SHERIDAN GROUP INC - FORM 10-Q

Attached files

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EX-32.1 - EXHIBIT 32.1 - SHERIDAN GROUP INC	ex32_1.htm
EX-31.1 - EXHIBIT 31.1 - SHERIDAN GROUP INC	ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - SHERIDAN GROUP INC	ex31_2.htm
EX-10.44 - EXHIBIT 10.44 - SHERIDAN GROUP INC	ex10_44.htm
EX-10.54 - EXHIBIT 10.54 - SHERIDAN GROUP INC	ex10_54.htm
EX-10.49 - EXHIBIT 10.49 - SHERIDAN GROUP INC	ex10_49.htm
EX-10.45 - EXHIBIT 10.45 - SHERIDAN GROUP INC	ex10_45.htm
EX-10.52 - EXHIBIT 10.52 - SHERIDAN GROUP INC	ex10_52.htm
EX-10.42 - EXHIBIT 10.42 - SHERIDAN GROUP INC	ex10_42.htm
EX-10.55 - EXHIBIT 10.55 - SHERIDAN GROUP INC	ex10_55.htm
EX-10.43 - EXHIBIT 10.43 - SHERIDAN GROUP INC	ex10_43.htm
EX-10.50 - EXHIBIT 10.50 - SHERIDAN GROUP INC	ex10_50.htm
EX-10.48 - EXHIBIT 10.48 - SHERIDAN GROUP INC	ex10_48.htm
EX-10.53 - EXHIBIT 10.53 - SHERIDAN GROUP INC	ex10_53.htm
EX-10.47 - EXHIBIT 10.47 - SHERIDAN GROUP INC	ex10_47.htm
EX-10.51 - EXHIBIT 10.51 - SHERIDAN GROUP INC	ex10_51.htm
EX-10.46 - EXHIBIT 10.46 - SHERIDAN GROUP INC	ex10_46.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10–Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010

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

FOR THE TRANSITION 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 No.)

11311 McCormick Road, Suite 260
Hunt Valley, Maryland	21031–1437
(Address of principal executive offices)	(Zip Code)

410–785–7277

(Registrant’s telephone number, including area code)

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 period that 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)	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

There was 1 share of Common Stock outstanding as of November 10, 2010.

The Sheridan Group, Inc. and Subsidiaries

Quarterly Report

For the Quarter Ended September 30, 2010

INDEX

		Page
PART I — FINANCIAL INFORMATION		3

Item 1.	Financial Statements:	3
	Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

PART II — OTHER INFORMATION		20

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Reserved	20

Item 5.	Other Information	20

Item 6.	Exhibits	20

SIGNATURE		21

Index

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
ASSETS	2010		2009

Current assets:
Cash and cash equivalents	$	12,389,043	$	4,109,740
Accounts receivable, net of allowance for doubtful accounts of $2,136,746 and $2,054,076, respectively		28,673,869		29,382,142
Inventories, net		14,745,408		13,989,631
Other current assets		5,457,013		5,724,134
Refundable income taxes		42,230		179,473
Total current assets		61,307,563		53,385,120

Property, plant and equipment, net		107,837,674		117,757,008
Intangibles, net		32,518,024		33,566,535
Goodwill		40,979,426		40,979,426
Deferred financing costs, net		749,718		1,483,423
Other assets		1,778,147		1,828,173

Total assets	$	245,170,552	$	248,999,685

LIABILITIES

Current liabilities:
Accounts payable	$	15,292,368	$	14,621,067
Accrued expenses		13,903,691		17,698,876
Current portion of notes payable		142,930,085		-
Due to parent		647,841		121,044
Total current liabilities		172,773,985		32,440,987

Notes payable		-		142,948,652
Deferred income taxes and other liabilities		27,418,379		29,598,477
Total liabilities		200,192,364		204,988,116

STOCKHOLDER'S EQUITY

Common stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding at September 30, 2010 and December 31, 2009		-		-
Additional paid-in capital		42,068,108		42,047,938
Retained earnings		2,910,080		1,963,631
Total stockholder's equity		44,978,188		44,011,569

Total liabilities and stockholder's equity	$	245,170,552	$	248,999,685

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

Index

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 and 2009

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net sales	$	67,867,423		$	73,340,611		$	200,583,436		$	221,018,395
Cost of sales		56,532,805			57,753,708			160,484,571			176,676,605
Gross profit		11,334,618			15,586,903			40,098,865			44,341,790
Selling and administrative expenses		8,915,649			9,074,061			26,902,425			27,861,953
Loss (gain) on disposition of fixed assets		63,179			(11,149	)		101,631			2,450
Restructuring costs		414			-			78,335			154,908
Amortization of intangibles		349,504			349,504			1,048,511			1,088,349
Total operating expenses		9,328,746			9,412,416			28,130,902			29,107,660
Operating income		2,005,872			6,174,487			11,967,963			15,234,130
Other (income) expense:
Interest expense		3,939,891			4,178,743			11,851,578			13,265,081
Interest income		(18,442	)		(18,949	)		(43,340	)		(51,392	)
Gain on repurchase of notes payable		-			(5,410,811	)		-			(7,193,906	)
Other, net		(54,804	)		(218,518	)		105,722			(397,436	)
Total other (income) expense		3,866,645			(1,469,535	)		11,913,960			5,622,347
(Loss) income before income taxes		(1,860,773	)		7,644,022			54,003			9,611,783
Income tax (benefit) provision		(654,984	)		2,437,457			(892,446	)		3,341,650
Net (loss) income	$	(1,205,789	)	$	5,206,565		$	946,449		$	6,270,133

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

Index

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 and 2009

(Unaudited)

