**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-K**

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**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For the Fiscal Year EndedDecember 31, 2006**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

**For thePeriod From              to              .**

**CommissionFile Number:  333-110441**

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**THE SHERIDAN GROUP, INC.**

(Exact name of Registrant as specified in its charter)

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

 

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

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

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

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

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant toItem 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 PartIII of this Form 10-K or any amendment to this Form 10-K.  x

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

Check one: Large accelerated filer o  Accelerated filer o  Non-accelerated filer x

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

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

There was 1 share of the Registrant’s Common Stock outstanding as ofMarch 29, 2007.

 

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**THESHERIDAN GROUP, INC.ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2006**

**INDEX**
| ** **                                                                                                                 | **Pages** |
|----------------------------------------------------------------------------------------------------------------------------|-----------|
| ITEM 1. BUSINESS                                                                                                           | 3         |
|                                                                                                                       |      |
| ITEM 1A. RISK FACTORS                                                                                                      | 6         |
|                                                                                                                       |      |
| ITEM 1B. UNRESOLVED STAFF COMMENTS                                                                                         | 11        |
|                                                                                                                       |      |
| ITEM 2. PROPERTIES                                                                                                         | 11        |
|                                                                                                                       |      |
| ITEM 3. LEGAL PROCEEDINGS                                                                                                  | 12        |
|                                                                                                                       |      |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                               | 12        |
|                                                                                                                       |      |
| ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 12        |
|                                                                                                                       |      |
| ITEM  6. SELECTED FINANCIAL DATA                                                                                           | 13        |
|                                                                                                                       |      |
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        | 13        |
|                                                                                                                       |      |
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK                                                       | 24        |
|                                                                                                                       |      |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 25        |
|                                                                                                                       |      |
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE                              | 48        |
|                                                                                                                       |      |
| ITEM 9A. CONTROLS AND PROCEDURES                                                                                           | 48        |
|                                                                                                                       |      |
| ITEM  9B. OTHER INFORMATION                                                                                                | 48        |
|                                                                                                                       |      |
| ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE  GOVERNANCE                                                           | 48        |
|                                                                                                                       |      |
| ITEM 11. EXECUTIVE COMPENSATION                                                                                            | 52        |
|                                                                                                                       |      |
| ITEM 12. SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                   | 63        |
|                                                                                                                       |      |
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                        | 66        |
|                                                                                                                       |      |
| ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES                                                                            | 67        |
|                                                                                                                       |      |
| ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES                                                                           | 68        |

 

**SPECIAL NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

This Annual Report on Form 10-K includes“forward-looking statements.” Forward-looking statements are those that do notrelate solely to historical fact. They include, but are not limited to, anystatement 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” orwords or phrases of similar meaning. They may relate to, among other things:

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·                  ourliquidity and capital resources;

·                  competitivepressures and trends in the printing industry;

·                  prevailinginterest rates;

·                  legalproceedings and regulatory matters;

·                  generaleconomic conditions;

·                  statementswith respect to the Buyout Transactions and the Dingley Transactions (each asdefined in this Annual Report on Form 10-K);

·                  predictionsof net sales, expenses or other financial items;

·                  futureoperations, financial condition and prospects; and

·                  ourplans, objectives, strategies and expectations for the future.

Forward-looking statements involve risks anduncertainties that may cause actual results to differ materially from theforward-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 mayaffect the value of our notes. These risks and uncertainties may include, butare not limited to, those discussed in Part I, Item 1A, “Risk Factors.” Newrisk factors can emerge from time to time. It is not possible for us to predictall of these risks, nor can we assess the extent to which any factor, orcombination of factors, may cause actual results to differ from those containedin forward-looking statements. Given these risks and uncertainties, we urge youto read this Annual Report on Form 10-K completely with the understanding thatactual future results may be materially different from what we plan or expect.We caution you that any forward-looking statement reflects only our belief atthe time the statement is made. We will not update these forward-lookingstatements even if our situation changes in the future.

**PART I**

**ITEM1.   BUSINESS**

**Overview**

We are a leadingspecialty printer offering a full range of printing and value-added supportservices for the journal, catalog, magazine, book and article reprintmarkets. We believe that we enjoy strong and longstanding relationships withour customers, which include publishers, catalog merchants, associations anduniversity presses.  We provide a wide range of printing services andvalue-added support services, such as electronic publishing support, digitalproofing, preflight checking, offshore key stroking and copy editing, onlinepeer review systems, manuscript tracking systems, subscriber databasemaintenance, mail sortation and distribution, customer audits and trainingclasses, and back issue fulfillment.  We utilize a decentralizedmanagement structure, which provides our customers with access to the resourcesof a large company, while maintaining the high level of service and flexibilityof a smaller company. We operate in three business segments:  short-runjournals, specialty catalogs and other publications.  For the year endedDecember 31, 2006, we generated net sales of $337.5 million, operating incomeof $5.5 million and net loss of $8.3 million.  As used in this AnnualReport on Form 10-K, the terms “we,” “us,” “our” and other similar terms referto the consolidated businesses of The Sheridan Group, Inc. and all of itssubsidiaries.

**History**

We trace our roots backto The Sheridan Press, the predecessor of which was founded in 1915. We enteredthe short-run journal market in 1980, targeting the printing of scientific,technical, medical and scholarly journals for publishers. The Sheridan Group,Inc. was formed in 1988 to complete the acquisition of Braun-Brumfield, Inc., ashort-run book printer located in Michigan. In 1994, we entered the specialtymagazine market with the acquisition of United Litho, Inc., a printer ofspecialty magazines serving the Washington, D.C. metro area. In conjunctionwith our recapitalization in 1998, we acquired Dartmouth Printing Company, aspecialty magazine printer in New Hampshire, and Capital City Press, a journalprinter in Vermont. In 1999, we acquired BookCrafters, Inc., a short-run bookprinter in Chelsea, Michigan and consolidated it with Braun-Brumfield to formSheridan Books, Inc. In 2004, we acquired The Dingley Press (the “DingleyAcquisition”), a specialty catalog printer in Maine. During the firstquarter of 2006, we shutdown the operations of Capital City Press andconsolidated the production of short-run journals at The Sheridan Press.Currently, we are comprised of six specialty printing companies operating inthe domestic scientific, technical, medical and scholarly journal, specialtycatalog, short-run book, specialty magazine and article reprints markets:The Sheridan Press in Pennsylvania; Sheridan Books in Michigan;

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Dartmouth PrintingCompany in New Hampshire; Dartmouth Journal Services in Vermont; United Litho inVirginia; and The Dingley Press in Maine.

**PrintingServices**

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

**Value-AddedSupport Services**

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

**PrintingSegments**

As a leading publicationsprinter, we offer a broad range of products and services, including theprinting of scientific, technical, medical and scholarly journals, specialtycatalogs, short-run books, specialty magazines, article reprints, and anextensive array of value-added support services.  Our products are sold toa diverse set of customers, including publishers, catalog merchants, universitypresses and associations.   Our printing operations are classifiedinto three reportable segments.  The following table presents thepercentage of net sales contributed by each segment during the past threefiscal years.

| Net sales %           | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
|----------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Short-run  journals        |       | 27                                           |       | 29                                           |       | 34                                           |       |
| Specialty  catalogs        |       | 29                                           |       | 32                                           |       | 22                                           |       |
| Other  publications        |       | 45                                           |       | 41                                           |       | 46                                           |       |
| Intersegment  eliminations |       | (1                                           | )          | (2                                           | )          | (2                                           | )          |
| Total                      |       | 100                                          |       | 100                                          |       | 100                                          |       |

 

*Short-RunJournals*

The journal marketincludes journals for the scientific, technical, medical and scholarlycommunities. We compete in both the short-run and medium-run portions of thejournal market.  We define short-run journals as journals produced onsheet-fed and digital presses with typical production runs of less than 5,000copies. Publishers, associations and university presses comprise the customersin this portion of the journals market.  In 2006, we printed over 2,200journal titles.

Our journals areprimarily black and white with a small amount of color for photographs,diagrams and advertisements.  They areprinted on schedules that range from weekly to annually in run lengths thataverage 1,800 copies and range from 50 to 10,000 copies. Journal printingtypically results in a high level of repeat business due to the periodic natureand complexity of these publications. The vast majority of journals are perfectbound, with the remainder saddle-stitched.  Our journal customers rely onour consistency and on-time reliability to meet the demands of their owncustomers.

The short-run journalssegment also includes article reprints, which are produced on sheet-fed anddigital presses, and originally developed as an ancillary product from the basejournal business.  Article reprints are produced for customers whorequire reprints of an individual article from a journal or magazine formarketing or other purposes. Historically, we have primarily reprinted journal andmagazine articles for which we were the original printer. We have expanded ourbusiness by winning

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article reprintbusiness on publications for which we were not the original printer.  Weare a full-service reprint printer, producing black and white as well as colorreprints for publishers, university presses and associations.

*SpecialtyCatalogs*

We entered the specialtycatalog segment in 2004 with our purchase of The Dingley Press.  Wecharacterize specialty catalogs as catalogs distributed by specialty catalogmerchant companies, which are often smaller entrepreneurial firms with highservice requirements. We produce catalogs with run lengths between 300,000 and10,000,000 copies, most of which are printed in four-color and are bound usingthe saddle stitching technique. Multiple versions of each catalog aredistributed during the year requiring high levels of customer service andextensive distribution services.  In 2006, we printed over 130 catalogtitles.

*OtherPublications*

The other publications segmentprovides products and services for specialty magazines, short-run books andmedium-run journals to publishers, university presses and associations.

Specialty Magazines

We characterize specialtymagazines as magazines having production runs of less than 100,000 copies. Ourcustomers in this market are publishers and associations. Specialty magazinesalso have a high level of repeat business due to the periodic nature of thepublications. This is largely a regional market defined by proximity to the customer.In 2006, we printed over 400 magazine titles.

We produce short-runmagazines with average run lengths of 25,000 copies.  The majority ofthese magazines are printed in four-color.  The magazines are bound usingthe saddle-stitching and perfect binding techniques. The magazines areproduced in frequencies that range from weekly to annually. These magazines areproduced on web presses.  Although specialty magazine customers do notrequire composition services, they do demand high levels of customer servicefocused on distribution and mailing services, where managing the customer’ssubscriber database is critical to customer satisfaction.

Short-Run Books

Short-run books, which wecharacterize as books having production runs of less than 5,000 copies, areprinted for publishers, associations and university presses. Sales to thismarket include both the initial printing of titles and subsequentreprints.  In 2006, we printed more than 10,200 book titles.

We produce books in runlengths that average 2,000 copies and range from 100 to 10,000 copies. The majority of these books are black and white.  Books are produced onboth sheet-fed and web presses.  About 50% of our books have soft covers(perfect bound) and about 50% have hard covers (case bound).

Medium-Run Journals

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

**Competition**

The printing industry inthe United States is fragmented and highly competitive in most productcategories and geographic regions. We compete in subsegments of the overallprinting market.  Competition is largely based on price, quality, range ofservices offered, distribution capabilities, ability to service the specializedneeds of customers, availability of printing time on appropriate equipment anduse of state-of-the-art technology.  Competitive price pressure continuesto be strong in the product segments in which we compete.

**Customers**

We benefit from a highlydiversified customer base. The majority of our business comes from publishers,followed by catalog merchants, associations and university presses.  The averagelength of our relationship with our top 50 customers is approximately 15years. In 2006, High Response Holdings, Inc. accounted for about 12.0% ofour net sales, which are included in the specialty catalogs segment. In 2006,Elsevier accounted for about 10.3% of our net sales, which are included in boththe short-run journals and other publications segments.

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**Salesand Marketing**

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

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

**RawMaterials**

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

**Technologyand Operations**

Our capital investmentshave been focused on productivity improvement, more efficient material usageand incremental capacity.  Additionally, our investments in technologyhave been critical in helping achieve improved workflow and reduced cycletimes.

**Employees**

We have about 1,900employees as of December 31, 2006. We focus heavily on fosteringenthusiastic and positive cultures at each of our locations, evidenced by thefact that we have been recognized with numerous “Best Workplace in America”awards presented by Printing Industries of America. In addition, we closelymonitor our employees’ level of job satisfaction with comprehensive surveys ona regular basis. Management believes our compensation and benefitspackages are competitive within the industry and local markets.

**Regulatory Matters**

Weare subject to a broad range of federal, state and local laws and regulationsrelating to the pollution and protection of the environment, health and safetyand labor. Based on currently available information, we do not anticipate anymaterial adverse effect on our operations, financial condition or competitiveposition as a result of our efforts to comply with environmental, health andsafety or labor requirements, and we do not anticipate needing to make anymaterial capital expenditures to comply with such requirements.

**ITEM1A.   RISK FACTORS**

**RiskFactors**

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

We have a significantamount of indebtedness.  On December 31, 2006, we had totalindebtedness of approximately $164.9 million.

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

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·                                         makeit more difficult for us to meet our payment and other obligations under ourindebtedness;

·                                         requireus to dedicate a substantial portion of our cash flow from operations topayments on our indebtedness, thereby reducing the availability of our cashflow to fund working capital, capital expenditures and other general corporatepurposes;

·                                         increaseour vulnerability to general adverse economic and industry conditions;

·                                         limitour flexibility in planning for, or reacting to, changes in our business andthe industry in which we operate;

·                                         placeus at a competitive disadvantage compared to our competitors that have lessdebt or are less leveraged; and

·                                         limitour ability to borrow additional funds or raise additional financing.

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

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

The technology we use in ouroperations is rapidly evolving. We could experience delays or difficulties inresponding to changing technology, in addressing the increasingly sophisticatedneeds of our customers or in keeping pace with emerging industry standards. Inaddition, the cost required to respond to and integrate changing technologiesmay be greater than we anticipate. If we do not respond adequately to the needto integrate changing technologies in a timely manner, or if the investmentrequired to so respond is greater than anticipated, our business, financialcondition, results of operations, cash flow and ability to make payments on thenotes may be adversely affected. We remain largely dependent on thedistribution of scientific, technical, medical and other scholarly informationin printed form. Usage of the Internet and other electronic media continues togrow. We cannot assure you that the acceleration of the trend toward suchelectronic media will not decrease the demand for our products which couldresult in lower profits and reduced cash flows.

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

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

The printing industry isextremely competitive. We compete with numerous companies, some of which havegreater financial resources than we do. Two of our direct competitors haverecently been acquired by larger printing companies, which could enable them toreduce operating costs and expand services – thus enhancing theircompetitiveness. We compete on the basis of ongoing customer service, qualityof finished products, range of services offered, distribution capabilities, useof state of the art technology and price. We cannot assure you that we will beable to compete successfully with respect to any of these factors. In certaincircumstances, due primarily to factors such as freight rates and customerpreference for local services, printers with better access to certain regionsof the country may have a competitive advantage in such regions. Our failure tocompete successfully could cause us to lose existing business or opportunitiesto generate new business and could result in decreased profitability, adverselyaffecting our business.

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

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

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

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We have two customersthat accounted for approximately 22.0% of our net sales in 2006. In 2007,these two customers are projected to account for similar percentages of our netsales. The loss of either of these customers would cause our net sales andprofitability to decline. We cannot assure you that net sales to these and ourother large customers will not continue to increase as a percentage of our totalnet sales or that these customers will continue to use our printing services.The loss of any such customer could adversely affect us.

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

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

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

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

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

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

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

We rely to a significantextent on our executive officers and other key management personnel. There canbe no assurance that we will be able to continue to retain our executiveofficers and key management personnel or attract additional qualifiedmanagement in the future. In addition, the success of any acquisition by us maydepend, in part, on our ability to retain management personnel of the acquiredcompanies. There can be no assurance that we will be able to retain suchmanagement personnel.

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

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

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

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

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

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

The reliability of ourprinting facilities is critical to the success of our business. Our facilitiesmight be damaged or

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interrupted by fire,flood, power loss, telecommunications failure, break-ins, earthquakes,terrorist attacks, war or similar events. Equipment malfunctions, computerviruses, physical or electronic break-ins and similar disruptions might causeinterruptions and delays in our printing services and could significantlydiminish our reputation and brand name and prevent us from providing services.Although we believe we have taken adequate steps to address these risks, damageto, or unreliability of, our printing facilities could have a material adverseeffect on our business, financial condition, results of operations and cashflow.

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

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

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

We use various materialsin our operations which contain substances considered hazardous or toxic underenvironmental laws. In addition, our operations are subject to federal, stateand local environmental laws and regulations relating to, among other things,air emissions, waste generation, handling, management and disposal, waste watertreatment and discharge and remediation of soil and groundwater contamination.Permits are required for the operation of certain of our businesses, and thesepermits 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 EnvironmentalResponse, Compensation and Liability Act, as amended (“CERCLA,” commonlyreferred to as “Superfund”) and similar state laws and regulations, we may beliable for costs and damages relating to soil and groundwater contamination atthese off-site disposal locations, or at our own facilities. In the past, suchmatters have not had a material impact on our business or operations. We arenot currently aware of any environmental matters that are likely to have amaterial adverse effect on our business, financial condition, results ofoperations and cash flow. However, we cannot assure you that such matters willnot have such an impact on us. Furthermore, future changes to environmentallaws and regulations may give rise to additional costs or liabilities thatcould have a material adverse impact on us.

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

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

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

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

We do not believe thatany of our products, services or activities infringe upon the intellectualproperty rights of third parties in any material respect. There can be noassurance, however, that third parties will not claim infringement by us withrespect to current or future products, services or activities. Any infringementclaim, with or without merit, could result in substantial costs and diversionof management and financial resources, and a successful claim could effectivelyblock our ability to use or license products and services or cost us money.

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

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We may require morecapital in the future to:

·                                         fundour operations;

·                                         financeinvestments in equipment and infrastructure needed to maintain and expand ournetwork;

·                                         enhanceand expand the range of services we offer; and

·                                         respondto competitive pressures and potential strategic opportunities, such asinvestments, acquisitions and international expansion.

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

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

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

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

Our future performancewill depend heavily on our ability to integrate the businesses that we mayacquire. To integrate newly acquired businesses we must integrate manufacturingfacilities and extend our financial and management controls and operating,administrative and information systems in a timely manner and on satisfactoryterms and conditions. This may be more difficult with respect to significantacquisitions. We may not be able to successfully integrate acquired businessesor realize projected cost savings and synergies in connection with thoseacquisitions on the timetable contemplated or at all.

Furthermore, the costs ofbusinesses that we may acquire could significantly impact our short-termoperating results. These costs could include:

·                                         restructuringcharges associated with the acquisitions; and

·                                         otherexpenses associated with a change of control, as well as non-recurringacquisition costs including accounting and legal fees, investment banking fees,recognition of transaction-related obligations and various otheracquisition-related costs.

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

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

·                                         thepossibility that we have acquired substantial undisclosed liabilities;

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

·                                         thepotential loss of key employees or customers as a result of changes inmanagement; and

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

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We may not be successfulin overcoming these risks.

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

As a result of theirstock ownership of TSG Holdings Corp., our parent, Bruckmann, Rosser, Sherrill& Co., L.L.C. (“BRS”), Jefferies Capital Partners (“JCP”) and theirrespective affiliates together beneficially own about 84.8% of TSG HoldingsCorp.’s outstanding capital stock. By virtue of their stock ownership and theterms of the securities holders agreement, these entities have significantinfluence over our management and will be able to determine the outcome of allmatters required to be submitted to the stockholders for approval, includingthe election of our directors and the approval of mergers, consolidations andthe sale of all or substantially all of our assets. The interests of BRS andJCP as equity owners of TSG Holdings Corp. may differ from the interests of ournoteholders and the lenders under our working capital facility, and, as such,BRS and JCP may take actions which may not be in the interest of suchnoteholders and lenders. For example, if we encounter financial difficulties orare unable to pay our debts as they mature, the interests of our equity ownersmight conflict with the interests of our noteholders and the lenders under ourworking capital facility. In addition, our equity owners may have an interestin pursuing acquisitions, divestitures, financings or other transactions that,in their judgment, could enhance their equity investments, even though suchtransactions might involve risks to our noteholders and the lenders under ourworking capital facility.

*Effectiveness of our internal controls — Our internal controls over financial reportingmay not be effective and our independent registered public accounting firm maynot be able to certify as to their effectiveness, which could have asignificant and adverse effect on our business and reputation.*

We are evaluating our internal controls over financialreporting in order to allow management to report on, and our independentregistered public accounting firm to attest to, our internal controls overfinancial reporting, as required by Section 404 of the Sarbanes-Oxley Actof 2002, as amended, and rules and regulations of the SEC thereunder,which we refer to as “Section 404”.  We are in the process ofdocumenting and testing our internal control procedures in order to satisfy therequirements of Section 404, which requires annual management assessmentsof the effectiveness of our internal controls over financial reporting and areport by our independent registered public accountants addressing theseassessments. During the course of our testing, we may identify deficiencieswhich we may not be able to remediate in time to meet the deadline imposed bythe Sarbanes-Oxley Act for compliance with the requirements ofSection 404. We will be required to comply with the requirements ofSection 404 for our fiscal year ending December 31, 2007. In addition,if we fail to achieve and maintain the adequacy of our internal controls, assuch standards are modified, supplemented or amended from time to time, we maynot be able to ensure that we can conclude on an ongoing basis that we haveeffective internal controls over financial reporting in accordance withSection 404. We cannot be certain as to the timing of completion of ourevaluation, testing and any remediation actions of the impact of the same onour operations. Our independent registered public accounting firm will berequired to certify as to the effectiveness of our internal control overfinancial reporting for our fiscal year ending December 31, 2008. If we are notable to implement the requirements of Section 404 in a timely manner orwith adequate compliance, our independent registered public accounting firm maynot be able to certify as to the effectiveness of our internal control overfinancial reporting and we may be subject to sanctions or investigation byregulatory authorities, such as the SEC. In addition, we expect theserules and regulations to increase our legal and financial compliance costsand to make some activities more time-consuming and costly. We cannot predictor estimate the amount of additional costs we may incur as a result of theserequirements or the timing of such costs.

**ITEM1B.   UNRESOLVED STAFF COMMENTS**

**None.**

**ITEM2.   PROPERTIES**

We operate a network of16 manufacturing, warehousing and office facilities located throughout the EastCoast and Midwest that occupy, in total, about 1,215,500 square feet. Wemaintain approximately 958,000 square feet of production space consisting ofmanufacturing and publication services. We own about 77% of the square footagewe use.  The following table provides an overview of our manufacturing,warehousing and office facilities.

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| **Location**     | ** ** | **Function(s)**                                      | ** ** | **Ownership  Structure** | ** ** | **Total Size  (Sq. Feet)** | ** ** |
|------------------|------------|------------------------------------------------------|------------|--------------------------|------------|--------------------------------------|------------|
| Hunt Valley, MD  |       | Corporate  Headquarters                              |       | Leased                   |       | 6,366                                |       |
| Orford, NH       |       | Publication  Services (Other publications)           |       | Leased                   |       | 6,895                                |       |
| Hanover, PA      |       | Manufacturing  (Short-run journals)                  |       | Owned                    | (1)        | 159,250                              |       |
| Chelsea, MI      |       | Manufacturing  (Other publications)                  |       | Owned                    | (1)        | 160,569                              |       |
| Hanover, NH      |       | Manufacturing  (Other publications)                  |       | Owned                    | (1)        | 147,830                              |       |
| Ashburn, VA      |       | Manufacturing  (Other publications)                  |       | Owned                    | (1)        | 70,159                               |       |
| Lisbon, ME       |       | Manufacturing  (Specialty catalogs)                  |       | Owned                    | (1)        | 276,787                              |       |
| Ann Arbor, MI    |       | Manufacturing  and Distribution (Other publications) |       | Owned                    |       | 124,726                              |       |
| Hanover, PA      |       | Warehousing  (Short-run journals)                    |       | Leased                   |       | 50,000                               |       |
| Williamstown, VT |       | Warehousing  (Short-run journals)                    |       | Leased                   |       | 27,120                               |       |
| Orford, NH       |       | Warehousing  (Other publications)                    |       | Leased                   |       | 4,330                                |       |
| Waterbury, VT    |       | Publication  Services (Other publications)           |       | Leased                   |       | 11,700                               |       |
| Sterling, VA     |       | Warehousing  (Other publications)                    |       | Leased                   |       | 6,304                                |       |
| Lewiston, ME     |       | Warehousing  (Specialty catalogs)                    |       | Leased                   |       | 55,858                               |       |
| Lewiston, ME     |       | Warehousing  (Specialty catalogs)                    |       | Leased                   |       | 97,606                               |       |
| Auburn, ME       |       | Warehousing  (Specialty catalogs)                    |       | Leased                   |       | 10,000                               |       |
|             | ** ** | ** **                                           | ** ** | **Total**                | ** ** | **1,215,500**                        | ** ** |
|                  |            |                                                      |            |                          |            |                                      |            |  |  |  |  |  |

 

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

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

In2006, our Sheridan Books subsidiary completed a 25,290 square foot expansion ofits existing facility in Chelsea, MI to provide additional manufacturingcapacity. We are continuing our efforts to sell the Ann Arbor, Michigan bookfacility. We may consolidate this facility with our Chelsea, Michiganoperation, pending a firm offer from a third party at an acceptable price.

In2006, we sold the former Capital City Press production facility in Berlin,Vermont as a result of the consolidation of the short-run journals business inearly 2006.

In2006, our Dingley Press subsidiary expanded its existing facility by 10,340square feet to provide additional manufacturing capacity.

**ITEM 3.   LEGALPROCEEDINGS**

Wecurrently are involved in various litigation proceedings as a defendant and arefrom time totime involved inroutine litigation. In the opinion of our management, these matters are notexpected to have a material adverse effect on our business, financial conditionor results of operations.

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

There were no matters submitted to a vote ofsecurity holders during the fourth quarter ended December 31, 2006.

**PARTII**

**ITEM5.   MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

We are wholly-owned by TSG Holdings Corp, aprivately owned corporation. There is no public trading market for our equitysecurities or for those of TSG Holdings Corp. As of March 28, 2007, therewere 32 holders of TSG Holdings Corp. common stock.

Our working capital facility contains customaryrestrictions on our ability and the ability of certain of our

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subsidiariesto declare or pay any dividends or repurchase stock. The indenture governingour 101⁄4% Senior Secured Notes due 2011 also contains customary termsrestricting our ability and the ability of certain of our subsidiaries todeclare or payany dividends or repurchase stock. Forfurther information related to the payment of dividends, see the discussioncontained in Part III, Item 12, “Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.”  Information with respect to shares of common stockthat may be issued under our equity compensation plans is set forth in PartIII, Item 12, “Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters.”

**ITEM 6.   SELECTEDFINANCIAL DATA**
| ** **                                  | ** ** | **Successor  Basis**  | ** ** | **Predecessor  Basis (1)** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                                  | ** ** | **Year ended**   | ** ** | **Year ended**        | ** ** | **Year ended** | ** ** | **August 21, 2003** | ** ** | **January 1, 2003** | ** ** | **Year ended** | ** ** |
| ** **                                  | ** ** | **December 31,** | ** ** | **December 31,**      | ** ** | **December 31,** | ** ** | **to December 31,** | ** ** | **to August 20,** | ** ** | **December 31,** | ** ** |
| **(Dollars in thousands)**        | ** ** | **2006**              | ** ** | **2005**                   | ** ** | **2004** | ** ** | **2003** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Statement  of Income Data:**              |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
|                                        |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
| Net sales                                   |       | $                     | 337,540    |                       | $          | 347,959 |   | $ | 287,513 |   | $ | 81,193 |   | $ | 131,904 |   | $ | 208,837 |   |
| Gross profit                                |       | 65,376                |       | 64,456                     |       | 60,782 |   | 18,745 |   | 31,839 |   | 48,997 |   |
| Selling and  administrative expenses        |       | 40,339                |       | 39,594                     |       | 37,404 |   | 12,704 |   | 23,619 |   | 32,244 |   |
| Operating income                            |       | 5,489                 |       | 21,897                     |       | 21,456 |   | 5,415 |   | 8,108 |   | 17,133 |   |
| Net (loss) income                           |       | (8,343                | )          | 1,180                      |       | 2,330 |   | 760 |   | 1,169 |   | 6,624 |   |
|                                        |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data (at end of period):** |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
|                                        |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                   |       | $                     | 7,800      |                       | $          | 7,962 |   | $ | 4,975 |   | $ | 9,918 |   |   |   | $ | 48 |   |
| Property, plant  and equipment, net         |       | 129,666               |       | 119,220                    |       | 115,253 |   | 57,277 |   |   |   | 45,664 |   |
| Total assets                                |       | 291,567               |       | 300,721                    |       | 299,139 |   | 202,488 |   |   |   | 99,955 |   |
| Total debt and  capital leases              |       | 164,915               |       | 164,904                    |       | 164,894 |   | 103,641 |   |   |   | 66,003 |   |
| Mandatorily  redeemable preferred stock     |       | —                |       | —                     |       | — |   | — |   |   |   | 18,192 |   |
| Total  stockholders’ equity (deficit)  |       | 46,688                |       | 54,996                     |       | 54,065 |   | 47,760 |   |   |   | (7,923 | ) |
|                                        |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
| **Other  Financial Data:**                  |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
| ** **                                  |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization              |       | $                     | 18,991     |                       | $          | 17,072 |   | $ | 14,593 |   | $ | 4,168 |   | $ | 4,874 |   | $ | 8,442 |   |
| Capital expenditures                        |       | 26,296                |       | 21,282                     |       | 21,827 |   | 2,915 |   | 5,213 |   | 4,870 |   |

 

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

**ITEM7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

The following discussion should be read inconjunction with, and is qualified in its entirety by reference to, ourhistorical consolidated financial statements and related notes includedelsewhere in this Annual Report on Form 10-K. The discussions in thissection contain forward-looking statements that involve risks anduncertainties. Actual results could differ materially from those discussedbelow. See “Special Note Regarding Forward-Looking Statements” and Part I, Item1A, “Risk Factors” for a discussion of some of the risks that could affect usin the future.

**Introduction**

We are a leading specialty printer offering afull range of printing and value-added support services for the journal,catalog, magazine, book and article reprint markets. We provide a widerange of printing services and value-added support services, such as electronicpublishing support, digital proofing, preflight checking, offshore key strokingand copy editing, online peer review systems, manuscript tracking systems,subscriber database maintenance, mail sortation and distribution, customeraudits and training classes, and back issue fulfillment. We utilize adecentralized management structure, which provides our customers with access tothe resources of a large company, while maintaining the high level of serviceand flexibility of a smaller company.

**Overview**

*Buyoutand acquisition transactions*

On August 21, 2003, TSG Holdings Corp.purchased 100% of the outstanding capital stock of The Sheridan Group, Inc.from its existing stockholders (the “Buyout”) for total cash consideration of$142.0 million less net debt (as defined in the stock purchase agreement),resulting in cash of $79.9 million being paid to the selling stockholders. Theaccounting purchase price was $186.6 million, which was comprised of the $79.9million of cash paid to the selling stockholders, $51.4 million of assumedliabilities and $55.3 million of refinanced debt. We funded the acquisitionprice and

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the related fees and expenses with the proceedsof the sale of $105,000,000 aggregate principal amount of our 101⁄4% SeniorSecured Notes due 2011 (the “2003 Notes”) and equity investments in TSGHoldings Corp. We refer to the Buyout, the sale of the 2003 Notes, the closingof our working capital facility and the equity investments collectively as the “BuyoutTransactions.”

On May 25, 2004, The Sheridan Group, Inc.,through a newly formed subsidiary, purchased substantially all of the assetsand business of The Dingley Press (the “Dingley Acquisition”).  The accounting purchase price was $95.4million, which was comprised of cash paid of $65.5 million, $26.0 million ofassumed liabilities and $3.9 million of financing costs. We funded theacquisition price and the related fees and expenses with the proceeds of thesale of $60,000,000 aggregate principal amount of our 101⁄4% Senior Secured Notesdue 2011 (the “2004 Notes”), available cash and equity investments in TSGHoldings Corp. The 2003 Notes and the 2004 Notes are fully and unconditionallyguaranteed on a joint and several basis by all of our subsidiaries. We refer tothe Dingley Acquisition, the sale of the 2004 Notes, the amendment of ourworking capital facility and the equity investments collectively as the “DingleyTransactions.”

