U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the Fiscal Year Ended December 31, 2012

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

For the Period From to .

Commission File Number: 333-110441

THE SHERIDAN GROUP, INC.

(Exact name of Registrant as specified in its charter)

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

11311 McCormick Road, Suite 260

Hunt Valley, Maryland 21031-1437

(Address of principal executive offices and zip code)

(410) 785-7277

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

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

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

There was 1 share of the Registrant’s Common Stock outstanding as of March 27, 2013.

THE SHERIDAN GROUP, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2012

INDEX

		Pages
ITEM 1. BUSINESS		3

ITEM 1A. RISK FACTORS		7

ITEM 1B. UNRESOLVED STAFF COMMENTS		13

ITEM 2. PROPERTIES		13

ITEM 3. LEGAL PROCEEDINGS		14

ITEM 4. MINE SAFETY DISCLOSURES		14

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		14

ITEM 6. SELECTED FINANCIAL DATA		14

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		15

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		28

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		50

ITEM 9A. CONTROLS AND PROCEDURES		50

ITEM 9B. OTHER INFORMATION		51

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		51

ITEM 11. EXECUTIVE COMPENSATION		55

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		64

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		67

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES		68

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES		69

Index

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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our liquidity and capital resources, including our ability to refinance our debt and our expected level of capital expenditures;

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competitive pressures and trends in the printing industry;

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prevailing interest rates;

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legal proceedings and regulatory matters;

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general economic conditions;

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predictions of net sales, expenses or other financial items;

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future operations, financial condition and prospects; and

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

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

PART I

ITEM 1.

BUSINESS

Overview

We are a leading specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine and book markets. We believe that we enjoy strong and long-standing relationships with our customers, which include publishers, catalog merchants, associations and university presses. We provide a wide range of printing services and value-added support services that supplement the core printing operations. We develop and implement technology-based services and solutions designed to help our customers be more successful in the rapidly changing publishing industry. We are focused on short production runs for small to medium sized customers who rely heavily on our world class prepress operations to prepare, edit and publish content for electronic or printed distribution. We utilize a decentralized management structure, which provides our customers with access to the resources of a large company, while maintaining the high level of service and flexibility of a smaller company. We operate in three business segments: Publications, Specialty Catalogs and Books. For the year ended December 31, 2012, we generated net sales of $267.2 million, operating income of $19.5 million and a net loss of $0.1 million. As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of The Sheridan Group, Inc. and all of its subsidiaries.

Index

History

We trace our roots back to The Sheridan Press (“TSP”), the predecessor of which was founded in 1915. We entered the short-run journal market in 1980, targeting the printing of scientific, technical, medical and scholarly journals for publishers. The Sheridan Group, Inc. was formed in 1988 to complete the acquisition of Braun-Brumfield, Inc., a short-run book printer located in Michigan. In 1994, we entered the specialty magazine market with the acquisition of United Litho, Inc. (“ULI”), a printer of specialty magazines serving the Washington, D.C. metro area. In conjunction with our recapitalization in 1998, we acquired Dartmouth Printing Company (“DPC”), a specialty magazine printer in New Hampshire, and Capital City Press (“CCP”), a journal printer in Vermont. In 1999, we acquired BookCrafters, Inc., a short-run book printer in Chelsea, Michigan and consolidated it with Braun-Brumfield to form Sheridan Books, Inc. (“SBI”). In 2002, we started Dartmouth Journal Services, Inc. (“DJS”) to serve the editorial and composition needs of the scientific, technical and medical journals publishing community and provide more robust journal production services for the customers of DPC and TSP. In 2004, we acquired The Dingley Press (“TDP”), a specialty catalog printer in Maine. In 2006, we shut down the operations of CCP and consolidated the production of short-run journals at TSP. In 2011, we shut down the operations of ULI and consolidated the production of specialty magazines at DPC. Currently, we are comprised of five specialty printing companies operating in the domestic scientific, technical, medical and scholarly journal, specialty catalog, short-run book and specialty magazine markets: TSP in Pennsylvania; SBI in Michigan; DPC in New Hampshire; DJS in Vermont; and TDP in Maine.

Printing Services

Our printing services include transferring content onto printing plates in pre-press, printing the content on press, binding the printed pages into the finished product and distributing the finished product to either the customer or the ultimate end user. Pre-press processes are critical front-end elements of our printing services which ready the content for printing on our presses. Digital, sheet-fed and web presses are used, depending on run length, to produce the printed product. We utilize three types of binding techniques for the printed product: perfect binding, saddle stitching and case binding. The product is then labeled and packaged prior to mailing. The majority of journals and magazines are mailed to the subscribers; the remainders are shipped to the publisher. Our books are shipped in cases to the customer. Catalogs are drop-shipped to various locations throughout the U.S. and placed into the mail stream close to the recipient.

Technology Services

We continue to develop new services and solutions to help our customers and prospects thrive in the evolving printing industry. Through our extensive experience as a journal printer providing a broad range of technology solutions for their content and delivery needs, we believe we are well positioned to bring innovative technology-based services and solutions to the journal, book, magazine, and catalog market segments. In order to accelerate our technology development, we have added technology resources throughout the organization and increased spending on innovative software development. The results of these efforts include the introduction of on-demand digital printing, custom publishing, interactive content for mobile applications and electronic content conversion, warehousing and delivery. We process significant amounts of our customers’ intellectual property and play a critical role in helping customers meet demands for electronic and printed media.

Value-Added Support Services

In addition to providing printing services to our customers, we offer a full range of value-added support services. The demand for these services is growing as they are critical to meeting our customers’ changing needs. These services are highly customized for each customer’s specifications and delivery requirements. Examples of the value-added support services we provide are page composition, copy-editing, digital proofing, electronic publishing systems, subscriber services, digital media distribution, custom publishing and back issue fulfillment.

Printing Segments

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

Index

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

Net sales %	2012		2011		2010
Publications		55		54		56
Specialty Catalogs		24		25		23
Books		21		21		21
Total		100		100		100

Our net sales attributable to customers in the United States were $262.2 million, $259.9 million and $261.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Our net sales attributable to customers in foreign countries were $5.0 million, $5.0 million and $5.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Additional financial information about our segments is set forth in Note 16 to our consolidated financial statements set forth in Part II, Item 8 of this report.

Assets by Segment

The following table presents the total assets by segment for each of the fiscal years ended December 31, 2012, 2011 and 2010 (in thousands):

	Year ended December 31,		Year ended December 31,		Year ended December 31,
	2012		2011		2010

Assets
Publications	$	117,954	$	124,886	$	140,566
Specialty catalogs		44,481		47,119		51,669
Books		41,827		39,429		46,519
Corporate		2,037		3,400		2,757
Consolidated total	$	206,299	$	214,834	$	241,511

Publications

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

Journals

The journal market includes journals for the scientific, technical, medical and scholarly communities. We compete in both the short-run and medium-run portions of the journal market. We define short-run journals as journals produced on sheet-fed and digital presses with typical production runs of less than 5,000. We consider medium-run journals to be journals with production runs between 5,000 and 100,000 copies. Medium-run journals are typically produced on web presses due to economies of scale versus sheet-fed presses. Publishers, associations and university presses comprise the customers in the journal market. In 2012, we printed over 2,900 journal titles.

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

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

Index

Specialty Magazines

We characterize specialty magazines as magazines having production runs of less than 100,000 copies. Our customers in this market are publishers and associations. Specialty magazines also have a high level of repeat business due to the periodic nature of the publications. This is largely a regional market defined by proximity to the customer. In 2012, we printed about 340 magazine titles.

We produce short-run magazines with average run lengths of about 20,000 copies. The majority of these magazines are printed in four-color. The magazines are bound using the saddle-stitching and perfect binding techniques. The magazines are produced in frequencies that range from weekly to annually. These magazines are produced on web presses. Although specialty magazine customers do not require composition services, they do demand high levels of customer service focused on distribution and mailing services, where managing the customer’s subscriber database is critical to customer satisfaction.

Specialty Catalogs

We entered the specialty catalog segment in 2004 with our purchase of TDP. We characterize Specialty Catalogs as catalogs distributed by specialty catalog merchant companies, which are often smaller entrepreneurial firms with high service requirements. We produce catalogs with run lengths between 50,000 and 8,500,000 copies, most of which are printed in four-color and are bound using the saddle stitching technique. Multiple versions of each catalog are distributed during the year requiring high levels of customer service and extensive distribution services. In 2012, we printed about 200 catalog titles.

Books

We print books for publishers, associations and university presses. Sales to this market include both the initial printing of titles and subsequent reprints. In 2012, we printed over 9,400 book titles.

We produce books in run lengths that average about 1,900 copies and range from 100 to 10,000 copies. The majority of these books are black and white. Books are produced on both sheet-fed and web presses. In 2012, about 55% of our books had soft covers (perfect bound) and about 45% had hard covers (case bound).

Competition

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

Customers

We benefit from a highly diversified customer base. The majority of our business comes from publishers, followed by catalog merchants, associations and university presses. The average length of our relationship with our top 50 customers is approximately 18 years. During 2012, 2011 and 2010, we had no customer that accounted for more than 10% of our net sales.

Sales and Marketing

We have developed a knowledgeable and experienced sales management team, which has successfully cultivated and maintained strong relationships with customers across the U.S. Our products are sold through internal direct sales professionals and a dedicated network of sales representatives. Across all of our companies, external representatives augment an internal customer service and sales staff, providing our customers with multiple touch points. Our sales representatives are paid a commission based on sales volume growth targets. Additionally, we have alliances with printers in other geographies to meet publishers’ global distribution needs for publications and books.

We have also invested in additional marketing resources and expanded our marketing programs to increase our visibility in the marketplace and emphasize the breadth of products and services we provide to our customers. We utilize social media, blogging, webinars and other innovative techniques to reach current and prospective customers.

Index

Raw Materials

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

Operational Technology

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

Employees

We had approximately 1,460 employees as of December 31, 2012. We focus heavily on fostering enthusiastic and positive cultures at each of our locations. In addition, we closely monitor our employees’ level of job satisfaction with comprehensive surveys on a regular basis. Management believes our compensation and benefits packages are competitive within the industry and local markets.

Regulatory Matters

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

ITEM 1A.

RISK FACTORS

Risk Factors

Senior Secured Notes Maturing—Our senior secured notes mature on April 15, 2014. We do not have sufficient funds to repay our senior secured notes and may not be able to refinance them prior to their maturity.