	Nine Months Ended
	September 30,			September 30,
	2010			2009
Cash flows provided by operating activities:
Net income	$	946,449		$	6,270,133
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		15,265,447			12,920,045
Amortization of intangible assets		1,048,511			1,088,349
Provision for doubtful accounts		736,468			322,711
Provision for inventory realizability and LIFO value		243,997			78,712
Stock-based compensation		17,200			13,200
Amortization of deferred financing costs and debt discount, included in interest expense		715,138			606,515
Deferred income tax benefit		(1,637,693	)		(35,877	)
Gain on repurchase of notes payable		-			(7,193,906	)
Loss on disposition of fixed assets		101,631			2,450
Changes in operating assets and liabilities
Accounts receivable		(28,195	)		2,459,729
Inventories		(999,774	)		4,325,395
Other current assets		192,542			(682,387	)
Refundable income taxes		95,013			2,934,809
Other assets		50,026			151,459
Accounts payable		436,946			(6,565,260	)
Accrued expenses		(3,795,185	)		(7,458,629	)
Income taxes payable (including amount due to parent)		569,027			982,609
Other liabilities		(467,826	)		(164,687	)
Net cash provided by operating activities		13,489,722			10,055,370

Cash flows used in investing activities:
Purchases of property, plant and equipment		(5,244,715	)		(5,673,470	)
Proceeds from sale of fixed assets		31,326			14,476
Advances paid to parent company, net		-			(2,216,941	)
Net cash used in investing activities		(5,213,389	)		(7,875,935	)

Cash flows provided by (used in) financing activities:
Borrowing of working capital facility		-			39,657,209
Repayment of working capital facility		-			(33,931,000	)
Repayment of long term debt		-			(14,539,500	)
Payment of deferred financing costs in connection with long term debt		-			(259,851	)
Proceeds from capital contribution from parent company		2,970			-
Dividends paid		-			(9,105,227	)
Net cash provided by (used in) financing activities		2,970			(18,178,369	)

Net increase (decrease) in cash and cash equivalents		8,279,303			(15,998,934	)

Cash and cash equivalents at beginning of period		4,109,740			16,396,628

Cash and cash equivalents at end of period	$	12,389,043		$	397,694

Non-cash investing and financing activities
Asset additions in accounts payable	$	395,287		$	215,412

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

Index

THE SHERIDAN GROUP, INC. and SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.	Company Information and Significant Accounting Policies

The accompanying unaudited financial statements of The Sheridan Group, Inc. and Subsidiaries (together, the “Company”) have been prepared by us pursuant to the rules of the Securities and Exchange Commission (the “SEC”). In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly, in all material respects, our financial position as of September 30, 2010 and our results of operations for the three and nine month periods ended September 30, 2010 and 2009 and our cash flows for the nine month periods ended September 30, 2010 and 2009. All such adjustments are deemed to be of a normal and recurring nature and all material intercompany balances and transactions have been eliminated. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

These condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and the notes thereto of The Sheridan Group, Inc. and Subsidiaries included in our Annual Report on Form 10–K for the year ended December 31, 2009. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the full fiscal year.

The preparation of condensed consolidated 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 disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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

New Accounting Standards

Effective January 1, 2010, we adopted authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) related to the accounting and disclosure requirements for transfers of financial assets. This guidance requires greater transparency and additional disclosures for transfers of financial assets and the entity’s continuing involvement with them and changes the requirements for derecognizing financial assets. In addition, the guidance eliminates the concept of a qualifying special-purpose entity. The adoption of this guidance did not have a material impact on our financial position, results of operations or cash flows.

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

Liquidity

All of our outstanding debt matures on August 15, 2011, with a balance due at maturity of $142.9 million. We do not have sufficient funds, nor do we anticipate generating sufficient funds from operations to repay the notes. We intend to refinance the notes prior to their maturity but we cannot assure you that we will be able to do so. Additionally, our working capital facility, for which we had no borrowings outstanding as of September 30, 2010, is scheduled to terminate on March 25, 2011. 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. 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. If we fail to refinance the notes and working capital facility this would have a material adverse impact on our business, assets and ability to fund our liquidity needs.

Index

Inventory

Components of net inventories at September 30, 2010 and December 31, 2009 were as follows:

	September 30,			December 31,
	2010			2009
Work-in-process	$	6,760,294		$	7,367,236
Raw materials (principally paper)		8,257,998			6,895,279
		15,018,292			14,262,515
Excess of current costs over LIFO inventory value		(272,884	)		(272,884	)
Net inventory	$	14,745,408		$	13,989,631

4.	Notes Payable and Working Capital Facility

On August 21, 2003, we completed a private debt offering of 10.25% senior secured notes totaling $105.0 million, priced to yield 10.50%, that mature August 15, 2011 (the “2003 Notes”). On May 25, 2004, we completed a private debt offering of 10.25% senior secured notes totaling $60.0 million, priced to yield 9.86%, that mature August 15, 2011 (the “2004 Notes”). The 2004 Notes have identical terms to the 2003 Notes. During the year ended December 31, 2009, we paid $15.0 million, which included $0.5 million of accrued interest, to repurchase 2003 Notes and 2004 Notes with a face value of $22.1 million. The carrying value of the 2003 Notes and the 2004 Notes was $142.9 million as of September 30, 2010 and December 31, 2009, respectively. The 2003 Notes and 2004 Notes are shown as current liabilities on the September 30, 2010 balance sheet since their maturity date is in less than one year.

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

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

Concurrent with the offering of the 2003 Notes, we entered into a working capital facility agreement. The working capital facility was amended concurrent with the offering of the 2004 Notes and again on June 16, 2009. Terms of the working capital facility allow for revolving debt of up to $20.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. The interest rate on borrowings under the working capital facility is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, or (c) the LIBOR rate plus a margin of 3.75%. At our option, we can elect a LIBOR option for a specified period. Any such borrowings bear interest at the specified LIBOR rate plus a margin of 3.75%. We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.50%. In addition, we have agreed to pay an annual fee of 3.875% on all letters of credit outstanding. The working capital facility is scheduled to mature on March 25, 2011. As of September 30, 2010 and December 31, 2009, we had no borrowings outstanding under the working capital facility. As of September 30, 2010, we had unused amounts available of $17.9 million and had $1.3 million in outstanding letters of credit under the working capital facility. The terms of the working capital facility prior to the June 16, 2009 amendment allowed for revolving debt of up to $30.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test, which bore interest at the bank’s base rate or the LIBOR rate plus a margin of 1.75% at our option. Additionally, we paid an annual commitment fee on the unused portion of the working capital facility at a rate of 0.35% and an annual fee of 1.875% on all letters of credit outstanding.

