10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2009

OR

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

For the transition period from              to             

Commission File Number 333-133825

SGS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	20-3939981
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

626 West Main Street, Suite 500 Louisville, Kentucky	40202
(Address of principal executive offices)	(Zip Code)

(502) 637-5443

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

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

As of April 30, 2009 there were 100 shares of the registrant’s common stock, $0.01 par value, outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			3
	Item 1.	Financial Statements	3
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statement of Stockholder’s Equity	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	20
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4T.	Controls and Procedures	25
PART II – OTHER INFORMATION			26
	Item 1.	Legal Proceedings	26
	Item 1A.	Risk Factors	26
	Item 6.	Exhibits	26
SIGNATURES			28

2

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

SGS International, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands of dollars)

	Three Months Ended March 31, 2009			Three Months Ended March 31, 2008
NET SALES	$	80,697		$	83,251
COSTS OF OPERATIONS:
Cost of goods sold (exclusive of depreciation)		51,377			54,312
Selling, general, and administrative expenses		12,656			12,585
Depreciation and amortization		5,729			6,493
INCOME FROM OPERATIONS		10,935			9,861
NON-OPERATING EXPENSES (INCOME):
Interest expense		8,080			9,502
Gain on debt extinguishment		(10,500	)		—
Other (income) expense, net		(548	)		361
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES		13,903			(2	)
PROVISION FOR INCOME TAXES		5,511			—
NET INCOME (LOSS)	$	8,392		$	(2	)

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2008, are an integral part of the financial statements.

3

SGS International, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)

(in thousands of dollars, except share data)

	March 31, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	6,290		$	10,766
Receivables from customers, less allowances of $1,072 and $1,327 at March 31, 2009 and December 31, 2008, respectively		62,654			56,302
Inventories		8,721			9,064
Deferred income taxes		1,710			699
Prepaid expenses and other current assets		3,688			3,780
Total current assets		83,063			80,611
Properties, plants and equipment, net		44,503			46,186
Goodwill		171,697			172,618
Other intangible assets, net		165,834			169,214
Deferred financing costs, net		6,226			7,100
Other assets		511			384
TOTAL ASSETS	$	471,834		$	476,113
LIABILITIES AND STOCKHOLDER’S EQUITY
Current liabilities:
Accounts payable, trade	$	13,311		$	14,536
Accrued compensation		4,938			5,920
Accrued taxes, including taxes on income		2,207			1,501
Accrued interest		6,009			1,018
Other current liabilities		7,714			9,792
Current portion of short-term and long-term obligations		10,020			1,089
Total current liabilities		44,199			33,856
Long-term obligations, net of current portion		318,235			344,611
Non-current liabilities		160			204
Deferred income taxes		13,579			7,926
Total liabilities		376,173			386,597
Commitments and contingencies
Stockholder’s equity:
Common stock, $.01 par value, 1,000 shares authorized and 100 shares outstanding		—			—
Additional capital		107,000			107,000
Accumulated other comprehensive loss - unrealized translation adjustments, net of tax		(16,986	)		(14,739	)
Retained earnings (accumulated deficit)		5,647			(2,745	)
Total stockholder’s equity		95,661			89,516
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	471,834		$	476,113

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2008, are an integral part of the financial statements.

4

SGS International, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholder’s Equity

(unaudited)

(in thousands of dollars)

	Comprehensive Income			Common Stock		Additional Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Stockholder’s Equity
Balance at December 31, 2008				$	—	$	107,000	$	(2,745	)	$	(14,739	)	$	89,516
Comprehensive income:
Net income	$	8,392			—		—		8,392			—			8,392
Cumulative translation adjustments, net		(2,247	)		—		—		—			(2,247	)		(2,247	)
Comprehensive income	$	6,145
Balance at March 31, 2009				$	—	$	107,000	$	5,647		$	(16,986	)	$	95,661

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2008, are an integral part of the financial statements.

5

SGS International, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in thousands of dollars)

	Three Months Ended March 31, 2009			Three Months Ended March 31, 2008
CASH FLOWS FROM OPERATING ACTIVITIES	$	6,978		$	9,186
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of properties, plants and equipment		(1,860	)		(2,462	)
Proceeds from sales of equipment		3			450
Business acquisitions, net of cash acquired		(3,106	)		(20,382	)
Net cash used in investing activities		(4,963	)		(22,394	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility		14,903			—
Payments on revolving credit facility		(6,000	)		—
Payments to extinguish senior subordinated notes		(15,000	)		—
Payments on acquisition facility		(98	)		—
Payments for deferred financing fees		—			(60	)
Payments on long-term debt		(208	)		(669	)
Net cash used in financing activities		(6,403	)		(729	)
Effect of exchange rate changes on cash		(88	)		(263	)
DECREASE IN CASH AND CASH EQUIVALENTS		(4,476	)		(14,200	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		10,766			34,467
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	6,290		$	20,267

The accompanying notes, together with the notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2008, are an integral part of the financial statements.

6

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(all amounts in thousands of dollars, unless otherwise stated)

A. Summary of Significant Accounting Policies

General Nature of Business

SGS International, Inc. (“the Company”), headquartered in Louisville, Kentucky, operates in one operating business segment, pre-press graphic services. The Company provides a variety of services that include the preparatory steps that precede the actual printing of an image onto packaging material. The Company supplies photographic images, digital images, flexographic printing plates and rotogravure cylinders for the packaging printing industry. The Company has 38 locations in the United States, Canada, Mexico, the United Kingdom, the Netherlands, and Hong Kong.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and related footnotes that would normally be required by accounting principles generally accepted in the United States of America for complete financial reporting. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s consolidated audited financial statements for the year ended December 31, 2008 in the Company’s Form 10-K filed with the Securities and Exchange Commission. The December 31, 2008 balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

The accompanying unaudited condensed consolidated financial statements include all adjustments (consisting of a normal and recurring nature) that management considers necessary for a fair statement of financial information for the interim periods. Interim results are not necessarily indicative of the results that may be expected for the remainder of the year ending December 31, 2009.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of SGS International, Inc., its wholly owned subsidiaries and companies more than fifty percent owned. These subsidiaries include Southern Graphic Systems, Inc., Project Dove Holdco, Inc., Project Dove Manitoba, L.P., Southern Graphic Systems-Canada, Co., Southern Graphic Systems Mexico, S. De R.L. De C.V, SGS Packaging Europe Holdings Limited, SGS Packaging Europe Limited, MCG Graphics Limited, The Box Room Limited, SGS Packaging Netherlands B.V., McGurk Studios Limited, Thames McGurk Limited and SGS Asia Pacific Limited. These subsidiaries also include Backwell Design Inc. and Gemini Graphic Imaging Inc. since May 2, 2008. On December 31, 2008, Backwell Design Inc. and Gemini Graphic Imaging Inc. transferred all of their assets and liabilities to Southern Graphic Systems-Canada, Co.