Thisdiscussion and analysis of our results of operations only covers the historical financialcondition and results of operations of The Dingley Press since May 25, 2004,the date of the Dingley Acquisition.

*Facilityshutdown*

Due to trends in theshort-run journal business and the high capital investment necessary tomaintain two manufacturing facilities serving the same market, our Board ofDirectors, on December 15, 2005, approved a restructuring plan toconsolidate all short-run journal printing operations into onesite. During the first quarter of 2006, we consolidated the printing ofshort-run journals at The Sheridan Press in Hanover, Pennsylvania and closedthe Capital City Press facility in Berlin, Vermont. Approximately 200 positionswere eliminated as a result of the closure. Of the 200 employees affected,approximately 45 Publication Services employees are now employed with one ofour subsidiaries, Dartmouth Journal Services.

Werecorded $2.7 million of restructuring costs during 2006, related primarily toguaranteed severance payments of $1.5 million, employee health benefits of $0.7million and other one-time costs of $0.5 million. There were no restructuringliabilities outstanding as of December 31, 2006. We estimate an additional$0.2 million of charges resulting in future cash expenditures will be chargedduring fiscal year 2007 related to the restructuring. Total restructuringcosts, including charges of $0.4 million recorded in 2005, are projected to be$3.3 million. We also recorded non-cash charges of $2.4 million during 2006associated with the accelerated depreciation and amortization of plant andequipment and the Capital City Press trade name, which was disposed of as aresult of the shutdown. During May 2006, excess equipment at Capital CityPress was sold through a public auction for cash proceeds of approximately$0.3 million, resulting in a gain of approximately $0.1 million. OnAugust 31, 2006, the Capital City Press land and building, which had a carryingvalue of approximately $1.6 million, was sold, resulting in a negligiblegain.

In connection withthe shutdown of Capital City Press, we transferred certain tangible assets,primarily production equipment, to our other subsidiaries. We also transferredintangible assets, which consisted of goodwill and customer relationships, toThe Sheridan Press. The tangible and intangible assets were transferred atcarryover, historical cost basis since the transfers took place betweenentities under common control.

**InternalControls**

Since 2004, we have invested significant resources tocomprehensively document and analyze our system of internal controls overfinancial reporting, which included contracting with outside consultants, thehiring of a Manager of Financial Controls to lead the internal audit function,along with the initiation of a Company-wide internal controls improvementproject. The focus of the improvement project, and the steering committeefounded to oversee the project, has been to design, implement and maintain asystem of internal controls, including financial policies and procedures,sufficient to satisfy our reporting obligations as a public company. Throughout2006, we continued to document significant processes and identify areas requiringimprovement, and we are in the process of designing enhanced processes andcontrols to address the concerns identified. We plan to continue theseinitiatives as well as prepare for our first management report on internalcontrol over financial reporting, as required by Section 404 of theSarbanes-Oxley Act of 2002, for the year ending December 31, 2007.

We believe adequate resources and expertise, bothinternal and external, have been put in place to meet the Section 404requirements. Though we have taken efforts to remediate existing controldeficiencies by the end of 2007, there is no guarantee that our efforts willresult in a management assurance, or an attestation by our independentregistered public accounting firm, that the operating effectiveness and designof our internal controls are adequate.

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**Critical Accounting Estimates**

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities at the dates of the financial statements and the reported amountsof revenues and expenses during the reporting periods. Actual results coulddiffer from those estimates, and the differences could be material. We considerthe following accounting policies to be critical policies which involve variousestimation 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 andnotes receivable is to maintain an adequate allowance or reserve for doubtfulaccounts for estimated losses from the inability of our customers to makerequired payments. The process to estimate the collectibility of our tradeaccounts receivable balances consists of two steps. First, we evaluate specificaccounts for which we have information that the customer may have an inabilityto meet its financial obligations (e.g., bankruptcy). In these cases, using ourjudgment based on available facts and circumstances, we record a specificallowance for that customer against the receivable to reflect the amount weexpect to ultimately collect. Second, we then establish an additional reservefor all customers based on a range of percentages applied to aging categories,based on management’s best estimate. If the financial condition of ourcustomers were to deteriorate and result in an impairment of their ability tomake payments, additional allowances may be required.

*Goodwill and Other Long-LivedAssets*

We conduct impairment reviews of long-livedassets and goodwill in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” and SFAS No. 142, “Goodwill andOther Intangible Assets.”

Onan annual basis or as circumstances dictate, we review goodwill and evaluateevents or other developments that may indicate impairment in the carryingamount. As of December 31, 2006, we tested goodwill for impairment using thetwo-step process prescribed in SFAS No. 142. The first step was to screen forpotential impairment, while the second step measured the amount of theimpairment, if any. This assessment indicated that goodwill related to theDingley Acquisition was impaired resulting in a write-down of goodwill totaling$12.8 million which was recorded during the fourth quarter of 2006. We alsoperformed the required impairment tests of goodwill to identify whetherimpairment existed on December 31, 2005. No impairments were noted as a result of thesetests. At December 31, 2006, we had $44.7 million in goodwill. Whilesignificant judgment is required, we believe that our estimates of fair valueare reasonable. However, should our assumptions change in future years, ourfair value models could result in lower fair values for goodwill, which couldmaterially affect the value of goodwill and our results of operations.

We review long-lived assets, consisting primarily ofproperty, plant and equipment and identified intangibles subject toamortization, for impairment, pursuant to SFAS No. 144, by analyzing the futureundiscounted cash flows whenever events or changes in circumstances indicatethat the carrying value may not be recoverable. No impairments were noted as aresult of these tests. While significant judgment is required, we believe thatour estimates of future undiscounted cash flows are reasonable. However, shouldour assumptions change in future years, our fair value models could result inlower fair values of long-lived assets, which could materially affect the valueof long-lived assets and the results of operations.

*Income Taxes*

As part of the process of preparing ourconsolidated financial statements, we are required to estimate income taxes ineach of the jurisdictions in which we operate. In addition to estimating theactual current tax liability, we must assess future tax effects of temporarydifferences between the tax bases of assets and liabilities and amountsreflected on our consolidated balance sheets, and operating loss carryforwards.Such differences result in deferred tax assets and liabilities, which arerecorded in our consolidated balance sheets. We then assess the likelihood thatdeferred tax assets will be recovered from future taxable income, and, to theextent recovery is not considered likely, establish a valuation allowance againstthose assets. The valuation allowance is based on estimates of future taxableincome in jurisdictions in which we operate and the period over which thedeferred tax assets will be recoverable. We use our best judgment indetermining the provision for income taxes, the deferred tax assets andliabilities and any valuation allowance recorded against the net

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deferredtax assets.

To the extent that actual results differ fromour estimates, new information results in changes to estimates or there is amaterial change in the actual tax rates or time periods within which theunderlying temporary differences become taxable or deductible, we may need toestablish an additional valuation allowance, reduce our existing valuationallowance or adjust the effective tax rate, all of which could materiallyimpact our financial position and results of operations.

In addition, as part of the financial statementprocess, we assess the positions taken on our tax returns and establish taxreserves for tax contingencies that in our judgment are probable and estimable.These estimates could change as the tax returns are reviewed by the taxauthorities or as statutes of limitations close on the returns; however, webelieve that we have adequately provided for all such tax contingencies.

*Self-Insurance*

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

**Results of Operations**

Our business includes three reportable segmentscomprised of “Short–run Journals,” “Specialty Catalogs” and “OtherPublications.”  Short–run Journals areprimarily medical, technical, scientific or scholarly journals and relatedreprints with run lengths of less than 5,000 copies. The Specialty Catalogssegment, which is comprised of the assets and operations of The Dingley Pressacquired on May 25, 2004, is focused on catalog merchants that require runlengths between 300,000 and 10,000,000 copies. The Other Publications businesssegment is comprised of three operating segments, which produce specialtymagazines, medium–run journals and short–run books.

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

16

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*Comparison of Years EndedDecember 31, 2006 and December 31, 2005*
| ** **                             | ** ** | **Year ended December 31,** | ** ** | **Increase (decrease)** | ** ** | **Percent of revenue  Year ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(in thousands)**                | ** ** | **2006**                                   | ** ** | **2005**                     | ** ** | **Dollars**                                                              | ** ** | **Percentage** | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Net  sales**                         |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| Short-run  journals                    |       | $                                          | 92,180     |                         | $          | 99,955                                                                   |       | $ | (7,775 | ) | (7.8 | )% | 27.3 | % | 28.7 | % |
| Specialty  catalogs                    |       | 99,060                                     |       | 111,846                      |       | (12,786                                                                  | )          | (11.4 | )% | 29.3 | % | 32.1 | % |
| Other  publications                    |       | 150,497                                    |       | 141,643                      |       | 8,854                                                                    |       | 6.3 | % | 44.6 | % | 40.7 | % |
| Intersegment  sales elimination        |       | (4,197                                     | )          | (5,485                       | )          | 1,288                                                                    |       | 23.5 | % | (1.2 | )% | (1.5 | )% |
| **Total  net sales**                   |       | 337,540                                    |       | 347,959                      |       | (10,419                                                                  | )          | (3.0 | )% | 100.0 | % | 100.0 | % |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Cost of  sales**                     |       | 272,164                                    |       | 283,503                      |       | (11,339                                                                  | )          | (4.0 | )% | 80.6 | % | 81.5 | % |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Gross  profit**                      |       | 65,376                                     |       | 64,456                       |       | 920                                                                      |       | 1.4 | % | 19.4 | % | 18.5 | % |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| Selling and  administrative expenses   |       | 40,339                                     |       | 39,594                       |       | 745                                                                      |       | 1.9 | % | 12.0 | % | 11.3 | % |
| Loss on  disposition of fixed assets   |       | 255                                        |       | 586                          |       | (331                                                                     | )          | (56.5 | )% | 0.1 | % | 0.2 | % |
| Restructuring  costs                   |       | 2,736                                      |       | 429                          |       | 2,307                                                                    |       | 537.8 | % | 0.8 | % | 0.1 | % |
| Amortization of  intangibles           |       | 3,782                                      |       | 1,950                        |       | 1,832                                                                    |       | 93.9 | % | 1.1 | % | 0.6 | % |
| Impairment of  goodwill                |       | 12,775                                     |       | —                       |       | 12,775                                                                   |       | N/A |   | 3.8 | % | — |   |
| **Total  operating expenses**          |       | 59,887                                     |       | 42,559                       |       | 17,328                                                                   |       | 40.7 | % | 17.7 | % | 12.2 | % |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Operating  income**                  |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| Short-run  journals                    |       | 10,910                                     |       | 12,618                       |       | (1,708                                                                   | )          | (13.5 | )% | 11.8 | % | 12.6 | % |
| Specialty  catalogs                    |       | (12,695                                    | )          | 2,599                        |       | (15,294                                                                  | )          | (588.4 | )% | (12.8 | )% | 2.3 | % |
| Other  publications                    |       | 9,566                                      |       | 8,678                        |       | 888                                                                      |       | 10.2 | % | 6.4 | % | 6.1 | % |
| Corporate  expenses                    |       | (2,292                                     | )          | (1,998                       | )          | (294                                                                     | )          | (14.7 | )% | N/A |   | N/A |   |
| **Total  operating income**            |       | 5,489                                      |       | 21,897                       |       | (16,408                                                                  | )          | (74.9 | )% | 1.6 | % | 6.3 | % |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Other  (income) expense**            |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| Interest expense                       |       | 18,818                                     |       | 18,968                       |       | (150                                                                     | )          | (0.8 | )% | 5.6 | % | 5.5 | % |
| Interest income                        |       | (226                                       | )          | (280                         | )          | 54                                                                       |       | 19.3 | % | (0.1 | )% | (0.1 | )% |
| Other, net                             |       | (316                                       | )          | (407                         | )          | 91                                                                       |       | 22.4 | % | (0.1 | )% | (0.1 | )% |
| **Total  other expense**               |       | 18,276                                     |       | 18,281                       |       | (5                                                                       | )          | (0.0 | )% | 5.4 | % | 5.3 | % |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **(Loss)  income before income taxes** |       | (12,787                                    | )          | 3,616                        |       | (16,403                                                                  | )          | (453.6 | )% | (3.8 | )% | 1.0 | % |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Income  tax (benefit) provision**    |       | (4,444                                     | )          | 2,436                        |       | (6,880                                                                   | )          | (282.4 | )% | (1.3 | )% | 0.7 | % |
|                                   |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Net (loss) income**                  |       | $                                          | (8,343     | )                            | $          | 1,180                                                                    |       | $ | (9,523 | ) | (806.8 | )% | (2.5 | )% | 0.3 | % |

 

Net sales were $337.5 million in 2006, a $10.4million or 3.0% decrease compared to net sales of $348.0 million for 2005, dueprimarily to customer attrition. Net sales for the short-run journals segmentfor 2006 decreased by 7.8% due mainly to planned customer attrition as a resultof the shutdown of the Capital City Press facility and the transfer ofpublication services work to Dartmouth Journal Services, which is included inother publications. Net sales for the specialty catalogs segment decreased by11.4% primarily due to customer attrition as well as reductions in run lengthsfor specific customers. Net sales for the other publications segment grew by6.3% primarily due to new work awarded to us in the book and medium-run journalmarkets, as well as the transfer of publication services work as a result ofthe Capital City Press shutdown.

Gross profit for 2006 was$65.4 million, a $0.9 million or 1.4% increase compared to gross profit of$64.5 million for 2005. Gross margin for 2006 increased to 19.4% of net salescompared to 18.5% for 2005. The gross profit and margin increases wereattributable primarily to productivity improvements, lower healthcare costs dueto plan changes and the shutdown of Capital City Press, partially offset by theimpact of decreased sales.

As a result of ourdecision to shut down the operations of Capital City Press and consolidate theproduction of short-run journals at The Sheridan Press, we recordedrestructuring costs of $2.7 million in 2006, a $2.3 million increase comparedto restructuring costs of $0.4 million in 2005. The restructuring costs in 2006related primarily to guaranteed severance payments of $1.5 million, employeehealth benefits of $0.7 million and other one-time costs of $0.5 million. Therestructuring costs in 2005 related primarily to guaranteed severance paymentsof $0.3 million and other one-time costs of $0.1 million.

Amortization expense for 2006 was $3.8 million, a $1.8million increase compared to amortization expense of $2.0 million for 2005. Theincrease in amortization expense in 2006 was due to a $1.9 million chargeassociated with

17

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acceleratedamortization on an intangible asset, the Capital City Press trade name, whichwas disposed of as a result of the shutdown of Capital City Press.

In connection with our annual assessment of goodwill,we concluded that the goodwill related to the Dingley Acquisition was impaired.This resulted in a non-cash impairment charge of $12.8 million during thefourth quarter of 2006. There were no indications of impairment as a result ofour annual goodwill assessment in 2005.

Operating incomeof $5.5 million in 2006 represented a $16.4 million or 74.9% decrease comparedto operating income of $21.9 million in 2005. This decrease was due principallyto the full impairment of the specialty catalogs segment goodwill related tothe Dingley Acquisition and the costs associated with the shutdown of CapitalCity Press, partially offset by the decrease in costs associated with thecompliance requirements of the Sarbanes-Oxley Act of 2002. Operating income of$10.9 million for the short-run journals segment in 2006 was $1.7 million lowerthan the operating income for the same period in 2005 primarily due to theaccelerated amortization of intangible assets recorded in connection with theshutdown of the Capital City Press facility partially offset by the absence in2006 of losses realized on the disposal of equipment of $0.4 million whichoccurred in 2005. The operating loss of $12.7 million for the specialtycatalogs segment in 2006 represented a $15.3 million decline as compared to thesame period last year. The impairment of goodwill, the decrease in net salesand an increase in the allowance for doubtful accounts of $1.1 million relatedto the liquidity concerns for a specific customer were the primary reasons forthe operating income decline. These adverse impacts were partially offsetby productivity improvements, lower healthcare costs due to plan changes, aswell as cost containment of materials and maintenance costs. Operatingincome for the other publications segment increased by $0.9 million in2006.  Increases in net sales due to growth in short-run books andmedium-run journals as well as the impact of the transfer of publicationservices work resulting from the Capital City Press consolidationpartially offset by additional operating costs were the primary reasons for theincrease.

Loss before income taxes for 2006 was $12.8million, a $16.4 million decrease as compared to income before income taxes of$3.6 million for 2005. Loss before income taxes margin for 2006 was negative3.8%, a decrease of 4.8 margin points compared to a 1.0% margin for 2005. Thedecrease in income before income taxes margin for 2006 was mainly the result ofthe full impairment of the specialty catalogs segment goodwill related to theDingley Acquisition, the restructuring costs andaccelerated amortization expense resulting from the shutdown of the CapitalCity Press facility, an increase in the allowance for doubtful accounts for aspecific customer in the specialty catalogs segment partially offset byproductivity improvements, lower healthcare costs due to plan changes and thedecrease in costs associated with the compliance requirements of theSarbanes-Oxley Act of 2002.

Our effective income tax rate in 2006 was 34.8%compared to 67.4% in 2005. The 2006 and 2005 effective tax rates reflect theimpact of apportioning the Company’s taxable income to states with unitary taxfiling requirements and higher tax rates. The 2006 effective tax rate reflectsa lower than expected tax benefit resulting from the impact of taxable income,despite a consolidated loss, incurred in states that do not have unitary taxfiling requirements. The 2005 effective rate reflects a higher than expectedtax expense resulting from the recognition of taxable income in unitary taxstates with higher state rates as well as non-unitary tax filing states.

Net loss for 2006 was $8.3 million, a $9.5 milliondecrease from net income of $1.2 million for 2005. The decrease in net incomefor 2006 was principally due to the full impairment of goodwill related to theDingley Acquisition, the restructuring costs and accelerated amortizationexpense resulting from the shutdown of the Capital City Press facility partiallyoffset by cost containment efforts and the income tax benefit.

18

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*Comparison of Years EndedDecember 31, 2005 and December 31, 2004*
| ** **                                  | ** ** | **Year ended December 31,** | ** ** | **Increase (decrease)** | ** ** | **Percent of revenue  Year ended December 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------------------------|------------|
| **(in thousands)**                     | ** ** | **2005**                                   | ** ** | **2004**                     | ** ** | **Dollars**                                                              | ** ** | **Percentage** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net  sales**                              |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| Short-run  journals                         |       | $                                          | 99,955     |                         | $          | 97,277                                                                   |       | $ | 2,678 |   | 2.8 | % | 28.7 | % | 33.8 | % |
| Specialty  catalogs                         |       | 111,846                                    |       | 64,204                       |       | 47,642                                                                   |       | 74.2 | % | 32.1 | % | 22.3 | % |
| Other  publications                         |       | 141,643                                    |       | 131,172                      |       | 10,471                                                                   |       | 8.0 | % | 40.6 | % | 45.6 | % |
| Intersegment  sales elimination             |       | (5,485                                     | )          | (5,140                       | )          | (345                                                                     | )          | (6.7 | )% | (1.6 | )% | (1.7 | )% |
| **Total  net sales**                        |       | 347,959                                    |       | 287,513                      |       | 60,446                                                                   |       | 21.0 | % | 100.0 | % | 100.0 | % |
|                                        |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Cost of  sales**                          |       | 283,503                                    |       | 226,731                      |       | 56,772                                                                   |       | 25.0 | % | 81.5 | % | 78.9 | % |
|                                        |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Gross  profit**                           |       | 64,456                                     |       | 60,782                       |       | 3,674                                                                    |       | 6.0 | % | 18.5 | % | 21.1 | % |
|                                        |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| Selling and  administrative expenses        |       | 39,594                                     |       | 37,404                       |       | 2,190                                                                    |       | 5.9 | % | 11.4 | % | 13.0 | % |
| Loss (gain) on  disposition of fixed assets |       | 586                                        |       | (172                         | )          | 758                                                                      |       | 440.7 | % | 0.2 | % | 0.0 | % |
| Restructuring  costs                        |       | 429                                        |       | 256                          |       | 173                                                                      |       | 67.6 | % | 0.1 | % | 0.1 | % |
| Amortization of  intangibles                |       | 1,950                                      |       | 1,838                        |       | 112                                                                      |       | 6.1 | % | 0.6 | % | 0.6 | % |
| **Total  operating expenses**               |       | 42,559                                     |       | 39,326                       |       | 3,233                                                                    |       | 8.2 | % | 12.2 | % | 13.7 | % |
|                                        |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Operating  income**                       |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| Short-run  journals                         |       | 12,618                                     |       | 13,344                       |       | (726                                                                     | )          | (5.4 | )% | 12.6 | % | 13.7 | % |
| Specialty  catalogs                         |       | 2,599                                      |       | 3,483                        |       | (884                                                                     | )          | (25.4 | )% | 2.3 | % | 5.4 | % |
| Other  publications                         |       | 8,678                                      |       | 6,885                        |       | 1,793                                                                    |       | 26.0 | % | 6.1 | % | 5.2 | % |
| Corporate  expenses                         |       | (1,998                                     | )          | (2,256                       | )          | 258                                                                      |       | 11.4 | % | N/A |   | N/A |   |
| **Total  operating income**                 |       | 21,897                                     |       | 21,456                       |       | 441                                                                      |       | 2.1 | % | 6.3 | % | 7.4 | % |
|                                        |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Other  (income) expense**                 |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| Interest expense                            |       | 18,968                                     |       | 16,678                       |       | 2,290                                                                    |       | 13.7 | % | 5.5 | % | 5.8 | % |
| Interest income                             |       | (280                                       | )          | (183                         | )          | (97                                                                      | )          | (53.0 | )% | (0.1 | )% | (0.1 | )% |
| Other, net                                  |       | (407                                       | )          | (134                         | )          | (273                                                                     | )          | (203.7 | )% | (0.1 | )% | (0.1 | )% |
| **Total  other expense**                    |       | 18,281                                     |       | 16,361                       |       | 1,920                                                                    |       | 11.7 | % | 5.3 | % | 5.6 | % |
|                                        |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Income  before income taxes**             |       | 3,616                                      |       | 5,095                        |       | (1,479                                                                   | )          | (29.0 | )% | 1.0 | % | 1.8 | % |
|                                        |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Income  tax provision**                   |       | 2,436                                      |       | 2,765                        |       | (329                                                                     | )          | (11.9 | )% | 0.7 | % | 1.0 | % |
|                                        |       |                                       |       |                         |       |                                                                     |       |   |   |   |   |   |   |
| **Net income**                              |       | $                                          | 1,180      |                         | $          | 2,330                                                                    |       | $ | (1,150 | ) | (49.3 | )% | 0.3 | % | 0.8 | % |

 

Net sales were $348.0 million in 2005, a $60.5million or 21.0% increase compared to net sales of $287.5 million for 2004. TheDingley Acquisition, completed in May 2004, added the specialty catalogssegment and accounted for $47.6 million of the sales growth. Significant growthin other publications combined with slightly stronger net sales in short-runjournals accounted for the rest of the increase.

Net sales for the short-run journals segment were$100.0 million in 2005, a $2.7 million or 2.8% increase compared to net salesof $97.3 million for 2004. The increase in net sales for the short-run journalssegment was primarily attributable to higher paper and shipping revenue as wellas new titles that were awarded to us partially offset by declines in revenuerelated to prepress services. Net sales for the specialty catalogs segment were$111.8 million in 2005, a $47.6 million or 74.2% increase compared to net salesof $64.2 million for 2004. The Dingley Acquisition added the specialty catalogssegment of the printing market. This segment has been included in our resultssince the May 2004 acquisition date which primarily accounts for thecomparative sales growth for 2005. Net sales for the other publications segmentfor 2005 were $141.6 million, a $10.4 million or 8.0% increase compared to$131.2 million for 2004. Continued growth in medium-run journals and magazinerevenues accounted for most of the growth in the other publications segment.

Gross profit for 2005 was $64.5 million, a $3.7million or 6.0% increase compared to gross profit of $60.8 million for 2004.Gross margin for 2005 decreased to 18.5% of net sales compared to 21.1% for2004. The gross margin decline for 2005 was attributable primarily to theinclusion of a full year’s gross margin for The Dingley Press as a result ofthe Dingley Acquisition, as the specialty catalogs segment has a lower grossmargin than our other businesses. Increases in paper and shipping expenses,which are primarily pass-through costs for our businesses, as well as pricingpressures also contributed to the gross margin decline in 2005.

Selling and administrative expenses for 2005were $39.6 million, a $2.2 million or 5.9% increase compared to $37.4 millionfor 2004. The increase for 2005 was due mainly to the inclusion of a full yearof selling and administrative

19

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expensesfor The Dingley Press as a result of the Dingley Acquisition.

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

Restructuring expenses related to the shutdownof Capital City Press were $0.4 million in 2005. In December 2005, our Board ofDirectors approved a plan to shut down the operations of Capital City Press andconsolidate the production of short-run journals at The Sheridan Press. Thisdecision resulted from trends in the short-run journals industry and thecapital investment required for maintaining two facilities serving the samemarket. The $0.4 million charge recorded in the fourth quarter of 2005 relatedprimarily to guaranteed severance payments and other one-time costs. Restructuringexpenses related to the closure of the Sheridan Books facility in Fredericksburg,Virginia were $0.3 million in 2004.

Amortization expense for 2005 was $2.0 million,a $0.2 million increase compared to amortization expense of $1.8 million for2004. The increase in amortization expense in 2005 was due to the recognitionof intangible assets associated with the Dingley Acquisition in May 2004.

Operating income for 2005 was $21.9 million, a$0.4 million or 2.1% increase compared to operating income of $21.5 million for2004. Operating margin for 2005 was 6.3%, reflecting a 1.2 margin pointdecrease compared to an operating margin of 7.5% for 2004. Operating marginswere lower in 2005 due primarily to the acquisition of The Dingley Press in May2004, as the specialty catalogs segment has a lower operating margin than ourother businesses. Operating margins were also adversely impacted by higherpaper and freight costs as well as pricing pressure.

Operating income for the short-run journalssegment for 2005 was $12.6 million, a $0.7 million or 5.4% decrease compared tooperating income of $13.3 million for 2004. The decrease in operating incomewas primarily attributable to declines in revenues related to prepressservices, resulting from continued pricing pressure and the loss of business tolower cost offshore suppliers, as well as $0.4 million of restructuring costs associatedwith the decision to shutdown the operations of Capital City Press and consolidate the production ofshort-run journals at The Sheridan Press. Operating margin for the short-runjournals segment was 12.6% for 2005, reflecting a 1.1 margin point decreasecompared to an operating margin of 13.7% for 2004. The decline in prepressservice sales, pricing pressures, increases in paper and shipping costs andrestructuring costs were primarily responsible for the decrease in operatingmargins for 2005. Operating income for the specialty catalogs segment for 2005was $2.6 million, a $0.9 million or 25.4% decrease compared to operating incomeof $3.5 million for 2004. Operating margin for the specialty catalogs segmentwas 2.3% for 2005, reflecting a 3.1 margin point decrease compared to anoperating margin of 5.4% for 2004. Increases in transportation costs andutility rates, coupled with pricing pressures and a full year’s allocation ofcorporate overhead were primarily responsible for the lower operating incomeand operating margins experienced in the specialty catalogs segment for 2005.Increases in paper costs, although a pass-through item to customers, alsoadversely impacted the operating margin for specialty catalogs in 2005.Operating income for the other publications segment for 2005 was $8.7 million,a $1.8 million or 26.0% increase compared to operating income of $6.9 millionfor 2004. Operating margin for the other publications segment was 6.1% for2005, reflecting a 0.9 margin point increase compared to an operating margin of5.2% for 2004. The increased operating income and operating margin in the otherpublications segment were primarily due to manufacturing labor and overheadsavings realized from the closing of the Sheridan Books facility in Fredericksburg,Virginia and the consolidation of the manufacturing operations into ourfacility in Chelsea, Michigan during the third and fourth quarters of 2004.

Interestexpense in 2005 was $19.0 million, a $2.3 million or 13.7% increase compared tointerest expense of $16.7 million for 2004. This increase was primarilyattributable to recording a full year of interest expense for the debtassociated with the Dingley Acquisition for 2005 as compared to a partial yearin 2004 since the Dingley Acquisition was finalized in May 2004.

Other income (including interest income) for2005 was $0.7 million, a $0.4 million increase compared to other income(including interest income) of $0.3 million for 2004. This increase was dueprimarily to increases in the market value of investments held in deferredcompensation funds as well as interest income earned on tax refunds during2005.

Income before income taxes for 2005 was $3.6million, a $1.5 million or 29.0% decrease as compared to income before incometaxes of $5.1 million for 2004. Income before income taxes margin for 2005 of1.0% decreased 0.8 margin points compared to a 1.8% margin for 2004. Thedecrease in income before income taxes margin for 2005 was mainly the result ofhigher interest expense associated with the financing of the DingleyAcquisition in May 2004, poorer operating results in our specialty catalogssegment and the restructuring costs recorded in connection with the shutdown ofCapital City

20

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Presspartially offset by improved profitability in other publications.

Our effective income tax rate in 2005 was 67.4%compared to 54.3% in 2004. The increase was primarily the result of the impactof increased state tax apportionment in states with unitary tax filingrequirements, primarily Maine and New Hampshire, as well as other high taxstates. The decline in pre-tax operating income in 2005 also contributed to thehigher effective income tax rate.

Net income for 2005 was $1.2 million, a $1.1million or 49.3% decrease from net income of $2.3 million for 2004. Thedecrease in net income for 2005 was principally due to higher interest expenseassociated with the financing of the Dingley Acquisition in May 2004, pooreroperating results in our specialty catalogs segment and the restructuring costsrecorded in connection with the shutdown of Capital City Press partially offsetby improved profitability in the other publications segment.

**Liquidity and Capital Resources**

*Operating Activiti*es

Net cash provided by operating activities was $24.3million for 2006, an increase of $0.8 million as compared to $23.5 million for2005. The net cash provided by operating activities for 2006 reflects a net lossof $8.3 million offset by $28.5 million of non-cash charges and favorableworking capital changes of $4.1 million. The non-cash charges consistedprimarily of depreciation, amortization, goodwill impairment and an increase inthe reserve for doubtful accounts partially offset by a deferred taxbenefit.  The working capital changes consistedprimarily of decreases in accounts receivable, due mainly to the decrease insales during 2006 as compared to 2005, and an increase in accrued expenses, duemainly to an increase in the amount of customer-owned paper inventory held byus as of December 31, 2006 as compared to December 31, 2005.

Net cash provided by operating activities was$23.5 million for 2005 compared to $22.7 million for 2004. This $0.8 millionincrease was primarily the result of $2.5 million of additional depreciationand amortization in 2005 as a result of the Dingley Acquisition and reductionsin working capital deployed, partially offset by lower earnings.

We had cash of $7.8 million as ofDecember 31, 2006 compared to $8.0 million as of December 31, 2005.During 2006 and 2005, we utilized cash provided by operating activities to makeinvestments in new equipment and make the semi-annual interest payments on the2003 Notes and the 2004 Notes.

*Investing Activities*

Net cash used in investing activities was $24.5million for 2006 compared to $20.3 million for 2005. This $4.2 million increasewas primarily the result of a $5.0 million increase in plant and equipmentpurchased in the ordinary course of business and the one-time impact ofinsurance proceeds of $0.8 million received in 2005 as a result of a propertydamage claim, partially offset by proceeds from the sale of excess equipmentand the Capital City Press facility in 2006 of $2.0 million.

Net cash used in investing activities was $20.3million for 2005 compared to $85.0 million for 2004. This $64.7 million decreasewas primarily the result of the abscence in 2005 of the $65.5 million of cashpaid related to the Dingley Acquisition offset by $0.8 million of proceedsreceived from our insurer in 2005 as a result of property damage suffered inSeptember 2004 at our manufacturing facility in Ashburn, Virginia.

*Financing**Activities*

Net cash provided by financing activities for2006 was negligible. Net cash used in financing activities for 2005 was $0.2million which primarily resulted from the payment of a cash dividend.

Net cash used in financing activities for 2005was $0.2 million which primarily resulted from the payment of a cash dividend.Net cash provided by financing activities for 2004 totaled $57.3 million andconsisted of $61.2 million of proceeds from the sale of the 2004 Notes less$3.9 million of costs paid in connection with such sale in conjunction with theDingley Acquisition.

Total debt outstanding at December 31, 2006was $164.9 million which was unchanged as compared to $164.9 millionoutstanding at December 31, 2005.