Borrowings and letters of credit under the working capital facility are collateralized by the assets of the Company and our subsidiaries, subject to permitted liens. The working capital facility contains various covenants including provisions that restrict our ability to incur or prepay indebtedness, including the 2003 Notes and the 2004 Notes, or pay dividends. It also requires us to satisfy financial tests, such as an interest coverage ratio and the maintenance of a minimum amount of earnings before interest, taxes, depreciation and amortization (as defined in the working capital facility agreement). We have complied with all of the restrictive covenants as of September 30, 2010. In an event of default, all principal and interest due under the working capital facility may become immediately due and payable.

Index

5.	Accrued Expenses

Accrued expenses as of September 30, 2010 and December 31, 2009 consisted of the following:

	September 30,		December 31,
	2010		2009
Payroll and related expenses	$	4,664,902	$	3,639,665
Profit sharing accrual		350,517		476,151
Accrued interest		1,854,726		5,516,678
Customer prepayments		3,503,082		3,727,548
Self-insured health and workers' compensation accrual		1,599,914		1,933,529
Other		1,930,550		2,405,305
	$	13,903,691	$	17,698,876

6.	Business Segments

We are a specialty printer in the United States offering a full range of printing and value–added support services for the journal, magazine, book, catalog and article reprint markets. Our business includes three operating segments comprised of “Publications,” “Books” and “Specialty Catalogs.” The Publications segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing, United Litho and Dartmouth Journal Services. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books. 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 accounting policies of the operating segments are the same as those described in Note 2 “Summary of Significant Accounting Policies” in the consolidated financial statements in our most recent Annual Report on Form 10–K for the year ended December 31, 2009. The results of each segment include certain allocations for general, administrative and other shared costs. However, certain costs, such as corporate profit sharing and bonuses and the amortization of a non–compete agreement with our former Chairman of the Board, are not allocated to the segments. Our customer base resides in the continental United States and our manufacturing, warehouse and office facilities are located throughout the East Coast and Midwest.

We had no customers that accounted for 10.0% or more of our net sales for the three and nine month periods ended September 30, 2010 and 2009.

The following table provides segment information as of September 30, 2010 and 2009 and for the three and nine month periods then ended:

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
(in thousands)

Net sales
Publications	$	36,302		$	40,326		$	112,297		$	126,588
Specialty catalogs		16,154			17,770			46,693			51,841
Books		15,413			15,259			41,597			42,604
Intersegment sales elimination		(2	)		(14	)		(4	)		(15	)
Consolidated total	$	67,867		$	73,341		$	200,583		$	221,018

Operating income
Publications	$	1,449		$	4,712		$	10,523		$	13,528
Specialty catalogs		(516	)		524			(565	)		695
Books		1,419			1,620			2,922			2,532
Corporate expenses		(346	)		(682	)		(912	)		(1,521	)
Consolidated total	$	2,006		$	6,174		$	11,968		$	15,234

	September 30,		December 31,
	2010		2009
Assets
Publications	$	143,633	$	146,047
Specialty catalogs		52,327		54,186
Books		46,424		46,173
Corporate		2,787		2,594
Consolidated total	$	245,171	$	249,000

Index

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

	Three months ended						Nine months ended
	September 30,						September 30,
(in thousands)	2010			2009			2010			2009

Total operating income (as shown above)	$	2,006		$	6,174		$	11,968		$	15,234

Interest expense		(3,940	)		(4,179	)		(11,852	)		(13,265	)
Interest income		18			19			43			51
Gain on repurchase of notes payable		-			5,411			-			7,194
Other, net		55			219			(105	)		398

(Loss) income before income taxes	$	(1,861	)	$	7,644		$	54		$	9,612

7.	Income Taxes

Although we generated income before income taxes of $0.1 million for the first nine months of 2010, we recorded an income tax benefit during that same period. The income tax benefit was the result of the impact of certain discrete adjustments of approximately $0.9 million (most of which were recorded in the first quarter of 2010), in relation to our modest income before income taxes for the first nine months of 2010. The discrete adjustments which reduced income tax expense included: (i) a change in the apportionment rules in the state of Maine which will result in a decrease in the income taxes we pay and (ii) a reduction in our accrual for uncertain tax positions due to an audit settlement with a state tax authority. Additionally, the impact of the permanent differences (primarily tax deductible goodwill) reduced the forecasted effective tax rate as of September 30, 2010 to approximately 8%. We recorded income tax expense during the nine months ended September 30, 2009 based on a forecasted effective income tax rate of approximately 35%.

We file consolidated tax returns with TSG Holdings Corp. (“Parent”), our parent company, for Federal and certain state jurisdictions. We classify these current tax liabilities as “Due to parent” on the consolidated balance sheets.

8.	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 they are invested in publicly traded mutual funds with quoted market prices that are available in active markets. Investments in marketable securities are classified as “Other Assets” on the consolidated balance sheets and had a fair value of $1.5 million and $1.7 million at September 30, 2010 and December 31, 2009, respectively.

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 quoted market prices, was approximately $141.6 million and $133.4 million at September 30, 2010 and December 31, 2009, respectively.

Index

9.	Related Party Transactions

During the first quarter of 2009, we paid a dividend in the aggregate amount of $9.1 million and made a loan in the principal amount of $2.0 million to our Parent. The loan had a maturity date of January 4, 2012 and accrued interest at the rate of 1.36% per year payable in cash or in kind on February 15 and August 15 each year. Our Parent used the entire cash proceeds of the dividend and loan to purchase capital stock issued by our Parent (the “Stock Purchase”) from Participatiemaatschappij Giraffe B.V. (“Giraffe”) and to pay related expenses in connection therewith. In connection with the Stock Purchase, Euradius Acquisition Co., a wholly owned subsidiary of our Parent, sold all of the outstanding stock of Euradius International Dutch Bidco B.V. (“Euradius”) to Giraffe. This resulted in our Parent fully divesting its interest in Euradius, which was our Parent's only investment other than The Sheridan Group, Inc. Neither Euradius nor its subsidiaries were guarantors of the 2003 or 2004 Notes. Neither Euradius nor its subsidiaries were subsidiaries of ours and their financial results were not included in our consolidated financial statements.