Inventories and Cost of Goods Sold

Raw materials inventory is valued at the lower of cost or market with cost determined using the first-in, first-out (“FIFO”) method. Work-in-process inventory is valued at the lower of cost or net realizable value. There is no finished goods inventory since all products are shipped upon completion. Raw materials inventory and work-in-process inventory are as follows:

	March 31, 2009		December 31, 2008
Raw materials	$	2,338	$	2,949
Work-in-process		6,383		6,115
Total	$	8,721	$	9,064

7

Use of Estimates

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and require management to make certain estimates and assumptions. These may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They may also affect the reported amounts of revenues and expenses during the reporting period. Areas that require significant judgments, estimates and assumptions include revenue recognition, accounts receivable and the allowance for doubtful accounts, work-in-process inventory, impairment of goodwill, other intangible assets and long-lived assets, accrued health and welfare benefits, and tax matters. Management uses historical experience and all available information to make these judgments and actual results could differ from those estimates upon subsequent resolution of some matters.

Recently Issued and Adopted Accounting Standards

On January 1, 2009, the Company adopted the provisions of Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS 141(R)). SFAS 141(R) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. The adoption of SFAS 141(R) did not have an impact on the Company’s condensed consolidated financial statements as of and for the three months ended March 31, 2009. The impact on the Company’s financial statements for subsequent periods will depend on the nature and size of future acquisitions.

On January 1, 2009, the Company adopted the provisions of Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51, (SFAS 160). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The adoption of SFAS 160 did not have an impact on the Company’s consolidated financial statements.

On January 1, 2009, the Company adopted the provisions of Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements. The adoption of SFAS 162 did not have an impact on the Company’s consolidated financial statements.

In April 2009, the Financial Accounting Standards Board (FASB) issued three FASB Staff Positions (FSPs) intended to provide application guidance and revise the disclosures regarding fair value measurements and impairments of securities.

• FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), addresses the determination of fair values when there is no active market or where the price inputs represent distressed sales. FSP FAS 157-4 reaffirms the view in SFAS 157 that the objective of fair value measurement is to reflect an asset’s sale price in an orderly transaction at the date of the financial statements.

• FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures to a quarterly instead of annual basis for any financial instruments that are not currently reflected on the balance sheet at fair value.

• FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater consistency to the timing of impairment recognition and provide greater clarity about the credit and noncredit components of impaired debt securities that are not expected to be sold.

8

These FSP pronouncements are effective for fiscal years and interim periods beginning after June 15, 2009. We do not expect the adoption of these FSP pronouncements will have a material impact on our consolidated financial statements.

B. Acquisitions

Effective January 1, 2008, Southern Graphic Systems-Canada, Co., a wholly owned subsidiary of SGS International, Inc., acquired the outstanding shares of 1043497 Ontario Limited (“1043497”) and Cooper & Williamson, Inc. (together with 1043497 and its wholly owned subsidiaries Tri-Ad Graphic Communications Ltd. and Flexart Design Inc., “Tri-Ad”) under a Share Purchase Agreement (the “SPA”), for a cash purchase price of 22.0 million Canadian dollars ($22,319 based on the U.S. dollar/Canadian dollar exchange rate at the time of acquisition), subject to adjustment as described in the SPA. Tri-Ad is a Canadian provider of packaging and retail graphics services with locations in Toronto, Ontario and outside of Montreal, Quebec. The preliminary purchase price allocation for the acquisition of Tri-Ad is provided below. We expect there will be additional adjustments to the cash purchase price since we are currently in the process of arbitration with the selling shareholders, in accordance with the dispute resolution provisions contained in the SPA, regarding the calculation of certain purchase price adjustments. This allocation may change significantly based on final purchase price adjustments.

Purchase price	$	22,319
Transaction costs		885
Total cash acquisition price	$	23,204
Allocation of acquisition price:
Current assets	$	7,778
Properties, plants and equipment		2,475
Goodwill		8,873
Customer relationships		7,085
Other intangible assets		885
Liabilities assumed		(3,892	)
Total cash acquisition price	$	23,204

On October 1, 2008, 1043497 Ontario Limited, Cooper & Williamson, Inc., Tri-Ad Graphic Communications Ltd. and Flexart Design Inc. were amalgamated as a single company named Tri-Ad Graphic Communications Ltd. Immediately following the amalgamation, Tri-Ad Graphic Communications Ltd. transferred all of its assets and liabilities to Southern Graphic Systems-Canada, Co. and was subsequently dissolved.

On May 2, 2008, Southern Graphic Systems-Canada, Co. acquired a Canadian provider of packaging and retail graphics, Backwell Design Inc. and Gemini Graphic Imaging Inc., for an aggregate cash consideration of 3.1 million Canadian dollars ($3,098 based on the U.S. dollar/Canadian dollar exchange rate at the time of acquisition). The purchase price allocation for the acquisition is provided below.

9

Purchase price	$	3,098
Transaction costs		50
Total cash acquisition price	$	3,148
Allocation of acquisition price:
Current assets	$	766
Properties, plants and equipment		70
Goodwill		946
Customer relationships		2,841
Liabilities assumed		(1,475	)
Total cash acquisition price	$	3,148

On December 31, 2008, Southern Graphic Systems, Inc. acquired substantially all of the assets of a provider of packaging and retail graphics located in Marietta, Georgia (the “Marietta acquisition” or “Marietta”) for an aggregate cash consideration of $6,031. The preliminary purchase price allocation for the acquisition is provided below, but remains subject to completion of final fair value allocations.

Purchase price	$	6,031
Transaction costs		63
Total cash acquisition price	$	6,094
Allocation of acquisition price:
Current assets	$	152
Properties, plants and equipment		445
Goodwill		1,035
Customer relationships		4,462
Total cash acquisition price	$	6,094

Results of operations of the above acquisitions are included in the consolidated statements of operations from the date of each acquisition. Pro forma results of the Company, assuming each acquisition, or all the acquisitions in the aggregate, had been made at the beginning of each period presented, would not have been materially different from the results reported.

C. Goodwill and Other Intangible Assets

Goodwill and other intangible assets consist of the following:

	March 31, 2009			December 31, 2008
Goodwill, cost	$	171,697		$	172,618
Customer relationships, cost		169,159			170,121
Customer relationships, accumulated amortization		(25,082	)		(23,082	)
Other intangible assets, cost		25,862			25,961
Other intangible assets, accumulated amortization		(4,105	)		(3,786	)
Total	$	337,531		$	341,832

10

The change in goodwill, customer relationships (cost) and other intangible assets (cost) during the three months ended March 31, 2009 is due to the following:

	Goodwill			Customer relationships (cost)			Other intangible assets (cost)
Balance at December 31, 2008	$	172,618		$	170,121		$	25,961
Revisions to purchase accounting during the three months ended March 31, 2009		216			—			—
Changes due to foreign currency fluctuations		(1,137	)		(962	)		(99	)
Balance at March 31, 2009	$	171,697		$	169,159		$	25,862

Amortization of customer relationships and other intangible assets is estimated to be approximately $9,800 annually from 2009 through 2013.