*Indebtedness*

As of December 31, 2006, we had totalindebtedness of $164.9 million comprised entirely of amounts due under the 2003Notes and the 2004 Notes, all with a scheduled maturity of August 2011. Wewill have significant interest payments due on the outstanding notes as well asinterest payments due on any borrowings under our working capital facility,under which there were no amounts outstanding as of December 31, 2006.Total cash interest payments related to our working capital facility and the2003 Notes and the 2004 Notes are expected to be in excess of $16.9 million onan annual basis.

 The termsof our working capital facility are substantially as set forth below. Revolvingadvances are available from the lenders in an aggregate principal amount of upto $30.0 million, subject to a borrowing base test. We are able to repay andre-borrow such advances until the May 2009 maturity date.

Ourworking capital facility and the indenture governing the 2003 Notes and the2004 Notes contain various covenants which limit our discretion in theoperation of our businesses. Additionally, our working capital facilitycontains various restrictive covenants. Among other things, it prohibits usfrom prepaying other indebtedness, including the 2003 Notes and the 2004 Notes,and it requires us to satisfy certain financial tests including an interest coverageratio and requires us to maintain a minimum EBITDA (as defined in andcalculated pursuant to our working capital facility) (such EBITDA

21

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beingreferred to hereinafter as “WCF EBITDA”), both calculated for the periodconsisting of the four preceding consecutive fiscal quarters. WCF EBITDA isdefined in and calculated pursuant to our working capital facility and is usedbelow solely for purposes of calculating our compliance with the covenants inour working capital facility. Failure to satisfy the financial tests in ourworking capital facility would constitute a default under our working capitalfacility. The required interest coverage ratio is 2.00 to 1.00 and the minimumWCF EBITDA requirement (calculated on a rolling twelve months) was $33.0million through the end of the third quarter of 2006 and $36.0 millionthereafter. For the year ended December 31, 2006, our interest coverage ratiowas 2.43 to 1.00 and our WCF EBITDA for purposes of our working capitalfacility was $41.9 million. In addition, our working capital facility restrictsour ability to declare or pay any dividends and prohibits us from making anypayments with respect to the 2003 Notes and the 2004 Notes if we fail toperform our obligations under, or fail to meet the conditions of, our workingcapital facility or if payment creates a default under our working capitalfacility.

WCF EBITDA calculated pursuant to the workingcapital facility is defined as net income (loss) before interest expense,income taxes, depreciation, amortization and other non-cash charges (includingall fees and costs relating to thetransactions contemplated by the working capitalfacility) as defined in the working capital facility. WCF EBITDA calculatedpursuant to the working capital facility is not an indicator of financialperformance or liquidity under generally accepted accounting principles and maynot be comparable to similarly captioned information reported by othercompanies. In addition, it should not be considered as an alternative to, ormore meaningful than, income before income taxes, cash flows from operatingactivities or other traditional indicators of operating performance.

WCF EBITDA is reconciled directly to cash flowfrom operations as follows (in thousands):
| ** **                                                               | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                               | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Net cash  provided by operating activities                               |       | $                     | 24,336     |                  | $          | 23,543                |       | $ | 22,692 |   |
| Accounts receivable                                                      |       | (1,174                | )          | 704                   |       | 1,697                 |       |
| Inventories                                                              |       | 9                     |       | 556                   |       | (6,658                | )          |
| Other current assets                                                     |       | (83                   | )          | 611                   |       | 897                   |       |
| Refundable income taxes                                                  |       | (671                  | )          | (1,935                | )          | 1,293                 |       |
| Other assets                                                             |       | 171                   |       | 846                   |       | 816                   |       |
| Accounts payable                                                         |       | 536                   |       | (3,357                | )          | (1,363                | )          |
| Accrued expenses                                                         |       | (3,214                | )          | (125                  | )          | 2,877                 |       |
| Accrued interest                                                         |       | 1                     |       | 119                   |       | (2,604                | )          |
| Other liabilities                                                        |       | (507                  | )          | (509                  | )          | (543                  | )          |
| Provision for doubtful accounts                                          |       | (1,220                | )          | (53                   | )          | (196                  | )          |
| Provision for inventory realizability and LIFO value                     |       | (106                  | )          | (64                   | )          | (136                  | )          |
| Deferred income tax benefit (expense)                                    |       | 7,235                 |       | 269                   |       | (332                  | )          |
| (Loss) gain on disposition of fixed assets, net                          |       | (254                  | )          | (586                  | )          | 172                   |       |
| Income tax (benefit) provision                                           |       | (4,444                | )          | 2,436                 |       | 2,765                 |       |
| Cash interest expense                                                    |       | 17,215                |       | 17,201                |       | 14,989                |       |
| Management fees                                                          |       | 784                   |       | 827                   |       | 769                   |       |
| Non cash adjustments:                                                    |       |                  |       |                  |       |                  |       |
| Purchase accounting write-up of inventory                                |       | —                |       | —                |       | 257                   |       |
| Adjustments to LIFO value                                                |       | 51                    |       | 30                    |       | 30                    |       |
| Increase in market value of investments                                  |       | 120                   |       | (85                   | )          | (66                   | )          |
| Amortization of prepaid lease costs                                      |       | 83                    |       | 83                    |       | 83                    |       |
| Loss on disposition of fixed assets                                      |       | 317                   |       | 695                   |       | 1,010                 |       |
| Restructuring costs                                                      |       | 2,736                 |       | 429                   |       | 256                   |       |
| Gain on sale of Fredericksburg, VA land and  building, net of exit costs |       | —                |       | —                |       | (776                  | )          |
| The Dingley Press EBITDA from January 1, 2004 through  May 24, 2004 (a)  |       | —                |       | —                |       | 4,327                 |       |
| **Working  Capital Facility EBITDA**                                     |       | $                     | 41,921     |                  | $          | 41,635                |       | $ | 42,256 |   |

 

----

(a)             Forcovenant calculation purposes, WCF EBITDA for The Dingley Press prior to theDingley Acquisition was included 

22

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with our results for the full year.

The indenture governing the 2003 Notes and the2004 Notes also contains various restrictive covenants. It, among other things:(i) limits our ability and the ability of our subsidiaries to incur additionalindebtedness, issue shares of preferred stock, incur liens and enter intocertain transactions with affiliates; (ii) places restrictions on our abilityto pay dividends or make certain other restricted payments; and (iii) placesrestrictions on our ability and the ability of our subsidiaries to merge orconsolidate with any other person or sell, assign, transfer, convey orotherwise dispose of all or substantially all of our assets.

Ourprincipal sources of liquidity are expected to be cash flow generated fromoperations and borrowings under our working capital facility. Our principaluses of cash are expected to be to meet debt service requirements, finance our capital expenditures andprovide working capital. We estimate that our capital expenditures for 2007will total about $15.1 million. Based on our current level of operations, webelieve that our cash flow from operations, available cash and availableborrowings under our working capital facility will be adequate to meet ourfuture short-term and long-term liquidity needs. Our future operatingperformance and ability to extend or refinance our indebtedness will bedependent on future economic conditions and financial, business and otherfactors that may be beyond our control.

**Contractual Obligations**

The following table summarizes our futureminimum non-cancelable contractual obligations as of December 31, 2006:
|                                         | ** ** | **Remaining Payments Due by Period** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                              | ** ** | ** **                                               | ** ** | ** ** | ** ** | **2008 to** | ** ** | **2010 to** | ** ** | **2012 and** | ** ** |
| **(in thousands)**                 | ** ** | **Total**                                                | ** ** | **2007** | ** ** | **2009** | ** ** | **2011** | ** ** | **beyond** | ** ** |
|                                    |       |                                                     |       |   |   |   |   |   |   |   |   |
| Long term debt,  including interest (1) |       | $                                                        | 243,221    |   | $ | 16,913 |   | $ | 33,825 |   | $ | 192,483 |   | $ | — |   |
| Operating leases                        |       | 11,133                                                   |       | 4,922 |   | 5,394 |   | 810 |   | 7 |   |
| Purchase  obligations (2)               |       | 12,480                                                   |       | 11,723 |   | 757 |   | — |   | — |   |
| Other long-term  obligations (3)        |       | 1,164                                                    |       | 247 |   | 451 |   | 302 |   | 164 |   |
| Total                                   |       | $                                                        | 267,998    |   | $ | 33,805 |   | $ | 40,427 |   | $ | 193,595 |   | $ | 171 |   |

 

----

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

(2)             Representspayments due under purchase agreements for consumable raw materials andcommitments for construction projects and equipment acquisitions.

(3)             Representspayments due under non-compete arrangements with our former Chairman of theBoard and the Chairman of The Dingley Press.

**Off-Balance Sheet Arrangements**

At December 31, 2006 and 2005, we did nothave any relationships with unconsolidated entities or financial partnerships,such as entities often referred to as structured finance or special purposeentities, which would have been established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes. We are, therefore, not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

**Effect of Inflation**

Inflation generally affects us by increasing ourcosts of labor, equipment and new materials. We do not believe that inflationhas had any material effect on our results of operations during 2006, 2005 and2004.

**Recently Issued Accounting Pronouncements**

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”),which clarifies the accounting for uncertain tax positions. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN 48 requires that we recognize in the financial statements,the impact of a tax position, if it is more likely than not that the taxposition will be sustained on audit, based on the technical merits of the

23

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position. FIN 48also provides guidance on derecognition, balance sheet classification, interestand penalties, accounting in interim periods and disclosure. FIN 48 will beeffective for us beginning January 1, 2007. We do not believe the adoptionof FIN 48 will have a material effect on our consolidated financial position,results of operations or cash flows.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements. SFAS 157 applies under other accounting pronouncementsthat require or permit fair value measurements, the FASB having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, SFAS 157 does not require any new fairvalue measurements. Under SFAS 157, fair value is established by the price thatwould be received to sell the item or the amount to be paid to transfer theliability (an exit price), as opposed to the price to be paid for the asset orreceived to assume the liability (an entry price).  SFAS 157 is effectivefor all assets valued in financial statements for fiscal years beginning afterNovember 15, 2007. We are currently evaluating whether the adoption of SFAS 157will have a material effect on our consolidated financial position, results ofoperations or cash flows.

In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans - anamendment of FASB Statements No. 87, 88, 106, and 132(R),” (“SFAS 158”). SFAS158 requires an employer to recognize the overfunded or underfunded status of adefined benefit postretirement plan (other than a multiemployer plan) as anasset or liability in its statement of financial position and to recognize changesin that funded status in the year in which the changes occur throughcomprehensive income. SFAS 158 also requires an employer to measure the fundedstatus of a plan as of the date of its year-end statement of financialposition, with limited exceptions. SFAS 158 is effective for fiscal yearsending after June 15, 2007. We do not believe the adoption of SFAS 158 willhave a material effect on our consolidated financial position, results ofoperations or cash flows.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities,” (“SFAS 159”). SFAS 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS 159 also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween entities that choose different measurement attributes for similar typesof assets and liabilities. ).  SFAS 159 is effective for fiscalyears beginning after November 15, 2007. We do not believe the adoption of SFAS159 will have a material effect on our consolidated financial position, resultsof operations or cash flows.

In September 2006, the SEC issued Staff AccountingBulletin No. 108 (“SAB 108”). SAB 108 provides interpretive guidance onthe process of quantifying financial statement misstatements. Theinterpretations in SAB 108 address the diversity in practice in quantifyingfinancial statement misstatements and the potential under current practice forthe build up of improper amounts on the balance sheet. As permitted by SAB 108,the provisions under SAB 108 will be applied in the first annual period endingafter November 15, 2006. The adoption of SAB 108 did not have a material effecton our consolidated financial position, results of operations or cash flows.

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Market risk represents the risk of changes invalue of a financial instrument, derivative or non-derivative, caused byfluctuations in interest rates, foreign exchange rates and equity prices.Changes in these factors could cause fluctuations in results of our operationsand cash flows. In the ordinary course of business, we are exposed to foreigncurrency and interest rate risks. These risks primarily relate to the sale ofproducts and services to foreign customers and changes in interest rates on ourlong-term debt.

**Foreign Exchange Rate Market Risk**

We consider the U.S. dollar to be the functionalcurrency for all of our entities. All of our net salesand our expenses infiscal years 2006, 2005 and 2004 were denominated in U.S. dollars. Therefore,foreign currency fluctuations did not impact our financial results in thoseperiods.

**Interest Rate Market Risk**

Wecould be exposed to changes in interest rates. Our working capital facility isvariable rate debt. Interest rate changes, therefore, generally do not affectthe market value of such debt but do impact the amount of our interest paymentsand, therefore, our future earnings and cash flows, assuming other factors are held constant. We currentlydo not have any borrowings under our working capital facility. During 2006, wedid have borrowings under our working capital facility and we estimate that a1.0% increase in interest rates would have resulted in a negligible amount ofadditional interest expense for the year ended December 31, 2006. All of ourother debt carries fixed interest rates.

24

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**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

**Report of Independent Registered Public Accounting Firm**

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

In our opinion, theaccompanying consolidated balance sheets and the related consolidatedstatements of operations, of changes in the stockholder’s equity and of cashflows present fairly, in all material respects, the financial position of TheSheridan Group, Inc. and Subsidiaries (the “Company”) at December 31, 2006 and2005, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2006 in conformity with accountingprinciples generally accepted in the United States of America.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States).  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

Asdiscussed in Note 3 to the consolidated financial statements, the Companychanged the manner in which it accounts for share-based compensation in 2006.

 
| /s/ PricewaterhouseCoopers  LLP |   |   |
|---------------------------------|--------|--------|
| Baltimore,  Maryland            |
| March 30, 2007                  |

 

25

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**The Sheridan Group, Inc. and SubsidiariesConsolidated Balance SheetsAt December 31, 2006 and 2005**
| ** **                                                                                                           | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                                                                                           | ** ** | **2006**              | ** **  | **2005**              | ** ** |
| **Assets**                                                                                                           | ** ** | ** **            | ** **  | ** **            | ** ** |
| ** **                                                                                                           | ** ** | ** **            | ** **  | ** **            | ** ** |
| Current assets                                                                                                       |       |                  |        |                  |       |
| Cash and cash  equivalents                                                                                           |       | $                     | 7,800,258   |                  | $          | 7,962,406 |   |
| Accounts receivable,  net of allowance for doubtful accounts of $1,951,420 and $956,612,  respectively               |       | 31,150,309            |        | 33,544,025            |       |
| Due from parent  company                                                                                             |       | 226,147               |        | —                |       |
| Inventories, net                                                                                                     |       | 18,957,879            |        | 19,055,266            |       |
| Other current  assets                                                                                                |       | 4,043,345             |        | 4,125,713             |       |
| Refundable  income taxes                                                                                             |       | 437,504               |        | 677,061               |       |
| Deferred income  taxes                                                                                               |       | 1,803,716             |        | 1,167,836             |       |
| Total current  assets                                                                                                |       | 64,419,158            |        | 66,532,307            |       |
|                                                                                                                 |       |                  |        |                  |       |
| Property, plant and  equipment, net                                                                                  |       | 129,665,739           |        | 119,219,511           |       |
| Intangibles, net                                                                                                     |       | 42,985,424            |        | 46,549,163            |       |
| Goodwill                                                                                                             |       | 44,697,800            |        | 56,983,043            |       |
| Deferred financing  costs, net                                                                                       |       | 5,324,014             |        | 6,915,181             |       |
| Other assets                                                                                                         |       | 4,474,484             |        | 4,521,350             |       |
|                                                                                                                 |       |                  |        |                  |       |
| Total assets                                                                                                         |       | $                     | 291,566,619 |                  | $          | 300,720,555 |   |
|                                                                                                                 |       |                  |        |                  |       |
| **Liabilities**                                                                                                      | ** ** | ** **            | ** **  | ** **            | ** ** |
| ** **                                                                                                           | ** ** | ** **            | ** **  | ** **            | ** ** |
| Current liabilities                                                                                                  |       |                  |        |                  |       |
| Accounts payable                                                                                                     |       | $                     | 20,502,823  |                  | $          | 19,401,927 |   |
| Accrued expenses                                                                                                     |       | 27,433,944            |        | 24,220,519            |       |
| Total current  liabilities                                                                                           |       | 47,936,767            |        | 43,622,446            |       |
|                                                                                                                 |       |                  |        |                  |       |
| Notes payable                                                                                                        |       | 164,915,478           |        | 164,903,580           |       |
| Deferred income taxes                                                                                                |       | 27,909,465            |        | 33,740,457            |       |
| Other liabilities                                                                                                    |       | 4,116,999             |        | 3,457,939             |       |
| Total liabilities                                                                                                    |       | 244,878,709           |        | 245,724,422           |       |
|                                                                                                                 |       |                  |        |                  |       |
| Commitments and  contingencies                                                                                       |       |                  |        |                  |       |
|                                                                                                                 |       |                  |        |                  |       |
| **Stockholder’s Equity**                                                                                        | ** ** | ** **            | ** **  | ** **            | ** ** |
| ** **                                                                                                           | ** ** | ** **            | ** **  | ** **            | ** ** |
| Common stock, $0.01 par  value; 100 shares authorized; 1 share issued and outstanding at December 31,  2006 and 2005 |       | —                |        | —                |       |
| Additional paid-in capital                                                                                           |       | 51,010,425            |        | 50,975,800            |       |
| (Accumulated deficit)  retained earnings                                                                             |       | (4,322,515            | )           | 4,020,333             |       |
| Total  stockholder’s equity                                                                                     |       | 46,687,910            |        | 54,996,133            |       |
|                                                                                                                 |       |                  |        |                  |       |
| Total  liabilities and stockholder’s equity                                                                     |       | $                     | 291,566,619 |                  | $          | 300,720,555 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

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**The Sheridan Group, Inc. and SubsidiariesConsolidated Statements of OperationsYears Ended December 31, 2006, 2005 and 2004**
| ** **                                  | ** ** | **Year Ended**   | ** **  | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|---------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **December 31,** | ** **  | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                  | ** ** | **2006**              | ** **  | **2005**              | ** ** | **2004**              | ** ** |
| Net sales                                   |       | $                     | 337,540,314 |                  | $          | 347,958,675           |       | $ | 287,513,124 |   |
| Cost of sales                               |       | 272,164,460           |        | 283,502,625           |       | 226,730,754           |       |
| Gross profit                                |       | 65,375,854            |        | 64,456,050            |       | 60,782,370            |       |
| Selling and  administrative expenses        |       | 40,338,796            |        | 39,594,103            |       | 37,404,454            |       |
| Loss (gain) on  disposition of fixed assets |       | 254,742               |        | 585,617               |       | (172,405              | )          |
| Restructuring  costs                        |       | 2,736,027             |        | 429,231               |       | 256,481               |       |
| Amortization of  intangibles                |       | 3,781,944             |        | 1,950,204             |       | 1,838,073             |       |
| Impairment of  goodwill                     |       | 12,774,931            |        | —                |       | —                |       |
| Total operating expenses                    |       | 59,886,440            |        | 42,559,155            |       | 39,326,603            |       |
| Operating income                            |       | 5,489,414             |        | 21,896,895            |       | 21,455,767            |       |
| Other (income)  expense                     |       |                  |        |                  |       |                  |       |
| Interest expense                            |       | 18,818,043            |        | 18,967,623            |       | 16,678,096            |       |
| Interest income                             |       | (225,759              | )           | (280,254              | )          | (183,296              | )          |
| Other, net                                  |       | (315,874              | )           | (406,853              | )          | (133,516              | )          |
| Total other expense                         |       | 18,276,410            |        | 18,280,516            |       | 16,361,284            |       |
| (Loss) income  before income taxes          |       | (12,786,996           | )           | 3,616,379             |       | 5,094,483             |       |
| Income tax  (benefit) provision             |       | (4,444,148            | )           | 2,436,000             |       | 2,764,851             |       |
| Net (loss) income                           |       | $                     | (8,342,848  | )                     | $          | 1,180,379             |       | $ | 2,329,632 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

27

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**TheSheridan Group, Inc. and SubsidiariesConsolidated Statements of Changes in Stockholder’s EquityYears Ended December 31, 2006, 2005 and 2004**
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | **(Accumulated**       | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Deficit)**           | ** ** | **Total**  | ** ** |
| ** **                                                          | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained**   | ** ** | **Stockholder’s** | ** ** |
| ** **                                                          | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Earnings**           | ** ** | **Equity** | ** ** |
| **Balance  as of December 31, 2003**                                |       | 1                     |       | —      |       | $              | 47,000,000 |                   | $          | 760,213    |       | $ | 47,760,213 |   |
| Capital  contribution from parent company                           |       | —                |       | —      |       | 3,975,000      |       | —                 |       | 3,975,000  |       |
| Net income                                                          |       | —                |       | —      |       | —         |       | 2,329,632              |       | 2,329,632  |       |
| **Balance  as of December 31, 2004**                                |       | 1                     |       | —      |       | 50,975,000     |       | 3,089,845              |       | 54,064,845 |       |
| Cash dividend                                                       |       | —                |       | —      |       | —         |       | (249,891               | )          | (249,891   | )          |
| Capital  contribution from parent company - stock options exercised |       | —                |       | —      |       | 800            |       | —                 |       | 800        |       |
| Net income                                                          |       | —                |       | —      |       | —         |       | 1,180,379              |       | 1,180,379  |       |
| **Balance  as of December 31, 2005**                                |       | 1                     |       | —      |       | $              | 50,975,800 |                   | $          | 4,020,333  |       | $ | 54,996,133 |   |
| Capital contribution  from parent company - stock options exercised |       | —                |       | —      |       | 1,200          |       | —                 |       | 1,200      |       |
| Income tax  benefit from stock options exercised                    |       | —                |       | —      |       | 655            |       | —                 |       | 655        |       |
| Share-based  compensation                                           |       | —                |       | —      |       | 32,770         |       | —                 |       | 32,770     |       |
| Net loss                                                            |       | —                |       | —      |       | —         |       | (8,342,848             | )          | (8,342,848 | )          |
| **Balance as of December 31, 2006**                                 |       | 1                     |       | —      |       | $              | 51,010,425 |                   | $          | (4,322,515 | )          | $ | 46,687,910 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

28

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**The Sheridan Group, Inc. and SubsidiariesConsolidated Statements of Cash FlowsYears Ended December 31, 2006, 2005 and 2004**
| ** **                                                                                    | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                    | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
|                                                                                          |       |                  |       |                  |       |                  |       |
| **Cash  flows provided by operating actvities:**                                              |       |                  |       |                  |       |                  |       |
| Net (loss) income                                                                             |       | $                     | (8,342,848 | )                     | $          | 1,180,379             |       | $ | 2,329,632 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities      |       |                  |       |                  |       |                  |       |
| Depreciation                                                                                  |       | 15,209,022            |       | 15,121,343            |       | 12,755,046            |       |
| Amortization of intangible assets                                                             |       | 3,781,944             |       | 1,950,204             |       | 1,838,073             |       |
| Impairment of goodwill                                                                        |       | 12,774,931            |       | —                |       | —                |       |
| Provision for doubtful accounts                                                               |       | 1,219,661             |       | 53,074                |       | 195,961               |       |
| Provision for inventory realizability and LIFO value                                          |       | 106,228               |       | 63,950                |       | 136,110               |       |
| Share-based compensation                                                                      |       | 32,770                |       | —                |       | —                |       |
| Amortization of deferred financing costs and debt  discount, included in interest expense     |       | 1,603,065             |       | 1,766,857             |       | 1,689,413             |       |
| Deferred income tax (benefit) expense                                                         |       | (7,235,320            | )          | (269,136              | )          | 332,614               |       |
| Loss (gain) on disposition of fixed assets                                                    |       | 254,742               |       | 585,617               |       | (172,405              | )          |
| Changes in operating assets and liabilities, net of  assets acquired and liabilities assumed: |       |                  |       |                  |       |                  |       |
| Accounts receivable                                                                           |       | 1,174,055             |       | (704,029              | )          | (1,697,032            | )          |
| Inventories                                                                                   |       | (8,841                | )          | (556,346              | )          | 6,657,930             |       |
| Other current assets                                                                          |       | 82,368                |       | (610,456              | )          | (896,973              | )          |
| Refundable income taxes                                                                       |       | 670,647               |       | 1,934,664             |       | (1,292,999            | )          |
| Other assets                                                                                  |       | (171,339              | )          | (845,880              | )          | (816,179              | )          |
| Accounts payable                                                                              |       | (535,703              | )          | 3,357,249             |       | 1,363,309             |       |
| Accrued expenses                                                                              |       | 3,214,047             |       | 125,202               |       | (2,877,309            | )          |
| Accrued interest                                                                              |       | (622                  | )          | (118,767              | )          | 2,604,371             |       |
| Other liabilities                                                                             |       | 506,730               |       | 509,253               |       | 542,515               |       |
| Net cash provided by operating activities                                                     |       | 24,335,537            |       | 23,543,178            |       | 22,692,077            |       |
|                                                                                          |       |                  |       |                  |       |                  |       |
| **Cash  flows used in investing activities:**                                                 |       |                  |       |                  |       |                  |       |
| Purchases of property, plant and equipment                                                    |       | (26,295,867           | )          | (21,282,193           | )          | (21,827,456           | )          |
| Proceeds from sale of fixed assets                                                            |       | 2,022,474             |       | 165,926               |       | 2,404,366             |       |
| Proceeds from insurance coverage                                                              |       | —                |       | 809,971               |       | —                |       |
| Acquisition of business, net of cash acquired                                                 |       | —                |       | —                |       | (65,529,531           | )          |
| Advances paid to parent company                                                               |       | (226,147              | )          | —                |       | —                |       |
| Net cash used in investing activities                                                         |       | (24,499,540           | )          | (20,306,296           | )          | (84,952,621           | )          |
|                                                                                          |       |                  |       |                  |       |                  |       |
| **Cash  flows provided by (used in) financing activities:**                                   |       |                  |       |                  |       |                  |       |
| Borrowing of revolving line of credit                                                         |       | 42,341,000            |       | 21,568,000            |       | 9,274,000             |       |
| Repayment of revolving line of credit                                                         |       | (42,341,000           | )          | (21,568,000           | )          | (9,274,000            | )          |
| Payment of deferred financing costs in connection  with issuance of long term debt            |       | —                |       | —                |       | (3,882,593            | )          |
| Proceeds from issuance of long term debt                                                      |       | —                |       | —                |       | 61,200,000            |       |
| Payment of dividend                                                                           |       | —                |       | (249,891              | )          | —                |       |
| Proceeds from capital contribution from parent  company                                       |       | 1,200                 |       | 800                   |       | —                |       |
| Realized income tax benefit from stock options  exercised                                     |       | 655                   |       | —                |       | —                |       |
| Net cash provided by (used in) financing activities                                           |       | 1,855                 |       | (249,091              | )          | 57,317,407            |       |
|                                                                                          |       |                  |       |                  |       |                  |       |
| Net (decrease)  increase in cash and cash equivalents                                         |       | (162,148              | )          | 2,987,791             |       | (4,943,137            | )          |
|                                                                                          |       |                  |       |                  |       |                  |       |
| Cash and cash  equivalents at beginning of period                                             |       | 7,962,406             |       | 4,974,615             |       | 9,917,752             |       |
|                                                                                          |       |                  |       |                  |       |                  |       |
| Cash and cash  equivalents at end of period                                                   |       | $                     | 7,800,258  |                  | $          | 7,962,406             |       | $ | 4,974,615 |   |
|                                                                                          |       |                  |       |                  |       |                  |       |
| **Supplemental  disclosure of cash flow information**                                         |       |                  |       |                  |       |                  |       |
| Cash paid during  the year for                                                                |       |                  |       |                  |       |                  |       |
| Interest                                                                                      |       | $                     | 17,215,599 |                  | $          | 17,319,533            |       | $ | 14,092,645 |   |
| Income taxes, net of refunds                                                                  |       | $                     | 2,062,831  |                  | $          | 738,852               |       | $ | 3,699,852 |   |
|                                                                                          |       |                  |       |                  |       |                  |       |
| Non-cash  investing and financing activities                                                  |       |                  |       |                  |       |                  |       |
| Asset additions in accounts payable                                                           |       | $                     | 2,577,331  |                  | $          | 940,732               |       | $ | 2,420,474 |   |
| Issuance of  stock as purchase consideration                                                  |       | $                     | —     |                  | $          | —                |       | $ | 3,975,000 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

29

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**The Sheridan Group, Inc. and SubsidiariesNotes to Consolidated Financial StatementsYears Ended December 31,2006, 2005 and 2004**

**1. Business Organization**

The Sheridan Group, Inc. (“TSG” or the “Company”) is one of theleading specialty printers in the United States, offering a full range ofprinting and value-added support services for the journal, magazine, book,catalog and article reprint markets. The Company provides a wide range ofprinting services and value-added support services, such as electronic copyediting, composition, digital proofing, subscriber database maintenance,distribution services and electronic publishing support. TSG has eightwholly-owned subsidiaries: The Sheridan Press, Inc. (“TSP”), UnitedLitho, Inc. (“ULI”), Dartmouth Printing Company (“DPC”), Capital CityPress, Inc. (“CCP”), Sheridan Books, Inc. (“SBI”), Dartmouth JournalServices, Inc. (“DJS”), The Dingley Press, Inc. (“TDP”) and TheSheridan Group Holding Company (collectively with TSG, the “Company”).

On August 21, 2003, the Company became awholly-owned subsidiary of TSG Holdings Corp. (“Holdings”), when Holdingspurchased 100% of the outstanding capital stock of TSG from its existingstockholders (the “Sheridan Acquisition.”) The Company funded the acquisitionprice and the related fees and expenses with the proceeds of the sale of $105.0million aggregate principal amount of 101⁄4% Senior Secured Notes due 2011 (the “2003Notes”) and equity investments in Holdings.

Holdings is owned 84.8% by its equity sponsors, Bruckmann, Rosser,Sherrill & Co. LLC (“BRS”) and Jefferies Capital Partners (“JCP”), and15.2% by the management and directors of TSG.

**2. Acquisition**

The Dingley Press, Inc.

On March 5, 2004, the Company entered into an agreement topurchase substantially all of the assets and business of The Dingley Press ofLisbon, Maine (the “Dingley Acquisition”). On May 25, 2004, the Companycompleted a private debt offering of 10.25% senior secured notes (the “2004Notes”) totaling $60.0 million, priced to yield 9.86%, that matureAugust 15, 2011. The 2004 Notes have identical terms to the 2003 Notes.Proceeds from the 2004 Notes of $61.2 million (which included a premium),together with approximately $4.0 million of stock issued by TSG Holdings Corp.,which was contributed to the Company as additional paid-in capital, were usedto fund the Dingley Acquisition and to cover fees and expenses of the 2004Notes offering and the Dingley Acquisition. The total purchase price for theDingley Acquisition was $95.4 million, which consisted of cash paid of $65.5million, liabilities assumed of $26.0 million and financing costs of $3.9million. The results of operations of The Dingley Press have been included inthe Company’s results of operations since the date of the Dingley Acquisition.

The Dingley Acquisition was accounted for as a purchase in accordancewith SFAS No. 141, “Business Combinations,” and the Company accordinglyallocated the purchase price of The Dingley Press based upon the fair value ofnet assets acquired and liabilities assumed. The purchase price of The DingleyPress was based on the projected business growth and future cash flows of The DingleyPress and indicated a value that was in excess of the net book value of thebusiness, resulting in the recognition of various intangible assets (primarilycustomer relationships) and goodwill. The total purchase price was allocated tothe acquired assets and liabilities based on their respective fair values atMay 25, 2004 as follows (in thousands):
| Current assets                        |   | $       | 26,926 |   |
|---------------------------------------|--------|---------|--------|--------|
| Property,  plant & equipment |   | 49,711  |   |
| Intangible  assets                    |   | 3,978   |   |
| Goodwill                              |   | 14,829  |   |
| Total assets acquired                 |   | 95,444  |   |
| Liabilities  assumed                  |   | (26,006 | )      |
| Net assets  acquired                  |   | $       | 69,438 |   |

 

30

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The following unaudited pro forma summary for the year endedDecember 31, 2004 presents the consolidated results of operations as ifthe Dingley Acquisition had occurred as of January 1, 2004. The summaryincludes adjustments for depreciation and amortization of noncurrent assets,income taxes, interest expense on the debt incurred to fund the DingleyAcquisition, management fees and transaction costs which would have beenincurred had the Dingley Acquisition occurred as of the beginning of theperiods presented. These unaudited pro forma results have been prepared forcomparative purposes only and do not purport to be indicative of what wouldhave occurred had the Dingley Acquisition and other transactions occurred as ofthat date or results which may occur in the future.
| ** **                           | ** ** | **(Unaudited)**       | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **December 31,** | ** ** |
| **(Dollars in thousands)** | ** ** | **2004**              | ** ** |
| Revenue                              |       | $                     | 324,453    |   |
| Net income                           |       | $                     | 2,074      |   |

 

**3. Summary of Significant Accounting Policies**

**Principles of Consolidation**

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

**Use of Estimates**

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

**Revenue Recognition**

In accordance with Staff Accounting Bulletin (“SAB”) 104, “RevenueRecognition,” the Company records revenue when realized or realizable andearned when all of the following criteria are met:

·   Persuasiveevidence of an arrangement exists,

·   Deliveryhas occurred or services have been rendered,

·   Theseller’s price to the buyer is fixed and determinable, and

·   Collectibilityis reasonably assured.