The loan owed by our Parent was satisfied by being netted against income tax obligations we owed to our Parent which is presented within “Due to parent” on the consolidated balance sheets.

We have a 10–year management agreement with our principal equity sponsors, expiring in August of 2013, under which an annual management fee is payable equal to the greater of $500,000 or 2% of EBITDA (as defined in the management agreement) plus reasonable out–of–pocket expenses. We expensed $0.2 million and $0.6 million in such fees for the three and nine month periods ended September 30, 2010, respectively and $0.2 million and $0.7 million for the three and nine month periods ended September 30, 2009, respectively.

10.	Contingencies

We are party to legal actions as a result of various claims arising in the normal course of business. We believe that the disposition of these matters will not have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

11.	Restructuring and Other Exit Costs

In January 2009, we announced our plan to consolidate some administrative and production operations at our DPC facility in Hanover, New Hampshire. Approximately 20 positions at our ULI facility in Ashburn, Virginia were eliminated as a result of this action. We recorded $0.1 million and $0.2 million of restructuring costs during the first nine months of 2010 and 2009, respectively. The costs relate primarily to guaranteed severance payments and employee health benefits. We do not expect to record any additional restructuring costs during 2010 in connection with this consolidation.

Item 2. 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 in the Annual Report on Form 10–K for the fiscal year ended December 31, 2009. References to the “Company” refer to The Sheridan Group, Inc. The terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of the Company and all of its subsidiaries.

Forward–Looking Statements

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

our liquidity and capital resources, including our ability to refinance our senior secured notes (which mature on August 15, 2011) and our working capital facility (which is scheduled to terminate on March 25, 2011);

competitive pressures and trends in the printing industry;

prevailing interest rates;

legal proceedings and regulatory matters;

general economic conditions;

the liquidity and capital resources of our customers and potential customers;

predictions of net sales, expenses or other financial items;

Index

future operations, financial condition and prospects; and

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

Forward–looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward–looking statements, might cause us to modify our plans or objectives, may affect our ability to pay timely amounts due under our outstanding notes and/or may affect the value of our outstanding notes. 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, 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.

Overview

Company Background

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

The Notes

On August 21, 2003, we completed a private debt offering of 10.25% senior secured notes totaling $105 million, priced to yield 10.50%, that mature August 15, 2011 (the “2003 Notes”). On May 25, 2004, we completed a private debt offering of 10.25% senior secured notes totaling $60 million, priced to yield 9.86%, that mature August 15, 2011 (the “2004 Notes”). The 2004 Notes have identical terms to the 2003 Notes.

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

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

Refer to the “Liquidity and Capital Resources” section for a further discussion of the 2003 Notes and the 2004 Notes, including their upcoming maturity.

Critical Accounting Estimates

In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of financial statements in conformity with generally accepted accounting principles. We believe the estimates, assumptions and judgments described in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” included in our most recent Annual Report on Form 10–K for the year ended December 31, 2009, have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. These policies include our accounting for allowances for doubtful accounts, impairment of goodwill and other identifiable intangibles, income taxes and self–insurance. These policies require us to exercise judgments that are often difficult, subjective and complex due to the necessity of estimating the effect of matters that are inherently uncertain. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe the consistent application of these policies enables us to provide readers of our financial statements with useful and reliable information about our operating results and financial condition.

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Results of Operations

Our business includes three reportable segments comprised of “Publications,” “Specialty Catalogs” and “Books.” The Publications business segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Dartmouth Printing, United Litho and Dartmouth Journal Services. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books. 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 table sets forth, for the periods indicated, information derived from our condensed consolidated statements of operations, 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. The tables should be read in conjunction with the commentary that follows them.

Three months ended September 30, 2010 and September 30, 2009:

													Percent of revenue
	Three months ended September 30,						Increase (decrease)						Three months ended September 30,
(in thousands)	2010			2009			Dollars			Percentage			2010			2009

Net sales
Publications	$	36,302		$	40,326		$	(4,024	)		(10.0	%)		53.5	%		55.0	%
Specialty catalogs		16,154			17,770			(1,616	)		(9.1	%)		23.8	%		24.2	%
Books		15,413			15,259			154			1.0	%		22.7	%		20.8	%
Intersegment sales elimination		(2	)		(14	)		12		nm				-			-
Total net sales	$	67,867		$	73,341		$	(5,474	)		(7.5	%)		100.0	%		100.0	%

Cost of sales		56,532			57,754			(1,222	)		(2.1	%)		83.3	%		78.7	%

Gross profit	$	11,335		$	15,587		$	(4,252	)		(27.3	%)		16.7	%		21.3	%

Selling and administrative expenses	$	8,915		$	9,074		$	(159	)		(1.8	%)		13.1	%		12.4	%
Loss on sale of fixed assets		64			(11	)		75		nm				0.1	%		-
Restructuring costs		-			-			-		nm				-			-
Amortization of intangibles		350			350			-			-			0.5	%		0.5	%
Total operating expenses	$	9,329		$	9,413		$	(84	)		(0.9	%)		13.7	%		12.9	%

Operating income
Publications	$	1,449		$	4,712		$	(3,263	)		(69.2	%)		4.0	%		11.7	%
Specialty catalogs		(516	)		524			(1,040	)	nm				(3.2	%)		2.9	%
Books		1,419			1,620			(201	)		(12.4	%)		9.2	%		10.6	%
Corporate expenses		(346	)		(682	)		336			49.3	%	nm			nm
Total operating income	$	2,006		$	6,174		$	(4,168	)		(67.5	%)		3.0	%		8.4	%

Other (income) expense
Interest expense	$	3,940		$	4,179		$	(239	)		(5.7	%)		5.8	%		5.7	%
Interest income		(18	)		(19	)		1			5.3	%		-			-
Gain on repurchase of notes payable		-			(5,411	)		5,411		nm				-			(7.4	%)
Other, net		(55	)		(219	)		164		nm				(0.1	%)		(0.3	%)
Total other (income) expense	$	3,867		$	(1,470	)	$	5,337		nm				5.7	%		(2.0	%)