D. Interest Expense

Interest expense consists of the following:

	Three Months Ended March 31, 2009		Three Months Ended March 31, 2008
Interest on senior term loan	$	1,166	$	2,270
Interest on borrowings on acquisition facility		407		740
Interest on borrowings on revolving credit facility		82		—
Interest on senior subordinated notes		5,484		6,000
Amortization of deferred financing costs		875		360
Commitment fees on senior credit facility		41		70
Other		25		62
Total	$	8,080	$	9,502

E. Gain on Debt Extinguishment

In privately negotiated transactions that settled on February 13 and February 18, 2009, respectively, the Company’s wholly-owned subsidiary, Southern Graphic Systems, Inc., acquired SGS International, Inc.’s 12% senior subordinated notes maturing on December 15, 2013 (“Notes”) in an aggregate principal amount of $25,500 for a cash purchase price of $15,000, resulting in a gain on debt extinguishment of $10,500.

With the cancellation of these repurchased Notes, $174,500 aggregate principal amount of Notes remain outstanding. The Note repurchases were financed in part by aggregate borrowings of $14,903 under the Company’s revolving credit facility.

F. Fair Value Measurements

The table below provides the carrying value and estimated fair value of the Company’s financial instruments as of December 31, 2008. The estimated fair value is determined using quoted prices in markets that are not active. The estimated fair value at December 31, 2008 is determined using the weighted average price of the Notes purchased by Southern Graphics Systems, Inc. on February 13, 2009 and February 18, 2009.

11

	Total Carrying Value at March 31, 2009		Fair Value Measurements at March 31, 2009
Senior subordinated notes	$	174,500	$	102,647

The Company’s ability to repurchase Notes is limited due to the terms of the Company’s senior secured credit facility.

G. Contingencies and Commitments

Various lawsuits, claims and proceedings have been or may be instituted or asserted against entities within the Company. While the amounts claimed may be substantial, the ultimate liability cannot be determined because of the considerable uncertainties that exist. Therefore, it is possible that results of operations or liquidity in a particular period could be materially affected by certain contingencies. However, based on currently available facts and in light of legal and other defenses available to us, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the Company’s financial position, results of operations, and liquidity.

H. Income Taxes

The effective tax rate for the three months ended March 31, 2009 was 39.6%, compared to 45.6% for the three months ended March 31, 2008. The decrease in the effective tax rate was primarily due to the impact of expenses not fully deductible for income tax purposes. Since income (loss) before income taxes was closer to zero for the three months ended March 31, 2008 than for the three months ended March 31, 2009, the impact of expenses not fully deductible for income tax purposes was more significant for the three months ended March 31, 2008 than for the three months ended March 31, 2009.

The Company has not recorded a deferred tax liability for undistributed earnings of certain international subsidiaries because such earnings are considered permanently invested in foreign countries. As of March 31, 2009, undistributed earnings of international subsidiaries considered permanently reinvested were approximately $1,511. The unrecognized deferred tax liability is dependent on many factors, including withholding taxes under current tax treaties and foreign tax credits. Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable. The Company does not consider undistributed earnings from certain other international operations to be permanently reinvested. A portion of the estimated tax liabilities upon repatriation of earnings from these international operations is expected to be offset with foreign tax credits.

On December 15, 2008 the United States and Canada exchanged instruments of ratification to place in force the Fifth Protocol of the U.S.-Canada Tax Treaty (Fifth Protocol). Included in the Fifth Protocol were provisions that affected certain hybrid entities that receive or pay cross border payments. The hybrid provisions in the Fifth Protocol are effective January 1, 2010. The Company believes that certain subsidiaries may be affected by the new provisions and is currently evaluating strategies to minimize any adverse tax impact from the Fifth Protocol provisions.

I. Supplemental Guarantor Information

The Company’s debt includes the senior credit facility and the Notes. The U.S. borrowings under the senior credit facility have been guaranteed by Southern Graphics Inc. (the parent of SGS International, Inc.), Southern Graphic Systems, Inc. and Project Dove Holdco, Inc. The Canadian borrowings under the senior credit facility have been guaranteed by SGS Packaging Europe Holdings Limited, SGS Packaging Europe Limited, MCG Graphics Limited, Southern Graphic Systems Mexico, S. De R.L. De C.V., The Box Room Limited, SGS Packaging Netherlands, B.V., McGurk Studios Limited, Thames McGurk Limited, SGS Asia Pacific Limited, Southern Graphic Systems, Inc., Project Dove Holdco, Inc., Project Dove Manitoba, L.P., Southern Graphics Inc., SGS International, Inc., Backwell Design Inc., and Gemini Graphic Imaging Inc. The Notes are general unsecured obligations and are guaranteed on a senior subordinated basis by the Company’s domestic subsidiaries and rank secondary to the Company’s senior credit facility. Guarantor subsidiaries for the Notes include Southern Graphic Systems, Inc. and Project Dove Holdco, Inc. Non-guarantor subsidiaries for the Notes include the direct and indirect foreign subsidiaries. The subsidiary guarantors are 100% owned by SGS International, Inc., the guarantees are full and unconditional, and the guarantees are joint and several.

12

Following are condensed consolidating financial statements of the Company. Investments in subsidiaries are either consolidated or accounted for under the equity method of accounting. Intercompany balances and transactions have been eliminated.

13

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

Supplemental Condensed Consolidating Balance Sheet

March 31, 2009

	Parent / Issuer		Consolidated Guarantor Subsidiaries		Consolidated Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	38	$	2,688	$	3,564	$	—		$	6,290
Receivables from customers, less allowances		—		43,650		19,004		—			62,654
Intercompany receivables		392,972		99,792		6,347		(499,111	)		—
Inventories		—		6,168		2,553		—			8,721
Deferred income taxes		297		636		777		—			1,710
Prepaid expenses and other current assets		145		2,150		1,393		—			3,688
Total current assets		393,452		155,084		33,638		(499,111	)		83,063
Investment in subsidiaries		106,899		33,694		36,567		(177,160	)		—
Properties, plants and equipment, net		—		35,895		8,608		—			44,503
Goodwill		—		120,998		50,699		—			171,697
Other intangible assets, net		—		124,649		41,185		—			165,834
Deferred financing costs, net		6,226		—		—		—			6,226
Other assets		—		171		340		—			511
Total assets	$	506,577	$	470,491	$	171,037	$	(676,271	)	$	471,834
Liabilities
Current liabilities
Accounts payable, trade	$	492	$	8,762	$	4,057	$	—		$	13,311
Intercompany payables		97,995		367,495		33,621		(499,111	)		—
Accrued compensation		—		3,712		1,226		—			4,938
Accrued taxes, including taxes on income		—		503		1,704		—			2,207
Accrued interest		7		6,000		2		—			6,009
Other current liabilities		—		5,955		1,759		—			7,714
Current portion of short-term and long-term obligations		9,295		711		14		—			10,020
Total current liabilities		107,789		393,138		42,383		(499,111	)		44,199
Non-current liabilities
Long-term obligations, net of current portion		301,139		194		16,902		—			318,235
Non-current liabilities		—		—		160		—			160
Deferred income taxes		1,988		459		11,132		—			13,579
Total liabilities		410,916		393,791		70,577		(499,111	)		376,173
Contingencies and commitments
Stockholder’s equity
Common stock		—		—		—		—			—
Other stockholder’s equity		95,661		76,700		100,460		(177,160	)		95,661
Total stockholder’s equity		95,661		76,700		100,460		(177,160	)		95,661
Total liabilities and stockholder’s equity	$	506,577	$	470,491	$	171,037	$	(676,271	)	$	471,834