We do not have sufficient funds, nor do we anticipate generating sufficient funds from operations, to repay our senior secured notes, which mature on April 15, 2014. We intend to refinance these notes prior to their maturity but we cannot assure you that we will be able to do so on terms and conditions satisfactory to us within the period needed to meet our repayment obligations. Our ability to refinance senior secured notes on commercially reasonable terms may be materially and adversely impacted by credit market conditions and our financial condition.

Working Capital Facility Maturing—Although we anticipate that we will be able to refinance our working capital facility prior to its termination on January 14, 2014, there can be no assurance that we will be able to do so.

Our working capital facility is scheduled to terminate on January 14, 2014. As of December 31, 2012 we had $5.7 million of borrowings outstanding under our working capital facility. We anticipate that we will be able to replace the current facility prior to its termination, but there can be no assurances that we will be able to do so on similar terms or at all. If we are not able to replace our working capital facility on similar terms it could adversely impact our ability to fund our liquidity needs.

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

We may require more capital in the future to:

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fund our operations;

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

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enhance and expand the range of services we offer; and

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

Index

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

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

We have a significant amount of indebtedness. On December 31, 2012, we had total indebtedness of approximately $128.0 million.

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

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

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

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increase our vulnerability to general adverse economic and industry conditions;

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

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

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

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

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

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

Digital printing methods continue to evolve and are becoming more cost effective for printing short-run publications. The growth of digital printing could allow other printers to compete against us in our specialized market, which could cause a decrease in the demand for our services or could force us to lower our prices to remain competitive. Such a decrease in demand or price could result in decreased profitability and have a material adverse effect on our business, financial condition and results of operations.

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

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

Index

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

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

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

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

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

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

During 2012 we did not derive more than 10% of our net sales from any single customer. However, we derived a significant portion of our net sales from our ten largest customers. In the future, an increase in business from a large customer could result in net sales to that customer comprising more than 10% of our total net sales. We cannot assure you that our large customers will continue to use our printing services. Our customer contracts need to be renewed from time to time and we cannot assure you that such contracts will be renewed in the future. The loss of any of our large customers could cause our net sales and profitability to decline materially.

Financial Covenant Compliance—If we are unable to comply with the financial covenants in our working capital facility or indenture, our business, results of operations and liquidity could be materially and adversely affected.

Our working capital facility and the indenture governing our senior secured notes both contain financial covenants requiring that we achieve certain levels of Consolidated EBITDA (as defined) and limiting our capital expenditures. For any period of four consecutive quarters, taken as one accounting period, we are required to maintain Consolidated EBITDA of at least $34.0 million for the period April 1, 2012 to March 31, 2013 and $35.0 million for the period April 1, 2013 and thereafter. Our capital expenditures can not exceed $13.3 million in the fiscal year ending December 31, 2013, which includes unused amounts carried forward from prior periods. We cannot be sure that we will be able to meet these financial covenants. If our revenues are not sufficient, we could be required to reduce operating expenses significantly in order to comply with the Consolidated EBITDA covenant. We cannot assure you that we will be successful in generating sufficient revenues or implementing additional operating expense reductions (if needed) on a timely basis, or at all, that any actions we take would be sufficient to avoid a default under our working capital facility and the indenture governing our senior secured notes, or that any additional operating expense reductions will not have a lasting material adverse impact on our results of operations or long-term business prospects. Furthermore, if management is unsuccessful in implementing sufficient additional operating expense reductions or otherwise ensuring that we are in compliance with the financial covenants, an event of default could occur, which, if we are not able to obtain a waiver, would allow the lenders under the working capital facility and the holders of the senior secured notes to accelerate any amounts outstanding and exercise their other remedies. There is no assurance that we would receive waivers should we not meet our financial covenants. In addition, we may not be able to refinance such indebtedness through the proceeds of debt or equity issuances or otherwise on reasonable terms, on a timely basis, or at all.

Index

Impairments—Our financial results could be negatively impacted by impairments of goodwill and other long-lived assets.

On an annual basis or as circumstances dictate, we review goodwill and other long-lived assets, consisting primarily of property, plant and equipment and identified intangibles subject to amortization, and evaluate events or other developments that may indicate impairment in the carrying amount. A decline in profitability at one of our reporting units could result in non-cash impairment charges. Any impairment charge could have a significant negative effect on our reported results of operations. In the fourth quarter of 2010, due primarily to the longer and more sustained deterioration of the magazine business and the unlikely prospect of a meaningful recovery in the near term, our assessment indicated that goodwill at Dartmouth Printing Company was fully impaired, resulting in a non-cash charge of $7.0 million.

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

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

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

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

Our journals, magazines and catalogs are mailed, either by us or our customers, to subscribers. As a result, an increase in postal rates may cause our customers to decrease the size and number of their publications. Although we generally have not experienced significant decreases in mailings in the past due to postal rate increases, we cannot assure you that such a decrease will not occur in the future or will not potentially adversely affect the financial results of our business. In addition, the U.S. Postal Service has proposed reducing the delivery of mail from six days to five days per week beginning in August 2013. If this change is adopted we cannot assure you how our customers will react and whether or not this will adversely affect the financial results of our business.

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

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

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

Our operating results and performance are impacted by general economic conditions, both domestic and abroad. Revenue in the printing industry has declined in the past five years due to the economic recession’s effects on advertising and consumer spending. Current global economic conditions may continue to negatively and materially affect demand for our products and services and our financial performance. Examples of how our business and financial performance may continue to be adversely affected by current and future economic conditions include:

•

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

•

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

•

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

Index

•

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

•

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

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

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

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

•

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

•

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

•

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

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

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

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

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

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

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

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

Index

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

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

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

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

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

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

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

•

restructuring charges associated with the acquisitions; and

•

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

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

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

•

the possibility that we have acquired substantial undisclosed liabilities;

•

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

•

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

•

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

Index

We may not be successful in overcoming these risks.

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

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

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

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

We operate a network of 13 manufacturing, warehousing and office facilities located throughout the East Coast and Midwest that occupy, in total, about 1.1 million square feet. We maintain approximately 1.0 million square feet of production space consisting of manufacturing and publication services. We own about 83% of the square footage we use. The following table provides an overview of our manufacturing, warehousing and office facilities.

Location	Function(s)	Ownership Structure	Total Size (Sq. Feet)
Hunt Valley, MD	Corporate Headquarters	Leased		10,628
York, PA	Administrative (Corporate)	Leased		1,020
Hanover, PA	Manufacturing (Publications)	Owned(1)		172,250
Chelsea, MI	Manufacturing (Books)	Owned(1)		160,569
Hanover, NH	Manufacturing (Publications)	Owned(1)		147,830
Lisbon, ME	Manufacturing (Specialty catalogs)	Owned(1)		276,787
Ann Arbor, MI	Manufacturing and Distribution (Books)	Owned(1)		124,726
Sterling, VA	Customer Service (Publications)	Leased		4,960
Hanover, PA	Warehousing (Publications)	Leased		70,000
Orford, NH	Warehousing (Publications)	Leased		8,264
Waterbury, VT	Publication Services (Publications)	Leased		13,000
Lewiston, ME	Warehousing (Specialty catalogs)	Leased		69,286
Lisbon, ME	Warehousing (Specialty catalogs)	Leased		2,500
		Total		1,061,820

(1)

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

Some of our office and warehouse leases are on yearly renewals. We believe that our office, manufacturing and warehousing facilities are adequate for our immediate needs and that additional or substitute space is available at a reasonable cost if needed to accommodate future growth and expansion.

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

Index

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.

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

We are wholly-owned by TSG Holdings Corp, a privately owned corporation. There is no public trading market for our equity securities or for those of TSG Holdings Corp. As of March 27, 2013, there were 34 holders of TSG Holdings Corp. common stock.

Our working capital facility contains customary restrictions on our ability and the ability of certain of our subsidiaries to declare or pay any dividends or repurchase stock. The indenture governing our 12.5% Senior Secured Notes due 2014 also contains customary terms restricting our ability and the ability of certain of our subsidiaries to declare or pay any dividends or repurchase stock. For further information related to the payment of dividends, see the discussion contained in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Information with respect to shares of common stock that may be issued under our equity compensation plans is set forth in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

ITEM 6.

SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this annual report on Form 10-K. The consolidated statement of operations and balance sheet data for all periods presented is derived from the audited consolidated financial statements included elsewhere in this annual report on Form 10-K or in annual reports on Form 10-K for prior years on file with the Securities and Exchange Commission (“SEC”).

	Year ended			Year ended			Year ended			Year ended		Year ended
	December 31,			December 31,			December 31,			December 31,		December 31,
(Dollars in thousands)	2012			2011			2010			2009		2008
Statement of Operations Data:

Net sales	$	267,232		$	264,891		$	266,188		$	293,349	$	348,027
Gross profit		53,306			48,148			53,677			60,401		66,647
Selling and administrative expenses		32,012			34,662			35,799			37,115		42,175
Operating income		19,458			7,362			9,392			21,390		12,757
Net loss		(93	)		(8,960	)		(5,941	)		8,217		(5,872	)

Balance Sheet Data (at end of period):

Cash and cash equivalents	$	1,598		$	475		$	13,717		$	4,110	$	16,397
Property, plant and equipment, net		93,137			98,836			112,044			117,757		127,064
Total assets		206,299			214,834			241,511			249,000		285,097
Total debt		127,975			135,865			142,924			142,949		164,946
Total stockholder's equity		29,086			29,169			38,099			44,012		44,882

Other Financial Data:

Depreciation and amortization	$	18,499		$	23,709		$	20,864		$	18,674	$	18,400
Capital expenditures		10,214			12,805			13,671			9,654		17,597

Index

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Introduction

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

Acquisition transactions

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

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

2011 Notes and Amended and Restated Working Capital Facility

On April 15, 2011, we completed a private debt offering of the 2011 Notes (senior secured notes totaling $150.0 million in aggregate principal amount). The 2011 Notes will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. On the same date, we entered into an agreement to amend and restate our working capital facility, which now has a scheduled maturity of January 14, 2014. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million until October 15, 2013 and up to $10.0 million thereafter until maturity, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test.

Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility were used to repurchase all of our existing 2003 and 2004 Notes (due August 15, 2011) and to pay related fees and expenses.

Restructuring costs and facility shutdown

DPC/ULI Consolidation

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

Due to continued adverse trends in the specialty magazine business (within our Publications segment) as a result of the weak economy, on January 19, 2011, our Board of Directors approved a restructuring plan to consolidate all specialty magazine printing operations into one site. Our ULI facility in Ashburn, Virginia ceased operation on July 1, 2011, and we consolidated the printing of specialty magazines at DPC in Hanover, New Hampshire. Approximately 80 positions were eliminated as a result of the closure. Approximately 20 employees in the Customer Service and Sales areas were retained by DPC. On November 23, 2011, we completed the sale of the Ashburn, Virginia facility for $4.2 million. After deducting related closing costs, our net proceeds were $3.9 million.