(Loss) income before income taxes		(1,861	)		7,644			(9,505	)	nm				(2.7	%)		10.4	%

Income tax (benefit) provision		(655	)		2,437			(3,092	)	nm				(1.0	%)		3.3	%

Net (loss) income	$	(1,206	)	$	5,207		$	(6,413	)	nm				(1.7	%)		7.1	%

___________________

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Index

Commentary:

Net sales for the third quarter of 2010 decreased $5.5 million or 7.5% versus the third quarter of 2009. Just under one-third of the dollar sales decline is due to decreases in shipping and paper costs, which are passed on to our customers, due principally to lower volumes being produced by us. The lower volumes are due primarily to reductions in print run lengths resulting from the economic recession as well as the loss of work from certain customers due to pricing considerations. Net sales for the Publications segment decreased $4.0 million or 10.0% in the third quarter of 2010 compared to the same period a year ago due primarily to: (i) loss of journal work from certain customers due to pricing considerations; (ii) sales declines in magazines as reductions in print advertising have led our customers to reduce run lengths, page counts and frequency of publication; and (iii) the conversion from offset to digital printing for journals as publishers seek cost-effective methods for delivering content. Decreases in shipping and paper costs, which are passed on to our customers, accounted for about 50% of the dollar sales decline in Publications sales. Net sales for the Specialty Catalogs segment decreased $1.6 million or 9.1% in the third quarter of 2010 compared with the same period a year ago due primarily to a reduction in print quantities for catalogs in response to softer than expected retail sales along with the impact of lower paper costs, which accounted for approximately one-third of the sales dollar decline. Net sales for the Books segment increased $0.2 million or 1.0% in the third quarter of 2010 compared with the same period a year ago due solely to higher paper sales, as a result of paper price increases and changes in product mix, which were largely offset by fewer titles being produced coupled with the loss of work from certain customers due to pricing considerations.

Gross profit for the third quarter of 2010 decreased by $4.3 million or 27.3% compared to the third quarter of 2009. Gross margin of 16.7% of net sales for the third quarter of 2010 reflected a 4.6 margin point decrease versus the third quarter of 2009. A one-time charge of $2.3 million for depreciation expense in connection with the write down of the value of a printing press that was removed from service accounted for slightly more than one-half of the gross profit decline and approximately three-quarters of the margin point decrease. Additionally, reductions in sales were partially offset by reductions in staffing, materials and operating lease costs as well as increased revenue from recyclable materials.

Selling and administrative expenses for the third quarter of 2010 decreased by $0.2 million due in large part to lower bad debt expense and professional fees versus year ago, partially offset by increases in sales staffing and higher healthcare costs.

Operating income for the third quarter of 2010 decreased $4.2 million or 67.5% compared to the third quarter of 2009. The impact of the $2.3 million one-time charge for depreciation expense, mentioned above, accounted for slightly more than one-half of the decrease in operating income. The remainder of the decrease was due to lower sales only partially offset by cost reductions. Operating income in the Publications segment for the third quarter of 2010 decreased by $3.3 million as compared to the third quarter of 2009 due primarily to the $2.3 million one-time charge for depreciation expense. Additionally, the decrease in sales and higher healthcare costs were only partially offset by lower staffing, materials and operating lease costs coupled with increases in revenue from recyclable materials. Specialty Catalogs realized an operating loss of $0.5 million in the third quarter of 2010 which was a $1.0 million reduction versus operating income in the year ago period due primarily to reductions in sales which outpaced reductions in our cost structure. Within our cost structure, decreases in materials costs and increased revenue from recyclable materials were partially offset by higher healthcare costs while staffing costs remained flat versus the same period last year. In the Books segment, operating income decreased by $0.2 million in the third quarter of 2010 compared to the third quarter of 2009 as net sales, excluding paper pass through costs, declined and were only partially offset by reductions in benefits, materials and equipment maintenance costs along with increased revenue from recyclable materials. A reduction in corporate expenses increased operating income by $0.3 million versus the year ago period due primarily to a decrease in deferred compensation costs coupled with lower fees for professional services.

Other expense was $3.9 million during the third quarter of 2010 as compared to other income of $1.5 million during the third quarter of 2009. This change was due primarily to the absence in the third quarter of 2010 of the $5.4 million gain on the repurchases of notes payable that occurred during the third quarter of 2009.

We realized a loss before income taxes of $1.9 million during the third quarter of 2010 as compared to income before income taxes of $7.6 million during the same period last year. This change was due primarily to the absence in 2010 of the $5.4 million gain on the repurchases of notes payable that occurred during the third quarter of 2009, as well as the $2.3 million one-time charge for depreciation expense in 2010.

We had an effective income tax rate of 35.2% for the third quarter of 2010 compared to 31.9% for the same period in 2009. The variance in rates is due primarily to the difference in discrete items recorded during the respective quarters.

The net loss of $1.2 million for the third quarter of 2010 represented a $6.4 million decrease as compared to net income of $5.2 million for the third quarter of 2009 due to the factors mentioned previously.

Index

Nine months ended September 30, 2010 and September 30, 2009:

													Percent of revenue
	Nine months ended September 30,						Increase (decrease)						Nine months ended September 30,
(in thousands)	2010			2009			Dollars			Percentage			2010			2009

Net sales
Publications	$	112,297		$	126,588		$	(14,291	)		(11.3	%)		56.0	%		57.3	%
Specialty catalogs		46,693			51,841			(5,148	)		(9.9	%)		23.3	%		23.4	%
Books		41,597			42,604			(1,007	)		(2.4	%)		20.7	%		19.3	%
Intersegment sales elimination		(4	)		(15	)		11		nm				-			-
Total net sales	$	200,583		$	221,018		$	(20,435	)		(9.2	%)		100.0	%		100.0	%

Cost of sales		160,484			176,676			(16,192	)		(9.2	%)		80.0	%		79.9	%

Gross profit	$	40,099		$	44,342		$	(4,243	)		(9.6	%)		20.0	%		20.1	%

Selling and administrative expenses	$	26,902		$	27,862		$	(960	)		(3.4	%)		13.4	%		12.6	%
Loss on sale of fixed assets		102			2			100		nm				0.1	%		-
Restructuring costs		78			155			(77	)		(49.7	%)		-			0.1	%
Amortization of intangibles		1,049			1,089			(40	)		(3.7	%)		0.5	%		0.5	%
Total operating expenses	$	28,131		$	29,108		$	(977	)		(3.4	%)		14.0	%		13.2	%