As such, substantially all revenue is recognized when a product isshipped and title and risk of loss transfers to the customer. Shipping andhandling fees billed to customers are included in net sales and any cost ofshipping and handling is included in cost of sales.

**Cash and Cash Equivalents**

Cash and cash equivalents include amounts invested in accounts whichare readily convertible to known amounts or have original maturities of threemonths or less when purchased.

**Business and Credit Concentrations**

The Company’s customers are not concentrated in any specific geographicregion, but are concentrated in the journal, magazine, book, specialty catalogand article reprint markets. There were no significant accounts receivablefrom a single customer. The Company establishes an allowance for doubtfulaccounts 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 donot bear interest. The allowance for doubtful accounts is the Company’s bestestimate of probable credit losses in its existing accounts receivable. TheCompany

31

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reviewsthe allowance for doubtful accounts on a regular basis. Past due balances over120 days are reviewed for collectibility and form the basis of the Company’sreserve. When the Company determines that a particular customer poses a creditrisk, a specific reserve is established. Account balances are charged offagainst the allowance when the Company feels it is probable the receivable willnot be recovered. The Company does not have any off-balance sheet creditexposure related to its customers.

A rollforward of the allowance for doubtful accounts is as follows:
|                                 | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                      | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
|                            |       |                  |       |                  |       |                  |       |
| Balance at  beginning of period |       | $                     | 956,612    |                  | $          | 1,136,719             |       | $ | 1,089,139 |   |
| Charged to  expense             |       | 1,219,661             |       | 53,074                |       | 195,961               |       |
| Deductions                      |       | (224,853              | )          | (233,181              | )          | (549,793              | )          |
| Other (a)                       |       | —                |       | —                |       | 401,412               |       |
| Balance at end of  period       |       | $                     | 1,951,420  |                  | $          | 956,612               |       | $ | 1,136,719 |   |

 

----

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

**Inventories**

Inventories are stated at the lower of cost or market with the cost ofTSP’s paper inventory and SBI’s work-in-process inventory determined by thelast-in, first-out (“LIFO”) cost method. The cost of the remaining inventory(approximately 92% of inventories at December 31, 2006 and 2005,respectively) is determined using the first-in, first-out (“FIFO”) method.

**Property and Equipment**

Property, plant and equipment are recorded at cost, except those assetsacquired through acquisitions, in which case they are recorded at fair value.Depreciation is provided using the straight-line method over the estimateduseful lives of the assets, as follows: 3-11 years for machinery and equipment;and 10-40 years for buildings and land improvements. Leasehold improvements areamortized over their estimated useful lives or the term of the underlyinglease, whichever is shorter. Upon disposal of property, plant and equipment,the cost of the asset and the related accumulated depreciation are removed fromthe accounts and any resulting gain or loss is reflected in earnings.

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

The Company reviews long-lived assets for impairment whenever events orchanges in circumstances indicate that the carrying amount of an assetmay not be recoverable pursuant to SFAS No. 144 (“SFAS 144”), “Accountingfor the Impairment or Disposal of Long-Lived Assets.” Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of anasset to future net cash flows expected to be generated by the asset. If suchassets are considered to be impaired, the impairment recognized is measured bythe amount by which the carrying amount of the assets exceeds the fair value ofthe assets. Assets to be disposed of by sale are reported at the lower of thecarrying amount or fair value less costs to sell.

**Income Taxes**

Deferred income taxes are recognized for the tax consequences ofapplying enacted statutory tax rates applicable to future years to differencesbetween the financial statement carrying amounts and the tax bases of existingassets and liabilities. A valuation allowance is recorded against deferred taxassets when it is more likely than not that a deferred tax asset will not berealized.

**Goodwill**

The Company reviews goodwill and indefinite-lived assets at leastannually forimpairment.Separable intangible

32

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assetsthat have finite useful lives are amortized over their useful lives.

Goodwill is tested for impairment at the reporting unit level atadoption and at least annually thereafter, utilizing a two-step methodology.The initial step requires the Company to determine the fair value of eachreporting unit and compare it to the carrying value, including goodwill, ofsuch unit. If the fair value exceeds the carrying value, no impairment loss isrecognized. However, if the carrying value of the reporting unit exceeds itsfair value, the goodwill of this unit may be impaired. The amount, if any,of the impairment is then measured in the second step by comparing the impliedfair value of goodwill to the carrying value of goodwill for each reportingunit. To determine the implied fair value of goodwill, the Company madea hypothetical allocation of the reporting unit’s estimated fair value to thetangible and intangible assets (other than goodwill) of the reporting unit.Based on this methodology, the Company concluded that $12.8 million of thespecialty catalogs segment goodwill was impaired and was required to beexpensed as a non-cash charge to continuing operations during the fourthquarter of 2006.

**Identified Intangible and Other Long-Lived Assets**

Identified intangible assets, which primarily consist of customerrelationships and trade names, were valued at fair value with the assistance ofindependent appraisers, effective with acquisitions. All long-lived assets areamortized over the estimated useful lives. The Company periodically reviewslong-lived assets for impairment using undiscounted future cash flows wheneverevents or changes in circumstances indicate that the carrying valuemay not be recoverable, and does not believe there is any impairment ofintangible assets or other long-lived assets as of December 31, 2006 and2005 pursuant to SFAS 144.

**Deferred Financing Costs**

Deferred financing costs incurred in connection with the 2003 Notes andthe 2004 Notes are being amortized over the term of the related debt using theeffective interest method. Deferred financing costs incurred in connection withestablishing the revolving credit agreement are being amortized over the termof the agreement using the straight-line method. Accumulated amortization as ofDecember 31, 2006 and 2005 was $5,440,381 and $3,849,214, respectively.

**Accounting for Stock Based Compensation**

Our parent company, TSG Holdings Corp. (“Holdings”)established the 2003 Stock-based Incentive Compensation Plan (the “2003 Plan”),pursuant to which Holdings has reserved for issuance 55,500 shares of itsCommon Stock. There is currently no public trading market for the Common Stock.When necessary, the Company determines fair value through internal valuationsbased on historical financial information and/or through a third party serviceprovider. As of December 31, 2006, 150 shares were available for future grants.Stock options are granted at exercise prices not less than the fair marketvalue of the stock at the date of grant. Options generally vest ratably over afive-year period, except those options granted to officers, portions of whichvest ratably over five years, and the remainder of which vest upon theachievement of certain performance targets, the occurrence of certain futureevents, including the sale of the Company or a qualified public offering, orafter eight years from the date of grant, as specified in the 2003 Plan.Options expire ten years from the date of grant. The Company has a policy ofissuing new shares to satisfy share options upon exercise.

Yearended December 31, 2006

In December 2004, the FASB issued SFASNo. 123R, “Share-Based Payment,” (“SFAS 123R”). SFAS 123R requires thatthe cost of equity-based service awards be measured based on the grant-datefair value of the award. The cost will be recognized over the period duringwhich an employee is required to provide service in exchange for the award orthe requisite service period. This statement became effective for the Companyon January 1, 2006. The Company adopted the “Modified ProspectiveApplication” transition method which does not result in restatement ofpreviously issued financial statements upon adoption. Awards that are grantedafter this date will be measured and non-cash compensation expense will berecognized in the consolidated statement of income in accordance with SFAS123R. In addition, non-vested awards that were granted prior to the effectivedate of SFAS 123R also result in recognition of non-cash compensation expenseafter the date of adoption. The Company recognizes stock-based compensationexpense ratably over the vesting periods of options, adjusted for estimatedforfeitures.

For the year ended December 31, 2006, the Companyrecognized non-cash stock-based compensation expense of approximately $32,800(approximately $20,300 net of taxes) which is included in selling andadministrative expenses.

The Company values options using the Black-Scholesoption-pricing model which was developed for use in estimating the fair valueof 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 effectat the time of the grant. The expected term of the options is an output

33

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of theoption-pricing model and estimates the period of time that options are expectedto remain unexercised. The Company uses historical data to estimate the timingand amount of option exercises and forfeitures. The expected volatility iscalculated by averaging the 12-month volatility for five peer group companiesand a small-cap index. The following summarizes the assumptions used forestimating the fair value of stock options granted during the year endedDecember 31, 2006:

| Risk-free interest rate                |   | 4.03%-4.69% |
|----------------------------------------|--------|-------------|
| Average expected  years until exercise |   | 5.0 years   |
| Expected  volatility                   |   | 35%         |
| Weighted-average  expected volatility  |   | 35%         |
| Dividend yield                         |   | 0.0%        |

 

Thefollowing is a summary of option activity for the year December 31, 2006:
|                                                                                        | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**        | ** ** | ** **    | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|--------------|------------|---------------------|------------|---------------|------------|
| ** **                                                                             | ** ** | ** ** | ** ** | ** **   | ** ** | **Average**         | ** ** | ** **    | ** ** |
| ** **                                                                             | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Remaining**       | ** ** | ** **    | ** ** |
| ** **                                                                             | ** ** | **Number** | ** ** | **Average**  | ** ** | **Contractual**     | ** ** | **Aggregate** | ** ** |
| ** **                                                                             | ** ** | **of**     | ** ** | **Exercise** | ** ** | **Term**            | ** ** | **Intrinsic** | ** ** |
| **(in thousands, except per share data and years)** | ** ** | **Shares** | ** ** | **Price**    | ** ** | **(in years)** | ** ** | **Value**     | ** ** |
| Options  outstanding at December 31, 2005                                              |       | 52,400     |       | $            | 10.00      |                |       |          |       |   |
| Granted                                                                                |       | 5,700      |       | 24.75        |       |                |       |          |       |
| Exercised                                                                              |       | (120       | )          | 10.00        |       |                |       |          |       |
| Forfeited                                                                              |       | (2,830     | )          | 10.00        |       |                |       |          |       |
| Options  outstanding at December 31, 2006                                              |       | 55,150     |       | $            | 11.52      |                | 7.4        |          | $          | 729,388 |   |
|                                                                                   |       |       |       |         |       |                |       |          |       |
| Options exercisable at  December 31, 2006                                              |       | 14,950     |       | $            | 10.09      |                | 7.4        |          | $          | 219,185 |   |

 

The following is a summary of non-vested options:
|                                                     | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                                          | ** ** | **Number** | ** ** | **Grant**           | ** ** |
| ** **                                          | ** ** | **of**     | ** ** | **Date**            | ** ** |
| ** **                                          | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Nonvested  options outstanding at December 31, 2005 |       | 42,280     |       | $                   | 2.67       |   |
| Granted                                             |       | 5,700      |       | 9.35                |       |
| Vested                                              |       | (5,190     | )          | 2.44                |       |
| Forfeited                                           |       | (2,590     | )          | 2.45                |       |
| Nonvested options  outstanding at December 31, 2006 |       | 40,200     |       | $                   | 3.32       |   |

 

The total compensation cost related to nonvestedawards not yet recognized as of December 31, 2006 is approximately $126,500 andwill be recognized over a weighted average period of approximately 4.9 years.

During the year ended 2006, 120 options to purchaseHoldings Common Stock were exercised and $1,200 of proceeds were received. Thetotal intrinsic value, the difference between the exercise price and the fairvalue of Holdings Common Stock on the date of exercise, of options exercisedduring the year ended December 31, 2006, was $1,770.

YearEnded December 31, 2005

The Company used the intrinsic value method as definedin Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” to account for stock options issued to employees.Accordingly, no compensation expense was recognized for stock options granted,as the exercise prices of the options were in excess of or equal to the fairvalue of the underlying common stock on the date of the option grants.

The following table reflects pro forma net income hadthe Company elected to adopt the fair value approach of SFAS No. 123, “Accountingfor Stock-Based Compensation”:

34

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|                                             | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                  | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Net income as  reported                     |       | $                     | 1,180,379  |                  | $          | 2,329,632 |   |
| Less:  Stock-based compensation, net of tax |       | 13,615                |       | 12,460                |       |
| Pro forma net  income                       |       | $                     | 1,166,764  |                  | $          | 2,317,172 |   |

 

The estimated fair value of each option on the date ofgrant was calculated using the Black-Scholes option-pricing model. Thefollowing table summarizes the weighted-average of the assumptions used forstock options granted:
|                                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Risk-free  interest rate               |       | 4.38                  | %          | 3.95                  | %          |
| Average expected  years until exercise |       | 5.6 years             |       | 6.5 years             |       |
| Expected  volatility                   |       | 0                     | %          | 0                     | %          |
| Dividend yield                         |       | 0                     | %          | 0                     | %          |
| Weighted average fair  value per share |       | $                     | 2.17       |                  | $          | 2.26 |   |
|                                        |            |                       |            |                       |            |  |  |

 

Plan activity in 2005 was as follows:
|                                                               | ** ** | **Year ended**   | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **December 31,** | ** ** |
| ** **                                                    | ** ** | **2005**              | ** ** |
| Shares under  option at beginning of year                     |       | 55,500                |       |
| Options granted  (weighted average exercise price of $10.00)  |       | 900                   |       |
| Options canceled  (weighted average exercise price of $10.00) |       | (3,920                | )          |
| Options  exercised (exercise price of $10.00)                 |       | (80                   | )          |
| Shares under option at  end of year                           |       | 52,400                |       |

 

At December 31, 2005, the remaining weightedaverage life of the outstanding options was approximately 8 years. All optionsissued since plan inception were granted with an exercise price of $10.00,which equaled the fair market value of Holdings Common Stock on the date ofgrant. At December 31, 2005, 10,120 options were exercisable. During 2005,80 options to purchase Holdings Common Stock were exercised and the $800 ofproceeds received was contributed from Holdings to the Company.

**Fair Value Information**

The Company believes that the carrying amounts of cash and cashequivalents, accounts and notes receivable, accounts payable and accruedexpenses reported in the consolidated balance sheets approximate their fairvalues due to the short maturity of these instruments. The estimated fair valueof the Company’s publicly traded debt, based on quoted market prices, wasapproximately $171.6 million and $169.7 million as of December 31, 2006and 2005, respectively.

**Advertising Costs**

The Company expenses advertising costs as the advertising occurs inaccordance with American Institute of Certified Public Accountants, Statementof Position 93-7, “Reporting on Advertising Costs.” Advertising expense,included in selling and administrative expenses in the consolidated statementsof operations, was approximately $379,000, $469,000 and $491,000, for the yearsended December 31, 2006, 2005 and 2004, respectively.

**New Accounting Standards**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”), which clarifiesthe accounting for uncertain tax positions. FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN 48 requires that the Company recognize in the financial statements, theimpact of a tax position, if it is more likely than not that the tax positionwill be sustained on audit, based on the technical

35

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merits of theposition. FIN 48 also provides guidance on derecognition, balance sheetclassification, interest and penalties, accounting in interim periods anddisclosure. FIN 48 will be effective for the Company beginning January 1,2007. The Company does not believe the adoption of FIN 48 will have a materialeffect on its consolidated financial position, results of operations or cashflows.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles and expands disclosures aboutfair value measurements. SFAS 157 applies under other accounting pronouncementsthat require or permit fair value measurements, the FASB having previouslyconcluded in those accounting pronouncements that fair value is the relevantmeasurement attribute. Accordingly, SFAS 157 does not require any new fairvalue measurements. Under SFAS 157, fair value is established by the price thatwould be received to sell the item or the amount to be paid to transfer theliability (an exit price), as opposed to the price to be paid for the asset orreceived to assume the liability (an entry price).  SFAS 157 is effectivefor all assets valued in financial statements for fiscal years beginning afterNovember 15, 2007. The Company is currently evaluating whether the adoption ofSFAS 157 will have a material effect on its consolidated financial position,results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans - anamendment of FASB Statements No. 87, 88, 106, and 132(R),” (“SFAS 158”). SFAS158 requires an employer to recognize the overfunded or underfunded status of adefined benefit postretirement plan (other than a multiemployer plan) as anasset or liability in its statement of financial position and to recognizechanges in that funded status in the year in which the changes occur throughcomprehensive income. SFAS 158 also requires an employer to measure the fundedstatus of a plan as of the date of its year-end statement of financialposition, with limited exceptions. SFAS 158 is effective for fiscal yearsending after June 15, 2007. The Company does not believe the adoption of SFAS158 will have a material effect on its consolidated financial position, resultsof operations or cash flows.

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities,” (“SFAS 159”). SFAS 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS 159 also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween entities that choose different measurement attributes for similar typesof assets and liabilities.  SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007. The Company does not believe the adoption ofSFAS 159 will have a material effect on its consolidated financial position,results of operations or cash flows.

In September 2006, the SEC issued Staff AccountingBulletin No. 108 (“SAB 108”). SAB 108 provides interpretive guidance onthe process of quantifying financial statement misstatements. Theinterpretations in SAB 108 address the diversity in practice in quantifyingfinancial statement misstatements and the potential under current practice forthe build up of improper amounts on the balance sheet. As permitted by SAB 108,the provisions under SAB 108 will be applied in the first annual period endingafter November 15, 2006. The adoption of SAB 108 did not have a material effecton the Company’s consolidated financial position, results of operations or cashflows.

**4. Inventories**

Inventories consist of the following:
|                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Work-in-process                                   |       | $                     | 8,966,708  |                  | $          | 9,998,419 |   |
| Raw materials  (principally paper)                |       | 10,101,504            |       | 9,116,711             |       |
|                                              |       | 19,068,212            |       | 19,115,130            |       |
| Excess of  current cost over LIFO inventory value |       | (110,333              | )          | (59,864               | )          |
|                                              |       | $                     | 18,957,879 |                  | $          | 19,055,266 |   |

 

The Company maintained a reserve for the realizability of inventory inthe amounts of $90,796 and $95,988 for the years ended December 31, 2006and 2005, respectively, which are included in the amounts in the table aboverelating to work-in-process and raw materials. A rollforward of this inventoryreserve is as follows:

36

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|                                 | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                      | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
|                            |       |                  |       |                  |       |                  |       |
| Balance at beginning of  period |       | $                     | 95,988     |                  | $          | 127,144               |       | $ | 72,608 |   |
| Charged to expense              |       | 55,759                |       | 34,351                |       | 105,845               |       |
| Deductions                      |       | (60,951               | )          | (65,507               | )          | (51,309               | )          |
| Balance at end of period        |       | $                     | 90,796     |                  | $          | 95,988                |       | $ | 127,144 |   |

 

**5. Property, Plant and Equipment**

Property, plant and equipment consist of the following:
|                                     | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                          | ** ** | **2006**              | ** **  | **2005**              | ** ** |
| Land                                |       | $                     | 4,893,202   |                  | $          | 5,235,310 |   |
| Buildings and  improvements         |       | 39,880,509            |        | 39,934,420            |       |
| Machinery and  equipment            |       | 123,875,309           |        | 103,704,298           |       |
|                                |       | 168,649,020           |        | 148,874,028           |       |
| Accumulated  depreciation           |       | (38,983,281           | )           | (29,654,517           | )          |
| Property, plant and  equipment, net |       | $                     | 129,665,739 |                  | $          | 119,219,511 |   |

 

Depreciation and amortization expense for the years endedDecember 31, 2006, 2005 and 2004, was $15,209,022, $15,121,343, and$12,755,046, respectively.

**6. Intangible Assets**

In conjunction with previous acquisitions, the Company acquiredintangible assets relating to customer relationships, trade names andtechnology. The customer relationships, trade names and technology are beingamortized using the straight-line method over their estimated useful lives asdescribed below. Amortization expense for the years ended December 31,2006 and 2005, related to customer relationships, trade name and technologyintangible assets was $3,563,739 and $1,731,999, respectively. Amortizationexpense for the year ended December 31, 2006 included $1,881,962, representingthe write-off of the Capital City Press trade name, which had an original valueof $2,000,000, as a result of the shutdown of the Capital City Press facility.
| ** **             | ** ** | ** **           | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------|------------|----------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | ** **           | ** ** | ** **                      | ** ** | **Accumulated**                 | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Useful Life** | ** ** | **Cost**                        | ** ** | **Amortization**                | ** ** | **Net** | ** ** | **Cost** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Customer relationships |       | 25  years            |       | $                               | 27,800,000 |                            | $          | 3,652,018 |   | $ | 24,147,982 |   | $ | 27,800,000 |   | $ | 2,540,241 |   | $ | 25,259,759 |   |
| Trade names            |       | 40  years            |       | 20,400,000                      |       | 1,706,392                       |       | 18,693,608 |   | 22,400,000 |   | 1,314,430 |   | 21,085,570 |   |
| Technology             |       | 5  years             |       | 300,000                         |       | 156,166                         |       | 143,834 |   | 300,000 |   | 96,166 |   | 203,834 |   |
|                   |       |                 |       | $                               | 48,500,000 |                            | $          | 5,514,576 |   | $ | 42,985,424 |   | $ | 50,500,000 |   | $ | 3,950,837 |   | $ | 46,549,163 |   |

 

The Company estimates annual amortization expense related to theseintangibles as follows:

37

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| Years Ended December 31, | ** ** | **Amortization** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| 2007                                    |       | $                | 1,682,000  |   |
| 2008                                    |       | 1,682,000        |       |
| 2009                                    |       | 1,645,834        |       |
| 2010                                    |       | 1,622,000        |       |
| 2011                                    |       | 1,622,000        |       |
| Thereafter                              |       | 34,731,590       |       |
| Total                                   |       | $                | 42,985,424 |   |

 

**7. Goodwill**

Goodwill, whicharises from the purchase price exceeding the assigned value of the net assetsof an acquired business, represents the value attributable to unidentifiableintangible elements being acquired. Goodwill at December 31, 2006 and 2005 totaled $44.7 million and$57.0 million, respectively. Goodwill resulted from the Sheridan Acquisition asa result of a stock purchase and; therefore, is not deductible for tax purposesand from the Dingley Acquisition as a result of an asset purchase and isdeductible for tax purposes.

As of December 31, 2006, the initial step in the Company’s annualtest for goodwill impairment indicated potential impairment in the specialtycatalogs segment, as a result of declining results at TDP. The Companycompleted the second step by comparing the implied fair value of goodwill tothe carrying value of goodwill for TDP. As a result of the second step, theCompany determined that the carrying value of goodwill at TDP was fullyimpaired. The changes in the carrying amount of goodwill for the years endedDecember 31, 2005 and 2006 are as follows:
| ** **                                                                                      | ** ** | **Short-Run** | ** ** | **Specialty** | ** ** | **Other**        | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                      | ** ** | **Journals**  | ** ** | **Catalogs**  | ** ** | **Publications** | ** ** | **Consolidated** | ** ** |
| **Balance at December 31, 2004**                                                                |       | $             | 24,069,401 |          | $          | 14,333,285       |       | $                | 19,360,621 |   | $ | 57,763,307 |   |
| Realization of  tax goodwill benefit related to the Dingley Acquisition                         |       | —        |       | (780,264      | )          | —           |       | (780,264         | )          |
| **Balance at December 31, 2005**                                                                |       | $             | 24,069,401 |          | $          | 13,553,021       |       | $                | 19,360,621 |   | $ | 56,983,043 |   |
| Realization of  tax goodwill benefit related to the Dingley Acquisition                         |       | —        |       | (778,090      | )          | —           |       | (778,090         | )          |
| Adjustment of  deferred tax liabilities related to assets acquired in the Sheridan  Acquisition |       | 768,448       |       | —        |       | —           |       | 768,448          |       |
| Adjustment of  current tax liabilities related to assets acquired in the Sheridan Acquisition   |       | 347,000       |       | —        |       | —           |       | 347,000          |       |
| Adjustment of  other liabilities related to assets acquired in the Sheridan Acquisition         |       | 152,330       |       | —        |       | —           |       | 152,330          |       |
| Impairment  charge                                                                              |       | —        |       | (12,774,931   | )          | —           |       | (12,774,931      | )          |
| **Balance at December 31, 2006**                                                                |       | $             | 25,337,179 |          | $          | —           |       | $                | 19,360,621 |   | $ | 44,697,800 |   |

 

38

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**8. Other Assets**

Other assets consist of the following:
|                                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Notes and other  receivables, net  |       | $                     | 1,409,750  |                  | $          | 1,172,148 |   |
| Prepaid expenses  and deposits     |       | 2,904,721             |       | 3,327,091             |       |
| Non-compete  agreements, net       |       | 363,875               |       | 582,080               |       |
| Deferred  compensation plan assets |       | 3,750,995             |       | 3,477,251             |       |
| Other                              |       | 88,488                |       | 88,493                |       |
| Total                              |       | 8,517,829             |       | 8,647,063             |       |
| Less: current  portion             |       | 4,043,345             |       | 4,125,713             |       |
| Long-term  portion                 |       | $                     | 4,474,484  |                  | $          | 4,521,350 |   |

 

Notes receivable are presented net of an allowance of $194,820 as ofDecember 31, 2005. There were no notes receivable outstanding as ofDecember 31, 2006. Non-compete agreements are presented net of accumulatedamortization of $1,340,134 and $1,121,929 as of December 31, 2006 and2005, respectively. Amortization expense related to the non-compete agreements(which is included in amortization of intangibles in the consolidatedstatements of income and cash flows) for the years ended December 31,2006, 2005 and 2004, was $218,205, $218,205 and $178,368, respectively.

**9. Notes Payable and Revolving Credit Facility**

In conjunction with the Sheridan Acquisition, on August 21, 2003,the Company completed a private debt offering of 10.25% senior secured notestotaling $105.0 million, priced to yield 10.50%, that mature August 15,2011. The carrying value of the 2003 Notes was $104.0 million and $103.9million as of December 31, 2006 and 2005, respectively.

In conjunction with the Dingley Acquisition, on May 25, 2004, theCompany completed a private debt offering of 10.25% senior secured notestotaling $60.0 million, priced to yield 9.86%, that mature August 15,2011. The carrying value of the 2004 Notes was $60.9 million and $61.0 millionas of December 31, 2006 and 2005, respectively. The 2004 Notes haveidentical terms to the 2003 Notes.

The 2003 Notes and the 2004 Notes are collateralized by securityinterests in substantially all of the assets of the Company and itssubsidiaries, subject to permitted liens. The capital stock, securities andother payment rights of the Company’s subsidiaries will constitute collateralfor the 2003 Notes and the 2004 Notes only to the extent that Rule 3-10and Rule 3-16 of Regulation S-X under the Securities Act do not requireseparate financial statements of a subsidiary to be filed with the SEC. Paymentobligations under the 2003 Notes and the 2004 Notes are guaranteed jointly andseverally, irrevocably and unconditionally, by all of the Company’ssubsidiaries. The Sheridan Group, Inc. (the stand-alone parent company)owns 100% of the outstanding stock of all of its subsidiaries and has nomaterial independent assets or operations. There are no restrictions on theability of The Sheridan Group, Inc. (the stand-alone parent company) toobtain funds by dividend, advance or loan from its subsidiaries.

In connection with the offerings of the 2003 Notes and the 2004 Notes(the “Offerings”), the Company entered into registration rights agreementspursuant to which the Company was required to register the 2003 Notes and the2004 Notes with the SEC. The Company filed Registration Statements onForm S-4 with the SEC in connection with exchange offers of itsoutstanding 2003 Notes and 2004 Notes for like principal amounts of new seniorsecured notes. The Registration Statement covering the 2003 Notes was declaredeffective on October 13, 2004. The Registration Statement covering the2004 Notes was declared effective on October 25, 2004. The new seniorsecured notes are identical in all material respects to the 2003 Notes and the2004 Notes, except that the new senior secured notes do not bear legendsrestricting the transfer thereof.

The terms of the registration rights agreement relating to the 2003Notes required the Company to have had an exchange registration statement forthe 2003 Notes filed with the SEC and declared effective by February 17,2004. Because of additional SEC requirements as a result of the DingleyAcquisition, the Company was not able to satisfy this requirement untilOctober 13, 2004. Consequently, during 2004 the Company paid liquidateddamages with respect to the 2003 Notes totaling approximately $319,000, whichis included in interest expense for the year ended December 31, 2004. The2004Notes did not accrueany liquidated damages since the registration of the 2004 Notes was declaredeffective prior to November 21, 2004.

In an event of default, the holders of at least 25% in aggregateprincipal amount of the 2003 Notes and the 2004 Notes, may declare theprincipal, premium, if any, and accrued and unpaid interest on the 2003 Notesand the 2004 Notes to be due and payable immediately.

39

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Concurrent with the offering of the 2003 Notes, the Company enteredinto a revolving credit agreement (the “Revolver”). The Revolver was amendedconcurrent with the offering of the 2004 Notes. Terms of the Revolver allow forrevolving debt of up to $30.0 million, including letters of credit commitmentsof up to $5.0 million, subject to a borrowing base test. Borrowings under theRevolver bear interest at the bank’s base rate or the LIBOR rate plus a marginof 1.75% at the Company’s option and mature in May 2009. Interest ispayable monthly in arrears. The Company has agreed to pay an annual commitmentfee on the unused portion of the Revolver at a rate of 0.35%. In addition, theCompany has agreed to pay an annual fee of 1.875% on all letters of creditoutstanding. As of December 31, 2006, the Company had no borrowingsoutstanding under the Revolver, had unused amounts available of $26,596,437 andhad $1,895,000 in outstanding letters of credit.

Borrowings under the Revolver are collateralized by the assets of theCompany and its subsidiaries, subject to permitted liens. The Revolver containsvarious covenants including provisions that prohibit the Company from incurringand prepaying other indebtedness and places restrictions on the Company’sability to pay dividends. It also requires the Company to satisfy financialtests, such as an interest coverage ratio and the maintenance of a minimumamount of earnings before interest, taxes depreciation and amortization (asdefined in the Revolver). The Company has complied with all of the restrictivecovenants as of December 31, 2006.

In an event of default, all principal and interest due under theRevolver shall be immediately due and payable.

