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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 MARCH 31, 2013

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 x  No o

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 May 13, 2013.
 


 
 

 

The Sheridan Group, Inc. and Subsidiaries
Quarterly Report
For the Quarter Ended March 31, 2013

INDEX

 
Page
3
 
 
 
Item 1.
3
 
3
 
4
 
5
 
6
 
 
 
Item 2.
10
 
 
 
Item 3.
17
 
 
 
Item 4.
17
 
 
 
18
 
 
 
Item 1.
18
 
 
 
Item 1A.   
18
 
 
 
Item 2.
18
 
 
 
Item 3.
18
 
 
 
Item 4.
18
 
 
 
Item 5.
18
 
 
 
Item 6.
18
 
 
 
19

 
2


PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements.

THE SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

   
March 31,
   
December 31,
 
   
2013
   
2012
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 1,652,551     $ 1,597,556  
Accounts receivable, net of allowance for doubtful accounts of $290,471 and $282,174, respectively
    26,852,157       25,543,990  
Inventories, net
    16,278,359       17,312,133  
Other current assets
    4,422,453       4,231,477  
Total current assets
    49,205,520       48,685,156  
                 
Property, plant and equipment, net
    90,254,668       93,136,696  
Intangibles, net
    26,743,390       27,164,853  
Goodwill
    33,978,641       33,978,641  
Deferred financing costs, net
    1,711,193       2,270,854  
Other assets
    1,110,534       1,062,326  
Total assets
  $ 203,003,946     $ 206,298,526  
                 
Liabilities
               
Current liabilities
               
Accounts payable
  $ 13,540,361     $ 15,151,602  
Accrued expenses
    18,145,527       13,154,439  
Working capital facility
    4,157,627       -  
Income taxes payable
    23,572       59,408  
Total current liabilities
    35,867,087       28,365,449  
                 
Notes payable and working capital facility
    116,434,523       127,974,519  
Deferred income taxes and other liabilities
    21,216,419       20,872,149  
Total liabilities
    173,518,029       177,212,117  
                 
Stockholder's Equity
               
Common stock, $0.01 par value; 100 shares authorized; 1 share issued and outstanding
    -       -  
Additional paid-in capital
    42,121,832       42,117,195  
Accumulated deficit
    (12,635,915 )     (13,030,786 )
Total stockholder's equity
    29,485,917       29,086,409  
                 
Total liabilities and stockholder's equity
  $ 203,003,946     $ 206,298,526  

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

 
3


THE SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 and 2012
  (Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2013
   
2012
 
             
Net sales
  $ 68,050,618     $ 69,942,258  
                 
Cost of sales
    54,376,558       56,256,698  
                 
Gross profit
    13,674,060       13,685,560  
                 
Selling and administrative expenses
    8,123,465       8,502,834  
(Gain) loss on disposition of fixed assets
    (52,743 )     4,076  
Restructuring costs
    66,748       4,764  
Amortization of intangibles
    421,463       421,463  
                 
Total operating expenses
    8,558,933       8,933,137  
                 
Operating income
    5,115,127       4,752,423  
                 
Other (income) expense:
               
Interest expense
    4,972,515       5,506,470  
Interest income
    (17,114 )     (4,892 )
Gain on repurchase of notes payable
    (678,678 )     (417,950 )
Other, net
    13,410       (2,435 )
                 
Total other expense
    4,290,133       5,081,193  
                 
Income (loss) before income taxes
    824,994       (328,770 )
                 
Income tax expense (benefit)
    430,123       (163,090 )
                 
Net income (loss)
  $ 394,871     $ (165,680 )
 
The accompanying notes are an integral part of the condensed consolidated financial statements.