Index

In connection with this consolidation, we recorded $0.2 million of restructuring charges during 2012. Charges related to severance and other personnel costs totaled $0.1 million and charges for other exit costs totaled $0.1 million. During 2011, we recorded $1.8 million of restructuring charges. Charges related to severance and other personnel costs totaled $1.3 million and charges for other exit costs totaled $0.5 million. We believe that any future costs in connection with this consolidation will be minimal. We had a liability of $0.2 million related to this restructuring outstanding as of December 31, 2012.

We recorded non-cash charges of $1.6 million during 2011, associated with the accelerated amortization of the ULI trade name based on updated estimates of useful life.

We also recorded non-cash charges of approximately $2.0 million during 2011 associated with the accelerated depreciation of equipment, based on updated estimates of remaining useful life and estimated residual value, equal to the lower of carrying value or best estimate of selling price, less costs to sell.

Workforce Reduction

During the third quarter of 2011, we implemented a restructuring plan to reduce our operating costs through a workforce reduction across all segments of our business. Approximately 20 positions were eliminated as a result of this action. We recorded $0.6 million of restructuring costs during 2011. The costs related primarily to guaranteed severance payments and employee health benefits. We had a minimal liability related to this restructuring outstanding as of December 31, 2012.

The table below shows our restructuring activity in 2012 and our restructuring accrual balance at December 31, 2012 (in thousands):

	DPC/ULI			Workforce
	consolidation			reduction			Total
Restructuring accrual at December 31, 2011	$	168		$	282		$	450
Restructuring costs expensed		220			-			220
Restructuring costs paid		(216	)		(254	)		(470	)
Restructuring accrual at December 31, 2012	$	172		$	28		$	200

Critical Accounting Estimates

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

•

Allowance for doubtful accounts;

•

Goodwill and other long-lived assets;

•

Income taxes; and

•

Self-insurance.

Allowance for Doubtful Accounts

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

Index

Goodwill and Other Long-Lived Assets

On an annual basis or as circumstances dictate, we review goodwill and evaluate events or other developments that may indicate impairment in the carrying amount. We test goodwill for impairment using the two-step process as prescribed by the appropriate guidance. The initial step requires us to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment is then measured in the second step by comparing the implied fair value of goodwill to the carrying value of goodwill for each reporting unit. To determine the implied fair value of goodwill, we make a hypothetical allocation of the reporting unit’s estimated fair value to the tangible and intangible assets (other than goodwill) of the reporting unit.

The determination of the fair value of our reporting units and the allocation of fair value to assets and liabilities within the reporting units requires management to make significant estimates and assumptions. We derive an estimate of fair values for each of our reporting units using a combination of an income approach and appropriate market approaches, each based on an applicable weighting. We assess the applicable weighting based on such factors as current market conditions and the quality and reliability of the data. Absent an indication of fair value from a potential buyer or similar specific transactions, we believe that the use of these methods provides a reasonable estimate of a reporting unit’s fair value. Fair value computed by these methods is arrived at using a number of factors, including projected future operating results, anticipated future cash flows, effective income tax rates, comparable marketplace data within a suitable industry grouping, control premiums appropriate for acquisitions in our industry and the cost of capital. There are inherent uncertainties related to these factors and to our judgment in applying them to this analysis. Nonetheless, we believe that the combination of these methods provides a reasonable approach to estimate the fair value of our reporting units. The allocation requires several analyses to determine the fair value of assets and liabilities including, among others, customer relationships, trade names, technology and property, plant and equipment. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both.

Due primarily to the longer and more sustained deterioration of the magazine business through the fourth quarter of 2010, and the unlikely prospect of a meaningful recovery in the near term, the December 31, 2010 assessment indicated that goodwill related to our Dartmouth Printing Company reporting unit, a component of the Publications segment, was fully impaired. This impairment resulted in a write-down of goodwill totaling $7.0 million which was recorded during the fourth quarter of 2010. The fair values of our remaining reporting units for goodwill impairment purposes were substantially in excess of their carrying values as of December 31, 2010. At December 31, 2012, we had $34.0 million in goodwill. Based on the results of impairment tests as of December 31, 2012, the fair values of our reporting units were significantly in excess of their carrying values. While significant judgment is required, we believe that our estimates of fair value are reasonable. However, should our assumptions change in future years, our fair value models could result in lower fair values for goodwill, which could materially affect the value of goodwill and our results of operations.

We review other long-lived assets, consisting primarily of property, plant and equipment and identified intangibles subject to amortization, for impairment by analyzing the future undiscounted cash flows whenever events or changes in circumstances indicate that the carrying value of the long-lived assets, including goodwill, may not be recoverable. We do not believe there was any impairment of intangible assets or other long-lived assets as of December 31, 2012 and 2011. While significant judgment is required, we believe that our estimates of future undiscounted cash flows are reasonable. However, should our assumptions change in future years, estimates of undiscounted cash flows could change, which could affect our conclusions regarding the recoverability of long-lived assets and could materially affect the value of long-lived assets and our results of operations.

Income Taxes

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

Index

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

We recognize liabilities for uncertain tax positions when it is more likely than not that the position will be sustained upon examination by tax authorities, including resolutions of any related appeals or litigation processes, based on the technical merits. Although we believe our estimates are reasonable, the final outcome of uncertain tax positions may be different from what is reflected in our consolidated financial statements. We adjust our uncertain tax positions based on changes in circumstances that would cause a change to the liability, upon settlement of the position or upon the expiration of the statute of limitations during the period in which such events occur.

We recognize interest and penalties related to uncertain tax positions as part of the income tax provision. We had accrued interest of $0.5 million and penalties of $0.3 million as of December 31, 2012. Interest and penalties expensed were negligible during the years ended December 31, 2012 and 2011 and $0.1 million during the year ended December 31, 2010. Interest and penalties will continue to accrue on certain issues in 2013 and forward. We do not anticipate a significant change in our liabilities for uncertain tax positions during 2013.

Self-Insurance

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

Results of Operations

The periods presented in this Form 10-K are reported on a comparable basis. The Publications business segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing and Dartmouth Journal Services. On July 1, 2011, we ceased operations at United Litho, which was part of our Publications segment, and consolidated the printing of specialty magazines at Dartmouth Printing. We believe there are many similarities in the journal and magazine markets such as the equipment used in the print and bind process, distribution methods, repetitiveness and frequency of titles and the level of service required by customers. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books. This market does not have the repetitive nature of our other products and does not require the same level of customer service. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies.

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

Index

Comparison of Years Ended December 31, 2012 and December 31, 2011

													Percent of revenue
	Year ended December 31,						Increase (decrease)						Year ended December 31,
(in thousands)	2012			2011			Dollars			Percentage			2012			2011

Net sales
Publications	$	146,373		$	142,878		$	3,495			2.4	%		54.8	%		54.0	%
Specialty catalogs		65,680			65,958			(278	)		(0.4	%)		24.5	%		24.9	%
Books		55,302			56,227			(925	)		(1.6	%)		20.7	%		21.2	%
Intersegment sales elimination		(123	)		(172	)		49			28.5	%		-			(0.1	%)
Total net sales		267,232			264,891			2,341			0.9	%		100.0	%		100.0	%

Cost of sales		213,926			216,743			(2,817	)		(1.3	%)		80.0	%		81.8	%

Gross profit		53,306			48,148			5,158			10.7	%		20.0	%		18.2	%

Selling and administrative expenses		32,012			34,662			(2,650	)		(7.6	%)		12.0	%		13.1	%
(Gain) loss on disposition of fixed assets		(70	)		437			(507	)	nm				-			0.2	%
Restructuring costs		220			2,369			(2,149	)	nm				0.1	%		0.9	%
Amortization of intangibles		1,686			3,318			(1,632	)		(49.2	%)		0.6	%		1.2	%
Total operating expenses		33,848			40,786			(6,938	)		(17.0	%)		12.7	%		15.4	%

Operating income
Publications		19,822			8,757			11,065			126.4	%		13.5	%		6.1	%
Specialty catalogs		(2,017	)		(2,575	)		558			21.7	%		(3.1	%)		(3.9	%)
Books		2,225			2,876			(651	)		(22.6	%)		4.0	%		5.1	%
Corporate expenses		(572	)		(1,696	)		1,124			66.3	%		N/A			N/A
Total operating income		19,458			7,362			12,096			164.3	%		7.3	%		2.8	%

Other (income) expense
Interest expense		21,052			21,172			(120	)		(0.6	%)		7.9	%		8.0	%
Interest income		(7	)		(14	)		7			50.0	%		-			-
(Gain) loss on repurchase of notes payable		(1,157	)		1,022			(2,179	)	nm				(0.4	%)		0.4	%
Other, net		61			15			46			306.7	%		-			-
Total other expense		19,949			22,195			(2,246	)		(10.1	%)		7.5	%		8.4	%

Loss before income taxes		(491	)		(14,833	)		14,342			96.7	%		(0.2	%)		(5.6	%)

Income tax benefit		(398	)		(5,873	)		5,475		nm				(0.2	%)		(2.2	%)

Net loss	$	(93	)	$	(8,960	)	$	8,867			99.0	%		-			(3.4	%)

nm—not meaningful

Commentary:

Net sales for 2012 increased by $2.3 million or 0.9% versus 2011 due primarily to work from new and existing customers partially offset by lower paper pass through costs. Net sales for the Publications segment increased $3.5 million or 2.4% in 2012 compared to 2011 due primarily to work from new and existing journal customers partially offset by sales declines in magazines and lower paper pass through costs. Net sales for the Specialty Catalogs segment decreased $0.3 million or 0.4% in 2012 compared with 2011 due primarily to reductions in run lengths as catalog merchants reduced quantities in response to weak product sales. Net sales for the Books segment decreased $0.9 million or 1.6% in 2012 compared with 2011 due primarily to lower paper pass through costs.

Gross profit for 2012 increased by $5.2 million or 10.7% compared to 2011. Gross margin of 20.0% of net sales for 2012 reflected a 1.8 margin point increase versus 2011. Approximately 60% of the increase in our gross profit was attributable to the improved performance of the consolidated DPC/ULI business unit. More specifically, the gross profit and gross margin increases were due primarily to the impact of higher sales coupled with the absence in 2012 of the acceleration of depreciation expense recorded in 2011 in connection with the shutdown of ULI and the disposal of two printing presses at TDP. Additionally, lower people-related costs, including healthcare claims, as well as lower operating lease costs were partially offset by lower recycling revenue and lower freight margins as well as higher material and repair costs.

