ITEM 1. BUSINESS
Overview
We are a leading specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine and book markets. We believe that we enjoy strong and long-standing relationships with our customers, which include publishers, catalog merchants, associations and university presses. We provide a wide range of printing services and value-added support services that supplement the core printing operations. We develop and implement technology-based services and solutions designed to help our customers be more successful in the rapidly changing publishing industry. We are focused on short production runs for small to medium sized customers who rely heavily on our world class prepress operations to prepare, edit and publish content for electronic or printed distribution. We utilize a decentralized management structure, which provides our customers with access to the resources of a large company, while maintaining the high level of service and flexibility of a smaller company. We operate in three business segments: Publications, Specialty Catalogs and Books. For the year ended December 31, 2011, we generated net sales of $264.9 million, operating income of $7.4 million and a net loss of $9.0 million. As used in this Annual Report on Form 10-K, the terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of The Sheridan Group, Inc. and all of its subsidiaries.
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History
We trace our roots back to The Sheridan Press (“TSP”), the predecessor of which was founded in 1915. We entered the short-run journal market in 1980, targeting the printing of scientific, technical, medical and scholarly journals for publishers. The Sheridan Group, Inc. was formed in 1988 to complete the acquisition of Braun-Brumfield, Inc., a short-run book printer located in Michigan. In 1994, we entered the specialty magazine market with the acquisition of United Litho, Inc. (“ULI”), a printer of specialty magazines serving the Washington, D.C. metro area. In conjunction with our recapitalization in 1998, we acquired Dartmouth Printing Company (“DPC”), a specialty magazine printer in New Hampshire, and Capital City Press (“CCP”), a journal printer in Vermont. In 1999, we acquired BookCrafters, Inc., a short-run book printer in Chelsea, Michigan and consolidated it with Braun-Brumfield to form Sheridan Books, Inc. (“SBI”). In 2002, we started Dartmouth Journal Services, Inc. (“DJS”) to serve the editorial and composition needs of the scientific, technical and medical journals publishing community and provide more robust journal production services for the customers of DPC and TSP. In 2004, we acquired The Dingley Press (“TDP”), a specialty catalog printer in Maine. In 2006, we shut down the operations of CCP and consolidated the production of short-run journals at TSP. In 2011, we shut down the operations of ULI and consolidated the production of specialty magazines at DPC. Currently, we are comprised of five specialty printing companies operating in the domestic scientific, technical, medical and scholarly journal, specialty catalog, short-run book and specialty magazine markets: TSP in Pennsylvania; SBI in Michigan; DPC in New Hampshire; DJS in Vermont; and TDP in Maine.
Printing Services
Our printing services include transferring content onto printing plates in pre-press, printing the content on press, binding the printed pages into the finished product and distributing the finished product to either the customer or the ultimate end user. Pre-press processes are critical front-end elements of our printing services which ready the content for printing on our presses. Digital, sheet-fed and web presses are used, depending on run length, to produce the printed product. We utilize three types of binding techniques for the printed product: perfect binding, saddle stitching and case binding. The product is then labeled and packaged prior to mailing. The majority of journals and magazines are mailed to the subscribers; the remainders are shipped to the publisher. Our books are shipped in cases to the customer. Catalogs are drop-shipped to various locations throughout the U.S. and placed into the mail stream close to the recipient.
Technology Services
We continue to develop new services and solutions to help our customers and prospects thrive in the evolving printing industry. Through our extensive experience as a journal printer supporting the sophisticated technology requirements of journal publishers and our deep understanding of our customers’ needs, we believe we are well positioned to bring innovative technology-based services and solutions to the journal, book, magazine, and catalog market segments. In order to accelerate our technology development, we have added technology resources throughout the organization and increased spending on software development. The result of these efforts includes the introduction of on-demand digital printing, custom publishing, interactive content for mobile applications and electronic content warehousing. We process significant amounts of our customers’ intellectual property and play a critical role in helping customers meet demands for electronic and printed media.
Value-Added Support Services
In addition to providing printing services to our customers, we offer a full range of value-added support services. While sales of these services constitute a relatively small percentage of total revenues, they are critical to meeting the customer’s needs. These services are highly customized for each customer’s specifications and logistics requirements. Examples of the value-added support services we provide are page composition, electronic copy-editing, digital proofing, electronic publishing systems, subscriber services, digital media distribution, custom publishing and back issue fulfillment.
Printing Segments
As a leading publications printer, we offer a broad range of products and services, including the printing of scientific, technical, medical and scholarly journals, specialty catalogs, short-run books, specialty magazines, article reprints and an extensive array of value-added support services. Our products are sold to a diverse set of customers, including publishers, catalog merchants, university presses and associations.
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The following table presents the percentage of net sales contributed by each segment during the past three fiscal years.
Our net sales attributable to customers in the United States were $259.9 million, $261.1 million and $287.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. Our net sales attributable to customers in foreign countries were $5.0 million, $5.1 million and $5.8 million for the years ended December 31, 2011, 2010 and 2009, respectively. Additional financial information about our segments is set forth in Note 16 to our consolidated financial statements set forth in Part II, Item 8 of this report.
Assets by Segment
The following table presents the total assets by segment for each of the fiscal years ended December 31, 2011, 2010 and 2009:
Publications
The Publications segment provides products and services for journals and specialty magazines to publishers, university presses and associations.
Journals
The journal market includes journals for the scientific, technical, medical and scholarly communities. We compete in both the short-run and medium-run portions of the journal market. We define short-run journals as journals produced on sheet-fed and digital presses with typical production runs of less than 5,000. We consider medium-run journals to be journals with production runs between 5,000 and 100,000 copies. Medium-run journals are typically produced on web presses due to economies of scale versus sheet-fed presses. Publishers, associations and university presses comprise the customers in the journals market. In 2011, we printed over 2,600 journal titles.
Our journals are primarily black and white with a small amount of color for photographs, diagrams and advertisements. They are printed on schedules that range from weekly to annually. Journal printing typically results in a high level of repeat business due to the periodic nature and complexity of these publications. The vast majority of journals are perfect bound, with the remainder saddle-stitched. Our journal customers rely on our consistency and on-time reliability to meet the demands of their own customers.
Originally developed as an ancillary product from the base journal business, we produce article reprints on sheet-fed and digital presses. Article reprints are produced for customers who require reprints of an individual article from a journal or magazine for marketing or other purposes. Historically, we have primarily reprinted journal and magazine articles for which we were the original printer. We have expanded our business by winning article reprint business on publications for which we were not the original printer. We are a full-service reprint printer, producing black and white as well as color reprints for publishers, university presses and associations.
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Specialty Magazines
We characterize specialty magazines as magazines having production runs of less than 100,000 copies. Our customers in this market are publishers and associations. Specialty magazines also have a high level of repeat business due to the periodic nature of the publications. This is largely a regional market defined by proximity to the customer. In 2011, we printed about 340 magazine titles.
We produce short-run magazines with average run lengths of about 20,000 copies. The majority of these magazines are printed in four-color. The magazines are bound using the saddle-stitching and perfect binding techniques. The magazines are produced in frequencies that range from weekly to annually. These magazines are produced on web presses. Although specialty magazine customers do not require composition services, they do demand high levels of customer service focused on distribution and mailing services, where managing the customer’s subscriber database is critical to customer satisfaction.
Specialty Catalogs
We entered the specialty catalog segment in 2004 with our purchase of TDP. We characterize Specialty Catalogs as catalogs distributed by specialty catalog merchant companies, which are often smaller entrepreneurial firms with high service requirements. We produce catalogs with run lengths between 50,000 and 8,500,000 copies, most of which are printed in four-color and are bound using the saddle stitching technique. Multiple versions of each catalog are distributed during the year requiring high levels of customer service and extensive distribution services. In 2011, we printed about 175 catalog titles.
Books
We print books for publishers, associations and university presses. Sales to this market include both the initial printing of titles and subsequent reprints. In 2011, we printed over 9,200 book titles.
We produce books in run lengths that average about 1,900 copies and range from 100 to 10,000 copies. The majority of these books are black and white. Books are produced on both sheet-fed and web presses. In 2011, about 56% of our books had soft covers (perfect bound) and about 44% had hard covers (case bound).
Competition
The printing industry in the United States is fragmented and highly competitive in most product categories and geographic regions. We compete in sub segments of the overall printing market. Competition is largely based on price, quality, range of services offered, distribution capabilities, ability to service the specialized needs of customers, availability of printing time on appropriate equipment and use of state-of-the-art technology. Competitive price pressure continues to be strong in the product segments in which we compete.
Customers
We benefit from a highly diversified customer base. The majority of our business comes from publishers, followed by catalog merchants, associations and university presses. The average length of our relationship with our top 50 customers is approximately 17 years. During 2011, 2010 and 2009, we had no customer that accounted for more than 10% of our net sales.
Sales and Marketing
We have developed a knowledgeable and experienced sales management team, which has successfully cultivated and maintained strong relationships with customers across the U.S. Our products are sold through internal direct sales professionals and a dedicated network of sales representatives. Across all of our companies, external representatives augment an internal customer service and sales staff, providing our customers with multiple touch points. Our sales representatives are paid a commission based on sales volume growth targets. Additionally, we have alliances with printers in other geographies to meet publishers’ global distribution needs for publications and books.
We have also invested in additional Marketing resources and expanded our marketing programs to increase our visibility in the marketplace and emphasize the breadth of products and services we provide to our customers. We utilize social media, blogging, webinars and other innovative techniques to reach current and prospective customers.
Raw Materials
The principal raw material used in our business is paper, which represents a significant portion of our cost of materials. Due to the significance of paper in our business, we are dependent upon the availability of paper. In periods of high demand, certain paper grades have been in short supply, including grades we use in our business. In addition, during periods of tight supply, many paper producers allocate shipments of paper based upon historical purchase levels of customers. Historically, however, we generally have not experienced significant difficulty in obtaining adequate quantities of paper. We do not have any long-term paper supply agreements. We also use a variety of other raw materials including ink, film, offset plates, chemicals and solvents, glue, wire and subcontracted components. In general, we have not experienced any significant difficulty in obtaining these raw materials.
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Operational Technology
Our capital investments have been focused on productivity improvement, more efficient material usage and incremental capacity. Additionally, our investments in technology have been critical in helping achieve improved workflow and reduced cycle times.
Employees
We had approximately 1,400 employees as of December 31, 2011. We focus heavily on fostering enthusiastic and positive cultures at each of our locations. In addition, we closely monitor our employees’ level of job satisfaction with comprehensive surveys on a regular basis. Management believes our compensation and benefits packages are competitive within the industry and local markets.
Regulatory Matters
We are subject to a broad range of federal, state and local laws and regulations relating to the pollution and protection of the environment, health and safety and labor. Based on currently available information, we do not anticipate any material adverse effect on our operations, financial condition or competitive position as a result of our efforts to comply with environmental, health and safety or labor requirements, and we do not anticipate needing to make any material capital expenditures to comply with such requirements.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risk Factors
Senior Secured Notes Maturing-Our senior secured notes mature on April 15, 2014. We do not have sufficient funds to repay our senior secured notes and may not be able to refinance them prior to their maturity.
We do not have sufficient funds, nor do we anticipate generating sufficient funds from operations, to repay our senior secured notes, which mature on April 15, 2014. We intend to refinance these notes prior to their maturity but we cannot assure you that we will be able to do so on terms and conditions satisfactory to us within the period needed to meet our repayment obligations. Our ability to refinance senior secured notes on commercially reasonable terms may be materially and adversely impacted by credit market conditions and our financial condition.
Working Capital Facility Maturing-Although we anticipate that we will be able to refinance our working capital facility prior to its termination on April 15, 2013, there can be no assurance that we will be able to do so.
Our working capital facility is scheduled to terminate on April 15, 2013. As of December 31, 2011 we had $4.5 million of borrowings outstanding under our working capital facility. We anticipate that we will be able to replace the current facility prior to its termination, but there can be no assurances that we will be able to do so on similar terms or at all. If we are not able to replace our working capital facility on similar terms it could adversely impact our ability to fund our liquidity needs.
Additional Capital-We may need additional capital in the future and it may not be available on acceptable terms.
We may require more capital in the future to:
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fund our operations;
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finance investments in equipment and infrastructure needed to maintain and expand our network;
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enhance and expand the range of services we offer; and
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respond to competitive pressures and potential strategic opportunities, such as investments, acquisitions and international expansion.
We cannot assure you that additional financing will be available on terms favorable to us, or at all. The terms of available financing may place limits on our financial and operating flexibility. If adequate funds are not available on acceptable terms, we may be forced to reduce our operations or delay, limit or abandon expansion opportunities. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could reduce our competitiveness as our competitors may provide better maintained networks or offer an expanded range of services.
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Substantial Leverage-Our substantial indebtedness could adversely affect our financial health and prevent us from meeting our obligations under our indebtedness.
We have a significant amount of indebtedness. On December 31, 2011, we had total indebtedness of approximately $135.9 million.
Our substantial indebtedness could have important consequences. For example, it could:
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make it more difficult for us to meet our payment and other obligations under our indebtedness;
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require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
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increase our vulnerability to general adverse economic and industry conditions;
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limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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place us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and
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limit our ability to borrow additional funds or raise additional financing.
In addition, agreements governing our indebtedness contain financial and other restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt.
Technological Change-The evolution of technology may decrease the demand for our products and services.
The technology we use in our operations is rapidly evolving. We could experience delays or difficulties in responding to changing technology, in addressing the increasingly sophisticated needs of our customers or in keeping pace with emerging industry standards. In addition, the cost required to respond to and integrate changing technologies may be greater than we anticipate. If we do not respond adequately to the need to integrate changing technologies in a timely manner, or if the investment required to so respond is greater than anticipated, our business, financial condition, results of operations, cash flow and ability to make payments on the notes may be adversely affected. We remain largely dependent on the distribution of scientific, technical, medical and other scholarly information in printed form. Usage of the Internet and other electronic media continues to grow. We cannot assure you that an acceleration of the trend toward such electronic media will not decrease the demand for our products which could result in lower profits and reduced cash flows.
Digital printing methods continue to evolve and are becoming more cost effective for printing short-run publications. The growth of digital printing could allow other printers to compete against us in our specialized market, which could cause a decrease in the demand for our services or could force us to lower our prices to remain competitive. Such a decrease in demand or price could result in decreased profitability and have a material adverse effect on our business, financial condition and results of operations.
Competition-The printing industry is competitive and rapidly evolving and competition may adversely affect our business.
The printing industry is extremely competitive. We compete with numerous companies, some of which have greater financial resources than we do. We compete on the basis of ongoing customer service, quality of finished products, range of services offered, distribution capabilities, use of state of the art technology and price. We cannot assure you that we will be able to compete successfully with respect to any of these factors. In certain circumstances, due primarily to factors such as freight rates and customer preference for local services, printers with better access to certain regions of the country may have a competitive advantage in such regions. Our failure to compete successfully could cause us to lose existing business or opportunities to generate new business and could result in decreased profitability, adversely affecting our business.
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Consolidation-Industry consolidation of customers and increased competition for those customers may result in increased expenses and reduced revenue and market position.
The continuing consolidation of publishing companies has shrunk the pool of available customers. Large publishing companies often have preferred provider arrangements with specific printing companies. As smaller publishing companies are consolidated into the larger companies, the smaller publishing companies are often required to use the printing company with which the acquiring company has established an arrangement. If our customers were to merge or consolidate with publishing companies utilizing other printing companies, we could lose our customers to competing printing companies. If we were to lose a significant portion of our current base of customers to competing printing companies, our business, financial condition, results of operations and cash flow could be materially adversely affected.
Customer Concentration-The increase in business from a top customer may make our net sales and profitability more sensitive to the loss of such a customer’s business.
During 2011 we did not derive more than 10% of our net sales from any single customer. However, we derived a significant portion of our net sales from our ten largest customers. In the future, an increase in business from a large customer could result in net sales to that customer comprising more than 10% of our total net sales. We cannot assure you that our large customers will continue to use our printing services. The loss of any of our large customers could cause our net sales and profitability to decline materially.
Financial Covenant Compliance-If we are unable to comply with the financial covenants in our working capital facility or indenture, our business, results of operations and liquidity could be materially and adversely affected.
Our working capital facility and the indenture governing our senior secured notes both contain financial covenants requiring that we achieve certain levels of Consolidated EBITDA (as defined) and limiting our capital expenditures. For any period of four consecutive quarters, taken as one accounting period, we are required to maintain Consolidated EBITDA of at least $34.0 million for the period April 1, 2012 to March 31, 2013 and $35.0 million for the period April 1, 2013 and thereafter. We are required to limit our capital expenditures to no more than $9.5 million in the fiscal year ending on December 31, 2012 and no more than 8.0 million in the fiscal year ending on December 31, 2013, with unused amounts in any fiscal year carried forward to subsequent fiscal years. We cannot be sure that we will be able to meet these financial covenants. If our revenues are not sufficient, we could be required to reduce operating expenses significantly in order to comply with the Consolidated EBITDA covenant. We cannot assure you that we will be successful in generating sufficient revenues or implementing additional operating expense reductions (if needed) on a timely basis, or at all, that any actions we take would be sufficient to avoid a default under our working capital facility and the indenture governing our senior secured notes, or that any additional operating expense reductions will not have a lasting material adverse impact on our results of operations or long-term business prospects. Furthermore, if management is unsuccessful in implementing sufficient additional operating expense reductions or otherwise ensuring that we are in compliance with the financial covenants, an event of default could occur, which, if we are not able to obtain a waiver, would allow the lenders under the working capital facility and the holders of the senior secured notes to accelerate any amounts outstanding and exercise their other remedies. There is no assurance that we would receive waivers should we not meet our financial covenants. In addition, we may not be able to refinance such indebtedness through the proceeds of debt or equity issuances or otherwise on reasonable terms, on a timely basis, or at all.
Impairments-Our financial results could be negatively impacted by impairments of goodwill and other long-lived assets.
On an annual basis or as circumstances dictate, we review goodwill and other long-lived assets, consisting primarily of property, plant and equipment and identified intangibles subject to amortization, and evaluate events or other developments that may indicate impairment in the carrying amount. A decline in profitability at one of our reporting units could result in non-cash impairment charges. Any impairment charge could have a significant negative effect on our reported results of operations. In the fourth quarter of 2010, due primarily to the longer and more sustained deterioration of the magazine business and the unlikely prospect of a meaningful recovery in the near term, our assessment indicated that goodwill at Dartmouth Printing Company was fully impaired, resulting in a non-cash charge of $7.0 million.
Cost and Availability of Paper and Other Raw Materials-Increases in prices of paper and other raw materials and postal rates as well as changes in postal delivery schedules could cause disruptions in our services to customers.
The principal raw material used in our business is paper, which represents a significant portion of our cost of materials. Although we believe that we have been successful in negotiating favorable price relationships with our paper vendors, prices in the overall paper market are beyond our control. Historically, we have generally been able to pass increases in the cost of paper on to our customers. If we are unable to continue to pass any price increases on to our customers, future paper price increases could adversely affect our margins and profits.
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Due to the significance of paper in our business, we are dependent upon the availability of paper. In periods of high demand, certain paper grades have been in short supply, including grades we use in our business. In addition, during periods of tight supply, many paper producers allocate shipments of paper based upon historical purchase levels of customers. Although we generally have not experienced significant difficulty in obtaining adequate quantities of paper, unforeseen developments in the overall paper markets could result in a decrease in the supply of paper and could cause either or both of our revenues or profits to decline.