 
4


THE SHERIDAN GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2013 and 2012
(Unaudited)

   
March 31,
   
March 31,
 
   
2013
   
2012
 
Cash flows provided by operating actvities:
           
Net income (loss)
  $ 394,871     $ (165,680 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities
               
Depreciation
    4,318,242       4,172,510  
Amortization of intangible assets
    421,463       421,463  
Provision for doubtful accounts
    8,168       (19,669 )
Stock-based compensation
    4,637       -  
Amortization of deferred financing costs and debt discount, included in interest expense
    1,094,855       1,233,370  
Deferred income tax provision (benefit)
    398,912       (231,382 )
Gain on repurchase of notes payable
    (678,678 )     (417,950 )
(Gain) loss on disposition of fixed assets
    (52,743 )     4,076  
Changes in operating assets and liabilities
               
Accounts receivable
    (1,316,335 )     (1,420,459 )
Inventories
    1,033,774       (226,871 )
Other current assets
    (177,894 )     1,321,352  
Refundable income taxes
    -       109,387  
Other assets
    (48,207 )     14,397  
Accounts payable
    (751,713 )     (254,225 )
Accrued expenses
    4,991,089       7,044,234  
Income taxes payable
    (35,836 )     -  
Other liabilities
    (67,724 )     (48,143 )
Net cash provided by operating activities
    9,536,881       11,536,410  
                 
Cash flows used in investing activities:
               
Purchases of property, plant and equipment
    (2,267,357 )     (2,464,874 )
Interest capitalized in connection with purchases of property, plant and equipment
    (45,668 )     -  
Proceeds from sale of fixed assets, net of disposal costs
    70,025       (985 )
Net cash used in investing activities
    (2,243,000 )     (2,465,859 )
                 
Cash flows used in financing activities:
               
Borrowing of working capital facility
    18,542,082       23,968,135  
Repayment of working capital facility
    (20,102,000 )     (27,800,000 )
Repayment of long-term debt
    (5,671,468 )     (5,051,931 )
Payment of deferred financing costs in connection with working capital facility
    (7,500 )     -  
Net cash used in financing activities
    (7,238,886 )     (8,883,796 )
                 
Net increase in cash and cash equivalents
    54,995       186,755  
                 
Cash and cash equivalents at beginning of period
    1,597,556       475,324  
                 
Cash and cash equivalents at end of period
  $ 1,652,551     $ 662,079  
                 
Non-cash investing and financing activities
               
Asset additions in accounts payable
  $ 244,378     $ 636,750  

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

 
5


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 March 31, 2013 and our results of operations and our cash flows for the three month periods ended March 31, 2013 and 2012. 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, 2012. 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 months ended March 31, 2013 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

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. The adoption of this guidance did not have an impact 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 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 did not have an impact on our consolidated financial statements.

2.
Inventory

Components of net inventories at March 31, 2013 and December 31, 2012 were as follows:
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
Work-in-process
  $ 7,198,429     $ 7,113,379  
Raw materials (principally paper)
    9,396,168       10,514,992  
      16,594,597       17,628,371  
Excess of current cost over LIFO inventory value
    (316,238 )     (316,238 )
Total
  $ 16,278,359     $ 17,312,133  

 
6


3.
Notes Payable and Working Capital Facility

On April 15, 2011, we completed a private debt offering of senior secured notes totaling $150.0 million in aggregate principal amount (the “2011 Notes”).  The 2011 Notes, which were issued by The Sheridan Group, Inc. under an indenture (the “Indenture”), 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. Proceeds of the 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 10.25% senior secured notes that were due to mature on August 15, 2011 (the “2003 and 2004 Notes”) and to pay approximately $6.5 million in professional fees and expenses incurred in connection with the issuance of the 2011 Notes. These fees and expenses were capitalized as deferred financing costs and will be amortized to interest expense using the effective interest rate method over the term of the 2011 Notes. We recognized a loss on the repurchase of the 2003 and 2004 Notes of approximately $1.2 million as a result of the tender offer premium paid, the professional fees incurred and the write-off of unamortized financing costs.

During 2011, we repurchased in the open market 2011 Notes with a face value of $8.2 million for $7.1 million, which included $0.1 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.7 million. As a result of the repurchases, we recognized a net gain of $0.5 million.
 