Index

Selling and administrative expenses decreased $2.7 million or 7.6% in 2012 as compared to 2011. The decrease was due primarily to lower people-related costs, lower bad debt expense and professional fees as well as the absence in 2012 of the management fee paid to our principal equity sponsors pursuant to an agreement that was terminated subsequent to the first quarter of 2011.

Restructuring costs were $2.1 million lower in 2012 as compared to 2011. The costs recorded during 2011 were primarily related to the shutdown of ULI, which was effectively completed by the end of 2011.

Amortization expense was $1.6 million lower in 2012 as compared to last year due to the absence in 2012 of the accelerated amortization of the ULI trade name recorded in 2011 in connection with the shutdown of ULI.

Operating income of $19.5 million for 2012 represented an increase of $12.1 million as compared to 2011. Approximately two-thirds of the increase in operating income was attributable to improved results from the consolidated DPC/ULI business unit. More specifically, the increase in operating income was due primarily to the impact of higher sales coupled with the absence in 2012 of depreciation and amortization expense and restructuring costs recorded in 2011 in connection with the shutdown of ULI. The non recurrence of restructuring costs related to a 2011 workforce reduction, the absence of a fee paid to our principal equity sponsors, and lower people-related and operating lease costs were partially offset by lower recycling revenue, reduced freight margins and increased material and repair costs. Publications operating income increased by $11.1 million in 2012 as compared to 2011 with approximately three-quarters of the increase attributable to the consolidated DPC/ULI business unit. The increase in Publications operating income was due principally to higher sales as well as the absence in 2012 of accelerated depreciation and amortization expense and restructuring costs recorded in connection with the shutdown of ULI incurred during 2011. Publications operating income also benefitted from reductions in people-related costs and operating lease expense partially offset by lower recycling revenue. Specialty Catalogs had an operating loss of $2.0 million in 2012 as compared to an operating loss of $2.6 million in 2011, an improvement of $0.6 million. This improvement was primarily due to reductions in depreciation expense and people-related costs partially offset by lower sales, lower recycling revenue, reduced freight margins and higher material and repair costs. Operating income for the Books segment decreased by $0.7 million in 2012 as compared to 2011 due primarily to lower recycling revenue and higher equipment depreciation. A decrease in corporate expenses increased operating income by $1.1 million in 2012 as compared with 2011 due primarily to the absence of the fee paid to our principal equity sponsors in 2011 and restructuring costs which were recorded in 2011 in connection with a workforce reduction.

During 2012, we repurchased 2011 Notes with a face value of $12.1 million for $10.5 million in the open market, which included $0.4 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.8 million. As a result of the repurchases, we recognized a gain of $1.2 million. This compares favorably to the $1.0 million loss recorded during 2011 due primarily to the repurchase of our 2003 and 2004 Notes as the result of the tender offer premium paid, the professional fees incurred and the write-off of unamortized deferred financing costs.

The loss before income taxes of $0.5 million for 2012 represented a $14.3 million improvement as compared to the $14.8 million loss before income taxes for 2011. The improvement was due primarily to higher sales, excluding pass through costs, and lower expenses mentioned previously.

Our effective income tax rate in 2012 was 81.0% as compared to 39.6% in 2011. As seen in the income tax rate reconciliation table in Note 11 to our Consolidated Financial Statements, the benefit derived from tax deductible goodwill (of approximately $0.5 million) has a significant impact on our income tax rate relative to our loss before income taxes. This benefit is partially offset by increases in state taxes as a result of conducting business in more states with higher statutory tax rates than in prior years.

We had a net loss of $0.1 million during 2012 as compared to net loss of $9.0 million for 2011. This improvement was due to the factors mentioned previously.

Index

Comparison of Years Ended December 31, 2011 and December 31, 2010

													Percent of revenue
	Year ended December 31,						Increase (decrease)						Year ended December 31,
(in thousands)	2011			2010			Dollars			Percentage			2011			2010

Net sales
Publications	$	142,878		$	148,758		$	(5,880	)		(4.0	%)		54.0	%		55.9	%
Specialty catalogs		65,958			60,725			5,233			8.6	%		24.9	%		22.8	%
Books		56,227			56,776			(549	)		(1.0	%)		21.2	%		21.3	%
Intersegment sales elimination		(172	)		(71	)		(101	)		(142.3	%)		(0.1	%)		-
Total net sales		264,891			266,188			(1,297	)		(0.5	%)		100.0	%		100.0	%

Cost of sales		216,743			212,511			4,232			2.0	%		81.8	%		79.8	%

Gross profit		48,148			53,677			(5,529	)		(10.3	%)		18.2	%		20.2	%

Selling and administrative expenses		34,662			35,799			(1,137	)		(3.2	%)		13.1	%		13.5	%
Loss on disposition of fixed assets		437			9			428		nm				0.2	%		-
Restructuring costs		2,369			78			2,291		nm				0.9	%		-
Amortization of intangibles		3,318			1,398			1,920			137.3	%		1.2	%		0.5	%
Impairment charge		-			7,001			(7,001	)	nm				-			2.7	%
Total operating expenses		40,786			44,285			(3,499	)		(7.9	%)		15.4	%		16.7	%

Operating income
Publications		8,757			8,070			687			8.5	%		6.1	%		5.4	%
Specialty catalogs		(2,575	)		(1,485	)		(1,090	)		(73.4	%)		(3.9	%)		(2.4	%)
Books		2,876			4,339			(1,463	)		(33.7	%)		5.1	%		7.6	%
Corporate expenses		(1,696	)		(1,532	)		(164	)		(10.7	%)		N/A			N/A
Total operating income		7,362			9,392			(2,030	)		(21.6	%)		2.8	%		3.5	%

Other (income) expense
Interest expense		21,172			15,791			5,381			34.1	%		8.0	%		5.9	%
Interest income		(14	)		(49	)		35			71.4	%		-			-
Loss on repurchase of notes payable		1,022			-			1,022		nm				0.4	%		-
Other, net		15			23			(8	)		(34.8	%)		-			-
Total other expense		22,195			15,765			6,430			40.8	%		8.4	%		5.9	%

(Loss) income before income taxes		(14,833	)		(6,373	)		(8,460	)		(132.7	%)		(5.6	%)		(2.4	%)

Income tax (benefit) provision		(5,873	)		(432	)		(5,441	)	nm				(2.2	%)		(0.2	%)

Net (loss) income	$	(8,960	)	$	(5,941	)	$	(3,019	)		(50.8	%)		(3.4	%)		(2.2	%)

nm—not meaningful

Commentary:

Net sales for 2011 decreased slightly versus 2010 as the impact of higher pass through paper costs (approximately $3.6 million) were more than offset by pricing and volume reductions versus a year ago. Net sales for the Publications segment decreased $5.9 million or 4.0% in 2011 compared to a year ago due primarily to: (i) sales declines in journals due to lower pricing and reduced run lengths, the continued migration to digital from offset printing and the expansion of online media and (ii) sales declines in magazines due primarily to lower pricing and reduced run lengths partially offset by modest volume growth with new customers. Net sales for the Specialty Catalogs segment increased $5.2 million or 8.6% in 2011 compared to a year ago with much of the increase due to increases in paper pass through costs coupled with increases in volume, principally from new customers, and higher freight costs. Net sales for the Books segment decreased $0.5 million or 1.0% in 2011 compared to a year ago due primarily to the migration from offset to digital printing and the expansion of electronic books partially offset by higher paper pass through costs.

Gross profit for 2011 decreased by $5.5 million or 10.3% compared to 2010. Gross margin of 18.2% of net sales for 2011 reflected a 2.0 margin point decrease versus 2010. Approximately 40% of the gross profit decline is attributable to increases in pre-consolidation start-up and accelerated depreciation costs associated with the ULI/DPC consolidation coupled with their decline in sales; this adverse impact was partially offset by post-consolidation savings realized following the closure of ULI. The remainder of the gross profit decline is due principally to reductions in sales (excluding pass through costs) in our Publications and Books businesses, an increase in development costs related to our technology-based services and increases in material costs and depreciation expense partially offset by lower operating lease costs, increases in recycling revenue and lower people-related costs.

Index

Selling and administrative expenses decreased $1.1 million or 3.2% in 2011 as compared to 2010. The decrease was due primarily to reductions in bad debt expense, professional fees, management incentive expense and the fees paid to our equity sponsors partially offset by an increase in marketing and technology staffing and travel costs coupled with certain non-capitalizable legal fees incurred in connection with negotiations to refinance our debt.

Restructuring costs of $2.4 million were recorded in 2011. Approximately $1.8 million of the restructuring costs resulted from our decision to shut down the operations of ULI and consolidate the production of specialty magazines at DPC. This decision resulted from adverse trends in the specialty magazine business. The restructuring costs related primarily to severance payments, employee health benefits and other one-time costs. We believe that any future costs in connection with this consolidation will be minimal. ULI ceased operation on July 1, 2011, and all production has been transferred to DPC. Additionally, $0.6 million of the restructuring costs were the result of a workforce reduction across all segments of our business designed to reduce our overall cost structure. These costs related primarily to guaranteed severance payments and employee health benefits. We do not believe any other costs will be expensed in the future in connection with this action.

Amortization expense in 2011 included a $1.6 million charge associated with accelerated amortization of the ULI trade name as a result of the shutdown of ULI.

We evaluate possible impairment of goodwill on an annual basis at the reporting unit level. As a result of our impairment tests in 2010, we concluded that the carrying value of goodwill at DPC exceeded its implied fair value. This resulted in a non-cash impairment charge of $7.0 million in 2010. In connection with our annual assessment of goodwill and other intangibles in 2011, we concluded that there were no indications of impairment.