We use a variety of other raw materials including ink, film, offset plates, chemicals and solvents, glue, wire and subcontracted components. In general, we have not experienced any significant difficulty in obtaining these raw materials. We cannot assure you, however, that a shortage of any of these raw materials will not occur in the future or will not potentially adversely affect the financial results of our business.
Our journals, magazines and catalogs are mailed, either by us or our customers, to subscribers. As a result, an increase in postal rates may cause our customers to decrease the size and number of their publications. Although we generally have not experienced significant decreases in mailings in the past due to postal rate increases, we cannot assure you that such a decrease will not occur in the future or will not potentially adversely affect the financial results of our business. In addition, the U.S. Postmaster General has proposed reducing the delivery of mail from six days to five days per week. If this change is adopted we cannot assure you how our customers will react and whether or not this will adversely affect the financial results of our business.
We require energy products, primarily natural gas and electricity, in our operating facilities. We also depend on gasoline and diesel fuel for our delivery vehicles and the vehicles of the carriers we utilize to deliver our products. Possible disruption of supplies or an increase in the prices of energy products could adversely affect the financial results of our business.
Fluctuations in the markets for paper and raw materials could adversely impact the market for our recycled materials, such as paper, cardboard and used plates. This could have a negative effect on the income we generate from such sales.
Economic Conditions-Current and future economic conditions could adversely affect our business and financial performance.
Our operating results and performance are impacted by general economic conditions, both domestic and abroad. Revenue in the printing industry has declined in the past five years due to the economic recession’s effects on advertising and consumer spending. Current global economic conditions may continue to negatively and materially affect demand for our products and services and our financial performance. Examples of how our business and financial performance may continue to be adversely affected by current and future economic conditions include:
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increased price competition resulting in lower sales, profitability and cash flow;
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deterioration in the financial condition of our customers resulting in reduced orders, an inability to collect receivables, payment delays or customer bankruptcy;
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increased risk of insolvency of financial institutions, which may limit our liquidity in the future or adversely affect our ability to use or refinance our senior secured notes and working capital facility;
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increased turmoil in the financial markets may limit our ability and the ability of our customers and suppliers to access the capital markets or require limitations or terms and conditions for such access that are more restrictive and costly than in the past; and
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declines in our businesses could result in material charges for restructuring or asset impairments.
Key Employees-Our ability to attract, train and retain executives and other qualified employees is crucial to results of operations and future growth.
We rely to a significant extent on our executive officers and other key management personnel. There can be no assurance that we will be able to continue to retain our executive officers and key management personnel or attract additional qualified management in the future. In addition, the success of any acquisition by us may depend, in part, on our ability to retain management personnel of the acquired companies. There can be no assurance that we will be able to retain such management personnel.
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In addition, to provide high-quality printed products in a timely fashion we must maintain an adequate staff of skilled technicians, including pre-press personnel, pressmen, bindery operators and fulfillment personnel. Accordingly, our ability to maintain and increase our productivity and profitability will depend, in part, on our ability to employ, train and retain the skilled technicians necessary to meet our commitments. From time-to-time:
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the industry experiences shortages of qualified technicians, and we may not be able to maintain an adequate skilled labor force necessary to operate efficiently;
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our labor expenses may increase as a result of shortages of skilled technicians; or
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we may have to curtail our planned internal growth as a result of labor shortages.
If any of these events were to occur, it could adversely affect our business.
Business Interruption-Our printing facilities may suffer business interruptions which could increase our operating costs, decrease our sales or cause us to lose customers.
The reliability of our printing facilities is critical to the success of our business. Our facilities might be damaged or interrupted by fire, flood, power loss, telecommunications failure, break-ins, earthquakes, terrorist attacks, war or similar events. Equipment malfunctions, computer viruses, physical or electronic break-ins and similar disruptions might cause interruptions and delays in our printing services and could significantly diminish our reputation and brand name and prevent us from providing services. Although we believe we have taken adequate steps to address these risks, damage to, or unreliability of, our printing facilities could have a material adverse effect on our business, financial condition, results of operations and cash flow.
Research Funding-Decreases in the types and amount of research funding could decrease the demand for our journal printing services.
In our journal business, we provide printing services primarily to scientific, technical, medical and other scholarly journals. The supply of research papers published in these journals is related to the amount of research funding provided by the federal government and private companies. In the future, the federal government or private companies could decrease the type and amount of funding that they provide for scientific, technical, medical and other scholarly research. A significant decrease in research funding might decrease the number or length of journals that we print for our customers, which would decrease our cash flow. A reduction in the investment value of university endowments in the current economic environment could also result in less demand by university libraries for printed journals.
Environmental Matters-Our printing and other facilities are subject to environmental laws and regulations, which may subject us to liability or require us to incur costs.
We use various materials in our operations which contain substances considered hazardous or toxic under environmental laws. In addition, our operations are subject to federal, state and local environmental laws and regulations relating to, among other things, air emissions, waste generation, handling, management and disposal, wastewater treatment and discharge and remediation of soil and groundwater contamination. Permits are required for the operation of certain of our businesses, and these permits are subject to renewal, modification and, in some circumstances, revocation. Our operations also generate wastes which are disposed of off-site. Under certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act, as amended (“CERCLA,” commonly referred to as “Superfund”) and similar state laws and regulations, we may be liable for costs and damages relating to soil and groundwater contamination at these off-site disposal locations, or at our own facilities. In the past, such matters have not had a material impact on our business or operations. We are not currently aware of any environmental matters that are likely to have a material adverse effect on our business, financial condition, results of operations and cash flow. However, we cannot assure you that such matters will not have such an impact on us. Furthermore, future changes to environmental laws and regulations may give rise to additional costs or liabilities that could have a material adverse impact on us.
Health and Safety Requirements-We could be adversely affected by health and safety requirements.
We are subject to requirements of federal, state and local occupational health and safety laws and regulations. These requirements are complex, constantly changing and have tended to become more stringent over time. It is possible that these requirements may change or liabilities may arise in the future in a manner that could have a material adverse effect on our business, financial condition, results of operations and cash flow. We cannot assure you that we have been or will be at all times in complete compliance with all those requirements or that we will not incur material costs or liabilities in connection with those requirements in the future.
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Intellectual Property-We may not protect our technology effectively, which would allow competitors to duplicate our products and services, or our products and services may infringe on claims of intellectual property rights of third parties.
Our success and ability to compete depend, in part, upon our technology. Among our significant assets are our proprietary information and intellectual property rights. We rely on a combination of copyright and trademark laws, confidentiality procedures and contractual provisions and other intellectual property safeguards to protect these assets. Unauthorized use and misuse of our intellectual property could have a material adverse effect on our business, financial condition and results of operations, and there can be no assurance that our legal remedies would adequately compensate us for the damages caused by unauthorized use. In addition, licenses for a number of software products have been granted to us. Some of these licenses, individually and in the aggregate, are material to our business. Although we believe that the risk that we will lose any material license is remote, any loss could have a material adverse effect on our business, financial condition, results of operations and cash flow.
We do not believe that any of our products, services or activities infringe upon the intellectual property rights of third parties in any material respect. There can be no assurance, however, that third parties will not claim infringement by us with respect to current or future products, services or activities. Any infringement claim, with or without merit, could result in substantial costs and diversion of management and financial resources, and a successful claim could effectively block our ability to use or license products and services or cost us money.
Consummation of Future Acquisitions-We may not be able to acquire other companies on satisfactory terms or at all.
Our business strategy includes pursuing acquisitions. Nonetheless, we cannot assure you that we will identify suitable acquisitions or that such acquisitions can be made at an acceptable price. If we acquire additional businesses, those businesses may require substantial capital. Although we will be able to borrow under our working capital facility under certain circumstances to fund acquisitions, we cannot assure you that such borrowings will be available in sufficient amounts or that other financing will be available in amounts and on terms that we deem acceptable. In addition, future acquisitions could result in us incurring debt and contingent liabilities. We cannot assure you that we will be successful in consummating future acquisitions on favorable terms or at all.
Integration of Acquired Businesses-The integration of acquired businesses may result in substantial costs, delays and other problems.
Our future performance will depend on our ability to integrate the businesses that we may acquire. To integrate newly acquired businesses we must integrate manufacturing facilities and extend our financial and management controls and operating, administrative and information systems in a timely manner and on satisfactory terms and conditions. This may be more difficult with respect to significant acquisitions. We may not be able to successfully integrate acquired businesses or realize projected cost savings and synergies in connection with those acquisitions on the timetable contemplated or at all.
Furthermore, the costs of businesses that we may acquire could significantly impact our short-term operating results. These costs could include:
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restructuring charges associated with the acquisitions; and
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other expenses associated with a change of control, as well as non-recurring acquisition costs including accounting and legal fees, investment banking fees, recognition of transaction-related obligations and various other acquisition-related costs.
The integration of newly acquired businesses will require the expenditure of substantial managerial, operating, financial and other resources and may also lead to a diversion of management’s attention from our ongoing business concerns.
Finally, although we conduct and intend to conduct what we believe to be a prudent level of investigation regarding the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses. Until we actually assume operating control of such business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. Once we acquire a business, we are faced with risks, including:
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the possibility that we have acquired substantial undisclosed liabilities;
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the risks of entering markets in which we have limited or no prior experience;
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the potential loss of key employees or customers as a result of changes in management; and
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the possibility that we may be unable to recruit additional managers with the necessary skills to supplement the management of the acquired businesses.
We may not be successful in overcoming these risks.
Principal Stockholders-Our principal stockholders could exercise their influence over us.
As a result of their stock ownership of TSG Holdings Corp., our parent, Bruckmann, Rosser, Sherrill & Co., L.L.C. (“BRS”), Jefferies Capital Partners (“JCP”) and their respective affiliates together beneficially own about 84.6% of TSG Holdings Corp.’s outstanding capital stock. By virtue of the ownership interests of these funds and affiliates and the terms of our securities holders’ agreement, these entities have significant influence over our management and will be able to determine the outcome of all matters required to be submitted to the stockholders for approval, including the election of our directors and the approval of mergers, consolidations and the sale of all or substantially all of our assets. The interests of the funds managed by BRS and JCP and their respective affiliates may differ from the interests of our noteholders and the lenders under our working capital facility, and, as such, BRS and JCP may take actions which may not be in the interest of such noteholders and lenders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity owners might conflict with the interests of our noteholders and the lenders under our working capital facility. In addition, our equity owners may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to our noteholders and the lenders under our working capital facility.
Effectiveness of our internal controls-Failure to comply with the Sarbanes-Oxley Act could impact our business.
There can be no assurance that the periodic evaluation of our internal controls required by the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies. Failure to comply may have consequences for our business. These consequences could include increased risks of financial statement misstatements, investigations or sanctions by regulatory authorities, such as the SEC, and negative capital market reactions.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
We operate a network of 13 manufacturing, warehousing and office facilities located throughout the East Coast and Midwest that occupy, in total, about 1.1 million square feet. We maintain approximately 1.0 million square feet of production space consisting of manufacturing and publication services. We own about 83% of the square footage we use. The following table provides an overview of our manufacturing, warehousing and office facilities.
(1)
Subject to liens in favor of the holders of our outstanding senior secured notes and the lenders under our working capital facility.
Index
Some of our office and warehouse leases are on yearly renewals. We believe that our office, manufacturing and warehousing facilities are adequate for our immediate needs and that additional or substitute space is available at a reasonable cost if needed to accommodate future growth and expansion.
We are continuing our efforts to sell the Ann Arbor, Michigan book facility. We may consolidate this facility with our Chelsea, Michigan operation, pending a firm offer from a third party at an acceptable price.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We currently are involved in various litigation proceedings as a defendant and are from time to time involved in routine litigation. Accruals for litigation have not been provided because information available at this time does not indicate that it is probable that a liability has been incurred. In the opinion of our management, these matters are not expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We are wholly-owned by TSG Holdings Corp, a privately owned corporation. There is no public trading market for our equity securities or for those of TSG Holdings Corp. As of March 28, 2012, there were 34 holders of TSG Holdings Corp. common stock.
Our working capital facility contains customary restrictions on our ability and the ability of certain of our subsidiaries to declare or pay any dividends or repurchase stock. The indenture governing our 12.5% Senior Secured Notes due 2014 also contains customary terms restricting our ability and the ability of certain of our subsidiaries to declare or pay any dividends or repurchase stock. For further information related to the payment of dividends, see the discussion contained in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Information with respect to shares of common stock that may be issued under our equity compensation plans is set forth in Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial data included elsewhere in this annual report on Form 10-K. The consolidated statement of operations and balance sheet data for all periods presented is derived from the audited consolidated financial statements included elsewhere in this annual report on Form 10-K or in annual reports on Form 10-K for prior years on file with the Commission.
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ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our historical consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The discussions in this section contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below. See “Special Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors” for a discussion of some of the risks that could affect us in the future.
Introduction
We are a leading specialty printer offering a full range of printing and value-added support services for the journal, catalog, magazine, book and article reprint markets. We provide a wide range of printing services and value-added support services, such as digital proofing, preflight checking, offshore composition, copy editing, subscriber services, mail sortation, distribution and back issue fulfillment. We utilize a decentralized management structure, which provides our customers with access to the resources of a large company, while maintaining the high level of service and flexibility of a smaller company.
Acquisition transactions
On August 21, 2003, TSG Holdings Corp (“Holdings” or our “Parent”) purchased 100% of the outstanding capital stock of The Sheridan Group, Inc. from its existing stockholders (the “Sheridan Acquisition”) for total cash consideration of $142.0 million less net debt (as defined in the stock purchase agreement), resulting in cash of $79.9 million being paid to the selling stockholders. The accounting purchase price was $186.6 million, which was comprised of the $79.9 million of cash paid to the selling stockholders, $51.4 million of assumed liabilities and $55.3 million of refinanced debt. We funded the acquisition price and the related fees and expenses with the proceeds of the sale of $105.0 million aggregate principal amount of our 10.25% Senior Secured Notes due 2011 (the “2003 Notes”) and equity investments in Holdings.
On May 25, 2004, The Sheridan Group, Inc., through a newly formed subsidiary, purchased substantially all of the assets and business of The Dingley Press (the “Dingley Acquisition”). The accounting purchase price was $95.4 million, which was comprised of cash paid of $65.5 million, $26.0 million of assumed liabilities and $3.9 million of financing costs. We funded the acquisition price and the related fees and expenses with the proceeds of the sale of $60.0 million aggregate principal amount of our 10.25% Senior Secured Notes due 2011 (the “2004 Notes”), available cash and equity investments in Holdings.
2011 Notes and Amended and Restated Working Capital Facility
On April 15, 2011, we completed a private debt offering of the 2011 Notes (senior secured notes totaling $150.0 million in aggregate principal amount). The 2011 Notes will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. On the same date, we entered into an agreement to amend and restate our working capital facility to, among other things, extend the scheduled maturity to April 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test.
Index
Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility were used to repurchase all of our existing 2003 and 2004 Notes (due August 15, 2011) and to pay related fees and expenses.
Restructuring costs and facility shutdown
In January 2009, we announced our plan to consolidate some administrative and production operations at our DPC facility in Hanover, New Hampshire. Approximately 20 positions at our ULI facility in Ashburn, Virginia were eliminated as a result of this action. We recorded $0.3 million of restructuring costs during 2009. The costs relate primarily to guaranteed severance payments and employee health benefits. We recorded an additional $0.1 million of restructuring costs in connection with this consolidation during 2010.
Due to continued adverse trends in the specialty magazine business (within our Publications segment) as a result of the weak economy, on January 19, 2011, our Board of Directors approved a restructuring plan to consolidate all specialty magazine printing operations into one site. Our ULI facility in Ashburn, Virginia ceased operation on July 1, 2011, and we have consolidated the printing of specialty magazines at DPC in Hanover, New Hampshire. Approximately 80 positions were eliminated as a result of the closure. Approximately 20 employees in the Customer Service and Sales areas were retained by DPC. On November 23, 2011, we completed the sale of the Ashburn, Virginia facility for $4.2 million. After deducting related closing costs, our net proceeds were $3.9 million.
In connection with this consolidation, we recorded $1.8 million of restructuring charges during 2011. Charges related to severance and other personnel costs totaled $1.3 million, and charges for other exit costs totaled $0.5 million. We believe that any future costs in connection with this consolidation will be minimal. We had a liability of $0.2 million related to this restructuring outstanding as of December 31, 2011.
During the third quarter of 2011, we implemented a restructuring plan to reduce our operating costs through a workforce reduction across all segments of our business. Approximately 20 positions were eliminated as a result of this action. We recorded $0.6 million of restructuring costs during 2011. The costs related primarily to guaranteed severance payments and employee health benefits. We do not believe any other costs will be expensed in the future in connection with this action. We had a liability of $0.3 million related to this restructuring outstanding as of December 31, 2011.
The table below shows our restructuring activity in 2011 and our restructuring accrual balance at December 31, 2011 (in thousands):
We recorded non-cash charges of $1.6 million during 2011, associated with the accelerated amortization of the ULI trade name based on updated estimates of useful life.
We also recorded non-cash charges of approximately $2.0 million during 2011 associated with the accelerated depreciation of equipment, based on updated estimates of remaining useful life and estimated residual value, equal to the lower of carrying value or best estimate of selling price, less costs to sell.
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Critical Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and the differences could be material. We consider the following accounting policies to be critical policies which involve various estimation processes:
•
Allowance for doubtful accounts;
•
Goodwill and other long-lived assets;
•
Income taxes; and
•
Self-insurance.
Allowance for Doubtful Accounts
Our policy with respect to trade accounts receivable is to maintain an adequate allowance or reserve for doubtful accounts for estimated losses from the inability of our customers to make required payments. The process to estimate the collectibility of our trade accounts receivable balances consists of two steps. First, we evaluate specific accounts for which we have information that the customer may have an inability to meet its financial obligations (e.g., bankruptcy). In these cases, using our judgment based on available facts and circumstances, we record a specific allowance for that customer against the receivable to reflect the amount we expect to ultimately collect. Second, we then establish an additional reserve for all customers based on a range of percentages applied to aging categories, based on management’s best estimate. If the financial condition of our customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.
Goodwill and Other Long-Lived Assets
On an annual basis or as circumstances dictate, we review goodwill and evaluate events or other developments that may indicate impairment in the carrying amount. We test goodwill for impairment using the two-step process as prescribed by the appropriate guidance. The initial step requires us to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment is then measured in the second step by comparing the implied fair value of goodwill to the carrying value of goodwill for each reporting unit. To determine the implied fair value of goodwill, we make a hypothetical allocation of the reporting unit’s estimated fair value to the tangible and intangible assets (other than goodwill) of the reporting unit.
The determination of the fair value of our reporting units and the allocation of fair value to assets and liabilities within the reporting units requires management to make significant estimates and assumptions. We derive an estimate of fair values for each of our reporting units using a combination of an income approach and appropriate market approaches, each based on an applicable weighting. We assess the applicable weighting based on such factors as current market conditions and the quality and reliability of the data. Absent an indication of fair value from a potential buyer or similar specific transactions, we believe that the use of these methods provides a reasonable estimate of a reporting unit’s fair value. Fair value computed by these methods is arrived at using a number of factors, including projected future operating results, anticipated future cash flows, effective income tax rates, comparable marketplace data within a suitable industry grouping, control premiums appropriate for acquisitions in our industry and the cost of capital. There are inherent uncertainties related to these factors and to our judgment in applying them to this analysis. Nonetheless, we believe that the combination of these methods provides a reasonable approach to estimate the fair value of our reporting units. The allocation requires several analyses to determine the fair value of assets and liabilities including, among others, customer relationships, trade names, technology and property, plant and equipment. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both.