14

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

Supplemental Condensed Consolidating Balance Sheet

December 31, 2008

	Parent / Issuer		Consolidated Guarantor Subsidiaries		Consolidated Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Current assets
Cash and cash equivalents	$	410	$	3,382	$	6,974	$	—		$	10,766
Receivables from customers, less allowances		—		38,435		17,867		—			56,302
Intercompany receivables		391,639		91,750		2,624		(486,013	)		—
Inventories		—		6,477		2,587		—			9,064
Deferred income taxes		—		581		118		—			699
Prepaid expenses and other current assets		78		2,322		1,380		—			3,780
Total current assets		392,127		142,947		31,550		(486,013	)		80,611
Investment in subsidiaries		106,624		33,694		—		(140,318	)		—
Properties, plants and equipment, net		—		36,916		9,270		—			46,186
Goodwill		—		120,966		51,652		—			172,618
Other intangible assets, net		—		126,492		42,722		—			169,214
Deferred financing costs, net		7,100		—		—		—			7,100
Deferred income taxes		1,635		1,211		—		(2,846	)		—
Other assets		—		164		220		—			384
Total assets	$	507,486	$	462,390	$	135,414	$	(629,177	)	$	476,113
Liabilities
Current liabilities
Accounts payable, trade	$	562	$	9,084	$	4,890	$	—		$	14,536
Intercompany payables		90,135		362,941		32,937		(486,013	)		—
Accrued compensation		—		5,238		682		—			5,920
Accrued taxes, including taxes on income		—		345		1,156		—			1,501
Accrued interest		6		1,010		2		—			1,018
Other current liabilities		—		8,276		1,516		—			9,792
Current portion of short-term and long-term obligations		392		674		23		—			1,089
Total current liabilities		91,095		387,568		41,206		(486,013	)		33,856
Non-current liabilities
Long-term obligations, net of current portion		326,875		463		17,273		—			344,611
Non-current liabilities		—		—		204		—			204
Deferred income taxes		—		—		10,772		(2,846	)		7,926
Total liabilities		417,970		388,031		69,455		(488,859	)		386,597
Contingencies and commitments
Stockholders’ equity:
Common stock		—		—		—		—			—
Other stockholder’s equity		89,516		74,359		65,959		(140,318	)		89,516
Total stockholder’s equity		89,516		74,359		65,959		(140,318	)		89,516
Total liabilities and stockholder’s equity	$	507,486	$	462,390	$	135,414	$	(629,177	)	$	476,113

15

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

Supplemental Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2009

	Parent / Issuer			Consolidated Guarantor Subsidiaries			Consolidated Non-Guarantor Subsidiaries		Eliminations			Consolidated
Revenues
Sales	$	—		$	60,405		$	20,292	$	—		$	80,697
Sales to related parties		—			280			948		(1,228	)		—
Revenues		—			60,685			21,240		(1,228	)		80,697
Costs of operations
Cost of goods sold (exclusive of depreciation)		—			37,489			15,116		(1,228	)		51,377
Selling, general and administrative expenses		387			8,563			3,706		—			12,656
Depreciation and amortization		—			4,372			1,357		—			5,729
Income from operations		(387	)		10,261			1,061		—			10,935
Interest expense		1,533			6,337			210		—			8,080
Gain on debt extinguishment		(10,500	)		—			—		—			(10,500	)
Other (income) expense, net		(617	)		(32	)		101		—			(548	)
Income from operations before equity in net income from subsidiaries		9,197			3,956			750		—			13,903
Equity in net income of subsidiaries		2,522			—			—		(2,522	)		—
Income from operations before income taxes		11,719			3,956			750		(2,522	)		13,903
Provision for taxes on income		3,327			1,614			570		—			5,511
Net income	$	8,392		$	2,342		$	180	$	(2,522	)	$	8,392

16

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

Supplemental Condensed Consolidating Statement of Operations

For the Three Months Ended March 31, 2008

	Parent / Issuer			Consolidated Guarantor Subsidiaries			Consolidated Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues
Sales	$	—		$	55,452		$	27,799		$	—		$	83,251
Sales to related parties		—			1,179			1,196			(2,375	)		—
Revenues		—			56,631			28,995			(2,375	)		83,251
Costs of operations
Cost of goods sold (exclusive of depreciation)		—			35,263			21,424			(2,375	)		54,312
Selling, general and administrative expenses		351			8,445			3,789			—			12,585
Depreciation and amortization		—			4,834			1,659			—			6,493
Income from operations		(351	)		8,089			2,123			—			9,861
Interest expense		1,170			7,652			680			—			9,502
Gain on debt extinguishment		—			—			—			—			—
Other (income) expense, net		(1,551	)		(216	)		2,128			—			361
Income (loss) from operations before equity in net income from subsidiaries		30			653			(685	)		—			(2	)
Equity in net income (loss) of subsidiaries		(499	)		—			—			499			—
Income (loss) from operations before income taxes		(469	)		653			(685	)		499			(2	)
Provision (benefit) for taxes on income (loss)		(467	)		299			168			—			—
Net income (loss)	$	(2	)	$	354		$	(853	)	$	499		$	(2	)

17

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

Supplemental Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2009

	Parent / Issuer			Consolidated Guarantor Subsidiaries			Consolidated Non-Guarantor Subsidiaries			Eliminations		Consolidated
Cash provided by operations	$	5,823		$	3,821		$	(2,666	)	$	—	$	6,978
Investing activities:
Acquisition of properties, plants and equipment		—			(1,269	)		(591	)		—		(1,860	)
Proceeds from sales of assets		—			—			3			—		3
Business acquisitions, net of cash acquired		—			(3,046	)		(60	)		—		(3,106	)
Cash used in investing activities		—			(4,315	)		(648	)		—		(4,963	)
Financing activities:
Payments on acquisition facility		(98	)		—			—			—		(98	)
Payments for deferred financing fees		—			—			—			—		—
Borrowings on revolving credit facility		14,903			—			—			—		14,903
Payments on revolving credit facility		(6,000	)		—			—			—		(6,000	)
Payments to extinguish senior subordinated notes		(15,000	)		—			—			—		(15,000	)
Payments on long-term debt		—			(200	)		(8	)		—		(208	)
Cash used in financing activities		(6,195	)		(200	)		(8	)		—		(6,403	)
Effect of exchange rate changes on cash		—			—			(88	)		—		(88	)
Net change in cash and cash equivalents		(372	)		(694	)		(3,410	)		—		(4,476	)
Cash and cash equivalents, beginning of period		410			3,382			6,974			—		10,766
Cash and cash equivalents, end of period	$	38		$	2,688		$	3,564		$	—	$	6,290