**10. Accrued Expenses**

Accrued expenses consist of the following:
|                                                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Payroll and  related expenses                               |       | $                     | 4,674,621  |                  | $          | 5,508,232 |   |
| Profit sharing  accrual                                     |       | 2,226,696             |       | 2,219,059             |       |
| Accrued interest                                            |       | 6,375,204             |       | 6,375,826             |       |
| Customer  prepayments                                       |       | 7,182,562             |       | 3,670,677             |       |
| Deferred revenue                                            |       | 1,333,852             |       | 1,515,840             |       |
| Self-insured  health and worker’s compensation accrual |       | 2,728,251             |       | 3,075,622             |       |
| Other                                                       |       | 2,912,758             |       | 1,855,263             |       |
|                                                        |       | $                     | 27,433,944 |                  | $          | 24,220,519 |   |

 

**11. Other Liabilities**

Other liabilities consist of the following:
|                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Non-compete agreements |       | $                     | 785,238    |                  | $          | 971,327 |   |
| Deferred compensation  |       | 3,228,927             |       | 2,394,894             |       |
| Other                  |       | 102,834               |       | 91,718                |       |
| Total                  |       | $                     | 4,116,999  |                  | $          | 3,457,939 |   |

 

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**12. Income Taxes**

The components of the income tax (benefit) provision are as follows:
|              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **   | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| **Current**  |       |                  |       |                  |       |                  |       |
| Federal      |       | $                     | 2,066,843  |                  | $          | 2,151,489             |       | $ | 1,819,044 |   |
| State        |       | 724,329               |       | 553,647               |       | 613,193               |       |
|         |       | 2,791,172             |       | 2,705,136             |       | 2,432,237             |       |
| **Deferred** |       |                  |       |                  |       |                  |       |
| Federal      |       | (6,570,263            | )          | (1,173,117            | )          | (45,795               | )          |
| State        |       | (665,057              | )          | 903,981               |       | 378,409               |       |
|         |       | (7,235,320            | )          | (269,136              | )          | 332,614               |       |
|         |       | $                     | (4,444,148 | )                     | $          | 2,436,000             |       | $ | 2,764,851 |   |

 

Deferred income taxes reflect the net tax effects of the temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.Significant components of the deferred tax assets and liabilities were asfollows:
|                                                                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                             | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **Deferred tax assets**                                                |       |                  |       |                  |       |
| Incentive and vacation  accrual                                        |       | $                     | 1,434,550  |                  | $          | 1,156,191 |   |
| Bad debt reserve                                                       |       | 725,715               |       | 435,811               |       |
| Self insurance accrual                                                 |       | 689,402               |       | 553,939               |       |
| Intangible assets                                                      |       | 645,901               |       | 607,128               |       |
| Amortization of  financing costs                                       |       | 485,979               |       | 425,981               |       |
| Inventory-additional  costs capitalized for tax                        |       | 225,165               |       | 220,918               |       |
| Net operating loss  carryforwards-Federal                              |       | 319,012               |       | 420,791               |       |
| Net operating loss  carryforwards-States                               |       | 868,690               |       | 691,603               |       |
| Fixed asset basis  related to state disallowance of bonus depreciation |       | 148,434               |       | 227,177               |       |
| Goodwill                                                               |       | 4,504,641             |       | —                |       |
| Other                                                                  |       | 59,462                |       | 44,677                |       |
| Valuation allowance                                                    |       | (1,205,168            | )          | (978,482              | )          |
| Total deferred  tax assets                                             |       | 8,901,783             |       | 3,805,734             |       |
| **Deferred tax liabilities**                                           |       |                  |       |                  |       |
| Intangible assets                                                      |       | 16,656,287            |       | 18,273,862            |       |
| Inventory basis  difference                                            |       | 275,729               |       | 277,078               |       |
| Property and equipment                                                 |       | 16,877,091            |       | 16,539,330            |       |
| Land                                                                   |       | 1,048,297             |       | 1,112,861             |       |
| Prepaid insurance                                                      |       | 150,128               |       | 175,224               |       |
| Total deferred  tax liabilities                                        |       | 35,007,532            |       | 36,378,355            |       |
| Net deferred tax  liabilities                                          |       | $                     | 26,105,749 |                  | $          | 32,572,621 |   |

 

41

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|                                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Included in the balance  sheet                           |       |                  |       |                  |       |
| Noncurrent  deferred tax liabilities in excess of assets |       | $                | 27,909,465 |                  | $     | 33,740,457 |   |
| Current deferred  tax assets in excess of liabilities    |       | 1,803,716             |       | 1,167,836             |       |
| Net deferred tax  liability                              |       | $                     | 26,105,749 |                  | $          | 32,572,621 |   |

 

As a result of theimpairment of tax deductible goodwill related to the Dingley Acquisition,deferred tax assets were increased by approximately $4.7 million to record thefuture tax benefit.

In accordance withFAS 109, “Accounting for Income Taxes”, the Company will realize a tax benefitassociated with the amount of tax goodwill in excess of book goodwillassociated with the Dingley Acquisition. The Company will only recognize thebenefit when realized on future tax returns and will apply the benefit first toreduce book goodwill associated with the acquisition to zero, second to reduceto zero other noncurrent intangible assets related to the acquisition, andthird to reduce income tax expense. During 2006 and 2005, the Company realizeda tax benefit of $0.8 million and $0.8 million, respectively, associated withthe realization of tax deductible goodwill in excess of book goodwill. Suchamount has been recorded as a reduction to book goodwill for the years endingDecember 31, 2006 and 2005 (see Note 7). During 2006, deferred taxliabilities were increased by $0.8 million to correct an immaterial error thatexisted as of the Sheridan Acquisition date with a corresponding increase tobook goodwill for the year ending December 31, 2006 (see Note 7.)

The Internal Revenue Code and various state taxing jurisdictions placecertain limitations on the annual amount of NOL carryforwards which can beutilized if certain changes in the Company’s ownership occur. In connectionwith the Company’s 1998 acquisition of CCP, a change in ownership occurred,resulting in a limitation on the utilization of CCP’s preacquistion NOLs.During 2004, the Company elected to adopt an alternative method of determiningthe limitation on the use of the NOLs pursuant to IRS Notice 2003-65, whichresulted in a decrease to the limitation on the use of Federal and certainState NOLs. As a result, the Company received U.S. Federal and State of Vermontincome tax refunds of approximately $1,322,000, generated from additional useof the net operating losses against taxable income in 2000, 2001, and 2002.Thus, management concluded during 2004 that it is more likely than not that theremaining U.S. Federal net operating losses in the table shown below and therelated State net operating losses will be utilized. Accordingly, the relatedvaluation allowance of approximately $1,220,000 was fully reversed in 2004.This reversal of valuation allowance resulted in a reduction to goodwill sincethe valuation allowance had been established through purchase accounting uponthe acquisition of CCP.

At December 31, 2006 and 2005, the Company had U.S. Federal netoperating loss (“NOL”) deduction carryforwards of approximately $938,000 and$1,238,000, respectively, attributable to one of its subsidiaries. Theremaining Federal NOLs as of December 31, 2006 are subject to limitationswhich allow for approximately $299,000 of NOLs to be available for use eachyear. The Company’s Federal NOLs will expire approximately as follows:
| Amount of Regular      | ** ** | **Year of** | ** ** |
|----------------------------------|------------|------------------|------------|
| **Net Operating Loss** | ** ** | **Expiration**   | ** ** |
| 85,000                           |       | 2009             |       |
| 674,000                          |       | 2010             |       |
| 179,000                          |       | 2012             |       |

 

As of December 31, 2006 and 2005, the Company had state NOLs witha tax effected value of approximately $869,000 and $692,000, respectively, invarious jurisdictions, which begin to expire in 2008. Management has determinedthat a valuation allowance is needed for approximately $853,000 and $623,000 asof December 31, 2006 and 2005, respectively, against net operating lossesin State jurisdictions without sufficient prior earnings.

The Company utilized NOLs against Federal and State taxable income,which reduced tax expense for 2006 by approximately $102,000.

The Company has also determined that valuation allowances ofapproximately $352,000 and $355,000 as of December 31, 2006 and 2005,respectively, are needed for a deferred tax asset relating to transaction costsfrom the Sheridan Acquisition which is deductible for tax purposes upon sale ofthe Company. Given the indefinite timing of this reversal, a valuationallowance was established.

42

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The Company has provided for contingencies related to income taxes inaccordance with SFAS No. 5. At December 31, 2006 andDecember 31, 2005, the Company has reserves of approximately $616,000 and$559,000, respectively, related to transaction costs for the SheridanAcquisition. In analyzing the need for the provision of tax contingencyreserves, including interest, management reviewed applicable statutes, rules,regulations and interpretations and established these reserves based on pastexperiences and judgments about potential actions by taxing jurisdictions.

A rollforward of the Company’svaluation allowance is as follows:
|                                 | ** ** | **Year Ended**   | ** ** | **Year Ended**   | ** ** | **Year ended**   | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                      | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
|                            |       |                  |       |                  |       |                  |       |
| Balance at beginning of  period |       | $                     | 978,482    |                  | $          | 669,180               |       | $ | 1,870,660 |   |
|                            |       |                  |       |                  |       |                  |       |
| Charged to expense              |       | 226,686               |       | 309,302               |       | 319,551               |       |
|                            |       |                  |       |                  |       |                  |       |
| Reductions                      |       | —                |       | —                |       | (1,223,505            | )          |
|                            |       |                  |       |                  |       |                  |       |
| Other, net                      |       | —                |       | —                |       | (297,526              | )          |
|                            |       |                  |       |                  |       |                  |       |
| Balance at end of period        |       | $                     | 1,205,168  |                  | $          | 978,482               |       | $ | 669,180 |   |

 

The Company’s income tax provision differs from taxes computed usingthe U.S. Federal statutory tax rate as follows:
| ** **                                                  | ** ** | **Years ended**  | ** **  | **Years ended**  | ** ** | **Years ended**  | ** ** |
|-------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|-----------------------|------------|
| ** **                                                  | ** ** | **December 31,** | ** **  | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                  | ** ** | **2006**              | ** **  | **2005**              | ** ** | **2004**              | ** ** |
|                                                        |       |                  |        |                  |       |                  |       |
| Income before income  taxes                                 |       | $                     | (12,786,996 | )                     | $          | 3,616,379             |       | $ | 5,094,483 |   |
|                                                        |       |                  |        |                  |       |                  |       |
| U.S. Federal statutory  tax rate                            |       | $                     | (4,347,579  | )                     | $          | 1,229,569             |       | $ | 1,732,125 |   |
| Increase (decrease) in  tax expense resulting from          |       |                  |        |                  |       |                  |       |
| Tax reserves                                                |       | 57,039                |        | 31,620                |       | 21,957                |       |
| Non-deductible  meals and entertainment                     |       | 67,485                |        | 79,459                |       | 82,218                |       |
| Change in  valuation allowance                              |       | 226,686               |        | 309,302               |       | 319,551               |       |
| State income  taxes, net of U.S. Federal income tax benefit |       | (137,730              | )           | 168,352               |       | (91,584               | )          |
| Change in state  tax apportionment and rates                |       | (275,872              | )           | 780,198               |       | 554,080               |       |
| Domestic  production activity deduction                     |       | (41,060               | )           | (65,179               | )          | —                |       |
| Other, net                                                  |       | 6,883                 |        | (97,321               | )          | 146,504               |       |
| Income tax provision                                        |       | $                     | (4,444,148  | )                     | $          | 2,436,000             |       | $ | 2,764,851 |   |

 

During 2006, the Company reported a decrease in its deferred State taxprovision of approximately $276,000 to properly reflect the lower anticipatedState effective income tax rates due to decreased apportionment of the Company’staxable income to states with high tax rates. During 2005, the Company reportedan increase in its deferred State tax provision of approximately $780,000 toproperly reflect higher anticipated State effective income taxes due primarilyto increased apportionment of the Company’s taxable income to states with unitaryfiling requirements and other high tax states.

On October 22, 2004, the President of the U.S. signed into law theAmerican Jobs Creation Act of 2004. The Company realized a benefit ofapproximately $41,000 and $65,000 from the deduction associated with domesticproduction activities in 2006 and 2005, respectively. This special deduction is3% of qualifying income for years 2005 and 2006, 6% in years 2007 through 2009and 9% thereafter.

**13. Commitments**

In February 1998, the Company entered into an employment agreementwith its former Chairman of the Board.

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Thisagreement includes a 10 year non-compete arrangement, which expires in 2008.The liability for this agreement is to be paid out in increments increasingfrom $126,000 to $151,200 per year, over 15 years. Included in otherliabilities as of December 31, 2006 is approximately $640,000 related tothe net present value of the obligation under this agreement.

In May 2004, the Company entered into an employment agreement withthe Chairman of The Dingley Press. This agreement includes a 5 year non-competearrangement, which expires in 2009. The liability for this agreement is to bepaid out in increments of $108,000 per year over 5 years. Included in otherliabilities as of December 31, 2006 is approximately $145,000 related tothe net present value of the obligation under the agreement.

The Company leases warehouse, plant and office space, printingequipment, computer equipment and delivery equipment under non-cancelableoperating leases. Rental expense relating to these leases was approximately$5,208,000, $5,441,000 and $4,806,000 for the years ended December 31,2006, 2005 and 2004, respectively. As of December 31, 2006 approximateminimum future rental payments under non-cancelable operating leases are asfollows:
| Years Ended December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2007                                    |       | 4,922,000  |       |
| 2008                                    |       | 3,436,000  |       |
| 2009                                    |       | 1,958,000  |       |
| 2010                                    |       | 579,000    |       |
| 2011                                    |       | 231,000    |       |
| Thereafter                              |       | 7,000      |       |
| Total                                   |       | $          | 11,133,000 |   |
|                                         |            |            |            |  |

 

In exchange for certain pricing arrangements, the Company has enteredinto agreements to purchase consumable raw materials. The Company has alsoentered into agreements to acquire additional plant and equipment. As ofDecember 31, 2006, approximate future payments related to these agreementsare as follows:
|                                             | ** ** | **Raw**       | ** ** | **Plant and** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------------|------------|
| **Years Ended December 31,** | ** ** | **materials** | ** ** | **equipment**      | ** ** |
| 2007                                        |       | $             | 2,856,000  |               | $          | 8,867,000 |   |
| 2008                                        |       | 377,000       |       | 9,000              |       |
| 2009                                        |       | 371,000       |       | —             |       |
| 2010                                        |       | —        |       | —             |       |
| 2011                                        |       | —        |       | —             |       |
| Thereafter                                  |       | —        |       | —             |       |
| Total                                       |       | $             | 3,604,000  |               | $          | 8,876,000 |   |

 

**14. Employee Benefit Plans**

The Company sponsors a 401(k) retirement plan (the “Plan”). The Companydetermines annual discretionary contributions to the Plans. Contributions ofapproximately $3,067,000, $2,886,000 and $2,103,000 were charged to operationsfor the years ended December 31, 2006, 2005 and 2004, respectively.

TheCompany maintains a non-qualified deferred compensation plan for certainemployees which allows participants to annually elect (via individualcontracts) to defer a portion of their compensation on a pre-tax basis andwhich allows for make-whole contributions for participants whose pre-taxdeferrals are limited under the Company’s 401(k) Plan and other discretionarycontributions. Employee and Company contributions are maintained in anirrevocable trust. Legally, the assets remain those of the Company; however,access to the trust assets is severely restricted. The trust cannot be revokedby the employer or an acquirer, but the assets are subject to the claims of theCompany’s general creditors. The employee has no right to assign or transfercontractual rights in the trust. The participants are fully vested in theircompensation deferred; however, the make-whole contributions and any employerdiscretionary contributions are subject to vesting requirements. The Companyaccounts for the plan in accordance with Emerging Issues Task Force (“EITF”)No. 97-14, “Accounting for Deferred Compensation Arrangements WhereAmounts Earned Are Held in a Rabbi Trust and Invested.” Pursuant to EITF 97-14,as of December 31, 2006 and 2005, the Company recorded a deferredcompensation liability of approximately $3,229,000 and $2,395,000,respectively, in other non-current liabilities in the accompanying consolidatedbalance sheets.Thechange in the deferred compensation obligation related to changes in the fairvalue of the vested diversified assets held in trust is recorded in accordancewith SFAS 115 as income (loss) in compensation expense with an offsetting entryto other income (loss), respectively. The diversified assets held in trust wereapproximately $3,751,000 and $3,477,000 as of 

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December 31, 2006 and2005, respectively, and are recorded at their fair value, based on quotedmarket prices, in other non-current assets on the accompanying consolidatedbalance sheets.

During the fourth quarter of2006, the Company recorded an adjustment to the deferred compensation liabilityof approximately $0.6 million to correct an immaterial error in the deferredcompensation liability as of December 31, 2006. Of this amount, approximately$0.4 million was charged to selling and administrative expense andapproximately $0.2 million was recorded as additional goodwill to reflect theliability that existed as of the date of the Sheridan Acquisition.

**15. Related Party Transactions**

In connection with the Sheridan Acquisition, the Company entered into a10 year management agreement with BRS and JCP. The management fee is equal tothe greater of $500,000 or 2% of earnings before interest, taxes depreciationand amortization (as defined in the management agreement), plus reasonableout-of-pocket expenses. The Company incurred and paid approximately $784,000,$827,000 and $769,000 in such fees for the years ended December 31, 2006,2005 and 2004, respectively.

During 2006, the Company advanced $226,147 to its sole shareholder,Holdings, to fund due diligence efforts related to a potential acquisition byHoldings. The Company anticipates that this advance will be repaid during 2007.

J. M. Dryden Hall, Jr., a member of the Company’s board of directors,previously served the Company as legal counsel. Fees paid to Mr. Hall forthe years ended December 31, 2005 and 2004, were approximately $50,000 and$56,000, respectively. Effective January 1, 2006, Mr. Hall no longerserved as legal counsel to the Company.

**16. Contingencies**

The Company is party to legal actions as a result of various claimsarising in the normal course of business. The Company believes that thedisposition of these matters will not have a material adverse effect on thefinancial condition, results of operations or liquidity of the Company.

**17. Business Segments**

The Company is a specialty printer in the United States offering a fullrange of printing and value-added support services for the journal, catalog,magazine, book and article reprint markets. The Company’s businessincludes three business reporting segments comprised of “Short-run Journals”, “SpecialtyCatalogs” and “Other Publications.” Short-run Journals are primarily medical,technical, scientific or scholarly journals and related reprints with runlengths of less than 5,000 copies. The Specialty Catalogs segment, which iscomprised of the assets and operations of The Dingley Press acquired onMay 25, 2004, is focused on catalog merchants that require run lengthsbetween 300,000 and 10,000,000 copies. The Other Publications business segmentis comprised of three operating segments which produce specialty magazines,medium-run journals and short-run books. Certain operations within the Company’sOther Publications segment have been aggregated following the provisions ofSFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” due to the similar characteristics of their financial performanceand operations, including the nature of their service offerings, processessupporting the delivery of the services, customers, and marketing and salesprocesses.

The accounting policies of the operating segments are the same as thosedescribed in the Summary of Significant Accounting Policies. The results ofeach segment include certain allocations for general, administrative and othershared costs. However, certain costs, such as corporate profit sharing andbonuses and the amortization of a non-compete agreement with the Company’sformer Chairman of the Board (Note 13), are not allocated to the segments. TheCompany’s customer base resides in the continental United States and itsmanufacturing, warehouse and office facilities are located throughout the EastCoast and Midwest.

The Company had one customer which accounted for 12.0% and 13.6 % ofconsolidated net sales for the years ended December 31, 2006 and 2005,respectively. Net sales for this customer are reported in the SpecialtyCatalogs segment. The Company had another customer which accounted for 10.3% ofconsolidated net sales for the year ended December 31, 2006. Net sales forthis customer are reported in both the Short-run Journals and OtherPublications segments.

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

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|                                   | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                        | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| **Net sales**                     |       |                  |       |                  |       |                  |       |
| Short-run journals                |       | $                     | 92,180     |                  | $          | 99,955                |       | $ | 97,277 |   |
| Specialty catalogs                |       | 99,060                |       | 111,846               |       | 64,204                |       |
| Other publications                |       | 150,497               |       | 141,643               |       | 131,172               |       |
| Intersegment  eliminations        |       | (4,197                | )          | (5,485                | )          | (5,140                | )          |
| Consolidated  total               |       | $                     | 337,540    |                  | $          | 347,959               |       | $ | 287,513 |   |
|                              |       |                  |       |                  |       |                  |       |
| **Operating income (loss)**       |       |                  |       |                  |       |                  |       |
| Short-run journals                |       | $                     | 10,910     |                  | $          | 12,618                |       | $ | 13,344 |   |
| Specialty catalogs                |       | (12,695               | )          | 2,599                 |       | 3,483                 |       |
| Other publications                |       | 9,566                 |       | 8,678                 |       | 6,885                 |       |
| Corporate                         |       | (2,292                | )          | (1,998                | )          | (2,256                | )          |
| Consolidated  total               |       | $                     | 5,489      |                  | $          | 21,897                |       | $ | 21,456 |   |
|                              |       |                  |       |                  |       |                  |       |
| **Assets**                        |       |                  |       |                  |       |                  |       |
| Short-run journals                |       | $                     | 102,140    |                  | $          | 98,535                |       | $ | 94,442 |   |
| Specialty catalogs                |       | 69,335                |       | 85,633                |       | 88,147                |       |
| Other publications                |       | 118,911               |       | 113,722               |       | 112,348               |       |
| Corporate                         |       | 1,181                 |       | 2,831                 |       | 4,202                 |       |
| Consolidated  total               |       | $                     | 291,567    |                  | $          | 300,721               |       | $ | 299,139 |   |
|                              |       |                  |       |                  |       |                  |       |
| **Depreciation and amortization** |       |                  |       |                  |       |                  |       |
| Short-run journals                |       | $                     | 6,182      |                  | $          | 4,796                 |       | $ | 4,604 |   |
| Specialty catalogs                |       | 5,777                 |       | 5,785                 |       | 3,424                 |       |
| Other publications                |       | 6,803                 |       | 6,281                 |       | 6,399                 |       |
| Corporate                         |       | 229                   |       | 210                   |       | 166                   |       |
| Consolidated  total               |       | $                     | 18,991     |                  | $          | 17,072                |       | $ | 14,593 |   |
|                              |       |                  |       |                  |       |                  |       |
| **Capital expenditures**          |       |                  |       |                  |       |                  |       |
| Short-run journals                |       | $                     | 6,304      |                  | $          | 8,992                 |       | $ | 4,583 |   |
| Specialty catalogs                |       | 3,959                 |       | 3,552                 |       | 5,815                 |       |
| Other publications                |       | 16,008                |       | 8,522                 |       | 11,122                |       |
| Corporate                         |       | 25                    |       | 216                   |       | 307                   |       |
| Consolidated  total               |       | $                     | 26,296     |                  | $          | 21,282                |       | $ | 21,827 |   |
|                              |       |                  |       |                  |       |                  |       |
| **Goodwill**                      |       |                  |       |                  |       |                  |       |
| Short-run journals                |       | $                     | 25,337     |                  | $          | 24,069                |       | $ | 24,069 |   |
| Specialty catalogs                |       | —                |       | 13,553                |       | 14,333                |       |
| Other publications                |       | 19,361                |       | 19,361                |       | 19,361                |       |
| Consolidated  total               |       | $                     | 44,698     |                  | $          | 56,983                |       | $ | 57,763 |   |
|                              |       |                  |       |                  |       |                  |       |
| **Intangible assets**             |       |                  |       |                  |       |                  |       |
| Short-run journals                |       | $                     | 23,720     |                  | $          | 26,507                |       | $ | 27,463 |   |
| Specialty catalogs                |       | 3,026                 |       | 3,208                 |       | 3,390                 |       |
| Other publications                |       | 16,239                |       | 16,834                |       | 17,428                |       |
| Consolidated total                |       | $                     | 42,985     |                  | $          | 46,549                |       | $ | 48,281 |   |

 

**18.Restructuring and Other Exit Costs**

Due to trends inthe short-run journal business and the high capital investment necessary tomaintain two manufacturing facilities serving the same market, the Company’sBoard of Directors, on December 15, 2005, approved a restructuring plan toconsolidate all short-run journal printing operations into onesite. During the first quarter of 2006, the 

46

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Company consolidated theprinting of short-run journals at The Sheridan Press in Hanover, Pennsylvaniaand closed the Capital City Press facility in Berlin, Vermont. Approximately200 positions were eliminated as a result of the closure. Of the 200employees affected, approximately 45 Publication Services employees wereoffered jobs with one of the Company’s subsidiaries, Dartmouth JournalServices.

TheCompany recorded $2.7 million of restructuring costs during 2006, relatedprimarily to guaranteed severance payments of $1.5 million, employee healthbenefits of $0.7 million and other one-time costs of $0.5 million. There wereno restructuring liabilities outstanding as of December 31, 2006. TheCompany estimates an additional $0.2 million of charges resulting in futurecash expenditures will be charged during fiscal year 2007 related to therestructuring. Total restructuring costs, including charges of $0.4 millionrecorded in 2005, are projected to be $3.3 million. The Company also recordednon-cash charges of $2.4 million during 2006 associated with the accelerateddepreciation and amortization of plant and equipment and the Capital City Presstrade name, which was disposed of as a result of the shutdown. During May2006, excess equipment at Capital City Press was sold through a public auctionfor cash proceeds of approximately $0.3 million, resulting in a gain ofapproximately $0.1 million. On August 31, 2006, the Capital City Pressland and building, which had a carrying value of approximately$1.6 million, was sold, resulting in a negligible gain.

In connection with the shutdown of Capital City Press, the Companytransferred certain tangible assets, primarily production equipment, to ourother subsidiaries. The Company also transferred intangible assets, whichconsisted of goodwill and customer relationships, to The Sheridan Press. Thetangible and intangible assets were transferred at carryover, historical costbasis since the transfers took place between entities under common control.

On August 31,2005 the Company announced plans to reduce the scope of its PublicationsServices operation at Capital City Press and eliminate approximately 35positions involved with composition and graphics work and also lay off about 10printing operations employees due to a reduced volume of printing work. Inconnection with these layoffs, the Company recorded approximately $74,000 ofrestructuring costs in 2005, primarily related to severance payments. TheCompany also incurred a charge of approximately $70,000, included in cost ofsales, in 2005 related to the write-off of equipment.

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

The Fredericksburgfacility and excess equipment were sold during 2004. The sale of the land andbuilding, which had a carrying value of approximately $952,000, resulted in again of approximately $919,000.  In connectionwith the sale of the land and building, the Company incurred approximately$143,000 of costs related to vacating the facility.  The sale and disposal of the excessequipment, which had a carrying value of approximately $484,000, resulted in aloss of approximately $435,000.

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

Quarterlyfinancial information for the years ended December 31, 2006 and 2005 is asfollows (in thousands):
|                         | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **2006**                | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Net sales               |       | $           | 86,150     |        | $          | 80,751      |       | $           | 84,241     |   | $ | 86,398 |   |
| Gross profit            |       | 14,148      |       | 16,351      |       | 17,765      |       | 17,112      |       |
| Operating (loss) income |       | (380        | )          | 5,612       |       | 7,423       |       | (7,166      | )          |
| Net (loss) income       |       | $           | (2,555     | )           | $          | 525         |       | $           | 1,607      |   | $ | (7,920 | ) |

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

 

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The results forthe first quarter of 2006 reflect the impact of the restructuring charges inconnection with the shutdown of CCP (see Note 18.)  The results for the fourth quarter of 2006reflect the impact of the full impairment of goodwill at TDP (see Note 7.)

**ITEM 9.****                 CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

Not applicable.

**ITEM 9A.   CONTROLS AND PROCEDURES**

 

As of the end ofthe period covered by this Annual Report on Form 10-K, we conducted anevaluation, under the supervision and with the participation of the principalexecutive officer (“CEO”) and principal financial officer (“CFO”), of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934 (the “Exchange Act”)). Based on thisevaluation, the CEO and CFO concluded that our disclosure controls andprocedures are effective to provide reasonable assurance that informationrequired to be disclosed by us in reports we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in SEC rules and forms. There was no change in our internal controlover financial reporting during our most recently completed fiscal quarter thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

**ITEM 9B.   OTHER INFORMATION**

 

Not applicable.

**PART III**

**ITEM10.****  DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

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

**OurEquity Sponsors**

Bruckmann, Rosser,Sherrill & Co., LLC, or BRS, is a New York-based private equityinvestment firm with about $1.2 billion under management. BRS was founded in1995 and has since invested in approximately 40 companies in the followingindustries: restaurants, consumer goods, specialty retail, recreation/leisure,apparel, home furnishings, industrial and commercial services (includingequipment rental), commercial equipment manufacturing, wholesale distributionand healthcare services. BRS and its affiliates are collectively referred to as“BRS.”

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

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**Directorsand Executive Officers**

Our executiveofficers and directors are as follows:
| **Name**                    | ** ** | **Age** | ** ** | **Position**                                                                                                                              |
|-----------------------------|------------|---------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|
| John A. Saxton              |       | 57      |       | President and Chief Executive Officer and Director                                                                                        |
| Robert M. Jakobe            |       | 53      |       | Executive Vice President and Chief Financial Officer  and Secretary                                                                       |
| Douglas R. Ehmann           |       | 50      |       | Vice President and Chief Technology Officer                                                                                               |
| Dale A. Tepp                |       | 50      |       | Vice President—Human Resources                                                                                                       |
| Joan B. Davidson            |       | 45      |       | Group President—Sheridan Publication Services                                                                                        |
| Patricia A. Stricker        |       | 42      |       | President and Chief Operating Officer—The Sheridan  Press, Inc. (“TSP”)                                               |
| Gary J. Kittredge           |       | 56      |       | President and Chief Operating Officer—Dartmouth  Printing Company (“DPC”) and Dartmouth Journal Services (“DJS”) |
| Robert M. Moore             |       | 41      |       | President and Chief Operating Officer—The Dingley Press, Inc.  (“TDP”)                                                |
| Michael J. Seagram          |       | 50      |       | President and Chief Operating Officer—Sheridan  Books, Inc. (“SBI”)                                                   |
| J. Kenneth Garner           |       | 53      |       | President and Chief Operating Officer—United  Litho, Inc. (“ULI”)                                                     |
| G. Paul Bozuwa              |       | 46      |       | Vice President—Global Business Development                                                                                           |
| Christopher A. Pierce       |       | 58      |       | Chairman—The Dingley Press, Inc. (“TDP”)                                                                              |
| Thomas J. Baldwin           |       | 48      |       | Director                                                                                                                                  |
| Nicholas Daraviras          |       | 33      |       | Director                                                                                                                                  |
| Craig H. Deery              |       | 59      |       | Director                                                                                                                                  |
| Gary T. DiCamillo           |       | 56      |       | Director                                                                                                                                  |
| J. Rice Edmonds             |       | 36      |       | Director                                                                                                                                  |
| J. M. Dryden Hall, Jr. |       | 73      |       | Director                                                                                                                                  |
| James L. Luikart            |       | 61      |       | Director                                                                                                                                  |
| Nicholas R. Sheppard        |       | 32      |       | Director                                                                                                                                  |
| George A. Whaling           |       | 70      |       | Director                                                                                                                                  |

 

The table aboveprovides a current list of our executive officers and their respective currentpositions. Effective January 1, 2007, the following organizational changes wereimplemented.  Mr. Jakobe became ExecutiveVice President and Chief Financial Officer and Secretary of TSG, Ms. Strickerbecame President and Chief Operating Officer of TSP, Ms. Davidson became GroupPresident, Sheridan Publication Services, and Mr. Bozuwa became Vice President,Global Business Development.  The newtitles are used in the following biographies.

***John A. Saxton, President, Chief Executive Officer andDirector****.*Mr. Saxtonjoined us in 1995 as our President and Chief Executive Officer and has servedon our board of directors since 1991. Prior to joining us, Mr. Saxton heldvarious positions at The Procter & Gamble Company, most recentlyserving as President of the Noxell Corporation following its acquisition by TheProcter & Gamble Company in 1990. Mr. Saxton is a member of theNational Association for Printing Leadership’s Walter E. Soderstrom Society,which honors individuals in the printing industry who have significantlycontributed to the development and the progress of the graphic arts.Mr. Saxton holds a B.S. from Bucknell University.

***Robert M. Jakobe, Executive Vice President and ChiefFinancial Officer and Secretary****.* Mr. Jakobe joined us in 1994 and effectiveJanuary 1, 2007, Mr. Jakobe began serving as Executive Vice President and ChiefFinancial Officer and Secretary of TSG. Mr. Jakobe served as our Vice Presidentand Chief Financial Officer through 2006. Prior to joining us, he worked atvarious positions within The Procter & Gamble Company, most recentlyserving as Division Comptroller and Vice President of Finance for the NoxellCorporation. Mr. Jakobe holds a B.A. from the University of Notre Dame.

***Douglas R. Ehmann, Vice President and Chief TechnologyOfficer****.*Mr. Ehmannjoined us in 1998 as our Vice President and Chief Technology Officer. Prior tojoining us, he worked at Northrop Grumman Corporation as a Sector ChiefInformation Officer for Information Systems from 1995 to 1998 and in theManagement Systems Division at the Procter & Gamble Company from 1981to 1995. Mr. Ehmann serves on the Executive Committee of the PrintIndustries Market Information and Research (PRIMIR) organization. He holds aB.S., an M.E. and an M.B.A. from Cornell University.

***Dale A. Tepp, Vice President—Human Resources****.*Ms. Tepp joined us in September 2006 asVice President, Human Resources.  Priorto joining us, she worked in various Human Resources positions with GreatNorthern Nekoosa Corporation, Georgia-Pacific Corporation, Color-Box andCenveo, most recently serving as Executive Director of Human Resources.  She holds a B.S. degree from the Universityof Wisconsin.