Operating income
Publications	$	10,523		$	13,528		$	(3,005	)		(22.2	%)		9.4	%		10.7	%
Specialty catalogs		(565	)		695			(1,260	)	nm				(1.2	%)		1.3	%
Books		2,922			2,532			390			15.4	%		7.0	%		5.9	%
Corporate expenses		(912	)		(1,521	)		609			40.0	%	nm			nm
Total operating income	$	11,968		$	15,234		$	(3,266	)		(21.4	%)		6.0	%		6.9	%

Other (income) expense
Interest expense	$	11,852		$	13,265		$	(1,413	)		(10.7	%)		5.9	%		6.0	%
Interest income		(43	)		(51	)		8			15.7	%		-			-
Gain on repurchase of notes payable		-			(7,194	)		7,194		nm				-			(3.2	%)
Other, net		105			(398	)		503		nm				0.1	%		(0.2	%)
Total other expense	$	11,914		$	5,622		$	6,292			111.9	%		6.0	%		2.6	%

Income before income taxes		54			9,612			(9,558	)		(99.4	%)		-			4.3	%

Income tax (benefit) provision		(892	)		3,342			(4,234	)	nm				(0.5	%)		1.5	%

Net income	$	946		$	6,270		$	(5,324	)		(84.9	%)		0.5	%		2.8	%

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Commentary:

Net sales for the first nine months of 2010 decreased $20.4 million or 9.2% versus the first nine months of 2009, with slightly less than one-half the dollar sales decline attributable to decreases in shipping and paper costs, which are passed on to our customers, due principally to lower volumes being produced by us. The lower volumes are due primarily to reductions in print run lengths resulting from the economic recession as well as the loss of work from certain customers due to pricing considerations. Net sales for the Publications segment decreased $14.3 million or 11.3% in the first nine months of 2010 compared to the same period a year ago due primarily to: (i) loss of journal work from certain customers due to pricing considerations; (ii) sales declines in magazines as reductions in print advertising have led our customers to reduce run lengths, page counts and frequency of publication; and (iii) the conversion from offset to digital printing for journals as publishers seek cost-effective methods for delivering content. Decreases in shipping and paper costs, which are passed on to our customers, accounted for slightly more than 50% of the dollar sales decline in Publications sales. Net sales for the Specialty Catalogs segment decreased $5.1 million or 9.9% in the first nine months of 2010 compared with the same period a year ago due primarily to the impact of lower paper costs, which accounted for about one-half of the sales dollar decline coupled with a reduction in print quantities for catalogs in response to softer than expected retail sales. Net sales for the Books segment decreased $1.0 million or 2.4% in the first nine months of 2010 compared with the same period a year ago due primarily to fewer titles being produced due to the economic recession as well as the loss of work from certain customers due to pricing considerations, which were partially offset by higher paper pass through costs due to price increases and product mix changes.

Index

Gross profit for the first nine months of 2010 decreased $4.2 million compared to the first nine months of 2009. A one-time charge of $2.3 million for depreciation expense in connection with the write down of the value of a printing press that was removed from service accounted for slightly more than one-half of the gross profit decline. Additionally, we were not able to adjust our cost structure in line with the reduction in sales. Gross margin of 20.0% of net sales for the first nine months of 2010 reflected a 0.1 margin point decrease versus the first nine months of 2009 due primarily to the 1.1 margin point reduction associated with the one-time depreciation charge.

Selling and administrative expenses for the first nine months of 2010 decreased $1.0 million or 3.4% versus the first nine months of 2009, due primarily to decreases in staffing costs (largely due to headcount reductions) coupled with the non-recurrence in the first nine months of 2010 of costs associated with renewing our working capital facility in the first nine months of 2009, partially offset by an increase in bad debt expense.

Operating income of $12.0 million for the first nine months of 2010 represented a decrease of $3.2 million or 21.4% as compared to operating income of $15.2 million for the first nine months of 2009. The impact of the $2.3 million one-time charge for depreciation expense, mentioned above, accounted for slightly more than two-thirds of the decrease in operating income. The remainder of the decrease was due to lower sales only partially offset by cost reductions. Publications operating income decreased $3.0 million in the first nine months of 2010 compared to the first nine months of 2009 due primarily to the $2.3 million one-time charge for depreciation expense. Additionally, a decrease in sales and an increase in bad debt expense to recognize potential risk associated with specific customers, partially offset by lower staffing, benefits, materials and operating lease costs coupled with increases in revenue from recyclable materials accounted for the remainder of the decline. Specialty Catalogs realized an operating loss of $0.6 million during the first nine months of 2010 as compared to operating income of $0.7 million during the first nine months a year ago due to reductions in sales which outpaced reductions in our cost structure. Lower staffing, benefit and utility costs along with increased revenue from recyclable materials helped to partially offset the impact of the lower sales. The Books segment increased operating income by $0.4 million in the first nine months of 2010 compared to the first nine months of 2009 as lower staffing and benefit costs coupled with increased revenue from recyclable materials more than offset the decrease in sales. A reduction in corporate expenses increased operating income by $0.6 million due primarily to the absence in 2010 of costs associated with renewing our working capital facility in the first nine months of 2009 coupled with a decrease in deferred compensation costs.

Other expense of $11.9 million for the first nine months of 2010 represented a $6.3 million increase as compared to other expense of $5.6 million for the first nine months of 2009. This increase was due primarily to the absence in the first nine months of 2010 of the $7.2 million gain on the repurchases of notes payable that occurred during the same period of 2009, partially offset by a corresponding reduction in interest expense. Additionally, although there was an increase in the market value of investments held in the deferred compensation plan during the first nine months of 2010, it was about $0.3 million lower than the increase in the same period last year.