On November 23, 2011, we sold the Ashburn, Virginia facility. Per the terms of the Indenture, on December 16, 2011, we used the net proceeds from this sale of $3.9 million to repurchase 2011 Notes at 100% of their face value plus $0.1 million of accrued interest. We recognized a loss on the repurchase of $0.3 million as the result of the write-off of deferred financing costs and unamortized debt discount.

During 2012, we repurchased in the open market 2011 Notes with a face value of $12.1 million for $10.5 million, 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 net gain of $1.2 million.

During the first quarter of 2013, we repurchased in the open market 2011 Notes with a face value of $6.6 million for $5.9 million, which included $0.2 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.3 million. As a result of the repurchases, we recognized a net gain of $0.7 million.
 
The carrying value of the 2011 Notes was $116.4 million as of March 31, 2013.
 
On April 15, 2011, we entered into an agreement to amend and restate our working capital facility, which, as a result of an amendment entered into on January 15, 2013, 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. 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. In addition, we paid an upfront fee of $0.3 million at closing and approximately $0.4 million of professional fees, which were capitalized as deferred financing costs and will be amortized to interest expense on a straight-line basis over the term of the working capital facility. As of March 31, 2013, we had $4.2 million outstanding under the working capital facility, $1.3 million in letters of credit outstanding and unused amounts available of $9.5 million.

The Indenture and the working capital facility require us to maintain certain minimum Consolidated EBITDA (as defined in the underlying agreements) levels 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 each fiscal year. In addition, the Indenture and the working capital facility contain affirmative and negative covenants, representations and warranties, borrowing conditions, events of default and remedies for the holders and lenders. We have complied with all of the restrictive covenants as of March 31, 2013.

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. 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. We do not have sufficient funds, nor do we anticipate generating sufficient funds from operations, to repay the 2011 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.

 
7


4. 
Accrued Expenses

Accrued expenses as of March 31, 2013 and December 31, 2012 consisted of the following:

   
March 31,
   
December 31,
 
   
2013
   
2012
 
Payroll and related expenses
  $ 4,534,733     $ 3,653,284  
Accrued interest
    6,846,823       3,374,934  
Customer prepayments
    4,473,783       3,604,679  
Self-insured health and workers' compensation accrual
    1,140,294       1,096,763  
Other
    1,149,894       1,424,779  
Total
  $ 18,145,527     $ 13,154,439  

5.
Business Segments

We are a specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine and book markets. We operate in three business segments: “Publications,” “Specialty Catalogs” and “Books.” 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 and Dartmouth Journal Services. 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. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books.

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, 2012. The results of each segment include certain allocations for general, administrative and other shared costs. However, certain costs, such as corporate depreciation, technology development costs, corporate restructuring costs and certain professional fees are not allocated to the segments and are shown as Corporate in the table below. 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 customer that accounted for 10.0% or more of our net sales for the three month periods ended March 31, 2013 and 2012.
 
 
The following table provides segment information as of March 31, 2013 and 2012 and for the three month periods then ended:

   
Three months ended March 31,
 
   
2013
   
2012
 
(in thousands)
           
             
Net sales
           
Publications
  $ 35,681     $ 37,462  
Specialty catalogs
    19,290       18,455  
Books
    13,122       14,035  
Intersegment sales elimination
    (42 )     (10 )
Consolidated total
  $ 68,051     $ 69,942  
                 
Operating income
               
Publications
  $ 4,955     $ 4,619  
Specialty catalogs
    732       (7 )
Books
    (507 )     556  
Corporate expenses
    (65 )     (416 )
Consolidated total
  $ 5,115     $ 4,752  
                 
   
March 31,
   
December 31,
 
    2013     2012  
Assets
               
Publications
  $ 116,067     $ 117,954  
Specialty catalogs
    44,309       44,481  
Books
    40,661       41,827  
Corporate
    1,967       2,037  
Consolidated total
  $ 203,004     $ 206,299  

 
8


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

   
Three months ended March 31,
 
(in thousands)
 