Due primarily to the longer and more sustained deterioration of the magazine business through the fourth quarter of 2010, and the unlikely prospect of a meaningful recovery in the near term, the December 31, 2010 assessment indicated that goodwill related to our Dartmouth Printing Company reporting unit, a component of the Publications segment, was fully impaired. This impairment resulted in a write-down of goodwill totaling $7.0 million which was recorded during the fourth quarter of 2010. The fair values of our remaining reporting units for goodwill impairment purposes were substantially in excess of their carrying values as of December 31, 2010. At December 31, 2011, we had $34.0 million in goodwill. Based on the results of impairment tests as of December 31, 2011, the fair values of our reporting units were significantly in excess of their carrying values. While significant judgment is required, we believe that our estimates of fair value are reasonable. However, should our assumptions change in future years, our fair value models could result in lower fair values for goodwill, which could materially affect the value of goodwill and our results of operations.
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We review other long-lived assets, consisting primarily of property, plant and equipment and identified intangibles subject to amortization, for impairment by analyzing the future undiscounted cash flows whenever events or changes in circumstances indicate that the carrying value of the long-lived assets, including goodwill, may not be recoverable. We do not believe there was any impairment of intangible assets or other long-lived assets as of December 31, 2011 and 2010. While significant judgment is required, we believe that our estimates of future undiscounted cash flows are reasonable. However, should our assumptions change in future years, estimates of undiscounted cash flows could change, which could affect our conclusions regarding the recoverability of long-lived assets and could materially affect the value of long-lived assets and our results of operations.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. In addition to estimating the actual current tax liability, we must assess future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reflected on our consolidated balance sheets, and operating loss carryforwards. Such differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and, to the extent recovery is not considered likely, establish a valuation allowance against those assets. The valuation allowance is based on estimates of future taxable income in jurisdictions in which we operate and the period over which the deferred tax assets will be recoverable. We use our best judgment in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets.
To the extent that actual results differ from our estimates, new information results in changes to estimates or there is a material change in the actual tax rates or time periods within which the underlying temporary differences become taxable or deductible, we may need to establish an additional valuation allowance, reduce our existing valuation allowance or adjust the effective tax rate, all of which could materially impact our financial position and results of operations.
We recognize liabilities for uncertain tax positions when it is more likely than not that the position will be sustained upon examination by tax authorities, including resolutions of any related appeals or litigation processes, based on the technical merits. Although we believe our estimates are reasonable, the final outcome of uncertain tax positions may be different from what is reflected in our consolidated financial statements. We adjust our uncertain tax positions based on changes in circumstances that would cause a change to the liability, upon settlement of the position or upon the expiration of the statute of limitations during the period in which such events occur.
We recognize interest and penalties related to uncertain tax positions as part of the income tax provision. We had accrued interest of $0.5 million and penalties of $0.3 million as of December 31, 2011. Interest and penalties expensed were negligible during the year ended December 31, 2011 and $0.1 million during the years ended December 31, 2010 and 2009, respectively. Interest and penalties will continue to accrue on certain issues in 2012 and forward. We do not anticipate a significant change in our liabilities for uncertain tax positions during 2012.
Self-Insurance
We are self-insured for healthcare and workers’ compensation costs. We seek to mitigate the risk related to our ultimate claims exposure under these self-insurance arrangements through the purchase of various levels of individual and aggregate claims stop-loss insurance coverage with third-party insurers. We periodically review health insurance and workers’ compensation claims outstanding and estimates of incurred but not reported claims with our third-party claims administrators and adjust our reserves for self-insurance risk accordingly. Provisions for medical and workers’ compensation claims are based on estimates, which are subject to differing financial outcomes based upon the nature and severity of those claims. As a result, additional reserves may be required in future periods.
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Results of Operations
The periods presented in this Form 10-K are reported on a comparable basis. The Publications business segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of The Sheridan Press, Inc., Dartmouth Printing Company, Dartmouth Journal Services, Inc. and United Litho, Inc. We believe there are many similarities in the journal and magazine markets such as the equipment used in the print and bind process, distribution methods, repetitiveness and frequency of titles and the level of service required by customers. Our Books segment is focused on the production of short-run books and is comprised of the assets and operations of Sheridan Books, Inc. This market does not have the repetitive nature of our other products and does not require the same level of customer service. The Specialty Catalogs segment, which is comprised of the assets and operations of The Dingley Press, Inc., is focused on catalog merchants that require run lengths between 50,000 and 8,500,000 copies.
The following tables set forth, for the periods indicated, information derived from our consolidated statements of income, the relative percentage that those amounts represent to total net sales (unless otherwise indicated), and the percentage change in those amounts from period to period. These tables should be read in conjunction with the commentary that follows them.
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Comparison of Years Ended December 31, 2011 and December 31, 2010
nm-not meaningful
Commentary:
Net sales for 2011 decreased slightly versus 2010 as the impact of higher pass through paper costs (approximately $3.6 million) were more than offset by pricing and volume reductions versus a year ago. Net sales for the Publications segment decreased $5.9 million or 4.0% in 2011 compared to a year ago due primarily to: (i) sales declines in journals due to lower pricing and reduced run lengths, the continued migration to digital from offset printing and the expansion of online media and (ii) sales declines in magazines due primarily to lower pricing and reduced run lengths partially offset by modest volume growth with new customers. Net sales for the Specialty Catalogs segment increased $5.2 million or 8.6% in 2011 compared to a year ago with much of the increase due to increases in paper pass through costs coupled with increases in volume, principally from new customers, and higher freight costs. Net sales for the Books segment decreased $0.5 million or 1.0% in 2011 compared to a year ago due primarily to the migration from offset to digital printing and the expansion of electronic books partially offset by higher paper pass through costs.
Index
Gross profit for 2011 decreased by $5.5 million or 10.3% compared to 2010. Gross margin of 18.2% of net sales for 2011 reflected a 2.0 margin point decrease versus 2010. Approximately 40% of the gross profit decline is attributable to increases in pre-consolidation start-up and accelerated depreciation costs associated with the ULI/DPC consolidation coupled with their decline in sales; this adverse impact was partially offset by post-consolidation savings realized following the closure of ULI. The remainder of the gross profit decline is due principally to reductions in sales (excluding pass through costs) in our Publications and Books businesses, an increase in development costs related to our technology-based services and increases in material costs and depreciation expense partially offset by lower operating lease costs, increases in recycling revenue and lower people-related costs.
Selling and administrative expenses decreased $1.1 million or 3.2% in 2011 as compared to 2010. The decrease was due primarily to reductions in bad debt expense, professional fees, management incentive expense and the fees paid to our equity sponsors partially offset by an increase in marketing and technology staffing and travel costs coupled with certain non-capitalizable legal fees incurred in connection with negotiations to refinance our debt.
Restructuring costs of $2.4 million were recorded in 2011. Approximately $1.8 million of the restructuring costs resulted from our decision to shut down the operations of ULI and consolidate the production of specialty magazines at DPC. This decision resulted from adverse trends in the specialty magazine business. The restructuring costs related primarily to severance payments, employee health benefits and other one-time costs. We believe that any future costs in connection with this consolidation will be minimal. ULI ceased operation on July 1, 2011, and all production has been transferred to DPC. Additionally, $0.6 million of the restructuring costs were the result of a workforce reduction across all segments of our business designed to reduce our overall cost structure. These costs related primarily to guaranteed severance payments and employee health benefits. We do not believe any other costs will be expensed in the future in connection with this action.
Amortization expense in 2011 included a $1.6 million charge associated with accelerated amortization of the ULI trade name as a result of the shutdown of ULI.
We evaluate possible impairment of goodwill on an annual basis at the reporting unit level. As a result of our impairment tests in 2010, we concluded that the carrying value of goodwill at DPC exceeded its implied fair value. This resulted in a non-cash impairment charge of $7.0 million in 2010. In connection with our annual assessment of goodwill and other intangibles in 2011, we concluded that there were no indications of impairment.
Operating income of $7.4 million for 2011 represented a decrease of $2.0 million or 21.6% as compared to operating income of $9.4 million for 2010. The $2.0 million reduction includes a $7.0 million improvement versus 2010 attributable solely to the nonrecurring goodwill impairment charge recorded in 2010. Excluding the 2010 goodwill impairment charge impact, operating income declined by $9.0 million in 2011. The combined results of ULI/DPC and their consolidation project accounted for approximately one-half of the $9.0 million decrease. The $9.0 million reduction was due primarily to the decline in gross profit mentioned above as well as the amortization expense and restructuring costs recorded in connection with the shutdown of ULI and the restructuring costs recorded as a result of the workforce reduction. Publications operating income increased by $0.7 million in 2011 due to the $7.0 million nonrecurring goodwill impairment charge incurred in 2010 partially offset by a $6.3 million reduction in operating income due to other factors. Approximately 75% of the $6.3 million decline was attributable to the ULI/DPC business units including the impact of lower sales, the increases in start-up operating costs at DPC in preparation for the incremental volume from ULI, the acceleration of depreciation and amortization expense and the restructuring costs recorded in connection with the shutdown of ULI. The balance of the $6.3 million decline in Publications operating income was attributable to declines in sales versus a year ago coupled with increases in corporate technology staffing cost allocations, which were partially offset by decreases in equipment lease costs and people costs. Specialty Catalogs had an operating loss of $2.6 million in 2011 as compared to an operating loss of $1.5 million in 2010, resulting in a decrease in profitability of $1.1 million. This decrease was primarily due to increases in paper waste, production wages, supplies, materials and depreciation expenses partially offset by higher recycling revenue and lower healthcare costs. Operating income for the Books segment decreased $1.5 million in 2011 compared with last year due principally to the impact of lower sales excluding pass through costs and an increase in the corporate technology staffing cost allocation. An increase in corporate expenses decreased income by $0.2 million. This increase was due primarily to our increased investment in technology resources, certain non-capitalizable legal fees incurred in connection with negotiations to refinance our debt and restructuring costs recorded in connection with a workforce reduction which were largely offset by higher cost allocations to our subsidiaries.
Interest expense of $21.2 million for 2011 represented a $5.4 million increase as compared to 2010 due to our April 15, 2011 refinancing, whereby we replaced our 2003 and 2004 Notes (10.25% senior secured notes with a face amount of $142.9 million) with our 2011 Notes (12.5% senior secured notes with a face amount of $150.0 million). Additionally, the amortization of the deferred financing costs paid and the original issue discount (both in connection with the 2011 Notes) resulted in higher interest charges in 2011 as compared to a year ago. We also recorded a $1.0 million loss primarily as the result of the repurchase of our 2003 and 2004 Notes due to the tender offer premium paid, the professional fees incurred and the write-off of unamortized financing costs associated with the 2003 and 2004 Notes. Additionally, the write-off of unamortized financing costs associated with the repurchase of certain 2011 Notes at 100% of face value, using the proceeds from the sale of the ULI facility, was also a contributing factor to the loss and was partially offset by a gain realized from repurchasing, in the open market, certain 2011 Notes at a discount from face value.
Index
The loss before income taxes of $14.8 million for 2011 represented an $8.5 million decline as compared to last year. The decline was due primarily to the higher expenses and lower sales, excluding pass through costs, mentioned previously.
Our effective income tax rate in 2011 was 39.6% as compared to 6.8% in 2010. The 2010 effective tax rate was lower due primarily to the impact of the goodwill impairment charge in the Publications segment, as this goodwill was not deductible for tax purposes.
Net loss of $9.0 million for 2011 represented a $3.0 million decline as compared to 2010 due to the factors mentioned previously.
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Comparison of Years Ended December 31, 2010 and December 31, 2009
nm-not meaningful
Commentary:
Net sales for 2010 decreased $27.2 million or 9.3% versus 2009, largely 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 $17.1 million or 10.3% in 2010 compared to a year ago due primarily to: (i) loss of a portion of our journal work from a specific customer 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 a majority of the dollar sales decline in Publications sales. Net sales for the Specialty Catalogs segment decreased $8.2 million or 11.9% in 2010 compared with a year ago due primarily to the impact of lower paper costs, coupled with a reduction in print quantities for catalogs in response to soft retail sales. Net sales for the Books segment decreased $1.8 million or 3.0% in 2010 compared with a year ago due primarily to fewer titles being produced due to the economic recession as well as the loss of a portion of our book work from a specific customer due to pricing considerations, which were partially offset by higher paper pass through costs due to price increases and product mix changes as well as increases in volume from new customers.
Index
Gross profit for 2010 decreased $6.7 million compared to 2009 as we were not able to adjust our cost structure sufficiently to offset the reduction in sales. A one-time charge of $2.3 million for depreciation expense in connection with the write down of the value of a printing press, in the Publications segment, that was removed from service accounted for slightly more than one-third of the gross profit decline. This was partially offset by a $1.8 million increase in revenue from recyclable materials. Gross margin of 20.2% of net sales for 2010 reflected a 0.4 margin point decrease versus 2009 due primarily to the 0.8 margin point reduction associated with the one-time depreciation charge.
Selling and administrative expenses for 2010 decreased $1.3 million or 3.5% versus 2009, due primarily to decreases in staffing and benefit costs (largely due to headcount reductions and the suspension of the Company’s contributions to the 401k plan) coupled with a decrease in bad debt expense and the non-recurrence in 2010 of non-capitalizable costs associated with renewing our working capital facility in 2009.
We evaluate possible impairment of goodwill on an annual basis at the reporting unit level. As a result of our impairment tests, we concluded that the carrying value of goodwill at Dartmouth Printing Company exceeded its implied fair value. This resulted in a non-cash impairment charge of $7.0 million during the fourth quarter of 2010. In connection with our annual assessment of goodwill and other intangibles in 2009, we concluded that there were no indications of impairment.
Operating income of $9.4 million for 2010 represented a decrease of $12.0 million or 56.1% as compared to operating income of $21.4 million for 2009. The impact of the $7.0 million goodwill impairment charge and the $2.3 million one-time charge for depreciation expense, mentioned above, accounted for a majority of the decrease in operating income. The remainder of the decrease was due to lower sales only partially offset by cost reductions in staffing, materials and operating leases and higher recyclables revenue. Publications operating income decreased $9.2 million in 2010 compared to 2009 due primarily to the $7.0 million goodwill impairment charge and the $2.3 million one-time charge for depreciation expense. Specialty Catalogs realized an operating loss of $1.5 million during 2010 as compared to operating income of $1.5 million a year ago due to reductions in sales, which outpaced reductions in our cost structure. The Books segment increased operating income by $0.3 million in 2010 compared to 2009 as lower costs, primarily staffing, benefits and materials, coupled with increased revenue from recyclable materials more than offset the decrease in sales.
Other expense of $15.8 million for 2010 represented a $6.1 million increase as compared to other expense of $9.7 million for 2009. This increase was due primarily to the absence in 2010 of the $7.2 million gain on the repurchases of notes payable that occurred during 2009, partially offset by a corresponding reduction in related interest expense of $1.4 million in 2010.
The loss before income taxes of $6.4 million for 2010 represented an $18.0 million decrease as compared to 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, the $7.0 million charge for goodwill impairment in 2010, the $2.3 million one-time charge for depreciation expense in 2010 and the reductions in sales which outpaced reductions in our cost structure.
Our effective income tax rate in 2010 was 6.8% compared to 29.5% in 2009. The decrease in the effective tax rate was due primarily to the impact of the goodwill impairment charge in the Publications segment, as this goodwill was not deductible for tax purposes.
Net loss of $5.9 million for 2010 represented a $14.1 million decrease as compared to net income of $8.2 million for 2009 due to the factors mentioned previously.
Liquidity and Capital Resources
As further described below under “-Indebtedness,” on April 15, 2011, we completed the offering of the 2011 Notes and entered into an agreement to amend and restate our working capital facility. Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under our working capital facility, were used to repurchase all of our existing 2003 and 2004 Notes (due August 15, 2011) and to pay related fees and expenses.
Our principal sources of liquidity are expected to be cash flow generated from operations and borrowings under our working capital facility. Our principal uses of cash are expected to be to meet debt interest requirements, finance capital expenditures and provide working capital. We estimate that our capital expenditures for 2012 will total about $11.0 million. The actual amount of our 2012 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 2012, the performance of our business and economic and market conditions. We may from time to time seek to purchase or retire our 2011 Notes through cash purchases, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Additionally, we may from time to time fund cash distributions to our Parent in accordance with the limitations outlined in the indenture governing our 2011 Notes and our working capital facility.
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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 liquidity needs for at least the next twelve months, but external sources would be necessary to repay at maturity or refinance our 2011 Notes (due April 2014).
We had cash of $0.5 million as of December 31, 2011 compared to $13.7 million as of December 31, 2010. During 2011, we utilized cash on hand to fund operations, pay fees and expenses related to the offering of the 2011 Notes, make investments in new plant and equipment and make the semi-annual interest payments on and repurchase our notes.
Operating Activities
Net cash provided by operating activities was $10.1 million for 2011 compared to $22.7 million for 2010, a decrease of $12.6 million. This decrease was primarily due to an increase in our net loss of $3.0 million in 2011 as compared to 2010, a $5.2 million decrease in non-cash charges and unfavorable changes in working capital and other assets and liabilities of $4.4 million. The decrease in non-cash charges was principally attributable to the nonrecurrence of the 2010 impairment charges for goodwill and the increase in the deferred income tax benefit in 2011 partially offset by increases in depreciation and amortization expenses. The unfavorable changes in working capital included (i) an increase in accounts receivable at the end of 2011 as compared to 2010 driven by sales activity, (ii) a decrease in accounts payable at the end of 2011 as compared to 2010 due to the timing of purchases, and (iii) a decrease in accrued expenses due primarily to the timing of interest payments. These were partially offset by a decrease in inventory at the end of 2011 as compared to 2010 because we had acquired additional paper inventory at the end of 2010 in advance of a price increase.
Net cash provided by operating activities was $22.7 million for 2010, virtually unchanged as compared to $23.0 million for 2009. The $0.2 million decline in 2010 versus 2009 was attributable to a $14.1 million reduction in net income, a $15.2 million increase in non-cash items and an unfavorable change in working capital and other assets and liabilities of $1.3 million. The $15.2 million increase in non-cash charges was largely due to the $7.0 million impairment charge for goodwill in 2010 and the nonrecurring $7.2 million gain on the repurchase of our notes in 2009. Our unfavorable working capital changes included (i) an increase in paper inventory at the end of 2010 as compared to 2009, primarily in our Specialty Catalogs segment in advance of a price increase and (ii) a decrease in our accrued expenses, which included our payroll-related liability, primarily due to a lower headcount at the end of 2010 as compared to the prior year and a decrease in the accrual for incentives paid to customers primarily due to lower sales in 2010 as compared to the prior year. These unfavorable changes were partially offset by (i) a decrease in accounts receivable at the end of 2010 as compared to 2009 due primarily to a decrease in sales activity and (ii) an increase in accounts payable at the end of 2010 as compared to 2009, due primarily to the timing of paper purchases and a change in payment terms with an ink supplier.
Investing Activities
Net cash used in investing activities was $7.8 million for 2011 compared to $13.1 million for 2010. This $5.3 million decrease in cash used was primarily the result of $0.8 million of lower capital spending in 2011 as compared to 2010 coupled with a $5.0 million increase in fixed asset sale proceeds in 2011 as compared to 2010 due to the sale of the facility and equipment in connection with the closing of ULI. These items were partially offset by the $0.5 million of interest capitalized in connection with the DPC expansion project.