Operating income of $7.4 million for 2011 represented a decrease of $2.0 million or 21.6% as compared to operating income of $9.4 million for 2010. The $2.0 million reduction includes a $7.0 million improvement versus 2010 attributable solely to the nonrecurring goodwill impairment charge recorded in 2010. Excluding the 2010 goodwill impairment charge impact, operating income declined by $9.0 million in 2011. The combined results of ULI/DPC and their consolidation project accounted for approximately one-half of the $9.0 million decrease. The $9.0 million reduction was due primarily to the decline in gross profit mentioned above as well as the amortization expense and restructuring costs recorded in connection with the shutdown of ULI and the restructuring costs recorded as a result of the workforce reduction. Publications operating income increased by $0.7 million in 2011 due to the $7.0 million nonrecurring goodwill impairment charge incurred in 2010 partially offset by a $6.3 million reduction in operating income due to other factors. Approximately 75% of the $6.3 million decline was attributable to the ULI/DPC business units including the impact of lower sales, the increases in start-up operating costs at DPC in preparation for the incremental volume from ULI, the acceleration of depreciation and amortization expense and the restructuring costs recorded in connection with the shutdown of ULI. The balance of the $6.3 million decline in Publications operating income was attributable to declines in sales versus a year ago coupled with increases in corporate technology staffing cost allocations, which were partially offset by decreases in equipment lease costs and people costs. Specialty Catalogs had an operating loss of $2.6 million in 2011 as compared to an operating loss of $1.5 million in 2010, resulting in a decrease in profitability of $1.1 million. This decrease was primarily due to increases in paper waste, production wages, supplies, materials and depreciation expenses partially offset by higher recycling revenue and lower healthcare costs. Operating income for the Books segment decreased $1.5 million in 2011 compared with last year due principally to the impact of lower sales excluding pass through costs and an increase in the corporate technology staffing cost allocation. An increase in corporate expenses decreased income by $0.2 million. This increase was due primarily to our increased investment in technology resources, certain non-capitalizable legal fees incurred in connection with negotiations to refinance our debt and restructuring costs recorded in connection with a workforce reduction which were largely offset by higher cost allocations to our subsidiaries.

Interest expense of $21.2 million for 2011 represented a $5.4 million increase as compared to 2010 due to our April 15, 2011 refinancing, whereby we replaced our 2003 and 2004 Notes (10.25% senior secured notes with a face amount of $142.9 million) with our 2011 Notes (12.5% senior secured notes with a face amount of $150.0 million). Additionally, the amortization of the deferred financing costs paid and the original issue discount (both in connection with the 2011 Notes) resulted in higher interest charges in 2011 as compared to a year ago. We also recorded a $1.0 million loss primarily as the result of the repurchase of our 2003 and 2004 Notes due to the tender offer premium paid, the professional fees incurred and the write-off of unamortized financing costs associated with the 2003 and 2004 Notes. Additionally, the write-off of unamortized financing costs associated with the repurchase of certain 2011 Notes at 100% of face value, using the proceeds from the sale of the ULI facility, was also a contributing factor to the loss and was partially offset by a gain realized from repurchasing, in the open market, certain 2011 Notes at a discount from face value.

The loss before income taxes of $14.8 million for 2011 represented an $8.5 million decline as compared to last year. The decline was due primarily to the higher expenses and lower sales, excluding pass through costs, mentioned previously.

Index

Our effective income tax rate in 2011 was 39.6% as compared to 6.8% in 2010. The 2010 effective tax rate was lower due primarily to the impact of the goodwill impairment charge in the Publications segment, as this goodwill was not deductible for tax purposes.

Net loss of $9.0 million for 2011 represented a $3.0 million decline as compared to 2010 due to the factors mentioned previously.

Liquidity and Capital Resources

As further described below under “—Indebtedness,” on April 15, 2011, we completed the offering of the 2011 Notes and entered into an agreement to amend and restate our working capital facility. Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility, were used to repurchase all of our existing 2003 and 2004 Notes (due August 15, 2011) and to pay related fees and expenses.

Our principal sources of liquidity are expected to be cash flow generated from operations and borrowings under our working capital facility. Our principal uses of cash are expected to be to meet debt interest requirements, finance capital expenditures and provide working capital. We estimate that our capital expenditures for 2013 will total about $8 million, which is below the amount allowed in our working capital facility and the indenture based on the unused amounts from prior periods that we can carry forward. The actual amount of our 2013 capital expenditures may vary materially depending on several factors including, among others, whether, when and to what extent any capital projects not yet planned, including those currently under senior-level review and any others, are approved, commenced and completed in 2013, the performance of our business and economic and market conditions. We may from time to time seek to purchase or retire our 2011 Notes through cash purchases, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Additionally, we may from time to time fund cash distributions to our Parent in accordance with the limitations outlined in the indenture governing our 2011 Notes and our working capital facility.

Based on our current level of operations, we believe that our cash flow from operations, available cash and available borrowings under our working capital facility will be adequate to meet our future short-term liquidity needs. Our working capital facility, under which we had $5.7 million outstanding as of December 31, 2012, is scheduled to terminate on January 14, 2014. We anticipate that we will be able to replace the current facility prior to its termination, but we cannot assure you that we will be able to do so. Additionally, our 2011 Notes mature on April 15, 2014. We do not have sufficient funds, nor do we anticipate generating sufficient funds from operations, to repay these notes. We intend to refinance these notes prior to their maturity but we cannot assure you that we will be able to do so. Our future operating performance and ability to extend or refinance our indebtedness will be dependent on future economic conditions and financial, business and other factors that may be beyond our control.

We had cash of $1.6 million as of December 31, 2012 compared to $0.5 million as of December 31, 2011. During 2012, we utilized cash on hand to fund operations, make investments in new plant and equipment, pay interest on our debt and repurchase some of our 2011 Notes.

Operating Activities

Net cash provided by operating activities was $20.6 million for 2012 compared to $10.1 million for 2011, an increase of $10.5 million. This increase was primarily due to a decrease in our net loss of $8.9 million coupled with favorable changes in working capital and other assets and liabilities of $3.7 million. These were partially offset by a $2.1 million decrease in non-cash charges principally attributable to decreases in depreciation and amortization expenses as well as the non-cash portion of the gain realized on the repurchase of notes payable in 2012 partially offset by the decrease in the deferred income tax benefit in 2012. The favorable changes in working capital included (i) a favorable change in accrued expenses during 2012 as compared to an unfavorable change in 2011 due primarily to a change in our interest payment dates and (ii) a favorable change in accounts payable due to the timing of purchases and (iii) the refund of a $1.3 million deposit (in exchange for issuing a letter of credit in favor of an insurance provider) reflected as a favorable change in other current assets. These favorable changes were partially offset by an increase in work-in-process inventory due primarily to the timing of production activity at the end of 2012 as compared to the same period in 2011 coupled with the acceleration of paper inventory purchased on behalf of a customer in the Specialty Catalogs segment.

Net cash provided by operating activities was $10.1 million for 2011 compared to $22.7 million for 2010, a decrease of $12.6 million. This decrease was primarily due to an increase in our net loss of $3.0 million in 2011 as compared to 2010, a $5.0 million decrease in non-cash charges and unfavorable changes in working capital and other assets and liabilities of $4.6 million. The decrease in non-cash charges was principally attributable to the non recurrence of the 2010 impairment charges for goodwill and the increase in the deferred income tax benefit in 2011 partially offset by increases in depreciation and amortization expenses. The unfavorable changes in working capital included (i) an increase in accounts receivable at the end of 2011 as compared to 2010 driven by sales activity, (ii) a decrease in accounts payable at the end of 2011 as compared to 2010 due to the timing of purchases, and (iii) a decrease in accrued expenses due primarily to the timing of interest payments. These unfavorable changes were partially offset by a decrease in inventory at the end of 2011 as compared to 2010 because we had acquired additional paper inventory at the end of 2010 in advance of a price increase.

Index

Investing Activities

Net cash used in investing activities was $10.5 million for 2012 compared to $7.8 million for 2011. This $2.7 million increase was primarily the result of a $5.4 million decrease in fixed asset sale proceeds in 2012 as compared to 2011 (due to the sale in 2011 of the facility and equipment in connection with the closing of ULI) partially offset by decreases of $2.6 million of capital spending and $0.1 million of interest capitalized in connection with capital projects in 2012 as compared to 2011.

Net cash used in investing activities was $7.8 million for 2011 compared to $13.1 million for 2010. This $5.3 million decrease in cash used was primarily the result of $0.8 million of lower capital spending in 2011 as compared to 2010 coupled with a $5.0 million increase in fixed asset sale proceeds in 2011 as compared to 2010 due to the sale of the facility and equipment in connection with the closing of ULI. These items were partially offset by the $0.5 million of interest capitalized in connection with the DPC expansion project.

Financing Activities

Net cash used in financing activities was $8.9 million for 2012 compared to $15.5 million during 2011. The primary reasons for this $6.6 million decrease were the absence in 2012 of: (i) $7.2 million in costs paid during 2011 in connection with the offering of the 2011 Notes and the amendment and restatement of our working capital facility and (ii) $1.9 million used to fund the difference between the proceeds from the 2011 Notes and the amount needed to repay our 2003 and 2004 Notes. Additionally, there was a $0.8 million decrease in cash used to repurchase a portion of our 2011 Notes in 2012 as compared to the prior year. These items were partially offset by a decrease in net borrowings of $3.3 million on our working capital facility in 2012 as compared to the prior year.

Net cash used in financing activities was $15.5 million for 2011 compared to minimal activity during 2010. The primary uses of cash in 2011 were (i) $7.2 million to pay for costs in connection with the offering of the 2011 Notes and the amendment and restatement of our working capital facility, (ii) $1.9 million to fund the difference between the proceeds from the 2011 Notes and the amount needed to repay our 2003 and 2004 Notes and (iii) $10.9 million to repurchase a portion of our 2011 Notes (which included a mandatory repurchase of $3.9 million with the proceeds from the sale of the ULI facility). These uses of cash were partially offset by net borrowings of $4.5 million on our working capital facility.

Indebtedness

On April 15, 2011, we completed the offering of the 2011 Notes pursuant to an indenture, by and among us, our subsidiaries named on the signature pages thereto, as guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Indenture”). The 2011 Notes will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. Interest on the 2011 Notes is payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2011. The 2011 Notes are fully and unconditionally guaranteed on a senior secured basis by all of our current subsidiaries.

The Indenture requires that we maintain certain minimum Consolidated EBITDA levels (as discussed further below) for any period of four consecutive fiscal quarters, taken as one accounting period, and prohibits us from making capital expenditures in amounts exceeding certain thresholds for the period beginning on April 15, 2011 and ending on December 31, 2011 and for each fiscal year thereafter. In addition, the Indenture contains covenants that, subject to a number of important exceptions and qualifications, limit our ability and the ability of our restricted subsidiaries to, among other things: pay dividends, redeem stock or make other distributions or restricted payments; incur indebtedness; make certain investments; create liens; agree to restrictions on the payment of dividends; consolidate or merge; sell or otherwise transfer or dispose of assets, including equity interests of our restricted subsidiaries; enter into transactions with our affiliates; designate our subsidiaries as unrestricted subsidiaries; use the proceeds of permitted sales of our assets; and change business lines. If an event of default, as specified in the Indenture, shall occur and be continuing, either the trustee or the holders of a specified percentage of the 2011 Notes may accelerate the maturity of all the 2011 Notes.