2013
   
2012
 
             
Total operating income (as shown above)
  $ 5,115     $ 4,752  
                 
Interest expense
    (4,973 )     (5,507 )
Interest income
    17       5  
Gain on repurchase of notes payable
    679       418  
Other, net
    (13 )     3  
                 
Income (loss) before income taxes
  $ 825     $ (329 )
 
6.
Income Taxes

We recorded an income tax provision during the three months ended March 31, 2013 based on an estimated effective income tax rate for the year ended December 31, 2013 of approximately 50%, which was increased by discrete adjustments resulting in an effective tax rate of approximately 52%. The impact of the permanent differences (primarily tax deductible goodwill) in relation to our projected pre-tax loss for 2013 increased the forecasted effective tax rate. We recorded income tax benefit during the three months ended March 31, 2012 based on an estimated effective income tax rate for the year ended December 31, 2012 of approximately 56%, which was partially offset by discrete adjustments resulting in an effective tax rate of approximately 50%.

7.
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.
 
The estimated fair value of our publicly traded debt, based on level 2 inputs, was approximately $108.5 million and $104.5 million as of March 31, 2013 and December 31, 2012, respectively.
 
8.
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.

 
9


9. 
Restructuring and Other Exit Costs

The table below shows our restructuring activity and our restructuring accrual balance as of March 31, 2013 (in thousands):
 
   
ULI/DPC
   
Workforce
       
   
consolidation
   
reductions
   
Total
 
Restructuring accrual at December 31, 2012
  $ 172     $ 28     $ 200  
Restructuring costs expensed
    (1 )     68       67  
Restructuring costs paid
    (46 )     (28 )     (74 )
Restructuring accrual at March 31, 2013
  $ 125     $ 68     $ 193  

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, 2012. 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 expected level of capital expenditures and our ability to refinance our debt;

 
·
competitive pressures and trends in the printing industry;

 
·
prevailing interest rates;

 
·
legal proceedings and regulatory matters;

 
·
general economic conditions;

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

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

 
·
future operations, financial condition and prospects; and

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

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements, may 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 and book markets. We provide a wide range of printing services and value-added support services that supplement the core printing operations such as page composition, copy-editing, digital proofing, 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.

 
10


2011 Notes and Amended and Restated Working Capital Facility

On April 15, 2011, we completed a private debt offering of senior secured notes totaling $150.0 million in aggregate principal amount (the “2011 Notes”).  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, as a result of an amendment entered into on January 15, 2013, now has a scheduled maturity of January 14, 2014. The 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 10.25% senior secured notes that were due to mature on August 15, 2011 (the “2003 and 2004 Notes”) and to pay related fees and expenses.

Restructuring costs

The table below shows our restructuring activity and our restructuring accrual balance as of March 31, 2013 (in thousands):
 
   
ULI/DPC
   
Workforce
       
   
consolidation
   
reductions
   
Total
 
Restructuring accrual at December 31, 2012
  $ 172     $ 28     $ 200  
Restructuring costs expensed
    (1 )     68       67  
Restructuring costs paid
    (46 )     (28 )     (74 )
Restructuring accrual at March 31, 2013
  $ 125     $ 68     $ 193  
 
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, 2012, 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.

Results of Operations

Our business includes three reportable segments comprised of “Publications,” “Specialty Catalogs” and “Books.” 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 and Dartmouth Journal Services. 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. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books.

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. This table should be read in conjunction with the commentary that follows it.