Net cash used in investing activities was $13.1 million for 2010 compared to $11.4 million for 2009. This $1.7 million increase was primarily the result of a $4.0 million increase in plant and equipment purchased in the ordinary course of business partially offset by a $0.5 million increase in proceeds received from the sale of fixed assets and a $1.7 million decrease in advances made to our parent company. The $4.0 million increase in plant and equipment was due to spending associated with the purchase of a new press at DPC to accommodate future journal growth and provide capacity for magazines being transferred from ULI as we consolidated sites.
Financing Activities
Net cash used in financing activities was $15.5 million for 2011 compared to minimal activity during 2010. The primary uses of cash in 2011 were (i) $7.2 million to pay for costs in connection with the offering of the 2011 Notes and the amendment and restatement of our working capital facility, (ii) $1.9 million to fund the difference between the proceeds from the 2011 Notes and the amount needed to repay our 2003 and 2004 Notes and (iii) $10.9 million to repurchase a portion of our 2011 Notes (which included a mandatory repurchase of $3.9 million with the proceeds from the sale of the ULI facility). These uses of cash were partially offset by net borrowings of $4.5 million on our working capital facility.
Net cash provided by financing activities was negligible in 2010. Net cash used in financing activities was $23.9 million in 2009 and consisted primarily of the $14.5 million we paid to repurchase our senior secured notes, the $9.1 million dividend paid to our parent company to enable it to repurchase its capital stock in connection with the complete divestiture of its interest in Euradius International Dutch Bidco B.V. and the $0.3 million in deferred financing costs we paid in connection with the amendment to our working capital facility
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Indebtedness
On April 15, 2011, we completed the offering of the 2011 Notes pursuant to an indenture, by and among us, our subsidiaries named on the signature pages thereto, as guarantors, and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Indenture”). The 2011 Notes will mature on April 15, 2014 and bear interest payable in cash in arrears at the fixed interest rate of 12.5% per year. Interest on the 2011 Notes will be payable semi-annually on April 15 and October 15 of each year, commencing on October 15, 2011. The 2011 Notes are fully and unconditionally guaranteed on a senior secured basis by all of our current subsidiaries.
The Indenture requires that we maintain certain minimum Consolidated EBITDA levels (as discussed further below) for any period of four consecutive fiscal quarters, taken as one accounting period, and prohibits us from making capital expenditures in amounts exceeding certain thresholds for the period beginning on April 15, 2011 and ending on December 31, 2011 and for each fiscal year thereafter. In addition, the Indenture contains covenants that, subject to a number of important exceptions and qualifications, limit our ability and the ability of our restricted subsidiaries to, among other things: pay dividends, redeem stock or make other distributions or restricted payments; incur indebtedness; make certain investments; create liens; agree to restrictions on the payment of dividends; consolidate or merge; sell or otherwise transfer or dispose of assets, including equity interests of our restricted subsidiaries; enter into transactions with our affiliates; designate our subsidiaries as unrestricted subsidiaries; use the proceeds of permitted sales of our assets; and change business lines. If an event of default, as specified in the Indenture, shall occur and be continuing, either the trustee or the holders of a specified percentage of the 2011 Notes may accelerate the maturity of all the 2011 Notes.
On April 15, 2011, we entered into an agreement to amend and restate our working capital facility to, among other things, extend the scheduled maturity to April 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 million, including letters of credit commitments of up to $5.0 million, subject to a borrowing base test. Actual available credit under the working capital facility fluctuates because it depends on inventory and accounts receivable values that fluctuate and is subject to discretionary reserves and revaluation adjustments that may be imposed by the agent from time to time and other limitations. The interest rate on borrowings under the working capital facility is the base rate plus a margin of 3.25%. The base rate is a fluctuating rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the bank’s prime rate, and (c) the specified LIBOR rate plus 1.00%. At our option, we can elect for borrowings to bear interest for specified periods at the specified LIBOR rate in effect for such periods plus a margin of 4.25%. We have agreed to pay an annual commitment fee on the unused portion of the working capital facility at a rate of 0.75% and an annual fee of 4.25% on all letters of credit outstanding.
Both the 2011 Notes and the related guarantees and our and the guarantors’ obligations under the working capital facility are secured by a lien in substantially all of our and the guarantors’ assets. Pursuant to an intercreditor agreement between the trustee under the Indenture and the lender under the working capital facility, (1) in the case of real property, fixtures and equipment that secure the 2011 Notes and guarantees, the lien securing the notes and the guarantees will be senior to the lien securing borrowings, other credit extensions and guarantees under the working capital facility and (2) in the case of the other assets of the Company and the guarantors (including the shares of stock of the Company and the guarantors) that secure the 2011 Notes and guarantees, the lien securing the 2011 Notes and the related guarantees is contractually subordinated to the lien thereon securing borrowings, other credit extensions and guarantees under the working capital facility. Consequently, the 2011 Notes and the related guarantees are effectively subordinated to the borrowings, other credit extensions and guarantees under the working capital facility to the extent of the value of such other assets.
Proceeds of the 2011 Notes offering of $141.0 million, net of discount, together with cash on hand and borrowings under the working capital facility were used to repurchase all of our existing 2003 and 2004 Notes (due August 15, 2011) and to pay related fees and expenses. We have significant interest payments due on the 2011 Notes, as well as interest payments due on borrowings under our working capital facility. Total cash interest payments related to our working capital facility and the 2011 Notes are expected to be in excess of $17.2 million on an annual basis.
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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:
Consolidated EBITDA has the same meaning under each of the Indenture and the working capital facility agreement and generally consists of net income (loss) before interest expense, income taxes, depreciation, amortization, restructuring charges and certain other non-cash items. Failure to satisfy the minimum Consolidated EBITDA amounts will constitute a default under each of the Indenture and the working capital facility agreement. For the twelve months ended December 31, 2011, our Consolidated EBITDA was $34.8 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.
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The following table provides a reconciliation of Consolidated EBITDA to cash flows from operating activities for the year ended December 31, 2011 (in thousands).
Contractual Obligations
The following table summarizes our future minimum non-cancelable contractual obligations as of December 31, 2011. 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:
(1)
Includes the $138.0 million aggregate principal amount due on the 2011 Notes plus interest at 12.5% payable semi-annually through April 15, 2014.
(2)
Represents payments due under purchase agreements for consumable raw materials and commitments for construction projects and equipment acquisitions.
(3)
Represents payments due under a non-compete arrangement with our former Chairman of the Board.
(4)
At December 31, 2011, 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.
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Off-Balance Sheet Arrangements
At December 31, 2011 and 2010, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Effect of Inflation
Inflation generally affects us by increasing our costs of labor, equipment and new materials. We do not believe that inflation has had any material effect on our results of operations during 2011, 2010 and 2009.
Recently Issued Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to the Balance Sheet (Disclosures about Offsetting Assets and Liabilities). This amendment requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The amendment should be applied retrospectively. We are in the process of evaluating this guidance but currently do not believe that it will have a material effect on our consolidated financial statements.
In September 2011, the FASB issued amended guidance that will simplify how entities test goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount; entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative tests become optional. The guidance is effective for annual and interim impairment tests performed in fiscal years beginning after December 15, 2011, and earlier adoption is permitted. We are in the process of evaluating this guidance but currently do not believe that it will have a material effect on our consolidated financial statements.
In June 2011, the FASB issued guidance on the presentation of comprehensive income that will require us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. This guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We currently do not believe that this guidance will have a material effect on our consolidated financial statements.
In May 2011, the FASB issued updated guidance to improve the comparability of fair value measurements between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for us beginning in the first quarter of 2012. We do not believe the adoption of this update will have a material impact on our consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in results of our operations and cash flows. In the ordinary course of business, we are exposed to foreign currency and interest rate risks. These risks primarily relate to the purchase of products and services from foreign suppliers and changes in interest rates on our long-term debt.
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Foreign Exchange Rate Market Risk
We consider the U.S. dollar to be the functional currency for all of our entities. All of our net sales and virtually all of our expenses in fiscal years 2011, 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. During 2011, we had borrowings under our working capital facility, and we estimate that a 1.0% increase in interest rates would have resulted in a negligible amount of additional interest expense for the year ended December 31, 2011. We do not currently utilize derivative financial instruments to hedge changes in interest rates. All of our other debt carries fixed interest rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the Stockholder
of The Sheridan Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholder’s equity and of cash flows present fairly, in all material respects, the financial position of The Sheridan Group, Inc. and Subsidiaries (the “Company”) at December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
March 28, 2012
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The Sheridan Group, Inc. and Subsidiaries
Consolidated Balance Sheets
At December 31, 2011 and 2010
The accompanying notes are an integral part of these consolidated financial statements.
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The Sheridan Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2011, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
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The Sheridan Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholder’s Equity
Years Ended December 31, 2011, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
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The Sheridan Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2011, 2010 and 2009
The accompanying notes are an integral part of these consolidated financial statements.
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The Sheridan Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2011, 2010 and 2009
1. Business Organization
The Sheridan Group, Inc. (“TSG”) is one of the leading specialty printers in the United States, offering a full range of printing and value-added support services for the journal, magazine, book, catalog and article reprint markets. We provide a wide range of printing services and value-added support services, such as page composition, electronic copy-editing, digital proofing, electronic publishing systems, subscriber services, digital media distribution and custom publishing. We operate six wholly-owned subsidiaries: The Sheridan Press, Inc. (“TSP”), Dartmouth Printing Company (“DPC”), Dartmouth Journal Services, Inc. (“DJS”), Sheridan Books, Inc. (“SBI”), The Dingley Press, Inc. (“TDP”) and The Sheridan Group Holding Company. During 2011, we consolidated the printing of magazines at DPC’s facility and closed the operations of United Litho, Inc. (“ULI”). The Sheridan Group, Inc. is a wholly-owned subsidiary of TSG Holdings Corp. (“Holdings”), whose stockholders include affiliates of Bruckmann, Rosser, Sherrill & Co., LLC (“BRS”) and Jefferies Capital Partners (“JCP”), members of our management and other shareholders. As used in the notes to the consolidated financial statements, the terms “we,” “us,” “our” and other similar terms refer to the consolidated businesses of The Sheridan Group, Inc. and all of its subsidiaries.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of The Sheridan Group, Inc. and its wholly-owned subsidiaries, TSP, DPC, ULI, DJS, SBI, TDP and The Sheridan Group Holding Company. All material intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
We record revenue when realized or realizable and earned when all of the following criteria are met:
•
Persuasive evidence of an arrangement exists,
•
Delivery has occurred,
•
The seller’s price to the buyer is fixed or determinable, and
•
Collectibility is reasonably assured.
As such, substantially all revenue is recognized when a product is shipped and title and risk of loss transfers to the customer. Shipping and handling fees billed to customers are included in net sales and any cost of shipping and handling is included in cost of sales. A liability is recognized when cash is received from customers in advance of the shipment of their products.
Cash and Cash Equivalents
Cash and cash equivalents include amounts invested in accounts which are readily convertible to known amounts or have original maturities of three months or less when purchased.
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Business and Credit Concentrations
Our customers are not concentrated in any specific geographic region, but are concentrated in the journal, magazine, book, specialty catalog and article reprint markets. There were no significant accounts receivable from a single customer. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of probable credit losses in our existing accounts receivable. We review the allowance for doubtful accounts on a regular basis. Past due balances over 120 days are reviewed for collectibility and form the basis of our reserve. When we determine that a particular customer poses a credit risk, a specific reserve is established. Account balances are charged off against the allowance when we feel it is probable the receivable will not be recovered. We do not have any off-balance sheet credit exposure related to our customers. During 2010 and 2011, we wrote off reserves we had provided in earlier periods for specific customers which were deemed to be insolvent.
A roll forward of the allowance for doubtful accounts is as follows:
Inventories
Inventories are stated at the lower of cost or market with the cost of TSP’s paper inventory and SBI’s work-in-process inventory determined by the last-in, first-out (“LIFO”) cost method. The cost of the remaining inventory (approximately 89% and 90% of inventories at December 31, 2011 and 2010, respectively) is determined using the first-in, first-out (“FIFO”) method.
Property and Equipment
Property, plant and equipment are recorded at cost, except those assets acquired through acquisitions, in which case they are recorded at fair value. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, as follows: 3-11 years for machinery and equipment; and 10-40 years for buildings and land improvements. Leasehold improvements are amortized over their estimated useful lives or the term of the underlying lease, whichever is shorter. Upon disposal of property, plant and equipment, the cost of the asset and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in earnings. For significant capital projects spread over a period of several months, we capitalize interest costs at the weighted-average borrowing rate until the asset is placed in service.
Expenditures for improvements which extend the original estimated lives of the assets are capitalized. Expenditures for maintenance and repairs are charged to operations as incurred.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset group to future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell. We do not believe there was any impairment of property and equipment as of December 31, 2011, 2010 and 2009.
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Income Taxes
Deferred income taxes are recognized for the tax consequences of applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. A valuation allowance is recorded against deferred tax assets when it is more likely than not that a deferred tax asset will not be realized.
We record a liability for uncertain tax positions when it is more likely than not that a tax position that has been taken will not be sustained under audit. The respective probability is evaluated based on relevant facts and tax law. Although we believe that our estimates are reasonable, the final outcome of uncertain tax positions may be materially different from that which is reflected in the consolidated financial statements. We adjust our reserves upon changes in circumstances that would cause a change to the estimate of the ultimate liability, upon effective settlement or upon the expiration of the statute of limitations, in the period in which such event occurs.
Goodwill
Goodwill is tested for impairment at the reporting unit level at least annually or whenever circumstances indicate that the carrying value of the reporting unit’s net assets may not be recoverable, utilizing a two-step methodology. The initial step requires us to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment is then measured in the second step by comparing the implied fair value of goodwill to the carrying value of goodwill for each reporting unit. To determine the implied fair value of goodwill, we make a hypothetical allocation of the reporting unit’s estimated fair value to the tangible and intangible assets (other than goodwill) of the reporting unit. Based on this methodology, we concluded there was no impairment of goodwill in 2009. In connection with our annual assessment of goodwill in 2010, we concluded that $7.0 million of DPC goodwill (a component of our Publications segment) was fully impaired and was required to be expensed as a non-cash charge to continuing operations during the fourth quarter of 2010. In connection with our annual assessment of goodwill in 2011, we concluded that there was no impairment.
Identified Intangible and Other Long-Lived Assets
Identified intangible assets, which primarily consist of customer relationships and trade names, were valued at fair value, effective with acquisitions. All long-lived assets are amortized over the estimated useful lives. We review long-lived assets for impairment using undiscounted future cash flows whenever events or changes in circumstances indicate that the carrying values of the long-lived asset groups (including goodwill) may not be recoverable. If the sum of undiscounted cash flows are less than the carrying values, the difference between the fair value of the long-lived asset group, using discounted cash flows, and the carrying value is recognized as impairment to the extent of the individual fair values of the long-lived assets (except goodwill). We do not believe there was any impairment of intangible assets or other long-lived assets as of December 31, 2011, 2010 and 2009.
Deferred Financing Costs
Deferred financing costs were $4.8 million and $0.5 million as of December 31, 2011 and 2010, respectively, net of accumulated amortization, and are amortized to interest expense over the term of the related debt. In connection with the issuance of the 2011 Notes and the extension of our working capital facility (see Note 8), we capitalized $7.2 million of professional fees and expenses and wrote-off previously unamortized costs of $0.3 million. We also wrote-off $0.4 million of costs in connection with the repurchase of certain 2011 Notes.
Accounting for Stock Based Compensation
Our parent company, Holdings, established the 2003 Stock-based Incentive Compensation Plan (the “2003 Plan”), pursuant to which Holdings has reserved for issuance 55,500 shares of its Common Stock. There is currently no public trading market for the Common Stock. When necessary, we determine fair value through internal valuations based on historical financial information and/or through a third party service provider. As of December 31, 2011, 3,270 shares were available for future grants. Stock options are granted at exercise prices not less than the fair market value of the stock at the date of grant. Options generally vest ratably over a five-year period, except those options granted to officers, portions of which vest ratably over five years, and the remainder of which vest upon the achievement of certain performance targets, the occurrence of certain future events, including the sale of the Company or a qualified public offering, or after eight years from the date of grant, as specified in the 2003 Plan. Options expire ten years from the date of grant. We have a policy of issuing new shares to satisfy share options upon exercise.
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For the years ended December 31, 2011, 2010 and 2009, we recognized non-cash stock-based compensation expense of approximately $30,600, $25,000 and $17,600, respectively, which is included in selling and administrative expenses.
We value options using the Black-Scholes option-pricing model which was developed for use in estimating the fair value of traded options that are fully transferable and have no vesting restrictions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected term of the options is an output of the option-pricing model and estimates the period of time that options are expected to remain unexercised. We use historical data to estimate the timing and amount of option exercises and forfeitures. The expected volatility is calculated by averaging the volatility, over a period equal to the expected term of the options, for five peer group companies and a small-cap index. There were no stock options granted during the years ended December 31, 2009 and 2011. The following summarizes the assumptions used for estimating the fair value of stock options granted during the year ended December 31, 2010:
The following is a summary of option activity for the years ended December 31, 2009, 2010 and 2011:
The following is a summary of non-vested option activity for the years ended December 31, 2011, 2010 and 2009:
The total compensation cost related to nonvested awards not yet recognized as of December 31, 2011 is approximately $0.1 million and will be recognized over a weighted average period of approximately 4.7 years.
During the years ended December 31, 2011 and 2009, no options to purchase Holdings Common Stock were exercised. During the year ended December 31, 2010, 120 options to purchase Holdings Common Stock were exercised and $2,970 of proceeds was received. The total intrinsic value, the difference between the exercise price and the fair value of Holdings Common Stock on the date of exercise of options exercised during the year ended December 31, 2010, was negligible.
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Fair Value Measurements
Certain of our assets and liabilities must be recorded at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Accounting guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures and prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data which require the reporting entity to develop its own assumptions.
Our financial instruments consist of long-term investments in marketable securities (held in trust for payment of non-qualified deferred compensation) and long-term debt. We are permitted to measure certain financial assets and financial liabilities at fair value that were not previously required to be measured at fair value. We have elected not to measure any financial assets or financial liabilities, including long-term debt, at fair value which were not previously required to be measured at fair value. We classify the investments in marketable securities within level 1 of the hierarchy since quoted market prices are available in active markets.
We believe that the carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable and accrued expenses reported in the consolidated balance sheets approximate their fair values due to the short maturity of these instruments. The estimated fair value of our publicly traded debt, based on quoted market prices, was approximately $121.4 million and $140.8 million as of December 31, 2011 and 2010, respectively.
Advertising Costs
We expense advertising costs as the advertising occurs in accordance with the authoritative guidance. Advertising expense, included in selling and administrative expenses in the consolidated statements of operations, was approximately $0.3 million, $0.2 million and $0.2 million, for the years ended December 31, 2011, 2010 and 2009, respectively.
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. We are in the process of evaluating this guidance but currently do not believe that it will have a material effect on our consolidated financial statements.
In September 2011, the FASB issued amended guidance that will simplify how entities test goodwill for impairment. After assessment of certain qualitative factors, if it is determined to be more likely than not that the fair value of a reporting unit is less than its carrying amount; entities must perform the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative tests become optional. The guidance is effective for annual and interim impairment tests performed in fiscal years beginning after December 15, 2011, and earlier adoption is permitted. We are in the process of evaluating this guidance but currently do not believe that it will have a material effect on our consolidated financial statements.
In June 2011, the FASB issued guidance on the presentation of comprehensive income that will require us to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of equity. This guidance requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We currently do not believe that this guidance will have a material effect on our consolidated financial statements.