On April 15, 2011, we entered into an agreement to amend and restate our working capital facility, which now has a scheduled maturity of January 14, 2014. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million until October 15, 2013 and up to $10.0 million thereafter until maturity, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. Actual available credit under the working capital facility fluctuates because it depends on inventory and accounts receivable values that fluctuate and is subject to discretionary reserves and revaluation adjustments that may be imposed by the agent from time to time and other limitations. The interest rate on borrowings under the working capital facility is the base rate plus a margin of 3.25%. The base rate is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, and (c) the specified LIBOR rate plus 1.00%. At our option, we can elect for borrowings to bear interest for specified periods at the specified LIBOR rate in effect for such periods plus a margin of 4.25%. We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.75% and an annual fee of 4.25% on all letters of credit outstanding.

Index

Both the 2011 Notes and the related guarantees and our and the guarantors’ obligations under the working capital facility are secured by a lien in substantially all of our and the guarantors’ assets. Pursuant to an intercreditor agreement between the trustee under the Indenture and the lender under the working capital facility, (1) in the case of real property, fixtures and equipment that secure the 2011 Notes and guarantees, the lien securing the notes and the guarantees will be senior to the lien securing borrowings, other credit extensions and guarantees under the working capital facility and (2) in the case of the other assets of the Company and the guarantors (including the shares of stock of the Company and the guarantors) that secure the 2011 Notes and guarantees, the lien securing the 2011 Notes and the related guarantees is contractually subordinated to the lien thereon securing borrowings, other credit extensions and guarantees under the working capital facility. Consequently, the 2011 Notes and the related guarantees are effectively subordinated to the borrowings, other credit extensions and guarantees under the working capital facility to the extent of the value of such other assets.

Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under the working capital facility were used to repurchase all of our existing 2003 and 2004 Notes (due August 15, 2011) and to pay related fees and expenses. We have significant interest payments due on the 2011 Notes, as well as interest payments due on borrowings under our working capital facility. Total cash interest payments related to our working capital facility and the 2011 Notes are expected to be in excess of $15.0 million during 2013.

Each of the Indenture and the working capital facility agreement requires that we maintain certain minimum consolidated EBITDA (“Consolidated EBITDA”) amounts for any period of four consecutive quarters, taken as one accounting period, as follows:

Period	Amount
April 15, 2011 to March 31, 2012	$	32.00 million
April 1, 2012 to March 31, 2013	$	34.00 million
April 1, 2013 and thereafter	$	35.00 million

Consolidated EBITDA has the same meaning under each of the Indenture and the working capital facility agreement and generally consists of net income (loss) before interest expense, income taxes, depreciation, amortization, restructuring charges and certain other non-cash items. Failure to satisfy the minimum Consolidated EBITDA amounts will constitute a default under each of the Indenture and the working capital facility agreement. For the twelve months ended December 31, 2012, our Consolidated EBITDA was $38.2 million.

Consolidated EBITDA is used for purposes of calculating our compliance with the minimum Consolidated EBITDA covenants in each of the Indenture and the working capital facility agreement and to evaluate our operating performance and determine management incentive payments. Consolidated EBITDA is not an indicator of financial performance or liquidity under generally accepted accounting principles and may not be comparable to similarly captioned information reported by other companies. In addition, it should not be considered as an alternative to, or more meaningful than, income before income taxes, cash flows from operating activities or other traditional indicators of operating performance.

The following table provides a reconciliation of Consolidated EBITDA to cash flows from operating activities for the years ended December 31, 2012 and 2011 (in thousands).

Index

	Year ended			Year ended
	December 31,			December 31,
	2012			2011

Net cash provided by operating activities	$	20,579		$	10,109

Accounts receivable		(68	)		333
Inventories		2,008			(492	)
Other current assets		(1,059	)		31
Refundable income taxes		(109	)		101
Other assets		(28	)		(753	)
Accounts payable		214			1,256
Accrued expenses		(135	)		2,523
Income taxes payable		(59	)		-
Due to parent, net		-			535
Other liabilities		33			941
Provision for doubtful accounts		108			(299	)
Provision for LIFO value		(39	)		26
Deferred income tax benefit		496			5,064
Gain (loss) on disposition of fixed assets, net		70			(436	)
Income tax benefit		(398	)		(5,873	)
Cash interest expense		16,303			17,101
Management fees		-			491
Non cash adjustments:
Adjustments to LIFO value		39			(26	)
Increase in market value of investments		(10	)		(8	)
Amortization of prepaid lease costs		-			1
Loss on disposition of fixed assets		24			560
Interest income		(7	)		(14	)
Restructuring costs		220			2,369
Premium and fees paid to repurchase notes payable		-			935
Non capitalizable professional fees associated with refinancing debt		-			278
Consolidated EBITDA	$	38,182		$	34,753

Contractual Obligations

The following table summarizes our future minimum non-cancelable contractual obligations as of December 31, 2012. The information presented in the table below reflects management’s estimates of the contractual maturities of our obligations. These maturities may differ significantly from the actual maturities of these obligations:

	Remaining Payments Due by Period
					2014 to		2016 to		2018 and
	Total		2013		2015		2017		beyond
(in thousands)

Long term debt, including interest (1)	$	155,226	$	15,738	$	139,488	$	-	$	-
Operating leases		3,343		1,400		1,591		352		-
Purchase obligations (2)		2,901		2,753		141		7		-
Other long-term obligations (3)		13		13		-		-		-

Total (4)	$	161,483	$	19,904	$	141,220	$	359	$	-

(1)	Includes $5.7 million principal amount due January 14, 2014 under our working capital facility and $125.9 million aggregate principal amount due on the 2011 Notes plus interest at 12.5% payable semi-annually through April 15, 2014.

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

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

(4)

At December 31, 2012, we have recognized $1.6 million of liabilities for unrecognized tax benefits. There is a high degree of uncertainty with respect to the timing of future cash outflows associated with our unrecognized tax benefits because they are dependent on various matters including tax examinations, changes in tax laws or interpretation of those laws, expiration of statutes of limitation, etc. Due to these uncertainties, our unrecognized tax benefits have been excluded from the contractual obligations table above.

Index

Off-Balance Sheet Arrangements

At December 31, 2012 and 2011, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Effect of Inflation

Inflation generally affects us by increasing our costs of labor, equipment and new materials. We do not believe that inflation has had any material effect on our results of operations during 2012, 2011 and 2010.

Recently Issued Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to the Balance Sheet (Disclosures about Offsetting Assets and Liabilities). This amendment requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amendment should be applied retrospectively. We are in the process of evaluating this guidance but currently do not believe that it will have a material effect on our consolidated financial statements.

In February 2013, the FASB issued an accounting standards update that amends accounting guidance to require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amounts reclassified are required by GAAP to be reclassified to net income in their entirety in the same reporting period. The amendments in this accounting standards update are effective prospectively for reporting periods beginning after December 15, 2012, with early adoption permitted. The adoption of this accounting standards update will not have a significant impact on 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 in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in results of our operations and cash flows. In the ordinary course of business, we are exposed to foreign currency and interest rate risks. These risks primarily relate to the purchase of products and services from foreign suppliers and changes in interest rates on our long-term debt.

Foreign Exchange Rate Market Risk

We consider the U.S. dollar to be the functional currency for all of our entities. All of our net sales and virtually all of our expenses in fiscal years 2012, 2011 and 2010 were denominated in U.S. dollars. Therefore, foreign currency fluctuations had a negligible impact on our financial results in those periods.

Interest Rate Market Risk

We could be exposed to changes in interest rates. Our working capital facility is variable rate debt. Interest rate changes, therefore, generally do not affect the market value of such debt but do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant. During 2012, we had borrowings under our working capital facility, and we estimate that a 1.0% increase in interest rates would have resulted in a negligible amount of additional interest expense for the year ended December 31, 2012. We do not currently utilize derivative financial instruments to hedge changes in interest rates. All of our other debt carries fixed interest rates.

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ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Stockholder of The Sheridan Group, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholder’s equity and of cash flows present fairly, in all material respects, the financial position of The Sheridan Group, Inc. and Subsidiaries (the “Company”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Baltimore, Maryland

March 27, 2013

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The Sheridan Group, Inc. and Subsidiaries

Consolidated Balance Sheets

At December 31, 2012 and 2011

	December 31,			December 31,
	2012			2011
Assets
Current assets
Cash and cash equivalents	$	1,597,556		$	475,324
Accounts receivable, net of allowance for doubtful accounts of $282,174 and $1,173,194, respectively		25,543,990			25,504,733
Inventories, net		17,312,133			15,343,487
Other current assets		3,366,730			4,425,998
Refundable income taxes		-			109,387
Deferred income taxes		864,747			1,400,710
Total current assets		48,685,156			47,259,639

Property, plant and equipment, net		93,136,696			98,835,957
Intangibles, net		27,164,853			28,850,705
Goodwill		33,978,641			33,978,641
Deferred financing costs, net		2,270,854			4,818,024
Other assets		1,062,326			1,090,681
Total assets	$	206,298,526		$	214,833,647

Liabilities
Current liabilities
Accounts payable	$	15,151,602		$	14,842,454
Accrued expenses		13,154,439			13,019,152
Income taxes payable		59,408			-
Total current liabilities		28,365,449			27,861,606

Notes payable and working capital facility		127,974,519			135,864,880
Deferred income taxes		18,449,300			19,452,050
Other liabilities		2,422,849			2,485,794
Total liabilities		177,212,117			185,664,330

Commitments and contingencies (Notes 12 and 15)

Stockholder's Equity
Common stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding		-			-
Additional paid-in capital		42,117,195			42,106,557
Accumulated deficit		(13,030,786	)		(12,937,240	)
Total stockholder's equity		29,086,409			29,169,317