18

SGS International, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited - continued)

(in thousands of dollars)

Supplemental Condensed Consolidating Statement of Cash Flows

For the Three Months Ended March 31, 2008

	Parent / Issuer			Consolidated Guarantor Subsidiaries			Consolidated Non-Guarantor Subsidiaries			Eliminations		Consolidated
Cash provided by operations	$	2,411		$	2,490		$	4,285		$	—	$	9,186
Investing activities:
Acquisition of properties, plants and equipment		—			(1,870	)		(592	)		—		(2,462	)
Proceeds from sales of assets		—			450			—			—		450
Business acquisition, net of cash acquired		(15,725	)		—			(4,657	)		—		(20,382	)
Cash used in investing activities		(15,725	)		(1,420	)		(5,249	)		—		(22,394	)
Financing activities:
Borrowings on revolving line of credit		—			—			—			—		—
Payments on revolving line of credit		—			—			—			—		—
Payments to extinguish senior subordinated notes		—			—			—			—		—
Payments on acquisition facility		—			—			—			—		—
Payments for deferred financing fees		(60	)		—			—			—		(60	)
Payments on long-term debt		(351	)		(200	)		(118	)		—		(669	)
Cash used in financing activities		(411	)		(200	)		(118	)		—		(729	)
Effect of exchange rate changes on cash		—			—			(263	)		—		(263	)
Net change in cash and cash equivalents		(13,725	)		870			(1,345	)		—		(14,200	)
Cash and cash equivalents, beginning of period		17,515			3,068			13,884			—		34,467
Cash and cash equivalents, end of period	$	3,790		$	3,938		$	12,539		$	—	$	20,267

19

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1, “ Financial Statements” in Part I of this quarterly report on Form 10-Q.

The statements in the discussion and analysis regarding our expectations regarding the performance of our business, our liquidity and capital resources and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties. Our actual results may differ materially from those contained in or implied by any of these forward-looking statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this report.

Overview

We are a global leader in the digital imaging industry, offering design-to-print graphic services to the international consumer products packaging market in North America, Europe and Asia. Our global service platform and financial capability provide a distinct competitive advantage over the majority of companies in our industry. We offer a full spectrum of innovative digital solutions that streamline the capture, management, execution, and distribution of graphics information. Our brand development, creative design, prepress, image carriers and print support services are utilized in each of the three main printing processes: flexography, gravure and lithography. Our customers, many of which we have served for over 20 years, include large branded consumer products companies, mass merchant retailers and the printers and converters that service them. Our services ensure that our customers are able to obtain or produce consistent, high quality packaging materials often on short turnaround times.

During 2009, we continued our strategy of reducing our debt levels to strengthen our balance sheet and reduce interest expense. In February 2009, we acquired an aggregate principal amount of $25.5 million of our 12% senior subordinated notes for a cash purchase price of $15.0 million. This is in addition to the optional principal repayment on our senior term loan of $8.2 million we made in September 2008. We project this combined reduction of $33.7 million in outstanding debt obligations will result in annual interest expense savings of approximately $3.0 million for 2009.

Sales for the quarter ended March 31, 2009 were $80.7 million, which was a reduction of $2.6 million from sales of $83.3 million for the quarter ended March 31, 2008. This reduction was due to the strengthening of the United States dollar as compared to the Canadian dollar and British Pound, which negatively impacted sales by $6.1 million. Excluding the negative impact from foreign currency fluctuations, sales increased by $3.5 million due to the impact from acquisitions and organic growth.

We acquired Backwell Design Inc. and Gemini Graphic Imaging Inc. (together with Backwell Design Inc. “Backwell”) in May 2008. We also acquired a provider of packaging and retail graphics located in Marietta, Georgia on December 31, 2008 (the “Marietta acquisition” or “Marietta”). These acquisitions generated sales of $2.5 million for the quarter ended March 31, 2009. During 2009, we will continue to focus on integrating our recent acquisitions.

Organic growth provided the remaining $1.0 million increase in sales for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. This increase in sales as a result of organic growth occurred despite a $2.1 million reduction in sales to our tobacco industry customers for the quarter. We believe this decrease in sales to our tobacco industry customers is due to the consolidation of brands within tobacco companies and anticipated changes in labeling requirements from the United States and Canadian Governments that have not yet occurred. Sales to our customers in the tobacco industry represented less than 5% of our sales for the 2008 fiscal year.

We have previously reported that price erosion in the industry, which we estimate at approximately 2% to 3% annually, is negatively impacting our sales. To date we have attempted to mitigate the negative impact of price concessions on our sales by putting in place effective cost control measures, among other things. As part of our strategy to combat continuing downward pressure on our pricing, we are seeking business at pricing that we believe is commensurate with the value we deliver, that will enable us to maintain margins at the levels we have historically achieved, and that will allow us to realize profitable organic growth. Consistent with that strategy, we have raised prices on our non-contractual work.

Cost of goods sold (exclusive of depreciation) expressed as a percentage of sales for our entire business was 63.7% for the quarter ended March 31, 2009, compared to 65.2% for the quarter ended March 31, 2008. This reduction in cost of goods sold as a percentage of sales is due to a combination of factors, including the consolidation of certain operations during 2008 in North America and Europe. We plan to continue the process of consolidating certain operations in 2009.

20

RESULTS OF OPERATIONS

The information presented below for the quarters ended March 31, 2009 and 2008 was prepared by management and is unaudited. In the opinion of management, all adjustments necessary for a fair statement of our financial position and operating results for such quarters and as of such dates have been included. (Dollar amounts in the table below are in thousands and percentages are expressed as a percentage of sales.)