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In May 2011, the FASB issued updated guidance to improve the comparability of fair value measurements between GAAP and International Financial Reporting Standards. This update amends the accounting rules for fair value measurements and disclosure. The amendments are of two types: (i) those that clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The update is effective for us beginning in the first quarter of 2012. We do not believe the adoption of this update will have a material impact on our consolidated financial statements.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current year presentation.
3. Inventories
Inventories consist of the following:
We maintained a reserve for the realizability of inventory in the amounts of $86,122 and $70,227 for the years ended December 31, 2011 and 2010, respectively, which are included in the amounts in the table above relating to work-in-process and raw materials. A roll forward of this inventory reserve is as follows:
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
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Depreciation expense for the years ended December 31, 2011, 2010 and 2009, was $20.4 million, $19.5 million, and $17.2 million, respectively. During 2011, we capitalized $0.5 million of interest costs in connection with plant and equipment we acquired.
5. Intangible Assets
In conjunction with previous acquisitions, we acquired intangible assets relating to customer relationships, trade names and technology. The customer relationships, trade names and technology are being amortized using the straight-line method over their estimated useful lives as described below. Amortization expense for the years ended December 31, 2011, 2010 and 2009 related to customer relationships, trade names and technology intangible assets was $3.3 million, $1.4 million and $1.4 million, respectively. In 2011, we expensed $1.6 million associated with the accelerated amortization of the ULI trade name which was disposed of as a result of the shutdown of the ULI facility (see Note 17). In 2011, our analysis of customer attrition rates indicated that an adjustment was needed to the remaining useful life associated with the customer relationship asset at DPC. This was due primarily to the loss of customers in the specialty magazine business. The remaining useful life changed from 25 years to 15 years effective January 1, 2011. Accumulated impairments, in the table below, consists of impairment charges we recorded in 2008 related to customer relationships at ULI and TDP. Other, in the table below, represents the realization of the tax goodwill benefit in connection with the acquisition of TDP (see Note 11). In the years 2008 through 2009, this benefit was applied to reduce intangibles related to the acquisition of TDP since there was no book goodwill related to this previous acquisition as of the beginning of 2008. Intangible assets as of December 31, 2011 and 2010 consisted of the following:
We estimate annual amortization expense related to these intangibles as follows:
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6. Goodwill
Goodwill, which arises from the purchase price exceeding the assigned value of the net assets of an acquired business, represents the value attributable to unidentifiable intangible elements being acquired. Goodwill totaled $34.0 million at December 31, 2011 and 2010, respectively.
As of December 31, 2010, the initial step in the annual test for goodwill impairment indicated potential impairment at DPC, one of the components of the Publications segment, due primarily to the longer and more sustained deterioration of the magazine business through the fourth quarter of 2010, and the unlikely prospect of a meaningful recovery in the near term. We completed the second step by comparing the implied fair value of goodwill to the carrying value of goodwill for DPC. As a result of the second step, we determined that the $7.0 million carrying value of goodwill at DPC was fully impaired. There were no changes in the carrying amount of goodwill for the year ended December 31, 2011. The following table reflects the components of goodwill by segment as of December 31, 2009, 2010 and 2011:
Index
7. Other Assets
Other assets consist of the following:
8. 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 will be 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 the fourth quarter of 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.
The carrying value of the 2011 Notes was $131.3 million as of December 31, 2011.
The 2011 Notes are fully and unconditionally guaranteed on a senior secured basis by all of our current subsidiaries. The 2011 Notes and the related guarantees rank equally in right of payment with all of our and the guarantors’ senior obligations and senior to all of our and the guarantors’ subordinated obligations. The 2011 Notes and the related guarantees, respectively, are secured by a lien on substantially all of our and the guarantors’ current and future assets (other than certain excluded assets), subject to permitted liens and other limitations, and by a limited recourse pledge of all of our capital stock by Holdings, our parent company.
Our obligations and those of the guarantors under our working capital facility are secured by a lien on substantially all of our and the guarantors’ assets. Pursuant to an intercreditor agreement between the trustee under the Indenture and the lender under our 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 our working capital facility and (2) in the case of the other assets of us and the guarantors (including the shares of stock of us 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 our working capital facility. Consequently, the 2011 Notes and the related guarantees are effectively subordinated to the borrowings, other credit extensions and guarantees under our working capital facility to the extent of the value of such other assets.
The Indenture requires that we maintain certain minimum Consolidated EBITDA (as defined in the Indenture) 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 the period beginning on April 15, 2011 and ending on December 31, 2011 and for each fiscal year thereafter. In addition, the Indenture contains covenants that, subject to a number of important exceptions and qualifications, limit our ability and the ability of our restricted subsidiaries to, among other things: pay dividends, redeem stock or make other distributions or restricted payments; incur indebtedness; make certain investments; create liens; agree to restrictions on the payment of dividends; consolidate or merge; sell or otherwise transfer or dispose of assets, including equity interests of our restricted subsidiaries; enter into transactions with our affiliates; designate our subsidiaries as unrestricted subsidiaries; use the proceeds of permitted sales of our assets; and change business lines. If an event of default, as specified in the Indenture, shall occur and be continuing, either the trustee or the holders of a specified percentage of the 2011 Notes may accelerate the maturity of all the 2011 Notes. We have complied with all of the restrictive covenants as of December 31, 2011.
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Subject to certain conditions, we are required to make an offer to purchase 2011 Notes with 75% of our Excess Cash Flow (as defined in the Indenture) following the end of each of (1) the fiscal year ending on December 31, 2011, (2) the fiscal year ending on December 31, 2012 and (3) the three consecutive fiscal quarters ended September 30, 2013 at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest (and liquidated damages, if any) to the date of repurchase. We determined that an Excess Cash Flow Offer was not required for the fiscal year ending December 31, 2011.
We may redeem some or all of the 2011 Notes at any time prior to April 15, 2012 by paying a make-whole premium, plus accrued and unpaid interest (and liquidated damages, if any) to the redemption date. In addition, at any time prior to April 15, 2012, we may use the net proceeds of certain equity offerings to redeem up to 35% of the principal amount of the 2011 Notes at a redemption price equal to 112.5% of their principal amount, plus accrued and unpaid interest (and liquidated damages, if any) to the redemption date; provided that at least 65% of the aggregate principal amount of such 2011 Notes originally issued remain outstanding immediately following such redemption and such redemption occurs within 90 days of such equity offering. Furthermore, if we experience specific kinds of change of control, the holders of the 2011 Notes will have the right to require us to repurchase their 2011 Notes at a repurchase price equal to 101% of their principal amount, plus accrued and unpaid interest (and liquidated damages, if any) to the date of repurchase.
We may also redeem the notes, in whole or in part, at the redemption prices specified in the Indenture, plus accrued and unpaid interest (and liquidated damages, if any) to the redemption date.
On April 15, 2011, we entered into an agreement to amend and restate our working capital facility to, among other things, extend the scheduled maturity to April 15, 2013. Terms of the amended and restated working capital facility allow for revolving debt of up to $15.0 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 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 December 31, 2011, we had $4.5 million outstanding under the working capital facility, no letters of credit outstanding and unused amounts available of $10.5 million.
The working capital facility requires us to maintain certain minimum Consolidated EBITDA (as defined in the working capital facility) 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 the period beginning on April 15, 2011 and ending on December 31, 2011 and for each fiscal year thereafter. In addition, the working capital facility contains affirmative and negative covenants, representations and warranties, borrowing conditions, events of default and remedies for the lender. The aggregate loan or any individual loan made under the working capital facility may be prepaid at any time subject to certain restrictions.
In accordance with the terms of the working capital facility, payment of the borrowings may be accelerated at the option of the lender if an event of default, as defined in the working capital facility agreement, occurs. Events of default include, without limitation, nonpayment of principal and interest by the due date; failure to perform or observe certain specific covenants; material breach of representations or warranties; default as to other indebtedness (including under the notes); certain events of bankruptcy and insolvency; inability or failure to pay debts as they come due; the entry of certain judgments against us; certain liabilities with regard to ERISA plans; the invalidity of any documents in connection with the working capital facility; a change in control of the Company; or an event effecting the subordination of certain indebtedness. We have complied with all of the restrictive covenants as of December 31, 2011.
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Prior to April 15, 2011, we had a working capital facility agreement that allowed 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. We had no borrowings under this working capital facility during 2011. We paid an annual commitment fee on the unused portion of the working capital facility at a rate of 0.50%. In addition, we paid an annual fee of 3.875% on all letters of credit outstanding.
9. Accrued Expenses
Accrued expenses consist of the following:
10. Other Liabilities
Other liabilities consist of the following:
11. Income Taxes
The components of the income tax (benefit) provision are as follows:
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Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities were as follows:
We will realize a tax benefit associated with the amount of tax goodwill in excess of book goodwill associated with the acquisition of TDP. We only recognize the benefit when realized on future tax returns and have previously applied the benefit first to reduce book goodwill associated with the acquisition to zero, second to reduce to zero other noncurrent intangible assets related to the acquisition, and third to reduce income tax expense. During 2011, 2010 and 2009, we realized a tax benefit of $0.8 million in each year associated with the realization of tax deductible goodwill. For the years ended December 31, 2011 and 2010, this benefit was recorded as a reduction to the tax provision. For the year ended December 31, 2009, the majority of this benefit was recorded as a reduction to the tax provision and a negligible amount of the benefit was recorded as a reduction to intangible assets which resulted in reducing these intangible assets to zero.
As of December 31, 2011 and 2010, we had state NOLs with a tax effected value of approximately $1.1 million and $0.8 million, respectively, in various jurisdictions, which begin to expire in 2012. We have determined that the majority of the state NOLs require a full valuation allowance as of December 31, 2011 and 2010, due to the uncertainty of their realization.
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We utilized NOLs against Federal and state taxable income, which reduced tax expense by a negligible amount in 2011 and $0.2 million for 2010 and 2009, respectively.
A roll forward of our valuation allowance is as follows:
Our income tax provision differs from taxes computed using the U.S. Federal statutory tax rate as follows:
We reported a decrease in our deferred state tax liabilities and our deferred state tax provision of approximately $0.2 million, $0.4 million and $0.5 million during the years ended December 31, 2011, 2010 and 2009, respectively, which includes adjustments to anticipated state effective income tax rates due to changes in apportionment of our taxable income to states with high tax rates. We recognized an increase of $0.2 million during the year ended December 31, 2011 in our effective rate related to the accounting for uncertain tax positions. During the years ended December 31 2010 and 2009, the change in our effective rate related to uncertain tax positions was minimal.
We file consolidated tax returns with Holdings for Federal and certain state jurisdictions. We classify these current tax liabilities as “Due to parent, net” on the consolidated balance sheet. The tax liabilities owed to Holdings were $0.5 million as of December 31, 2010. During 2011, we generated a net operating loss (“NOL”). Due to the operating loss carryforwards at Holdings, we will not realize a current benefit from our NOLs. Therefore, the current benefit, of approximately $3.1 million, has been reclassified as a non-current deferred tax asset and is netted against non-current deferred tax liabilities on the consolidated balance sheet. The Federal NOL expires in 2031. The state NOLs expire at various times beginning in 2012.
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Our uncertain tax positions relate primarily to state nexus and other related state tax issues. The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.7 million. Our uncertain tax positions, excluding interest and penalties, are as follows:
We continue to recognize both interest and penalties related to uncertain tax positions as part of the income tax provision. We had accrued interest of $0.5 million and penalties of $0.3 million as of December 31, 2011 and $0.4 million and $0.3 million as of December 31, 2010, respectively. Interest and penalties expensed were negligible during the year ended December 31, 2011 and $0.1 million during the years ended December 31, 2010 and 2009, respectively. Interest and penalties will continue to accrue on certain issues in 2012 and forward.
We are subject to U.S. Federal income tax as well as income tax of multiple state and local jurisdictions. The statute of limitations related to the consolidated U.S. federal income tax return and most state income tax returns are closed for all tax years up to and including 2007. During the first quarter of 2010, we reached a settlement in connection with an audit conducted by the state of Maryland. As a result of this audit, all tax years are closed with the state of Maryland through 2008. No Federal or state income tax returns are under examination by the respective taxing authorities.
12. Commitments
We lease warehouse, plant and office space, printing equipment, computer equipment and delivery equipment under non-cancelable operating leases. Rental expense relating to these leases was approximately $2.4 million, $3.5 million and $4.5 million for the years ended December 31, 2011, 2010 and 2009, respectively. As of December 31, 2011 approximate minimum future rental payments under non-cancelable operating leases are as follows:
We have also entered into agreements to acquire raw materials and additional plant and equipment. As of December 31, 2011, approximate future payments related to these agreements are as follows:
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13. Employee Benefit Plans
We sponsor a 401(k) retirement plan (the “Plan”). Substantially all of our employees are eligible to participate in the Plan on the first day of the month in which the employee has attained 18 years of age and 30 days of employment. Employees may make pre-tax contributions of their eligible compensation under the Plan and may direct their investments among various pre-selected investment alternatives. We determine discretionary and matching contributions to the Plan. No contributions were charged to operations for the years ended December 31, 2011 and 2010. Contributions of approximately $0.8 million were charged to operations for the year ended December 31, 2009.
We maintain a non-qualified deferred compensation plan for certain employees which allows participants to annually elect (via individual contracts) to defer a portion of their compensation on a pre-tax basis and which allows for make-whole contributions for participants whose pre-tax deferrals are limited under our 401(k) Plan and other discretionary contributions. Contributions made by us and our employees are maintained in an irrevocable trust. Legally, the assets remain ours; however, access to the trust assets is severely restricted. The trust cannot be revoked by the employer or an acquirer, but the assets are subject to the claims of our general creditors. The employee has no right to assign or transfer contractual rights in the trust. The participants are fully vested in their compensation deferred; however, the make-whole contributions and any employer discretionary contributions are subject to vesting requirements. As of December 31, 2011 and 2010, we recorded a deferred compensation liability of approximately $0.8 million and $1.4 million, respectively, in other non-current liabilities in the accompanying consolidated balance sheets. We account for the assets as trading securities. The change in the fair value of the non-vested assets held in trust is recorded within “Other, net” in the accompanying consolidated statements of operations. The change in the deferred compensation obligation related to changes in the fair value of the vested assets is recorded as income (loss) in compensation expense. The assets held in trust were approximately $0.9 million and $1.6 million as of December 31, 2011 and 2010, respectively, and are recorded at their fair value, based on quoted market prices, as discussed in “Fair Value Measurements” in Note 2. The assets held in trust are included in “Other assets” in the accompanying consolidated balance sheets.
14. Related Party Transactions
On January 5, 2009, we executed a waiver to our working capital facility to allow for payment of a cash dividend and a loan to Holdings, which is not a registrant with the Securities and Exchange Commission, in the aggregate amount of up to $14.0 million, provided that Holdings used the entire cash proceeds of such dividend and loan solely to purchase capital stock issued by Holdings (the “Stock Purchase”) from Participatiemaatschappij Giraffe B.V. (“Giraffe”) and to pay related expenses in connection therewith. On January 5, 2009, we paid a dividend in the aggregate amount of $8.0 million to Holdings and made a loan in the principal amount of $2.0 million to Holdings. The loan had an original maturity on January 4, 2012 and accrued interest at the rate of 1.36% per year. The loan was subsequently settled against the income tax obligations due to Holdings, which is presented within “Due to parent, net” in the consolidated balance sheet as of December 31, 2010 (as discussed in Note 11).
Additionally, subsequent to January 5, 2009, we paid an additional dividend in the amount of $1.1 million to Holdings to pay expenses and other amounts in connection with the Stock Purchase. In connection with the Stock Purchase, Euradius Acquisition Co., a majority owned subsidiary of Holdings, sold all of the outstanding stock of Euradius International Dutch Bidco B.V. (“Euradius”) to Giraffe. This resulted in Holdings fully divesting its interest in Euradius, which was Holdings’ only investment other than The Sheridan Group, Inc. Neither Euradius nor its subsidiaries were guarantors of the 2003 or 2004 Notes. Neither Euradius nor its subsidiaries were subsidiaries of ours and their financial results were not included in our consolidated financial statements.
In 2003, we entered into a 10-year management agreement with our principal equity sponsors, BRS and JCP, pursuant to which BRS and JCP provided financial, advisory and consulting services to us. In exchange for these services, BRS and JCP received a management fee equal to the greater of $0.5 million or 2% of earnings before interest, taxes depreciation and amortization (as defined in the management agreement), plus reasonable out-of-pocket expenses. On April 15, 2011, the management agreement was terminated and no amounts will be expensed in connection with the management agreement subsequent to the three-month period ended March 31, 2011. We incurred and paid approximately $0.5 million, $0.8 million and $0.9 million in management fees for the years ended December 31, 2011, 2010 and 2009, respectively.
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Pierce Atwood LLP provides legal services for TDP. A partner at Pierce Atwood LLP is the brother of Christopher A. Pierce, one of our largest shareholders. The fees incurred and paid for the years ended December 31, 2011, 2010 and 2009 were negligible.
15. Contingencies
We are party to legal actions as a result of various claims arising in the normal course of business. Accruals for litigation have not been provided because information available at this time does not indicate that it is probable that a liability has been incurred. We believe that the disposition of these matters will not have a material adverse effect on our financial condition, results of operations or cash flows.
16. Business Segments
We are a specialty printer in the United States offering a full range of printing and value-added support services for the journal, magazine, book and catalog markets. The Publications business segment is focused on the production of short-run journals, medium-run journals and specialty magazines and is comprised of the assets and operations of TSP, DPC, ULI and DJS. We believe there are many similarities in the journal and magazine markets such as the equipment used in the print and bind process, distribution methods, repetitiveness and frequency of titles and the level of service required by customers. The Books segment is focused on the production of short-run books and is comprised of the assets and operations of SBI. This market does not have the repetitive nature of our other products and does not require the same level of customer service. The Specialty Catalogs segment, which is comprised of the assets and operations of TDP, 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 the Summary of Significant Accounting Policies. The results of each segment include certain allocations for general, administrative and other shared costs. However, certain costs, such as corporate 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 primarily in the continental United States and our manufacturing, warehouse and office facilities are located throughout the East Coast and Midwest.
We had no customers which accounted for 10.0% or more of our net sales for the years ended December 31, 2011, 2010 and 2009.
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The following table provides segment information for continuing operations (in thousands):
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A reconciliation of total segment operating income to consolidated loss before income taxes is as follows:
17. Restructuring Costs
In January 2009, we announced our plan to consolidate some administrative and production operations at our DPC facility in Hanover, New Hampshire. Approximately 20 positions at our ULI facility in Ashburn, Virginia were eliminated as a result of this action. We recorded $0.3 million of restructuring costs during 2009. These costs relate primarily to guaranteed severance payments and employee health benefits. We recorded an additional $0.1 million of restructuring costs in connection with this consolidation during 2010. There was no liability outstanding as of December 31, 2011 related to this restructuring.
Due to continued adverse trends in the specialty magazine business (within our Publications segment) as a result of the weak economy, on January 19, 2011, our Board of Directors approved a restructuring plan to consolidate all specialty magazine printing operations into one site. Our ULI facility in Ashburn, Virginia ceased operation on July 1, 2011, and we have consolidated the printing of specialty magazines at DPC in Hanover, New Hampshire. Approximately 80 positions were eliminated as a result of the closure. Approximately 20 employees in the Customer Service and Sales areas were retained by DPC. On November 23, 2011, we completed the sale of the Ashburn, Virginia facility for $4.2 million. After deducting related closing costs, our net proceeds were $3.9 million.