Income before income taxes of $0.1 million for the first nine months of 2010 represented a $9.6 million decrease as compared to the same period last year. This change was due primarily to the absence in 2010 of the $7.2 million gain on the repurchases of notes payable that occurred during the same period of 2009, as well as the $2.3 million one-time charge for depreciation expense in 2010.

Net income of $0.9 million for the first nine months of 2010 represented a $5.4 million decrease as compared to net income of $6.3 million for the first nine months of 2009 due to the factors mentioned previously.

Liquidity and Capital Resources

We had cash of $12.4 million as of September 30, 2010 compared to $4.1 million as of December 31, 2009. During the first nine months of 2010, we utilized cash on hand to fund operations, make investments in new plant and equipment and make the semi-annual interest payments on the senior secured notes.

Our principal sources of liquidity are expected to be cash flow generated from operations and borrowings under our working capital facility. Our principal uses of cash are expected to be to meet debt service requirements, finance our capital expenditures and provide working capital. We may from time to time seek to purchase or retire our outstanding debt, including the 2003 Notes and 2004 Notes, through cash purchases, in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Additionally, we may from time to time fund cash distributions to our Parent, as we did in the first quarter of 2009, in accordance with the limitations outlined in our bond indenture and our working capital facility. We estimate that our capital expenditures for the remainder of 2010 will total about $8.5 million.

Index

Our working capital facility is scheduled to terminate on March 25, 2011. 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. 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. Our 2003 Notes and 2004 Notes mature on August 15, 2011. We do not have sufficient funds, nor do we anticipate generating sufficient funds from operations to repay these notes. We intend to refinance these notes prior to their maturity but we cannot assure you that we will be able to do so. Our future operating performance and ability to extend or refinance our indebtedness will be dependent on future economic conditions and financial, business, and other factors that may be beyond our control. If we fail to refinance the notes this would have a material adverse impact on our business, assets and ability to fund our liquidity needs.

We are subject to liquidity risk, which is the potential that we will be unable to meet our obligations as they become due or capitalize on growth opportunities as they arise because of an inability to liquidate assets, or obtain adequate funding on a timely basis at a reasonable cost and within acceptable risk tolerances. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the printing industry in general, including a decrease in the level of our business activity due to a market downturn or the insufficient access to liquidity. If we do not have sufficient liquidity to comply with the terms of the working capital facility and the 2003 and 2004 Notes, we could be in default under those agreements, and the debt under those instruments, together with the accrued interest, could then be declared immediately due and payable.

To service our debt, we require a significant amount of cash. Our ability to generate cash, make scheduled payments or refinance our obligations depends on our successful financial and operating performance. If our cash flow and capital resources are insufficient, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt. If we are required to take any such actions, it could have a material adverse effect on our business, financial condition, and results of operations. In addition, we cannot assure that we would be able to take any of these actions on terms acceptable to us, or at all, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt agreements.

Operating Activities

Net cash provided by operating activities was $13.5 million for the first nine months of 2010 compared to $10.1 million for the first nine months of 2009, an increase of $3.4 million. Although net income decreased by $5.3 million during the first nine months of 2010 as compared to the same period last year, most of the decrease was due to an increase in non-cash charges. The increase in these non-cash charges, which included depreciation, amortization, provisions for bad debt and inventory reserves and the absence during 2010 of the gain on the repurchase of notes payable that occurred during the same period in 2009 was partially offset by the increase in the deferred income tax benefit, which accounts for the year over year increase in net cash provided by operating activities.

Investing Activities

Net cash used in investing activities was $5.2 million for the first nine months of 2010 compared to $7.9 million for the first nine months of 2009. This $2.7 million decrease in cash used was primarily the result of lower capital spending coupled with the absence in the first nine months of 2010 of the $2.2 million we advanced to our Parent during the same period in 2009, the majority of which was used to repurchase its capital stock resulting in the complete divestiture of its interest in Euradius.

Financing Activities

There was minimal cash provided by financing activities for the first nine months of 2010 as compared to $18.2 million used in financing activities for the first nine months of 2009. The $18.2 million used in the first nine months of 2009 was primarily the result of the $9.1 million dividend paid to our Parent to enable it to repurchase its capital stock resulting in the complete divestiture of its interest in Euradius and the $14.5 million we paid to repurchase our senior secured notes, partially offset by $5.7 million borrowed under our working capital facility.

Index

Indebtedness

As of September 30, 2010, we had total indebtedness of $142.9 million comprised entirely of amounts due under the 2003 Notes and the 2004 Notes, all with a scheduled maturity of August 2011. We have significant interest payments due on the outstanding notes as well as interest payments due on any borrowings under our working capital facility, under which there were no amounts outstanding as of September 30, 2010. Total cash interest payments related to our working capital facility and the 2003 Notes and the 2004 Notes are expected to be in excess of $14.6 million on an annual basis.

Our working capital facility provides for available credit of up to $20.0 million, subject to a borrowing base test, that we may repay and borrow until the March 25, 2011 maturity date. Actual available credit under the working capital facility fluctuates because it depends on inventory and accounts receivable values that fluctuate and is subject to discretionary reserves and revaluation adjustments that may be imposed by the agent from time to time and other limitations. Our working capital facility contains various covenants which limit our discretion in the operation of our businesses. Among other things, our working capital facility restricts our ability to prepay other indebtedness, including the 2003 Notes and the 2004 Notes, incur other indebtedness or pay dividends. Our working capital facility prohibits us from repurchasing the 2003 Notes and the 2004 Notes unless certain conditions are met, including that the amount expended for note repurchases after May 25, 2009 may not exceed $20.0 million in the aggregate, and that immediately after each note repurchase, there must be at least $5.0 million available under the working capital facility. The working capital facility also requires us to satisfy an interest coverage ratio of at least 1.80 to 1.00 and to maintain EBITDA (as defined in and calculated pursuant to our working capital facility, such EBITDA being referred to hereinafter as “WCF EBITDA”) of at least $33.0 million, both calculated for the period consisting of the four preceding consecutive fiscal quarters. Failure to satisfy the financial tests in our working capital facility would constitute a default under our working capital facility. For the twelve months ended September 30, 2010, our interest coverage ratio was 2.71 to 1.00 and our WCF EBITDA for purposes of our working capital facility was $40.1 million. As of September 30, 2010, we had no borrowings outstanding under the working capital facility, had unused amounts available of $17.9 million and had $1.3 million in outstanding letters of credit.