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***Joan B. Davidson, Group President—Sheridan PublicationServices****.*  Ms. Davidson joined us in 1995, andeffective January 1, 2007, began serving as Group President, SheridanPublication Services. Ms. Davidson served as President and Chief OperatingOfficer of TSP from 1996 through 2006. From 1995 to 1996, she served as FinanceManager of TSP. Prior to joining us; Ms. Davidson worked in various positionsin the marketing and finance departments of The Procter & GambleCompany, most recently serving as a Finance Manager. Ms. Davidson isactive in the industry as Chairman of the National Association for PrintingLeadership and as past Secretary and past Treasurer of the Print and GraphicScholarship Foundation of the Graphic Arts. She is a member of the NationalAssociation for Printing Leadership’s Walter E. Soderstrom Society.Ms. Davidson holds a B.S. from the College of Notre Dame of Maryland andan M.B.A. from Loyola College in Maryland.

***Patricia A. Stricker, President and Chief OperatingOfficer—TSP****.*Ms. Strickerjoined us in 1998 and effective January 1, 2007, began serving as President andChief Operating Officer of TSP.  Ms.Stricker served as Vice President, Operations and Human Resources for TSG fromJanuary 2003 through 2006. From 2000 to 2003, she served as President ofSBI. Ms. Stricker served as our Vice President, Corporate Development from1999 to 2000, and as our Projects Manager from 1998 to 1999. Prior to joiningus, Ms. Stricker held various positions at General Physics Corporation,most recently serving as Vice President, Finance and Administration. She holdsa B.A. from the College of Notre Dame of Maryland.

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

***Gary J. Kittredge, President and Chief Operating Officer—DPCand DJS****. *Mr. Kittredge joined us in2000, and effective April 1, 2006 began serving as President and ChiefOperating Officer of DPC and DJS. From 2002 to 2006, he served as President andChief Operating Officer of CCP. From 2000 to 2002, he served as Executive VicePresident of CCP. Prior to joining us, Mr. Kittredge was the General Managerand Vice President of Manufacturing for IPD Printing. Prior to that, he servedas a Business Unit Manager and Manager of Technical Development of Litho-KromeCo., a subsidiary of Hallmark Cards, Incorporated. Mr. Kittredge is amember of the Board of Directors of the Printing Industry of New England. Heholds a B.S. and an M.S. from Rochester Institute of Technology.

***Robert M. Moore, President and Chief Operating Officer—TDP****.*****Mr. Moorejoined us in 2000, and since April 1, 2006 has served as President and ChiefOperating Officer of TDP. From 2003 to 2006, he served as President and ChiefOperating Officer of SBI. From November 2001 to January 2003, heserved as Vice President of Finance of SBI, and, from 2000 toNovember 2001, Mr. Moore served as Director of Finance of SBI. Priorto joining us, Mr. Moore held several positions at The Procter &Gamble Company, most recently serving as Assistant Brand Manager, New BusinessDevelopment from 1999 to 2000. He served as Finance Manager, Commercial ProductsGroup from 1998 to 1999 and as Manager, Profit Forecasting for the Food andBeverage Sector from 1997 to 1998. Mr. Moore holds a B.A. from theUniversity of Cincinnati.

***Michael J. Seagram, President and Chief OperatingOfficer—SBI.***Mr. Seagram joined us in 2003, andsince April 1, 2006 has served as President and Chief Operating Officer ofSBI. From 2003 to 2006, he served as Vice President of Sales and Marketing ofSBI. Before joining SBI, Mr. Seagram was Owner and President ofAristoplay, Ltd., a publisher of children’s games, from 1997 to 2003. He wasalso the Owner and President of the marketing firm, Seagram &Singer, Inc. from 1986 to 1998. Mr. Seagram holds a B.S. from WayneState University.

***J. Kenneth Garner, President and Chief Operating Officer—ULI****.*****Mr. Garnerjoined us in 1975 and has served as President and Chief Operating Officer ofULI since 1994. From 1985 to 1993, he served as Executive Vice President andChief Operating Officer of ULI. Mr. Garner is very active in industryaffairs and is a past Chairman of the National Association for PrintingLeadership (“NAPL”), a member of the Walter E. Soderstrom Society and therecipient of the 2002 Soderstrom Award. He is a former chairman of the GraphicArts Education & Research Foundation, Environmental ConservationBoard, and the Printing Industries of America’s (“PIA’s”) Executive DevelopmentCommittee. He is a former director of the Graphic Arts Show Company and thePrinting Industries of Virginia. He is a current director for the VirginiaPrinting Foundation. Mr. Garner holds a B.A. from Randolph-Macon College.

***G. Paul Bozuwa, Vice President—Global Business Development****.*****Mr. Bozuwajoined us in 1991 and effective January 1, 2007, Mr. Bozuwa began serving asVice President, Global Business Development. Mr. Bozuwa served as President of DJS from 2002 to 2006.  From 1995 to 2002, Mr. Bozuwa served asPresident and Chief Operating Officer of CCP. From 1991 to 1995, he served asChief Financial Officer of CCP. Mr. Bozuwa is active in industry affairsserving as Chair of the task force on Science, Journals, Poverty and HumanDevelopment, past Chairman of the Finance Committee and past Treasurer of theCouncil of Science Editors. Prior to joining us, he was an Associate ofKearsarge Ventures, a venture fund, from 1989 to 1991. Mr. Bozuwa holds aB.A. from Dartmouth College and an M.B.A. from the University of New Hampshire.

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***Christopher A. Pierce—Chairman—TDP****.*Mr. Pierce joined us inMay 2004, upon the consummation of the Dingley Acquisition, and sinceApril 1, 2006, has served as Chairman of TDP. From 2004 to 2006, he servedas President and Chief Operating Officer of TDP. From 1980 to the time of theDingley Acquisition, Mr. Pierce served as President of The Dingley Press.Mr. Pierce holds a B.A. from Bowdoin College.

***Thomas J. Baldwin, Director****.*****Mr.Baldwin has been a member of our board of directors since 2003.  Mr. Baldwin is a Managing Director ofBRS. He joined BRS in 2000. From 1995 to 2000, Mr. Baldwin was a Principal atPB Ventures, Inc. From 1988 to 1995, he served as Vice President and thenManaging Director of The INVUS Group, Ltd., a private equity investment firm.Prior to that he was a consultant with the Boston Consulting Group, a strategyconsulting firm. Mr. Baldwin holds a B.B.A. from Siena College and an M.B.A.from Harvard Business School. Mr. Baldwin is also a director of Eurofresh,Inc., Lazy Days, Inc. and Totes Isotoner Corporation.

***NicholasDaraviras, Director****.*****Mr.Daraviras 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. fromthe Wharton School of the University of Pennsylvania. Mr. Daraviras also servesas a director of Edgen Corp. and various private companies in which JCP has aninterest.

***CraigH. Deery, Director****.*Mr. Deery has been a member of our board ofdirectors since August 2003.  He was alsomember of our board of directors from 1998 through early 2002.  Mr. Deery was a Managing Director of JCP from2002 to 2003. He previously served as a member of our board of directors from1995 to 2001. From 1987 to 2002, Mr. Deery was a Managing Director atBancBoston Capital, where he served on the management committee of BancBostonCapital. While at BancBoston Capital, Mr. Deery supervised a direct investmentportfolio of $500 million, including mezzanine securities and equity as aminority, co-invest, and control investor. Prior to 1987, Mr. Deery spentfifteen years at BancBoston, serving as a team leader in domestic lending andas Senior Credit Officer and Chairman of the Credit Committee of BancBostonAustralia, Ltd. Mr. Deery holds a B.A. from Bucknell University and an M.B.A.from New York University. Mr. Deery is also a director of First IpswichBancorp.

***GaryT. DiCamillo, Director****.*Mr. DiCamillo has been a member of ourboard of directors since 1989. Mr. DiCamillo has served as President and ChiefExecutive Officer of American Crystal, Inc. in Dedham, Massachusetts since2005. From 2002 to 2005, Mr. DiCamillo served as President, Chief ExecutiveOfficer, and Director of TAC Worldwide Companies. From 1995 to 2002, he wasChairman and Chief Executive Officer of Polaroid Corporation and from 1993 to1995 he was President of Worldwide Power Tools for Black & DeckerCorporation. Mr. DiCamillo holds a B.S. from Rensselaer Polytechnic Instituteand an M.B.A. from Harvard Business School. Mr. DiCamillo is also a director ofPella Corporation, 3Com Corporation and Whirlpool Corporation.

***J.Rice Edmonds, Director****.*****Mr. Edmonds has been a member of our board ofdirectors since 2003.  Mr. Edmonds is aManaging Director at BRS. He joined BRS in 1996. From 1993 to 1996, he workedin the high yield finance group of Bankers Trust. Mr. Edmonds holds a B.S. fromthe University of Virginia McIntire School of Commerce and an M.B.A. from TheWharton School of the University of Pennsylvania. Mr. Edmonds is also adirector of McCormick & Schmick Restaurant Corporation, Town SportsInternational, Inc. and several private companies in which BRS has an interest.

***J. M.Dryden Hall, Jr., Director****.*****Mr. Hall has been a member of our board ofdirectors since 1967. Mr. Hall formed and has been the principal in the lawfirm of J.M.D. Hall, Jr., P.A. and its predecessors in Baltimore, Maryland since1962. Mr. Hall holds a B.A. from Johns Hopkins University and an L.L.B. fromNew York University Law School.

***James L. Luikart****, **Director***. Mr. Luikart has been a member of ourboard of directors since 2003.  Mr.Luikart is Executive Vice President of JCP. Mr. Luikart joined JCP in 1994after spending over twenty years with Citicorp, the last seven years of whichwere as a Vice President of Citicorp Venture Capital, Ltd. Mr. Luikart holds aB.A. from Yale University and an M.I.A. from Columbia University. Mr. Luikartalso serves as a director of W & T Offshore, Inc., Edgen Corp. and variousprivate companies in which JCP has an interest.

***NicholasR. Sheppard, Director****.*****Mr. Sheppard has been a member of our board ofdirectors since 2003.  Mr. Sheppard is aVice President at BRS. He joined BRS in 2000. From 1997 to 2000, he worked as aConsultant in the London and New York offices of Marakon Associates, a strategyconsulting firm. Mr. Sheppard is a graduate of the London School of Economics.Mr. Sheppard is a director of Penhall International, Inc.

***GeorgeA. Whaling, Director****.*****Mr. Whaling has been amember of our board of directors since 1998 and is Chairman of KingstonCapital Corporation in New York. From 1980 to 1997, he was Chairman and ownerof the Petty Printing Company, a commercial web printer. Mr. Whaling holds aB.A. from Colgate University and is a Trustee and Director of ColgateUniversity, Chairman of the Hamilton Initiative LLC, on the board ofdirectors of the Burr & Burton Academy in Manchester, VT, and adirector of Augusta Glenn Partners, LLC.

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**Board Composition and Director Independence**

The securities holders agreement among BRS, JCP and the otherstockholders of TSG Holdings Corp. provides that TSG Holdings Corp.’s and ourboard of directors will consist of ten members, including four designees of BRS(who currently are Messrs. Baldwin, DiCamillo, Edmonds and Sheppard), fourdesignees of JCP (who currently are Messrs. Daraviras, Deery, Luikart andWhaling) and two directors jointly designated by both BRS and JCP (whocurrently are Messrs. Hall and Saxton). Pursuant to the securities holdersagreement, we may not take certain significant actions without theapproval 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 directorshas determined that each of Messrs. DiCamillo, Hall and Whaling isindependent.  If we were listed on theNew York Stock Exchange, we would be exempt from certain independencerequirements with respect to our board of directors and board committees underthe “controlled company” exemption.  SeePart III, Item 13, “Certain Relationships and Related Transactions—SecuritiesHolders Agreement.”

**AuditCommittee**

The board ofdirectors has an audit committee. The audit committee consists ofMessrs. Daraviras, DiCamillo, Edmonds, Hall and Whaling. The audit committeereviews our financial statements and accounting practices, selects ourindependent registered public accounting firm and oversees our internal auditfunction. The responsibilities of the Audit Committee are defined in a charter,which has been approved by the Board of Directors. In carrying out theirresponsibilities, the Committee has reviewed and discussed the Company’saudited financial statements with management, and it has discussed the matterswhich are required to be discussed by Statement on Auditing Standards No. 61,as amended by Statement on Auditing Standards No. 90 (Communication with AuditCommittees), with the Company’s Independent Registered Public Accounting Firm.In addition, the Committee has reviewed the written disclosures required byIndependence Standards Board Standard No. 1, which were received from theCompany’s Independent Registered Public Accounting Firm, and has discussed theIndependent Registered Public Accounting Firm’s independence with them. TheAudit Committee has reviewed the fees of the Independent Registered PublicAccounting Firm for non-audit services and believes that such fees arecompatible with the independence of the Independent Registered PublicAccounting Firm.

Based on thesereviews and discussions, the Committee recommended to the Board of Directorsthat the Company’s audited financial statements be included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2006.

The Board ofDirectors has determined that Mr. DiCamillo, the chairman of the auditcommittee, is the “audit committee financial expert” as defined in applicableSEC rules and regulations. Mr. DiCamillo is “independent” as defined in thelisting standards of the New York Stock Exchange.

**Code ofBusiness Conduct**

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

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

**CompensationDiscussion and Analysis**

**Introduction**

This CompensationDiscussion and Analysis (“CD&A”) provides an overview of the Company’sexecutive compensation program together with a description of the materialfactors underlying the decisions which resulted in the compensation provided tothe Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”)and certain other executive officers (collectively, the named executiveofficers) for 2006 (as presented in the tables which follow this CD&A).

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**Compensation Committee**

The board ofdirectors has a compensation committee. The compensation committee consists ofthree members, Messrs. Baldwin, Deery and Luikart. The compensation committee has responsibilityfor establishing, implementing and continually monitoring adherence with theCompany’s compensation philosophy. The role of the compensation committee is tomake recommendations to our board of directors concerning salaries, incentivecompensation and employee benefit programs. The compensation committee reviewsand approves employment agreements and compensation programs or benefit plansfor all of our executive officers, including the named executive officers, andcertain other management employees. The compensation committee periodicallycompares our executive compensation levels with those of companies with whichwe believe that we compete in recruitment and retention of senior executives.The compensation committee also reviews and makes recommendations with respectto succession planning and management development. The CEO recommends changesin compensation for his direct reports to the compensation committee forapproval. The compensation committee recommends changes in compensation for theCEO to the full board for approval.

**Compensation Philosophy and Objectives**

In reviewing our compensation programs, the compensation committeeapplies a philosophy which is based on the premise that our achievements resultfrom the coordinated efforts of all individuals working toward commonobjectives. We have developed a compensation policy that is designed to attractand retain qualified senior executives, reward executives for actions thatresult in the long-term enhancement of stockholder value and reward resultswith respect to our financial and operational goals.

**Setting Executive Compensation**

Based on the foregoing philosophy, the company’s annual and long-termincentive-based cash and non-cash executive compensation has been structured to(a) pay competitive levels of compensation in order to attract and retainqualified executives, (b) motivate executives to achieve the short-term andlong-term business goals set by the Company and reward the executives forachieving such goals and (c) reward long-term Company performance. The Companycompetes with many larger companies for top executive-level talent.  Competitors include RR Donnelley, Quebecor,Cenveo (previously Cadmus), Quad Graphics, Edwards Brothers, and numerous otherprinting companies. We consider these our primary competitors because wecompete against these companies in each of our market segments. Accordingly,the base salary for executive-level talent is generally set at the 50th percentile of compensation paid to similarlysituated executives at these larger corporations. Variations to this objectivemay occur as dictated by the experience level of the individual and marketfactors. A significant percentage of total compensation is allocated toincentive compensation. However, there is no pre-established policy or targetfor the allocation between either cash and non-cash or short-term and long-termincentive compensation. Rather, market data, internal equity and performanceare the factors considered in determining the appropriate level and mix ofincentive compensation.

**2006 Executive Compensation Components**

For the fiscal year endingDecember 31, 2006, the principal components of compensation for named executiveofficers were:

·                  Base salary;

·                  Non-equity annual incentive compensation;

·                  Stock-based incentive compensation;

·                  Non-qualified deferred compensation program; and

·                  Perquisites and other benefits.

The Company has also enteredinto employment agreements and/or change in control arrangements with all ofthe named executive officers. In addition to the compensation components listedabove, these agreements provide for post-employment severance payments andbenefits in the event of a termination of employment under certaincircumstances.  The terms of theseagreements are described in more detail below (see the section entitled “PotentialPayments on Termination or a Change in Control”). The Company believes thatthese agreements provide an incentive to the named executive officers to remainwith the Company and serve to align the interest of the executives and thestockholders in the event of a potential acquisition of the Company.Additionally, retention awards were provided to certain named executiveofficers employees (excluding our CEO) whose retention is determined by ourboard of directors to be critical to our ongoing success.

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**BaseSalary**

The Company provides the named executive officers with base salaries tocompensate them for services rendered during the fiscal year. The base salariesfor our CEO and Mr. Bozuwa and Ms. Davidson are contained in their respectiveemployment agreements and are subject to increase at the discretion of ourboard of directors.  The base salaries ofMessrs. Jakobe and Kittredge were not the subject of employment agreements in2006 (however the Company did enter into employment agreements with theseindividuals in March of 2007.) Base salary levels are intended to reflect anindividual’s responsibilities, performance and expertise and are designed to becompetitive with salary levels in effect at other manufacturing companies, andin particular companies within the printing industry. Accordingly, we establishsalaries for the named executive officers on the basis of personal performanceand by reviewing available national (prepared by Watson Wyatt) and printingindustry compensation data, including published salary surveys regardingcompensation of officers of larger and smaller companies, both within andoutside the printing industry.****Thecompensation committee has reviewed the base salaries of our named executiveofficers for 2006 and is of the opinion that such salaries are in line withmarket data.

**AnnualIncentive Compensation**

*ManagementPerformance Incentive Plan*. Annual cash bonuses are included in our executive compensation programbecause the Company believes that a significant portion of each named executiveofficer’s compensation should be contingent on the annual performance of theCompany, as well as the individual contribution of the executive.  Accordingly, our named executive officersparticipate in a management performance incentive plan, which compensates themfor achievement of certain objectives established annually by our board ofdirectors. For 2006, these objectives are based on our earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”), the EBITDA of eachexecutive’s operating subsidiary and individual performance.   Since the company is owned by private equityinvestors, it is operated to maximize cash flow and EBITDA is the primarymeasure of the cash flow generated by the company.  Under the management performance incentiveplan, our executive officers are eligible to receive a maximum award of 50% ofbase salary, except Mr. Saxton, whose maximum award is 80% of base salary.   Maximum award amounts are developed based onmarket data but also set at a level to insure that a significant portion ofpotential compensation is tied to delivering results.  For fiscal year 2006, management performanceincentive awards were based upon achievement of corporate EBITDA financialobjectives and individual performance objectives.  Upon completion of the fiscal year, thecompensation committee assesses the performance of the Company for eachcorporate financial objective, comparing actual year-end results to theobjectives.  Then individual performanceis evaluated and an overall award is calculated.

The board ofdirectors established the following financial and discretionary objectives for ournamed executive officers for 2006**  **The objectives are set based onthe annual plan that is approved by the Board of Directors.  The maximum target is set to be approximately2-4% above the target and the minimum is set to be approximately 8-10% below thetarget.  As stated earlier, EBITDA is theprimary measure that private equity investors like ours use to determine thesuccess of their portfolio companies, since this is a good measure of the cashflow generation capability of a company. We have focused all of the company’s reward systems on EBITDAgeneration.  This is very typical forcompanies owned by private equity investors. TSG and operating company subsidiary EBITDA targets are set at levels toincent improvement over previous-year operating results and are designed to bechallenging to achieve, consistent with the company annual financial plan thatis approved by the board of directors. As detailed below, TSG financial targetshave been achieved in one out of the last three fiscal years.  With the exception of the 2005 DPC/DJS EBITDAtarget set for Mr. Bozuwa, operating company subsidiary EBITDA targets havebeen achieved at least at the threshold level in each of the last three years.

Mr. Saxton waseligible for a maximum award of 80% of base salary in 2006.  75% of this award was based on attainment ofTSG financial objectives and 25% was discretionary based on individualperformance.  The financial threshold wasnot achieved; therefore, no bonus for EBITDA was earned.  There is no minimum threshold for thediscretionary bonus.  This is totallydiscretionary based on the board’s view of an individual’s contribution to thecompany’s success.  Mr. Saxton receivedan incentive award equal to 25% of the maximum award as a discretionary awardbased on the board’s evaluation of his effectiveness as CEO.  This amount was equal to $102,000, orapproximately 20% of his base salary. For 2005, TSG financial targets were not met and only the discretionaryportion of the bonus was earned.  In2004, 70% of a maximum of 75% was awarded for achievement of TSG and individualcompany financial targets and an additional 25% was awarded as discretionarybonus, resulting in an award equal to 95% of Mr. Saxton’s total bonus potentialfor the year.  Mr. Saxton’s bonuspayments for 2005 and 2004, respectively, were $102,000 and $380,000.

Mr. Jakobe waseligible for a maximum award of 50% of base salary in 2006.  75% of this award was based on attainment ofTSG financial objectives and 25% was discretionary based on individualperformance.  The financial threshold wasnot achieved; therefore, no bonus for EBITDA was earned.  There is no minimum threshold for thediscretionary bonus.  This is totallydiscretionary based on the board’s view of an individual’s contribution to thecompany’s success.  Mr. Jakobe receivedan incentive award equal to 25% of the maximum award as a discretionary awardbased on the board’s view of his effectiveness as CFO.  This amount was equal to $30,000, orapproximately 12.5% of his base salary.  For 2005, TSG

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financial targets werenot met and only the discretionary portion of the bonus was earned.  In 2004, 70% of a maximum of 75% was awardedfor achievement of TSG and individual company financial targets and an additional25% was awarded as discretionary bonus, resulting in an award equal to 95% ofMr. Jakobe’s total bonus potential for the year.  Mr. Jakobe’s bonus payments for 2005 and2004, respectively, were $30,000 and $106,900.

Ms. Davidson waseligible for a maximum award of 50% of base salary in 2006.  50% of this award was based on attainment ofTSP financial objectives, 25% was based on attainment of TSG financialobjectives and 25% was discretionary based on individual performance.  Ms. Davidson received an incentive awardequal to 75% of the maximum award as follows: 50% for achieving TSP maximum EBITDA, and 25% for individual performancebased on the board’s view of her effectiveness as President and COO of TSP.This amount was equal to $95,700, or approximately 37.5% of her base salary.   The TSG threshold was not achieved;therefore, no bonus for TSG EBITDA was earned. There is no minimum threshold for the discretionary bonus.  This is totally discretionary based on theboard’s view of an individual’s contribution to the company’s success.  For 2005, 36.3% of a maximum of 50% wasawarded for achievement of TSP financial targets and 25% was awarded forindividual performance.  TSG financialtargets were not met, so there was no payout for that component. This resultedin an award equal to 61.3% of Ms. Davidson’s total bonus potential for theyear.  In 2004, both TSG and TSP maximumfinancial targets were achieved as well as the discretionary bonus, resultingin payment of full bonus potential for the year.  Ms. Davidson’s bonus payments for 2005 and2004, respectively, were $78,300 and $120,000.

Mr. Bozuwa waseligible for a maximum award of 50% of base salary in 2006.  25% of this award was based on attainment ofDPC/DJS financial objectives, 25% was for obtaining new DPC/DJS long-runjournal sales, 25% was based on TSG EBITDA and 25% was discretionary based onindividual performance.  Mr. Bozuwareceived an incentive award equal to 43.1% of the maximum award as follows:13.1% for achieving threshold DPC/DJS financial targets, 25% for individualperformance based on the board’s view of his effectiveness as Vice President –Global Business Development, and 5% for special projects. ** **This amount was equal to $50,000,or approximately 21% of his base salary. There was no award for DPC/DJS new long-run journal sales because thethreshold was not achieved.   The TSGthreshold was also not achieved; therefore, no bonus for TSG EBITDA wasearned.  There is no minimum thresholdfor the discretionary bonus.  This istotally discretionary based on the board’s view of an individual’s contributionto the company’s success.  For 2005,18.2% of a maximum of 25% was awarded for achievement of new DPC/DJS long-runjournal sales, 25% was awarded for individual performance and 0% for DPC/DJSEBITDA and 0% for TSG EBITDA. This resulted in an award equal to 43.2% of Mr.Bozuwa’s total bonus potential for the year. In 2004, 29% of a maximum of 50% was awarded for achievement of companyfinancial targets.  Maximum TSG EBITDAwas achieved resulting in an additional 25% of bonus earned and the 25%discretionary bonus was also earned, for a total payment of 79% of maximumbonus.  Mr. Bozuwa’s bonus payments for2005 and 2004, respectively, were $50,200 and $89,300.

Mr. Kittredge waseligible for a maximum award of 50% of base salary in 2006.  50% of this award was based on attainment ofDPC financial objectives, 25% was based on TSG EBITDA, and 25% wasdiscretionary based on individual performance. Mr. Kittredge received an incentive award equal to 49.4% of the maximumaward as follows: 24.4% for achieving threshold DPC financial targets and 25%for individual performance based on the board’s view of his effectiveness asPresident and Chief Operating Officer of DPC and DJS.  This amount was equal to $48,200, or approximately25% of his base salary.   The TSGthreshold was not achieved; therefore, no bonus for TSG EBITDA was earned.  There is no minimum threshold for thediscretionary bonus.  This is totallydiscretionary based on the board’s view of an individual’s contribution to thecompany’s success.   During 2005 and2004, Mr. Kittredge was President and COO of Capital City Press.  For 2005, 33.2% of a maximum of 50% wasawarded for achievement of company financial targets as well as the 25%discretionary bonus.  TSG financialtargets were not met so there was no payout for that component.  This resulted in an award equal to 58.2% ofMr. Kittredge’s total bonus potential for the year.  In 2004, maximum financial targets for bothCCP and TSG were attained as well as the discretionary bonus, resulting in 100%of the maximum bonus award being earned. Mr. Kittredge’s bonus payments for 2005 and 2004, respectively, were$56,800 and $92,500.

Awards for 2006,2005 and 2004 appear as “Non-Equity Incentive Plan Compensation” in the SummaryCompensation Table.  Plan threshold, target and maximum are disclosed inthe Grants of Plan-Based Awards table.

*ProfitSharing Plan.*  TheSheridan Group Profit Sharing Plan is a broad-based incentive program providedto all eligible employees at each location, excluding Capital City Press andThe Dingley Press, Inc. The annual discretionary profit sharingcontribution for each participating operating subsidiary company is determinedby a formula approved each year by our board of directors.

Under the formulaapproved for 2006, a guideline has been established of 10% of EBITDA for TSP,SBI and DPC, and 5% for ULI.  If companyEBITDA is a positive number, the Company’s established percent of EBITDA is putinto

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the profit sharingpool.  The total dollar contribution foran operating subsidiary cannot exceed 10% (or 5% for ULI) of its total payrollfor the year.

All of thecompanies that participate in the Profit Sharing Plan, except for DartmouthPrinting Company, currently deposit profit sharing contributions into theemployees’ accounts in our 401(k) plan; however if the contribution wouldotherwise exceed the contribution limits applicable to the 401(k) plan underthe Internal Revenue Code, then the excess will be contributed to the nonqualifieddeferred compensation plan, discussed below. Dartmouth Printing Company had anestablished cash payment policy when they were acquired, which remains inplace, although employees may choose to put their cash into their 401(k)accounts.

Amounts awarded tothe named executive officers for 2006 under the Profit Sharing Plan were$22,000, $22,000, $0, $8,924, and $22,000 for each of Messrs. Saxton, Jakobe,Bozuwa and Kittredge and Ms. Davidson, respectively.  These amounts are reported in the “All OtherCompensation” column in the Summary Compensation Table shown below.

**Stock-BasedIncentive Compensation**

TSG HoldingsCorp., our parent company, adopted a Stock-Based Incentive Compensation Plan inOctober 2003. The purpose of the 2003 Stock-Based Incentive Compensation Planis to provide long-term equity incentives to assist us in attracting andretaining valued management employees through the award of options to purchasecommon stock of TSG Holdings Corp. Option grants are designed to align the interests of officers andemployees with those of the stockholders, to provide each individual with asignificant incentive to manage our business from the perspective of an ownerand to remain employed by us.  Eligible employees will receive options onterms determined by our board of directors. The compensation committee considers awards made by our board ofdirectors under the Stock-Based Incentive Plan in conjunction with therecipient’s level of responsibility and relative position within the company,past performance, potential and annual base salary.  The stock option awards are recommended bythe CEO to the compensation committee, who then makes a recommendation to ourboard of directors for approval.

Options grantedunder the Stock-Based Incentive Compensation Plan have exercise prices equal toor above the fair market value of the underlying common stock (as determinedunder the Stock-Based Incentive Compensation Plan) on the grant date and areequally split 50% between a time-based vesting schedule and a companyperformance-based vesting schedule.  Time-based awards vest 20% per yearover five years subject to the executive’s continued employment with us. Performance-based awards vest 20% per year over five years based on the Companyachieving a per share equity value each year as determined by the board. Theper share equity value is calculated as a multiple of the Company’s trailingtwelve month EBITDA minus net debt. If an annual performance target is not metin any of the five years, but is achieved by meeting subsequent year targets,shares will vest for all preceding plan years

In fiscal 2006, the onlynamed executive officer to receive an option award was Mr. Kittredge, who wasgranted an option to purchase 300 shares of TSG Holdings Corp. common stock onApril 27, 2006. Mr. Kittredge was reassigned to DPC and DJS and was givenadditional options to bring his total option grants in line with otherexecutives with similar potential to impact the company’s results.** **Thetargets for the performance based options were established based upon theoriginal objectives that BRS and JCP established when they bought the companyin 2003 and wanted to incent management to deliver the rate of return expectedon their investment in the company.

The Company does not require its named executive officers tomaintain a minimum ownership interest in the Company or its affiliates.

**NonqualifiedDeferred Compensation**

*InGeneral.*  Ournonqualified deferred compensation program serves primarily to attract andretain qualified executives by providing them with enhanced tax deferralopportunities and retirement benefits in addition to those provided under ourbroad-based 401(k) plan.  Under thenonqualified deferred compensation plan, officers, directors and certainmanagement employees may annually elect (via individual contracts) to defer aportion of their compensation, on a pre-tax basis. The benefit is based on theamount of compensation (salary and bonus) deferred, company “make-whole”contributions, employer discretionary contributions and earnings on theseamounts.  Make-whole contributions are matching and profit sharingcontributions which the Company would have made to the participants’ accountsunder the 401(k) plan were the Company not prohibited from making such contributionunder the limits applicable to the 401(k) plan under the Internal RevenueCode.  For example, if a participant was eligible to receive 10% ofcompensation in a profit sharing contribution and the limit on compensationthat could be taken into account in determining contribution amounts to the401(k) plan for 2006 was $220,000, the maximum contribution the participantcould receive under the 401(k) plan would be $22,000.  The make-wholecontribution to the deferred compensation plan takes the difference between theparticipant’s salary and $220,000 and multiplies that number by the profitsharing contribution percentage of 10%.   Individuals are fully

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vested in deferred salaryand bonus amounts; however, the make-whole contributions vest in full after threeyears of employment, which is the same schedule applicable to employercontributions under the 401(k) plan. The employer discretionary contributionsbecome vested pursuant to a vesting schedule as determined by the Company.

Salary and bonusamounts deferred by named executive officers in 2006 under the nonqualifieddeferred compensation plan are shown in the “Executive Contributions” column ofthe Deferred Compensation Table below. Company make whole and discretionary contributions for 2006 are shown inthe “Registrant Contributions” column of the Deferred Compensation Table and inthe “All Other Compensation” column of the Summary Compensation Table.

*RetentionAwards.* Annualretention awards are employer discretionary contributions paid to certain managementemployees whose retention is determined by our board of directors to becritical to our ongoing success. These awards are deposited in the deferredcompensation plan under the employee’s name and vest after five years.  Distribution is made on a date previouslyelected by the executive. Other than the awards paid in accordance with theemployment agreements of Mr. Bozuwa and Ms. Davidson, these awards are solelyawarded at the board of directors’ discretion. Any awards made outside of anemployment agreement were equal to 10% of base salary.