In connection with this consolidation, we recorded $1.8 million of restructuring charges during 2011. Charges related to severance and other personnel costs totaled $1.3 million, and charges for other exit costs totaled $0.5 million. We believe that any future costs in connection with this consolidation will be minimal. We had a liability of $0.2 million related to this restructuring outstanding as of December 31, 2011.
During the third quarter of 2011, we implemented a restructuring plan to reduce our operating costs through a workforce reduction across all segments of our business. Approximately 20 positions were eliminated as a result of this action. We recorded $0.6 million of restructuring costs during 2011. These costs related primarily to guaranteed severance payments and employee health benefits. We do not believe any other costs will be expensed in the future in connection with this action. We had a liability of $0.3 million related to this restructuring outstanding as of December 31, 2011.
The table below shows our restructuring activity in 2011 and our restructuring accrual balance as of December 31, 2011 (in thousands):
We recorded non-cash charges of $1.6 million during 2011 associated with the accelerated amortization of the ULI trade name based on updated estimates of useful life.
We also recorded non-cash charges of approximately $2.0 million during 2011 associated with the accelerated depreciation of equipment at ULI, based on updated estimates of remaining useful life and estimated residual value, equal to the lower of carrying value or best estimate of selling price, less costs to sell.
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18. Quarterly Financial Information (unaudited)
Quarterly financial information for the years ended December 31, 2011 and 2010 is as follows (in thousands):
The results for the first and second quarters of 2011 reflect the impact of $2.0 million and $1.6 million for accelerated depreciation and amortization, respectively, in connection with the shutdown of ULI. The results for the fourth quarter of 2011 include the effects of $0.5 million of interest capitalized in connection with capital expenditures made during the first and second quarters of 2011. The results for the third quarter of 2010 reflect the impact of a 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. The results for the fourth quarter of 2010 reflect the impact of a charge of $7.0 million in connection with the impairment of goodwill at DPC (see Note 6).
19. Subsequent Events (unaudited)
During the first quarter of 2012, we repurchased in the open market 2011 Notes with a face value of $5.9 million for $5.3 million, which included $0.3 million of accrued interest. Deferred financing costs and unamortized debt discount attributable to these notes totaled $0.4 million. As a result of the repurchases, we will recognize a net gain of $0.4 million.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we conducted an evaluation, under the supervision and with the participation of the principal executive officer (“CEO”) and principal financial officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation and as of the end of the period for which this report is made, the CEO and CFO concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the CEO and CFO, to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). To evaluate the effectiveness of our internal control over financial reporting, we use the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Using the COSO Framework, our management, including the CEO and CFO, evaluated our internal control over financial reporting and concluded that our internal control over financial reporting was effective as of December 31, 2011. Because of the inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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(c) Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We are a wholly-owned subsidiary of TSG Holdings Corp., whose stockholders include affiliates of Bruckmann, Rosser, Sherrill & Co., LLC and Jefferies Capital Partners and members of our senior management.
Our Equity Sponsors
Bruckmann, Rosser, Sherrill & Co., LLC, or BRS, is a New York-based private equity investment firm with over $1.4 billion under management. BRS was founded in 1995 and has since invested in over 20 companies in the following industries: restaurants, consumer goods, specialty retail, recreation/leisure, apparel, home furnishings, industrial and commercial services (including equipment rental), commercial equipment manufacturing, wholesale distribution and healthcare services. BRS’s strategy is to make leveraged buyout, recapitalization/restructuring and growth capital investments in companies with superior management, predictable cash flow, strong market share and growth potential. BRS and its affiliates are collectively referred to as “BRS.”
Jefferies Capital Partners, or JCP, is a New York-based private equity investment firm with over $1.3 billion in equity commitments under management. Since 1994, JCP’s professionals have invested in over 50 companies in a variety of industries. JCP focuses on partnering with entrepreneurs and management teams in industries in which JCP has expertise. JCP invests in management buyouts, recapitalizations, industry consolidations and growth equity. JCP and its affiliates are collectively referred to as “JCP.”
Directors and Executive Officers
We have provided information below about our directors and executive officers, including their ages, term of service, business experience, and service on other boards of directors. We have also included information about each director’s specific experience, qualifications, attributes or skills that led the board to conclude that he should serve as a director of the Company, in light of our business and structure. Our executive officers and directors are as follows:
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John A. Saxton, President, Chief Executive Officer and Director. Mr. Saxton joined us in 1995 as our President and Chief Executive Officer and has served on our board of directors since 1991. Prior to joining us, Mr. Saxton held various positions during 24 years at The Procter & Gamble Company, most recently serving as President of the Noxell Corporation following its acquisition by The Procter & Gamble Company in 1990. Mr. Saxton is a member of the National Association for Printing Leadership’s Walter E. Soderstrom Society, which honors individuals in the printing industry who have significantly contributed to the development and the progress of the graphic arts. Mr. Saxton holds a B.S. from Bucknell University. Mr. Saxton is the only director who is also one of our officers. The board believes that Mr. Saxton has a deep knowledge of our business gained throughout his 17 years as Chief Executive Officer of the Company and adds a valuable perspective for board decision making.
Robert M. Jakobe, Executive Vice President and Chief Financial Officer and Secretary. Mr. Jakobe joined us in 1994 as Vice President and Chief Financial Officer of TSG. He has served as Secretary of TSG since 2003. Effective January 1, 2007, he began serving as Executive Vice President and Chief Financial Officer and Secretary. Prior to joining us, he worked at various positions within The Procter & Gamble Company, most recently serving as Division Comptroller and Vice President of Finance for the Noxell Corporation. Mr. Jakobe holds a B.A. from the University of Notre Dame.
Joan B. Davidson, Group President. Ms. Davidson joined us in 1995 and effective January 1, 2007, began serving as Group President. Ms. Davidson served as President and Chief Operating Officer of TSP from 1996 through 2006. From 1995 to 1996, she served as Finance Manager of TSP. Prior to joining us, Ms. Davidson worked in various positions in the marketing and finance departments of The Procter & Gamble Company, most recently serving as a Finance Manager. Ms. Davidson is active in the industry as former Chairman of the National Association for Printing Leadership and as past Secretary and past Treasurer of the Print and Graphic Scholarship Foundation of the Graphic Arts. She is a member of the National Association for Printing Leadership’s Walter E. Soderstrom Society and was inducted into the Printing Industry Hall of Fame in 2010. Ms. Davidson holds a B.S. from the College of Notre Dame of Maryland and an M.B.A. from Loyola College in Maryland.
Dale A. Tepp, Vice President-Human Resources. Ms. Tepp joined us in September 2006 as Vice President, Human Resources. Prior to joining us, she worked in various Human Resources positions with Great Northern Nekoosa Corporation, Georgia-Pacific Corporation, Color-Box and Cenveo, most recently serving as Executive Director of Human Resources. She holds a B.S. from the University of Wisconsin.
Patricia A. Stricker, President and Chief Operating Officer-TSP. Ms. Stricker joined us in 1998, and effective January 1, 2007, began serving as President and Chief Operating Officer of TSP. Ms. Stricker served as Vice President, Operations and Human Resources for TSG from January 2003 through 2006. From 2000 to 2003, she served as President of SBI. Ms. Stricker served as our Vice President, Corporate Development from 1999 to 2000 and as our Projects Manager from 1998 to 1999. Prior to joining us, Ms. Stricker held various positions at General Physics Corporation, most recently serving as Vice President, Finance and Administration. She holds a B.A. from the College of Notre Dame of Maryland.
Ms. Stricker, President and Chief Operating Officer of TSP, and Ms. Davidson, Group President, are sisters.
Gary J. Kittredge, President and Chief Operating Officer-DJS. Mr. Kittredge joined us in 2000 and effective September 1, 2009, began serving as President and Chief Operating Officer of DJS. From January 2008 to August 2009 he served as President and Chief Operating Officer of DPC, DJS, and ULI. From April 2006 to 2008, he served as President and Chief Operating Officer of DPC and DJS. From 2002 to 2006, he served as President and Chief Operating Officer of CCP. From 2000 to 2002, he served as Executive Vice President of CCP. Prior to joining us, Mr. Kittredge was the General Manager and Vice President of Manufacturing for IPD Printing. Prior to that, he served as a Business Unit Manager and Manager of Technical Development of Litho-Krome Co., a subsidiary of Hallmark Cards, Incorporated. He holds a B.S. and an M.S. from Rochester Institute of Technology.
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Michael J. Seagram, President and Chief Operating Officer-SBI. Mr. Seagram joined us in 2003 and since April 1, 2006 has served as President and Chief Operating Officer of SBI. From 2003 to 2006, he served as Vice President of Sales and Marketing of SBI. Before joining SBI, Mr. Seagram was Owner and President of Aristoplay, Ltd., a publisher of children’s games, from 1997 to 2003. He was also the Owner and President of the marketing firm Seagram & Singer, Inc. from 1986 to 1998. Mr. Seagram holds a B.S. from Wayne State University.
G. Paul Bozuwa, President and Chief Operating Officer-DPC and ULI. Mr. Bozuwa joined us in 1991, and effective September 2009, began serving as President and Chief Operating Officer of DPC and ULI. From January 2007 to August 2009 Mr. Bozuwa served as Vice President, Global Business Development. Mr. Bozuwa served as President of DJS from 2002 to 2006. From 1995 to 2002, he served as President and Chief Operating Officer of CCP. From 1991 to 1995, he served as Chief Financial Officer of CCP. Mr. Bozuwa is active in industry affairs serving as past Chairman of the Finance Committee and past Treasurer of the Council of Science Editors. He was also the Chairman of the task force on Science, Journals, Poverty and Human Development. Prior to joining us, he was an Associate of Kearsarge Ventures, a venture fund, from 1989 to 1991. Mr. Bozuwa holds a B.A. from Dartmouth College and an M.B.A. from the University of New Hampshire.
Eric D. Lane, President and Chief Operating Officer-TDP. Mr. Lane joined us in 1986 and, effective October, 2008, began serving as President and Chief Operating Officer of TDP. From 2000 to 2008, he served as Vice President of Finance of TDP. From 1986 to 2000, he served as Controller of TDP. Mr. Lane holds an A.S. in Accounting from Andover College.
Thomas J. Baldwin, Director. Mr. Baldwin has been a member of our board of directors since 2003. Mr. Baldwin is a Managing Director of BRS. He joined BRS in 2000. From 1996 to 2000, Mr. Baldwin was a Principal at PB Ventures, Inc. From 1988 to 1995, he served as Vice President and then Managing Director of The INVUS Group, Ltd., a private equity investment firm. Prior to that he was a consultant with the Boston Consulting Group, a strategy consulting firm. Mr. Baldwin holds a B.B.A. from Siena College and an M.B.A. from Harvard Business School. From 2005 to 2006, Mr. Baldwin also held Directorships with Eurofresh, Inc., Lazy Days R.V. Center, Inc., and Totes Isotoner Corp. Mr. Baldwin brings to the board extensive experience advising portfolio companies of BRS and provides valuable insight regarding strategic, financing, acquisition and management issues.
Nicholas Daraviras, Director. Mr. Daraviras has been a member of our board of directors since August 2003. Mr. Daraviras is a Managing Director of JCP. Mr. Daraviras joined JCP in 1996. Mr. Daraviras holds a B.S. and an M.B.A. from the Wharton School of the University of Pennsylvania. Mr. Daraviras is also a Director of Carrols Restaurant Group. He has served as director of Edgen Murray II, L.P. or of its predecessor companies since February 2005 and various private companies in which JCP has an interest. Mr. Daraviras brings to the board extensive experience advising portfolio companies of JCP and provides valuable insight regarding strategic, financing, acquisition and management issues.
Craig H. Deery, Director. Mr. Deery has been a member of our board of directors since August 2003. He was also a member of our board of directors from 1991 through 2001. Mr. Deery was a Managing Director of JCP from 2002 to 2003. From 1987 to 2002, Mr. Deery was a Managing Director at BancBoston Capital, where he served on the management committee. While at BancBoston Capital, Mr. Deery supervised a direct investment portfolio of $500 million, including mezzanine securities and equity as a minority, co-invest, and control investor. Prior to 1987, Mr. Deery spent fifteen years at BancBoston, serving as a team leader in domestic lending and as Deputy Managing Director and Senior Credit Officer of BancBoston Australia, Ltd. Mr. Deery holds a B.A. from Bucknell University and an M.B.A. from New York University. He served as Director of First Ipswich Bancorp from 2005 to 2007. Mr. Deery has a broad knowledge of our business gained throughout his 19 years as a director of the Company. Mr. Deery brings to the board extensive experience advising portfolio companies of BancBoston Capital and JCP and he provides valuable insight to the board regarding strategic, financial, acquisition, and management issues.
Gary T. DiCamillo, Director. Mr. DiCamillo has been a member of our board of directors since 1989. Mr. DiCamillo has been a partner for Eaglepoint Advisors, LLC since January 2010. He served as President and Chief Executive Officer of RADIA International in Dedham, Massachusetts from 2005 to 2009. From 2002 to 2005, Mr. DiCamillo served as President, Chief Executive Officer, and Director of TAC Worldwide Companies. From 1995 to 2002, he was Chairman and Chief Executive Officer of Polaroid Corporation (which filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on October 12, 2001), and from 1993 to 1995 he was President of Worldwide Power Tools for Black & Decker Corporation. Mr. DiCamillo holds a B.S. from Rensselaer Polytechnic Institute and an M.B.A. from Harvard Business School. Mr. DiCamillo was a director of 3Com Corporation from 2000 to April 2010 and has been a director of Whirlpool Corporation since 1997. Mr. DiCamillo has a broad knowledge of our business gained throughout his 23 years as a director of the Company and brings to the board his vast experience as a chief executive, non-executive director, and audit committee chair with a variety of both public and private companies. These experiences have provided Mr. DiCamillo with a depth of knowledge in such areas as finance, general management, marketing, risk management and strategic development.
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James L. Luikart, Director. Mr. Luikart has been a member of our board of directors since 2003. Mr. Luikart is Executive Vice President of JCP. Mr. Luikart joined JCP in 1994 after spending over twenty years with Citicorp, the last seven years of which were as a Vice President of Citicorp Venture Capital, Ltd. Mr. Luikart holds a B.A. from Yale University and an M.I.A. from Columbia University. He served as director of W&T Offshore, Inc. from 2002 to 2006, Edgen Murray II, L.P. or its predecessor companies since February 2005, United Maritime Group LLC in 2010, and various private companies in which JCP has an interest. Mr. Luikart brings to the board extensive experience advising portfolio companies of JCP and provides valuable insight regarding strategic, financing, acquisition and management issues.
Nicholas R. Sheppard, Director. Mr. Sheppard was a member of our board of directors from 2003 to 2007, rejoining our board in March 2009. Mr. Sheppard is a Managing Director of BRS. Prior to joining BRS in 2000, he worked as a Consultant in the London and New York offices of Marakon Associates, a strategy consulting firm. Mr. Sheppard received his BSc from the London School of Economics and Political Science and his MBA from The Wharton School of the University of Pennsylvania. Mr. Sheppard was a director of Lazy Days R.V. Center, Inc. from 2005 to 2009 and was Director of Penhall International, Inc. from 2005 to 2006. Mr. Sheppard brings to the board extensive experience advising portfolio companies of BRS and provides valuable insight regarding strategic, financing, acquisition and management issues.
George A. Whaling, Director. Mr. Whaling has been a member of our board of directors since 1998 and is Chairman of Kingston Capital Corporation in New York. From 1980 to 1997, he was Chairman and owner of the Petty Printing Company, a commercial web printer. Mr. Whaling holds a B.A. from Colgate University. Mr. Whaling served as Director of Colgate University, Hamilton Initiative LLC and Augusta Glenn Partners LLC from 2005 to 2006. Mr. Whaling has a broad knowledge of our business gained throughout his 13 years as a director of the Company and his 32 years of experience in the printing industry and provides valuable insight to the board regarding operational, sales, and management issues.
Board Composition and Director Independence
The securities holders’ agreement among BRS, JCP and the other stockholders of TSG Holdings Corp. provides that TSG Holdings Corp.’s and our board of directors will consist of eight members, including four designees of BRS (who currently are Messrs. Baldwin, DiCamillo, Sheppard and Saxton) and four designees of JCP (who currently are Messrs. Daraviras, Deery, Luikart and Whaling). Pursuant to the securities holders’ agreement, we may not take certain significant actions without the approval of each of BRS and JCP. Although our securities are not listed on the New York Stock Exchange, for purposes of this item we have adopted the definition of “independence” applicable under the listing standards of the New York Stock Exchange. Using such definition, the board of directors has determined that each of Messrs. DiCamillo, Deery and Whaling is independent. If we were listed on the New York Stock Exchange, we would be exempt from certain independence requirements with respect to our board of directors and board committees under the “controlled company” exemption. See Part III, Item 13, “Certain Relationships and Related Transactions-Securities Holders’ Agreement.”
Audit Committee
The board of directors has an audit committee. The audit committee consists of Messrs. Daraviras, DiCamillo and Sheppard. The audit committee reviews our financial statements and accounting practices, selects our independent registered public accounting firm and oversees our internal audit function. The responsibilities of the Audit Committee are defined in a charter, which has been approved by the Board of Directors. In carrying out their responsibilities, the Committee has reviewed and discussed our audited financial statements with management, and it has discussed the matters which are required to be discussed by AU Section 380 (The Auditor’s Communication with Those Charged With Governance), as adopted by the Public Company Accounting Oversight Board, with our Independent Registered Public Accounting Firm. In addition, the Committee has reviewed the written disclosures required by the Public Company Accounting Oversight Board, which were received from our Independent Registered Public Accounting Firm, and has discussed the Independent Registered Public Accounting Firm’s independence with them. The Audit Committee has reviewed the fees of the Independent Registered Public Accounting Firm for non-audit services and believes that such fees are compatible with the independence of the Independent Registered Public Accounting Firm.
Based on these reviews and discussions, the Committee recommended to the Board of Directors that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
The Board of Directors has determined that Mr. DiCamillo, the chairman of the audit committee, is the “audit committee financial expert” as defined in applicable SEC rules and regulations. Mr. DiCamillo is “independent” as defined in the listing standards of the New York Stock Exchange.
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Code of Business Conduct
Our Code of Business Conduct applies to all employees of The Sheridan Group, Inc. and all its wholly-owned subsidiaries. Each supervisor and above has been required to sign annually that they have read, understand and will comply with the Code. Our Code of Business Conduct is included on our internet website at www.sheridan.com. If any substantive amendments are made to the Code of Business Conduct or the Board of Directors grants any waiver from a provision of the Code to any officers of The Sheridan Group, Inc. or its wholly-owned subsidiaries, the nature of such amendment or waiver will be disclosed on our website.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Introduction
This Compensation Discussion and Analysis (“CD&A”) provides an overview of our executive compensation program together with a description of the material factors underlying the decisions which resulted in the compensation provided to our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and certain other executive officers (collectively, the named executive officers) for 2011 (as presented in the tables which follow this CD&A).
Compensation Committee
The board of directors has a compensation committee. The compensation committee consists of three members, Messrs. Baldwin, Deery and Luikart. The compensation committee has responsibility for establishing, implementing and continually monitoring adherence with our compensation philosophy. The role of the compensation committee is to make recommendations to our board of directors concerning salaries, incentive compensation and employee benefit programs. The compensation committee reviews and approves employment agreements and compensation programs or benefit plans for all of our executive officers, including the named executive officers, and certain other management employees. The compensation committee periodically compares our executive compensation levels with those of companies with which we believe that we compete in recruitment and retention of senior executives. The compensation committee also reviews and makes recommendations with respect to succession planning and management development. The CEO recommends changes in compensation for his direct reports, including each of the named executive officers, to the compensation committee for approval. The compensation committee recommends changes in compensation for the CEO to the full board for approval.