 
11



                           
Percent of revenue
 
   
Three months ended March 31,
   
Increase (decrease)
   
Three months ended March 31,
 
(in thousands)
 
2013
   
2012
   
Dollars
   
Percentage
   
2013
   
2012
 
                                     
Net sales
                                   
Publications
  $ 35,681     $ 37,462     $ (1,781 )     (4.8 %)     52.4 %     53.5 %
Specialty catalogs
    19,290       18,455       835       4.5 %     28.3 %     26.4 %
Books
    13,122       14,035       (913 )     (6.5 %)     19.3 %     20.1 %
Intersegment sales elimination
    (42 )     (10 )     (32 )  
nm
      -       -  
Total net sales
    68,051       69,942       (1,891 )     (2.7 %)     100.0 %     100.0 %
                                                 
Cost of sales
    54,377       56,257       (1,880 )     (3.3 %)     79.9 %     80.4 %
                                                 
Gross profit
    13,674       13,685       (11 )     (0.1 %)     20.1 %     19.6 %
                                                 
Selling and administrative expenses
    8,124       8,503       (379 )     (4.5 %)     11.9 %     12.2 %
(Gain) loss on disposition of fixed assets
    (53 )     4       (57 )  
nm
      -       -  
Restructuring costs
    67       5       62    
nm
      0.1 %     -  
Amortization of intangibles
    421       421       -       -       0.6 %     0.6 %
Total operating expenses
    8,559       8,933       (374 )     (4.2 %)     12.6 %     12.8 %
                                                 
Operating income
                                               
Publications
    4,955       4,619       336       7.3 %     13.9 %     12.3 %
Specialty catalogs
    732       (7 )     739    
nm
      3.8 %     -  
Books
    (507 )     556       (1,063 )  
nm
      (3.9 %)     4.0 %
Corporate expenses
    (65 )     (416 )     351       84.4 %  
nm
   
nm
 
Total operating income
    5,115       4,752       363       7.6 %     7.5 %     6.8 %
                                                 
Other (income) expense
                                               
Interest expense
    4,973       5,507       (534 )     (9.7 %)     7.3 %     7.9 %
Interest income
    (17 )     (5 )     (12 )  
nm
      -       -  
Gain on repurchase of notes payable
    (679 )     (418 )     (261 )     (62.4 %)     (1.0 %)     (0.6 %)
Other, net
    13       (3 )     16    
nm
      -       -  
Total other expense
    4,290       5,081       (791 )     (15.6 %)     6.3 %     7.3 %
                                                 
Income (loss) before income taxes
    825       (329 )     1,154    
nm
      1.2 %     (0.5 %)
                                                 
Income tax expense (benefit)
    430       (163 )     593    
nm
      0.6 %     (0.2 %)
                                                 
Net income (loss)
  $ 395     $ (166 )   $ 561    
nm
      0.6 %     (0.3 %)

nm - not meaningful

Commentary:

Our sales for the first quarter of 2013 decreased $1.9 million or 2.7% versus the first quarter of 2012, with the majority of the decrease attributable to declines in magazines and books as well as lower paper pass through costs. Net sales for the Publications segment decreased $1.8 million or 4.8% in the first quarter of 2013 compared to the same period a year ago with approximately two-thirds of the decrease attributable to lower paper pass through costs and the balance due to continued softness in magazine sales partially offset by new work from journal customers. Net sales for the Specialty Catalogs segment increased $0.8 million or 4.5% in the first quarter of 2013 compared with the same period a year ago primarily due to an increase in the number of catalogs produced and increases in pass through costs for paper and shipping. Net sales for the Books segment decreased $0.9 million or 6.5% in the first quarter of 2013 compared with the same period a year ago as publishers placed fewer orders, which resulted in the production of fewer books and lower paper pass through costs.

Gross profit for the first quarter of 2013 was virtually unchanged compared to the first quarter of 2012. Gross margin of 20.1% of net sales for the first quarter of 2013 reflected a 0.5 margin point increase versus the first quarter of 2012. The increase in our gross margin was due principally to the impact of lower paper pass through costs coupled with a decrease in people-related costs, despite higher healthcare costs, in the first quarter of 2013 as compared to the first quarter of 2012.
 
Selling and administrative expenses decreased $0.4 million or 4.5% in the first quarter of 2013 as compared to the first quarter of 2012. The decrease was due primarily to lower people-related costs coupled with lower costs for professional fees.