In 2006, our boardof directors continued to provide retention awards to Mr. Bozuwa in the amountof $118,000 and Ms. Davidson in the amount of $63,750 in accordance with theiremployment agreements.  These awards for our named executive officers arecaptured under “All Other Compensation” on the Summary Compensation Table andin the Nonqualified Deferred Compensation table above under RegistrantContributions.

**OtherCompensation, Perquisites and Other Benefits**

*401(k)Plan.*  We sponsor adefined contribution plan, or 401(k) Plan, intended to qualify under section401 of the Internal Revenue Code. Substantially all of our employees areeligible to participate in the 401(k) Plan on the first day of the month in whichthe employee has attained 18 years of age and 90 days of employment. Employeesmay make pre-tax contributions of their eligible compensation, not to exceedthe limits under the Internal Revenue Code.  We match 50% of the employee’scontributions, up to a maximum of 4% of the employee’s eligiblecompensation.  In addition, most of the companies that participate in theProfit Sharing Plan deposit their Profit Sharing Plan contributions into the401(k) plan.  Certain participating companies also make a 1% of pay fixedcontribution, for which the 90-day service requirement is waived. Employees may direct their investments among various pre-selected investmentalternatives.  Employer contributions to the 401(k) plan, including profitsharing contributions, fixed contributions and employer matching contributions,vest after three years of employment.

*Perquisitesand Other Benefits.* The named executive officers are not generally entitled to benefits thatare not otherwise available to all of our employees.  In this regard it should be noted that theCompany does not provide pension arrangements (other than the 401(k) plan andthe nonqualified deferred compensation plan), post-retirement health coverageor similar benefits for its executives. However, some of the named executiveofficers are entitled to certain insurance benefits, relocation benefits and anexecutive physical program.  Theseamounts are noted in the “All Other Compensation” column in the SummaryCompensation Table.  The Company and theCommittee believe that these benefits are consistent with the goal ofattracting and retaining superior executive talent.

**Tax and Accounting Implications**

*Deductibility of Certain Compensation.*** **Section 162(m) of the InternalRevenue Code imposes a $1.0 million limit on the deductibility of compensationpaid to certain executive officers of public companies, unless the compensationmeets certain requirements for “performance-based” compensation.  Indetermining executive compensation, the compensation committee considers, amongother factors, the possible tax consequences to us and to the executives. However, tax consequences, including but not limited to tax deductibility byus, are subject to many factors (such as changes in the tax laws andregulations or interpretations thereof and the timing and nature of variousdecisions by executives regarding options and other rights) that are beyond ourcontrol.  In addition, the compensation committee believes that it isimportant for it to retain maximum flexibility in designing compensationprograms that meet its stated objectives.  For all of the foregoingreasons, the compensation committee, while considering tax deductibility as oneof its factors in determining compensation, will not limit compensation tothose levels or types of compensation that will be deductible.  Thecompensation committee will, of course, consider alternative forms ofcompensation, consistent with its compensation goals, which preservedeductibility.

*Accounting Impact.  *Considerations of accounting impacts do notaffect decisions on grants of equity compensation.

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**CompensationCommittee Report**

The CompensationCommittee of the Company has reviewed and discussed the Compensation Discussionand Analysis required by Item 402(b) of Regulation S-K with management and,based on such review and discussion, the Compensation Committee recommended tothe Board that the Compensation Discussion and Analysis be included in thisannual report for the fiscal year ending December 31, 2006.

Thomas J. Baldwin

Craig H. Deery

James L. Luikart

The following tablesummarizes compensation awarded or paid by us during 2006, 2005 and 2004 to ourPresident and Chief Executive Officer, our Executive Vice President and ChiefFinancial Officer, and our three next most highly compensated executiveofficers (our “named executive officers”). Perquisites and other benefits included in the All Other Compensationcolumn 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                             |       | 2006     |       | 510,016         |       | —              |       | —                     |       | 2,102                            |       | 102,000                                                     |       | 138,295                                    |       | 752,413        |       |
| President and Chief                        |       | 2005     |       | 509,939         |       | —              |       | —                     |       | —                           |       | 102,000                                                     |       | 135,841                                    |       | 747,780        |       |
| Executive Officer                          |       | 2004     |       | 509,648         |       | —              |       | —                     |       | —                           |       | 380,000                                                     |       | 234,135                                    |       | 1,123,783      |       |
|                                       |       |     |       |            |       |                |       |                       |       |                             |       |                                                        |       |                                       |       |           |       |
| Robert M. Jakobe                           |       | 2006     |       | 240,032         |       | —              |       | —                     |       | 2,102                            |       | 30,000                                                      |       | 47,259                                     |       | 319,393        |       |
| Executive Vice President                   |       | 2005     |       | 240,032         |       | —              |       | —                     |       | —                           |       | 30,000                                                      |       | 70,835                                     |       | 340,867        |       |
| and Chief Financial Officer                |       | 2004     |       | 229,043         |       | 25,000              |       | —                     |       | —                           |       | 106,900                                                     |       | 64,305                                     |       | 425,248        |       |
|                                       |       |     |       |            |       |                |       |                       |       |                             |       |                                                        |       |                                       |       |           |       |
| Joan B. Davidson                           |       | 2006     |       | 257,239         |       | 40,135              |       | —                     |       | 1,338                            |       | 95,700                                                      |       | 115,786                                    |       | 510,198        |       |
| Group President Sheridan                   |       | 2005     |       | 254,893         |       | 135                 |       | —                     |       | —                           |       | 78,300                                                      |       | 114,789                                    |       | 448,117        |       |
| Publication Services                       |       | 2004     |       | 244,359         |       | 135                 |       | —                     |       | —                           |       | 120,000                                                     |       | 105,788                                    |       | 470,282        |       |
|                                       |       |     |       |            |       |                |       |                       |       |                             |       |                                                        |       |                                       |       |           |       |
| G. Paul Bozuwa                             |       | 2006     |       | 236,465         |       | 10,000              |       | —                     |       | 1,147                            |       | 50,000                                                      |       | 131,223                                    |       | 428,835        |       |
| Vice President Global                      |       | 2005     |       | 231,885         |       | —              |       | —                     |       | —                           |       | 100,200                                                     |       | 65,544                                     |       | 397,629        |       |
| Business Development                       |       | 2004     |       | 225,885         |       | —              |       | —                     |       | —                           |       | 89,300                                                      |       | 64,650                                     |       | 379,835        |       |
|                                       |       |     |       |            |       |                |       |                       |       |                             |       |                                                        |       |                                       |       |           |       |
| Gary J. Kittredge                          |       | 2006     |       | 195,000         |       | 40,000              |       | —                     |       | 1,333                            |       | 48,200                                                      |       | 115,576                                    |       | 400,109        |       |
| President - DPC & DJS                  |       | 2005     |       | 195,000         |       | —              |       | —                     |       | —                           |       | 56,800                                                      |       | 29,403                                     |       | 281,203        |       |
|                                            |       | 2004     |       | 185,000         |       | —              |       | —                     |       | —                           |       | 92,500                                                      |       | 11,122                                     |       | 288,622        |       |

 

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(1) The amounts reportedas “Bonus” for 2006 consist of payments made as part of a special incentiverelated to the closing of CCP and the transition of work from CCP to TSP. Theadditional $135 amounts in 2006, 2005 and 2004 for Ms. Davidson were Christmasbonuses.  Mr. Jakobe received a $25,000cash bonus in 2004 upon completion of the Dingley Acquisition.

(2) Mr. Kittredge was theonly Named Executive Officer who received additional Stock Options in 2006 inthe amount of 300 shares. This option grant is disclosed in the Grants ofPlan-Based Awards table. The amounts reflected are the stock based compensationexpense recognized pursuant to FAS 123(R) in 2006 for these options.Assumptions used in the calculation of these amounts are disclosed in footnote3 to our audited financial statements for the fiscal year ending December 31,2006, included in this annual report.

(3) The amounts reportedas “Non-Equity Incentive Plan Compensation” for 2006, 2005 and 2004 consist ofbonuses paid as management performance incentive compensation.

(4) The amounts reportedas “All Other Compensation” for 2006, 2005 and 2004 are itemized in the “AllOther Compensation” table below.

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**All OtherCompensation**
|                             | ** ** | ** ** | ** ** | ** **  | ** ** | **Taxable**    | ** ** | **Taxable** | ** ** | ** **    | ** ** | **Additional** | ** ** | ** **         | ** ** | ** **   | ** ** | **GTL**     | ** ** | ** **  | ** ** | **Profit**          | ** ** | ** ** | ** ** | **401k**  | ** ** | **401(k)** | ** ** | **Total**          | ** ** |
|-----------------------------|------------|------------|------------|-------------|------------|----------------|------------|-------------|------------|---------------|------------|----------------|------------|--------------------|------------|--------------|------------|-------------|------------|-------------|------------|---------------------|------------|------------|------------|-----------|------------|------------|------------|--------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Spousal** | ** ** | **Relocation** | ** ** | **Travel**  | ** ** | **Retention** | ** ** | **Disability** | ** ** | **Taxable**        | ** ** | **Physical** | ** ** | **Taxable** | ** ** | **Profit**  | ** ** | **Sharing**         | ** ** | **401k**   | ** ** | **Fixed** | ** ** | **Make**   | ** ** | **All Other** | ** ** |
| **Name**                    | ** ** | **Year**   | ** ** | **Travel**  | ** ** | **Income**     | ** ** | **Income**  | ** ** | **Awards**    | ** ** | **Coverage**   | ** ** | **Term Life** | ** ** | **Program**  | ** ** | **Income**  | ** ** | **Sharing** | ** ** | **Make Whole** | ** ** | **Match**  | ** ** | **1%**    | ** ** | **Whole**  | ** ** | **Comp**           | ** ** |
| ** **                  | ** ** | ** ** | ** ** | **($)**     | ** ** | **($)**        | ** ** | **($)**     | ** ** | **($)**       | ** ** | **($)**        | ** ** | **($)**            | ** ** | **($)**      | ** ** | **($)**     | ** ** | **($)**     | ** ** | **($)**             | ** ** | **($)**    | ** ** | **($)**   | ** ** | **($)**    | ** ** | **($)**            | ** ** |
| John A. Saxton              |       | 2006       |       | 1,238       |       | —         |       | —      |       | —        |       | 4,000          |       | 12,230             |       | 140          |       | 3,695       |       | 22,000      |       | 67,994              |       | 4,400      |       | 2,200     |       | 20,398     |       | 138,295            |       |
| President and Chief         |       | 2005       |       | 717         |       | —         |       | —      |       | —        |       | 3,992          |       | 12,230             |       | 5,819        |       | 3,695       |       | 21,000      |       | 63,145              |       | 4,200      |       | 2,100     |       | 18,943     |       | 135,841            |       |
| Executive Officer           |       | 2004       |       | 288         |       | —         |       | —      |       | —        |       | 3,195          |       | 113,849            |       | —       |       | 3,617       |       | 20,500      |       | 64,023              |       | 4,100      |       | 2,050     |       | 22,513     |       | 234,135            |       |
|                        |       |       |       |        |       |           |       |        |       |          |       |           |       |               |       |         |       |        |       |        |       |                |       |       |       |      |       |       |       |               |       |
| Robert M. Jakobe            |       | 2006       |       | —      |       | —         |       | —      |       | —        |       | —         |       | —             |       | —       |       | 858         |       | 22,000      |       | 13,693              |       | 4,400      |       | 2,200     |       | 4,108      |       | 47,259             |       |
| Executive Vice President    |       | 2005       |       | 1,148       |       | —         |       | —      |       | 24,000        |       | —         |       | —             |       | —       |       | 858         |       | 21,000      |       | 13,484              |       | 4,200      |       | 2,100     |       | 4,045      |       | 70,835             |       |
| and Chief Financial Officer |       | 2004       |       | 351         |       | —         |       | —      |       | 22,500        |       | —         |       | —             |       | 1,719        |       | 795         |       | 20,500      |       | 9,454               |       | 4,100      |       | 2,050     |       | 2,836      |       | 64,305             |       |
|                        |       |       |       |        |       |           |       |        |       |          |       |           |       |               |       |         |       |        |       |        |       |                |       |       |       |      |       |       |       |               |       |
| Joan B. Davidson            |       | 2006       |       | 605         |       | —         |       | —      |       | 63,750        |       | 268            |       | —             |       | —       |       | 599         |       | 22,000      |       | 17,017              |       | 4,400      |       | 2,200     |       | 4,947      |       | 115,786            |       |
| Group President Sheridan    |       | 2005       |       | 1,015       |       | —         |       | —      |       | 63,750        |       | 268            |       | —             |       | 3,652        |       | 400         |       | 21,000      |       | 14,202              |       | 4,200      |       | 2,100     |       | 4,202      |       | 114,789            |       |
| Publication Services        |       | 2004       |       | 845         |       | —         |       | —      |       | 60,000        |       | 170            |       | —             |       | —       |       | 373         |       | 20,788      |       | 13,827              |       | 4,100      |       | 2,050     |       | 3,635      |       | 105,788            |       |
|                        |       |       |       |        |       |           |       |        |       |          |       |           |       |               |       |         |       |        |       |        |       |                |       |       |       |      |       |       |       |               |       |
| G. Paul Bozuwa              |       | 2006       |       | —      |       | —         |       | 3,855       |       | 118,000       |       | 2,198          |       | —             |       | —       |       | 546         |       | —      |       | —              |       | 4,400      |       | —    |       | 2,224      |       | 131,223            |       |
| Vice President Global       |       | 2005       |       | 471         |       | —         |       | —      |       | 58,000        |       | —         |       | —             |       | —       |       | 514         |       | —      |       | —              |       | 4,199      |       | —    |       | 2,360      |       | 65,544             |       |
| Business Development        |       | 2004       |       | —      |       | —         |       | —      |       | 56,500        |       | —         |       | —             |       | 1,982        |       | 390         |       | —      |       | —              |       | 3,653      |       | —    |       | 2,125      |       | 64,650             |       |
|                        |       |       |       |        |       |           |       |        |       |          |       |           |       |               |       |         |       |        |       |        |       |                |       |       |       |      |       |       |       |               |       |
| Gary J. Kittredge           |       | 2006       |       | —      |       | 98,012         |       | —      |       | —        |       | —         |       | —             |       | —       |       | 1,316       |       | 8,924       |       | —              |       | 4,400      |       | 1,177     |       | 1,747      |       | 115,576            |       |
| President - DPC & DJS   |       | 2005       |       | 424         |       | —         |       | —      |       | 19,500        |       | —         |       | —             |       | 3,090        |       | 912         |       | —      |       | —              |       | 4,200      |       | —    |       | 1,277      |       | 29,403             |       |
|                             |       | 2004       |       | —      |       | —         |       | —      |       | —        |       | —         |       | —             |       | —       |       | 881         |       | 5,049       |       | —              |       | 4,100      |       | —    |       | 1,092      |       | 11,122             |       |

 

Retention awards, profitshare and make-whole contributions are invested in the deferred compensationplan. 401(k) match and 1% fixed contributions are invested in the 401(k) plan.

**Grants of Plan-Based Awards**
| ** **                  | ** ** | ** **          | ** ** | ** **                               | ** ** | ** **                             | ** ** | **All Other**     | ** ** | **Exercise**      | ** ** | **Grant**         | ** ** |
|-----------------------------|------------|---------------------|------------|------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                  | ** ** | ** **          | ** ** | ** **                               | ** ** | ** **                             | ** ** | **Option Awards** | ** ** | **or Base**  | ** ** | **Date**          | ** ** |
| ** **                  | ** ** | ** **          | ** ** | **Estimated Possible Payouts** | ** ** | **Estimated Future Payouts** | ** ** | **Number of**     | ** ** | **Price of** | ** ** | **Fair**          | ** ** |
| ** **                  | ** ** | ** **          | ** ** | **Under Non-Equity**                | ** ** | **Under Equity Incentive**   | ** ** | **Securities**         | ** ** | **Option**        | ** ** | **Value of** | ** ** |
| ** **                  | ** ** | ** **          | ** ** | **Incentive Plan Awards**      | ** ** | **Plan Awards**                   | ** ** | **Underlying**         | ** ** | **Awards**        | ** ** | **Option**        | ** ** |
| Name                        | ** ** | **Grant Date** | ** ** | **Threshold**                            | ** ** | **Target**                             | ** ** | **Maximum**            | ** ** | **Threshold**     | ** ** | **Target**        | ** ** | **Maximum** | ** ** | **Options** | ** ** | **($/sh)** | ** ** | **Awards** | ** ** |
| ** **                  | ** ** | ** **          | ** ** | **($)**                                  | ** ** | **($)**                                | ** ** | **($)**                | ** ** | **(#)**           | ** ** | **(#)**           | ** ** | **(#)** | ** ** | **(#)** | ** ** | **($)** | ** ** | ** ** | ** ** |
|                        |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| John A. Saxton              |       | N/A                 |       | 102,000                                  |       | 332,500                                |       | 408,000                |       |              |       |              |       |   |   |   |   |   |   |   |   |
| President and Chief         |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Executive Officer           |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
|                        |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Robert M. Jakobe            |       | N/A                 |       | 30,000                                   |       | 97,800                                 |       | 120,000                |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Executive Vice President    |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| and Chief Financial Officer |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
|                        |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Joan B. Davidson            |       | N/A                 |       | 31,875                                   |       | 103,600                                |       | 127,500                |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Group President Sheridan    |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Publication Services        |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
|                        |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| G. Paul Bozuwa              |       | N/A                 |       | 29,000                                   |       | 72,800                                 |       | 116,000                |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Vice President Global       |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Business Development        |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
|                        |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
| Gary J. Kittredge           |       | N/A                 |       | 24,375                                   |       | 79,400                                 |       | 97,500                 |       |              |       |              |       |   |   |   |   |   |   |   |   |
| President - DPC & DJS   |       | 4/27/2006           |       |                                     |       |                                   |       |                   |       |              |       | 150               |       |   |   | 150 |   | 24.75 |   | 2,784 |   |
|                             |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |
|                             |       |                |       |                                     |       |                                   |       |                   |       |              |       |              |       |   |   |   |   |   |   |   |   |

 

----

(1) The “Estimated Possible PayoutsUnder Non-Equity Incentive Plan Awards” for 2006 consist of Entry, Plan andMaximum bonus earnings possible under the Management Performance IncentivePlan. The maximum bonus potential for Mr. Saxton is 80% of annual base salary.For Messrs. Jakobe, Bozuwa and Kittredge and Ms. Davidson, the maximum bonuspotential is 50% of annual base salary. All bonus payments are reviewed andapproved by our board of directors.

(2) Mr. Kittredge was awarded300 additional stock options under the Stock-Based Incentive Compensation Planin 2006 in connection with his expanded role as President and COO of DPC andDJS. Fifty percent (50%) of the options vest over time and fifty percent vestbased on company performance. There were no threshold or maximum performancelevels for vesting of the stock. Time-based options vest 20% per year over fiveyears. Performance options vest upon the achievement of certain performancetargets, the sale of the Company or a qualified public offereing, or aftereight years from the date of grant.

(3) Refer to Non-EquityIncentive Plan Compensation in the summary compensation table for actualpayments of incentive plan awards for years ending December 31, 2006.

(4) There is currently nopublic trading market for the common stock of TSG Holdings Corp. An independentappraiser engaged by TSG Holdings Corp.has determined that the fair marketvalue of the common stock of TSG Holdings Corp. was $24.75 per share on thegrant date.

59

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**Outstanding Equity Awards at Fiscal Year-End**
|                   | ** ** | **Option Awards** | ** ** |
|-------------------|------------|------------------------|------------|
| ** **        | ** ** | ** **             | ** ** | ** ** | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **             | ** ** | ** ** | ** ** | **Incentive** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **             | ** ** | ** ** | ** ** | **Plan** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Number of**     | ** ** | ** ** | ** ** | **Awards:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Securities**         | ** ** | **Number of** | ** ** | **Number of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Underlying**         | ** ** | **Securities** | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Unexercised**        | ** ** | **Underlying** | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Options (#)**   | ** ** | **Unexercised** | ** ** | **Unexercised** | ** ** | **Option** | ** ** | **Option** | ** ** |
| ** **        | ** ** | **(Exercisable)**      | ** ** | **Options (#)** | ** ** | **Unearned** | ** ** | **Exercise** | ** ** | **Expiration** | ** ** |
| **Name**          | ** ** | **(1)**                | ** ** | **(Unexercisable)** | ** ** | **Options (#)** | ** ** | **Price ($)** | ** ** | **Date** | ** ** |
|              |       |                   |       |   |   |   |   |   |   |   |   |
| John A. Saxton    |       | 1,650                  |       |   |   | 3,850 |   | 10.00 |   | 11/16/2013 |   |
|              |       |                   |       |   |   |   |   |   |   |   |   |
| Robert M. Jakobe  |       | 1,650                  |       |   |   | 3,850 |   | 10.00 |   | 11/16/2013 |   |
|              |       |                   |       |   |   |   |   |   |   |   |   |
| Joan B. Davidson  |       | 1,050                  |       |   |   | 2,450 |   | 10.00 |   | 11/16/2013 |   |
|              |       |                   |       |   |   |   |   |   |   |   |   |
| G. Paul Bozuwa    |       | 900                    |       |   |   | 2,100 |   | 10.00 |   | 11/16/2013 |   |
|              |       |                   |       |   |   |   |   |   |   |   |   |
| Gary J. Kittredge |       | 810                    |       |   |   | 1,890 |   | 10.00 |   | 11/16/2013 |   |
|                   |       |                   |       |   |   | 300 |   | 24.75 |   | 4/26/2016 |   |

 

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(1) Stock option awards, withthe exception of the 300 shares awarded to Mr. Kittredge in 2006, were awarded onOctober 16, 2003. The shares began vesting on January 1, 2004. As of December31, 2006, 40% of the Named Executive Officers’ time-based shares were vested.Because 2006 company performance targets were not met, only 20% of performanceshares vested through December 31, 2006. The established performance-basedoption targets (per share equity values) are $20/share on 1/1/05, $52/share on1/1/06, $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 theCompensation Discussion and Analysis for details on the vesting schedule.

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**Option Exercises and Stock Vestedin Last Fiscal Year**
|                             | ** ** | **Option Awards** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **Number of**     | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Shares**             | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Acquired on**   | ** ** | **Value** | ** ** |
| ** **                  | ** ** | **Exercise (#)**  | ** ** | **Realized on** | ** ** |
| **Name**                    | ** ** | **(1)**                | ** ** | **Exercise ($)** | ** ** |
|                        |       |                   |       |   |   |
| John A. Saxton              |       | —                 |       | — |   |
| President and Chief         |       |                   |       |   |   |
| Executive Officer           |       |                   |       |   |   |
|                        |       |                   |       |   |   |
| Robert M. Jakobe            |       | —                 |       | — |   |
| Executive Vice President    |       |                   |       |   |   |
| and Chief Financial Officer |       |                   |       |   |   |
|                        |       |                   |       |   |   |
| Joan B. Davidson            |       | —                 |       | — |   |
| Group President Sheridan    |       |                   |       |   |   |
| Publication Services        |       |                   |       |   |   |
|                        |       |                   |       |   |   |
| G. Paul Bozuwa              |       | —                 |       | — |   |
| Vice President Global       |       |                   |       |   |   |
| Business Development        |       |                   |       |   |   |
|                        |       |                   |       |   |   |
| Gary J. Kittredge           |       | —                 |       | — |   |
| President - DPC & DJS   |       |                   |       |   |   |

 

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(1) No options were exercisedduring 2006.

**NonqualifiedDeferred Compensation**
|                    | ** ** | ** **                        | ** ** | **Registrant**                    | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
|--------------------|------------|-----------------------------------|------------|-----------------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **         | ** ** | ** **                        | ** ** | **Contributions**                 | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| ** **         | ** ** | ** **                        | ** ** | **in Last FY ($)** | ** ** | **Aggregate**    | ** ** | **Aggregate**     | ** ** | **Aggregate**    | ** ** |
| ** **         | ** ** | **Executive**                     | ** ** | **(Retention Bonus**         | ** ** | **Earnings**     | ** ** | **Withdrawals/**  | ** ** | **Balance**      | ** ** |
| ** **         | ** ** | **Contributions**                 | ** ** | **and Make-Wholes)**         | ** ** | **in Last** | ** ** | **Distributions** | ** ** | **at Last** | ** ** |
| **Name**           | ** ** | **in last FY ($)** | ** ** | **(a)(b)**                        | ** ** | **FY ($)**  | ** ** | **($)**           | ** ** | **FYE ($)** | ** ** |
| John A. Saxton     |       | $                                 | 20,800     |                              | $          | 88,392           |       | $                 | 15,848     |             | $          | 299,054 |   | $ | 257,648 |   |
|               |       |                              |       |                              |       |             |       |              |       |             |       |
| Robert M. Jakobe   |       | $                                 | —     |                              | $          | 17,801           |       | $                 | 29,998     |             | $          | 58,876 |   | $ | 225,597 |   |
|               |       |                              |       |                              |       |             |       |              |       |             |       |
| Joan B. Davidson   |       | $                                 | 10,290     |                              | $          | 85,714           |       | $                 | 34,122     |             | $          | 24,210 |   | $ | 451,513 |   |
|               |       |                              |       |                              |       |             |       |              |       |             |       |
| G. Paul Bozuwa     |       | $                                 | —     |                              | $          | 120,224          |       | $                 | 61,145     |             | $          | — |   | $ | 605,308 |   |
|               |       |                              |       |                              |       |             |       |              |       |             |       |
| Gary  J. Kittredge |       | $                                 | 25,598     |                              | $          | 1,747            |       | $                 | 13,178     |             | $          | — |   | $ | 142,187 |   |

 

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(a) Registrant contributionsfor Fiscal Years ending 2006, 2005 and 2004, respectively, that were includedin the Summary Compensation Table are as follows: Mr. Saxton - Make WholeContributions of $88,392, $82,088 and $86,536; Mr. Jakobe – Make WholeContributions of $17,801, $17,529 and $12,290 and Retention Awards of $0,$24,000 and $22,500; Ms. Davidson – Make Whole Contributions of $21,964,$18,404 and $17,462 and Retention Awards of $63,750, $63,750 and $60,000; Mr.Bozuwa – Make Whole Contributions of $2,224, $2,360 and $2,125 and RetentionAwards of $118,000, $58,000 and $56,500; and Mr. Kittredge – Make WholeContributions of $1,747, $1,277 and $1,092 and a Retention Award in 2005 of$19,500. Retention awards and employer make-whole contributions (describedbelow) are reported in the Summary Compensation Table in the “All OtherCompensation” column.

The types ofcompensation that may be deferred under our nonqualified deferred compensationplan are salary and bonus, deferred at the employee’s election, employeeretention awards, employer make-whole contributions, employer discretionarycontributions and earnings on the deferrals. The individuals are fully vestedin the compensation deferred; however, the make-whole contributions and theemployer discretionary contributions and employee retention awards are subjectto vesting requirements. Make-whole contributions vest once the employee hasattained three years of service.  Employee retention awards cliff vestafter five years.  Employees may defer up to 20% of their base salary andup to 100% of

61

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any earned bonus into thedeferred compensation program on an annual basis.  Earnings under thenonqualified plan are calculated by reference to the return on investment fundsselected by the executives from a menu of investment fund options offered underthe plan.  These investment fund options are the same options as areavailable to all participants under our 401(k) plan.  Participants maychange their investment fund elections at any time.   A participantmay 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 theinitial election is made, five years after a subsequent election is made, orupon separation of service from the company.

The table belowshows the funds available under our 401(k) plan and their annual rate of returnfor the calendar year ended December 31, 2006:

**Deferred Compensation Investment Options**
| **Name of Fund**          | ** ** | **Rate of Return** | ** ** | **Name of Fund**              | ** ** | **Rate of Return** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------------------|------------|------------------------------|------------|
| Maxim Money Market  Portfolio       |       | 1.19                         |       | Legg  Mason Value, FI                   |       | 9.95                         |       |
| Legg Mason Investment  Grade Income |       | 1.68                         |       | Franklin  Small-Mid-Cap Growth Fund A   |       | 6.23                         |       |
| PIMCO Low Duration Fund  - A        |       | 0.71                         |       | Legg  Mason Special Investment FI       |       | 9.54                         |       |
| American Funds Wash  Mutual A       |       | 6.35                         |       | Pennsylvania  Mutual Fund Consultant CI |       | 8.32                         |       |
| Legg Mason American Leading Trust   |       | 8.22                         |       | American Funds  EuroPacific A           |       | 8.67                         |       |

 

**PotentialPayments on Termination or Change of Control**

Our employmentagreements with Mr. Saxton, Mr. Bozuwa and Ms. Davidson provide that if theexecutive is terminated by us without “cause” (as defined in the agreements) orby the executive for “good reason” (as defined in the agreements), theexecutive will be entitled to receive the following amounts:  (1)severance pay equal to his or her annual base salary and average annualincentive bonus during the two years preceding the termination for a period of18 months in the case of Mr. Bozuwa and Ms. Davidson, and 24 months in the caseof Mr. Saxton, (2) all amounts credited to the executive under our deferredcompensation plan will fully vest and become payable in a single lump sum and(3) the executive will continue to have coverage under our health insuranceplan for 18 months, or 24 months in the case of Mr. Saxton.

In addition, wehave entered into change in control arrangements with Mr. Jakobe and Mr.Kittredge that provide that if the executive is terminated by us without “cause”(as defined in the agreements) or by the executive for “good reason” (asdefined in the agreements) within 18 months following any change in control,the executive will be entitled to receive the following amounts:  (1)severance pay equal to his or her annual base salary and average annualincentive bonus during the two years preceding the termination for a period of18 months,  (2) all amounts credited to the executive under our deferredcompensation plan will fully vest and become payable in a single lump sum and(3) the executive will continue to have coverage under our health insuranceplan for 18 months.  In March of 2007, we entered into employmentagreements with Mr. Jakobe and Mr. Kittredge which provide for the sameseverance benefits upon a termination without cause or for good reason withoutregard to a change in control.

The employmentagreements contain non-compete and non-solicitation language prohibiting suchactions for the term of the severance period. Additionally, the severed employee is prohibited from disclosingproprietary company information to any person, firm, corporation, associationor entity, during or after their term of employment.  Any breach of these terms will be subject toappropriate injunctive and equitable relief.

The followingtable summarizes potential benefits that each of the Named Executive Officerswould have received under their employment agreements or change in controlarrangements on December 31, 2006, if a termination without cause or for goodreason occurred, or they had been terminated following a change in control.
| Named Executive | ** ** | **Severance** | ** ** | **Incentive** | ** ** | **Deferred**     | ** ** | **COBRA**                          | ** ** |
|----------------------|------------|---------------|------------|---------------|------------|------------------|------------|------------------------------------|------------|
| **Officer**          | ** ** | **Pay**       | ** ** | **Pay**       | ** ** | **Compensation** | ** ** | **(Employer’s Portion)** | ** ** |
|                 |       |          |       |          |       |             |       |                               |       |
| John A. Saxton       |       | $             | 1,020,000  |          | $          | 204,000          |       | $                                  | 257,648    |   | $ | 16,513 |   |
| Robert M. Jakobe     |       | $             | 360,000    |          | $          | 45,000           |       | $                                  | 225,597    |   | $ | 12,384 |   |
| Joan B. Davidson     |       | $             | 382,500    |          | $          | 130,500          |       | $                                  | 451,513    |   | $ | 11,702 |   |
| G. Paul Bozuwa       |       | $             | 348,000    |          | $          | 75,150           |       | $                                  | 605,308    |   | $ | 18,935 |   |
| Gary J. Kittredge    |       | $             | 292,500    |          | $          | 78,375           |       | $                                  | 142,187    |   | $ | 17,190 |   |

 

62

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**Compensationof Directors**

Each director whois not also one of our executive officers or an employee of BRS or JCP receivesa fee of $16,000 per year for their service on our board of directors. Thechairman of the audit committee (Mr. DiCamillo) receives an additional fee of$4,000 per year. All directors are reimbursed for any personal expensesincurred in the conduct of their duties as a director. There were no stockoptions awarded to directors during 2006.
|                        | ** ** | **Fees Earned**     | ** ** | ** **         | ** ** | ** ** | ** ** |
|------------------------|------------|--------------------------|------------|--------------------|------------|------------|------------|
| ** **             | ** ** | **or Paid in** | ** ** | **All Other** | ** ** | ** ** | ** ** |
| **Name**               | ** ** | **Cash**                 | ** ** | **Compensation**   | ** ** | **Total**  | ** ** |
| ** **             | ** ** | **($)**                  | ** ** | **($)**            | ** ** | **($)**    | ** ** |
|                   |       |                     |       |               |       |       |       |
| Gary T. DiCamillo      |       | 20,000                   | *          | —             |       | 20,000     |       |
|                   |       |                     |       |               |       |       |       |
| Craig H. Deery         |       | 16,000                   | *          | —             |       | 16,000     |       |
|                   |       |                     |       |               |       |       |       |
| J. M. Dryden Hall, Jr. |       | 16,000                   |       | —             |       | 16,000     |       |
|                   |       |                     |       |               |       |       |       |
| George A. Whaling      |       | 16,000                   |       | —             |       | 16,000     |       |

 

----

* Messrs. DiCamillo and Deeryhave elected deferred payment of their annual director’s fees. 