Compensation Philosophy and Objectives
In reviewing our compensation programs, the compensation committee applies a philosophy which is based on the premise that our achievements result from the coordinated efforts of all individuals working toward common objectives. We have developed a compensation policy that is designed to attract and retain qualified senior executives, reward executives for actions that result in the long-term enhancement of stockholder value and reward results with respect to our financial and operational goals.
Setting Executive Compensation
Based on the foregoing philosophy, the company’s annual and long-term incentive-based cash and non-cash executive compensation has been structured to (a) pay competitive levels of compensation in order to attract and retain qualified executives, (b) motivate executives to achieve the short-term and long-term business goals set by us and reward the executives for achieving such goals and (c) reward long-term performance. We compete with many larger companies for top executive-level talent. Competitors include RR Donnelley, WorldColor, Cenveo (previously Cadmus), Quad Graphics, Edwards Brothers, and numerous other printing companies. We consider these our primary competitors because we compete against these companies in each of our market segments. Accordingly, we generally consider the compensation paid to similarly situated executives at these larger corporations, together with individual experience, performance and cost-of-living factors, when determining the overall compensation available to our named executive officers. A significant percentage of total compensation is allocated to incentive compensation. However, there is no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Rather, market data, internal pay equity and performance are the factors considered in determining the appropriate level and mix of incentive compensation.
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Compensation Policies and Practices as they Relate to Risk Management
We conducted an assessment of potential risks arising from our compensation policies and practices and concluded that these risks are not reasonably likely to have a material adverse effect on the Company.
2011 Executive Compensation Components
For the fiscal year ending December 31, 2011, the principal components of compensation considered by the compensation committee for named executive officers were:
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Base salary;
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Non-equity annual incentive compensation;
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Stock-based incentive compensation;
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Non-qualified deferred compensation program; and
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Perquisites and other benefits.
We have also entered into employment agreements and/or change in control arrangements with all of the named executive officers. In addition to the compensation components listed above, these agreements provide for post-employment severance payments and benefits in the event of a termination of employment under certain circumstances. The terms of these agreements are described in more detail below (see the section entitled “Potential Payments on Termination or a Change in Control”). We believe that these agreements provide an incentive to the named executive officers to remain with us and serve to align the interests of the executives and the stockholders in the event of a potential acquisition. Additionally, a retention award, made pursuant to the Deferred Compensation Plan described below, was provided to a certain named executive officer whose retention is determined by our board of directors to be critical to our ongoing success.
Base Salary
We provide the named executive officers with base salaries to compensate them for services rendered during the fiscal year. The base salaries for our CEO, Messrs. Jakobe and Bozuwa, and Mss. Davidson and Stricker are contained in their respective employment agreements and are subject to increase at the discretion of our board of directors. Base salary levels are intended to reflect an individual’s responsibilities, performance and expertise and are designed to be competitive with salary levels in effect at other manufacturing companies, and in particular, companies within the printing industry. Accordingly, we establish salaries for the named executive officers on the basis of personal performance and by reviewing available national and printing industry compensation data from time to time, including published salary surveys regarding compensation of officers of larger and smaller companies, both within and outside the printing industry. Our CEO annually reviews and provides his subjective assessment of the performance of each of our named executive officers and recommends whether any adjustment to base salary for any named executive officer should be considered by the compensation committee. The compensation committee generally affords significant consideration to the CEO’s recommendations based on his proximity to the other named executive officers and understanding of their day-to-day performance and responsibilities. Based on the CEO’s recommendations and the compensation committee’s review of available market data, the compensation committee set base salaries for 2011 at the levels reported in the Summary Compensation Table, below. The compensation committee believes such salaries are in line with market data and reflect the responsibilities, performance and expertise of our named executive officers.
Annual Incentive Compensation
Management Performance Incentive Plan. Annual cash bonuses are generally considered for inclusion in our executive compensation program because we believe that a significant portion of each named executive officer’s compensation should be contingent on our annual performance, as well as the individual contribution of the executive. Accordingly, our named executive officers have historically participated in a management performance incentive plan, which compensated them for achievement of certain objectives established annually by our board of directors.
The management performance incentive plan was suspended for 2011 as a cost-savings measure to offset revenue reductions brought on by the economic recession.
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Annual incentive compensation awards for 2010 appear as “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table.
Profit Sharing Plan. The Sheridan Group Profit Sharing Plan is a broad- based incentive program provided to all eligible employees at each location, excluding TDP and DJS. The board of directors determines, on an annual basis, if a profit sharing contribution will be made for each participating company. The contribution, if any, is determined by a formula approved by our board of directors.
As a cost-savings measure, the profit sharing plan was suspended during 2009, 2010 and 2011 at all locations except TSP. At TSP the profit sharing plan was suspended effective July 1, 2011. Under the formula used at TSP, a guideline was established of 5.0% of EBITDA. If company EBITDA is a positive number, the established percent of EBITDA is put into the profit sharing pool. The total dollar contribution for an operating subsidiary cannot exceed 5.0% of its total payroll for the year. Additionally, a company must also meet a minimum threshold of an 8% net profit margin (before profit sharing) in order to be eligible for profit sharing. In 2009, all companies transitioned to payment of profit sharing in cash; however, employees have the option of deferring their cash payment into their 401(k) accounts. Ms. Stricker was the only named executive officer eligible to receive a profit sharing award for 2011. The $6,105 profit sharing award for Ms. Stricker is reported in the “All Other Compensation” column in the Summary Compensation Table shown below.
Stock-Based Incentive Compensation
TSG Holdings Corp., our parent company, adopted a Stock-Based Incentive Compensation Plan in October 2003. The purpose of the 2003 Stock-Based Incentive Compensation Plan is to provide long-term equity incentives to assist us in attracting and retaining valued management employees through the award of options to purchase common stock of TSG Holdings Corp. Option grants are designed to align the interests of officers and employees with those of the stockholders, to provide each individual with a significant incentive to manage our business from the perspective of an owner and to remain employed by us. Eligible employees will receive options on terms determined by our board of directors. The compensation committee considers the level of responsibility, position, past and expected performance, potential incentive payouts and annual base salary of each named executive officer when determining awards to be made under the Stock-Based Incentive Plan. The stock option awards are recommended by the CEO to the compensation committee, who then makes a recommendation to our board of directors for approval.
Options granted under the Stock-Based Incentive Compensation Plan have exercise prices equal to or above the fair market value of the underlying common stock (as determined under the Stock-Based Incentive Compensation Plan) on the grant date and are equally split 50% between a time-based vesting schedule and a performance-based vesting schedule. Time-based awards vest 20% per year over five years subject to the executive’s continued employment with us. Performance-based awards vest 20% per year over five years based on us achieving a per share equity value, as defined by the option agreements, each year as determined by the board. The per share equity value is calculated by multiplying our twelve month EBITDA by a pre-defined multiple, then subtracting net debt, and then dividing by the number of issued and outstanding shares of TSG Holdings Corp. Common Stock. If an annual performance target is not met in any of the five years, but is achieved by meeting subsequent year targets, shares will vest for all preceding plan years. The targets for the performance based options were established based upon the original objectives that BRS and JCP established when they bought us in 2003 (as modified in connection with the acquisition of TDP in 2004) which were designed to incent management to deliver the rate of return expected on their investment in us.
Stock options were granted to employees, including the named executive officers, on February 3, 2010. Pursuant to the stock option award agreements, the exercise price of the stock options was set at $23.24. Because the original exercise price of the 2010 stock option grants of $23.24 significantly exceeds the current value of our common stock, we believe that the stock option grants were not appropriately incentivizing our employees, including the named executive officers. Therefore, on May 4, 2011, the board amended the stock option award agreements for the 2010 stock option grants to provide for an exercise price of $10. We believe that this reduction in the exercise price of the 2010 stock option grants will serve to better incentivize our employees, including the named executive officers.
No named executive officers received an option award in fiscal year 2011.
We do not require our named executive officers to maintain a minimum ownership interest in us or our affiliates.
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Nonqualified Deferred Compensation
In General. Our nonqualified deferred compensation program serves primarily to attract and retain qualified executives by providing them with enhanced tax deferral opportunities and retirement benefits in addition to those provided under our broad-based 401(k) plan. Under the nonqualified deferred compensation plan, officers, directors and certain management employees may annually elect (via individual contracts) to defer a portion of their compensation, on a pre-tax basis. The benefit is based on the amount of compensation (salary and bonus) deferred, employer “make-whole” contributions, employer discretionary contributions and earnings on these amounts. Make-whole contributions are matching contributions and profit sharing contributions which we would have made to the participants’ accounts under the 401(k) plan were we not prohibited from making such contribution under the limits applicable to the 401(k) plan under the Internal Revenue Code. Make-whole contributions are made early in the year following the year in which the applicable matching and profit sharing contributions to our 401(k) plan were limited. Individuals are fully vested in deferred salary and bonus amounts; however, the make-whole contributions vest in full after two years of employment, which is the same schedule applicable to employer contributions under the 401(k) plan. The employer discretionary contributions become vested pursuant to a vesting schedule as determined by us.
Salary and bonus amounts deferred by named executive officers in 2011 under the nonqualified deferred compensation plan are shown in the “Executive Contributions” column of the Deferred Compensation Table below. Employer make-whole and discretionary contributions for 2011 are shown in the “Registrant Contributions” column of the Deferred Compensation Table and in the “All Other Compensation” column of the Summary Compensation Table.
Retention Awards. Annual retention awards are employer discretionary contributions paid to certain management employees whose retention is determined by our board of directors to be critical to our ongoing success. These awards are deposited in the deferred compensation plan under the employee’s name and vest after five years. Distribution is made on a date previously elected by the executive. Other than the awards paid in accordance with the employment agreement of Ms. Davidson, these awards are solely awarded at the board of directors’ discretion. Any awards made outside of an employment agreement were equal to 10% of base salary.
In 2011, our board of directors provided a retention award to Ms. Davidson in the amount of $84,000 in accordance with the terms of her existing employment agreement. The retention awards for our named executive officers are disclosed under “All Other Compensation” on the Summary Compensation Table and in the Nonqualified Deferred Compensation table under Registrant Contributions.
Effective as of September 1, 2010, the Company adopted the Change-of-Control Incentive Plan for Officers under which certain executives, including the named executive officers, would be entitled to extended additional severance benefits in the event of a change of control with a specific strategic buyer. This plan was adopted because the Board felt that is was necessary to incent such officers to remain in the employ of the Company notwithstanding any risks and uncertainties created by a potential change of control. The amounts of such additional severance benefits are set forth under “Potential Payments Upon Termination or a Change in Control.”
Other Compensation, Perquisites and Other Benefits
401(k) Plan. We sponsor a defined contribution plan, or 401(k) Plan, intended to qualify under section 401 of the Internal Revenue Code. Substantially all of our employees are eligible to participate in the 401(k) Plan on the first day of the month in which the employee has attained 18 years of age and 30 days of employment. Employees may make pre-tax contributions of their eligible compensation, not to exceed the limits under the Internal Revenue Code. Employees may direct their investments among various pre-selected investment alternatives. Employer matching contributions to the 401(k) plan vest after two years of employment. Employer matching contributions were suspended as of July 2009.
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Perquisites and Other Benefits. The named executive officers are not generally entitled to benefits that are not otherwise available to all of our employees. In this regard, it should be noted that we do not provide pension arrangements (other than the 401(k) plan and the nonqualified deferred compensation plan), post-retirement health coverage or similar benefits for our executives. However, some of the named executive officers are entitled to certain insurance benefits, relocation benefits and an executive physical program. These perquisites are provided because we view the benefits as being very closely related to the services our named executive officers perform for us. Supplemental Long-Term disability insurance is provided as an income security measure in the event of a catastrophic illness. Relocation benefits are provided to all management employees who are relocated at our request, including named executive officers. The executive physical program benefit is provided to all of our key managers and officers, including the named executive officers, to ensure their continuing ability to fulfill the responsibilities of their respective positions. These amounts are noted in the “All Other Compensation” column in the Summary Compensation Table. The Committee believes that these benefits are consistent with the goal of attracting and retaining superior executive talent.
Tax and Accounting Implications
Deductibility of Certain Compensation. Section 162(m) of the Internal Revenue Code imposes a $1.0 million limit on the deductibility of compensation paid to certain executive officers of public companies, unless the compensation meets certain requirements for “performance-based” compensation. Although Section 162(m) does not apply to companies that do not have registered common equity securities, we generally consider the potential loss of deduction under Section 162(m) in designing certain types of compensation plans so that such plans may protect us from a potential loss of deduction if our common equity securities become publicly traded. In determining executive compensation, the compensation committee considers, among other factors, the possible tax consequences to us and to the executives. However, tax consequences, including but not limited to tax deductibility by us, are subject to many factors (such as changes in the tax laws and regulations or interpretations thereof and the timing and nature of various decisions by executives regarding options and other rights) that are beyond our control. In addition, the compensation committee believes that it is important for it to retain maximum flexibility in designing compensation programs that meet its stated objectives. For all of the foregoing reasons, the compensation committee, while considering tax deductibility as one of its factors in determining compensation, will not limit compensation to those levels or types of compensation that will be deductible. The compensation committee will, of course, consider alternative forms of compensation, consistent with its compensation goals, which preserve deductibility.
Accounting Impact. The compensation committee does not consider potential accounting treatment in making decisions regarding equity-based or cash-based compensation.
Compensation Committee Report
Our Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management, and, based on such review and discussion, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this annual report for the fiscal year ending December 31, 2011.
Thomas J. Baldwin
Craig H. Deery
James L. Luikart
The following table summarizes compensation awarded or paid by us during 2011, 2010, and 2009 to our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer, and our three next most highly compensated executive officers (our “named executive officers”). Perquisites and other benefits included in the All Other Compensation column are disclosed and itemized in the “All Other Compensation” table below.
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Summary Compensation Table
(1)
Ms. Stricker and Mr. Bozuwa received a special incentive bonus of $300 in 2010. Mr. Bozuwa received a special project incentive bonus of $20,000 and a $40 gift card in 2011.
(2)
Three named executive officers received option awards in 2010. Mr. Saxton received 4,060 shares, Ms. Davidson received 1,500 shares, and Ms. Stricker received 300 shares. The amounts shown represent the aggregate grant date fair value of awards during the year determined in accordance with FASB ASC Topic 718. The assumptions made in determining the grant date fair values of the options are disclosed in Note 2 of our consolidated financial statements. As described in the CD&A, the exercise prices of the option awards granted to the named executive officers in 2010 were reduced from $23.24 to $10. The incremental fair value of this reduction computed as of May 4, 2011 in accordance with FASB ASC Topic 718 is zero because we estimate that our common stock has a current value of zero.
(3)
The amounts reported as “Non-Equity Incentive Plan Compensation” for 2011, 2010, and 2009 consist of bonuses paid as management performance incentive compensation.
(4)
The amounts reported as “All Other Compensation” for 2011, 2010, and 2009, are itemized in the “All Other Compensation” table below.
Index
All Other Compensation
Retention awards and make-whole contributions are invested in the deferred compensation plan. Even though the profit sharing plan was not available in 2010 for named executive officers other than Ms. Stricker, Mr. Saxton and Ms. Davidson’s deferred compensation plan accounts were credited with a profit-sharing make-whole contribution in 2010 due to the limitations applicable to our 401(k) plan for 2009. 401(k) match is invested in the 401(k) plan. Pre-2010 Profit sharing and 1% fixed contributions are also invested in the 401(k) plan.
Grants of Plan-Based Awards
(1)
As described in the CD&A, the exercise prices of the option awards granted to the named executive officers in 2010 were reduced from $23.24 to $10. The incremental fair value of this reduction computed as of May 4, 2011 in accordance with FASB ASC Topic 718 is zero because we estimate that our common stock has a current value of zero.
Index
Outstanding Equity Awards at Fiscal Year-End
(1)
Stock option awards were awarded on October 16, 2003. The shares began vesting on January 1, 2004. Twenty percent (20%) of the time-based shares vest each year on January 1st, i.e. 20% vested on January 1, 2005, 20% vested on January 1, 2006, 20% vested on January 1, 2007, 20% vested on January 1, 2008, and the remaining 20% vested on January 1, 2009. As of December 31, 2009, 100% of the Named Executive Officers’ time-based shares were vested. The established performance-based option targets (per share equity values, as defined in the stock option agreements) are $20/share on 1/1/05, $52/share on 1/1/06, $86/share on 1/1/07, $118/share on 1/1/08, $148/share on 1/1/09, $178/share on 1/1/10. Alternatively, 100% of performance shares vest after 8 years. All performance shares awarded on October 16, 2003 fully vested on January 1, 2012.
(2)
Stock option awards were awarded on February 4, 2010. The shares began vesting on January 1, 2011. Twenty percent (20%) of the time-based shares vest each year on January 1st, i.e., 20% vested on January 1, 2011, 20% will vested on January 1, 2012, 20% will vest on January 1, 2013, 20% will vest on January 1, 2014, and the remaining 20% will vest on January 1, 2015. The established performance-based option targets (per share equity values, as defined in the stock option agreements) are $35/share on 1/1/11, $40/share on 1/1/12, $85/share on 1/1/13, $85/share on 1/1/14, and $85/share on 1/1/15. As described in the CD&A, the exercise prices of the option awards granted to the named executive officers in 2010 were reduced from $23.24 to $10. The incremental fair value of this reduction computed as of May 4, 2011 in accordance with FASB ASC Topic 718 is zero because we estimate that our common stock has a current value of zero.
See Stock-Based Incentive Compensation under the Compensation Discussion and Analysis for details on the vesting schedule.
Index
Option Exercises and Stock Vested in Last Fiscal Year
(1) No options were exercised during 2011.
Nonqualified Deferred Compensation
(1)
Registrant contributions for Fiscal Years ending 2011, 2010, and 2009, respectively, that were included in the Summary Compensation Table are as follows: Mr. Saxton-Make Whole Contributions of $0, $3,482, and $109,668; Mr. Jakobe-Make Whole Contributions of $0, $0, and $24,873; Ms. Davidson-Make Whole Contributions of $0, $333, and $26,751, and Retention Awards of $84,000, $82,388, and $82,388; Mr. Bozuwa-Make Whole Contributions of $0, $0, and $12,315; and Ms. Stricker-Make Whole Contributions of $0, $350, and $12,637. Retention awards and employer make-whole contributions (described below) are reported in the Summary Compensation Table in the “All Other Compensation” column.
The types of compensation that may be deferred under our nonqualified deferred compensation plan are salary, profit share and bonus (deferred at the employee’s election), employee retention awards, employer make-whole contributions, employer discretionary contributions and earnings on the deferrals. The individuals are fully vested in the compensation they voluntarily defer; however, the make-whole contributions, the employer discretionary contributions and employee retention awards are subject to vesting requirements. Make-whole contributions vest once the employee has attained two years of service. Employee retention awards cliff vest after five years. Employees may defer up to 20% of their base salary and up to 100% of any earned bonus or profit share into the deferred compensation program on an annual basis. Earnings under the nonqualified plan are calculated by reference to the return on investment of funds selected by the executives from a menu of investment fund options offered under the plan. These investment fund options are the same options as are available to all participants under our 401(k) plan. Participants may change their investment fund elections at any time. A participant may elect distribution of their vested account balance at a fixed payment date, no earlier than the third calendar year after the calendar year in which the initial election is made, five years after a previously-scheduled distribution is to be made, or upon separation of service from the company.