Total liabilities and stockholder's equity	$	206,298,526		$	214,833,647

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

Index

The Sheridan Group, Inc. and Subsidiaries

Consolidated Statements of Operations

Years Ended December 31, 2012, 2011 and 2010

	Year Ended December 31,			Year Ended December 31,			Year Ended December 31,
	2012			2011			2010
Net sales	$	267,232,526		$	264,890,671		$	266,187,753
Cost of sales		213,926,099			216,743,214			212,510,439
Gross profit		53,306,427			48,147,457			53,677,314
Selling and administrative expenses		32,012,176			34,662,195			35,799,291
(Gain) loss on disposition of fixed assets		(70,447	)		436,596			9,385
Restructuring costs		220,342			2,368,933			78,335
Amortization of intangibles		1,685,852			3,317,815			1,398,015
Impairment charges		-			-			7,000,785
Total operating expenses		33,847,923			40,785,539			44,285,811
Operating income		19,458,504			7,361,918			9,391,503
Other (income) expense
Interest expense		21,052,109			21,172,207			15,790,421
Interest income		(6,855	)		(14,508	)		(48,869	)
(Gain) loss on repurchase of notes payable		(1,156,855	)		1,021,929			-
Other, net		61,370			15,064			22,906
Total other expense		19,949,769			22,194,692			15,764,458
Loss before income taxes		(491,265	)		(14,832,774	)		(6,372,955	)
Income tax benefit		(397,719	)		(5,872,649	)		(432,209	)
Net loss	$	(93,546	)	$	(8,960,125	)	$	(5,940,746	)

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

Index

The Sheridan Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholder’s Equity

Years Ended December 31, 2012, 2011 and 2010

							Retained
					Additional		Earnings			Total
	Common Stock				Paid-In		(Accumulated			Stockholder's
	Shares		Amount		Capital		Deficit)			Equity
Balance as of December 31, 2009		1		-	$	42,047,938	$	1,963,631		$	44,011,569

Capital contribution from parent company - stock options exercised		-		-		2,970		-			2,970
Stock-based compensation		-		-		25,000		-			25,000
Net loss		-		-		-		(5,940,746	)		(5,940,746	)

Balance as of December 31, 2010		1		-		42,075,908		(3,977,115	)		38,098,793

Stock-based compensation		-		-		30,649		-			30,649
Net loss		-		-		-		(8,960,125	)		(8,960,125	)

Balance as of December 31, 2011		1		-		42,106,557		(12,937,240	)		29,169,317

Stock-based compensation		-		-		10,638		-			10,638
Net loss		-		-		-		(93,546	)		(93,546	)

Balance as of December 31, 2012		1		-	$	42,117,195	$	(13,030,786	)	$	29,086,409

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

Index

The Sheridan Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Years Ended December 31, 2012, 2011 and 2010

	December 31,			December 31,			December 31,
	2012			2011			2010
Cash flows provided by operating activities:
Net loss	$	(93,546	)	$	(8,960,125	)	$	(5,940,746	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation		16,813,475			20,391,299			19,466,429
Amortization of intangible assets		1,685,852			3,317,815			1,398,015
Impairment of goodwill		-			-			7,000,785
Provision for doubtful accounts		(107,606	)		298,703			917,857
Provision for LIFO value		39,096			(25,968	)		30,226
Stock-based compensation		10,638			30,649			25,000
Amortization of deferred financing costs and debt discount, included in interest expense		4,749,405			4,070,731			942,225
Deferred income tax benefit		(496,383	)		(5,064,322	)		(1,199,846	)
Non-cash portion of net (gain) loss on repurchase of notes payable		(1,156,855	)		87,433			-
(Gain) loss on disposition of fixed assets		(70,447	)		436,596			9,385
Changes in operating assets and liabilities
Accounts receivable		68,349			(332,803	)		2,993,652
Inventories		(2,007,742	)		491,533			(1,849,648	)
Other current assets		1,059,267			(31,335	)		(366,020	)
Refundable income taxes		109,387			(100,930	)		171,016
Other assets		28,355			753,058			(15,566	)
Accounts payable		(213,916	)		(1,255,940	)		1,057,415
Accrued expenses		135,286			(2,522,706	)		(2,157,018	)
Income taxes payable		59,408			-			413,396
Due to parent, net		-			(534,440	)		-
Other liabilities		(33,349	)		(940,627	)		(156,379	)
Net cash provided by operating activities		20,578,674			10,108,621			22,740,178

Cash flows used in investing activities:
Purchases of property, plant and equipment		(10,213,587	)		(12,804,799	)		(13,671,287	)
Interest capitalized in connection with purchases of property, plant and equipment		(405,000	)		(542,000	)		-
Proceeds from sale of fixed assets		97,885			5,515,182			535,481
Net cash used in investing activities		(10,520,702	)		(7,831,617	)		(13,135,806	)

Cash flows (used in) provided by financing activities:
Borrowing of revolving line of credit		95,490,222			44,327,324			-
Repayment of revolving line of credit		(94,300,000	)		(39,800,000	)		-
Repayment of long term debt		(10,110,962	)		(153,800,600	)		-
Proceeds from issuance of long term debt		-			141,000,000			-
Payment of deferred financing costs in connection with long term debt		(15,000	)		(7,245,486	)		-
Proceeds from capital contribution from parent company		-			-			2,970
Net cash (used in) provided by financing activities		(8,935,740	)		(15,518,762	)		2,970

Net increase (decrease) in cash and cash equivalents		1,122,232			(13,241,758	)		9,607,342

Cash and cash equivalents at beginning of period		475,324			13,717,082			4,109,740

Cash and cash equivalents at end of period	$	1,597,556		$	475,324		$	13,717,082

Supplemental disclosure of cash flow information
Cash paid (received) during the year for
Interest paid	$	16,539,010		$	19,007,382		$	14,822,816
Income taxes (received) paid, net	$	(24,495	)	$	(12,985	)	$	181,237

Non-cash investing activities
Asset additions in accounts payable	$	1,103,907		$	580,843		$	787,993

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

Index

The Sheridan Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Years Ended December 31, 2012, 2011 and 2010

1. Business Organization

The Sheridan Group, Inc. (“TSG”) is one of the leading specialty printers in the United States, offering a full range of printing and value-added support services for the journal, magazine, book, catalog and article reprint markets. We provide a wide range of printing services and value-added support services, such as page composition, electronic copy-editing, digital proofing, electronic publishing systems, subscriber services, digital media distribution and custom publishing. We operate six wholly-owned subsidiaries: The Sheridan Press, Inc. (“TSP”), Dartmouth Printing Company (“DPC”), Dartmouth Journal Services, Inc. (“DJS”), Sheridan Books, Inc. (“SBI”), The Dingley Press, Inc. (“TDP”) and The Sheridan Group Holding Company. During 2011, we consolidated the printing of magazines at DPC’s facility and closed the operations of United Litho, Inc. (“ULI”). The Sheridan Group, Inc. is a wholly-owned subsidiary of TSG Holdings Corp. (“Holdings”), whose stockholders include affiliates of Bruckmann, Rosser, Sherrill & Co., LLC (“BRS”) and Jefferies Capital Partners (“JCP”), members of our management and other shareholders. As used in the notes to the consolidated financial statements, the terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of The Sheridan Group, Inc. and all of its subsidiaries.

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

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

Revenue Recognition

We record revenue when realized or realizable and earned when all of the following criteria are met:

•

Persuasive evidence of an arrangement exists,

•

Delivery has occurred,

•

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

•

Collectibility is reasonably assured.

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

Cash and Cash Equivalents

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

Index

Business and Credit Concentrations

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

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of probable credit losses in our existing accounts receivable. We review the allowance for doubtful accounts on a regular basis. Past due balances over 120 days are reviewed for collectibility and form the basis of our reserve. When we determine that a particular customer poses a credit risk, a specific reserve is established. Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. During 2010, 2011 and 2012, we wrote off significant reserves we had provided in earlier periods for specific customers which were deemed to be insolvent.

A roll forward of the allowance for doubtful accounts is as follows:

	Year Ended December 31,			Year Ended December 31,			Year Ended December 31,
	2012			2011			2010

Balance at beginning of period	$	1,173,194		$	2,261,252		$	2,055,569

Charged to expense, net of recoveries		(107,606	)		298,703			917,857

Deductions		(783,414	)		(1,386,761	)		(712,174	)

Balance at end of period	$	282,174		$	1,173,194		$	2,261,252

Inventories

Inventories are stated at the lower of cost or market with the cost of TSP’s paper inventory and SBI’s work-in-process inventory determined by the last-in, first-out (“LIFO”) cost method. The cost of the remaining inventory (approximately 88% and 89% of inventories at December 31, 2012 and 2011, respectively) is determined using the first-in, first-out (“FIFO”) method.

Property and Equipment

Property, plant and equipment are recorded at cost, except those assets acquired through acquisitions, in which case they are recorded at fair value. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, as follows: 3-11 years for machinery and equipment; and 10-40 years for buildings and land improvements. Leasehold improvements are amortized over their estimated useful lives or the term of the underlying lease, whichever is shorter. Upon disposal of property, plant and equipment, the cost of the asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in earnings. For significant capital projects spread over a period of several months, we capitalize interest costs at the weighted-average borrowing rate until the asset is placed in service.

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

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell. We do not believe there was any impairment of property and equipment as of December 31, 2012, 2011 and 2010.

Index

Income Taxes

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

We record a liability for uncertain tax positions when it is more likely than not that a tax position that has been taken will not be sustained under audit. The respective probability is evaluated based on relevant facts and tax law. Although we believe that our estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the consolidated financial statements. We adjust our reserves upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement or upon the expiration of the statute of limitations, in the period in which such event occurs.

Goodwill

Goodwill is tested for impairment at the reporting unit level at least annually or whenever circumstances indicate that the carrying value of the reporting unit’s net assets may not be recoverable, utilizing a two-step methodology. The initial step requires us to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment is then measured in the second step by comparing the implied fair value of goodwill to the carrying value of goodwill for each reporting unit. To determine the implied fair value of goodwill, we make a hypothetical allocation of the reporting unit’s estimated fair value to the tangible and intangible assets (other than goodwill) of the reporting unit. In connection with our annual assessment of goodwill in 2010, we concluded that $7.0 million of DPC goodwill (a component of our Publications segment) was fully impaired and was required to be expensed as a non-cash charge to continuing operations during the fourth quarter of 2010. In connection with our annual assessment of goodwill in 2011 and 2012, we concluded that there was no impairment.

Identified Intangible and Other Long-Lived Assets

Identified intangible assets, which primarily consist of customer relationships and trade names, were valued at fair value, effective with acquisitions. All long-lived assets are amortized over the estimated useful lives. We review long-lived assets for impairment using undiscounted future cash flows whenever events or changes in circumstances indicate that the carrying values of the long-lived asset groups (including goodwill) may not be recoverable. If the sum of undiscounted cash flows are less than the carrying values, the difference between the fair value of the long-lived asset group, using discounted cash flows, and the carrying value is recognized as impairment to the extent of the individual fair values of the long-lived assets (except goodwill). We do not believe there was any impairment of intangible assets or other long-lived assets as of December 31, 2012, 2011 and 2010.