Quarter ended March 31, 2009 compared to quarter ended March 31, 2008

	Quarter Ended March 31, 2009			Quarter Ended March 31, 2008			$ Change			Percentage Change
	(unaudited)			(unaudited)
Net sales	$	80,697		$	83,251		$	(2,554	)	(3.1	)%
Cost of goods sold (exclusive of depreciation)		51,377			54,312			(2,935	)	(5.4	)%
Selling, general, and administrative expenses		12,656			12,585			71		0.6	%
Depreciation and amortization		5,729			6,493			(764	)	(11.8	)%
Income from operations		10,935			9,861			1,074		10.9	%
Interest expense		8,080			9,502			(1,422	)	(15.0	)%
Gain on debt extinguishment		(10,500	)		—			(10,500	)	nm
Other expense (income), net		(548	)		361			(909	)	nm
Income from (loss on) continuing operations before income taxes		13,903			(2	)		13,905		nm
Provision for income taxes		5,511			—			5,511		nm
Net income (loss)	$	8,392		$	(2	)		8,394		nm

Net Sales. Sales for the quarter ended March 31, 2009 decreased 3.1%, or $2.6 million, to $80.7 million from $83.3 million for the quarter ended March 31, 2008. This decrease in sales, which was partially mitigated by organic growth and sales generated from acquisitions, was principally due to changes in foreign currency exchange rates. The strengthening of the United States dollar, as compared to the Canadian dollar and British pound, negatively impacted sales by $3.0 million and $3.1 million, respectively. This decrease was partially offset by sales generated from the acquisitions of Backwell in Canada on May 2, 2008 and Marietta on December 31, 2008. These acquisitions contributed sales of $0.4 million and $2.1 million, respectively, for the quarter ended March 31, 2009.

After excluding the impact of sales generated from acquisitions, sales in the United States increased by $2.9 million for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008 primarily due to organic growth. This increase in sales in the United States was despite a $1.9 million decrease in sales to our customers in the tobacco industry for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. We believe this reduction in sales to our tobacco industry customers is due to the consolidation of brands within tobacco companies and anticipated changes in labeling requirements that have not yet occurred. After excluding the impact of foreign currency fluctuations and sales generated from acquisitions, sales in Canada decreased approximately $0.8 million for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. The decrease in sales to our tobacco industry customers previously discussed resulted in a $0.2 million decrease in sales in Canada for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. The remaining decrease in sales in Canada is primarily due to transitioning work to the United Kingdom and the United States. After excluding the impact of foreign currency fluctuations, sales in the United Kingdom decreased by $0.4 million for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. This decrease was partially due to operations in the United Kingdom being in a period of transition with a major customer and the overall economic downturn.

Cost of Goods Sold. Cost of goods sold for the quarter ended March 31, 2009 decreased 5.4%, or $2.9 million, to $51.4 million from $54.3 million for the quarter ended March 31, 2008. The decrease in cost of goods sold was due to the strengthening of the United

21

States dollar as compared to the Canadian dollar and British Pound, which reduced cost of goods sold by $2.2 million and $2.3 million, respectively. This decrease in cost of goods sold was partially offset by the additional costs of goods sold from acquired businesses. The acquisition of Backwell and Marietta added incremental costs of goods sold of $1.5 million in the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008.

Cost of goods sold expressed as a percentage of sales decreased to 63.7% for the quarter ended March 31, 2009 from 65.2% for the quarter ended March 31, 2008. The decrease in cost of goods sold as a percentage of sales is due to a combination of factors, including the consolidation of certain operations during 2008 in North America and Europe, as well as sales in the United States operations representing a higher percentage of total company sales for the quarter ended March 31, 2009 than for the quarter ended March 31, 2008. The United States’ operations have a lower cost of goods sold percentage than our operations in Canada and the United Kingdom.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the quarter ended March 31, 2009 increased 0.6%, or $0.1 million, to $12.7 million from $12.6 million for the quarter ended March 31, 2008. This increase was primarily due to the expenses associated with driving organic growth in the United States and the expenses associated with acquisitions, partially offset by the previously discussed strengthening of the United States dollar as compared to the Canadian dollar and British Pound. The acquisitions of Backwell and Marietta added incremental selling, general and administrative expenses of $0.4 million in the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. The impact of foreign currency fluctuations resulted in a decrease of selling, general and administrative expenses of $0.8 million in the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. The remaining increase in selling, general and administrative expenses is primarily due to the incremental expenses related to the organic growth in the United States.

Depreciation and Amortization Expenses. Depreciation and amortization expenses for the quarter ended March 31, 2009 decreased 11.8%, or $0.8 million, to $5.7 million from $6.5 million for the quarter ended March 31, 2008. Depreciation and amortization expenses decreased $0.5 million for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008 due to certain production software becoming fully amortized during 2008. In addition, the previously discussed strengthening of the United States dollar as compared to the Canadian dollar and British Pound resulted in a decrease of $0.4 million of depreciation and amortization expenses for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. These decreases in depreciation and amortization expenses were partially offset by $0.2 million in incremental depreciation and amortization expenses associated with the previously discussed acquisitions.

Interest Expense. Interest expense for the quarter ended March 31, 2009 decreased 15.0%, or $1.4 million, to $8.1 million from $9.5 million for the quarter ended March 31, 2008. This decrease was primarily due to lower interest rates on the senior term and acquisition loan facilities during the quarter ended March 31, 2009 than for the quarter ended March 31, 2008, as well as the Company’s debt reduction strategy. The weighted average interest rates on the senior term and acquisition loan facilities were 4.5% and 7.4% for the quarters ended March 31, 2009 and March 31, 2008, respectively. The reduction in these interest rates resulted in a reduction of interest expense of $1.1 million for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. In addition, the acquisition in February 2009 of $25.5 million of 12% senior subordinated notes and the optional principal repayment of $8.2 million on the senior term loan facility in September 2008 resulted in a combined reduction in interest expense of $0.5 million for the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008. These decreases in interest expense were partially offset by an increase of $0.5 million in the quarter ended March 31, 2009 of deferred financing costs that were written off due to the extinguishment of $25.5 million in principal of the Notes. The residual decrease in interest expense was primarily due to the previously discussed strengthening of the United States dollar as compared to the Canadian dollar and British Pound.

Gain on Debt Extinguishment. The $10.5 million gain on debt extinguishment is due to the acquisition of $25.5 million of Notes for a cash purchase price of $15.0 million.

Other Expense (Income), net. Other expense (income), net fluctuated by $0.9 million to $0.5 million of income for the quarter ended March 31, 2009 from $0.4 million of expense for the quarter ended March 31, 2008. Other expense (income), net, primarily consists of realized (gains) losses on foreign exchange, net of interest income. The fluctuation in other expense (income), net from the quarter ended March 31, 2008 to the quarter ended March 31, 2009 was primarily due to more favorable fluctuations in the exchange rates related to the United States dollar, Canadian dollar, British pound, and Euro during the quarter ended March 31, 2009 than compared to the quarter ended March 31, 2008.

22

Provision for Income Taxes. The effective tax rate for the quarter ended March 31, 2009 was 39.6%, compared to 45.6% for the quarter ended March 31, 2008. The decrease in the effective tax rate is primarily due to expenses not fully deductible for income tax purposes having a larger impact on the effective tax rate for the quarter ended March 31, 2008 than for the quarter ended March 31, 2009. This larger impact in the quarter ended March 31, 2008 than the quarter ended March 31, 2009 is due to the income (loss) before income taxes for the quarter ended March 31, 2008 being closer to zero than the income before income taxes for the quarter ended March 31, 2009.