Index
The table below shows the funds available under our 401(k) plan and their annual rate of return for the calendar year ended December 31, 2011:
Deferred Compensation Investment Options
Potential Payments on Termination or Change of Control
Our employment agreements with Mr. Saxton, Mr. Jakobe, Ms. Davidson, Mr. Bozuwa and Ms. Stricker provide that if the executive is terminated by us without “cause” or by the executive for “good reason,” the executive will be entitled to receive the following amounts: (1) severance pay equal to his or her annual base salary and average annual incentive bonus during the two years preceding the termination for a period of 18 months in the case of Messrs. Jakobe and Bozuwa and Mss. Davidson and Stricker, and 24 months in the case of Mr. Saxton, (2) all amounts credited to the executive under our deferred compensation plan will fully vest and become payable in a single lump sum and (3) the executive will continue to have coverage under our health insurance plan for 18 months, or 24 months in the case of Mr. Saxton. A termination shall be for “cause,” as defined in the agreements, if any one or more of the following has occurred: i) the employee shall have committed an act of fraud, embezzlement or misappropriation against the employer, including, but not limited to, the offer, payment, solicitation or acceptance of any unlawful bribe or kickback with respect to the employer’s business; or, ii) the employee shall have been convicted by a court of competent jurisdiction of, or pleaded guilty or nolo contendere to, any felony or any crime involving moral turpitude; or, iii) the employee shall have refused, after explicit written notice, to obey any lawful resolution of or direction by the Board which is consistent with his duties; or, iv) the employee has been chronically absent from work (excluding vacations, illnesses or leaves of absence approved by the Board); or, v) the employee shall have failed to perform the duties incident to his employment with the employer on a regular basis, and such failure shall have continued for a period of twenty (20) days after written notice to the employee specifying such failure in reasonable detail (other than as a result of the employee’s disability); or, vi) the employee shall have engaged in the unlawful use (including being under the influence) or possession of illegal drugs on the employer’s premises; or vii) the employee shall have breached any one or more of the provisions of the Stock Purchase Agreement, dated as of August 1, 2003, among The Sheridan Group, Inc. and its stockholders as amended and in effect from time to time, and such breach shall have continued for a period of ten (10) days after written notice to the employee specifying such breach in reasonable detail. “Good reason” is defined as the occurrence of: i) a material reduction in the employee’s status, position, scope of authority or responsibilities, the assignment to the employee of any duties or responsibilities which are materially inconsistent with such status, position, authority or responsibilities; involuntary relocation of the employee to an extent requiring an increase in his commute to his normal place of employment of more than 50 miles; or any removal of the employee from or failure to reappoint him to any of positions to which the employee has been appointed by the employer, except in connection with the termination of his employment; or, ii) a material reduction by the employer in the employee’s compensation or benefits, except in conjunction with a general reduction by the employer in the salaries of its executive level employees or the TSG site management team.
The employment agreements contain non-compete and non-solicitation language prohibiting such actions for the term of the severance period. Additionally, the severed employee is prohibited from disclosing proprietary company information to any person, firm, corporation, association or entity, during or after their term of employment. Any breach of these terms will be subject to appropriate injunctive and equitable relief.
Index
The following table summarizes potential benefits that each of the Named Executive Officers would have received under their employment agreements or change in control arrangements on December 31, 2011, if a termination without cause or for good reason occurred, or they had been terminated following a change in control.
Severance payments for the named executive officers include the additional benefits that are described under “Retention Awards.”
Compensation of Directors
Beginning on October 1, 2011, each director who is not also one of our executive officers or an employee of BRS or JCP will receive a fee of $20,000 per year for their service on our board of directors. Prior to October 1, the fee was $30,000 per year. The chairman of the audit committee (Mr. DiCamillo) will receive an additional fee of $5,000 per year. All directors are reimbursed for any personal expenses incurred in the conduct of their duties as a director. There were no stock options awarded to directors during 2011. A summary of fees paid to our directors in 2011 is as follows:
Compensation Committee Interlocks and Insider Participation
In 2011, the compensation committee consisted of Messrs. Baldwin, Deery and Luikart. None of the members of the compensation committee are currently, or have been at any time since the time of our formation, one of our officers or employees. None of our executive officers was a director of another entity where one of that entity’s executive officers served on our Compensation Committee; and none of our executive officers served on the Compensation Committee or the entire Board of Directors of another entity where one of that entity’s executive officers served as a director on our Board of Directors.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
We are a wholly-owned subsidiary of TSG Holdings Corp, which has pledged our shares as security for our obligations under our working capital facility. The following table sets forth certain information regarding the beneficial ownership of TSG Holdings Corp., as of March 28, 2012, by (i) each person or entity known to us to own more than 5% of any class of TSG Holdings Corp.’s outstanding securities, (ii) each member of our board of directors and each of our named executive officers and (iii) all of the members of the board of directors and executive officers as a group. TSG Holdings Corp.’s outstanding securities consist of about 597,553 shares of TSG Holdings Corp. common stock and about 45,326 shares and 4,234 shares of TSG Holdings Corp. Series A and Series B preferred stock, respectively, the terms of which are described in more detail below. Additionally, there are 27,662 options to purchase common stock outstanding that are held by our executive officers. To our knowledge, each of such stockholders will have sole voting and investment power as to the stock shown unless otherwise noted. Beneficial ownership of the securities listed in the table has been determined in accordance with the applicable rules and regulation promulgated under the Exchange Act.
Index
(1)
Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power and as to which such person has the right to acquire such voting and/or investment power within 60 days. Percentage of beneficial ownership as to any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person by the sum of the number of shares outstanding as of such date and the number of shares as to which such person has the right to acquire voting and/or investment power within 60 days.
(2)
The Sheridan Group Holdings (BRS), LLC (the “BRSLLC”) is controlled by Bruckmann, Rosser, Sherrill & Co. II, L.P. (the “BRS Fund”) which is a private equity investment fund managed by Bruckmann, Rosser, Sherrill & Co., LLC. BRSE, L.L.C. (“BRSE”) is the general partner of the BRS Fund and by virtue of such status may be deemed to be the beneficial owner of the shares owned by BRSLLC. BRSE has the power to direct BRSLLC as to the voting and disposition of shares held by BRSLLC. No single person controls the voting and dispositive power of BRSE with respect to the shares owned by BRSLLC. Bruce Bruckmann, Harold O. Rosser, Stephen C. Sherrill, Paul D. Kaminski and Thomas J. Baldwin are the managers of BRSE, and none of them individually has the power to direct or veto the voting or disposition of shares owned by BRSLLC. BRSE expressly disclaims beneficial ownership of the shares owned by BRSLLC. Each of Messrs. Bruckmann, Rosser, Sherrill, Kaminski and Baldwin expressly disclaims beneficial ownership of the shares owned by BRSLLC.
(3)
The Sheridan Group Holdings (Jefferies), LLC is controlled by ING Furman Selz Investors III L.P., ING Barings U.S. Leveraged Equity Plan LLC and ING Barings Global Leveraged Equity Plan Ltd. which are private equity investment funds managed by Jefferies Capital Partners. Brian P. Friedman and James L. Luikart are the Managing Members of JCP and may be considered the beneficial owners of the shares owned by The Sheridan Group Holdings (Jefferies), LLC, but each of Messrs. Friedman and Luikart expressly disclaim beneficial ownership of such shares, except to the extent of each of their pecuniary interests therein.
(4)
The address of each of Mr. Pierce, Mr. Saxton, Mr. Jakobe, Ms. Davidson, Mr. Bozuwa, Ms. Stricker, Mr. Deery, Mr. DiCamillo and Mr. Whaling is c/o The Sheridan Group, Inc., 11311 McCormick Road, Suite 260, Hunt Valley, Maryland 21031.
(5)
Includes options to purchase 1,920 shares of TSG Holdings Corp. common stock exercisable within 60 days.
Index
(6)
Includes 17,602 common shares, 1,340 Series A preferred shares and 125 Series B preferred shares which are owned by RBC Capital Markets Corp. FBO John Saxton. Mr. Saxton may be deemed to beneficially own such shares.
(7)
Includes options to purchase 6,312 shares of TSG Holdings Corp. common stock exercisable within 60 days.
(8)
Includes 1,288 common shares and 108 Series A preferred shares which are owned by CGM Custodian FBO Robert M. Jakobe Roll-over IRA. Mr. Jakobe may be deemed to beneficially own such shares.
(9)
Includes options to purchase 5,500 shares of TSG Holdings Corp. common stock exercisable within 60 days.
(10)
Includes options to purchase 3,800 shares of TSG Holdings Corp. common stock exercisable within 60 days.
(11)
Includes options to purchase 3,000 shares of TSG Holdings Corp. common stock exercisable within 60 days.
(12)
Includes options to purchase 2,760 shares of TSG Holdings Corp. common stock exercisable within 60 days.
(13)
The address of each of Mr. Baldwin and Mr. Sheppard is c/o Bruckmann, Rosser, Sherrill & Co., Inc., 126 East 56th Street, New York, New York 10022.
(14)
Consists of 19,210 shares and 1,833 shares of TSG Holdings Corp. Series A and Series B preferred stock, respectively, and 252,756 shares of TSG Holdings Corp. common stock owned and/or controlled by the BRSLLC. Mr. Baldwin may be deemed to share beneficial ownership of the shares owned of record and/or controlled by BRSLLC by virtue of his status as a manager of BRSE, but he expressly disclaims such beneficial ownership of the shares owned and/or controlled by BRSLLC. The members and managers of BRSE share investment and voting power with respect to securities owned and/or controlled by BRSE, but no individual controls such investment or voting power.
(15)
The address of each of Mr. Daraviras and Mr. Luikart is c/o Jefferies Capital Partners, 520 Madison Avenue, 10th Floor, New York, New York 10022.
(16)
Consists of 19,210 shares and 1,833 shares of TSG Holdings Corp. Series A and Series B preferred stock, respectively, and 252,756 shares of TSG Holdings Corp. common stock owned by The Sheridan Group Holdings (Jefferies), LLC. Mr. Luikart is a Managing Member of JCP and may be considered the beneficial owner of such shares, but he expressly disclaims such beneficial ownership of the shares owned by The Sheridan Group Holdings (Jefferies), LLC, except to the extent of his pecuniary interest therein.
(17)
Includes options to purchase 27,662 shares of TSG Holdings Corp. common stock exercisable within 60 days.
TSG Holdings Corp. Preferred Stock
TSG Holdings Corp.’s Certificate of Incorporation provides that TSG Holdings Corp. may issue 200,000 shares of preferred stock, 50,000 of which is designated as 10% Series A Cumulative Compounding Preferred Stock (“Series A”), 20,000 of which is designated as 10% Series B Cumulative Compounding Preferred Stock (“Series B”) and 130,000 of which is undesignated. TSG Holdings Corp. preferred stock has a stated value of $1,000 per share for Series A and $1,428.89 per share for Series B and is entitled to annual dividends when, as and if declared, which dividends will be cumulative, whether or not earned or declared, and will accrue at a rate of 10%, compounding annually. As of March 28, 2012, there are issued and outstanding about 45,326 and 4,234 shares of Series A and Series B preferred stock, respectively.
Except as otherwise required by law, the TSG Holdings Corp. preferred stock is not entitled to vote. TSG Holdings Corp. may not pay any dividend upon (except for a dividend payable in Junior Stock, as defined below), or redeem or otherwise acquire shares of, capital stock junior to the TSG Holdings Corp. preferred stock (including the common stock) (“Junior Stock”) unless all cumulative dividends on the TSG Holdings Corp. preferred stock have been paid in full. Upon liquidation, dissolution or winding up of TSG Holdings Corp., holders of TSG Holdings Corp. Series A and Series B preferred stock are entitled to receive out of the legally available assets of TSG Holdings Corp., before any amount shall be paid to holders of Junior Stock, an amount equal to $1,000 per share and $1,428.89 per share, respectively, of TSG Holdings Corp. preferred stock, plus all accrued and unpaid dividends to the date of final distribution. If the available assets are insufficient to pay the holders of the outstanding shares of TSG Holdings Corp. preferred stock in full, the assets, or the proceeds from the sale of the assets, will be distributed ratably among the holders.
Index
TSG Holdings Corp. Common Stock
The Certificate of Incorporation of TSG Holdings Corp. provides that TSG Holdings Corp. may issue 1,000,000 shares of TSG Holdings Corp. common stock. About 597,553 shares of TSG Holdings Corp. common stock are issued and outstanding as of March 28, 2012. The holders of TSG Holdings Corp. common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2011 regarding all of our existing compensation plans pursuant to which equity securities are authorized for issuance to employees and non-employee directors.
(1)
As of December 31, 2011.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Dividend and Loan
On January 5, 2009, we executed a waiver to our working capital facility. The waiver allowed us to pay a cash dividend and make a loan to our parent company, TSG Holdings Corp. (“Holdings”), which is not a registrant with the Securities and Exchange Commission, in the aggregate amount of up to $14.0 million, provided that Holdings used the entire cash proceeds of such dividend and loan solely to purchase capital stock issued by Holdings (the “Stock Purchase”) from Participatiemaatschappij Giraffe B.V. and to pay related expenses in connection therewith. On January 5, 2009, we paid a dividend in the aggregate amount of $8.0 million and made a loan in the principal amount of $2.0 million to Holdings. The loan had an original maturity on January 4, 2012 and accrued interest at the rate of 1.36% per year. The loan was subsequently settled against the income tax obligations due to Holdings, which is presented within “Due to parent, net” in the consolidated balance sheet as of December 31, 2010 (as discussed in Note 11 of our financial statements). Additionally, subsequent to January 5, 2009, we paid an additional dividend in the amount of $1.1 million to Holdings to pay expenses and other amounts in connection with the Stock Purchase.
Securities Holders’ Agreement
The second amended and restated securities holders’ agreement among BRS, JCP and the other stockholders of Holdings provides that Holdings’ and our board of directors will consist of eight members, including four designees of BRS and four designees of JCP. Also pursuant to the securities holders’ agreement, we may not take certain significant actions, such as incurrence of indebtedness in excess of certain thresholds or a sale of all or substantially all of our assets, without the approval of each of BRS and JCP.
The securities holders’ agreement generally restricts the transfer of shares of Holdings’ common stock or Holdings’ preferred stock without the consent of BRS and JCP. Exceptions to this restriction include transfers to affiliates and transfers for estate planning purposes, in each case so long as any transferee agrees to be bound by the terms of the agreement.
Each of Holdings, BRS and JCP has a right of first refusal under the securities holders’ agreement with respect to sales of shares of Holdings by management investors. Under certain circumstances, the stockholders have “tag-along” rights to sell their shares on a pro rata basis with the selling stockholder in certain sales to third parties. If BRS and JCP approve a sale of Holdings, they have the right to require the other stockholders of Holdings to sell their shares on the same terms. The securities holders’ agreement also contains a provision that gives Holdings the right to repurchase a management investor’s shares upon termination of that management stockholder’s employment or removal or resignation from the board of directors.
Index
Registration Rights Agreement
Pursuant to the amended and restated registration rights agreement among BRS, JCP and the other stockholders of Holdings, upon the written request of either BRS or JCP, Holdings has agreed to, on one or more occasions, prepare and file a registration statement with the SEC concerning the distribution of all or part of the shares of Holdings’ common stock held by BRS or JCP or certain of their respective affiliates, as the case may be, and use its best efforts to cause the registration statement to become effective. Following an initial public offering of Holdings, BRS, JCP and the management investors also have the right, subject to certain exceptions and rights of priority, to have their shares included in certain registration statements filed by Holdings. Registration expenses of the selling stockholders (other than underwriting discounts and commissions and transfer taxes applicable to the shares sold by such stockholders or the fees and expenses of any accountants or other representatives retained by a selling stockholder) will be paid by Holdings. Holdings has also agreed to indemnify the stockholders against certain customary liabilities in connection with any registration.
Management Agreement
In connection with the Sheridan Acquisition, we entered into a 10-year management agreement with BRS and JCP pursuant to which BRS and JCP provided financial, advisory and consulting services to us. In exchange for these services, BRS and JCP received a management fee equal to the greater of 2% of EBITDA (as defined in the management agreement) or $0.5 million per year, plus reasonable out-of-pocket expenses split equally between BRS and JCP. On April 15, 2011, the management agreement was terminated and no amounts will be paid under the management agreement subsequent to the three-month period ended March 31, 2011. In the future, BRS and JCP may negotiate with us to provide services in connection with any transaction in which we may be, or may consider becoming, involved.
Policy for Approval of Related Transactions
We do not have a written policy for the treatment of transactions required to be disclosed under Item 404(a) of Regulation S-K. Our securities holders’ agreement described above generally prohibits entry into such transactions without the consent of BRS and JCP.
Director Independence
See Part III, Item 10, “Directors, Executive Officers and Corporate Governance-Board Composition and Director Independence.”
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company incurred fees for services performed by PricewaterhouseCoopers LLP as follows:
All services that are performed by PricewaterhouseCoopers LLP for the Company, including those described herein, are pre-approved by the audit committee prior to performance in accordance with legal requirements.
Index
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
(1)
All Financial Statements:
(2)
Financial Statement Schedules:
All schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements and the footnotes thereto.
(3)
Exhibits
The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference.
Index
Index
Index
Index
†
Filed as a like numbered exhibit to the Registrant’s Registration Statement on Form S-4 (File No. 333-110441) and incorporated herein by reference.
^
Filed as a like numbered exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, filed on March 30, 2006 and incorporated herein by reference.
^^
Filed as a like numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, filed on May 13, 2005 and incorporated herein by reference.
~
Filed as a like numbered exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed on March 31, 2005 and incorporated herein by reference.
#
Filed as a like numbered exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed on March 30, 2007 and incorporated herein by reference.
††
Filed as a like numbered exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 28, 2008 and incorporated herein by reference.
Index
*
Management contract or compensatory plan or arrangement.
##
Filed as a like numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, filed on November 10, 2010 and incorporated herein by reference.
&
Filed as a like numbered exhibit to the Registrant’s Current Report on Form 8-K, filed on April 20, 2011 and incorporated herein by reference.
&&
Filed as a like numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, filed on May 13, 2011 and incorporated herein by reference.
ƒ
Filed as a like numbered exhibit to the Registrant’s Registration Statement on Form S-4 (File No. 333-174734) and incorporated herein by reference.
‡
Filed as a like numbered exhibit to the Registrant’s Current Report on Form 8-K/A, filed on May 23, 2011 and incorporated herein by reference.
€
Filed as a like numbered exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, filed on November 10, 2011 and incorporated herein by reference.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act
No annual report or proxy material has been sent to security holders in the year ended December 31, 2011. The Registrant is a wholly-owned subsidiary of TSG Holdings Corp.
Index
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John A. Saxton
President and Chief Executive Officer and Director
(Principal Executive Officer)
March 28, 2012
John A. Saxton
/s/ Robert M. Jakobe
Chief Financial Officer (Principal Financial and
Accounting Officer)
March 28, 2012
Robert M. Jakobe
/s/ Thomas J. Baldwin
Director
March 28, 2012
Thomas J. Baldwin
/s/ Nicholas Daraviras
Director
March 28, 2012
Nicholas Daraviras
/s/ Craig H. Deery
Director
March 28, 2012
Craig H. Deery
/s/ Gary T. DiCamillo
Director
March 28, 2012
Gary T. DiCamillo
/s/ James L. Luikart
Director
March 28, 2012
James L. Luikart
/s/ Nicholas R. Sheppard
Director
March 28, 2012
Nicholas R. Sheppard
/s/ George A. Whaling
Director
March 28, 2012
George A. Whaling