Operating income of $5.1 million for the first quarter of 2013 represented an increase of $0.4 million as compared to the first quarter of 2012. The increase in operating income was due primarily to the impact of the lower selling and administrative expenses mentioned above. Publications operating income increased by $0.3 million in the first quarter of 2013 compared to the first quarter of 2012 as the impact of lower sales was more than offset by lower people-related costs, despite higher healthcare costs. Specialty Catalogs operating income increased by $0.7 million in the first quarter of 2013 as compared to the first quarter of 2012 due primarily to the impact of higher sales coupled with lower people-related costs. The Books segment realized an operating loss of $0.5 million in the first quarter of 2013 as compared to operating income of $0.6 million in the first quarter of 2012, a decline of $1.1 million. The primary reasons for the decline were a decrease in sales coupled with an increase in depreciation expense. A decrease in corporate expenses increased operating income by $0.4 million in the first quarter of 2013 as compared with the same period last year due primarily to decreases in people-related costs, professional fees and technology developments costs.

 
12


Interest expense of $5.0 million in the first quarter of 2013 represented a $0.5 million decrease as compared to the first quarter of 2012 due primarily to the impact of the repurchase of 2011 Notes with a face amount of $12.8 million subsequent to the end of the first quarter of 2012.

During the first quarter of 2013, we repurchased in the open market 2011 Notes with a face value of $6.6 million at a discount and recorded a gain of $0.7 million, which was $0.3 million higher than the first quarter of 2012, when we repurchased in the open market 2011 Notes with a face value of $5.9 million and recorded a gain of $0.4 million.

Net income before income taxes was $0.8 million in the first quarter of 2013 as compared to a loss before income taxes of $0.3 million in the first quarter of 2012.  This $1.1 million improvement was due primarily to decreases in selling and administrative costs and interest expense along with an increase in the gain realized on the repurchase of some of our 2011 Notes.

We recorded an income tax provision during the three months ended March 31, 2013 based on an estimated effective income tax rate for the year ended December 31, 2013 of approximately 50%, which was increased by discrete adjustments resulting in an effective tax rate of approximately 52%. The impact of the permanent differences (primarily tax deductible goodwill) in relation to our projected pre-tax loss for 2013 increased the forecasted effective tax rate. We recorded income tax benefit during the three months ended March 31, 2012 based on an estimated effective income tax rate for the year ended December 31, 2012 of approximately 56%, which was partially offset by discrete adjustments resulting in an effective tax rate of approximately 50%.

Net income of $0.4 million for the first quarter of 2013 represented a $0.6 million improvement as compared to net loss of $0.2 million for the first quarter of 2012 due to the factors mentioned previously.

Liquidity and Capital Resources

As further described below under “Indebtedness,” on April 15, 2011, we completed the 2011 Notes offering 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 Notes and 2004 Notes (due in 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. 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 company, TSG Holdings Corp., 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 $4.2 million outstanding as of March 31, 2013, 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 $1.7 million as of March 31, 2013 compared to $1.6 million as of December 31, 2012. During the first three months of 2013, we utilized cash on hand to fund operations, make investments in new plant and equipment, pay down our working capital facility and repurchase some of our 2011 Notes.

 
13


Operating Activities

Net cash provided by operating activities was $9.5 million for the first three months of 2013 compared to $11.5 million for the first three months of 2012. This $2.0 million decline was primarily due to unfavorable changes in working capital and other assets and liabilities that totaled $2.9 million partially offset by an increase in net income of $0.6 million and an increase in net non-cash expenses of $0.3 million. The major balance sheet changes included:

 
·
an unfavorable change of $2.1 million from accrued expenses due primarily to the timing of payroll disbursements and the amount of payments for interest on the 2011 Notes;
 
 
·
an unfavorable change of $1.5 million from other current assets primarily as the result of the return of a deposit from an insurance provider in the first quarter of 2012;

 
·
an unfavorable change of $0.5 million from accounts payable due to the timing of purchases;

 
·
a favorable change of $1.3 million from inventories primarily as the result of a decrease in paper inventory on hand at our Specialty Catalogs segment.