Liquidity and Capital Resources

At March 31, 2009, we had $6.3 million in cash and cash equivalents and $42.6 million in adjusted working capital¹ compared with $10.8 million in cash and cash equivalents and $37.1 million in adjusted working capital¹ at December 31, 2008. The $4.5 million decrease in cash is primarily due to management’s decision to reduce debt levels and maintain a lower level of cash for operations. Specifically, the decrease in cash is due to the payment of $15.0 million to acquire an aggregate amount of $25.5 million of our Notes, the payment of $3.1 million in cash payments related to acquisitions completed during 2008 and $1.9 million in capital expenditures made during the quarter ended March 31, 2009. These payments are partially offset by $8.9 million in net borrowings on our revolving credit facility and $7.0 million of cash generated from operations during the quarter ended March 31, 2009. The $5.5 million increase in adjusted working capital is primarily due to a $6.4 million increase in accounts receivable, a $2.1 million decrease in other current liabilities, and a $1.0 million decrease in accrued compensation. These increases in working capital were partially offset by a $5.0 million increase in accrued interest due to the timing of the interest payment on our Notes. The previously discussed decrease in other current liabilities is due to $3.0 million paid during the quarter ended March 31, 2009 for the 2008 Marietta acquisition. The previously discussed decrease in accrued compensation is due to $2.0 million paid during the quarter ended March 31, 2009 related to the 2007 acquisition of the operations of C.M. Jackson Associates, Inc. As of March 31, 2009, there are no significant remaining amounts payable related to either of these acquisitions.

1 Adjusted working capital is defined as current assets (excluding cash and cash equivalents) less current liabilities (excluding the current portion of long-term debt). However, adjusted working capital is not a recognized measurement under GAAP, and when analyzing our financial position, investors should use adjusted working capital in addition to, and not as an alternative for, working capital as defined in GAAP. The following table reconciles working capital to adjusted working capital:

	March 31, 2009			December 31, 2008
Working capital	$	38,864		$	46,755
Less cash		(6,290	)		(10,766	)
Add current portion of short-term and long-term obligations		10,020			1,089
Adjusted working capital	$	42,594		$	37,078

Our revolving credit facility (the “Revolver”) under our senior secured credit facility provides for $35 million of borrowing availability. Lehman Commercial Paper Inc. (“Lehman”) has a lending commitment of $8.9 million (or 25.5%) of the total $35 million available under the Revolver. We have concluded that Lehman is unable or unwilling to fund its portion of loans under the Revolver and that, as a result, the amount actually available under the Revolver is $26.1 million. We expect that cash generated from operating activities and availability under the Revolver, which is included in our senior secured credit facility, will be our principal sources of liquidity. At March 31, 2009, there were $8.9 million of borrowings outstanding under the Revolver and $17.2 million of remaining borrowing availability. Based on our current level of operations, we believe our cash flow from operations and availability under the Revolver will be adequate to meet our liquidity needs for at least the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flows from operations, or that future borrowings will be available to us under the Revolver in an amount sufficient to enable us to repay our indebtedness, or to fund our other liquidity needs.

We are highly leveraged and our aggregate indebtedness at March 31, 2009 was $328.3 million. In 2011, our debt service requirements will substantially increase as a result of the maturity on December 30, 2011 of the senior secured term loans and borrowings on the senior secured acquisition facility. We anticipate that we will refinance these borrowings prior to their maturity. Our ability to operate our business, service our debt requirements and reduce our total debt will depend upon our future operating performance.

23

Our senior secured credit facility contains customary financial and other covenants, including a maximum leverage ratio and a minimum interest coverage ratio, as defined in the senior secured credit agreement. Our senior secured credit facility also places certain restrictions on our ability to make capital expenditures. As of March 31, 2009 we were in compliance with all covenants. Below are the required financial covenant levels and the actual levels as of March 31, 2009:

	Required		Actual
Maximum leverage ratio		5.25		4.79
Minimum interest coverage ratio		1.80		2.10
Maximum annual capital expenditures	not to exceed $	15.0 million	$	1.9 million

We believe that our financing arrangements provide us with sufficient financial flexibility to fund our operations, debt service requirements and contingent earnout obligations. Our ability to access additional capital in the long-term depends on availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. From time-to-time, we review our long-term financing and capital structure. As a result of our review, we may periodically explore alternatives to our current financing, including the issuance of additional long-term debt, refinancing our credit facility and other restructurings or financings. In addition, we may from time to time seek to retire our outstanding Notes in open market purchases, privately negotiated transactions or otherwise. These repurchases, if any, will depend on prevailing market conditions based on our liquidity requirements, contractual restrictions and other factors. The amount of repurchases of our Notes may be material and may involve significant amounts of cash and/or financing availability.

Cash flow

Quarter ended March 31, 2009 compared to the quarter ended March 31, 2008

Cash flows from operating activities. Net cash provided by operating activities was $7.0 million for the quarter ended March 31, 2009 as compared to $9.2 million for the quarter ended March 31, 2008. The primary reason for this decrease is the timing of cash collections of receivables and payments of liabilities. Accounts receivable increased $6.4 million during the quarter ended March 31, 2009 compared to a $0.3 million increase during the quarter ended March 31, 2008. This fluctuation in accounts receivable was partially offset by the fluctuations of accounts payable and accrued compensation for the two periods. On a combined basis, accounts payable and accrued compensation decreased by $2.2 million during the quarter ended March 31, 2009 compared to a decrease of $5.5 million during the quarter ended March 31, 2008.

Cash flows from investing activities. Net cash used for investing activities was $5.0 million for the quarter ended March 31, 2009 as compared to $22.4 million for the quarter ended March 31, 2008. The decrease in cash used for investing activities is primarily due to a reduction of $17.3 million in acquisition-related cash payments in the quarter ended March 31, 2009 compared to the quarter ended March 31, 2008.

Cash flows from financing activities. Net cash used in financing activities was $6.4 million for the quarter ended March 31, 2009 as compared to cash used by financing activities of $0.7 million for the quarter ended March 31, 2008. The primary reason for this fluctuation was the payment of $15.0 million to acquire $25.5 million of Notes, partially offset by $8.9 million in net borrowings on the Revolver during the quarter ended March 31, 2009.

Contractual Obligations

At March 31, 2009, there were no material changes in our December 31, 2008 contractual obligations, except for the reduction in principal payments on debt and interest payments on debt due to the extinguishment of $25.5 million in principal of the Notes.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

24

Critical Accounting Policies and Recently Issued Accounting Standards

See Note A to the condensed consolidated financial statements for the impact of recently issued accounting standards.

There have been no other material changes to our critical accounting policies since December 31, 2008.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

At March 31, 2009 there were no material changes in our December 31, 2008 market risks relating to interest and foreign exchange rates.

Item 4T. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2009. Based on this evaluation, which excluded an assessment of internal control of the Marietta acquired operations, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2009, at the reasonable assurance level.