Deferred Financing Costs

Deferred financing costs were $2.3 million and $4.8 million as of December 31, 2012 and 2011, respectively, net of accumulated amortization, and are amortized to interest expense over the term of the related debt. During 2012, we capitalized a nominal amount of professional fees in connection with an amendment to our working capital facility and wrote off $0.3 million of costs in connection with the repurchase of certain 2011 Notes.

Accounting for Stock Based Compensation

Our parent company, Holdings, established the 2003 Stock-based Incentive Compensation Plan (the “2003 Plan”), pursuant to which Holdings has reserved for issuance 55,500 shares of its Common Stock. There is currently no public trading market for the Common Stock. When necessary, we determine fair value through internal valuations based on historical financial information and/or through a third party service provider. As of December 31, 2012, 5,370 shares were available for future grants. Stock options are granted at exercise prices not less than the fair market value of the stock at the date of grant. Options generally vest ratably over a five-year period, except those options granted to officers, portions of which vest ratably over five years, and the remainder of which vest upon the achievement of certain performance targets, the occurrence of certain future events, including the sale of the Company or a qualified public offering, or after eight years from the date of grant, as specified in the 2003 Plan. Options expire ten years from the date of grant. We have a policy of issuing new shares to satisfy share options upon exercise.

Index

For each of the years ended December 31, 2012, 2011 and 2010, we recognized minimal amounts of non-cash stock-based compensation expense which was included in selling and administrative expenses.

We value options using the Black-Scholes option-pricing model which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term of the options is an output of the option-pricing model and estimates the period of time that options are expected to remain unexercised. We use historical data to estimate the timing and amount of option exercises and forfeitures. The expected volatility is calculated by averaging the volatility, over a period equal to the expected term of the options, for five peer group companies and a small-cap index. There were no stock options granted during the years ended December 31, 2011 and 2012. The following summarizes the assumptions used for estimating the fair value of stock options granted during the year ended December 31, 2010:

Risk-free interest rate		2.87%-3.44	%
Average expected years until exercise	7.75 years
Expected volatility		52.13%-54.37	%
Weighted-average expected volatility		53.25	%
Dividend yield		0	%

The following is a summary of option activity for the years ended December 31, 2010, 2011 and 2012:

				Weighted average				Aggregate
	Number of			Exercise		Remaining term		intrinsic
	shares			price		(in years)		value
Options outstanding at December 31, 2009		45,600		$	12.56		4.3	$	487,000
Granted		7,660			23.24
Exercised		(120	)		24.75
Forfeited		(640	)		16.45
Options outstanding at December 31, 2010		52,500		$	14.05		4.2	$	-
Granted		-			-
Exercised		-			-
Forfeited		(2,630	)		11.36
Options outstanding at December 31, 2011		49,870		$	10.09		3.2	$	-
Granted		-
Exercised		-
Forfeited		(2,100	)		11.70
Options outstanding at December 31, 2012		47,770		$	10.09		2.1

Options exercisable at December 31, 2012		39,582		$	10.06		1.3	$	-

The following is a summary of non-vested option activity for the years ended December 31, 2012, 2011 and 2010:

										Weighted average grant
	Number of shares									date fair value
	Years ended December 31,									Years ended December 31,
	2012			2011			2010			2012		2011		2010
Non vested options outstanding at beginning of year		22,224			26,200			19,800		$	5.89	$	6.63	$	4.13
Granted		-			-			7,660			-		-		13.80
Vested		(13,346	)		(1,346	)		(620	)		14.58		9.21		10.60
Forfeited		(690	)		(2,630	)		(640	)		12.64		4.14		5.60
Non vested options outstanding at end of year		8,188			22,224			26,200		$	13.31	$	5.89	$	6.63

The total compensation cost related to nonvested awards not yet recognized as of December 31, 2012 is approximately $0.1 million and will be recognized over a weighted average period of approximately 3.9 years.

During the years ended December 31, 2012 and 2011, no options to purchase Holdings Common Stock were exercised. During the year ended December 31, 2010, 120 options to purchase Holdings Common Stock were exercised and $2,970 of proceeds was received. The total intrinsic value, the difference between the exercise price and the fair value of Holdings Common Stock on the date of exercise of options exercised during the year ended December 31, 2010, was negligible.

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Fair Value Measurements

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

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

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

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

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

We believe that the carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses reported in the consolidated balance sheets approximate their fair values due to the short maturity of these instruments. The estimated fair value of our publicly traded debt, based on level 2 inputs, was approximately $104.5 million and $121.4 million as of December 31, 2012 and 2011, respectively.

Advertising Costs

We expense advertising costs as the advertising occurs in accordance with the authoritative guidance. Advertising expense, included in selling and administrative expenses in the consolidated statements of operations, was approximately $0.5 million, $0.3 million and $0.2 million, for the years ended December 31, 2012, 2011 and 2010, respectively.

New Accounting Standards

Reclassifications

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

3. Inventories

Inventories consist of the following:

Index

	December 31,			December 31,
	2012			2011
Work-in-process	$	7,113,379		$	6,160,151
Raw materials (principally paper)		10,514,992			9,460,478
		17,628,371			15,620,629
Excess of current cost over LIFO inventory value		(316,238	)		(277,142	)
Total	$	17,312,133		$	15,343,487

4. Property, Plant and Equipment

Property, plant and equipment consist of the following:

	December 31,			December 31,
	2012			2011
Land	$	3,272,111		$	3,272,111
Buildings and improvements		43,631,665			43,507,154
Machinery and equipment		164,753,375			158,826,090
		211,657,151			205,605,355
Accumulated depreciation		(118,520,455	)		(106,769,398	)
Property, plant and equipment, net	$	93,136,696		$	98,835,957

Depreciation expense for the years ended December 31, 2012, 2011 and 2010, was $16.8 million, $20.4 million, and $19.5 million, respectively. During 2012 and 2011, we capitalized $0.4 million and $0.5 million, respectively, of interest costs in connection with plant and equipment we acquired.

5. Intangible Assets

In conjunction with previous acquisitions, we acquired intangible assets relating to customer relationships, trade names and technology. The customer relationships, trade names and technology are being amortized using the straight-line method over their estimated useful lives as described below. Amortization expense for the years ended December 31, 2012, 2011 and 2010 related to customer relationships, trade names and technology intangible assets was $1.7 million, $3.3 million and $1.4 million, respectively. In 2011, we expensed $1.6 million associated with the accelerated amortization of the ULI trade name which was disposed of as a result of the shutdown of the ULI facility (see Note 17). In 2011, our analysis of customer attrition rates indicated that an adjustment was needed to the remaining useful life associated with the customer relationship asset at DPC. This was due primarily to the loss of customers in the specialty magazine business. The remaining useful life changed from 25 years to 15 years effective January 1, 2011. Accumulated impairments, in the table below, consist of impairment charges we recorded in 2008 related to customer relationships at ULI and TDP. Other, in the table below, represents the realization of the tax goodwill benefit in connection with the acquisition of TDP (see Note 11). In the years 2008 through 2009, this benefit was applied to reduce intangibles related to the acquisition of TDP since there was no book goodwill related to this previous acquisition as of the beginning of 2008. Intangible assets as of December 31, 2012 and 2011 consisted of the following:

Index

		December 31, 2012
	Useful Life	Gross Carrying Amount		Accumulated Amortization		Accumulated Impairments		Other		Net Carrying Amount
Customer relationships	15-25 years	$	27,800,000	$	10,084,387	$	2,202,626	$	2,135,806	$	13,377,181
Trade names	40 years		20,400,000		6,253,225		-		359,103		13,787,672
Technology	5 years		300,000		243,416		-		56,584		-
Totals		$	48,500,000	$	16,581,028	$	2,202,626	$	2,551,493	$	27,164,853

		December 31, 2011
	Useful Life	Gross Carrying Amount		Accumulated Amortization		Accumulated Impairments		Other		Net Carrying Amount
Customer relationships	15-25 years	$	27,800,000	$	8,848,535	$	2,202,626	$	2,135,806	$	14,613,033
Trade names	40 years		20,400,000		5,803,225		-		359,103		14,237,672
Technology	5 years		300,000		243,416		-		56,584		-
Totals		$	48,500,000	$	14,895,176	$	2,202,626	$	2,551,493	$	28,850,705

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

	Amortization
Years ended December 31,	expense

2013		1,685,852
2014		1,685,852
2015		1,685,852
2016		1,685,852
2017		1,685,852
Thereafter		18,735,593

Total	$	27,164,853

6. Goodwill

Goodwill, which arises from the purchase price exceeding the assigned value of the net assets of an acquired business, represents the value attributable to unidentifiable intangible elements being acquired. Goodwill totaled $34.0 million at December 31, 2012 and 2011, respectively.

As of December 31, 2010, the initial step in the annual test for goodwill impairment indicated potential impairment at DPC, one of the components of the Publications segment, due primarily to the longer and more sustained deterioration of the magazine business through the fourth quarter of 2010, and the unlikely prospect of a meaningful recovery in the near term. We completed the second step by comparing the implied fair value of goodwill to the carrying value of goodwill for DPC. As a result of the second step, we determined that the $7.0 million carrying value of goodwill at DPC was fully impaired. There were no changes in the carrying amount of goodwill for the year ended December 31, 2011 and 2012. The following table reflects the components of goodwill by segment as of December 31, 2010, 2011 and 2012:

Index

				Specialty
	Publications			Catalogs			Books		Consolidated

Goodwill		35,493,565			12,774,931			8,922,848		57,191,344
Accumulated impairment losses		(10,437,772	)		(12,774,931	)		-		(23,212,703	)
Balance at December 31, 2010	$	25,055,793		$	-		$	8,922,848	$	33,978,641

Goodwill		35,493,565			12,774,931			8,922,848		57,191,344
Accumulated impairment losses		(10,437,772	)		(12,774,931	)		-		(23,212,703	)
Balance at December 31, 2011	$	25,055,793		$	-		$	8,922,848	$	33,978,641

Goodwill		35,493,565			12,774,931			8,922,848		57,191,344
Accumulated impairment losses		(10,437,772	)		(12,774,931	)		-		(23,212,703	)
Balance at December 31, 2012	$	25,055,793		$	-		$	8,922,848	$	33,978,641

7. Other Assets

Other assets consist of the following:

December 31,

SHERIDAN GROUP INC 10-K