Their fees are invested inTSG’s Non-Qualified Deferred Compensation Plan rather than paid in cash.

See Compensation Discussion and Analysis for further details.

**CompensationCommittee Interlocks and Insider Participation**

In 2006, thecompensation committee consisted of Messrs. Baldwin, Deery and Luikart. None ofthe members of the compensation committee are currently, or have been at anytime since the time of our formation, one of our officers or employees.

**ITEM 12.**** SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

We are awholly-owned subsidiary of TSG Holdings Corp. The following table sets forthcertain information regarding the beneficial ownership of TSG Holdings Corp.,as of March 29, 2007, by (i) each person or entity known to us to own more than5% of any class of TSG Holdings Corp.’s outstanding securities, (ii) each memberof 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 539,800 shares ofTSG Holdings Corp. common stock and about 45,327 shares of TSG Holdings Corp.preferred stock, the terms of which are described in more detail below. Additionally,there are 14,290 options to purchase common stock outstanding that are held byour executive officers. To our knowledge, each of such stockholders will havesole voting and investment power as to the stock shown unless otherwise noted.Beneficial ownership of the securities listed in the table has been determinedin accordance with the applicable rules and regulation promulgated under theExchange Act.

63

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|                                                                   | ** ** | **Number and Percent of Shares of TSG Holdings Corp.(1)** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **Preferred Stock**                                                                          | ** ** | **Common Stock** | ** ** |
| ** **                                                        | ** ** | **Number**                                                                                        | ** ** | **Percent** | ** ** | **Number** | ** ** | **Percent** | ** ** |
| **Greater than 5% Stockholders:**                                 | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bruckmann, Rosser, Sherrill  & Co. II, L.P.(2)                |       |                                                                                              |       |   |   |   |   |   |   |
| 126 East 56th Street New York, New York 10022                |       | 19,209.704                                                                                        |       | 42.4 | % | 228,687 |   | 42.4 | % |
| Funds affiliated with  Jefferies Capital Partners(3)              |       |                                                                                              |       |   |   |   |   |   |   |
| 520 Madison Avenue, 12th Floor New York, New York 10022 |       | 19,209.704                                                                                        |       | 42.4 | % | 228,687 |   | 42.4 | % |
| Christopher A.  Pierce(4)(5)                                      |       | 3,096.224                                                                                         |       | 6.8 | % | 38,140 |   | 7.0 | % |
| **Named Executive Officers and Directors:**                       | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| John A. Saxton(4)(6)(7)                                           |       | 1,340.426                                                                                         |       | 3.0 | % | 18,157 |   | 3.4 | % |
| Robert M. Jakobe(4)(8)(9)                                         |       | 108.190                                                                                           |       |   | * | 3,488 |   | * |   |
| Joan B. Davidson(4)(10)                                           |       | 67.021                                                                                            |       |   | * | 2,198 |   | * |   |
| Gary J. Kittredge(4)(11)                                          |       | 22.340                                                                                            |       |   | * | 1,376 |   | * |   |
| G. Paul Bozuwa(4)(12)                                             |       | 268.085                                                                                           |       |   | * | 4,391 |   | * |   |
| Thomas J. Baldwin(13)(14)                                         |       | 19,209.704                                                                                        |       | 42.4 | % | 228,687 |   | 42.4 | % |
| Nicholas Daraviras(15)                                            |       | —                                                                                            |       | — |   | — |   | — |   |
| Craig H. Deery(4)                                                 |       | 244.616                                                                                           |       |   | * | 2,912 |   |   | * |
| Gary T. DiCamillo(4)                                              |       | 268.085                                                                                           |       |   | * | 3,191 |   |   | * |
| J. Rice Edmonds(13)                                               |       | —                                                                                            |       | — |   | — |   | — |   |
| J. M. Dryden Hall, Jr.(4)                                         |       | 89.362                                                                                            |       |   | * | 1,064 |   |   | * |
| James L.  Luikart(15)(16)                                         |       | 19,209.704                                                                                        |       | 42.4 | % | 228,687 |   | 42.4 | % |
| Nicholas R. Sheppard(13)                                          |       | —                                                                                            |       | — |   | — |   | — |   |
| George A. Whaling(4)                                              |       | 272.040                                                                                           |       |   | * | 3,239 |   |   | * |
| All executive officers and  directors as a group (21 persons)(17) |       | 44,422.261                                                                                        |       | 98.0 | % | 543,126 |   | 98.0 | % |

 

----

* indicates less than 1%

(1)                  Pursuant to Rule13d-3 under the Securities Exchange Act of 1934, as amended, a person hasbeneficial ownership of any securities as to which such person, directly orindirectly, through any contract, arrangement, undertaking, relationship orotherwise has or shares voting power and/or investment power and as to whichsuch person has the right to acquire such voting and/or investment power within60 days. Percentage of beneficial ownership as to any person as of a particulardate is calculated by dividing the number of shares beneficially owned by suchperson by the sum of the number of shares outstanding as of such date and thenumber of shares as to which such person has the right to acquire voting and/orinvestment power within 60 days.

(2)                  The SheridanGroup Holdings (BRS), LLC (the “BRSLLC”) is controlled by Bruckmann, Rosser,Sherrill & Co. II, L.P. (the “BRS Fund”) which is a private equity investmentfund 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 bedeemed to be the beneficial owner of the shares owned by BRSLLC. BRSE has thepower to direct BRSLLC as to the voting and disposition of shares held byBRSLLC. No single person controls the voting and dispositive power of BRSE withrespect to the shares owned by BRSLLC. Bruce Bruckmann, Harold O. Rosser,Stephen C. Sherrill, Paul D. Kaminski and Thomas J. Baldwin are the managers ofBRSE, and none of them individually has the power to direct or veto the votingor disposition of shares owned by BRSLLC. BRSE expressly disclaims beneficialownership of the shares owned by BRSLLC. Each of Messrs. Bruckmann, Rosser,Sherrill, Kaminski and Baldwin expressly disclaims beneficial ownership of theshares owned by BRSLLC.

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

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

(5)                  Includes optionsto purchase 1,280 shares of TSG Holdings Corp. common stock exercisable within60 days.

(6)                  Includes 15,957shares 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 optionsto purchase 2,200 shares of TSG Holdings Corp. common stock exercisable within60 days.

(8)                  Includes 1,288shares 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 optionsto purchase 2,200 shares of TSG Holdings Corp. common stock exercisable within60 days.

(10)            Includes options topurchase 1,400 shares of TSG Holdings Corp. common stock exercisable within 60days.

(11)            Includes options topurchase 1,110 shares of TSG Holdings Corp. common stock exercisable within 60days.

(12)            Includes options topurchase 1,200 shares of TSG Holdings Corp. common stock exercisable within 60days.

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

(14)            Consists of 19,209.704shares of TSG Holdings Corp. preferred stock and 228,687 shares of TSG HoldingsCorp. common stock owned and/or controlled by the BRSLLC. Mr. Baldwin may bedeemed to share beneficial ownership of

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the shares owned of record and/or controlled by BRSLLCby virtue of his status as a manager of BRSE, but he expressly disclaims suchbeneficial ownership of the shares owned and/or controlled by BRSLLC. Themembers and managers of BRSE share investment and voting power with respect tosecurities owned and/or controlled by BRSE, but no individual controls suchinvestment or voting power.

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

(16)            Consists of 19,209.704shares of TSG Holdings Corp. preferred stock and 228,687 shares of TSG HoldingsCorp. common stock owned by The Sheridan Group Holdings (Jefferies), LLC. Mr.Luikart is a Managing Member of JCP and may be considered the beneficial ownerof such shares, but he expressly disclaims such beneficial ownership of theshares owned by The Sheridan Group Holdings (Jefferies), LLC, except to theextent of his pecuniary interest therein.

(17)            Includes options topurchase 14,290 shares of TSG Holdings Corp. common stock exercisable within 60days.

**TSGHoldings Corp. Preferred Stock**

TSG Holdings Corp.’sCertificate of Incorporation provides that TSG Holdings Corp. may issue 100,000shares of preferred stock, 75,000 of which is designated as 10% Series ACumulative Compounding Preferred Stock and 25,000 of which is undesignated. TSGHoldings Corp. preferred stock has a stated value of $1,000 per share and isentitled to annual dividends when, as and if declared, which dividends will becumulative, whether or not earned or declared, and will accrue at a rate of10%, compounding annually. As of March 29, 2007, there are issued andoutstanding about 45,327 shares of TSG Holdings Corp. preferred stock.

Except asotherwise required by law, the TSG Holdings Corp. preferred stock is notentitled to vote. TSG Holdings Corp. may not pay any dividend upon (except fora dividend payable in Junior Stock, as defined below), or redeem or otherwiseacquire shares of, capital stock junior to the TSG Holdings Corp. preferredstock (including the common stock) (“Junior Stock”) unless all cumulativedividends on the TSG Holdings Corp. preferred stock have been paid in full.Upon liquidation, dissolution or winding up of TSG Holdings Corp., holders ofTSG Holdings Corp. preferred stock are entitled to receive out of the legallyavailable assets of TSG Holdings Corp., before any amount shall be paid toholders of Junior Stock, an amount equal to $1,000 per share of TSG HoldingsCorp. preferred stock, plus all accrued and unpaid dividends to the date offinal distribution. If the available assets are insufficient to pay the holdersof 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 amongthe holders.  The TSG Holdings Corp.preferred stock is not redeemable.

**TSGHoldings Corp. Common Stock**

The Certificate ofIncorporation of TSG Holdings Corp. provides that TSG Holdings Corp. may issue1,000,000 shares of TSG Holdings Corp. common stock. About 539,800 shares ofTSG Holdings Corp. common stock are issued and outstanding as of March 29,2007. The holders of TSG Holdings Corp. common stock are entitled to one votefor each share held of record on all matters submitted to a vote of thestockholders.

**EquityCompensation Plan Information**

The followingtable sets forth information as of December 31, 2006 regarding all of ourexisting compensation plans pursuant to which equity securities are authorizedfor 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/A                                                                                                                                                                                                          |       |
| Equity compensation  plans not approved by security holders |       | 55,150                                                                                                                                               |       | $                                                                                                              | 11.52      |                                                                                                                                                                                                         | 150        |   |
| Total                                                       |       | 55,150                                                                                                                                               |       | $                                                                                                              | 11.52      |                                                                                                                                                                                                         | 150        |   |

 

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(1)          As of December 31,2006.

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**ITEM 13.****   CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

**SecuritiesHolders Agreement**

At the closing ofthe Buyout Transactions, TSG Holdings Corp. entered into a securities holdersagreement with BRS, JCP and the management investors. The securities holdersagreement provides that TSG Holdings Corp.’s and our board of directors willconsist of ten members, including four designees of BRS, four designees of JCPand two directors jointly designated by both BRS and JCP. Also pursuant to thesecurities holders agreement, we may not take certain significant actions, suchas incurrences of indebtedness in excess of certain thresholds or a sale of allor substantially all of our assets, without the approval of each of BRS andJCP.

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

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

**RegistrationRights Agreement**

At the closing ofthe Buyout Transactions, TSG Holdings Corp., BRS, JCP and the managementinvestors entered into a registration rights agreement. Pursuant to theregistration rights agreement, upon the written request of either BRS or JCP,TSG Holdings Corp. has agreed to, on one or more occasions, prepare and file aregistration statement with the SEC concerning the distribution of all or partof the shares of TSG Holdings Corp. common stock held by BRS or JCP or certainof their respective affiliates, as the case may be, and use its best efforts tocause the registration statement to become effective. Following an initialpublic offering of TSG Holdings Corp., BRS, JCP and the management investorsalso have the right, subject to certain exceptions and rights of priority, tohave their shares included in certain registration statements filed by TSGHoldings Corp. Registration expenses of the selling stockholders (other thanunderwriting discounts and commissions and transfer taxes applicable to theshares sold by such stockholders or the fees and expenses of any accountants orother representatives retained by a selling stockholder) will be paid by TSGHoldings Corp. TSG Holdings Corp. has also agreed to indemnify the stockholdersagainst certain customary liabilities in connection with any registration.

**ManagementAgreement**

In connection withthe Buyout Transactions, we entered into a management agreement with BRS andJCP pursuant to which BRS and JCP may provide financial, advisory andconsulting services to us. In exchange for these services, BRS and JCP will beentitled to an annual management fee. The total management fee will be equal tothe greater of 2% of EBITDA (as defined in the Management Agreement) or $0.5million per year, plus reasonable out-of-pocket expenses and will be splitequally between BRS and JCP. In addition, BRS and JCP may negotiate with us toprovide additional services in connection with any transaction in which we maybe, or may consider becoming, involved. At the closing of the SheridanAcquisition, BRS and JCP also were paid a transaction fee of about $1.0million, plus reasonable out-of-pocket expenses, pursuant to the managementagreement. The management agreement has an initial term of ten years. Theagreement automatically renews for additional one year terms unless either weor BRS and JCP give written notice of termination within 90 days prior to theexpiration of the initial term or any extension thereof. There are no minimumlevels of service required to be provided pursuant to the management agreement.The management agreement includes customary indemnification provisions in favorof BRS and JCP.

**OtherRelated Party Transactions and Matters**

In May 2005 our twoprincipal stockholders, BRS and funds affiliated with Jefferies CapitalPartners, each entered into a separate limited liability company agreement withJohn A. Saxton, our chief executive officer, pursuant to which each principalstockholder contributed their preferred and common stock of TSG Holdings Corp.,our parent corporation, to a limited liability company, or LLC, called TheSheridan Group Holdings (BRS), LLC and The Sheridan Group Holdings (Jefferies),LLC, respectively, in exchange for limited liability company interests inthe LLC, and Mr. Saxton acquired an interest in the LLC fornominal consideration. Mr. Saxton’s interest in each LLC entitles himto receive a portion of any profit earned by the LLC on the shares of TSGHoldings Corp. stock held by it, after the principal

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stockholder has received back its entire investment insuch shares, plus a specified return on its investment. Under each limitedliability company agreement, Mr. Saxton will forfeit his interest inthe LLCs if he terminates or we terminate his employment for any reason;however, if Mr. Saxton’s employment is terminated as a result of hisdeath, one–third of his interest in the LLC will not be forfeited for eachyear of his service following the date of the limited liability companyagreement.

**Policy for Approval of Related Transactions**

We do not have a writtenpolicy for the treatment of transactions required to be disclosed under Item404(a) of Regulation S-K.  Our securitiesholder agreement described above generally prohibits entry into suchtransactions without the consent of BRS and JCP.

**Director Independence**

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

**ITEM 14.****   PRINCIPALACCOUNTING FEES AND SERVICES**

The Company incurred fees for services performed byPricewaterhouseCoopers LLP as follows:
|                                                                                                                                                                         | ** ** | **Year ended**   | ** ** | **Year ended**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| **(Dollars in thousands)**                                                                                                                                    | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Audit fees  (includes the review of interim consolidated financial statements, annual  audit of the consolidated financial statements and assistance with SEC  filings) |       | $                     | 829        |                  | $          | 654 |   |
|                                                                                                                                                                    |       |                  |       |                  |       |
| Audit-related  fees (includes review of internal controls and due diligence related to  acquisitions)                                                                   |       | 14                    |       | 2                     |       |
|                                                                                                                                                                    |       |                  |       |                  |       |
| Tax fees  (includes tax compliance, transactional consulting and advice for state tax  issues)                                                                          |       | 131                   |       | 123                   |       |
|                                                                                                                                                                    |       |                  |       |                  |       |
| All other fees  (includes license fees for online financial reporting and assurance  literature)                                                                        |       | 2                     |       | 2                     |       |
|                                                                                                                                                                    |       |                  |       |                  |       |
| Total                                                                                                                                                                   |       | $                     | 976        |                  | $          | 781 |   |

 

All services performed by PricewaterhouseCoopers LLPhave been approved by the audit committee prior to performance in accordancewith legal requirements.

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**PART IV**

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

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

(1)AllFinancial Statements:
|                                                                                                                        | ** ** | **Page No.** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| Reports of  Independent Registered Public Accounting Firm                                                              |       | 25           |
| Consolidated balance  sheets as of December 31, 2006 and 2005                                                          |       | 26           |
| Consolidated  statements of operations for the years-ended December 31, 2006, 2005 and 2004                            |       | 27           |
| Consolidated statements  of changes in stockholder’s equity for the years-ended December 31, 2006,  2005 and 2004 |       | 28           |
| Consolidated  statements of cash flows for the years-ended December 31, 2006, 2005 and 2004                            |       | 29           |
| Notes to  consolidated financial statements                                                                            |       | 30-48        |

 

(2) FinancialStatement Schedules:

All schedules havebeen omitted because they are not applicable or the required information isincluded in the consolidated financial statements and the footnotes thereto.

(3) Exhibits

The following is alist of exhibits filed as part of this Annual Report on Form 10-K.  Where so indicated by footnote, exhibitswhich 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  |   | Amended and Restated Certificate of Incorporation of  TSG Holdings Corp.†                                                                                                                                                                                                                                                          |
| 3.2  |   | Amended and Restated Bylaws of TSG Holdings Corp.†                                                                                                                                                                                                                                                                                 |
| 3.3  |   | Amended and Restated Articles of Incorporation of  The Sheridan Group, Inc.†                                                                                                                                                                                                                                                       |
| 3.4  |   | Amended and Restated Bylaws of The Sheridan Group,  Inc.†                                                                                                                                                                                                                                                                          |
| 3.5  |   | Restated and Amended Articles of Association of  Capital City Press, Inc.†                                                                                                                                                                                                                                                         |
| 3.6  |   | Restated and Amended By-laws of Capital City Press,  Inc.†                                                                                                                                                                                                                                                                         |
| 3.7  |   | Articles of Incorporation of Dartmouth Journal  Services, Inc.†                                                                                                                                                                                                                                                                    |
| 3.8  |   | Bylaws of Dartmouth Journal Services, Inc.†                                                                                                                                                                                                                                                                                        |
| 3.9  |   | Articles of Agreement of Dartmouth Printing Company,  as amended.†                                                                                                                                                                                                                                                                 |
| 3.10 |   | By-Laws of Dartmouth Printing Company.†                                                                                                                                                                                                                                                                                            |
| 3.11 |   | Certificate of Incorporation of Sheridan Books,  Inc., as amended.†                                                                                                                                                                                                                                                                |
| 3.12 |   | By-laws of Sheridan Books, Inc.†                                                                                                                                                                                                                                                                                                   |
| 3.13 |   | Certificate of Incorporation of The Sheridan Group  Holding Company.†                                                                                                                                                                                                                                                              |
| 3.14 |   | By-Laws of The Sheridan Group Holding Company.†                                                                                                                                                                                                                                                                                    |
| 3.15 |   | Amended and Restated Articles of Incorporation of  The Sheridan Press, Inc.†                                                                                                                                                                                                                                                       |
| 3.16 |   | By-Laws of The Sheridan Press, Inc.†                                                                                                                                                                                                                                                                                               |
| 3.17 |   | Amendment and Restatement of Articles of  Incorporation of United Litho, Inc.†                                                                                                                                                                                                                                                     |
| 3.18 |   | By-Laws of United Litho, Inc.†                                                                                                                                                                                                                                                                                                     |
| 3.19 |   | Amended and Restated Certificate of Incorporation of  The Dingley Press, Inc.†                                                                                                                                                                                                                                                     |
| 3.20 |   | Amended and Restated Bylaws of The Dingley Press,  Inc.^                                                                                                                                                                                                                                                                                |
| 4.1  |   | Indenture, dated as of August 21, 2003, among  Sheridan Acquisition Corp. and The Bank of New York, as trustee and notes  collateral agent.†                                                                                                                                                                                       |
| 4.2  |   | Supplemental Indenture, dated as of August 21, 2003,  among Capital City Press, Inc., Dartmouth Printing Company, Dartmouth Journal  Services, Inc., Sheridan Books, Inc., The Sheridan Group Holding Company, The  Sheridan Press, Inc., United Litho, Inc. and The Bank of New York, as trustee  and notes collateral agent.†    |
| 4.3  |   | Form of 101⁄4% Senior Secured Note Due 2011 (included  in Exhibit 4.1).†                                                                                                                                                                                                                                                        |

 

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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  |   | Amended and Restated Revolving Credit Agreement,  dated as of May 25, 2004, by and among The Sheridan Group, Inc., Fleet  National Bank, as administrative agent, issuer and a lender, and the other  financial institutions party thereto.†                                                                                                                                                   |
| 10.2  |   | Intercreditor Agreement, dated as of August 21,  2003, among Sheridan Acquisition Corp., The Sheridan Group, Inc., the  guarantors signatory thereto, The Bank of New York, as trustee and collateral  agent, and Fleet National Bank.†                                                                                                                                                        |
| 10.3  |   | Securities Holders Agreement, dated as of August 21,  2003, by and among TSG Holdings Corp., Bruckmann, Rosser, Sherrill & Co.  II, L.P., ING Furman Selz Investors III L.P., ING Barings Global Leveraged  Equity Plan Ltd., ING Barings U.S. Leveraged Equity Plan LLC and the  management investors named therein.†                                                                     |
| 10.4  |   | Registration Rights Agreement, dated as of August  21, 2003, by and among TSG Holdings Corp., Bruckmann, Rosser, Sherrill &  Co. II, L.P., ING Furman Selz Investors III L.P., ING Barings Global  Leveraged Equity Plan Ltd., ING Barings U.S. Leveraged Equity Plan LLC and  the management investors named therein.†                                                                    |
| 10.5  |   | Securities Purchase Agreement, dated as of August  21, 2003, by and among TSG Holdings Corp., Bruckmann, Rosser, Sherrill &  Co. II, L.P., ING Furman Selz Investors III L.P., ING Barings Global  Leveraged Equity Plan Ltd. and ING Barings U.S. Leveraged Equity Plan LLC.†                                                                                                             |
| 10.6  |   | Securities Purchase and Exchange Agreement, dated as  of August 21, 2003, by and among TSG Holdings Corp. and the management  investors named therein.†                                                                                                                                                                                                                                        |
| 10.7  |   | Management Agreement, dated as of August 21, 2003,  by and among Bruckmann, Rosser, Sherrill & Co., LLC, FS Private  Investments III LLC (d/b/a Jefferies Capital Partners) and Sheridan  Acquisition Corp.†                                                                                                                                                                               |
| 10.8  |   | Employment and Non-Competition Agreement, dated as  of January 2, 1998, between The Sheridan Group, Inc. and John A. Saxton, as  amended by First Amendment to Employment Agreement, dated as of April 1,  2000.†*                                                                                                                                                                             |
| 10.9  |   | Employment and Non-Competition Agreement, dated as  of June 30, 2001, between The Sheridan Group, Inc. and G. Paul Bozuwa, as  amended by First Amendment to Employment Agreement, dated as of April 18,  2003.†*                                                                                                                                                                              |
| 10.10 |   | Employment and Non-Competition Agreement, dated as  of October 31, 2001, between The Sheridan Group, Inc. and Joan B. Davidson.†*                                                                                                                                                                                                                                                              |
| 10.11 |   | TSG Holdings Corp. 2003 Stock-Based Incentive  Compensation Plan.†*                                                                                                                                                                                                                                                                                                                            |
| 10.12 |   | The Sheridan Group, Inc. Executive and Director  Deferred Compensation Plan.†*                                                                                                                                                                                                                                                                                                                 |
| 10.13 |   | The Sheridan Group, Inc. Change-of-Control Incentive  Plan for Corporate Staff.~                                                                                                                                                                                                                                                                                                                    |
| 10.14 |   | The Sheridan Group, Inc. Change-of-Control Incentive  Plan for Key Management Employees.~                                                                                                                                                                                                                                                                                                           |
| 10.15 |   | Amendment No. 1 to Intercreditor Agreement, dated as  of May 11, 2004, by and among The Sheridan Group, Inc., the guarantors  signatory thereto, The Bank of New York, as trustee and collateral agent, and  Fleet National Bank.†                                                                                                                                                             |
| 10.16 |   | Securities Purchase Agreement, dated as of May 25,  2004, by and among TSG Holdings Corp. and the management investors named  therein.†                                                                                                                                                                                                                                                        |
| 10.17 |   | Joinder Agreement—Securities Holders Agreement,  dated as of May 25, 2004, by and among Christopher A. Pierce, Eric Lane, William  Braley, Kenneth Stickley, Jr. and TSG Holdings Corp.†                                                                                                                                                                                                  |
| 10.18 |   | Joinder Agreement—Registration Rights Agreement,  dated as of May 25, 2004, by and among Christopher A. Pierce, Eric Lane,  William Braley, Kenneth Stickley, Jr., TSG Holdings Corp., Bruckmann, Rosser,  Sherrill & Co. II, L.P., ING Furman Selz Investors III L.P., ING Barings  U.S. Leveraged Equity Plan LLC and ING Barings Global Leveraged Equity Plan  Ltd.†               |
| 10.19 |   | Employment and Non-Competition Agreement, dated as  of May 25, 2004, among The Dingley Press, Inc., Christopher A. Pierce and The  Sheridan Group, Inc.*†                                                                                                                                                                                                                                      |
| 10.20 |   | Limited Liability Company Agreement dated as of  May 10, 2005, of The Sheridan Group Holdings (BRS), LLC by and  between Bruckmann, Rosser, Sherrill & Co. II, L.P. and John A.  Saxton.^^                                                                                                                                                                                       |
| 10.21 |   | Limited Liability Company Agreement dated as of  May 10, 2005, of The Sheridan Group Holdings                                                                                                                                                                                                                                                                                                  |

 

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|          |   | (Jefferies), LLC by and among ING Furman Selz  Investors III L.P., ING Barings U.S. Leveraged Equity Plan LLC, ING  Barings Global Leveraged Equity Plan Ltd. and John A. Saxton.^^                                                                                                    |
|---------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22         |   | Joinder Agreement—Securities Holders Agreement and  Registration Rights Agreement, dated as of August 3, 2004, by and among  William P. Walters and TSG Holdings Corp.^                                                                                                                     |
| 10.23         |   | Employment and Non-Competition Agreement, dated as  of March 28, 2006, among Robert M. Moore and The Sheridan Group, Inc.*^                                                                                                                                                                      |
| 10.24

  |   | First Amendment to Employment Agreement, dated as of  March 28, 2006, between The Sheridan Group, Inc. and Christopher A. Pierce.*^                                                                                                                                                              |
| 10.25

  |   | First Amendment to Employment Agreement, dated as of  March 29, 2007, between The Sheridan Group, Inc. and Christopher A. Pierce.*                                                                                                                                                               |
| 10.26         |   | Employment and Non-Competition Agreement, dated as  of March 29, 2007, between The Sheridan Group, Inc. and Robert M. Moore.*                                                                                                                                                                    |
| 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, as  amended by First Amendment to Employment Agreement, dated as of April 18,  2003.†*                                                                          |
| 10.30         |   | Employment and Non-Competition Agreement, dated as  of March 29, 2007, between The Sheridan Group, Inc. and John A. Saxton, as  amended by First Amendment to Employment Agreement, dated as of April 1,  2000.†*                                                                           |
| 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.*                                                                                                                                                                   |
| 21.1          |   | Subsidiaries of The Sheridan Group, Inc.†                                                                                                                                                                                                                                                   |
| 31.1          |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                 |
| 31.2          |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                 |
| 32.1          |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed  by John A. Saxton, President and Chief Executive Officer of The Sheridan  Group, Inc. and Robert Jakobe, Chief Financial Officer of The Sheridan Group,  Inc. |

 

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

^                  Filedas a like numbered exhibit to the Registrant’s Annual Report on Form 10K forthe year ended December 31, 2005, filed on March 30, 2006 and incorporatedherein by reference.

^^            Filedas a like numbered exhibit to the Registrant’s Quarterly Report on Form 10Q forthe quarter ended March 31, 2005, filed on May 13, 2005 and incorporated hereinby reference.

~                 Filedas a like numbered exhibit to the Registrant’s Annual Report on Form 10K forthe year ended December 31, 2004, filed on March 31, 2005 and incorporatedherein by reference.

*                 Managementcontract or compensatory plan or arrangement.

70

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**SIGNATURES**

Pursuant to therequirements of Section 13 or Section 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Annual Report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized.
|        | THE SHERIDAN GROUP, INC. |
|--------|--------------------------|
|   |                     |
|   |                     |
|   | By:                      |  /s/ John A.  Saxton |   |
|   |                     | Name: | John A. Saxton |
|   |                     | Title: | President and Chief Executive  Officer and Director |
|   |                     |   |   |
|   |                     | Date: | March 30, 2007 |
|        |                          |  |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Annual Report on Form10-K has been signed below by the following persons on behalf of the Registrantin the capacities and on the dates indicated.
| Signature                         | ** ** | **Title**                                          | ** ** | **Date**       |
|-----------------------------------|------------|----------------------------------------------------|------------|----------------|
| ** **                        | ** ** | ** **                                         | ** ** | ** **     |
|  /s/ John A.  Saxton         |       | President and Chief Executive Officer and Director |       | March 30, 2007 |
| **John A. Saxton**                | ** ** | (Principal  Executive Officer)                     | ** ** | ** **     |
| ** **                        | ** ** | ** **                                         | ** ** | ** **     |
|  /s/ Robert M. Jakobe        |       | Chief Financial Officer                            |       | March 30, 2007 |
| **Robert M. Jakobe**              | ** ** | (Principal  Financial and Accounting Officer)      | ** ** | ** **     |
| ** **                        | ** ** | ** **                                         | ** ** | ** **     |
|  /s/ Thomas J. Baldwin       |       | Director                                           |       | March 30, 2007 |
| **Thomas J. Baldwin**             | ** ** | ** **                                         | ** ** | ** **     |
| ** **                        | ** ** | ** **                                         | ** ** | ** **     |
|  /s/ Nicholas Daraviras      |       | Director                                           |       | March 30, 2007 |
| **Nicholas Daraviras**            | ** ** | ** **                                         | ** ** | ** **     |
|                              |       |                                               |       |           |
|  /s/ Craig H. Deery          |       | Director                                           |       | March 30, 2007 |
| **Craig H. Deery**                | ** ** | ** **                                         | ** ** | ** **     |
|                              |       |                                               |       |           |
|  /s/ Gary T. DiCamillo       |       | Director                                           |       | March 30, 2007 |
| **Gary T. DiCamillo**             | ** ** | ** **                                         | ** ** | ** **     |
|                              |       |                                               |       |           |
|  /s/ J. Rice Edmonds         |       | Director                                           |       | March 30, 2007 |
| **J. Rice Edmonds**               | ** ** | ** **                                         | ** ** | ** **     |
| ** **                        | ** ** | ** **                                         | ** ** | ** **     |
|  /s/ J. M.  Dryden Hall, Jr. |       | Director                                           |       | March 30, 2007 |
| **J. M. Dryden Hall, Jr.**        |       | ** **                                         |       | ** **     |
|                              |       |                                               |       |           |
|  /s/ James L. Luikart        |       | Director                                           |       | March 30, 2007 |
| **James L. Luikart**              |       | ** **                                         |       | ** **     |
|                              |       |                                               |       |           |
|  /s/ Nicholas R. Sheppard    |       | Director                                           |       | March 30, 2007 |
| **Nicholas R. Sheppard**          |       | ** **                                         |       | ** **     |
|                              |       |                                               |       |           |
|  /s/ George A. Whaling       |       | Director                                           |       | March 30, 2007 |
| **George A. Whaling**             |       | ** **                                         |       | ** **     |

 

71

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