Investing Activities

Net cash used in investing activities was $2.2 million for the first three months of 2013 compared to $2.5 million for the first three months of 2012. This $0.3 million decrease in cash used was primarily the result of lower capital spending in the first quarter of 2013 as compared to the same period last year.

Financing Activities

Net cash used in financing activities was $7.2 million for the first three months of 2013 compared to $8.9 million for the first three months of 2012. This $1.6 million decrease in cash used was due primarily to the $2.2 million decrease in net repayments under our working capital facility partially offset by a $0.6 million increase in cash used to repurchase some of our 2011 Notes.

Indebtedness
 
2011 Notes and Amended and Restated Working Capital Facility

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 further discussed 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 each fiscal year. 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, as a result of an amendment entered into on January 15, 2013, 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 as well as 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.

 
14


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 Notes and 2004 Notes (due in 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 March 31, 2013, our Consolidated EBITDA was $38.8 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.

 
15


The following table provides a reconciliation of Consolidated EBITDA to cash flows from operating activities for the three month periods ended March 31, 2013 and 2012. The Consolidated EBITDA covenants under each of the Indenture and the working capital facility agreement are based upon a rolling twelve months. Therefore, Consolidated EBITDA for the twelve months ended March 31, 2013 includes the amounts presented in the following table as well as the amounts from the second, third and fourth quarters of 2012.

   
Three Months Ended March 31,
 
(in thousands)
 
2013
   
2012
 
             
Net cash provided by operating activities
  $ 9,537     $ 11,536  
                 
Accounts receivable
    1,316       1,420  
Inventories
    (1,034 )     227  
Other current assets
    178       (1,321 )
Refundable income taxes
    -       (109 )
Other assets
    48       (14 )
Accounts payable
    752       254  
Accrued expenses
    (4,991 )     (7,044 )
Income taxes payable
    36       -  
Other liabilities
    68       48  
Provision for doubtful accounts
    (8 )     20  
Deferred income tax (provision) benefit
    (399 )     231  
Gain (loss) on disposition of fixed assets, net
    53       (4 )
Income tax expense (benefit)
    430       (163 )
Cash interest expense
    3,877       4,273  
Non cash adjustments:
               
Increase in market value of investments
    (1 )     (4 )
Loss on disposition of fixed assets
    17       3  
Interest income
    (17 )     (5 )
Restructuring costs
    67       5  
                 
Consolidated EBITDA
  $ 9,929     $ 9,353  
 
 
Contractual Obligations

The following table summarizes the Company’s future minimum non-cancellable obligations as of March 31, 2013. 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)
  $ 145,789     $ 14,909     $ 130,880     $ -     $ -  
Operating leases
    2,990       1,037       1,601       352       -  
Purchase obligations (2)
    2,752       2,546       187       19       -  
                                         
Total (3)
  $ 151,531     $ 18,492     $ 132,668     $ 371     $ -  
 

(1)
Includes $4.2 million principal amount due January 14, 2014 under our working capital facility and $119.3 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)
At March 31, 2013, we have recognized $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 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.

 
16


Off Balance Sheet Arrangements

At March 31, 2013 and December 31, 2012, 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

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. The adoption of this guidance did not have an impact 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 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 did not have an impact on our consolidated financial statements.

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 months ended March 31, 2013 and 2012 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 are exposed to changes in interest rates because our working capital facility is variable rate debt. Interest rate changes 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 the first quarter of 2013, 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 three months ended March 31, 2013. We do not currently utilize derivative financial instruments to hedge changes in interest rates. 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.

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.

 
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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, 2012, 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 risks 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. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits
 
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.
 
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.
 
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.
 
101.1
The following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.  In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101.1 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filing.

 
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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/ Robert M. Jakobe
 
 
Robert M. Jakobe
 
 
Executive Vice President and Chief Financial Officer
 
 
 
Date:  
May 13, 2013
 
 
 
 
 
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