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

The following table provides a reconciliation of WCF EBITDA to cash flows from operating activities for the nine month periods ended September 30, 2010 and 2009 (in thousands). The financial covenants under our working capital facility, as noted above, are based upon a rolling twelve months. Therefore, WCF EBITDA for the twelve months ended September 30, 2010 includes the amounts presented in the following table as well as the amounts from the fourth quarter of 2009.

Index

	Nine Months Ended September 30,
	2010			2009

Net cash provided by operating activities	$	13,490		$	10,055

Accounts receivable		28			(2,460	)
Inventories		1,000			(4,325	)
Other current assets		(193	)		682
Refundable income taxes		(95	)		(2,935	)
Other assets		(50	)		(151	)
Accounts payable		(437	)		6,565
Accrued expenses		3,795			7,459
Income taxes payable		(569	)		(983	)
Other liabilities		468			165
Provision for doubtful accounts		(736	)		(323	)
Deferred income tax benefit		1,638			36
Provision for inventory realizability and LIFO value		(244	)		(79	)
Loss on disposition of fixed assets, net		(102	)		(2	)
Income tax (benefit) provision		(892	)		3,342
Cash interest expense		11,136			12,658
Management fees		577			673
Non cash adjustments:
Increase in market value of investments		(18	)		(73	)
Amortization of prepaid lease costs		2			65
Loss on disposition of fixed assets		115			15
Interest income		(43	)		(51	)
Restructuring costs		78			155
Bank fees for abandoned line of credit renewal		-			308

Working Capital Facility EBITDA	$	28,948		$	30,796

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

Contractual Obligations

The following table summarizes the Company’s future minimum non-cancellable contractual obligations as of September 30, 2010:

	Remaining Payments Due by Period
					2011 to		2013 to		2015 and
	Total		2010		2012		2014		beyond
(in thousands)

Long term debt, including interest (1)	$	157,548	$	-	$	157,548	$	-	$	-
Operating leases		4,733		826		3,684		222		1
Purchase obligations (2)		12,547		7,576		4,956		15		-
Other long-term obligations (3)		353		38		302		13		-

Total (4)	$	175,181	$	8,440	$	166,490	$	250	$	1

_____________________

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

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

Index

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

(4)

At September 30, 2010, we have recognized approximately $1.7 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, among others, tax examinations, changes in tax laws or interpretation of those laws and expiration of statutes of limitation. Due to these uncertainties, our unrecognized tax benefits have been excluded from the contractual obligations table above.

Off Balance Sheet Arrangements

At September 30, 2010 and December 31, 2009, 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 therefore are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

New Accounting Standards

Item 3. 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 the three and nine months ended September 30, 2010 and 2009 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. We did not have any borrowings under our working capital facility during the first nine months of 2010. All of our other debt carries fixed interest rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Index

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are party to various legal actions in the ordinary course of our business. In our opinion, these matters are not expected to have a material adverse effect on our business, financial condition or results of operations.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risk and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Reserved

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits

10.42

First Amendment to the Employment and Non-Competition Agreement, dated as of April 1, 2007, between The Sheridan Group, Inc. and Douglas R. Ehmann.

10.43

First Amendment to the Employment and Non-Competition Agreement, dated as of April 1, 2007, between The Sheridan Group, Inc. and Gary J. Kittredge.

10.44

First Amendment to the Employment and Non-Competition Agreement, dated as of April 1, 2007, between The Sheridan Group, Inc. and G. Paul Bozuwa.

10.45

First Amendment to the Employment and Non-Competition Agreement, dated as of April 1, 2007, between The Sheridan Group, Inc. and John A. Saxton.

10.46

First Amendment to the Employment and Non-Competition Agreement, dated as of April 1, 2007, between The Sheridan Group, Inc. and Joan B. Davidson.

10.47

First Amendment to the Employment and Non-Competition Agreement, dated as of April 1, 2007, between The Sheridan Group, Inc. and Patricia A. Stricker.

10.48

First Amendment to the Employment and Non-Competition Agreement, dated as of April 1, 2007, between The Sheridan Group, Inc. and Robert M. Jakobe.

10.49

Second Amendment to the Employment and Non-Competition Agreement, dated as of August 31, 2010, between The Sheridan Group, Inc. and Douglas R. Ehmann.

10.50

Second Amendment to the Employment and Non-Competition Agreement, dated as of August 31, 2010, between The Sheridan Group, Inc. and Gary J. Kittredge.

10.51

Second Amendment to the Employment and Non-Competition Agreement, dated as of August 31, 2010, between The Sheridan Group, Inc. and G. Paul Bozuwa.

10.52

Second Amendment to the Employment and Non-Competition Agreement, dated as of August 31, 2010, between The Sheridan Group, Inc. and John A. Saxton.

10.53

Second Amendment to the Employment and Non-Competition Agreement, dated as of August 31, 2010, between The Sheridan Group, Inc. and Joan B. Davidson.

10.54

Second Amendment to the Employment and Non-Competition Agreement, dated as of August 31, 2010, between The Sheridan Group, Inc. and Patricia A. Stricker.

10.55

Second Amendment to the Employment and Non-Competition Agreement, dated as of August 31, 2010, between The Sheridan Group, Inc. and Robert M. Jakobe.

31.1	Certification of Chief Executive Officer pursuant to Rule 13a–14(a) or 15d–14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.

31.2	Certification of Chief Financial Officer pursuant to Rule 13a–14(a) or 15d–14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes–Oxley Act of 2002.

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002, executed by John A. Saxton, President and Chief Executive Officer of The Sheridan Group, Inc. and Robert M. Jakobe, Chief Financial Officer of The Sheridan Group, Inc.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	The Sheridan Group, Inc.
	Registrant


	By:	/s/ John A. Saxton
		John A. Saxton
		President and Chief Executive Officer

Date: November 10, 2010

SHERIDAN GROUP INC - FORM 10-Q - November 10, 2010

Attached files

SHERIDAN GROUP INC Reports