bank of America, N.A., as agent, issuer and lender (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on June 17, 2009 and incorporated herein by reference).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
Second Amendment and Restatement to the Securities Holders Agreement and the Registration Rights Agreement by and among TSG Holdings Corp., The Sheridan Group Holdings (BRS) LLC and The Sheridan Group Holdings (Jefferies) LLC, dated as of March 30, 2009 (filed as Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008, filed on March 31, 2009 and incorporated herein by reference).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.†10.20
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.^^




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10.27
Employment and Non-Competition Agreement, dated as of March 29, 2007, between The Sheridan Group, Inc. and Douglas R. Ehmann.*#10.28
Employment and Non-Competition Agreement, dated as of March 29, 2007, between The Sheridan Group, Inc. and Gary J. Kittredge.*#10.29
Employment and Non-Competition Agreement, dated as of March 29, 2007, between The Sheridan Group, Inc. and G. Paul Bozuwa.*#10.30
Employment and Non-Competition Agreement, dated as of March 29, 2007, between The Sheridan Group, Inc. and John A. Saxton*#10.31
Employment and Non-Competition Agreement, dated as of March 29, 2007, between The Sheridan Group, Inc. and Joan B. Davidson.*#10.32
Employment and Non-Competition Agreement, dated as of March 29, 2007, between The Sheridan Group, Inc. and Patricia A. Stricker.*#10.33
Employment and Non-Competition Agreement, dated as of March 29, 2007, between The Sheridan Group, Inc. and Robert M. Jakobe.*#10.35
Addendum to Employment and Non-Competition Agreement, dated as of February 18, 2008, between The Sheridan Group, Inc. and Douglas R. Ehmann.* ††10.36
Addendum to Employment and Non-Competition Agreement, dated as of February 18, 2008, between The Sheridan Group, Inc. and Gary J. Kittredge.* ††10.37
Addendum to Employment and Non-Competition Agreement, dated as of February 18, 2008, between The Sheridan Group, Inc. and G. Paul Bozuwa.* ††10.38
Addendum to Employment and Non-Competition Agreement, dated as of February 18, 2008, between The Sheridan Group, Inc. and John A. Saxton.* ††10.39
Addendum to Employment and Non-Competition Agreement, dated as of February 18, 2008, between The Sheridan Group, Inc. and Joan B. Davidson.* ††10.40
Addendum to Employment and Non-Competition Agreement, dated as of February 18, 2008, between The Sheridan Group, Inc. and Patricia A. Stricker.* ††10.41
Addendum to Employment and Non-Competition Agreement, dated as of February 18, 2008, between The Sheridan Group, Inc. and Robert M. Jakobe.* ††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.


______________________


†
Filed as a like numbered exhibit to the Registrant’s Registration Statement on Form S-4 (File No. 333-110441) and incorporated herein by reference.





^
Filed as a like numbered exhibit to the Registrant’s Annual Report on Form 10K for the year ended December 31, 2005, filed on March 30, 2006 and incorporated herein by reference.





^^
Filed as a like numbered exhibit to the Registrant’s Quarterly Report on Form 10Q for the quarter ended March 31, 2005, filed on May 13, 2005 and incorporated herein by reference.





~
Filed as a like numbered exhibit to the Registrant’s Annual Report on Form 10K for the year ended December 31, 2004, filed on March 31, 2005 and incorporated herein by reference.




#
Filed as a like numbered exhibit to the Registrant’s Annual Report on Form 10K for the year ended December 31, 2006, filed on March 30, 2007 and incorporated herein by reference.





††
Filed as a like numbered exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 28, 2008 and incorporated herein by reference.





*
Management contract or compensatory plan or arrangement.




Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act




No annual report or proxy material has been sent to security holders in the year ended December 31, 2009. The Registrant is a wholly owned subsidiary of TSG Holdings Corp.


75
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SIGNATURES





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





THE SHERIDAN GROUP, INC.By:
/s/ John A. SaxtonName:
John A. SaxtonTitle:
President and Chief ExecutiveOfficer and DirectorDate:
March 29, 2010





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





Signature

Title

Date/s/ John A. Saxton

President and Chief Executive Officer and Director

March 29, 2010John A. Saxton

(Principal Executive Officer)/s/ Robert M. Jakobe

Chief Financial Officer

March 29, 2010Robert M. Jakobe

(Principal Financial and Accounting Officer)/s/ Thomas J. Baldwin

Director

March 29, 2010Thomas J. Baldwin/s/ Nicholas Daraviras

Director

March 29, 2010Nicholas Daraviras/s/ Craig H. Deery

Director

March 29, 2010Craig H. Deery/s/ Gary T. DiCamillo

Director

March 29, 2010Gary T. DiCamillo/s/ James L. Luikart

Director

March 29, 2010James L. Luikart/s/ Nicholas R. Sheppard

Director

March 29, 2010Nicholas R. Sheppard/s/ George A. Whaling

Director

March 29, 2010George A. Whaling






76