The Company completed its Marietta acquisition effective December 31, 2008. As permitted by the SEC, management’s assessment as of March 31, 2009 did not include the internal controls of Marietta, which is included in the Company’s condensed consolidated financial statements as of March 31, 2009.

Changes in Internal Control Over Financial Reporting

The Company is in the process of implementing the Order to Cash module in its enterprise resource planning system for most of its US and Canadian locations. This implementation will result in certain changes to business processes and internal controls impacting financial reporting. Management is taking the necessary steps to monitor and maintain appropriate internal controls during this period of change. The Company also continues to integrate new acquisitions into corporate processes. No potential internal control changes due to new acquisitions would be considered material to, or are reasonably likely to materially affect, our internal control over financial reporting. The Marietta acquisition is expected to be fully integrated into corporate processes by year-end.

There were no other changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Various lawsuits, claims and proceedings have been or may be instituted or asserted against entities within the Company. While the amounts claimed may be substantial, the ultimate liability cannot be determined because of the considerable uncertainties that exist. Therefore, it is possible that results of operations or liquidity in a particular period could be materially affected by certain contingencies. However, based on currently available facts and in light of legal and other defenses available to us, management believes that the disposition of matters that are pending or asserted will not have a materially adverse effect on the Company’s financial position, results of operations, and liquidity.

Item 1A. Risk Factors

There have been no material changes to the risk factors included in the Registrant’s Form 10-K for the year ended December 31, 2008.

Item 6. Exhibits

EXHIBIT NUMBER	DESCRIPTION
3.	CERTIFICATE OF INCORPORATION AND BY-LAWS
3.1	Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on November 8, 2005, incorporated by reference to exhibit 3.1 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
3.2	By-Laws of the Registrant adopted on November 8, 2005, incorporated by reference to exhibit 3.2 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.	INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1	Certificate of Incorporation. See Exhibit 3.1
4.2	By-laws. See Exhibit 3.2
4.3	Indenture dated as of December 30, 2005, by and between the Registrant and Wells Fargo Bank National Association, as trustee, relating to the 12% Senior Subordinated Notes due 2013, incorporated by reference to exhibit 4.3 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.4	Form of Global 12% Notes due 2013 (included in Exhibit 4.3)
4.5	Form of Regulation S Temporary Global 12% Notes due 2013 (included in Exhibit 4.3)
4.6	Supplemental Indenture, dated April 25, 2006, by and among the Registrant, Southern Graphic Systems, Inc., Project Dove Holdco, Inc. and Wells Fargo Bank, N.A., as trustee, incorporated by reference to exhibit 4.6 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.7	Registration Rights Agreement, dated as of December 30, 2005, by and between the Registrant, certain of its subsidiaries as Guarantors, and UBS Securities LLC and Lehman Brothers Inc. as Initial Purchasers, incorporated by reference to exhibit 4.7 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.8	Credit Agreement, dated as of December 30, 2005, among the Registrant and Southern Graphic Systems – Canada, Co., as borrowers, certain of the Registrant’s subsidiaries, as guarantors, UBS Securities LLC and Lehman Brothers Inc., as joint arrangers and joint bookmanagers, UBS AG, Stamford Branch, as issuing bank, US administrative agent, US collateral agent and Canadian collateral agent, Lehman Brothers Inc., as syndication agent, CIT Lending Services Corporation, as documentation agent, National City Bank, as Canadian administrative agent, UBS Loan Finance LLC, as swingline lender, and the lenders referred to therein, incorporated by reference to exhibit 10.7 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825

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4.9	First Amendment to Credit Agreement by and among the Registrant and Southern Graphic Systems - Canada, Co., as borrowers, certain affiliates of the borrowers, as guarantors, and the lenders party to the Credit Agreement as described therein, incorporated by reference to exhibit 10.8 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.10	Security Agreement, dated as of December 30, 2005, by the Registrant, as borrower, certain of the Registrant’s subsidiaries, as guarantors, and UBS AG, Stamford Branch, as US collateral agent, incorporated by reference to exhibit 10.9 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.11	Canadian Security Agreement, dated as of December 30, 2005, by certain of the Registrant’s subsidiaries, as pledgors, and UBS AG, Stamford Branch, as Canadian collateral agent, incorporated by reference to exhibit 10.10 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.12	Debenture dated as of December 30, 2005, from SGS-UK Holdings Limited and others, as chargors, in favour of UBS AG, Stamford Branch, as Canadian collateral agent, incorporated by reference to exhibit 10.11 to the Registrant’s registration statement on Form S-4 filed on May 5, 2006, File No. 333-133825
4.13	Limited Waiver and Consent to Credit Agreement dated as of April 11, 2007 among SGS International, Inc. and Southern Graphic Systems – Canada, Co., as borrowers, certain of the Registrant’s subsidiaries, as guarantors, the lenders signatory thereto, UBS AG, Stamford Branch, as US administrative agent, US collateral agent and Canadian collateral agent, and National City Bank, as Canadian administrative agent (incorporated by reference to Exhibit 4.13 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, filed May 15, 2007, File No. 333-133825)
10.	MATERIAL CONTRACTS
10.1*	Second Amendment of the Southern Graphic Systems, Inc. Deferred Compensation Plan, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K dated February 10, 2009, filed February 13, 2009, File No. 333-133825
10.2*	Amendment, dated as of March 12, 2009, to Employment Agreement dated December 30, 2005 between the Registrant and Henry R. Baughman, incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, filed March 12, 2009, File No. 333-133825
10.3*	Amendment, dated as of March 12, 2009, to Employment Agreement dated as of April 10, 2006 between the Registrant and James M. Dahmus, incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, filed March 12, 2009, File No. 333-133825
31.	CERTIFICATIONS
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES OXLEY ACT OF 2002
32.1	Certification of Chief Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K.

27

SIGNATURES

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

	SGS INTERNATIONAL, INC.
Date: May 11, 2009	By:	/s/ Henry R. Baughman
		Henry R. Baughman
		President, Chief Executive Officer and Director
		(Principal Executive Officer)
Date: May 11, 2009	By:	/s/ James M. Dahmus
		James M. Dahmus
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

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EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Henry R. Baughman, Chief Executive Officer, President and Director, certify that:

1. I have reviewed this quarterly report on Form 10-Q of SGS International, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 11, 2009	/s/ Henry R. Baughman
	Henry R. Baughman President, Chief Executive Officer and Director

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, James M. Dahmus, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of SGS International, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 11, 2009	/s/ James M. Dahmus
	James M. Dahmus Senior Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of SGS International, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2009 (the “Report”), the undersigned each hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

• the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 11, 2009	/s/ Henry R. Baughman
	Henry R. Baughman President, Chief Executive Officer and Director
May 11, 2009	/s/ James M. Dahmus
	James M. Dahmus
	Senior Vice President and Chief Financial Officer